UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended July 29, 2006
[  ]	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 1-2191

BROWN SHOE COMPANY, INC. (Exact name of registrant as specified in its charter)
New York (State or other jurisdiction of incorporation or organization)	43-0197190 (IRS Employer Identification Number)
8300 Maryland Avenue St. Louis, Missouri (Address of principal executive offices)	63105 (Zip Code)
(314) 854-4000 (Registrant's telephone number, including area code)

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes  R    No £

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):       Large accelerated filer R    Accelerated filer £    Non-accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes £    No R

As of August 26, 2006, 28,612,747 common shares were outstanding.

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PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
($ thousands)	July 29, 2006			July 30, 2005			January 28, 2006
Assets
Current Assets
Cash and cash equivalents	$	31,001		$	37,037		$	34,288
Receivables		137,804			124,650			158,103
Inventories		480,409			493,745			414,295
Prepaid expenses and other current assets		26,973			22,260			18,985
Total current assets		676,187			677,692			625,671
Other assets		85,369			87,923			86,330
Goodwill and intangible assets, net		218,932			188,998			198,737
Property and equipment		364,197			351,154			354,683
Allowance for depreciation and amortization		(242,166	)		(235,237	)		(238,128	)
Net property and equipment		122,031			115,917			116,555
Total assets	$	1,102,519		$	1,070,530		$	1,027,293
Liabilities and Shareholders' Equity
Current Liabilities
Borrowings under revolving credit agreement	$	50,000		$	79,000		$	50,000
Trade accounts payable		227,316			195,974			173,083
Accrued expenses		120,372			119,776			131,409
Income taxes		2,366			7,038			3,828
Total current liabilities		400,054			401,788			358,320
Other Liabilities
Long-term debt		150,000			200,000			150,000
Other liabilities		83,607			70,021			84,763
Total other liabilities		233,607			270,021			234,763
Shareholders' Equity
Common stock		107,225			69,006			103,916
Additional paid-in capital		39,157			61,841			29,923
Accumulated other comprehensive income (loss)		4,258			(233	)		2,822
Retained earnings		318,218			268,107			297,549
Total shareholders’ equity		468,858			398,721			434,210
Total liabilities and shareholders’ equity	$	1,102,519		$	1,070,530		$	1,027,293

See notes to condensed consolidated financial statements.

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BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

	(Unaudited)						(Unaudited)
	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands, except per share amounts)	July 29, 2006			July 30, 2005			July 29, 2006			July 30, 2005
Net sales	$	579,319		$	551,480		$	1,154,857		$	1,074,763
Cost of goods sold		355,299			335,834			707,840			648,511
Gross profit		224,020			215,646			447,017			426,252
Selling and administrative expenses		197,754			204,872			402,157			392,410
Operating earnings		26,266			10,774			44,860			33,842
Interest expense		(4,436	)		(5,157	)		(8,924	)		(8,556	)
Interest income		495			184			779			633
Earnings before income taxes		22,325			5,801			36,715			25,919
Income tax provision		(7,134	)		(1,718	)		(11,493	)		(18,057	)
Net earnings	$	15,191		$	4,083		$	25,222		$	7,862
Basic earnings per common share	$	0.54		$	0.15		$	0.90		$	0.29
Diluted earnings per common share	$	0.52		$	0.14		$	0.87		$	0.28
Dividends per common share	$	0.08		$	0.067		$	0.16		$	0.133

See notes to condensed consolidated financial statements.

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BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Twenty-six Weeks Ended
($ thousands)	July 29, 2006			July 30, 2005
Operating Activities:
Net earnings	$	25,222		$	7,862
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		20,416			18,343
Share-based compensation expense		4,944			1,155
Loss on disposal of facilities and equipment		650			632
Impairment charges for facilities and equipment		698			565
Provision for doubtful accounts		634			105
Foreign currency transaction losses		67			56
Changes in operating assets and liabilities:
Receivables		20,027			(6,571	)
Inventories		(66,114	)		(42,878	)
Prepaid expenses and other current assets		(8,856	)		(4,726	)
Trade accounts payable and accrued expenses		43,196			64,831
Income taxes		(1,462	)		(399	)
Deferred rent		(2,100	)		(136	)
Deferred income taxes		401			6,582
Collection of insurance receivable		-			3,093
Other, net		(1,075	)		552
Net cash provided by operating activities		36,648			49,066
Investing Activities:
Acquisition cost, net of cash received		(22,700	)		(206,633	)
Capital expenditures		(23,696	)		(16,449	)
Other		-			531
Net cash used for investing activities		(46,396	)		(222,551	)
Financing Activities:
Decrease in borrowings under revolving credit agreement		-			(13,000	)
Proceeds from issuance of senior notes		-			150,000
Debt issuance costs		-			(4,733	)
Proceeds from stock options exercised		7,236			1,900
Tax benefit related to share-based plans		3,717			455
Dividends paid		(4,553	)		(3,666	)
Net cash provided by financing activities		6,400			130,956
Effect of exchange rate changes on cash		61			118
Decrease in cash and cash equivalents		(3,287	)		(42,411	)
Cash and cash equivalents at beginning of period		34,288			79,448
Cash and cash equivalents at end of period	$	31,001		$	37,037

See notes to condensed consolidated financial statements.

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BROWN SHOE COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals) to present fairly the financial position, results of operations, and cash flows of Brown Shoe Company, Inc. (the “Company”). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

The Company's business is subject to seasonal influences, particularly the back-to-school selling season at Famous Footwear, which falls in the Company’s third quarter. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole.

Certain prior period amounts on the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings.

Stock Split

On March 2, 2006, the Company’s Board of Directors authorized a three-for-two split of its common stock, to be effected in the form of a dividend of one share of stock for every two shares outstanding. The dividend was paid on April 3, 2006 to shareholders of record on March 17, 2006. All share and per share data provided herein gives effect to this stock split, applied retroactively.

For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended January 28, 2006.

Note 2. Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the Company will adopt the new requirements in its fiscal first quarter of 2007. The cumulative effects, if any, of adopting FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company has not yet determined the impact, if any, of adopting FIN 48 on its consolidated financial statements.

Note 3. Acquisition of Bennett Footwear Group and Related Financing

On April 22, 2005, the Company completed the acquisition of Bennett Footwear Holdings, LLC and its subsidiaries (“Bennett”) for $205 million in cash, including indebtedness of Bennett repaid by the Company at closing of $35.7 million. The operating results of Bennett have been included in the Company’s financial statements since April 22, 2005. The Company believes the acquisition of Bennett complements the Company’s portfolio of wholesale footwear brands, which are primarily sold in the moderately priced range, by adding owned and licensed brands that sell primarily in the better and bridge footwear price zones at department stores, including Via Spiga, Franco Sarto, Etienne Aigner and Nickels Soft.

The sellers were able to receive up to $42.5 million in contingent payments to be earned upon the achievement of certain performance targets over the three years following the acquisition. On March 29, 2006, the Company made a payment to the sellers of $22.7 million related to the first of the three contingent performance periods. The sellers may receive a total of up

5

to an additional $17.5 million in contingent payments related to the second and third performance periods. The total consideration paid by the Company in connection with the acquisition of Bennett was $229.1 million, including the $22.7 million contingent payment discussed above, and associated fees and expenses. The cost to acquire Bennett has been allocated to the assets acquired and liabilities assumed according to estimated fair values. The allocation resulted in acquired goodwill of $107.3 million and intangible assets related to trademarks, licenses and customer relationships of $98.5 million.

Prior to and in connection with the acquisition, the Company entered into a commitment with a lender to provide $100.0 million of short-term financing (the “Bridge Commitment”) on a senior unsecured basis. The Bridge Commitment was not funded as a result of the issuance of the senior notes, described below, simultaneously with the closing of the Bennett acquisition. The Company expensed all fees and costs associated with the Bridge Commitment, totaling $1.0 million, during the quarter ended April 2005 as a component of interest expense.

To fund a portion of the acquisition and associated expenses, the Company issued $150 million aggregate principal amount of 8.75% senior notes due 2012. To fund the remaining portion of the acquisition and associated expenses, the Company repatriated $60.5 million of earnings from its foreign subsidiaries pursuant to the American Jobs Creation Act of 2004 during the quarter ended April 2005.

Note 4. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the periods ended July 29, 2006, and July 30, 2005:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
(in thousands, except per share data)	July 29, 2006		July 30,  2005		July 29, 2006		July 30, 2005
NUMERATOR
Net earnings	$	15,191	$	4,083	$	25,222	$	7,862
DENOMINATOR
Denominator for basic earnings per common share		28,153		27,219		27,967		27,165
Dilutive effect of unvested restricted stock and stock options		961		1,182		1,127		1,112
Denominator for diluted earnings per common share		29,114		28,401		29,094		28,277
Basic earnings per common share	$	0.54	$	0.15	$	0.90	$	0.29
						0.
Diluted earnings per common share	$	0.52	$	0.14	$	0.87	$	0.28

Options to purchase 10,000 and 549,176 shares of common stock for the thirteen-week periods and 10,000 and 734,663 for the twenty-six-week periods ended July 29, 2006, and July 30, 2005, respectively, were not included in the denominator for diluted earnings per common share because their effect would be antidilutive.

Note 5. Comprehensive Income

Comprehensive income includes changes in shareholders’ equity related to foreign currency translation adjustments and unrealized gains or losses from derivatives used for hedging activities.

