<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K
(MARK ONE)
/X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996 OR

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

              FOR THE TRANSITION PERIOD FROM                    TO

                         COMMISSION FILE NUMBER 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. [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 7, 1997, was approximately $20,830,560 based on the
closing price of the registrant's common stock as reported on The NASDAQ Stock
Market on March 7, 1997.

             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 [X]         No [ ]

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

                      8,346,051 shares as of March 7, 1997

                      DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 15, 1997, are incorporated by reference into
Part III of this report.

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                                     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., formerly known as The Florsheim Shoe Company,
founded in 1892, markets, designs, manufactures, and sources a diverse and
extensive range of products in the middle to upper price range of the men's
quality footwear market.  Florsheim Group Inc. (Florsheim or the Company)
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 351 Company-operated specialty stores and
outlet stores as of December 28, 1996. 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 primarily competes in the $60 and above retail price point
segment of the men's non-athletic footwear market.  The below $60 price point
segment is dominated by private label offerings.  According to FMI, the Company
is the leading provider of men's dress shoes in the $60 and above U.S. market,
with approximately a 17% market share, nearly twice the market share of the
Company's nearest competitor.

     The Company's worldwide wholesale distribution accounted for approximately
41% of fiscal 1996 sales.  The Company has a global wholesale customer base
which includes department stores and national accounts, such as Sears and
Nordstrom, Inc., independent dealers located worldwide and licensee locations
in Mexico, India, the Pacific Rim and the Middle East. In addition, as of
December 28, 1996, Florsheim has a retail network of 205 Company-operated
specialty stores and 93 Company-operated outlet stores in the U.S. As of
December 28, 1996, the Company also operated 45 specialty retail stores and
eight outlet stores in Australia, Canada, England and Italy.  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.

     On March 22, 1996, the Company completed the sale of the assets of its
Hy-Test safety shoe division, including its Kirksville, Missouri factory, to
Wolverine World Wide, Inc., for a cash sale price settled at $23.2 million.
Annual net sales of Hy-Test were approximately $6.9 million in fiscal 1996,
$38.7 million in fiscal 1995 and  $36.1 million in fiscal 1994.


INDUSTRY OVERVIEW

     The U.S. footwear industry has undergone substantial change since the
early 1980s, which has resulted in significant challenges for U.S.-based
footwear manufacturers and retailers. Two major influences of this change have
been the increase in footwear imports into the U.S. and the growth of consumer
demand for athletic and casual

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

     According to FMI, 1996 U.S. retail sales of men's footwear (excluding
athletic footwear and work boots) were approximately $7.6 billion, or 133
million pairs.  Within this market, recent 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 has embarked upon a
program to enhance its marketing efforts in order to respond to these market
developments and capture a larger percentage of the footwear market consisting
of younger and more casual-dress oriented consumers.  Florsheim also has begun
remodeling Company-operated specialty store locations to provide an updated,
contemporary look to its stores.

     The primary channels of distribution for footwear have shifted during the
past ten to fifteen years. 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 channels of distribution, the Company has expanded its distribution
to department stores and regional and national retail stores and through
Company-operated outlet stores in response to the shifts in consumer shopping
patterns.  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 manufacturer and distributor
of men's dress shoes at retail prices of $60 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) increase sales at the
Company-operated retail stores through the remodeling of stores in a
contemporary format and selectively opening new specialty and outlet stores,
(v) offer additional products in its retail stores, using a multi-brand
approach, (vi) expand international sales and (vii) increase sales through new
product introductions.

     In order to execute the growth plans, the Company, in early 1996,
organized strategic business units (SBUs) within the Company: wholesale,
retail, international and new products.   The SBUs will be able to 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 $60 and above dress shoe segment of the men's footwear
market, Florsheim's strongest historical product segment, accounted for $2.3
billion in annual retail sales in 1996.  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

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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 the acceptance of
Comfortech line extensions.  To capitalize on the success of Comfortech
Maintenance Free dress shoes, the Company is extending the Maintenance Free
concept into a line of dress casual and casual footwear.  According to FMI
data, the Company maintains the sixth largest market share, approximately 4%,
in the casual segment of the $60 and above men's footwear market. With
approximately 39% of this market comprised of manufacturers that account for
less than a 1% market share according to FMI data, management believes the 
casual market represents a key area of opportunity for the Company and intends
to concentrate on growth in this category.

     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
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.  The video kiosk concept is adaptable to most retailers'
needs and will be expanded beyond Sears.

     Remodeling of Company-Operated Stores:  The Company is currently
remodeling its chain of Company-operated specialty stores with a new
contemporary and more casual format which includes new interiors with better
utilization of selling space.  The Company intends to continue and further
enhance this remodeling effort with a more dramatic overhaul of store design
during 1997.  The Company anticipates that the remodeled stores' contemporary
look combined with expanded product offerings will increase shopper traffic,
attract a younger consumer, and improve sales and productivity, and potentially
have the further beneficial effect of enhancing the Company's relationships
with mall developers and providing increased access to prime retail locations.
Through its Company-operated outlet stores  Florsheim has been able to
participate in the growing U.S. outlet mall segment of the retailing industry.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Capital Expenditures".

     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.
Based on these  results, 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, specifically, Milan, Italy, and,
London, England, and increased sales to wholesale accounts, to increase its
penetration of established markets and to introduce the Florsheim brand in
selected new markets.

     New Product Introductions:  The Company, in early 1996, established a new
products division. Through this division, the Company will review and develop
opportunities to expand sales beyond the product areas in which  Florsheim
currently focuses its efforts.  The New Products Division will pursue business
building opportunities that take advantage of the Company's expertise in
footwear.  In 1996, four opportunities were identified;  these will be in the
market in 1997.  The new products are:  Florsheim Golf Shoes, John Deere
Footwear, @ease 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 a FMI survey, 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 its nearest competitor in the dress category of the
footwear industry and

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is third overall, behind Nike and Reebok, in the entire footwear industry.  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 Company is
also using advertising to reach a younger market segment.   In Fall 1996, the
Company began its ""SOLE OF SUCCESS" campaign using celebrities from various
walks of life.  Celebrities are seen wearing Florsheim product in leading
magazines and in point of sale materials at retail.  A new group of celebrities
will be rotated in each season to keep the campaign fresh.  The campaign has
thus far included Pat O'Brien, Jim Harbaugh, Corbin Bernsen, Luke and Murphy
Jensen, Oscar De La Hoya, Nick Faldo and Derek Jeter.

     The total domestic advertising expenditures for fiscal 1996 were
approximately 1.3% of Florsheim's total domestic sales (excluding Hy-Test),
versus 2.2% in fiscal 1995 and 2.7% in fiscal 1994.  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 distribution programs to add
new distribution, strengthen its position with its existing customers and
capitalize on new distribution 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.
Management believes that new product introductions  such as Florsheim golf
shoes, John Deere work boots and Joseph Abboud dress and casual shoes
strengthen the Company's position with its distribution by providing innovative
merchandise.

     Due to the changing profile of the retailing 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 a broader distribution
base that includes department stores, national and regional retailers and mass
merchandisers is essential for continued success.

     RETAIL OPERATIONS

     As of December 28, 1996, Florsheim had 351 Company-operated stores
worldwide, represented by 250 traditional Florsheim specialty shoe shops and
101 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.  As of December 28, 1996, the Company
operated a core of 205 U.S. specialty retail locations. The Company evaluates
each of these locations as leases expire and makes the decision to renew,
relocate, or close. In addition, the Company intends to continue the selective
opening of new 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 maintain its own controlled distribution channel. Company-operated
stores are the largest distributor of company products and, in the U.S.,
represented approximately 39% of the wholesale sales value of total domestic
wholesale shipments during fiscal 1996. The Company realizes both a wholesale
profit margin and a retail profit margin on product distributed through its
Company-operated stores. The combined operating profit margin on such sales is
larger than the operating 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, the number of 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 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

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quality footwear image by displaying the complete Florsheim product line in an
attractive, Company-controlled display format.

     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. 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, a focal point 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 Mexico, a licensee operation.  The Company has
recently initiated efforts to establish a stronger presence in selected regions
of Europe, Central, and South America, the Middle East and the Pacific Rim. The
international division markets the Company's products through a global network
of wholesale dealers, licensees and Company-operated stores. At December 28,
1996, the Company operated 53 specialty and outlet stores in international
markets and licensed an additional 30 specialty shops to selected partners.
International sales, including exports, were $45.8 million in fiscal 1996, and
were distributed as shown below:



                         International Distribution

             Percentage of Total Fiscal 1996 International Sales


                           Australia ......   49  %
                           Canada .........   24
                           Pacific Rim ....   14
                           Europe .........    7
                           Other Exports ..    6
                                             ---
                                             100  %
                                             ===

     Management believes American brand names, in general, have well recognized
marketing appeal in many countries throughout the world and anticipates that
the Company's classic, high quality products will be especially well received
in the European, Central and South American and Pacific Rim markets. The
Company believes that the Florsheim brand 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
December 28, 1996, the Company operated 34 stores in Australia and 16 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, and Japan in particular, 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 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.  In addition, the Company will explore other formats for
distribution opportunities, such as licensing, in markets such as Japan.


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     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, opened its first Company-operated store
in Europe, located in Milan, Italy, in 1994, and opened another
Company-operated store, located in London, England, in 1996.

     The network of Company-operated stores in Mexico was sold in fiscal 1991
to a company located in Mexico which management believed was better positioned
to expand distribution in the Mexican market. This sale included an ongoing
royalty and licensing agreement.

     Note 16  to the Company's consolidated financial statements included under
item 8 of this Report contains certain foreign, geographical segment
information regarding the Company's domestic and international revenue,
operating income and assets.


     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 $60 and above price range. All
products, (except those that are sold under license), are currently sold under
the Florsheim brand, but segmented 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.


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

*   This is the registered trademark of Joseph Abboud
** This is the registered trademark of John Deere

     Florsheim:  Florsheim is the signature of quality and value.  This is the
foundation of Florsheim heritage - dress and casual styles you can wear with
confidence. Tradition woven with fashion - the intrinsic marriage of style,
quality and value.  Retail price points for this line range from $80 to $120.

     Florsheim Comfortech:  Florsheim Comfortech is the signature of comfort.
Using the most advanced comfort technology and most sophisticated comfort
construction methods, Florsheim Comfortech provides a comfortable alternative
to ordinary dress and casual shoes.  Retail price points range from $90 to
$120.

     Florsheim Imperial:  Florsheim Imperial is the definition of American
style.  The glamour of our past with the function and versatility of the
present and the comfort and streamlined shapes of the future.  Superior quality
paired with comfort.  A classic look laced with style.  A shoe built with the
exacting standards worth of the Imperial name.  These fashionable styles range
from dress to dress/casual styles.  Retail price points range from $120 to
$170.

     Joseph Abboud Footwear:  Complete line of high-end fashion footwear
designed and manufactured to the specifications of men's fashion designer
Joseph Abboud.  Abboud fashions are available only at high-end retail outlets
and appeal to the needs and desires of an upscale clientele.  Retail price
points range from $125 to $300.

     Florsheim FLS:    To maintain the equity position of the Florsheim name
but still offer product at entry price-points, this new line of value priced
product has been developed.  Florsheim FLS offers quality product at $50 to
$70.


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     John Deere:   A complete line of authentic work boots designed
specifically to the needs of industrial, agricultural and other blue collar
workers.  The line is marketed under the John Deere name through a licensing
agreement with one of the world's best known industrial/agricultural  equipment
manufacturer.  The boots are specifically designed to be the most comfortable
and durable product in the market.   Retail price points range from $110 to
$175.

     Florsheim Frogs:  Florsheim has entered the golf shoe arena with product
designed to be technologically superior.  This is achieved by combining the
Florsheim Comfortech advantages into a well-built, waterproof, leather shoe.
Florsheim Frogs also offers some high-end  styles in sturdy leather soled golf
shoes.  Retail price points range from $100 to $200.

     Florsheim @ease:  Out of the strategy to appeal to a younger consumer in
the wardrobe building phase of his life, Florsheim has developed a line of
young contemporary, dress casual and casual styles.  Retail price points range
from $100 to $200.


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. The Company owns a manufacturing plant in Cape
Girardeau, Missouri as well as a warehouse distribution center in Jefferson
City, Missouri.  Based on 1996 results, the production at Cape Girardeau, is
approximately 20% of the total worldwide production and is primarily involved
in finishing imported uppers which is approximately two-thirds of its total
production.  The remaining one-third is the complete cut-through pack.
Florsheim has consolidated its domestic manufacturing in recent years to
improve production capabilities and concentrate on products which can be
produced domestically more cost efficiently. By using a mix of domestic and
overseas production, Florsheim is able to benefit from lower costs for certain
labor-intensive operations while maintaining a limited manufacturing base close
to its end-market. During 1996, approximately three-quarters of Florsheim's
finished shoe sourcing requirements were fulfilled outside of the United
States.  Approximately two-thirds 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 non-domestic products are sourced from a variety of suppliers in
a number of other countries, including  Portugal, Spain, Italy, Dominican
Republic, China and Mexico.

     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 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.


                                       7


<PAGE>   9




     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.


MANAGEMENT INFORMATION SYSTEMS

     The Company maintains sophisticated information systems to process
information from its Company-operated retail stores and to track its
inventories. At the retail stores, electronic point of sale cash registers
capture sales transactions and transmit daily activity each night to a central
computer system in Chicago. An automated reordering system is used to track
retail store inventories and automatically generate warehouse orders to keep
the stores supplied with model stock inventories. The Express Shops,
interactive video kiosks, are utilized at many of the Company-operated and
dealer stores to view an electronic catalog and accept customers' orders for
items that are not in stock at the store.

     For the U.S. wholesale division, a sophisticated forecasting and material
requirements planning system is utilized to order and track finished shoes,
leather, and components. A perpetual inventory system is used to track finished
shoes on order and at the warehouse and to provide customer service information
regarding delivery dates. Electronic Data Interchange (EDI) is used with a
number of large customers to process orders, invoices, and payments.

     During 1997, the Company is reviewing its information systems in order to
assess how to improve the systems based on new technology.  An investment will
be made, over the next two to three years, in updated management information
systems.


COMPETITION

     Florsheim competes with a number of domestic marketers of men's dress,
dress casual and casual footwear, including Rockport, Cole Haan, Johnston &
Murphy, Dexter, Bostonian and Bass, with respect to fashion, quality and price.
In addition to direct competition with the dress, dress casual and casual
footwear product markets, Florsheim indirectly competes against 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 will increase the number and
types of marketers with which the Company competes.  Florsheim also experiences
significant competition from imports.


SEASONALITY OF BUSINESS

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


BACKLOG

     At December 28, 1996 the Company's U.S. wholesale operations had a backlog
of customer orders amounting to approximately $14.5 million, compared to
approximately $11.0 million, at December 30, 1995, excluding Hy-Test, an
increase of 31.7%.  The increase was primarily due to strong orders for future
delivery of both the Company's new products and its traditional line and
partially due to temporary delivery delays of certain categories of product.
The majority of incoming orders are for "at once" shipments; therefore, the
backlog is not necessarily indicative of a corresponding change in annual
sales.




                                       8


<PAGE>   10


EMPLOYEES

     As of December 28, 1996, Florsheim had 2,129 employees in the United
States and overseas. Approximately 20% of Florsheim's work force is represented
by unions. Management believes Florsheim has maintained satisfactory overall
relations with its unionized and non-unionized workforce.


