NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Brown Shoe Company, Inc. (the “Company”), founded in 1878, is a footwear retailer and wholesaler. The Company’s shares trade under the “BWS” symbol on the New York and Chicago Stock Exchanges.

The Company provides a broad offering of branded, licensed and private label casual, athletic and dress footwear products to women, children and men. Footwear is sold at a variety of price points through multiple distribution channels both domestically and internationally. The Company currently operates 1,406 retail shoe stores in the United States and Canada primarily under the Famous Footwear, Naturalizer and F. X. LaSalle names. In addition, through its Wholesale divisions, the Company designs, sources and markets footwear to retail stores domestically and internationally, including department stores, mass merchandisers and specialty shoe stores. In fiscal 2000, approximately 73% of the Company’s sales were at retail, compared to 70% in 1999 and 68% in 1998. See Note 5 for additional information regarding the Company’s business segments.

CONSOLIDATION

The consolidated financial statements include the accounts of Brown Shoe Company, Inc. and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions. The accounts of the Brown Pagoda division are consolidated as of December 31.

ACCOUNTING PERIOD

The Company’s fiscal year is the 52-or 53-week period ending the Saturday nearest to January 31. Fiscal years 2000, 1999 and 1998 ended on February 3, 2001, January 29, 2000, and January 30, 1999, respectively. Fiscal year 2000 included 53 weeks and fiscal years 1999 and 1998 each included 52 weeks.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all short-term investments with maturities of three months or less when purchased to be cash equivalents.

INVENTORIES

All inventories are valued at the lower of cost or market, with 94% of consolidated inventories using the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method had been used, inventories would have been $11.4 million and $11.7 million higher at February 3, 2001, and January 29, 2000, respectively.

COMPUTER SOFTWARE COSTS

The Company capitalizes in Other Assets certain costs, including internal payroll costs, incurred in connection with the development or acquisition of software for internal use.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization of property and equipment are provided over the estimated useful lives of the assets, or the remaining term of leases where applicable, using the straight-line method.

REVENUE RECOGNITION

Retail sales are recorded, net of returns, and exclude sales tax. Wholesale sales are recorded, net of returns, when the merchandise has been shipped and legal title has passed to the customer.

INCOME TAXES

Provision is made for the tax effects of timing differences between financial and tax reporting. These differences relate principally to employee benefit plans, bad debt reserves and inventory.

EARNINGS PER SHARE

Basic earnings per share is calculated using only the outstanding shares of common stock. Diluted earnings per share is calculated using all outstanding shares, unvested restricted stock and the dilutive effect, if any, of stock options.

COMPREHENSIVE INCOME

Comprehensive Income includes all changes in equity except those resulting from investments by owners and distributions to owners. The Accumulated Other Comprehensive Loss for the Company is comprised solely of cumulative foreign currency translation adjustments.

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and accordingly recognizes compensation expense related to stock appreciation units, the stock performance plan and restricted stock grants. No compensation expense is recorded for stock options granted at market value. The Company has elected to apply the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), by making pro forma disclosures of net earnings and earnings per share to reflect the fair value of stock options as if SFAS No. 123 had been adopted.