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The following table sets forth the reconciliation from net earnings to comprehensive income for the periods ended July 29, 2006, and July 30, 2005:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ Thousands)	July 29, 2006			July 30, 2005			July 29, 2006			July 30, 2005
Net earnings	$	15,191		$	4,083		$	25,222		$	7,862
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(594	)		1,172			702			604
Unrealized gains (losses) on derivative instruments		403			(727	)		825			(720	)
Net (gain) loss from derivatives reclassified into earnings		(157	)		296			(91	)		866
		(348	)		741			1,436			750
Comprehensive income	$	14,843		$	4,824		$	26,658		$	8,612

Note 6. Restructuring Charges

Strategic Earnings Enhancement Program

During the second quarter of 2006, the Company initiated a strategic earnings enhancement program designed to increase earnings through cost reductions and efficiency initiatives. The costs to implement these programs, which are expected to be incurred in the second half of 2006 and in 2007, are estimated to be in the range of $32-$37 million ($20-$23 million on after-tax basis). These estimates are preliminary and differences may arise between these estimates and actual costs to the Company. The Company incurred charges of $2.0 million ($1.2 million on an after-tax basis), or $0.04 per diluted share, in the second quarter of 2006, related to this program: $1.1 million for consulting services, all of which has been paid by the end of the quarter, and $0.9 million for severance. Approximately $0.1 million of severance was settled in the second quarter of 2006, leaving an accrued liability for the remaining $0.8 million.

Of the $2.0 million in costs, $1.4 million was recorded in the Other segment, $0.4 million was recorded in the Wholesale Operations segment, and $0.2 million was recorded in the Specialty Retail segment. The entire $2.0 million charge was reflected as a component of selling and administrative expenses. A tax benefit of $0.8 million was associated with this charge.

Naturalizer Restructuring and Store Closings

During 2005, the Company announced a series of initiatives to strengthen its Naturalizer brand, including plans to close underperforming Naturalizer stores, consolidate all buying, merchandise planning and allocation functions, consolidate all retail accounting and information systems support and streamline certain Naturalizer Wholesale operations, including the sales, marketing and product development areas.

The following is a summary of the activity in the reserve, by category of costs:

($ millions)	Employee Severance			Lease Buyouts			Inventory Markdowns			Fixed Asset Write-Offs			Total
Original charges and reserve balance	$	2.3		$	6.4		$	3.3		$	2.7		$	14.7
Amounts settled in 2005		(1.5	)		(6.3	)		(3.3	)		(2.7	)		(13.8	)
Amounts settled in 2006		(0.8	)		(0.1	)		-			-			(0.9	)
Reserve balance April 29, 2006	$	-		$	-		$	-		$	-		$	-

Inventory markdowns and the write-off of assets are non-cash items.

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Note 7. Business Segment Information

Applicable business segment information is as follows for the periods ended July 29, 2006, and July 30, 2005:

($ thousands)	Famous Footwear		Wholesale Operations		Specialty Retail			Other			Totals
Thirteen Weeks Ended July 29, 2006
External sales	$	292,682	$	227,162	$	59,475		$	-		$	579,319
Intersegment sales		667		36,726		-			-			37,393
Operating earnings (loss)		11,935		19,053		(1,450	)		(3,272	)		26,266
Operating segment assets		441,102		495,468		74,832			91,117			1,102,519
Thirteen Weeks Ended July 30, 2005
External sales	$	286,245	$	207,379	$	57,856		$	-		$	551,480
Intersegment sales		414		32,105		-			-			32,519
Operating earnings (loss)		9,296		16,260		(5,470	)		(9,312	)		10,774
Operating segment assets		441,319		452,402		76,233			100,576			1,070,530
Twenty-six Weeks Ended July 29, 2006
External sales	$	594,998	$	443,996	$	115,863		$	-		$	1,154,857
Intersegment sales		1,322		86,167		-			-			87,489
Operating earnings (loss)		27,830		33,201		(4,353	)		(11,818	)		44,860
Twenty-six Weeks Ended July 30, 2005
External sales	$	574,980	$	388,668	$	111,115		$	-		$	1,074,763
Intersegment sales		854		79,050		-			-			79,904
Operating earnings (loss)		25,810		33,765		(8,979	)		(16,754	)		33,842

The Other segment includes unallocated corporate administrative and other costs and, in 2006, net recoveries of $7.3 million from insurance companies for remediation costs associated with our Redfield site in Denver, Colorado. See Note 12 for further discussion of these recoveries.

The Other segment, Wholesale Operations segment and the Specialty Retail segment include $1.4 million, $0.4 million and $0.2 million, respectively, of charges in the thirteen weeks ended July 29, 2006 related to our strategic earnings enhancement program. See Note 6 for further discussion of these charges.

Note 8. Goodwill and Other Intangible Assets

Goodwill and intangible assets were attributable to the Company's operating segments as follows:

($ thousands)	July 29, 2006		July 30, 2005		January 28, 2006
Famous Footwear	$	3,529	$	3,529	$	3,529
Wholesale Operations		207,353		177,676		187,253
Specialty Retail		7,537		7,070		7,442
Other		513		723		513
	$	218,932	$	188,998	$	198,737

The goodwill and intangible assets in the Wholesale Operations segment primarily reflects the Company’s purchase price allocation for the acquisition of Bennett on April 22, 2005, which resulted in acquired goodwill of $107.3 million and identifiable intangible assets of $98.5 million. The intangible assets are being amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 14 years, except for the Via Spiga trademark, for which an indefinite life has been

8

assigned. The change between July 2005 and July 2006 is primarily due to the contingent purchase price payment as described in Note 2, which was made in March 2006, partially offset by amortization of intangible assets. The change between periods for the Specialty Retail segment reflects changes in the Canadian dollar exchange rate. The change in the Other segment from July 30, 2005, to July 29, 2006, of $0.2 million reflects the adjustment to the Company’s minimum pension liability recorded in the fourth quarter of 2005.

Note 9. Share-Based Compensation

Prior to fiscal 2006, which began on January 29, 2006, the Company accounted for its stock compensation awards using the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and the related Interpretations. Accordingly, the cost of stock appreciation units, stock performance awards and restricted stock grants were reflected in net earnings, but no compensation cost was recognized for stock options, as all option grants had an exercise price equal to the quoted market price of the underlying common stock on the date of grant.

The Company has adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R), effective January 29, 2006. SFAS 123R requires companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees. The Company has elected the modified prospective transition method and therefore adjustments to prior periods are not required as a result of adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted after the date of adoption and to any unrecognized expense of awards unvested at the date of adoption based on the grant date fair value. SFAS 123R also amends SFAS No. 95 “Statement of Cash Flows,” to require that tax benefits that had been reflected as operating cash flows be reflected as financing cash flows. The Company has a policy of issuing treasury shares in satisfaction of share-based awards.

Share-based compensation expense of $2.5 million and $4.9 million was recognized in the thirteen-week and twenty-six- week periods ended July 29, 2006, respectively, as a component of selling and administrative expense. The following table details the effect of share-based compensation on operating earnings, net income and earnings per share for the thirteen-week and twenty-six-week periods ended July 29, 2006:

	Thirteen Weeks Ended		Twenty-six Weeks Ended
($ thousands)	July 29, 2006		July 29, 2006
Expense for share-based compensation plans
Stock options	$	1,152	$	2,278
Stock performance awards		869		1,734
Restricted stock grants		470		932
Total share-based compensation included in    operating earnings		2,491		4,944
Income taxes		618		1,273
Effect on net earnings	$	1,873	$	3,671
Effect on basic earnings per common share	$	0.07	$	0.13
Effect on diluted earnings per common share	$	0.06	$	0.13

The Company issued 186,949 and 882,483 shares of common stock for the thirteen-week and twenty-six-week periods ended July 29, 2006 and 142,622 and 239,934 shares of common stock for the thirteen-week and twenty-six-week periods ended July 30, 2005, respectively, for stock options exercised, stock performance awards and restricted stock grants. For the thirteen-week and twenty-six-week periods ended July 29, 2006, there were no significant modifications to any share based awards.

Stock Options

Stock options are granted to employees at exercise prices equal to the quoted market price of the Company’s stock at the date of grant. Stock options generally vest over four years and have a term of 10 years. Compensation cost for all stock options is recognized over the requisite service period for each award. No dividends are paid on unexercised options. Expense for stock options granted prior to January 29, 2006 is recognized on a straight-line basis over the four year vesting period. Expense for

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stock options granted subsequent to January 29, 2006 is recognized on a straight-line basis separately for each vesting portion of the stock option award. The Company recognized expense related to stock options, net of estimated forfeitures, of approximately $1.2 million for the thirteen-week period and $2.3 million for the twenty-six-week period ended July 29, 2006.

There were no stock options granted during the second quarter of 2006. Fair values of options granted in the second quarter of 2005 were estimated using the Black-Scholes option-pricing model, based on the following assumptions:

	July 30, 2005
Dividend yield		1.2%
Expected volatility		43.4%
Risk-free interest rate		3.9%
Expected term (in years)		7

Dividend yields are based on historical dividend yields. Expected volatilities are based on historical volatilities of the Company’s common stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the options. The expected term of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns.

The following table illustrates the effect on net earnings and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock options outstanding for the thirteen-week and twenty-six-week periods ended July 30, 2005:

	Thirteen Weeks Ended			Twenty-six Weeks Ended
($ thousands, except per share amounts)	July 30, 2005			July 30, 2005
Net earnings, as reported	$	4,083		$	7,862
Add: Total share-based employee compensation expense    included in reported net earnings, net of related tax effect		591			728
Deduct: Total share-based employee compensation expense    determined under the fair value based method for all awards,    net of related tax effect		(1,689	)		(2,824	)
Pro forma net earnings	$	2,985		$	5,766
Earnings per share:
Basic - as reported	$	0.15		$	0.29
Basic - pro forma		0.11			0.21
Diluted - as reported		0.14			0.28
Diluted - pro forma		0.11			0.20

Summarized information about stock options outstanding and exercisable at July 29, 2006 is as follows:

	Outstanding				Exercisable
Exercise Price Range	Number of Options	Weighted- Average Remaining Life (Years)	Weighted- Average Exercise Price		Number of Options	Weighted- Average Exercise Price
$ 7 - $10	218,643	3	$	8	218,643	$	8
$10 - $12	191,934	3		11	191,934		11
$12 - $15	383,227	5		13	383,227		13
$15 - $20	360,567	7		17	242,810		17
$20 - $23	515,076	9		22	110,625		22
Over $23	634,985	8		27	224,088		26
	2,304,432	7	$	19	1,371,327	$	15

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The weighted average remaining contractual term of stock options outstanding and currently exercisable at July 29, 2006 was 7 years and 6 years, respectively. The aggregate intrinsic value of stock options outstanding and currently exercisable at July 29, 2006 was $31.3 million and $23.5 million, respectively. Intrinsic value for stock options is calculated based on the exercise price of the underlying awards as compared to the quoted price of the Company’s common stock as of the reporting date.