INTELLECTUAL PROPERTY

     The major trademarks and trade names under which Florsheim's men's
footwear are sold are: Florsheim, Florsheim Comfortech, Florsheim Imperial,
Florsheim Comfortech Maintenance Free, Florsheim Frogs, Florsheim FLS and
Florsheim @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 environment 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.


                                       9



<PAGE>   11


Reliance on Foreign Production

     During 1996, approximately three-quarters of Florsheim's finished shoe
sourcing requirements were fulfilled outside of the United States, with
approximately two-thirds of such non-domestic product manufactured in India,
where Florsheim is a participant in a joint venture arrangement with a local
operation, and 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.

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 67.3% of the outstanding shares of Florsheim
Common Stock.  By reason of their ownership of shares of Florsheim Common
Stock, the Apollo Stockholders have the power effectively 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.  The Apollo Stockholders have advised Florsheim that at
this time they do not have any present plan or intention to dispose of any such
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.


                                       10



<PAGE>   12


Item 2.  Properties

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



<TABLE>
                                                          Floor       Owned
                                                          Space       or
Location                                Type of Facility  (Sq. Ft. )  Leased
--------                                ----------------  ----------  ------
<S>                                     <C>               <C>         <C>
Chicago, IL..........................   Headquarters      129,000     Leased
Jefferson City, MO...............       Warehouse         562,000     Owned
Cape Girardeau, MO............          Plant              90,000     Owned
Preston, Australia.................     Plant/Warehouse    59,000     Leased
Hong Kong...........................    Office/Warehouse   12,000     Leased
Florence, Italy.......................  Office/Warehouse    5,000     Leased
New York, NY......................      Office/Showroom     3,000     Leased
</TABLE>

     The owned properties listed above are encumbered by a first priority lien
and mortgage pursuant to the Credit Agreement, dated November 17, 1994, among
the Company and certain of its subsidiaries, certain financial institutions and
BT Commercial Corporation, as Agent.

     On March 20, 1997, the Company completed the sale of its former
headquarters located in Chicago, Illinois.

     The Company's properties listed above are generally well maintained,
suitable for present operations and adequate for current production
requirements.  Production and sourcing of Florsheim dress and dress casual
product formerly accomplished at the Kirksville, Missouri facility sold in
connection with the sale of Hy-Test, has been directed towards Cape Girardeau
and other locations.  Productive capacity and extent of utilization of
Florsheim's manufacturing facilities are difficult to quantify with certainty
because maximum capacity and utilization in a facility varies periodically
depending upon the product that is being manufactured, the degree of automation
and the utilization of the labor force in the facility.  In this context,
Florsheim estimates that overall its production facilities were effectively
utilized during fiscal 1996 at moderate to high 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.


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

     Not  applicable.

                                       11



<PAGE>   13


                                   PART II


Item 5.  Market for The Registrant's Common Equity and Related  Stockholder
Matters

     As of February 20, 1997,  there were approximately 1,900 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 17 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 December 30, 1995 and December 28, 1996.

     A discussion of restrictions on the Company's ability to pay cash
dividends is included in Note 7 to the consolidated financial statements of the
Company included under Item 8 of this Report.

                                       12


<PAGE>   14
Item 6.    Selected Consolidated Financial and Operating Data

(Dollars in thousands other than per share data)

The following financial data should be read in conjunction with the consolidated
financial statements and notes thereto included.

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                             Fiscal year   Fiscal year   Fiscal year   Fiscal year
                                                    Five months ended(1)(2)  ended(1)(2)   ended(1)(2)   ended(1)(2)   ended(1)(2) 
                                                   ------------------------  --------------------------  --------------------------
                                                   Aug 2, 1992  Jan 2, 1993  Jan 1, 1994   Dec 31, 1994  Dec 30, 1995  Dec 28, 1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>           <C>             <C>         <C>           <C>
SUMMARY OF OPERATING RESULTS:                    
Net sales:                                       
  U.S. wholesale                                     $ 29,521   $ 40,757      $ 89,863        $92,447     $ 79,924     $ 73,637
  U.S. retail                                          56,296     59,056       132,163        130,960      122,588      118,507
  International                                  
  (including exports from the U.S.)                    15,741     19,306        41,408         42,493       44,136       45,768
-----------------------------------------------------------------------------------------------------------------------------------
  Subtotal                                            101,558    119,119       263,434        265,900      246,648      237,912
  Hy-Test (3)                                          13,607     14,793        36,191         36,101       38,659        6,943
===================================================================================================================================
  Total net sales                                     115,165    133,912       299,625        302,001      285,307      244,855
-----------------------------------------------------------------------------------------------------------------------------------
                                                 
Gross profit                                           51,235     65,157       140,892        134,898      124,376      116,773
Selling, general, and administrative expenses          46,808     48,897       110,974        114,766      117,456      105,365
-----------------------------------------------------------------------------------------------------------------------------------
Earnings from operations                                4,427     16,260        29,918         20,132        6,920       11,408
Other income (expense), net                               161      1,603            63           (194)          67        1,366
Interest expense                                        4,454      4,457        10,350         10,408       13,274        9,989
Reorganization items                                  (11,445)       -             -             -             -             -
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income tax                
  expense, and cumulative effect of              
  a change in accounting principle                    (11,311)    13,406        19,631          9,530       (6,287)       2,785
Income tax expense (benefit)                             (151)     4,173         7,351          3,048       (1,441)         821
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect         
  of a change in accounting principle                 (11,160)     9,233        12,280          6,482       (4,846)       1,964
Cumulative effect of a change in accounting      
  principle                                           (17,059)       -             -             -             -             -
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                  $(28,219)   $ 9,233      $ 12,280         $6,482     $ (4,846)     $ 1,964
Earnings (loss) per share (4)                            -           -             -             -        $  (0.58)     $  0.23
-----------------------------------------------------------------------------------------------------------------------------------
                                                 
OTHER INFORMATION:                               
Ratio of earnings to fixed charges (8)                   -          2.83x         2.15x          1.54x        -            1.16x
Pro forma ratio of earnings to fixed charges (5)                                  1.54x          1.07x
EBITDA (6)                                           $  6,849    $17,292      $ 33,138        $23,974     $ 11,459      $16,283
Pro Forma EBITDA (5)(6)                                   -           -         29,465         20,538            -            -
Depreciation and amortization                           2,422      1,032         3,220          3,842        4,539        4,875
Capital expenditures                                    1,476      1,870         8,142          9,498        5,479        9,424
BALANCE SHEET DATA AT PERIOD END:                
Working capital                                       138,427    133,363       152,035        141,300      111,922       95,116
Property, plant, and equipment, net                    14,865     14,189        17,817         21,687       21,742       24,974
Total assets                                          198,550    197,151       221,404        215,270      186,321      185,238
Long-term debt, less current maturities               116,970    107,770       104,287        105,533       80,126       69,450
Stockholder's investment                               31,134     36,289        65,587             -             -            -
Shareholders' equity                                      -           -             -          60,148       55,068       57,655
-----------------------------------------------------------------------------------------------------------------------------------
                                                 
NUMBER OF RETAIL STORES: (7)                     
  U.S. specialty                                         278         267           248            233          220          205
  U.S. outlet                                             19          37            58             78           90           93
  International                                           61          60            51             57           53           53
-----------------------------------------------------------------------------------------------------------------------------------
  Total stores                                           358         364           357            368          363          351
===================================================================================================================================
</TABLE>




                                      13

<PAGE>   15



(1)  Effective January 2, 1993, Florsheim changed its fiscal year end from the
     last Saturday in February to the Saturday closest to December 31.  This
     change, coupled with "fresh start" reporting, results in reporting fiscal
     1992 in two 22-week periods.

(2)  As of November 17, 1994, Florsheim became an independent public company.
     Prior to that date, Florsheim operated as a division and/or subsidiary of
     Furniture Brands International, Inc., formerly known as INTERCO
     INCORPORATED (see note 1 to consolidated financial statements).

(3)  Represents sales of the Company's Hy-Test safety shoe business, which was
     sold in March, 1996.

(4)  Earnings (loss) per share data are presented for the full years that the
     Company operated during the period as an independent public company.

(5)  Calculated on a pro forma basis.  See note 18 to consolidated financial
     statements for discussion of  pro forma financial data.

(6)  EBITDA represents earnings before interest expense, income taxes,
     depreciation and amortization, and other income and expense. See the
     Company's consolidated statements of cash flows in the Company's
     consolidated financial statements contained elsewhere in this report.
     EBITDA is presented solely as supplemental disclosure because (i) the
     Company's gross profit and earnings from operations after August 2, 1992
     are not comparable to its gross profit and earnings from operations before
     August 2, 1992; (ii) the Company believes EBITDA is comparable for periods
     before and after August 2, 1992: and (iii) EBITDA is frequently used to
     analyze companies on the basis of operating performance, leverage, and
     liquidity.  EBITDA is not intended to provide a measure of profitability
     and is being presented solely for informational purposes as one of several
     measures of financial performance.

     (7) Figures include only Company-operated stores at period end.

(8)  For purposes of determining the ratio of earnings to fixed charges,
     earnings are defined as earnings (loss) before income taxes, plus fixed
     charges.  Fixed charges consist of interest expense on all indebtedness
     (including amortization of deferred debt issuance costs) and the portion
     of operating lease rental expenses that is representative of the interest
     factor.  For the five months ended August 2, 1992, and for the twelve
     months ended December 30, 1995, earnings were inadequate to cover fixed
     charges by $11.3 million and  $6.3 million, respectively.

                                       14



<PAGE>   16



Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

(Dollars in thousands)

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


OVERVIEW

     Florsheim Group Inc. (Florsheim or the Company), founded in 1892, designs,
markets, manufactures, and sources a diverse and extensive range of products in
the middle to upper price range of the men's quality footwear market.
Florsheim distributes its products to more than 6,000 specialty and department
store locations worldwide and through 351 Company-operated specialty stores and
outlet stores as of December 28, 1996.

On December 26, 1996, Florsheim Group Inc. changed to its present corporate
name from The Florsheim Shoe Company.

Effective November 17, 1994, Florsheim became an independent public company
when 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
at a rate of one share of Florsheim common stock for every six shares of
INTERCO common stock (the Distribution).  In connection with the Distribution,
Florsheim issued $85,000 in 12-3/4% Senior Notes due 2002 (Senior Notes) and
entered into a $75,000 secured credit facility (credit facility).  Florsheim
used the proceeds from the Senior Notes and $25,000 borrowed under the credit
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.

On March 22, 1996, the Company completed the sale of the assets of its Hy-Test
safety shoe division, including its Kirksville, Missouri factory, to Wolverine
World Wide, Inc., for an all cash sale price settled at approximately $23.2
million.  Annual net sales of the sold business were $38,659 for the twelve
months ended December 30, 1995 and $6,943 for the period through the March 22,
1996 sale date.

                                       15

<PAGE>   17




RESULTS OF OPERATIONS

The Company's fiscal year end is the Saturday closest to December 31.
Throughout this analysis, fiscal 1994 refers to the twelve-month period ended
December 31, 1994, fiscal 1995 refers to the twelve-month period ended December
30, 1995, and fiscal 1996 refers to the twelve-month period ended December 28,
1996.

The following tables set forth, for the periods indicated, certain historical
operating data, expressed in thousands of dollars and as a percentage of net
sales, and retail store information.

<TABLE>
<CAPTION>
==============================================================================================================
                                                                   Twelve months ended
                                       -----------------------------------------------------------------------
(Dollars in thousands)                 December 31, 1994            December 30, 1995      December 28, 1996
--------------------------------------------------------------------------------------------------------------
                                       Amount         %             Amount         %        Amount         %
--------------------------------------------------------------------------------------------------------------
<S>                                   <C>           <C>           <C>          <C>        <C>         <C>   
Net sales:
   U.S. Wholesale                     $ 92,447      30.6 %        $ 79,924      28.0%     $ 73,637      30.1%
   U.S. Retail                         130,960      43.3           122,588      43.0       118,507      48.4
   International (including
     exports from U.S.)                 42,493      14.1            44,136      15.5        45,768      18.7
---------------------------------------------------------------------------------------------------------------
   Subtotal                            265,900      88.0           246,648      86.5       237,912      97.2
   Hy- Test (1)                         36,101      12.0            38,659      13.5         6,943       2.8
---------------------------------------------------------------------------------------------------------------
   Total net sales                    $302,001     100.0 %         $285,307     100.0 %    $244,855    100.0 %
===============================================================================================================
Percent change in same store
   sales (2)                                        (1.0)%                      (6.3)%                  (0.3)%
EBITDA (3)                            $ 23,974       7.9%         $ 11,459       4.0   %  $ 16,283       6.7 %
===============================================================================================================
</TABLE>

(1)  The Hy-Test safety shoe business was sold on March 22, 1996.
(2)  Includes only those sales figures for U.S. specialty stores that have
     been in operation for at least twelve full months.  Percentage change
     reflects figures for period depicted as compared to the figures from the
     preceding period of comparable length.
(3)  Earnings  before interest expense, income taxes, depreciation and
     amortization, and other income (expense), net.  EBITDA is not intended to
     represent cash flows for the period, nor has it been presented as an
     alternative to earnings from operations as an indicator of operating
     performance and should not be considered in isolation or as a substitute
     for measures of performance prepared in accordance with GAAP.




<TABLE>
<CAPTION>
========================================================================================================================
                                                                                 Twelve months ended
                                                            ------------------------------------------------------------    
                                                                Dec. 31,            Dec. 30,              Dec. 28,
Operations data (as a percent of net sales)                      1994                1995                   1996
------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                 <C>                   <C>                  
Net sales                                                        100.0 %             100.0 %               100.0 %
Gross profit                                                      44.7                43.6                  47.7
Selling, general, and administrative expense                      38.0                41.2                  43.0
Earnings from operations                                           6.7                 2.4                   4.7
Interest expense                                                   3.5                 4.7                   4.1
Net earnings (loss)                                                2.1                (1.7)                  0.8
=====================================================================================================================
</TABLE>




                                       16




<PAGE>   18


   FISCAL 1996 COMPARED TO FISCAL 1995

Net sales for fiscal 1996 were $244,855, a decrease of $40,452, or 14.2%, as
compared to fiscal 1995.  Of the decrease, $31,716, or 11.1% is attributed to
the Hy-Test division, which was sold on March 22, 1996.  U.S. wholesale net
sales decreased $6,287, or 7.9%, due to decreases in unit volume reflecting
difficult market conditions and product availability.   U.S. retail net sales
decreased $4,081, or 3.3%, as additional sales from stores opened during or
after fiscal 1995 were more than offset by store closings, a net store
reduction during fiscal 1996 of twelve stores, and fiscal 1996 same store sales
decreases at U.S. specialty stores of 0.3%.  International sales increased
$1,632, or 3.7%, with the increase due to increased sales at Company-operated
stores and expanded wholesale distribution.

Gross profit margin for fiscal 1996 was 47.7% of net sales, as compared to
43.6% of net sales for fiscal 1995.  The increase was due to a mix change
(reflecting the sale of Hy-Test) to a higher percentage of retail sales and
costs decreases due to the Company's expense reduction programs and was
partially offset by increased price promotion activity.

Selling, general and administrative expenses for fiscal 1996 were $105,365, a
decrease of $12,091, or 10.3%, from fiscal 1995.  Selling, general and
administrative expenses for fiscal 1996 were 43.0% of net sales, an increase
from 41.2% of net sales for fiscal 1995 due to lower sales volume and a mix
change reflecting the sale of Hy-Test. Expense decreases due to the Company's
expense reduction programs were partially offset by increased selling costs and
spending on sales growth opportunities.