The following table summarizes stock option activity for the twenty-six week period ended July 29, 2006 under the current and prior plans:

	Number of Options		Weighted-Average Exercise Price
Outstanding at January 28, 2006	3,120,788		$	16
Granted	148,500			33
Exercised	(940,481	)		12
Forfeited	(10,478	)		27
Canceled or expired	(13,897	)		15
Outstanding at July 29, 2006	2,304,432		$	19
Exercisable at July 29, 2006	1,371,327		$	15

The intrinsic value of stock options exercised was $7.3 million and $2.2 million for the thirteen-week periods and $20.4 million and $2.7 million for the twenty-six-week periods ended July 29, 2006 and July 30, 2005, respectively. The amount of cash received from the exercise of stock options was $1.8 million and $1.3 million for the thirteen-week periods and $7.2 million and $1.9 million for the twenty-six-week periods ended July 29, 2006 and July 30, 2005, respectively. In addition, 55,025 and 41,535 shares were tendered by employees in satisfaction of the exercise price of stock options during the thirteen-week periods and 124,689 and 44,507 shares during the twenty-six-week periods ended July 29, 2006 and July 30, 2005 respectively. The tax benefit associated with stock options exercised during the period was $0.9 million and $0.2 million for the thirteen-week periods and $3.4 million and $0.3 million for the twenty-six-week periods ended July 29, 2006 and July 30, 2005, respectively.

The following table summarizes nonvested stock option activity for the twenty-six-week period ended July 29, 2006 under the current and prior plans:

	Number of Options		Weighted-Average Grant Date Fair Value
Nonvested at January 28, 2006	1,276,979		$	10
Granted	148,500			15
Vested	(481,896	)		9
Forfeited	(10,478	)		13
Nonvested at July 29, 2006	933,105		$	11

The weighted-average fair value of stock options granted for the twenty-six week periods ended July 29, 2006 and July 30, 2005 was $15.20 and $10.67, respectively. The total grant date fair value of stock options vested during the twenty-six week periods ended July 29, 2006 and July 30, 2005 was $4.4 million and $3.2 million, respectively. As of July 29, 2006, the total remaining unrecognized compensation cost related to nonvested stock options amounted to $7.6 million, which will be amortized over the weighted-average remaining requisite service period of 2.4 years.

Stock Performance Awards

Under the Company’s incentive compensation plans, common stock may be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Under the plan, employees are granted stock performance awards at a target number of shares, which cliff vest over a three-year service period. At the end of the three-year period, the employee will be given an amount of shares between 0% and 200% of the targeted award, depending on the achievement of specified financial goals for the three-year period.

11

Prior to the adoption of SFAS 123R, expense for stock performance awards was recognized based upon the intrinsic value of the awards and the anticipated number of shares to be awarded, and was adjusted to reflect the quoted market price of the Company’s common stock at the end of each period. Expense for stock performance awards is now recognized based upon the fair value of the awards on the date of grant and the anticipated number of shares to be awarded, on a straight-line basis over the three-year service period. The fair value of the stock performance awards is the quoted market price for the Company’s common stock on the date of grant. The Company had nonvested outstanding stock performance awards for 291,000 shares at a target level, as of July 29, 2006, which may result in the issuance of up to 582,000 shares at the end of the service periods. The Company recognized expense related to stock performance awards of $0.9 million and $0.7 million for the thirteen-week periods and $1.7 million and $0.7 million for the twenty-six-week periods ended July 29, 2006 and July 30, 2005, respectively.

The following table summarizes stock performance activity for the twenty-six week period ended July 29, 2006 under our incentive compensation plans:

	Number of Nonvested Stock Performance Awards at Target Level			Number of Nonvested Stock Performance Awards  at Maximum Level			Weighted-Average Grant Date Fair Value
Nonvested at January 28, 2006		134,250			268,500		$	23
Granted		161,250			322,500			32
Vested		-			-			-
Forfeited		(4,500	)		(9,000	)		32
Nonvested at July 29, 2006		291,000			582,000		$	26

The weighted-average fair value of stock performance awards granted for the twenty-six week periods ended July 29, 2006 and July 30, 2005 was $32 and $23, respectively. No stock performance awards vested during either of the twenty-six week periods ended July 29, 2006 and July 30, 2005. As of July 29, 2006, the total remaining unrecognized compensation cost related to nonvested stock performance awards amounted to $6.8 million, based on the anticipated number of shares to be awarded, which will be amortized over the weighted-average remaining requisite service period of 1.9 years.

Restricted Stock Grants

Under the Company’s incentive compensation plans, restricted stock of the Company may be granted at no cost to certain officers and key employees. Plan participants are entitled to cash dividends and voting rights for their respective shares. Restrictions limit the sale or transfer of these shares during the requisite service period, which ranges from four to eight years. Prior to January 29, 2006, the Company recorded unearned compensation equivalent to the quoted market price of the Company’s common stock at the date of grant as a charge to shareholders’ equity and subsequently amortized it to expense over the restriction period. Subsequent to January 29, 2006, expense for restricted stock grants is recognized on a straight-line basis separately for each vesting portion of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock grants is determined by the quoted market price for the Company’s common stock on the date of grant.

The following table summarizes restricted stock activity for the twenty-six week period ended July 29, 2006 under our incentive compensation plans:

	Number of Nonvested Restricted Shares			Weighted-Average Grant Date Fair Value
Nonvested at January 28, 2006		272,250		$	16
Granted		171,250			32
Vested		(50,250	)		12
Forfeited		(8,250	)		30
Fractional shares repurchased as a result of stock split		(11	)		22
Nonvested at July 29, 2006		384,989		$	23

12

For the thirteen-week periods ended July 29, 2006 and July 30, 2005, restricted shares granted were 13,000 and 0, respectively, and restricted shares terminated were 8,250 and 0, respectively. The weighted-average fair value of restricted stock awards granted for the thirteen-week periods ended July 29, 2006 and July 30, 2005 was $39 and $0, respectively. The total grant date fair value of restricted stock awards vested during the thirteen-week periods ended July 29, 2006 and July 30, 2005 was $0.3 million and $0 million, respectively.

Compensation expense related to restricted shares was $0.5 million and $0.2 million for the thirteen-week periods and $0.9 and $0.4 for the twenty-six-week periods ended July 29, 2006 and July 30, 2005, respectively. As of July 29, 2006, the total remaining unrecognized compensation cost related to nonvested restricted stock grants amounted to $6.1 million, which will be amortized over the weighted-average remaining requisite service period of 4 years.

Note 10. Retirement and Other Benefit Plans

The following table sets forth the components of net periodic benefit plan cost or income for the Company, including all domestic and Canadian plans:

	Pension Benefits						Other Postretirement Benefits
	Thirteen Weeks Ended						Thirteen Weeks Ended
($ thousands)	July 29, 2006			July 30, 2005			July 29, 2006		July 30, 2005
Service cost	$	1,923		$	1,580		$	-	$	-
Interest cost		2,600			2,283			65		65
Expected return on assets		(4,270	)		(3,935	)		-		-
Amortization of:
Actuarial loss (gain)		157			130			5		(15	)
Prior service costs		88			100			-		-
Net transition assets		(47	)		(46	)		-		-
Total net periodic benefit cost	$	451		$	112		$	70	$	50

	Pension Benefits						Other Postretirement Benefits
	Twenty-six Weeks Ended						Twenty-six Weeks Ended
($ thousands)	July 29, 2006			July 30, 2005			July 29, 2006			July 30, 2005
Service cost	$	3,951		$	3,188		$	-		$	-
Interest cost		5,093			4,567			125			130
Expected return on assets		(8,600	)		(7,870	)		-			-
Amortization of:
Actuarial loss (gain)		278			260			(5	)		(30	)
Prior service costs		174			200			-			-
Net transition assets		(93	)		(92	)		-			-
Total net periodic benefit cost	$	803		$	253		$	120		$	100

Note 11. Debt

Brown Shoe Company, Inc. has a Revolving Credit Agreement (the “Agreement”) that provides for a maximum line of credit of $350 million, subject to a calculated borrowing base, and is guaranteed by certain of its subsidiaries. Borrowing availability under the Agreement is based upon the sum of eligible accounts receivable and inventory, less outstanding borrowings, letters of credit and applicable reserves. The Agreement matures in 2009, and the Company’s obligations are secured by its accounts receivable and inventory. Borrowings under the Agreement bear interest at a variable rate determined based upon the level of availability under the Agreement. If availability falls below specified levels, the Company would then be subject to certain financial covenants. In addition, if availability falls below $25 million and the fixed charge coverage

13

ratio is less than 1.0 to 1, the Company would be in default. The Agreement also contains certain other covenants and restrictions. At July 29, 2006 the Company had $50.0 million of borrowings outstanding and $18.1 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $281.9 million at July 29, 2006.

To fund a portion of the Bennett acquisition, Brown Shoe Company, Inc. issued $150 million of 8.75% senior notes due 2012 (“Senior Notes”) in April 2005. The Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Brown Shoe Company, Inc. that is an obligor under its secured Revolving Credit Agreement. Interest on the Senior Notes is payable on May 1 and November 1 of each year. The Senior Notes mature on May 1, 2012, but are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain restrictive covenants.

Note 12. Commitments and Contingencies

Environmental Remediation

The Company is involved in environmental remediation and ongoing compliance activities at several of its former manufacturing sites. The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (also known as the Redfield site) and residential neighborhoods adjacent to and near the property that have been affected by solvents previously used at the facility. During the first half of 2006, the Company recorded no expense related to this remediation. The anticipated future cost of remediation activities at July 29, 2006, is $5.0 million and is included within accrued expenses and other noncurrent liabilities. While management has recorded its best estimate of loss, the ultimate cost to the Company may vary. The cumulative remediation costs incurred through July 29, 2006, are $17.2 million. As discussed further below, a portion of these costs has been recovered from insurers.

The Company has completed its remediation efforts at its closed New York tannery and two landfill sites related to that operation. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring over the next 18 years. The Company had an accrued liability of $2.1 million at July 29, 2006, related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $3.4 million. The Company expects to spend approximately $0.2 million in each of the next five succeeding years and $2.4 million in aggregate thereafter related to these sites.

In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other landfills.

Based on information currently available, the Company had an accrued liability of $7.5 million as of July 29, 2006, for the cleanup, maintenance and monitoring at all sites. Of the $7.5 million liability, $1.0 million is included in accrued expenses, and $6.5 million is included in other noncurrent liabilities in the consolidated balance sheet. The ultimate costs may vary, and it is possible costs may exceed the recorded amounts.

While the Company currently does not operate manufacturing facilities, prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future.

Litigation

In March 2000, a class action lawsuit was filed in Colorado State Court (District Court for the City and County of Denver) related to the Redfield site described above. Plaintiffs alleged claims for trespass, nuisance, strict liability, unjust enrichment, negligence and exemplary damages arising from the alleged release of solvents contaminating the groundwater and indoor air in the areas adjacent to and near the site. In December 2003, the jury hearing the claims returned a verdict finding the Company’s subsidiary negligent and awarded the class plaintiffs $1.0 million in damages. The Company recorded this award along with estimated pretrial interest on the award and estimated costs related to sanctions imposed by the court related to a pretrial discovery dispute between the parties. In the first quarter of 2005, the federal court hearing a cost recovery suit against other responsible parties approved a settlement agreement between the Company, its co-defendant in the class action lawsuit and an insurer which resolved all remaining sanctions issues related to the class action. The plaintiffs have filed an appeal of the December 2003 jury verdict, and the ultimate outcome and cost to the Company may vary.

14

In connection with the Redfield environmental remediation and class action litigation discussed above, the Company sued a number of its insurers seeking recovery of defense costs, indemnity and other damages related to the former operations and the remediation at the site. During the second quarter of 2006, we reached agreements with certain of those insurers to resolve our coverage claims arising out of the Redfield site. We recorded income related to these recoveries, net of related legal expenses, of $7.3 million ($4.4 million on an after-tax basis), or $0.15 per diluted share, in the second quarter of 2006, as a reduction of selling and administrative expenses. The Company continues to pursue recovery of additional remediation, defense costs and other damages from other insurers, but is unable to estimate the ultimate recovery from those insurers.

The Company also is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on the Company’s results of operations or financial position. All legal costs associated with litigation are expensed as incurred.

Other

During prior years, the Company recorded charges totaling $2.7 million relating to the insolvency of an insurance company that insured the Company for workers’ compensation and casualty losses from 1973 to 1989, for which certain claims are still outstanding. That insurance company is now in liquidation. While management has recorded its best estimate of loss, the ultimate outcome and cost to the Company may vary.

The Company is contingently liable for lease commitment guarantees of approximately $5.4 million in the aggregate, which relate to the Cloth World and Meis specialty retailing chains and a manufacturing facility, which were sold in prior years. In order for the Company to incur any liability related to these lease commitment guarantees, the current owners would have to default. At this time, the Company does not believe this is reasonably likely to occur.

Note 13. Financial Information for the Company and its Subsidiaries

In April 2005, Brown Shoe Company, Inc. issued senior notes to finance a portion of the purchase price of Bennett. The notes are fully and unconditionally and jointly and severally guaranteed by all existing and future subsidiaries of Brown Shoe Company, Inc. that are guarantors under its existing Revolving Credit Agreement. The following table presents the condensed consolidating financial information for each of Brown Shoe Company, Inc. (Parent), the Guarantors and subsidiaries of the Parent that are not Guarantors (the Non-Guarantors), together with consolidating eliminations, as of and for the periods indicated. The Guarantors are all direct or indirect wholly-owned (100%) subsidiaries of the Parent.

The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operation and cash flow of, each of the consolidating groups.

15

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JULY 29, 2006

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
ASSETS
Current Assets
Cash and cash equivalents	$	(413	)	$	13,093		$	18,321		$	-		$	31,001
Receivables		75,388			7,819			54,597						137,804
Inventories		90,981			378,378			15,005			(3,955	)		480,409
Prepaid expenses and other current assets		13,294			11,388			1,394			897			26,973
Total current assets		179,250			410,678			89,317			(3,058	)		676,187
Other assets		270,509			31,704			2,088			-			304,301
Property and equipment, net		15,313			103,389			3,329			-			122,031
Investment in subsidiaries		509,773			30,074			-			(539,847	)		-
Total assets	$	974,845		$	575,845		$	94,734		$	(542,905	)	$	1,102,519
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of debt	$	50,000		$	-		$	-		$	-		$	50,000
Trade accounts payable		33,551			139,195			54,570			-			227,316
Accrued expenses		56,632			58,511			8,643			(3,414	)		120,372
Income taxes		354			(579	)		1,245			1,346			2,366
Total current liabilities		140,537			197,127			64,458			(2,068	)		400,054
Other Liabilities
Long-term debt		150,000			-			-			-			150,000
Other liabilities		56,376			27,283			(52	)		-			83,607
Intercompany (receivable) payable		159,074			(158,282	)		198			(990	)		-
Total other liabilities		365,450			(130,999	)		146			(990	)		233,607
Shareholders’ equity		468,858			509,717			30,130			(539,847	)		468,858
Total liabilities and shareholders’ equity	$	974,845		$	575,845		$	94,734		$	(542,905	)	$	1,102,519

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE TWENTY-SIX WEEKS ENDED JULY 29, 2006

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net Sales	$	327,363		$	707,912		$	209,026		$	(89,444	)	$	1,154,857
Cost of goods sold		243,542			381,191			172,551			(89,444	)		707,840
Gross profit		83,821			326,721			36,475			-			447,017
Selling and administrative expenses		82,977			297,498			21,682			-			402,157
Equity in (earnings) of subsidiaries		(30,000	)		(14,966	)		-			44,966			-
Operating earnings		30,844			44,189			14,793			(44,966	)		44,860
Interest expense		(8,897	)		(9	)		(18	)		-			(8,924	)
Interest income		298			204			277			-			779
Intercompany interest income (expense)		2,483			(3,268	)		785			-			-
Earnings before income taxes		24,728			41,116			15,837			(44,966	)		36,715
Income tax benefit (provision)		494			(10,607	)		(1,380	)		-			(11,493	)
Net earnings (loss)	$	25,222		$	30,509		$	14,457		$	(44,966	)	$	25,222

16

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE TWENTY-SIX WEEKS ENDED JULY 29, 2006

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net cash provided by operating activities	$	(1,608	)	$	23,203		$	14,915		$	138		$	36,648
Investing activities
Acquisition cost, net of cash received		(22,700	)		-			-			-			(22,700	)
Capital expenditures		(758	)		(22,740	)		(198	)		-			(23,696	)
Net cash used by investing activities		(23,458	)		(22,740	)		(198	)		-			(46,396	)
Financing activities
Increase (decrease) in current maturities of debt, net of reclassifications		-			-			-			-			-
Proceeds from stock options exercised		7,236			-			-			-			7,236
Tax benefit related to share-based plans		3,717			-			-			-			3,717
Dividends paid		(4,553	)		-			-			-			(4,553	)
Intercompany financing		4,916			(2,064	)		(2,714	)		(138	)		-
Net cash (used) provided by financing activities		11,316			(2,064	)		(2,714	)		(138	)		6,400
Effect of exchange rate changes on cash		-			128			(67	)		-			61
Increase (decrease) in cash and cash equivalents		(13,750	)		(1,473	)		11,936			-			(3,287	)
Cash and cash equivalents at beginning of period		13,337			14,566			6,385			-			34,288
Cash and cash equivalents at end of period	$	(413	)	$	13,093		$	18,321		$	-		$	31,001

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JULY 30, 2005

($ thousands)	Parent		Guarantors			Non-Guarantors			Eliminations			Total
ASSETS
Current Assets
Cash and cash equivalents	$	803	$	10,532		$	25,702		$	-		$	37,037
Receivables		75,475		10,742			38,433			-			124,650
Inventories		105,247		385,944			7,155			(4,601	)		493,745
Prepaid expenses and other current assets		7,073		13,444			970			773			22,260
Total current assets		188,598		420,662			72,260			(3,828	)		677,692
Other assets		244,754		30,169			1,998			-			276,921
Property and equipment, net		17,248		95,175			3,494			-			115,917
Investment in subsidiaries		431,551		41,020			-			(472,571	)		-
Total assets	$	882,151	$	587,026		$	77,752		$	(476,399	)	$	1,070,530
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of debt	$	79,000	$	-		$	-		$	-		$	79,000
Trade accounts payable		20,363		141,025			34,586			-			195,974
Accrued expenses		56,245		57,387			5,023			1,121			119,776
Income taxes		2,799		1,869			2,369			1			7,038
Total current liabilities		158,407		200,281			41,978			1,122			401,788
Other Liabilities
Long-term debt		200,000		-			-			-			200,000
Other liabilities		42,936		27,194			(109	)		-			70,021
Intercompany payable (receivable)		82,087		(75,740	)		(1,397	)		(4,950	)		-
Total other liabilities		325,023		(48,546	)		(1,506	)		(4,950	)		270,021
Shareholders’ equity		398,721		435,291			37,280			(472,571	)		398,721
Total liabilities and shareholders’ equity	$	882,151	$	587,026		$	77,752		$	(476,399	)	$	1,070,530