Earnings from operations for fiscal 1996 were $11,408, an increase of $4,488,
or 64.9%, from fiscal 1995, and EBITDA  for fiscal 1996 was $16,283, an
increase of $4,824, or 42.1% from fiscal 1995.  Earnings from operations for
fiscal 1996 were 4.7% of net sales, as compared to 2.4% of net sales for fiscal
1995, and EBITDA for fiscal 1996 was 6.7% of net sales, as compared to 4.0% of
net sales for fiscal 1995.  EBITDA is presented as a supplemental disclosure;
EBITDA is frequently used to analyze companies on the basis of operating
performance, leverage, and liquidity.  Earnings from operations and EBITDA in
fiscal 1996 are improved from fiscal 1995 primarily due to the expense
reduction  programs, partially offset by the reduction in earnings from
operations due to sales volume decreases.

Interest expense for fiscal 1996 was $9,989 as compared to fiscal 1995 amount
of $13,274.  This decrease is due to the lower average amount of Senior Notes
outstanding and lower average outstanding borrowings under the credit facility,
primarily due to the use of the proceeds from the sale of the assets of Hy-Test
during fiscal 1996 as compared to the average outstanding during fiscal 1995.

The net earnings per share for fiscal 1996 were $0.23 per share, an improvement
from a loss per share of $0.58 in fiscal 1995.  The improvement is primarily
due to the reduction in interest expense, expense reduction program, and the
gain on sale of Hy-Test, partially offset by the reduction in earnings from
operations due to sales volume decreases.


Pro forma Comparisons

The following pro forma financial data reflects the sale of the assets of
Hy-Test as if the sale had occurred as of January 1, 1995 for pro forma
statement of operations purposes and as of December 30, 1995 for pro forma
balance sheet purposes.  The pro forma data excludes the net sales and direct
costs of the Hy-Test division and the Hy-Test operating profit contribution to
central overhead costs. Management believes that the assumptions used provide a
reasonable basis on which to present the pro forma condensed financial data.
The pro forma data are presented for informational purposes only and are not
necessarily indicative of the results that would have been achieved had the
transaction actually been consummated as of such dates.


                                       17




<PAGE>   19

<TABLE>
<CAPTION>

                                                                        Twelve months ended
                                              -----------------------------------------------------------------------  
                                                                        Pro forma (Unaudited)
                                              -----------------------------------------------------------------------          
                                                December 30,                                  December 28, 
                                                    1995                                          1996
---------------------------------------------------------------------------------------------------------------------
                                                 Amount        %                         Amount           %
---------------------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>                      <C>               <C>     
Net sales                                      $ 246,648      100%                    $  237,912         100%
Gross profit                                     113,920     46.2                        115,173        48.4
Selling, general, and
  administrative expense                         109,442     44.4                        103,265        43.4
Earnings from operations                           4,478      1.8                         11,908         5.0
EBITDA                                             8,877      3.6                         16,783         7.1
---------------------------------------------------------------------------------------------------------------------

</TABLE>


Pro forma net sales for fiscal 1996 were $237,912 (3.5%) lower than  fiscal
1995 pro forma net sales.  As noted above, the reductions were primarily due to
decreases in U.S. wholesale unit volume and closed store sale decreases at
Company-operated stores.

Pro forma earnings from operations and pro forma EBITDA for 1996 were $7,430
and $7,906, respectively, higher than fiscal 1995.  As noted above, the effect
of the expense reduction programs were partially offset by the lower sales
volume.

The pro forma balance sheet date reflects the sale of Hy-Test receivables and
inventory, the sale of the Kirksville, Missouri factory, the transfer of
certain liabilities to the buyer, the use of cash proceeds from the sale to
eliminate outstanding borrowings under the credit facility, and the unapplied
balance of the cash proceeds from the sale, net of transaction costs and taxes
as a result of the transaction, as if the transaction occurred as of December
30,1995.


<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------
Balance Sheet Data                                               Pro forma
                                                             ------------------   
                                                                December 30,            December 28,
ASSETS                                                              1995                    1996
-----------------------------------------------------------------------------------------------------------
<S>                                                            <C>                     <C>          
Cash and cash equivalents                                       $   16,227              $  21,691 
Receivables, net                                                    25,810                 26,431 
Inventories                                                         74,826                 73,824 
Other current assets                                                14,111                  8,773 
-----------------------------------------------------------------------------------------------------------
Total current assets                                               130,974                130,719 

Property, plant and equipment, net                                  20,686                 24,974 
Other assets                                                        23,898                 29,545 
-----------------------------------------------------------------------------------------------------------
Total assets                                                    $  175,558              $ 185,238 
-----------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities                                             $   27,242              $  35,603 
-----------------------------------------------------------------------------------------------------------
Long-term debt                                                      69,450                 69,450 
Other long-term liabilities                                         22,885                 22,530 
-----------------------------------------------------------------------------------------------------------
Total liabilities                                                  119,577                127,583 
-----------------------------------------------------------------------------------------------------------
Shareholders' equity                                                55,981                 57,655 
Total liabilities & shareholders' equity                        $  175,558              $ 185,238 
-----------------------------------------------------------------------------------------------------------
</TABLE>







                                       18
<PAGE>   20




   FISCAL 1995 COMPARED TO FISCAL 1994

Net sales for fiscal 1995 were $285,307, a decrease of $16,694, or 5.5%, as
compared to fiscal 1994.  U.S. wholesale net sales decreased $12,523, or 13.5%,
due to unit volume decreases primarily reflecting adjustments in dealer
inventories and difficult market conditions.  U.S. retail net sales decreased
$8,372, or 6.4%, as a result of an above normal level of promotional pricing
throughout 1995 due to competitive retail market conditions, which led to same
store sales decreases of 6.3% at U.S. specialty stores, and a net reduction of
thirteen retail specialty stores. For the fourth quarter ended December 30,
1995, same store sales were down 6.1% at U.S. specialty stores. International
sales increased $1,643, or 3.9%, primarily due to wholesale sales increases.

Gross profit margin for fiscal 1995 was 43.6% of net sales, as compared to
44.7% of net sales for fiscal 1994.  The decrease in gross profit was due to
continued promotional pricing above historical levels at both the wholesale and
retail levels and reduced overall sales volume.

Selling, general, and administrative expenses for fiscal 1995 were $117,456, an
increase of $2,690 or 2.3%, from fiscal 1994.  Selling, general, and
administrative expenses for fiscal 1995 were 41.2% of net sales, as compared to
38.0% of net sales for fiscal 1994.  The increases were primarily due to
increased pension costs associated with the Distribution, the impact of fourth
quarter 1995 workforce reductions, additional merchandising costs required to
support the brand, and higher selling expenses partially offset by cost
reduction programs initiated by management during fiscal 1995. The decline in
sales also caused operating expenses as a percentage of net sales to increase.

As a result of the foregoing factors, earnings from operations for fiscal 1995
were $6,920, a decrease of $13,212, or 65.6%, from fiscal 1994, and EBITDA for
fiscal 1995 was $11,459, a decrease of $12,515, or 52.2%, from fiscal 1994.
Earnings from operations for fiscal 1995 were 2.4% of net sales, as compared to
6.7% of net sales for fiscal 1994, and EBITDA for fiscal 1995 was 4.0% of net
sales, as compared to 7.9% of net sales for fiscal 1994.  Declines in earnings
from operations and EBITDA during fiscal 1995 occurred primarily as a result of
decreases in unit sales volume, margin declines and increases in pension and
other expenses.

Interest expense for fiscal 1995 was $13,274, as compared to the fiscal 1994
amounts of $10,408.  This increase is due to INTERCO's lower effective
borrowing costs (pre-Distribution) compared to Florsheim's higher effective
borrowing costs (post-Distribution).


SUBSEQUENT EVENT

On March 20, 1997, the Company completed the sale of  the corporate
headquarters building located in downtown Chicago, Illinois, for an all cash
sale price of $8,050.  Net cash  proceeds were approximately $6,000 before
income taxes.


ACCOUNTING POLICIES ADOPTIONS

The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996.  This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flow expected
to be generated by the asset.  If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.  Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.  Adoption of this Statement, resulted in a $500 charge to the
Selling, General and Administrative Expenses within the Consolidated Statements
of Operations during fiscal 1996.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation",  a fair value based method, is effective for
transactions entered into in fiscal years that begin after December 15, 1995.
Management has reviewed the Statement and continues  to use the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", an
intrinsic value base method, for stock option grants outstanding as of December
30, 1995.

                                       19



<PAGE>   21


LIQUIDITY AND CAPITAL RESOURCES

     WORKING CAPITAL

Working capital at December 28, 1996, was $95,116, a decrease of $16,806, as
compared to $111,922 at December 30, 1995.  The decrease is primarily due to
the sale of assets of the Hy-Test division, the use of a portion of the cash
proceeds to reduce to zero the $17.6 million of outstanding borrowings under
the Company's credit facility as of the sale date and an increase in accounts
payable due to the timing of payments related to the capital expenditures made
on the leased property in downtown Chicago to prepare for the occupancy as the
new corporate headquarters.  Cash interest  payments totaled $9,328 during the
fiscal 1996, and $10,820 during fiscal 1995, and cash income tax payments were
$693 during the fiscal 1996 and $1,635 during fiscal 1995.


     CAPITAL EXPENDITURES

During fiscal 1995 and fiscal 1996, capital expenditures totaled $5,479 and
$9,424, respectively.  Approximately 70% of these expenditures in 1995 were
used to open or remodel retail specialty stores or outlet stores; during 1996,
approximately 60% of the capital expenditures were used to prepare the leased
property in downtown Chicago for the occupancy as the new corporate
headquarters.  Management estimates that capital expenditures in 1997 will be
between the total fiscal 1995 and total fiscal 1996 amounts.


     FINANCING ARRANGEMENTS

Credit facility borrowings may be made from time to time to finance future
liquidity requirements, including seasonal working capital requirements.  The
credit facility provides for borrowings of up to $75,000 based on a borrowing
base formula reflecting eligible accounts receivable and inventory and
includes, as part of and not in addition to the $75,000 credit limit, a
sub-facility for the issuance of up to an aggregate of $60,000 in letters of
credit for issuance to Florsheim suppliers in connection with the importation
of foreign goods and for other corporate purposes and foreign currency hedging
obligations.  The cash borrowings under the credit facility bear interest at
prime rate plus 1.25% or at an adjusted LIBOR rate plus 2.50% depending on the
type of loan the Company executes.  As of December 28, 1996, the Company's
borrowing base was approximately $31,185 outstanding domestic letters of credit
were $8,817, and there were no outstanding borrowings under the credit
facility.  There were no outstanding borrowings under a line of credit for a
foreign subsidiary as of December 28, 1996.

On March 22, 1996, the Company received an amendment to its credit facility
agreement allowing it to purchase on the open market (and retire) Senior Notes
using up to $15,000 of proceeds from the credit facility. Such repurchases, if
executed, will enable the Company to reduce its interest expense by replacing a
portion of the Senior Notes with lower cost debt from the credit facility.
However, the amount of availability under the credit facility to meet working
capital and other borrowing needs is reduced by the amount borrowed for the
purpose of purchasing Senior Notes, and the term of the credit facility is less
than the maturity date of the Senior Notes.  As of December 28, 1996, the
Company had made no purchases of Senior Notes under the amendment.  Florsheim
believes that, if repurchases of Senior Notes are made, available borrowings
under the credit facility, together with cash generated from operations, will
be adequate to meet debt service, capital expenditures, and other liquidity
requirements for the foreseeable future.


SEASONALITY OF BUSINESS

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





                                       20


<PAGE>   22

FOREIGN CURRENCY

The Company does not believe that foreign currency risk is material to its
operations.  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 foreign
operations are located.  In view of these factors and the historically
immaterial currency translation adjustments for international sales,  Florsheim
has not hedged, and does not presently anticipate the future need to hedge in
any material respect, foreign currency risk related to international and export
sales.  The majority of purchases by the Company from foreign sources are
denominated in United States dollars.  To the extent that import transactions
are denominated in other currencies, it is the Company's practice, based on a
review of market conditions, to hedge its risks, where appropriate, through the
purchase of forward exchange contracts to cover firm purchase orders.  Any
gains or losses from such transactions are reported in income and have not been
material to the Company's operating results.


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.



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.

                                       21



<PAGE>   23
FLORSHEIM GROUP INC.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

December 30, 1995 and December 28, 1996



<TABLE>
<CAPTION>
=============================================================================================================
                                                                            December 30,       December 28,
         ASSETS                                                                 1995               1996
=============================================================================================================
<S>                                                                        <C>               <C>
Current assets:
  Cash and cash equivalents                                                 $    5,249        $    21,691 
  Receivables, less allowances of $2,284 at December 30, 1995  
    and $1,705 at December 28, 1996                                             36,113             26,431 
  Inventories                                                                   84,684             73,824 
  Deferred tax assets, net                                                      10,027              4,552 
  Prepaid expenses and other current assets                                      4,091              4,221 
-------------------------------------------------------------------------------------------------------------
Total current assets                                                           140,164            130,719 

Property, plant and equipment
  Buildings and improvements                                                    18,567             22,539 
  Machinery and equipment                                                       15,821             19,381 
-------------------------------------------------------------------------------------------------------------
                                                                                34,388             41,920 
  Less: accumulated depreciation                                               (12,646)           (16,946)
-------------------------------------------------------------------------------------------------------------
Net property, plant and equipment                                               21,742             24,974 
Deferred tax assets, net                                                         6,144             11,475 
Other assets                                                                    18,271             18,070 
=============================================================================================================
                                                                            $  186,321        $   185,238 
=============================================================================================================
         LIABILITIES AND SHAREHOLDERS' EQUITY
=============================================================================================================
Current liabilities:
  Notes payable                                                             $       94        $         -
  Accounts payable                                                              11,492             17,900 
  Accrued employee compensation                                                  4,098              4,160 
  Accrued interest expense                                                       3,082              2,858 
  Other accrued expenses                                                         8,990             10,207 
  Income taxes payable                                                             486                478
-------------------------------------------------------------------------------------------------------------
Total current liabilities                                                       28,242             35,603 
Long-term debt                                                                  80,126             69,450 
Deferred postretirement benefits other than pensions                            20,462             20,614 
Other long-term liabilities                                                      2,423              1,916 
-------------------------------------------------------------------------------------------------------------
                                                                               131,253            127,583 

Shareholders' equity:
  Preferred stock, without par value, 2,000,000 shares authorized and no   
     shares issued and outstanding                                                  -                   -
  Common stock, 20,000,000 shares authorized, without par value,
     $1.00 stated value, 8,346,051 shares issued and outstanding                8,346               8,346 
  Paid-in capital                                                              50,295              50,295 
  Accumulated translation adjustment                                             (251)                372
  Accumulated deficit                                                          (3,322)             (1,358)
=============================================================================================================
Total shareholders' equity                                                     55,068              57,655 
=============================================================================================================
                                                                            $ 186,321         $   185,238 
=============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.




                                       22
<PAGE>   24
FLORSHEIM GROUP INC.