17

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 2005

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net Sales	$	265,684		$	737,073		$	158,726		$	(86,720	)	$	1,074,763
Cost of goods sold		193,984			410,303			129,826			(85,602	)		648,511
Gross profit		71,700			326,770			28,900			(1,118	)		426,252
Selling and administrative expenses		67,894			311,365			14,269			(1,118	)		392,410
Equity in (earnings) of subsidiaries		(19,575	)		(13,372	)		-			32,947			-
Operating earnings		23,381			28,777			14,631			(32,947	)		33,842
Interest expense		(8,526	)		-			(30	)		-			(8,556	)
Interest income		11			86			536			-			633
Intercompany interest income (expense)		2,725			(3,291	)		566			-			-
Earnings before income taxes		17,591			25,572			15,703			(32,947	)		25,919
Income tax provision		(9,729	)		(5,923	)		(2,405	)		-			(18,057	)
Net earnings (loss)	$	7,862		$	19,649		$	13,298		$	(32,947	)	$	7,862

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 2005

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net cash provided by operating activities	$	12,540		$	27,897		$	7,209		$	1,420		$	49,066
Investing activities
Payments on acquisition, net of cash received		(206,633	)		-			-			-			(206,633	)
Capital expenditures		(665	)		(15,513	)		(271	)		-			(16,449	)
Other		531			-			-			-			531
Net cash used by investing activities		(206,767	)		(15,513	)		(271	)		-			(222,551	)
Financing activities
Increase (decrease) in current maturities of debt, net of reclassifications		(13,000	)		-			-			-			(13,000	)
Proceeds from the issuance of Senior Notes		150,000			-			-			-			150,000
Debt issuance costs		(4,733	)		-			-			-			(4,733	)
Proceeds from stock options exercised		1,900			-			-			-			1,900
Tax benefit related to share based plans		455			-			-			-			455
Dividends (paid) received		(3,666	)		60,464			(60,464	)		-			(3,666	)
Intercompany financing		67,732			(72,395	)		6,083			(1,420	)		-
Net cash provided (used) by financing activities		198,688			(11,931	)		(54,381	)		(1,420	)		130,956
Effect of exchange rate changes on cash		-			174			(56	)		-			118
Increase (decrease) in cash and cash equivalents		4,461			627			(47,499	)		-			(42,411	)
Cash and cash equivalents at beginning of period		(3,657	)		9,905			73,200			-			79,448
Cash and cash equivalents at end of period	$	804		$	10,532		$	25,701		$	-		$	37,037

18

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our net earnings for the second quarter of fiscal 2006 were significantly higher than the same period last year as several unusual items affected both years. On an operating basis, results were in line with our expectations and each segment achieved improved results.

·   Consolidated net sales rose 5.0% to $579.3 million for the second quarter of fiscal 2006, as compared to $551.5 million for the second quarter of last year, driven by higher sales in our Wholesale Operations.

·   Operating earnings more than doubled to $26.3 million in the second quarter of 2006 compared to $10.8 million in the second quarter of 2005.

·   Net earnings were $15.2 million, or $0.52 per diluted share, for the second quarter compared to $4.1 million, or $0.14 per diluted share, for the second quarter of last year.

Following is a summary of the significant factors affecting the comparability of our financial results for the second quarter of 2006 as compared to the second quarter of 2005:

·   During the second quarter of 2006, we reached agreements with certain insurance carriers to recover environmental remediation costs associated with our facility in Denver, Colorado (the Redfield facility). We recorded income related to these recoveries, net of related legal expenses, of $7.3 million ($4.4 million on an after-tax basis), or $0.15 per diluted share, in the second quarter of 2006. We continue to pursue recovery of additional remediation costs from other insurance carriers.

·   During the second quarter of 2006, we initiated a strategic earnings enhancement program designed to increase earnings through cost reductions and efficiency initiatives and reallocating resources and investment to drive consumer preference. Key elements of the plan include: i) restructuring administrative and support areas; ii) redesigning logistics and distribution platforms; iii) reorganizing to eliminate operational redundancies; iv) realigning strategic priorities; and v) refining the supply chain process and enhancing inventory utilization. We are in the early stages of developing these earnings improvement initiatives, but estimate that these initiatives will generate a minor amount of after-tax savings in 2006, $10-$12 million in 2007 with continuing annual after-tax savings of approximately $17-$20 million, beginning in 2008. The costs to implement these programs are estimated to be in the range of $20-$23 million, after-tax with these costs incurred in the second half of 2006 and in 2007. The estimates of costs and savings related to these initiatives are preliminary and differences may arise between these estimates and actual costs and savings. We incurred charges of $2.0 million ($1.2 million on an after-tax basis), or $0.04 per diluted share, in the second quarter of 2006, related to this program.

·   At the beginning of fiscal 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees. In 2005 and prior years, no compensation cost was recognized for stock options, as all option grants had an exercise price equal to the market value of the underlying common stock on the date of grant. During the second quarter of 2006, we recognized $1.2 million ($1.0 million on an after-tax basis), or $0.04 per diluted share, of share-based compensation related to stock options. See Note 9 of the condensed consolidated financial statements for additional information related to share-based compensation and the impact of adopting SFAS 123R.

·   During the second quarter of 2005, we recorded charges of $2.9 million ($1.8 million on an after-tax basis, or $0.06 per diluted share) related to our initiative to strengthen our flagship Naturalizer brand by closing underperforming retail stores and consolidating and streamlining certain retail and wholesale functions.

·   During the second quarter of 2005, our gross profit was reduced by approximately $2.0 million ($1.3 million on an after-tax basis, or $0.05 per diluted share) related to the write-up of inventory to fair value during the Bennett purchase price allocation. Lower margins were recognized on this inventory as it was sold in the second quarter of 2005.

19

Following is a summary of our operating results in the second quarter of 2006 and the status of our balance sheet:

·   Famous Footwear’s net sales increased 2.2% to $292.7 million in the second quarter compared to $286.2 million last year, driven by our higher store count. Same-store sales decreased 0.1%, reflecting lower customer traffic and lower sales of athletic footwear. However, operating earnings increased 28.4% to $11.9 million in the second quarter compared to $9.3 million in the second quarter of the prior year due to lower markdowns and an improved gross profit rate.

·   Our Wholesale Operations segment’s sales increased 9.5% to $227.2 million in the second quarter compared to $207.4 million last year, reflecting increased sales of Naturalizer, LifeStride, Dr. Scholl’s and private label product. These gains were partially offset by lower sales of Bass product. Operating earnings increased in the second quarter to $19.1 million compared to $16.3 million in the second quarter last year. The most significant improvement in operating earnings is in our Naturalizer division, which has benefited from our new business model and recent process changes designed to enhance the performance of the brand. Strength in the Naturalizer division was partially offset by weakness at Bass and the lackluster performance of our Franco Sarto, Via Spiga and Etienne Aigner brands. We recently announced that we are exiting the Bass business at the end of 2006, and we estimate that we will incur incremental after-tax losses of approximately $2.1 million in the second half of 2006.

·   Our Specialty Retail segment experienced a 2.8% increase in net sales to $59.5 million in the second quarter, compared to $57.9 million in the second quarter of last year, due to growth in our Shoes.com business. Same-store sales declined 2.7% for the quarter. We incurred an operating loss of $1.5 million in the second quarter compared to an operating loss of $5.5 million in the second quarter of the prior year. This improvement is primarily a result of the closure of 95 underperforming Naturalizer retail stores in 2005, which resulted in a more productive store base in 2006, and the consolidation of certain administrative functions, and the impact of the charges incurred of $2.3 million related to these initiatives that were recorded in the second quarter of 2005.

·   Inventories at quarter-end were $480.4 million, down from $493.7 million last year, principally reflecting lower inventory levels within our Wholesale Operations segment. Our current ratio, the relationship of current assets to current liabilities, decreased to 1.69 to 1 compared to 1.75 to 1 at January 28, 2006, but was even with the July 30, 2005 ratio. Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and shareholders’ equity decreased to 29.9% at the end of the quarter from 41.2% at the end of the year-ago quarter, reflecting the decrease in borrowings under our revolving credit agreement and increased shareholders’ equity.

CONSOLIDATED RESULTS

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	July 29, 2006				July 30, 2005				July 29, 2006				July 30, 2005
($ millions)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Net sales	$	579.3		100.0%	$	551.5		100.0%	$	1,154.9		100.0%	$	1,074.8		100.0%
Cost of goods sold		355.3		61.3%		335.9		60.9%		707.9		61.3%		648.5		60.3%
Gross profit		224.0		38.7%		215.6		39.1%		447.0		38.7%		426.3		39.7%
Selling and administrative expenses		197.7		34.2 %		204.8		37.1%		402.1		34.8%		392.5		36.6%
Operating earnings		26.3		4.5%		10.8		2.0%		44.9		3.9%		33.8		3.1%
Interest expense		(4.4	)	(0.8)%		(5.2	)	(0.9)%		(8.9	)	(0.8)%		(8.5	)	(0.8)%
Interest income		0.4		0.2%		0.2		0.0%		0.7		0.1%		0.6		0.1%
Earnings before income taxes		22.3		3.9%		5.8		1.1%		36.7		3.2%		25.9		2.4%
Income tax provision		(7.1	)	(1.3)%		(1.7	)	(0.4)%		(11.5	)	(1.0)%		(18.0	)	(1.7)%
Net earnings	$	15.2		2.6%	$	4.1		0.7%	$	25.2		2.2%	$	7.9		0.7%

20

Net Sales

Net sales increased $27.8 million, or 5.0%, to $579.3 million in the second quarter of 2006 as compared to $551.5 million in the second quarter of the prior year. Famous Footwear’s sales increased by $6.5 million over the year-ago quarter, reflecting the higher store count in the current period. Our Wholesale Operations contributed the remaining portion of this increase, driven primarily by increases in our Naturalizer, Life Stride, Dr. Scholl’s and private label divisions, partially offset by declines in our Bass division.

Net sales increased $80.1 million, or 7.5%, to $1,154.9 million in the first half of 2006 as compared to $1,074.8 million in the first half of the prior year. The acquired Bennett business contributed $57.6 million of the increase during the first half accounting for approximately 72% of the increase. Famous Footwear’s sales increased by $20.0 million over the year-ago quarter, reflecting a same-store sales gain of 0.9% and additional stores in the current period. Our Wholesale Operations, excluding Bennett, decreased $2.2 million, driven primarily by a decline in our Bass and children’s divisions.

Gross Profit

Gross profit increased $8.4 million, or 3.9%, to $224.0 million for the second quarter of 2006 as compared to $215.6 million in the second quarter of the prior year. The increase in gross profit is the result of higher net sales. However, as a percent of net sales, our gross profit rate decreased to 38.7% in the second quarter from 39.1% in the second quarter of the prior year, driven by lower margin rates in our Wholesale Operations segment, primarily in our Franco Sarto, Via Spiga and Etienne Aigner brands, and a greater mix of wholesale business, which carries a lower gross profit rate than our retail business. Our Famous Footwear and Specialty Retail divisions achieved higher gross profit rates.

Gross profit increased $20.7 million, or 4.9%, to $447.0 million for the first half of 2006 as compared to $426.3 million in the first half of the prior year. As a percent of net sales, our gross profit rate decreased to 38.7% in the first half from 39.7% in the first half of the prior year, driven by lower margin rates in our Wholesale Operations segment, primarily in our Franco Sarto, Via Spiga and Etienne Aigner brands, and a greater mix of wholesale business. Our Specialty Retail division increased its gross profit rate as a result of the closure of underperforming stores in the prior year.

Selling and Administrative Expenses

Selling and administrative expenses decreased $7.1 million, or 3.5%, to $197.7 million for the second quarter as compared to $204.8 million in the second quarter of the prior year. The following are some of the more significant factors impacting the comparison of selling and administrative expenses for the second quarter:

·   Decrease of $7.3 million related to agreements reached with certain insurance carriers to reimburse past environmental remediation costs, net of related legal fees, which was recorded as a reduction of selling and administrative expenses in the second quarter of 2006. See Note 12 of the condensed consolidated financial statements for further information.

·   Decrease of $2.7 million related to expenses recorded in the second quarter of 2005 related to our initiative to close underperforming retail stores and consolidate certain administrative functions.

·   Increase of $2.0 million consulting and severance costs incurred in connection with our earnings enhancement program.

·   Increase of $1.2 million for share-based compensation expense related to stock options, as required by SFAS 123R, which was adopted at the beginning of the fiscal year.

As a percentage of sales, selling and administrative expenses have decreased to 34.2% from 37.1%, due to the impact of the factors listed above and overall better leveraging of our expense base.

Selling and administrative expenses increased $9.6 million, or 2.5%, to $402.1 million for the first half as compared to $392.5 million in the first half of the prior year. The following are some of the more significant factors impacting the comparison of selling and administrative expenses for the first half:

·   Increase of $11.2 million related to Bennett. The majority of this increase is due to the inclusion of Bennett’s selling and administrative expenses, including the amortization of intangible assets, for the entire period in 2006 and only the period since acquisition (April 22, 2005) in the prior year.

·   Increase of $6.6 million related to the larger store and sales base at our Famous Footwear division.

·   Decrease of $7.3 million related to the insurance recoveries, described above.

·   Decrease of $2.7 million related to expenses recorded in the second quarter of 2005 related to our initiative to close underperforming Naturalizer stores and consolidate certain administrative functions.

·   Increase of $2.0 million for costs related to our earnings enhancement program.

·   Increase of $2.3 million for share-based compensation expense related to stock options, as required by SFAS 123R, which was adopted at the beginning of the fiscal year.

21

As a percentage of sales, selling and administrative expenses have decreased to 34.8% from 36.6%, due to the impact of the insurance recovery and overall better leveraging of our expense base.

Interest Expense

Interest expense decreased $0.8 million to $4.4 million in the second quarter as compared to $5.2 million in the second quarter of the prior year. The decrease in interest expense is a result of the lower average borrowings on our revolving credit facility.

Interest expense increased $0.4 million to $8.9 million in the first half as compared to $8.5 million in the first half of the prior year. The increase in interest expense is a result of the additional interest expense from the $150 million 8.75% senior notes that we issued in April, 2005 to fund a portion of the Bennett acquisition, offset by lower average borrowings on our revolving credit facility and the non-recurrence of a bridge loan fee incurred in 2005 related to the Bennett acquisition.

Income Tax Provision

Our consolidated effective tax rate was 32.0% in the second quarter of 2006 as compared to 29.6% in the second quarter of the prior year. The increase is due to the recognition of stock option expense in net earnings in 2006, as required by SFAS No. 123R, the majority of which is not deductible for tax purposes. In addition, the tax rate was negatively impacted by the recognition of minor audit settlements in the second quarter of 2006 accounted as discrete tax expense adjustments.

Our consolidated effective tax rate was 31.3% in the first half of 2006 as compared to 69.7% in the first half of the prior year. In the first half of 2005, our income tax provision included $9.6 million of incremental tax expense related to our repatriation of $60.5 million of previously untaxed earnings from our foreign subsidiaries in the first quarter of 2005. Excluding the tax on the repatriation, the effective tax rate was 32.8% in the first half of 2005. Our current year rate for the first half of 2006 of 31.3% is lower than the prior year rate due to a higher anticipated mix of wholesale earnings, which are taxed at lower rates, and a current year reduction in the Canadian statutory rates.

Net Earnings

Net earnings increased $11.1 million, or 272%, to $15.2 million in the second quarter as compared to $4.1 million in the second quarter of the prior year. The following are some of the more significant factors impacting the comparison of net earnings for the second quarter:

·   Increase of $4.4 million (after-tax) related to insurance recoveries recorded in the second quarter of 2006, as described above.

·   Increase of $1.8 million (after-tax) related to expenses incurred in 2005 to close underperforming Naturalizer stores and consolidate certain administrative functions.

·   Decrease of $1.2 million (after-tax) related to our expenses for our earnings enhancement program recorded in 2006.

·   Decrease of $1.0 million (after-tax) for share-based compensation expense in 2006 related to stock options.

In addition to the above listed items, we experienced improvement in all of our major divisions, with the largest increase coming from our Wholesale Operations segment. Specialty Retail improved its operating results after eliminating underperforming stores last year. Famous Footwear improved upon the prior year as a result of a larger store base and improved gross profit rate resulting from our inventory freshness and velocity initiatives.

Net earnings increased $17.3 million, or 221%, to $25.2 million in the first half as compared to $7.9 million in the first half of the prior year. The following are some of the more significant factors impacting the comparison of net earnings for the first half:

·   Increase of $9.6 million related to tax expense on the repatriation of foreign earnings in the first quarter of 2005.

·   Increase of $4.4 million (after-tax) related to insurance recoveries, described above.

·   Decrease of $2.1 million (after-tax) for share-based compensation expense in 2006 related to stock options.

·   Decrease of $1.2 million (after-tax) related to our expenses for our earnings enhancement program recorded in 2006.

·   Increase of $1.8 million (after-tax) related to expenses incurred in 2005 to close underperforming Naturalizer stores and consolidate certain administrative functions.

·   Increase of $0.6 million (after-tax) related to a bridge loan fee recorded in 2005 in connection with the financing for the Bennett acquisition.

22

After consideration of the above listed factors, the Company’s net earnings in the quarter and year to date have benefited from improved operating earnings at Famous Footwear and the more productive store base at Specialty Retail, which closed underperforming stores in 2005.

FAMOUS FOOTWEAR

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	July 29, 2006			July 30, 2005			July 29, 2006			July 30, 2005
($ millions, except sales per square foot)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net Sales
Operating Results
Net sales	$	292.7	100.0%	$	286.2	100.0%	$	595.0	100.0%	$	575.0	100.0%
Cost of goods sold		160.8	54.9%		160.5	56.1%		331.5	55.7%		320.1	55.7%
Gross profit		131.9	45.1%		125.7	43.9%		263.5	44.3%		254.9	44.3%
Selling and administrative expenses		120.0	41.0%		116.4	40.7%		235.7	39.6%		229.1	39.8%
Operating earnings	$	11.9	4.1%	$	9.3	3.2%	$	27.8	4.7%	$	25.8	4.5%
Key Metrics
Same-store sales % change		(0.1)%			2.2%			0.9%			1.8%
Same-store sales $ change	$	(0.3)		$	5.5		$	5.0		$	9.6
Sales change from new and closed stores, net	$	6.8		$	10.9		$	15.0		$	23.5
Sales per square foot	$	44			44		$	89		$	88
Square footage (thousand sq. ft.)		6,706			6,540			6,706			6,540
Stores opened		28			15			38			35
Stores closed		17			9			28			21
Ending stores		963			933			963			933

Net Sales

Net sales increased $6.5 million, or 2.2%, to $292.7 million in the second quarter of 2006 as compared to $286.2 million in the second quarter of the prior year. This increase is attributable to higher sales from new stores, partially offset by the same-store sales decrease of 0.1%. The same-store decrease was attributable to lower customer traffic coming into the stores. The ratio of customers making purchases, however, increased and sales per transaction also increased. Famous Footwear benefited from sales improvements in virtually all footwear categories except athletics, and the women’s junior category performed particularly well. During the second quarter of 2006, we opened 28 new stores and closed 17, resulting in 963 stores at the end of the second quarter as compared to 933 at the end of the second quarter of the prior year. Sales per square foot were $44, the same as a year ago.