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

Fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996


<TABLE>
<CAPTION>               
----------------------------------------------------------------------------------------------------------------------
                                                        Fiscal year             Fiscal year          Fiscal year
                                                          ended                    ended               ended
                                                        December 31,            December 30,         December 28,
                                                           1994                    1995                 1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                        <C>                  <C>
Net sales                                              $ 302,001                 $  285,307           $  244,855 
Cost of sales                                            167,103                    160,931              128,082 
----------------------------------------------------------------------------------------------------------------------
Gross profit                                             134,898                    124,376              116,773 
Selling, general and
    administrative expenses                              114,766                    117,456              105,365 
----------------------------------------------------------------------------------------------------------------------
Earnings from operations                                  20,132                      6,920               11,408 
Interest expense, net                                     10,408                     13,274                9,989 
Other income (expense), net                                 (194)                        67                1,366 
----------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes                        9,530                     (6,287)               2,785 
Income tax expense (benefit)                               3,048                     (1,441)                 821
----------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                    $   6,482                 $   (4,846)          $    1,964 
----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per common share                        N.A.                 $    (0.58)          $     0.23
----------------------------------------------------------------------------------------------------------------------

Weighted average common shares outstanding                  N.A.                  8,346,051                    -
Weighted average common shares/equivalents outstanding         -                          -            8,379,287 
======================================================================================================================
</TABLE>

   See accompanying notes to consolidated financial statements.

   N. A. - Not Applicable (See Note 2)









                                       23
<PAGE>   25
FLORSHEIM GROUP INC.

Consolidated Statements of Cash Flows

(Dollars in thousands)

Fiscal years ended December 31, 1994, December 30, 1995, and December 28, 1996


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                         Fiscal year        Fiscal year       Fiscal year
                                                                            ended             ended             ended
                                                                         December 31,       December 30,      December 28,
                                                                             1994               1995             1996
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                <C>              <C>         
Cash flows from operating activities:
  Net earnings (loss)                                                    $    6,482         $  (4,846)       $  1,964 
  Adjustments to reconcile net earnings (loss) to net
    cash provided by (used in) operating activities
    (excluding assets/liabilities related to the sale
    of assets of Hy-Test):
         Loss (gain) on disposal of assets                                      158                55          (2,112)
         Depreciation and amortization                                        3,841             4,539           4,875 
         Deferred taxes                                                        (907)           (2,622)            144 
         Noncash interest and other expense                                     202               914             885
         Decrease (increase) in receivables                                     924             3,880            (284)
         Decrease in inventories                                             12,239            27,357             348
         Decrease (increase) in prepaid expenses and other assets            (2,851)              289            (308)
         Increase in accounts payable, accrued interest
            expense and other accrued expenses                                   82             1,177           8,072 
         Increase (decrease) in income taxes payable                          1,157              (671)             (8)
         Increase (decrease) in other long-term
            liabilities                                                         335               938            (355)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                    21,662            31,010          13,221 
------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:                                           
  Proceeds from sale of assets of Hy-Test, 
    net of transaction costs                                                      -                 -          23,025 
  Proceeds from the disposal of assets                                          767               159             390
  Additions to property, plant and equipment                                 (9,498)           (5,479)         (9,424)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                          (8,731)           (5,320)         13,991 
------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Net capital contribution to INTERCO                                       (12,916)                -               -
  Net change in notes and loans payable                                           -                94             (94)
  Receipts from long-term debt                                              110,000                 -               -
  Payments of allocated long-term debt                                     (107,802)                -               -
  Repurchase of Senior Notes                                                      -           (15,550)              -
  Net reduction in bank credit facility                                      (4,467)           (9,857)        (10,676)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                       (15,185)          (25,313)        (10,770)
------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                         (2,254)              377          16,442 
Cash and cash equivalents at beginning of period                              7,126             4,872           5,249 
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                               $    4,872         $   5,249        $ 21,691 
------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure:
  Cash payments for income taxes, net                                    $    1,785         $   1,635        $    693

  Cash payments for interest                                             $    9,491         $  10,820        $  9,328 
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.





                                       24
<PAGE>   26
FLORSHEIM GROUP INC.

Consolidated Statements of Shareholders' Equity

Fiscal years ended December 31, 1994, December 30, 1995, and December 28, 1996

(Dollars and number of shares in thousands)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                        Preferred stock       Common stock                                                 Retained
                            Stock-      ---------------     ----------------         Paid       Accumulated    earnings/    Share-
                           holder's     Number of           Number of             in        translation   (accumulated     holders'
                          investment    shares   Amount     shares    Amount    capital     adjustment      deficit)        equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>            <C>     <C>       <C>      <C>       <C>            <C>           <C>            <C>
Balance at
  January 1, 1994           65,587         -       -            -        -          -            -               -          65,587 

Net earnings                 4,958         -       -            -        -          -            -           1,524           6,482 

Foreign currency
  translations               1,012         -       -            -        -          -          (17)              -             995

Net capital change         (12,916)        -       -            -        -          -            -               -         (12,916)

Distribution of
  common stock             (58,641)        -       -        8,346    8,346      50,295           -               -               -
------------------------------------------------------------------------------------------------------------------------------------
Balance at
  December 31, 1994              -         -       -        8,346    8,346      50,295         (17)          1,524          60,148 

Net loss                         -         -       -            -        -           -           -          (4,846)         (4,846)

Foreign currency
  translations                   -         -       -            -        -           -        (234)              -            (234)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
  December 30, 1995      $       -         -    $  -        8,346   $ 8,346   $ 50,295     $  (251)       $ (3,322)      $  55,068 

Net earnings                     -         -       -            -         -          -           -           1,964           1,964 

Foreign currency
  translations                   -         -       -            -         -          -         623               -             623
------------------------------------------------------------------------------------------------------------------------------------
Balance at
  December 28, 1996      $       -         -    $  -        8,346   $ 8,346   $ 50,295     $   372        $ (1,358)      $  57,655 
====================================================================================================================================
</TABLE>

  See accompanying notes to consolidated financial statements.


                                       25
<PAGE>   27




FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)


DECEMBER 30, 1995 AND DECEMBER 28, 1996

(1) BASIS OF PRESENTATION


     NATURE OF BUSINESS

   Florsheim Group Inc. and its subsidiaries (Florsheim or the Company) design,
   market, manufacture and source a diverse and extensive range of products in
   the middle to upper price range of the men's quality footwear market. The
   majority of revenues are derived from operations in the United States.  On
   December 26, 1996, Florsheim changed to its present corporate name from The
   Florsheim Shoe Company.


     THE DISTRIBUTION

   Effective November 17, 1994 (the effective date) 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 at a rate of one share of Florsheim common stock for
   every six shares of  INTERCO common stock (the Distribution).  In connection
   with the Distribution, Florsheim issued $85,000 in 12-3/4% Senior Notes due
   2002 (Senior Notes) and entered into a $75,000 secured credit facility
   (credit facility).  Florsheim used the proceeds from the Senior Notes and
   $25,000 borrowed under the credit 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.

   Financial information prior to the Distribution reflects the financial
   position and results of operations of the Company as a division and/or
   subsidiary of INTERCO and is not necessarily indicative of the financial
   position or results of operations had the Company operated as a separate,
   stand-alone entity during the periods covered.

   Prior to November 17, 1994, Florsheim operations were conducted through a
   division and/or certain wholly owned subsidiaries of INTERCO.


     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 (the
   Court).  INTERCO emerged from Chapter 11 effective with the beginning of
   business on August 3, 1992.


(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:

                                                                     (continued)

                                       26


<PAGE>   28

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



        SALE OF ASSETS OF HY-TEST SAFETY SHOE DIVISION

   On March 22, 1996, the Company completed the sale of the assets of its
   Hy-Test safety shoe division, including its Kirksville, Missouri factory, to
   Wolverine World Wide, Inc., for an all cash sale price settled at
   approximately $23.2 million.  A portion of this cash was used to reduce to
   zero the $17.6 million of outstanding borrowings under the Company's bank
   credit facility as of the sale date.  The balance of the proceeds are
   available for investment in the business and for further debt reduction.
   Annual net sales of the sold business were $38,659 for the twelve months
   ended December 30, 1995.  The net gain on sale of $1,850 is included in
   other income (expense), net.


        PRINCIPLES OF CONSOLIDATION

   Commencing with the effective date of the Distribution, the financial
   statements include the accounts of the Company and its subsidiaries on a
   consolidated basis.  Prior to the effective date, the financial statements
   include the accounts of the Company on a combined basis as described in the
   Distribution.  All significant intercompany transactions and balances have
   been eliminated.   The results of Hy-Test are included through the sale
   date, March 22, 1996.


        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 for the fiscal years ended December 31, 1994, December 30, 1995,
   and December 28, 1996.


        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
   fiscal year.  Fiscal 1994, 1995 and 1996 each represented a 52 week fiscal
   year.  For purposes of these financial statements, fiscal 1994 refers to the
   12 month period ended December 31, 1994, fiscal 1995 refers to the 12 month
   period ended December 30, 1995, and fiscal 1996 refers to the 12 month
   period ended December 28, 1996.


        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 market.

                                                                     (continued)

                                       27

<PAGE>   29

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



        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.  When properties are disposed of, the
   related cost and accumulated depreciation or amortization are removed from
   the accounts, and gains or losses on the dispositions are reflected in
   results of operations.  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 3 to 45 years for
   buildings and improvements and from 3 to 11 years for machinery and
   equipment.

        TRADEMARKS

   Trademarks are recorded at fair value and are amortized on a straight-line
   basis over a forty year period.


        ADVERTISING

   All advertising costs are expensed as incurred.


        INCOME TAX EXPENSE

   The results of Florsheim are included in the consolidated tax returns filed
   by Florsheim for the year ended December 28, 1996, December 30, 1995, the
   period November 18, 1994 to December 31, 1994, and in the consolidated tax
   returns filed by INTERCO for the period January 2, 1994 to November 17,
   1994.   The Federal income  tax expense in the consolidated financial
   statements for period prior to the Distribution is allocated in accordance
   with U. S. Treasury Regulations, and approximates the expenses as if
   Florsheim had filed a separate return.

   As of the Distribution date (as defined in Note 1), Florsheim and INTERCO
   entered into a formal tax agreement to provide for the payment of taxes, and
   the entitlement to tax refunds, for periods ended on and prior to the
   November 17, 1994 distribution date, and to provide for various related
   matters.  The tax agreement generally provides that any Federal and state
   tax, interest, or penalty attributable to Florsheim for periods ending on or
   prior to the date of distribution will be indemnified by INTERCO, subject to
   any tax liabilities which have been transferred to Florsheim.

   The tax agreement also provides that INTERCO will pay Florsheim a portion of
   the tax  benefits received by INTERCO from any tax operating losses
   generated by Florsheim (which Florsheim elects to carryback) for periods
   after the distribution that are eligible for carryback to periods when
   Florsheim was owned by INTERCO.

   Florsheim complies with Statement of Financial Accounting Standards No. 109,
   "Accounting for Income Taxes" (SFAS No. 109).  SFAS No. 109, which was
   adopted by the Company as of August 2, 1992, requires the recognition of
   deferred tax assets and liabilities for the expected future tax consequences
   of temporary differences  between  the carrying amounts and  the tax bases
   of other assets and liabilities.  Deferred  tax assets


                                                                    (continued)


                                       28

<PAGE>   30

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



   and liabilities are measured using enacted tax rates in effect for the year
   in which those temporary differences are expected to be recovered or
   settled.  The effect of a change in tax rates on deferred tax assets and
   liabilities is recognized in income in the period that includes the
   enactment date.

     STOCK OPTION PLAN

   Prior to January 1, 1996, the Company accounted for its stock option plan in
   accordance with the provisions of Accounting Principles Board ("APB")
   Opinion No. 25, Accounting for Stock Issued to Employees, and related
   interpretations.  As such, compensation expense would be recorded on the
   date of grant only if the current market price of the underlying stock
   exceeded the exercise price.  On December 31, 1995, the Company adopted SFAS
   No. 123, Accounting for Stock-Based Compensation, which permits entities to
   recognize as expense over the vesting period the fair value of all
   stock-based awards on the date of grant.  Alternatively, SFAS No. 123 also
   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 future years
   as if the fair-valued-based method defined in SFAS No. 123 had been applied.
   The Company has elected to continue to apply the provisions of APB Opinion
   No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.


     POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

   Florsheim complies with Statement of Financial Accounting Standards No. 106,
   "Employers' Accounting for Postretirement Benefits other than Pensions"
   (SFAS No. 106).  SFAS No. 106, which was adopted by the Company as of August
   2, 1992, requires the cost of these benefits to be recognized in the
   financial statements over an employee's service period with the company.


     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 shareholders' equity subsequent to the Distribution and as a part of
   stockholder's investment prior to the Distribution.


     EARNINGS PER SHARE

   Net earnings (loss) per common share is computed based on the weighted
   average number of common shares outstanding and common stock equivalents
   when the results are not antidulutive.

   The historical capital structure of the Company during most of fiscal 1994
   is not comparable to the ongoing capital structure of the Company since the
   Distribution date; historical per share data would not be meaningful and,
   accordingly, has not been presented for periods prior to fiscal 1995.




                                                                    (continued)

                                       29


<PAGE>   31

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)




     AMORTIZATION OF PREPAID EXPENSES

   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 assets and 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 AND LONG-LIVED ASSETS TO BE DISPOSED OF

   The Company adopted the provisions of SFAS No. 121, Accounting for the
   Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
   on January 1, 1996.  This Statement requires that long-lived assets and
   certain identifiable intangibles be reviewed for impairment whenever events
   or changes in circumstances indicate that the carrying amount of an asset
   may not be recoverable.  Recoverability of assets to be held and used is
   measured by a comparison of the carrying amount of an asset to future net
   cash flows expected to be generated by the asset.  If such assets are
   considered to be impaired, the impairment to be recognized is measured by
   the amount by which the carrying amount of the assets exceed the fair value
   of the assets.  Assets to be disposed of are reported at the lower of the
   carrying amount or fair value less costs to sell.  Adoption of this
   statement resulted in a $500 write-down of assets, which is included in
   selling, general and administrative expense on the income statement.


(3) INVENTORIES

     Inventories are categorized as follows:

--------------------------------------------------------------------------------
                                              December 30,   December 28,
                                                  1995           1996
--------------------------------------------------------------------------------
 Retail merchandise                             $45,543       $44,474
 Finished products                               29,186        19,588
 Work-in-process                                  1,418         1,363
 Raw materials                                    8,537         8,399
--------------------------------------------------------------------------------
                                                $84,684       $73,824
--------------------------------------------------------------------------------
               
               
               
                                                                     (continued)

                                       30



<PAGE>   32


FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



(4) LONG-LIVED ASSETS

    Management determined that the assets of the U.S. and Canada Retail
    divisions might have been impaired because of operating losses sustained by
    these divisions over the last two years.  Accordingly, management estimated 
    the undiscounted future cash flows to be generated by the U.S. and Canada   
    Retail divisions, which was less than the carrying amount of the divisions'
    long-lived assets.  Management then estimated the fair value of those
    assets using discounted future cash flows as a measure of fair value.  As
    stated above, this resulted in a $500 write-down of the assets which is
    included in selling, general and administrative expense on the income
    statement.


(5) LONG-TERM DEBT

    Long-term debt consisted of the following:


--------------------------------------------------------------------------------
                                            December 30,  December 28,
                                               1995          1996
--------------------------------------------------------------------------------
12-3/4% Senior Notes due 2002                 $69,450       $69,450
Credit facility                                10,676             -
--------------------------------------------------------------------------------
                                  
                                              $80,126       $69,450
--------------------------------------------------------------------------------



    The common stock of Florsheim's principal subsidiaries and substantially
    all of Florsheim's cash, working capital and property, plant and equipment
    have        been pledged as security for the credit facility.  The debt
    instruments pursuant to which the Senior Notes and credit facility were
    issued contain a number of restrictive covenants and events of default,
    including covenants limiting capital expenditures and incurrence of debt
    and require Florsheim to achieve certain financial ratios.  The Company was
    in compliance with the financial covenants of its debt instruments, as of
    December 28, 1996.


        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 and will not be  
    redeemable, in whole or part, prior to September 1, 1998, except that, at
    any time prior to September 1, 1997, Florsheim, at its option, may redeem
    up to $28,050 principal amount of Senior Notes, at a price equal to 112.75%
    of the principal amount thereof plus accrued and unpaid interest, if any,
    to the redemption date, with the net cash proceeds of any equity offering;
    provided,  however, that at least $56,950  principal amount of Senior Notes
    remains outstanding immediately following each such redemption.  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,

                                                                     (continued)

                                       31


<PAGE>   33

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)




   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.

   The financing fees of $2,550 have been capitalized and are being amortized
   over an eight year period to the maturity of the notes.  When Senior Notes
   were purchased and retired in fiscal 1995, the capitalized financing fees
   were adjusted proportionately to the remaining outstanding balance of the
   Senior Notes.


        CREDIT FACILITY

   The Company maintains a $75,000 revolving credit facility which matures
   November 17, 1997.  Florsheim can elect to extend the term of the credit
   facility for an additional two years provided that the Company is in
   compliance with the restrictive covenants of its debt agreements at the time
   the term is extended.  At December 28, 1996, the outstanding borrowings
   under the revolving credit loan facility was zero, as compared to $10,676 at
   December 30, 1995, none of which, in the prior fiscal year, the Company
   considered to be for seasonal borrowings.  The weighted average outstanding
   balance of the credit facility during the twelve months of 1996 was
   approximately $2,200.

   The credit facility allows for issuance of letters of credit and foreign
   currency hedging obligations and cash borrowing.  Letters of credit
   issuances and hedging obligations are limited to no more than $60,000; cash
   borrowings are limited only by the facility's maximum availability less
   letters of credit and hedging obligations  outstanding.  Maximum
   availability under the facility is determined by the amount of eligible
   accounts receivable and inventory at each month end (referred to in
   aggregate as a "borrowing base").  As of December 28, 1996, the Company's
   borrowing base totaled $31,185 as compared to $49,282 at December 30, 1995.

   The credit facility is secured by a first priority lien on and security
   interest in substantially all property of the Company.  In 1994, the Company
   paid an origination fee of 2.5% of the commitment of $75,000 to the banks.
   The Company is required to pay an annual unused line (commitment) fee of
   one-half of one percent on the average daily unused portion of the
   commitment, payable monthly in arrears, until such commitments are
   terminated.  The Company also pays an annual collateral management fee of
   $100. The outstanding cash borrowings under the revolving credit loan
   facility bear interest at prime rate plus 1.25% or at an adjusted LIBOR rate
   plus 2.50% depending upon which type of loan the Company executes.

   Under the letter of credit facility a fee of 1.25% per annum in the case of
   commercial (trade) letters of credit and 1.75% per annum in the case of
   stand-by letters of credit is assessed for the account of the lenders
   ratably.   A further fee of one-half of one percent is assessed on stand-by
   letters of credit representing a facing fee.  A customary administrative
   charge for issuance of letters of credit is also payable to the relevant
   issuing banks.  Letters of credit fees are payable monthly in arrears.  At
   December 28, 1996, there were $8,817 in letters of credit outstanding under
   the working capital facility.




                                                                     (continued)

                                       32


<PAGE>   34



FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)




   The commitment fee of $1,875 has been capitalized and is being amortized
   over a three year period to  November 1997.

   The Australian operations utilized a credit facility for revolver balances
   and issuance of letters of credit. The outstanding letters of credit, as of
   the end of December 1996, was $231.  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. As of December 30, 1995, Florsheim
   Australia's borrowing totaled $94, as compared to zero at December 28, 1996.


(6)  PREFERRED STOCK

   The Company's restated certificate of incorporation includes authorization
   to issue up to 2.0 million shares of no par value, preferred stock.  As of
   December 30, 1995 and December 28, 1996, no preferred stock had been issued.


(7)  COMMON STOCK

   The Company's restated certificate of incorporation includes authorization
   to issue up to 20 million shares of common stock.  As of December 30, 1995,
   and December 28, 1996, 8,346,051 shares of common stock had been issued and
   were outstanding.

   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 December 28, 1996), 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 and certain of  the debt instruments to which the Company
   is a party restrict the payment of dividends.  All of the outstanding
   shares of common stock are fully paid and nonassessable.


(8)  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 Committee of the Board and 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 authorized and not issued common stock.  The Option Plan consists
   of five individual grants that are non-qualified.  Stock options may be
   granted with an exercise price below the stock's fair market at the grant
   date.  All stock options have ten year terms, vest, and become fully
   exercisable after five to six years from the date of grant.

                                                                     (continued)

                                       33

<PAGE>   35

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)




   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 1995 and
   1996 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 December 30, 1995 and December 28, 1996 would not have been
   significant.

   At December 28, 1996, options to purchase 471,000 shares of common stock
   were outstanding and 52,250 shares were exercisable.  The per share
   weighted-average fair value of stock options granted during 1996, 272,000
   shares, was $2.13 (no options were granted during 1995 under the Option
   Plan) 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 6.1%, stock volatility rate of 50.0%, expected
   turnover rate of 25.0% 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 Chairman of the Board, Charles J. Campbell.
   The Campbell Plan was also approved by the public stockholders during the
   Company's annual 1996 Stockholder Meeting.

   The Campbell Plan authorizes grants of options to purchase up to a total of
   250,000 shares of authorized but unissued common stock.  The Campbell  Plan
   consists 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 have ten year terms, vest, and 20% become fully exercisable on
   the first five anniversaries of 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 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.  Had compensation cost for the Company's Campbell Plan been
   determined based on the fair value at the grant date for awards in 1995 and
   1996 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
   December 30, 1995 and December 28, 1996 would not have been significant.

   At December 28, 1996, options to purchase 250,000 shares of common stock
   were outstanding and 50,000 shares exercisable.  The per share
   weighted-average fair value of stock options granted during 1995, 250,000
   shares, was $1.80 (no options were granted during 1996 under the Campbell
   Plan).  The Black Scholes option pricing model was utilized on the date of
   grant with the following weighted-average assumptions used for grants in
   1995:  dividend yield rate of 0.0%, risk free interest rate of 6.1%, stock
   volatility rate of 50.0%, turnover rate of 0.0%, and an expected life of
   five years.


                                                                     (continued)

                                       34



<PAGE>   36



FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements


Stock option activity during the following periods indicated as follows:



                                  Number of           Weighted-Average
                                    Shares            Exercise Price
--------------------------------------------------------------------------------

Balance at January 1, 1994               ----               ----
  Granted                                454,500            $3.63
  Exercised                              -----              -----
  Forfeited                              -----              -----
  Expired                                -----              -----

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

Balance at December 31, 1994             454,500            $3.63

  Granted                                ----               ----
  Exercised                              ----               ----
  Forfeited                              (19,000)           $3.76
  Expired                                ----               ----

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

Balance at December 30, 1995             435,500            $3.62

  Granted                                552,000            $6.13
  Exercised                              ----               ----
  Forfeited                             (266,500)           $3.78
  Expired                                ----               ----

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

Balance at December 28, 1996             721,000            $5.49

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



                                                                    (continued)

                                       35
<PAGE>   37


FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements



   The following tables summarize information about fixed price stock options
   outstanding and exercisable at December 28, 1996:



                              OPTIONS OUTSTANDING



<TABLE>
<CAPTION>
    Range of        Number                  Weighted-                 Weighted-
    Exercise      Outstanding at        Average Remaining         Average Exercise
     Prices      December 28, 1996   Contractual Life (in years)        Price
----------------------------------------------------------------------------------
<S>                <C>                <C>                           <C>

   $3.01-$4.00      168,000                 5.7                       $3.23

   $4.01-$5.00      355,333                 9.2                       $5.00

   $5.01-$6.00       31,000                 7.3                       $5.76

   $6.01-$8.00       83,333                 8.8                       $7.50

   $8.01-$10.00      83,334                 8.8                       $10.00
----------------------------------------------------------------------------------

        TOTAL       721,000                 8.2                       $5.49

</TABLE>


                              OPTIONS EXERCISABLE

<TABLE>
<CAPTION>
    Range of        Number             Weighted-
    Exercise      Exercisable at    Average Exercise
     Prices      December 28, 1996       Price

----------------------------------------------------------------------------------
<S>                <C>                   <C>     

   $3.01-$4.00       36,750               $3.23

   $4.01-$5.00       16,666               $5.00

   $5.01-$6.00       15,500               $5.76

   $6.01-$8.00       16,667               $7.50

   $8.01-$10.00      16,667              $10.00

----------------------------------------------------------------------------------
        TOTAL       102,250               $5.70

</TABLE>
                                                                    (continued)

                                       36




<PAGE>   38

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)


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

(9)     INCOME TAXES

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

-----------------------------------------------------------------------------------------------------
                                        Fiscal year          Fiscal year             Fiscal year
                                          ended                ended                    ended
                                        December 31,         December 30,            December 28,
                                           1994                1995                      1996
-----------------------------------------------------------------------------------------------------
        <S>                         <C>                   <C>                       <C>       
         Current:
            Federal                  $    3,046            $      -                  $   (659)
            State and local                 450                 163                       111
            Foreign                         459               1,018                     1,225 
-----------------------------------------------------------------------------------------------------
                                          3,955               1,181                       677
         Deferred                          (907)             (2,622)                      144
-----------------------------------------------------------------------------------------------------
                                     $    3,048            $ (1,441)                 $    821
-----------------------------------------------------------------------------------------------------
</TABLE>


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



<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                         Fiscal year        Fiscal year       Fiscal year
                                                           ended              ended              ended
                                                         December 31,       December 30,      December 28,
                                                           1994                1995              1996
--------------------------------------------------------------------------------------------------------------
       <S>                                              <C>                 <C>                <C>
        Federal corporate statutory rate                 35.0  %             35.0 %              35.0  %
        State and local income taxes, net of
            Federal tax benefit                           1.6                (1.7)                2.6  %
        Foreign taxes, including foreign
            currency translation effects                  3.1                (3.6)              (11.8) %
        Prior year adjustments-foreign tax credit
            and foreign dividend income                     -                   -               (14.2) %
        Foreign dividend income                             -                (5.3)               17.2  %
        Nontaxable foreign income                        (7.9)                  -                   -
        Other                                             0.2                (1.5)                0.7  %
--------------------------------------------------------------------------------------------------------------
        Effective income tax rate                        32.0  %             22.9 %              29.5  %
--------------------------------------------------------------------------------------------------------------
</TABLE>


           The operating result for fiscal 1995 is a loss before tax.  For this
reason, 1995 shows a net tax benefit rather than a tax charge. This is in
contrast to fiscal 1994 and fiscal 1996 which show a profit before tax and a
tax charge.


 
                                                                     (continued)

                                       37




<PAGE>   39

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)

<TABLE>
<CAPTION>

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

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

----------------------------------------------------------------------------------------------------------------------
                                                     December 31,          December 30,           December 28,
                                                        1994                 1995                    1996
----------------------------------------------------------------------------------------------------------------------
       <S>                                          <C>                   <C>                    <C>
        Deferred tax assets:
          Fair value adjustments                     $  4,891              $  4,355               $   3,798 
          Employee postretirement benefits
            other than pensions                         7,892                 7,739                   7,617 
          Expense accruals                              1,821                 2,363                   3,291 
          Valuation reserves                            4,129                 2,976                     425
          Depreciation                                    559                   873                   1,319 
          Inventory costs capitalized                     975                   719                     561
          Carry forward - loss                              -                 3,273                   4,179 
          Foreign tax credit & withholding taxes            -                   259                   1,648 
----------------------------------------------------------------------------------------------------------------------
        Total gross deferred tax assets                20,267                 22,557                 22,838 
----------------------------------------------------------------------------------------------------------------------
        Deferred tax liabilities:
          Employee pension plans                       (6,562)                (6,340)                (6,811)
          Other                                          (156)                   (46)                     -
----------------------------------------------------------------------------------------------------------------------
        Total deferred tax liabilities                 (6,718)                (6,386)                (6,811)
----------------------------------------------------------------------------------------------------------------------
        Net deferred tax assets                      $ 13,549              $  16,171              $  16,027 
----------------------------------------------------------------------------------------------------------------------
</TABLE>


     A valuation allowance is provided when it is more likely than not that some
     portion of the deferred tax assets will not be realized.  Management 
     believes sufficient taxable income will be generated to realize the 
     benefits of the deferred tax assets.
        

(10) EMPLOYEE BENEFITS

     Florsheim sponsors or contributes to retirement plans covering 
     substantially all employees.  The total cost (benefit) of all plans for
     fiscal 1994, 1995 and 1996, (excluding "fresh start" adjustment) were 
     $(1,610),  $1,432, and $(222) respectively.

        COMPANY-SPONSORED DEFINED BENEFIT PLANS

     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.

                                                                     (continued)



                                       38

<PAGE>   40



FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



It is Florsheim's practice to fund pension costs to the extent that such costs
are tax deductible and in accordance with ERISA.  Funding decisions made in
fiscal 1996 and 1995 contributed towards the deferred or prepaid pension cost.
The assets of the various plans include corporate equities, government
securities, corporate debt securities and insurance contracts.  The table below
summarizes the funded status of Florsheim-sponsored defined benefit plans.



<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                     December 30,          December 28,
                                                                         1995                 1996
-----------------------------------------------------------------------------------------------------------
        <S>                                                           <C>                  <C>              
        Actuarial present value of benefit obligations:
           Vested benefit obligation                                   $  75,274            $  71,090 
-----------------------------------------------------------------------------------------------------------
           Accumulated benefit obligation                                 76,370               73,201 
-----------------------------------------------------------------------------------------------------------
           Projected benefit obligation                                   83,317               79,621 

        Plan assets at fair value                                         94,785               98,761 
-----------------------------------------------------------------------------------------------------------
        Plan assets in excess of projected benefit obligation             11,468               19,140 
        Unrecognized net (gain) loss                                       1,815               (4,698)
        Unrecognized prior service cost                                    5,604                5,239 
        Additional minimum liability                                        (265)                (220)
        Fresh start adjustment                                           (11,147)             (10,475)
-----------------------------------------------------------------------------------------------------------
        Net prepaid pension assets (included in other assets)          $   7,475            $   8,986 
-----------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

        Net periodic pension expense for fiscal 1994, 1995 and 1996 include the following components:

-----------------------------------------------------------------------------------------------------------
                                                     Fiscal year          Fiscal year        Fiscal year
                                                       ended                ended               ended
                                                     December 31,         December 30,       December 28,
                                                         1994                1995                1996
-----------------------------------------------------------------------------------------------------------
       <S>                                          <C>                 <C>                 <C>    
        Service cost-benefits earned
           during the period                         $    704            $   1,131           $   1,305 
        Interest cost on the projected benefit          6,731                5,948               5,793 
        Actual return on plan assets                   (2,889)             (19,234)            (10,491)
        Net amortization and deferral                  (6,850)              12,830               2,672 
        Fresh start amortization                       (1,041)                (672)               (672)
-----------------------------------------------------------------------------------------------------------
        Net periodic pension expense                 $ (3,345)           $       3           $  (1,393)
-----------------------------------------------------------------------------------------------------------
</TABLE>





                                                                     (continued)

                                       39




<PAGE>   41


-----------------------------------------------------------------------------
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)
-----------------------------------------------------------------------------



   Employees are covered primarily by noncontributory plans, funded by
   Florsheim contributions to trust funds, which are held for the sole benefit
   of employees.  Monthly retirement benefits generally are based upon service,
   pay, or both, with employees generally becoming vested upon completion of
   five years of service.