Net sales increased $20.0 million, or 3.5%, to $595.0 million in the first half of 2006 as compared to $575.0 million in the first half of the prior year. This increase is attributable to higher sales from new stores and the same-store sales increase of 0.9%. As with the second quarter, sales of all footwear categories increased, except for athletic. During the first half of 2006, we opened 38 new stores and closed 28, resulting in 963 stores at the end of the first half as compared to 933 at the end of the first half of the prior year. Sales per square foot were $89, slightly larger than a year ago.

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. This method avoids the distorting effect that grand opening sales have in the first month of operation. Relocated stores are treated as new stores. Closed stores are excluded from the calculation. Sales change from new and closed stores, net, reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation.

23

Gross Profit

Gross profit increased $6.2 million, or 4.9%, to $131.9 million in the second quarter of 2006 as compared to $125.7 million in the second quarter of the prior year. The increase reflects a larger store base and a higher gross profit rate, which was 45.1% in the second quarter of 2006, up from 43.9% in the second quarter of the prior year. The improvement in the rate was due to aggressive markdowns taken in the second quarter of 2005 related to closed-up footwear and athletic footwear in order to better position the division for the back to school season.

Gross profit increased $8.6 million, or 3.4%, to $263.5 million in the first half of 2006 as compared to $254.9 million in the first half of the prior year. The increase in the gross profit is due to the higher sales base and larger store count. As a percentage of net sales, the gross profit rate of 44.3% was the same as the first half of the prior year.

Selling and Administrative Expenses

Selling and administrative expenses increased $3.6 million, or 3.0%, to $120.0 million for the second quarter of 2006 as compared to $116.4 million in the second quarter of the prior year. This increase is primarily attributable to increased retail facilities costs, which are driven by store growth, and higher selling costs. In addition, the division recognized $0.2 million of expense related to stock options in 2006, as required by SFAS 123R, with no stock option expense recorded in the prior year. As a percentage of net sales, selling and administrative costs have increased to 41.0% from 40.7% last year.

Selling and administrative expenses increased $6.6 million, or 2.9%, to $235.7 million for the first half of 2006 as compared to $229.1 million in the first half of the prior year. This increase is primarily attributable to increased retail facilities costs, which are driven by store growth. In addition, the division recognized $0.4 million of expense related to stock options in 2006, as required by SFAS 123R, with no stock option expense recorded in the prior year. As a percentage of net sales, selling and administrative costs have decreased to 39.6% from 39.8% last year, as the division leveraged its expense base over higher net sales.

Operating Earnings

Operating earnings increased $2.6 million, or 28.4%, to $11.9 million for the second quarter of 2006 as compared to $9.3 million in the second quarter of the prior year. The increase in operating earnings was due to the higher sales, and the higher gross profit rate.

Operating earnings increased $2.0 million, or 7.8%, to $27.8 million for the first half of 2006 as compared to $25.8 million in the first half of the prior year. The increase in operating earnings was due to the higher sales and better leveraging of the expense base.

WHOLESALE OPERATIONS

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	July 29, 2006			July 30, 2005			July 29, 2006			July 30, 2005
($ millions)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net Sales
Operating Results
Net sales	$	227.2	100.0%	$	207.4	100.0%	$	444.0	100.0%	$	388.7	100.0%
Cost of goods sold		163.2	71.8%		142.4	68.7%		315.1	71.0%		267.2	68.7%
Gross profit		64.0	28.2%		65.0	31.3%		128.9	29.0%		121.5	31.3%
Selling and administrative expenses		44.9	19.8%		48.7	23.5%		95.7	21.5%		87.7	22.6%
Operating earnings	$	19.1	8.4%	$	16.3	7.8%	$	33.2	7.5%	$	33.8	8.7%
Key Metrics
Unfilled order position at end of period	$	269.3		$	263.5

24

Net Sales

Net sales increased $19.8 million, or 9.5%, to $227.2 million in the second quarter of 2006 as compared to $207.4 million in the second quarter of the prior year. We experienced higher sales in our Naturalizer, LifeStride, Dr. Scholl’s and private label product, which were partially offset by continuing weakness in our Bass division. We recently announced that we are exiting the Bass business at the end of 2006 due to poor operating performance.

Net sales increased $55.3 million, or 14.2%, to $444.0 million in the first half of 2006 as compared to $388.7 million in the first half of the prior year. The increase in sales was driven by the inclusion of the Bennett business, which accounted for $57.6 million of the increase, for the full period in 2006 as compared to a partial period in the first half of 2005. In addition, we experienced higher sales in our LifeStride, Carlos by Carlos Santana and women’s private label divisions, but lower sales in our Bass and children’s divisions. Sales of children’s product in the first half of 2006 were negatively impacted by the timing of our children’s licenses, which are generally driven by major children’s movies and/or events.

Gross Profit

Gross profit decreased $1.0 million, or 1.5%, to $64.0 million in the second quarter of 2006 as compared to $65.0 million in the second quarter of the prior year. As a percentage of net sales, our gross profit rate declined to 28.2% in the second quarter from 31.3% in the second quarter of the prior year. Despite a larger sales base, gross profit and the gross profit rate are lower due primarily to lower margins on sales of Franco Sarto, Via Spiga, Etienne Aigner and Bass footwear. In addition, there was a larger mix of private label product sales, which carry a lower gross profit rate than our branded product. However, our Naturalizer division experienced higher gross profit rates as we have implemented a new business model for this brand, which focuses on a continuous flow of smaller quantities of new goods versus large pre-season sell-ins, thereby minimizing markdowns and allowances.

Gross profit increased $7.4 million, or 6.1%, to $128.9 million in the first half of 2006 as compared to $121.5 million in the first half of the prior year, driven by the increase in net sales and the inclusion of Bennett for the entire period in 2006 and only the period since acquisition (April 22, 2005) in the prior year. However, as a percentage of net sales, our gross profit rate declined to 29.0% in the first half from 31.3% in the first half of the prior year. This decline was due to the same factors that affected the second quarter.

Selling and Administrative Expenses

Selling and administrative expenses decreased $3.8 million, or 7.7%, to $44.9 million for the second quarter of 2006 as compared to $48.7 million in the second quarter of the prior year, primarily driven by efficiencies gained by consolidating certain Bennett administrative functions. In addition, in the prior year, we incurred a $0.6 million restructuring charge to streamline certain Naturalizer wholesale operations. As a percent of sales, selling and administrative expenses decreased from 23.5% last year to 19.8% this year, reflecting better leveraging of the sales base, in particular the Bennett business acquired on April 22, 2005.

Selling and administrative expenses increased $8.0 million, or 9.1%, to $95.7 million for the first half of 2006 as compared to $87.7 million in the first half of the prior year. The increase is due primarily to the inclusion of Bennett’s selling and administrative expenses, including the amortization of intangible assets, for the entire first half of 2006 as compared to approximately one quarter during the first half of 2005. As a percent of sales, selling and administrative expenses decreased from 22.6% last year to 21.5% this year, reflecting better leveraging of the sales base.

Operating Earnings

Operating earnings increased $2.8 million, or 17.2%, to $19.1 million for the second quarter of 2006 as compared to $16.3 million in the second quarter of the prior year. The improvement in operating earnings is primarily the result of the benefits achieved in the new Naturalizer business model, which focuses on a continuous flow of smaller quantities of new goods versus large pre-season sell-ins, thereby minimizing markdowns and allowances, and the decrease in selling and administrative expenses.

Operating earnings decreased $0.6 million, or 1.7%, to $33.2 million for the first half of 2006 as compared to $33.8 million in the first half of the prior year. The decline in operating earnings is primarily the result of the lower gross profit rate.

25

SPECIALTY RETAIL

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	July 29, 2006				July 30, 2005				July 29, 2006				July 30, 2005
($ millions, except for sales per square foot)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Operating Results	$
Net sales		59.5		100.0%	$	57.9		100.0%	$	115.9		100.0%	$	111.1		100.0%
Cost of goods sold		31.3		52.6%		32.9		56.8%		61.3		52.8%		61.2		55.1%
Gross profit		28.2		47.4%		25.0		43.2%		54.6		47.2%		49.9		44.9%
Selling and administrative expenses		29.7		49.8%		30.5		52.7%		59.0		51.0%		58.9		53.0%
Operating loss	$	(1.5	)	(2.4)%	$	(5.5	)	(9.5)%	$	(4.4	)	(3.8)%	$	(9.0	)	(8.1)%
Key Metrics
Same-store sales % change		(2.7)%				0.1%				(1.1)%				0.1%
Same-store sales $ change	$	(1.0	)		$	0.1			$	(0.7	)		$	0.2
Sales change from new and closed stores, net	$	(4.4)			$	1.2			$	(7.9	)		$	1.2
Impact of changes in Canadian exchange rate on sales	$	1.8			$	1.6			$	2.8			$	2.8
Increase in sales of  e-commerce subsidiary	$	5.2			$	3.0			$	10.6			$	6.8
Sales per square foot, excluding e-commerce subsidiary	$	86			$	84			$	163			$	161
Square footage (thousand sq. ft.)		525				565				525				565
Stores acquired upon Bennett acquisition		-				-				-				12
Stores opened		1				4				2				5
Stores closed		8				13				11				23
Ending stores		305				369				305				369

Net Sales

Net sales increased $1.6 million, or 2.8%, to $59.5 million in the second quarter of 2006 as compared to $57.9 million in the second quarter of the prior year. Same-store sales decreased 2.7%. Our improvement in net sales was due to growth in sales at our e-commerce subsidiary and the favorable impact of the Canadian exchange rate, partially offset by a lower store count. Sales at our e-commerce subsidiary, Shoes.com, Inc., increased $5.2 million, or 78%, to $11.9 million in the second quarter compared to $6.7 million in last year’s second quarter. The favorable impact of the Canadian exchange rate improved net sales by $1.8 million. We opened 1 new store and closed 8 during the quarter resulting in 305 stores at the end of the quarter compared to 369 last year. This large decrease reflects the closing of 95 underperforming Naturalizer stores over the last three quarters of 2005.