   The expected long-term rate of return on plan assets was 8.0%, 9.0%, and
   9.0% in fiscal 1994, 1995 and 1996 respectively.  Measurement of the
   projected benefit obligation was based upon a weighted average discount rate
   of  8.25%, 7.25% and 7.75% and a long-term rate of compensation increase of
   4.5%, 4.5% and 4.5%, for fiscal  1994 , 1995 and 1996  respectively.


        OTHER RETIREMENT PLANS AND BENEFITS

   In addition to the Company-sponsored defined benefit plans, Florsheim makes
   contributions to various defined contribution, union-negotiated and foreign
   plans.  The cost of these plans is included in the total cost for all plans
   reflected above.

   Florsheim also participated in an employee savings plan during fiscal years
   1994 through 1996.  Florsheim's cost for this plan for fiscal  1994, 1995
   and 1996  was  $214, $209 and $164  respectively.

   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 medical benefit trusts, third-party
   administrators and insurance companies.



                                                                     (continued)

                                      40




<PAGE>   42

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
        The following table sets forth the consolidated financial status of
        postretirement benefits other than pensions:
----------------------------------------------------------------------------------------------------------------
                                                                         December 30,          December 28,
                                                                            1995                  1996
----------------------------------------------------------------------------------------------------------------
       <S>                                                            <C>                    <C>    
        Accumulated postretirement benefit obligation:
          Retirees                                                      $   11,625             $  10,563 
          Fully eligible active plan participants                            2,592                 2,660 
          Other active plan participants                                     3,067                 3,018 
----------------------------------------------------------------------------------------------------------------
        Total                                                               17,284                16,241 
        Plan assets at fair value                                            4,104                 3,926 
----------------------------------------------------------------------------------------------------------------
        Accumulated postretirement benefit obligation in
          excess of plan assets                                             13,180                12,315 
        Unrecognized net gain                                                7,745                 8,366 
        Unrecognized prior service gain                                      1,187                 1,083 
----------------------------------------------------------------------------------------------------------------
        Accrued postretirement benefit obligation                       $   22,112             $  21,764 
----------------------------------------------------------------------------------------------------------------
</TABLE>

        As of December 30, 1995 and December 28, 1996, the Company has
        recorded $1,650 and $1,150 respectively,   of the accrued
        postretirement benefit expense in accrued expenses as shown in Note 15.

        Net periodic postretirement benefit expense include the following
        components:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
                                                                      Fiscal year          Fiscal year         Fiscal year
                                                                         ended               ended               ended
                                                                      December 31,         December 30,        December 28,
                                                                         1994                 1995                1996
--------------------------------------------------------------------------------------------------------------------------------
       <S>                                                           <C>                   <C>               <C>
        Service cost-benefits earned
           during the period                                          $   506               $   267           $    342
        Interest cost on the postretirement benefit obligation          1,554                 1,336              1,176 
        Estimated return on plan assets                                  (304)                 (305)              (309)
        Net amortization and deferral                                    (256)                 (438)              (424)
--------------------------------------------------------------------------------------------------------------------------------
        Net periodic postretirement benefit expense                   $ 1,500               $   860           $    785
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


For measurement purposes, annual rates of increase in the expense of health
care benefits of  12.0%, 11.0% and 10%  were assumed for fiscal 1994 , 1995 and
1996  respectively.  The rates are assumed to decrease gradually to 6.0% in
fiscal 2000 and remain at those levels thereafter.  The health care expense
trend rate assumption has an effect on amounts reported.  For example,
increasing the health care expense trend rate by one percentage point in each
year would increase the accumulated postretirement benefit obligation as of
December 28, 1996 by approximately $499 and the net periodic expense by $85 for
the year.





                                                                     (continued)

                                       41


<PAGE>   43

FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)




   The weighted average discount rate used in determining the accumulated
   postretirement obligation was 8.25%, 7.25% and 7.75% for fiscal  1994 , 1995
   and 1996  respectively.  The expected long-term rate of return on plan
   assets was 8.0% for fiscal 1996.


(11) 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 2008.  Leases covering retail outlets and
   equipment generally require, in addition to stated minimums, contingent
   rentals based on retail sales and 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      Fiscal year      Fiscal year
                                  ended            ended            ended
                               December 31,     December 30,     December 28,
                                  1994             1995             1996
--------------------------------------------------------------------------------
  
 Basic rentals                   $14,992          $15,611          $15,852
 Contingent rentals                6,532            6,790            6,469

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

                                  21,524           22,401           22,321
 Less: sublease rentals              181               63               24
--------------------------------------------------------------------------------

                                 $21,343          $22,338          $22,297
--------------------------------------------------------------------------------


   Amount of minimum future annual rental commitments under non-cancellable
   operating leases in each of the five fiscal years 1997 through 2001 are
   $14,517,  $12,666,  $10,956, $9,230 and $7,631 and in aggregate for all
   lease agreements, $76,854 through the end of the lease terms.  At December
   28, 1996, INTERCO guaranteed future base operating lease payments on behalf
   of Florsheim of approximately $20 million, exclusive of related operating
   expenses.



                                                                    (continued)

                                       42

<PAGE>   44



FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



(12) FAIR  VALUE OF FINANCIAL INSTRUMENTS

     LONG-TERM DEBT

     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 credit facility.


                                      December 30, 1995     December 28, 1996
                                      -----------------     -----------------
                                     Carrying  Estimated   Carrying   Estimated
                                      amount  fair value    amount   fair value
--------------------------------------------------------------------------------
12-3/4% Senior Notes due 2002        $69,450   $57,296     $69,450      $75,180
Credit facility                       10,676    10,676           -            -
--------------------------------------------------------------------------------


(13) TRANSACTIONS WITH AFFILIATES

   Prior to the Distribution date, cash collected by Florsheim in excess of
   operating needs was transferred to Interco and Florsheim's cash requirements
   were funded by INTERCO.  The cumulative net impact of the cash transfers and
   other intercompany transactions have been included in stockholder's
   investment.  All capital transactions and equity balances between Florsheim
   and INTERCO through the Distribution date were recorded in stockholder's
   investment.  These transactions and balances include net earnings, capital
   contributions, dividends, income taxes, and translation adjustments.


                            (continued on next page)


                                                                     (continued)

                                       43
<PAGE>   45
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)


     Prior to the Distribution date, INTERCO provided services to Florsheim,
     including legal, administration of certain benefit and insurance programs,
     income tax management and cash management and treasury services.  The
     financial statements include an administrative fee allocated to Florsheim
     totaling $440 for fiscal year 1994.  The allocations are not necessarily
     representative of general and administrative expenses that would have been
     incurred had Florsheim been an unaffiliated entity.
        
     At the effective date of the Distribution, a consulting agreement was
     established with Apollo Advisors, L.P., an affiliate of Florsheim's
     controlling shareholders.  Charges totaled $50, $400, and $400 for fiscal
     years 1994,  1995, and 1996 respectively.
        
     Under an employment agreement with Charles J. Campbell, the Company
     advanced Mr. Campbell $300 to purchase the Company's common stock.  At
     December 30, 1995, the advance was repaid in full.
        
(14) 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.
        
(15) OTHER FINANCIAL DATA

     Items charged to earnings during fiscal 1994, 1995 and 1996 include the
     following:

<TABLE>
<CAPTION>       
--------------------------------------------------------------------------------
                                 Fiscal year     Fiscal year   Fiscal year
                                   ended           ended          ended
                                 December 31,    December 30,  December 28,
                                    1994            1995          1996
--------------------------------------------------------------------------------
<S>                               <C>             <C>           <C>     
Advertising and promotion          $9,530          $7,659        $6,293
Repairs and maintenance             1,978           1,718         1,472
--------------------------------------------------------------------------------
</TABLE>


Items included in other accrued expenses include:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                            December 30,          December 28,
                                                               1995                  1996
-------------------------------------------------------------------------------------------------------
        <S>                                                 <C>                  <C>       
Taxes - general                                              $  1,574             $  1,189 
Postretirement benefits other than pensions                     1,650                1,150 
Group insurance                                                 1,081                1,706 
Legal/other contingencies                                       1,300                2,626 
Miscellaneous                                                   3,385                3,536 
-------------------------------------------------------------------------------------------------------
Total other accrued expenses                                 $  8,990             $ 10,207 
-------------------------------------------------------------------------------------------------------
</TABLE>


                                                                    (continued)

                                       44




<PAGE>   46


FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Items included in other assets are as follows:
-----------------------------------------------------------------------------------------------------------
                                                               December 30,          December 28,
                                                                  1995                  1996
-----------------------------------------------------------------------------------------------------
<S>                                                            <C>                   <C>
Prepaid pension                                                 $  8,726              $ 10,244 
Investment in unconsolidated subsidiaries                          3,997                 4,024 
Trademarks                                                         1,871                 1,820 
Unamortized debt                                                   2,082                 1,347 
Other                                                              1,595                   635
-----------------------------------------------------------------------------------------------------
Total other assets                                              $ 18,271              $ 18,070 
=====================================================================================================
</TABLE>

(16) BUSINESS SEGMENT INFORMATION

   Florsheim operates in one industry segment - the design, sourcing and
   marketing of quality footwear.  Florsheim's products are marketed in the
   United States and internationally with  no one customer or foreign
   geographical region accounting for 10% or more of consolidated sales.
   Florsheim operates subsidiaries in Australia, Canada, Europe and the Pacific
   Rim.  Information about Florsheim's operations in the United States and
   internationally are presented in the table below:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                 Fiscal year            Fiscal year           Fiscal year
                                                    ended                 ended                 ended
                                                 December 31,           December 30,          December 28,
                                                     1994                  1995                  1996
--------------------------------------------------------------------------------------------------------------
       <S>                                     <C>                    <C>                   <C>       
        Sales to unrelated entities:
           United States (includes exports)      $   261,699            $   243,329           $   201,829 
           Other                                      40,302                 41,978                43,026 
--------------------------------------------------------------------------------------------------------------
                                                 $   302,001            $   285,307           $   244,855 
--------------------------------------------------------------------------------------------------------------
        Operating income:                                                              
           United States                         $    18,233            $     5,906           $     8,782 
           Other                                       1,899                  1,014                 2,626 
-------------------------------------------------- ------------------------------------------------------------
                                                 $    20,132            $     6,920           $    11,408 
--------------------------------------------------------------------------------------------------------------

                                                 December 31,           December 30,          December 28,
                                                     1994                   1995                  1996
--------------------------------------------------------------------------------------------------------------
        Total assets:
           United States                         $   191,128            $   163,660           $   159,799 
           Other                                      24,142                 22,661                25,439 
--------------------------------------------------------------------------------------------------------------
                                                 $   215,270            $   186,321           $   185,238 
--------------------------------------------------------------------------------------------------------------
</TABLE>
 


                                                                     (continued)






                                       45

<PAGE>   47
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

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

(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

        Following is a summary of unaudited quarterly information:

-----------------------------------------------------------------------------------------------------------------------------------
                                                              First             Second             Third                Fourth
                                                              quarter           quarter            quarter              quarter
-----------------------------------------------------------------------------------------------------------------------------------
       <S>                                             <C>                <C>               <C>               <C>
        Fiscal year ended December 30, 1995:
           Net sales                                    $     71,131       $     68,859      $      67,992     $         77,325 
           Gross profit                                       31,881             30,481             29,461               32,553 
           Net earnings (loss)                          $        292       $       (882)     $      (1,302)    $         (2,954)
           Common stock price
             range (high-low)                           $  6 - 3 3/4       $  5 3/8 - 4      $  5  1/4 - 4     $  5 1/4 - 3 1/2
           Common stock price
             at quarter end                             $     4  5/8       $     4  1/4      $      5  1/8     $         3  3/4

           Net earnings (loss) per
           common shares outstanding                    $       0.03       $      (0.11)     $       (0.15)    $          (0.35)

           Weighted average common
           shares outstanding (1)                          8,415,257          8,416,477          8,346,051            8,346,051 
-----------------------------------------------------------------------------------------------------------------------------------

        Fiscal year ended December 28, 1996:
                                                       <S>               <C>                      <C>               <C>          
           Net sales                                    $     61,927     $       58,958      $      60,107     $         63,863 
           Gross profit                                       27,884             27,899             28,142               32,848 
           Net earnings (loss)                          $       (160)    $         (284)     $          92     $          2,316 
           Common stock price
             range (high-low)                           $ 5 - 3  1/2     $5 1/4 - 3 7/8      $  5 - 4  1/4     $     6 - 4  1/4
           Common stock price
             at quarter end                             $     4  1/2      $           5      $      4  3/8     $         5  5/8

           Net earnings (loss) per
           common shares outstanding                    $      (0.02)     $       (0.03)     $        0.01     $           0.28

           Weighted average common
           shares outstanding (1)                          8,346,051          8,346,051          8,390,211            8,382,594 
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1) Common stock equivalents were not used in the computation of average 
    shares outstanding in the third and fourth quarters of 1995 and in the first
    and second quarters of 1996 due to the antidilutive effect.





                                                                     (continued)

                                       46



<PAGE>   48



FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)



(18) PRO FORMA FINANCIAL DATA - DISTRIBUTION (UNAUDITED)

     Pro forma information reflects the November 1994 spin-off from the
Company's former parent company and the related debt transactions as if they
had occurred as of January 1, 1994. The pro forma information reflects the
annual interest expense of the Senior Notes and the bank credit facility, the
adjustment to pension expense, and a consulting agreement established at the
spin-off date.  The pro forma information does not necessarily reflect the
operating data of Florsheim which would have resulted if Florsheim had been
operated as a separate independent company during the fiscal year ended
December 31, 1994.


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                       Pro Forma (Unaudited)                      Actual
                                                       ---------------------         ------------------------------------ 
                                                          Fiscal year                 Fiscal year         Fiscal year
                                                            ended                       ended               ended
                                                         December 31                  December 30,        December 28, 
                                                            1994                         1995               1996
-------------------------------------------------------------------------------------------------------------------------
               <S>                                      <C>                           <C>                <C>          
                Earnings from operations                 $    16,275                   $    6,920         $    11,408 
                Interest expense                              14,500                       13,274               9,989 
                Net earnings (loss)                            1,573                       (4,846)              1,964 
-------------------------------------------------------------------------------------------------------------------------
                Earnings before interest, taxes,
                depreciation and amortization, and 
                other income and expense (EBITDA)        $    20,538                   $   11,459         $    16,283 
-------------------------------------------------------------------------------------------------------------------------
                Net earnings (loss) per
                common share                             $      0.19                   $    (0.58)        $      0.23
-------------------------------------------------------------------------------------------------------------------------
                Weighted average common
                shares outstanding (See Note 2)                                         8,346,051           8,379,287 
                Actual number of shares
                outstanding at 12/31/94                    8,346,051 
=========================================================================================================================
</TABLE>








                                                                     (continued)

                                       47


<PAGE>   49



FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)


(19) PRO FORMA FINANCIAL DATA - HY-TEST (UNAUDITED)

The following pro forma financial data reflects the sale of the assets of
Hy-Test as if the sale had occurred as of January 1, 1995 for pro forma
statement of operations purposes and as of December 30, 1995 for pro forma
balance sheet purposes.  The pro forma data excludes the net sales and direct
costs of the Hy-Test division and the Hy-Test operating profit contribution to
central overhead costs. Management believes that the assumptions used provide a
reasonable basis on which to present the pro forma condensed financial data.
The pro forma data are presented for informational purposes only and are not
necessarily indicative of the results that would have been achieved had the
transaction actually been consummated as of such dates.


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                          Twelve months ended
                                          --------------------------------------------------------
                                                          Pro forma (Unaudited)
                                          --------------------------------------------------------
                                             December 30,                  December 28, 
                                               1995                          1996
--------------------------------------------------------------------------------------------------
                                             Amount      %                 Amount       %
--------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>               <C>           <C>
Net sales                                 $  246,648     100%             $ 237,912     100%
Gross profit                                 113,920    46.2                115,173    48.4
Selling, general, and
  administrative expense                     109,442    44.4                103,265    43.4
Earnings from operations                       4,478     1.8                 11,908     5.0
EBITDA                                         8,877     3.6                 16,783     7.1
==================================================================================================
</TABLE>


The pro forma balance sheet date reflects the sale of Hy-Test receivables and
inventory, the sale of the Kirksville, Missouri factory, the transfer of
certain liabilities to Wolverine, the use of cash proceeds from the sale to
eliminate outstanding borrowings under the bank credit facility, and the
unapplied balance of the cash proceeds from the sale, net of transaction costs
and taxes as a result of the transaction, as if the transaction occurred as of
December 30,1995.








                            (continued on next page)






                                                                     (continued)


                                       48



<PAGE>   50


FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



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

--------------------------------------------------------------------------------------------------------------------
Balance Sheet Data                                                 Pro forma
                                                                --------------
                                                                  December 30,         December 28,
ASSETS                                                               1995                  1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                    <C>       
Cash and cash equivalents                                        $  16,227              $  21,691 
Receivables, net                                                    25,810                 26,431 
Inventories                                                         74,826                 73,824 
Other current assets                                                14,111                  8,773 
--------------------------------------------------------------------------------------------------------------------
Total current assets                                               130,974                130,719 

Property, plant and equipment, net                                  20,686                 24,974 
Other assets                                                        23,898                 29,545 
--------------------------------------------------------------------------------------------------------------------
Total assets                                                     $ 175,558              $ 185,238 
--------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities                                              $  27,242              $  35,603 
--------------------------------------------------------------------------------------------------------------------
Long-term debt                                                      69,450                 69,450 
Other long-term liabilities                                         22,885                 22,530 
--------------------------------------------------------------------------------------------------------------------
Total liabilities                                                  119,577                127,583 
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity                                                55,981                 57,655 
Total liabilities & shareholders' equity                         $ 175,558              $ 185,238 
--------------------------------------------------------------------------------------------------------------------
</TABLE>



 






                                                                     (continued)

                                       49




<PAGE>   51



FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)




(20)  SUBSEQUENT EVENT


   On March 20, 1997, the Company completed the sale of the corporate
   headquarters building located in downtown Chicago, Illinois, for an all cash
   sale price of approximately $8,050.  Net cash proceeds were approximately
   $6,000 before income taxes.


(21) SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

   In connection with the Distribution, Florsheim issued $85,000 in 12-3/4%
   Senior Notes due 2002, of which $69,450 are outstanding, and the Senior
   Notes are guaranteed, on a joint and several basis, by all domestic
   subsidiaries of Florsheim.

   The following condensed consolidating information presents:

   (1)  Condensed consolidating financial statements as of December 30,
        1995 and December 28, 1996 and for the fiscal years ended December 31,
        1994, December 30, 1995 and December 28, 1996, of (a) Florsheim, the
        parent, (b) the guarantor subsidiaries, (c) the nonguarantor
        subsidiaries and (d) Florsheim on a consolidated basis.

   (2)  Florsheim, the parent, with the investments in the guarantor and
        nonguarantor subsidiaries accounted for on the equity method, and

   (3)  Elimination entries necessary to consolidate Florsheim, the parent,
        with the guarantor and nonguarantor subsidiaries.


   There are no restrictions on the parent or guarantor subsidiaries to obtain
   funds from the subsidiaries by dividend or loan.







                                                                     (continued)

                                       50

<PAGE>   52
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)

<TABLE>
<CAPTION>
=====================================================================================================================

                                              CONDENSED CONSOLIDATING BALANCE SHEET

                                                        DECEMBER 30, 1995

=====================================================================================================================
                                                       Guarantor      Nonguarantor
                                           Parent      subsidiaries    subsidiaries     Eliminations    Consolidated
---------------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>               <C>           <C>              <C>            
Assets:                                                                                                                 
  Current assets:                                                                                                       
    Cash and cash                                                                                                       
      equivalents                         $  2,658       $ 1,131           $ 1,460       $      -         $  5,249      
    Receivables                             15,756        10,490             8,906            961           36,113      
    Inventories                             45,250        28,751            10,683              -           84,684      
    Prepaid expenses and                                                                                                
      other current assets                  11,032         1,450             1,636              -           14,118      
---------------------------------------------------------------------------------------------------------------------
  Total current assets                      74,696        41,822            22,685            961          140,164      
  Net property, plant and                                                                                               
    equipment                               14,473         4,640             2,629              -           21,742      
  Other assets                              22,231         1,755               504            (75)          24,415      
  Investments in subsidiaries               65,006             -                 -        (65,006)               -      
---------------------------------------------------------------------------------------------------------------------
Total assets                              $176,406       $48,217           $25,818       $(64,120)        $186,321      
=====================================================================================================================
Liabilities and Shareholders' Equity:                                                                                   
  Current liabilities:                                                                                                  
    Notes payable                                -             -                94              -               94      
    Accounts payable                         5,133         2,469             2,929            961           11,492      
    Accrued expenses                                                                                                    
      and other current                                                                                                 
      liabilities                           13,194           874             2,588              -           16,656      
---------------------------------------------------------------------------------------------------------------------
  Total current liabilities                 18,327         3,343             5,611            961           28,242      
  Long-term debt, less                                                                                                  
    current maturities                      80,126             -                 -              -           80,126      
  Deferred postretirement                                                                                               
    benefits                                20,462             -                 -              -           20,462      
  Other long-term liabilities                2,423             -                75            (75)           2,423      
  Shareholders' equity                      55,068        44,874            20,132        (65,006)          55,068      
---------------------------------------------------------------------------------------------------------------------
Total liabilities and                                                                                                   
  shareholders' equity                    $176,406       $48,217           $25,818       $(64,120)        $186,321      
---------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      51
<PAGE>   53
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)

<TABLE>
<CAPTION>
============================================================================================================================

                                              CONDENSED CONSOLIDATING BALANCE SHEET

                                                        DECEMBER 28, 1996

============================================================================================================================
                                                     Guarantor       Nonguarantor
                                      Parent        subsidiaries     subsidiaries     Eliminations      Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                <C>          <C>                   <C>              
Assets:
  Current assets:
    Cash and cash
      equivalents                        $ 18,427         $   397           $ 2,867        $      -            $ 21,691
    Receivables                            22,724             135             5,692          (2,120)             26,431
    Inventories                            41,086          20,216            12,522               -              73,824
    Prepaid expenses and                                                                                               
      other current assets                  6,522             820             1,431               -               8,773
----------------------------------------------------------------------------------------------------------------------------
  Total current assets                     88,759          21,568            22,512          (2,120)            130,719
  Net property, plant and                                                                                              
    equipment                              18,182           3,953             2,839               -              24,974
  Other assets                             29,068           1,369               514          (1,406)             29,545
  Investments in subsidiaries              44,110               -                 -         (44,110)                  -
----------------------------------------------------------------------------------------------------------------------------
Total assets                             $180,119         $26,890           $25,865        $(47,636)           $185,238
=============================================================================================================================
Liabilities and Shareholders' Equity:                                                                            
  Current liabilities:                                                                                                 
    Accounts payable                       15,916             377             3,727          (2,120)             17,900
    Accrued expenses                                                                                                   
      and other current                                                                                                
      liabilities                          14,568             548             2,587               -              17,703
----------------------------------------------------------------------------------------------------------------------------
  Total current liabilities                30,484             925             6,314          (2,120)             35,603
  Long-term debt, less                                                                                                 
    current maturities                     69,450               -                 -               -              69,450
  Deferred postretirement                                                                                              
    benefits                               20,614               -                 -               -              20,614
  Other long-term liabilities               1,916               -             1,406          (1,406)              1,916
  Shareholders' equity                     57,655          25,965            18,145         (44,110)             57,655
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and                                                                                                  
  shareholders' equity                   $180,119         $26,890           $25,865        $(47,636)           $185,238
============================================================================================================================
</TABLE>


                                      52

<PAGE>   54
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)

<TABLE>
<CAPTION>
============================================================================================================================

                                         CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

                                           FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994

============================================================================================================================
                                                               Guarantor     Nonguarantor
                                                   Parent     subsidiaries   subsidiaries    Eliminations     Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>          <C>             <C>            <C>           <C>            
Net sales                                          $215,158       $83,234         $40,302       $(36,693)        $302,001 
Cost of sales                                       130,781        49,998          23,017        (36,693)         167,103 
----------------------------------------------------------------------------------------------------------------------------
Gross profit                                         84,377        33,236          17,285              -          134,898 
Selling, general and administrative                                                                                         
  expenses                                           72,178        27,203          15,385              -          114,766 
----------------------------------------------------------------------------------------------------------------------------
Earnings from operations                             12,199         6,033           1,900              -           20,132 
Interest expense                                     10,407             1               -              -           10,408 
Equity earnings of subsidiaries,                                                                                            
  net of tax                                          6,854             -               -         (6,854)               - 
Other income (expense), net                          (1,916)           14           1,708              -             (194) 
----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income                                                                                               
  tax expense                                         6,730         6,046           3,608         (6,854)           9,530 
Income tax expense                                      248         2,353             447              -            3,048 
----------------------------------------------------------------------------------------------------------------------------
Net earnings                                         $6,482       $ 3,693          $3,161        $(6,854)          $6,482 
============================================================================================================================
</TABLE>   


                                      53

<PAGE>   55
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)

<TABLE>
<CAPTION>
====================================================================================================================================

                                         CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

                                           FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995

====================================================================================================================================
                                                              Guarantor      Nonguarantor
                                              Parent         subsidiaries    subsidiaries      Eliminations         Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>              <C>               <C>                  <C> 
Net sales                                    $182,042         $86,607          $41,978           $(25,320)             $285,307
Cost of sales                                 109,403          51,961           24,887            (25,320)              160,931
------------------------------------------------------------------------------------------------------------------------------------
Gross profit                                   72,639          34,646           17,091                  -               124,376
Selling, general and administrative
  expenses                                     70,772          30,607           16,077                  -               117,456
------------------------------------------------------------------------------------------------------------------------------------
Earnings from operations                        1,867           4,039            1,014                  -                 6,920
Interest expense                               13,273               1                -                  -                13,274
Equity earnings of subsidiaries,
  net of tax                                    2,730               -                -             (2,730)                    -
Other income (expense), net                       385              30             (348)                 -                    67
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income
  tax expense                                  (8,291)          4,068              666             (2,730)               (6,287)
Income tax expense (benefit)                   (3,445)          1,548              456                  -                (1,441)
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                          $ (4,846)        $ 2,520          $   210           $ (2,730)             $ (4,846)
====================================================================================================================================

                                           FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996

<CAPTION>
====================================================================================================================================
                                                          Guarantor      Nonguarantor
                                             Parent       subsidiaries    subsidiaries      Eliminations         Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>              <C>               <C>                  <C> 
Net sales                                    $172,683         $53,414          $43,026           $(24,268)             $244,855
Cost of sales                                  99,291          29,101           23,958            (24,268)              128,082
------------------------------------------------------------------------------------------------------------------------------------
Gross profit                                   73,392          24,313           19,068                  -               116,773
Selling, general and administrative
  expenses                                     65,532          23,391           16,442                  -               105,365
------------------------------------------------------------------------------------------------------------------------------------
Earnings from operations                        7,860             922            2,626                  -                11,408
Interest expense                                9,989               -                -                  -                 9,989
Equity earnings of subsidiaries,
  net of tax                                    2,614               -                -             (2,614)                    -
Other income (expense), net                     1,307             (29)              88                  -                 1,366
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income
  tax expense                                   1,792             893            2,714             (2,614)                2,785
Income tax expense (benefit)                     (172)            371              622                  -                   821
------------------------------------------------------------------------------------------------------------------------------------
Net earnings                                 $  1,964         $   522          $ 2,092           $ (2,614)             $  1,964
====================================================================================================================================
</TABLE>


                                      54


<PAGE>   56
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)

<TABLE>
<CAPTION>
==========================================================================================================================

                                         CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

                                           FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994

==========================================================================================================================
                                                                 Guarantor    Nonguarantor
                                                    Parent      subsidiaries  subsidiaries  Eliminations    Consolidated
--------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>             <C>            <C>           <C>
Net cash provided by
  operating activities                            $ 20,110       $  (8,736)      $ 1,598        $ 8,690        $ 21,662
--------------------------------------------------------------------------------------------------------------------------
Cash flows from investing
  activities:
    Proceeds from the                                          
      disposal of assets                               453              24           290            -               767
    Additions to property,
      plant, and equipment                          (7,538)           (811)       (1,149)           -            (9,498)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing
  activities:                                       (7,085)           (787)         (859)           -            (8,731)
--------------------------------------------------------------------------------------------------------------------------
Cash flows from financing
  activities:
    Net capital contribution
      from (to) Parent or
      INTERCO                                      (11,921)          9,158        (1,463)        (8,690)        (12,916)
    Receipts from long-term
      debt                                         110,000             -             -              -           110,000
    Payments of allocated
      long-term debt                              (107,802)            -             -              -          (107,802)
    Net reduction in bank
      credit facility                               (4,467)            -             -              -            (4,467)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
  activities:                                      (14,190)          9,158        (1,463)        (8,690)        (15,185)
--------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash
  equivalents                                       (1,165)           (365)         (724)            -           (2,254)
Cash and cash equivalents
  at beginning of period                             3,322           1,426         2,378             -            7,126
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
  end of period                                   $  2,157         $ 1,061       $ 1,654        $    -         $  4,872
==========================================================================================================================
</TABLE>


                                      55

<PAGE>   57
FLORSHEIM GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)


<TABLE>
<CAPTION>
================================================================================================================================

                                         CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                                                                 
                                            FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995

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

                                                                    Guarantor    Nonguarantor
                                                     Parent        subsidiaries  subsidiaries   Eliminations     Consolidated
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>          <C>              <C>            <C>
Net cash provided by                           
  operating activities                              $ 29,769        $ (368)      $  1,360         $  249         $   31,010
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing                      
  activities:                                  
    Proceeds from the                          
      disposal of assets                                 159           -               -              -                 159
    Additions to property,                     
      plant, and equipment                            (3,786)         (918)          (775)            -              (5,479)
--------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing                     
  activities:                                         (3,627)         (918)          (775)            -              (5,320)
--------------------------------------------------------------------------------------------------------------------------------
Net cash from financing                        
  activities:                                  
    Net capital contribution                   
      from (to) Parent                                  (234)        1,356           (873)          (249)                -
    Net change in notes                        
      and loans payable                                  -             -               94             -                  94
    Repurchase of Senior Notes                       (15,550)          -               -              -             (15,550)
    Net reduction in bank                      
      credit facility                                 (9,857)          -               -              -              (9,857)
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing       
  activities:                                        (25,641)        1,356           (779)          (249)           (25,313)
--------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash                  
  equivalents                                            501            70           (194)            -                 377
Cash and cash equivalents                      
  at beginning of period                               2,157         1,061          1,654             -               4,872
================================================================================================================================
Cash and cash equivalents at                   
  end of period                                     $  2,658        $1,131         $1,460         $   -          $    5,249
================================================================================================================================

</TABLE>                                       


                                      56
<PAGE>   58

FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)

               CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                 FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                               Guarantor    Nonguarantor
                                                 Parent       subsidiaries  subsidiaries  Eliminations  Consolidated
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>            <C>           <C>          <C>                      
Net cash provided by (used in)
    operating activities:
    (excluding assets/liabilities related
    to the sale of assets of Hy-Test)           $  9,993        $ (116)      $ 7,143       $(3,799)     $ 13,221
--------------------------------------------------------------------------------------------------------------------

Cash flows from investing
    activities:
      Proceeds from the sale of assets of
        Hy-Test, net of transaction costs         23,025             -             -             -        23,025
      Proceeds from the
        disposal of assets                           390             -             -             -           390
      Additions to property,
        plant, and equipment                      (7,586)         (898)         (940)            -        (9,424)
--------------------------------------------------------------------------------------------------------------------

Net cash provided by (used in)
  investing activities:                           15,829          (898)         (940)            -        13,991
--------------------------------------------------------------------------------------------------------------------
Net cash from financing
  activities:
    Net capital contribution
      from (to) Parent                               623           280        (4,702)        3,799             -
    Net change in notes
      and loans payable                              -               -           (94)            -           (94)
    Payment of long-term debt                    (10,676)            -             -             -       (10,676)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
  financing activities:                          (10,053)          280        (4,796)        3,799       (10,770)
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
  and cash equivalents                            15,769          (734)        1,407             -        16,442
Cash and cash equivalents
  at beginning of period                           2,658         1,131         1,460             -         5,249
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
  at end of period                              $ 18,427        $  397       $ 2,867       $     -      $ 21,691
--------------------------------------------------------------------------------------------------------------------
</TABLE>
                                   

Item 9.  Changes in and Disagreements with Independent Accountants on
Accounting and Financial Disclosure.
     None



                                      57
<PAGE>   59




                                    Part III

Item 10. Directors and Executive Officers of the Registrant

     The section entitled "Election of Directors-Nominees" in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders on May 15,
1997 is incorporated herein by reference.

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


NAME                  AGE            POSITION
----                  ---            --------
Charles J. Campbell   52   Chairman of the Board of Directors,
                           President and Chief Executive Officer
Thomas W. Joseph      46   President, International Division
Karen Nyman Latham    38   Vice President, Chief Financial Officer
L. David Sanguinetti  53   Executive Vice President, Chief
                           Operating Officer and President,
                           Retail Division
Gregory J. Van Gasse  46   Vice President, Marketing and Director, New Products
                           Division

     MR. CAMPBELL was elected Chairman of the Board of Directors and was
appointed to the Executive Committee of the Board of Directors in September
1995, and was elected to the additional office of President and Chief Executive
Officer in October 1995.  From August 1993 to February 1995,  Mr. Campbell was
chairman, president and chief executive officer of Crystal Brands Inc., a
multi-division apparel company.  From 1989 to August 1993, Mr. Campbell was
president and chief executive officer of Munsingwear Inc., a manufacturer and
marketer of branded men's sportswear.

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

     MS. LATHAM  was  elected Vice President, Chief Financial Officer, (January
1997).  From November 1990 through November 1996, Ms. Latham served as Vice
President and Treasurer of The Vigoro Corporation, a vertically integrated
fertilizer company, which was acquired by IMC Global Inc., of Northbrook,
Illinois.  Prior to her employment with The Vigoro Corporation, Ms. Latham was
employed by Harris Trust and Savings Bank from 1981 until November 1990.

     MR. SANGUINETTI  was appointed  Executive Vice President, Chief Operating
Officer (February 1997) and elected President, Retail Division, (April 1996).
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 Younkers Department Store and previously held several senior
officer positions at other department stores in multi-store management and
merchandising.

     MR. VAN GASSE was appointed Director, New Products Division (January
1996), and previously has served as    Vice President, Marketing  since joining
the Company in June 1990. Previously Mr. Van Gasse was employed by Chesebrough
Ponds/Unilever as Director of Marketing for cosmetics and personal care
products (June 1986 to June 1990) and performed in various domestic and
international marketing roles at Colgate Palmolive, also a personal care
company  (July 1974 to May 1986).





                                       58




<PAGE>   60


Item 11. Executive Compensation

The sections entitled "Executive Compensation", "Executive Compensation and
Stock Option Committee Report on Executive Compensation", "Compensation
Committee Interlocks", "Stock Options", "Retirement Plans", "Certain
Agreements", "Comparative Stock Performance Graph" and "Compensation and
Organization of Board of Directors"  of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on May 15, 1997, are
incorporated herein by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management

The section entitled "Security Ownership" of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on May 15, 1997, is
incorporated herein by reference.


Item 13. Certain Relationships and Related Transactions

The sections entitled  "Compensation Committee Interlocks" ,  "Certain
Agreements" and "Certain Transactions" of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on May 15, 1997, are
incorporated herein by reference.


                                       59




<PAGE>   61

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K


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


     1. Consolidated balance sheets, December 30, 1995 and December 28, 1996.

        Consolidated statements of operations for the fiscal year ended         
        December 31, 1994, for the fiscal year ended December 30, 1995, and for
        the fiscal year ended December 28, 1996.

        Consolidated statements of cash flows for the fiscal year ended December
        31, 1994,  for the fiscal year ended December 30, 1995, and for the
        fiscal year ended December 28, 1996.

        Consolidated statements of shareholders' equity for the fiscal year
        ended   December 31, 1994, for the fiscal year ended December 30, 1995,
        and for the fiscal year  ended December 28, 1996.

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

        2.1      Capital Contribution Agreement, dated as of October 2, 1994,
                 between INTERCO INCORPORATED and the Company (incorporated by 
                 reference to Exhibit 2.1 by The Florsheim Shoe Company
                 Registration Statement on Form S-1, and all amendments 
                 thereto, File No. 33-83204).

        2.2      Distribution and Services Agreement, dated as of November 17,
                 1994, among  INTERCO INCORPORATED, the Company and certain of
                 its subsidiaries  (incorporated by reference to Exhibit 2.2
                 by The Florsheim Shoe Company Registration Statement on  Form
                 10/A, Amendment No. 3).

        3.1      Restated Certificate of Incorporation of the Company.

        3.2      Restated by-laws of the Company.

        4.1      Indenture, dated as of November 17, 1994, among the Company,
                 certain of its subsidiaries and First Fidelity Bank, National  
                 Association, 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      Credit Agreement, dated as of November 17, 1994, among the
                 Company and its subsidiaries named therein, certain financial
                 institutions and BT Commercial Corporation, as agent
                 (incorporated  by reference to Exhibit 4.2 by The Florsheim
                 Shoe Company Registration Statement on Form S-1, and all
                 amendments  thereto, File No. 33-83204).

                                       60

<PAGE>   62


        4.3      Waiver #1, dated as of March 17, 1995 (received and became
                 effective April 3, 1995)  to the Credit Agreement, dated
                 November 17, 1994, among the Company, its subsidiaries  named
                 therein, BT Commercial Corporation, as agent, and certain
                 lenders named therein (incorporated by reference to Exhibit 4
                 as filed with the Company's Quarterly Report on  Form 10-Q for
                 the Quarterly Period Ended April 1, 1995).

        4.4      Amendment #1, dated as of December 29, 1995, to the Credit
                 Agreement, dated November 17,  1994, among the Company, its
                 subsidiaries named therein, BT Commercial Corporation, as
                 agent, and certain lenders named therein (incorporated by
                 reference to Exhibit 4.4 as filed with  the Company's Report on
                 Form 10-K, report date - December 30, 1995).

        4.5      Amendment #2, dated as of March 22, 1996, to the Credit
                 Agreement, dated November 17, 1994, among the Company, its
                 subsidiaries named therein, BT Commercial Corporation, as
                 agent, and certain lenders named therein  (incorporated by
                 reference to Exhibit 4.5 as filed with  the Company's Report on
                 Form 10-K, report date - December 30, 1995).

       10.1      INTERCO/Florsheim Tax Sharing Agreement, dated as of November
                 17, 1994, among  INTERCO INCORPORATED, the Company and certain
                 of its subsidiaries (incorporated by reference to Exhibit
                 10.1 by The Florsheim Shoe Company Registration Statement on
                 Form 10/A, Amendment No. 3).

       10.2      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).

       10.3      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).

       10.4      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).

       10.5      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).

       10.6      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).

       10.7      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).

       10.10     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).


                                       61


<PAGE>   63




       10.11     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).

       10.14     Employment Agreement, dated September 15, 1995, between the
                 Company and Ronald J.  Mueller, amending and superseding the   
                 employment agreement dated October 1, 1994,  between the
                 Company and Ronald J. Mueller (incorporated by reference to
                 Exhibit 10.14  filed with the Company's Quarterly Report on
                 Form 10-Q for the Quarterly Period ended September 30, 1995).

       10.15     Employment Agreement, dated September 7, 1995, between the
                 Company and Charles J.  Campbell  (incorporated by reference to
                 Exhibit 10.15 as filed with the Company's Quarterly Report on
                 Form 10-Q for the Quarterly Period ended September 30, 1995).

       10.16     Amendment #1, dated December 29, 1995, to Employment
                 Agreement between the Company and Charles J. Campbell 
                 (incorporated  by reference to Exhibit 10.16 as filed with the
                 Company's Report on form 10-K,  report date - December 30,
                 1995).

       10.17     Amendment, dated December 29, 1995, to Employment Agreement
                 between the Company and Ronald J. Mueller (incorporated by
                 reference to Exhibit 10.17 as filed with the Company's
                 Report on  form 10-K, report date - December 30, 1995).

       10.18     Asset Purchase Agreement dated as of February 13, 1996
                 between Wolverine World Wide, Inc., Hy-Test, Inc. and The
                 Florsheim Shoe Company (incorporated by reference to
                 Exhibit 10 as filed with the Company's Report on form 8-K, 
                 report date - March 22, 1996).

       10.19     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.
                 333-6353).

       10.20     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. 333-6353).

       10.21     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 Report on 10-Q, report date - September 28, 1996).

       10.22     Real Estate Sale Contract, as amended and restated,  for the
                 sale of property located at 130 South Canal Street,  Chicago,  
                 Illinois, dated February 21, 1997, between The Florsheim Shoe
                 Company and Everest Partners L.L.C.

       11        Statement re Computation of Net Earnings Per Common Share.

       12.1      Computation of ratio of earnings to fixed charges.

       21        Subsidiaries of the Company.

       23        Consent of KPMG Peat Marwick LLP.


(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 December 28, 1996.


                                       62




<PAGE>   64




     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.










                            (this  section is blank)

                                       63




<PAGE>   65




FLORSHEIM GROUP INC.  AND SUBSIDIARIES

           Index to Consolidated Financial Statements and Schedule


Consolidated Financial Statements:

           Consolidated balance sheets, December 30, 1995 and December 28, 1996.

           Consolidated statements of operations for the fiscal year ended
           December 31, 1994, for the fiscal year ended December 30,
           1995, and for the fiscal year ended December 28, 1996.

           Consolidated statements of cash flows for the fiscal year ended
           December 31, 1994, for the fiscal year ended December 30,
           1995, and for the fiscal year ended December 28, 1996.

           Consolidated statements of shareholders' equity for the fiscal
           year ended December 31, 1994, for the fiscal year ended
           December 30, 1995, and for the fiscal year ended December
           28, 1996.

           Notes to consolidated financial statements.

           Independent Auditors' Report

Consolidated Financial Statement Schedules:

                                                                    Schedule
           Valuation and qualifying accounts                           II


                                       64

<PAGE>   66



FLORSHEIM GROUP INC.                                                 Schedule II
                                                                     -----------

Valuation and Qualifying Accounts

(Dollars in thousands)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                            Charged      Charged        Other
                                                           Balance at      to costs     to other        charges
Fiscal                                                     beginning         and         account      add (deduct)    Balance at
Year               Description                              of year       expenses(1)    describe     describe(2)    end of year
<S>                <C>                                         <C>          <C>           <C>         <C>            <C>
1994               Allowance for doubtful accounts
                     and cash discounts                        $1,630       $6,096        $-          $(6,033)       $1,693

1995               Allowance for doubtful accounts
                     and cash discounts                         1,693        6,667         -           (6,076)        2,284

1996               Allowance for doubtful accounts
                     and cash discounts                         2,284        6,733         -           (7,312)        1,705
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  Includes provisions for bad debt expense of $750, $1,309, and $645 and
     provisions for cash discount expense of  $5,346, $5,358, and $6,088 for
     1994,1995, and 1996, respectively.

(2)  Includes write-offs for bad debts of $648, $838, and $893 and cash
     discounts allowed of $5,385, $5,238, and $6,419 for 1994, 1995, and 1996,
     respectively.






                                       65




<PAGE>   67




                          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 December 28, 1996 and December 30, 1995 and
the consolidated statements of operations, cash flows, and shareholders' equity
for the years ended December 28, 1996, December 30, 1995 and December 31, 1994.
These consolidated financial statements  are the responsibility of management
of Florsheim Group Inc.  Our responsibility is to express an opinion on these
consolidated financial statements and the 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 December 28, 1996 and December 30, 1995 and the
results of their operations and their cash flows for the years ended December
28, 1996, December 30, 1995 and December 31, 1994 in conformity with generally
accepted accounting principles.





KPMG Peat Marwick LLP
Chicago, Illinois
February 3, 1997

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<PAGE>   68


                                   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)

                                     By  Karen Nyman Latham
                                         -----------------------------------
                                         Karen Nyman Latham
                                         Vice President, Chief Financial Officer


Date:  March 25 , 1997

     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 25, 1997.


             Signature            Title
----------------------            -----------------------------------
          
Charles J. Campbell               Chairman of the Board of Directors,
----------------------          
(Charles J. Campbell)             President, Chief Executive Officer
          
Bernard Attal                     Director
----------------------          
(Bernard Attal)          
          
Robert H. Falk                    Director
----------------------          
(Robert H. Falk)          
          
Michael S. Gross                  Director
----------------------          
(Michael S. Gross)          
          
John J. Hannan                    Director
----------------------          
(John J. Hannan)          
          
Joshua J. Harris                  Director
----------------------          
(Joshua J. Harris)          
          
John H. Kissick                   Director
----------------------          
(John H. Kissick)          
          
Richard B. Loynd                  Director
----------------------          
(Richard B. Loynd)          
          
Ronald J. Mueller                 Director
----------------------          
(Ronald J. Mueller)          
          
Michael D. Weiner                 Director
----------------------          
(Michael D. Weiner)          
          
Karen Nyman Latham                Vice President,
----------------------          
(Karen Nyman Latham)              Chief Financial Officer
          
Thomas E. Poggensee               Treasurer, Secretary, Controller
----------------------          
(Thomas E. Poggensee)             and Chief Accounting Officer



                                       67