Net sales increased $4.8 million, or 4.3%, to $115.9 million in the first half of 2006 as compared to $111.1 million in the first half of the prior year. Same-store sales decreased 1.1%. Our improvement in net sales was primarily due to growth in sales at Shoes.com, the favorable impact of the Canadian exchange rate, partially offset by a lower store count. Sales at Shoes.com increased $10.6 million, or 79%, to $23.9 million in the first half compared to $13.3 million in last year’s first half. The favorable impact of the Canadian exchange rate increased net sales by $2.8 million.

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Gross Profit

Gross profit increased $3.2 million, or 12.7%, to $28.2 million in the second quarter of 2006 as compared to $25.0 million in the second quarter of the prior year. The increase in gross profit is due to the higher sales base. In addition, as a percentage of net sales, our gross profit rate increased to 47.4% in the second quarter from 43.2% in the year ago quarter, reflecting higher gross profit rates in our Naturalizer stores as compared to the prior year.

Gross profit increased $4.7 million, or 9.6%, to $54.6 million in the first half of 2006 as compared to $49.9 million in the first half of the prior year. The increase in gross profit is due to the higher sales base. In addition, as a percentage of net sales, our gross profit rate increased to 47.2% in the first half from 44.9% in the year ago quarter, driven by better margins in our Naturalizer stores.

Selling and Administrative Expenses

Selling and administrative expenses decreased $0.8 million, or 2.8%, to $29.7 million for the second quarter of 2006 as compared to $30.5 million in the second quarter of the prior year. In the second quarter of 2005, we recorded charges of $2.1 million related to our initiative to close underperforming Naturalizer retail stores and consolidate certain administrative functions. Offsetting this change, was the impact of the strengthening Canadian exchange rate, which had the effect of increasing expenses approximately $0.8 million on a U.S. dollar basis in the second quarter. In addition, we have incurred higher costs at our Shoes.com business to support the sales growth. As a percent of sales, selling and administrative expenses decreased from 52.7% last year to 49.8% this year as a result of the above named factors and the effect of a more productive store base.

Selling and administrative expenses increased $0.1 million, or 0.3%, to $59.0 million for the first half of 2006 as compared to $58.9 million in the first half of the prior year. The non-recurrence of charges to close Naturalizer stores and consolidate certain administrative functions totaling $2.1 million recorded in the prior year impacted this comparison. Offsetting the store closing charges, a strengthening Canadian exchange rate had the effect of increasing expenses on a U.S. dollar basis by $1.4 million. In addition, we have incurred higher costs at our Shoes.com business to support the sales growth. As a percent of sales, selling and administrative expenses decreased from 53.0% last year to 51.0% this year as a result of the above named factors.

Operating Earnings

Specialty Retail’s operating loss decreased to $1.5 million in the second quarter of 2006 as compared to a loss of $5.5 million in the second quarter of the prior year. The segment improved its operating results as a result of increased sales, strong gross profit rates, and the non-recurrence of the 2005 charge to close underperforming Naturalizer retail stores.

Specialty Retail’s operating loss decreased to $4.4 million in the first half of 2006 as compared to a loss of $9.0 million in the first half of the prior year. The segment improved its operating results as a result of increased sales, strong gross profit rates, and the non-recurrence of the 2005 charge to close underperforming Naturalizer retail stores.

OTHER SEGMENT

The Other segment includes unallocated corporate administrative and other costs. Unallocated corporate administrative and other costs were $3.3 million in the second quarter of 2006 as compared to $9.3 million in the second quarter of the prior year. The primary contributor to this reduction is the income recorded for insurance recoveries associated with our Redfield site, which resulted in income of $7.3 million, net of related legal fees, in the second quarter of 2006. We experienced costs related to our strategic earnings enhancement program, which resulted in a charge of $1.4 million in the Other segment in the second quarter of 2006. We also experienced higher share-based incentive compensation costs recorded in the current year, including the impact of adopting SFAS 123R, which resulted in an additional $0.3 million of costs at the corporate level, related to stock options in the second quarter of 2006.

Unallocated corporate administrative and other costs were $11.8 million in the first half of 2006 as compared to $16.8 million in the first half of the prior year. The insurance recoveries described above were the primary contributor to this reduction. We experienced costs related to our strategic earnings enhancement program, which resulted in a charge of $1.4 million in the first half of 2006. We also experienced higher share-based incentive compensation costs recorded in the current year, including the impact of adopting SFAS 123R, which resulted in an additional $0.7 million of costs related to stock options.

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LIQUIDITY AND CAPITAL RESOURCES

Borrowings

($ millions)	July 29, 2006		July 30, 2005		Increase/ (Decrease)
Borrowings under revolving credit agreement	$	50.0	$	129.0	$	(79.0	)
Senior notes		150.0		150.0		-
Total debt	$	200.0	$	279.0	$	(79.0	)

Total debt obligations have decreased by $79.0 million, or 28.3%, to $200.0 million at July 29, 2006, as compared to $279.0 million at July 30, 2005. The decrease in total debt obligations is due to the repatriation of cash from our foreign subsidiaries in the last two quarters of 2005 and the associated decline in borrowings under our revolving credit agreement. Interest expense decreased $0.8 million, or 15.4%, to $4.4 million in the second quarter of 2006 from $5.2 million in the second quarter of the prior year, due to lower average borrowings on our revolving credit facility.

To fund a portion of the Bennett acquisition, on April 22, 2005, we issued $150 million of 8.75% senior notes due 2012. The Senior Notes are guaranteed on a senior unsecured basis by each of our subsidiaries that is an obligor under our senior secured credit facility. Interest is payable on May 1 and November 1 of each year. The Senior Notes mature on May 1, 2012, but are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain restrictive covenants, including, among other things, restrictions on the payment of dividends, the incurrence of additional indebtedness, the guarantee or pledge of our assets, certain investments, and our ability to merge or consolidate with another entity or sell substantially all of our assets.

We have a Revolving Credit Agreement that provides for a maximum line of credit of $350 million, subject to a calculated borrowing base. Borrowing availability under the Credit Agreement is based upon the sum of eligible accounts receivable and inventory, less outstanding borrowings, letters of credit and applicable reserves. The Credit Agreement expires in 2009, and our obligations are secured by our accounts receivable and inventory. Borrowings under the Credit Agreement bear interest at a variable rate determined based upon the level of availability under the Credit Agreement. If availability falls below specified levels, we would then be subject to certain financial covenants. In addition, if availability falls below $25 million and the fixed charge coverage ratio is less than 1.0 to 1, we would be in default. The Credit Agreement also contains certain other covenants and restrictions.

At July 29, 2006 we had $50.0 million of borrowings outstanding and $18.1 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was approximately $281.9 million at July 29, 2006. We believe that borrowing capacity under the Credit Agreement will be adequate to meet our operational needs and capital expenditure plans for the foreseeable future.

Working Capital and Cash Flow

	Twenty-six Weeks Ended
($ millions)	July 29, 2006			July 30, 2005			Increase/ (Decrease)
Net cash provided (used) by operating activities	$	36.6		$	49.1		$	(12.5	)
Net cash provided (used) by investing activities		(46.4	)		(222.6	)		176.2
Net cash provided (used) by financing activities		6.4			131.0			(124.6	)
Effect of exchange rate changes on cash		0.1			0.1			-
Increase (decrease) in cash and cash equivalents	$	(3.3	)	$	(42.4	)	$	39.1

The major variances in cash provided (used) in the table above relate to the acquisition of Bennett in April 2005, which was reflected as an investing activity, and the related issuance of the $150 million senior notes, issued in conjunction with the Bennett acquisition, which was reflected as a financing activity. We have also reduced our borrowings outstanding under our revolving credit facility, as discussed earlier. Further, in 2006, we have received cash benefits related to the proceeds of stock options exercised and the tax benefit for share based plans totaling $11.0 million as compared to $2.4 million in the prior year.

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A summary of key financial data and ratios at the dates indicated is as follows:

	July 29, 2006	July 30, 2005	January 28, 2006
Working capital ($ millions)	$276.1	$275.9	$267.4
Current ratio	1.69:1	1.69:1	1.75:1
Total debt as a percentage of total capitalization	29.9%	41.2%	31.5%

Working capital at July 29, 2006 was $276.1 million, which was $8.7 million higher than at January 28, 2006, and $0.2 million higher than at July 30, 2005. Our current ratio, the relationship of current assets to current liabilities, decreased to 1.69 to 1 compared to 1.75 to 1 at January 28, 2006, and remained flat compared to July 30, 2005. The reduction in the current ratio since January 28, 2006 reflects the payment of $22.7 million related to the first contingent performance period under the terms of the Bennett acquisition, which was paid in the first quarter of 2006. Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and shareholders’ equity decreased to 29.9% at the end of the quarter from 41.2% at the end of the year-ago quarter, reflecting the decrease in borrowings under our revolving credit agreement since July 2005. At July 29, 2006, we had $31.0 million of cash and cash equivalents, of which the majority represents cash and cash equivalents of our Canadian and other foreign subsidiaries.

As described in Note 3 to the condensed consolidated financial statements, the Company may pay up to an additional $17.5 million in contingent payments related to the Bennett acquisition. We made the first performance payment of $22.7 million during the first quarter of 2006. The remaining payments may be earned upon the achievement of certain performance targets over fiscal years 2006 and 2007. At this time, we do not anticipate that any payment will be made for the 2006 performance period. The Company expects to have sufficient liquidity available to make such contingent payments, should they become due.

As described in the Overview section and in Note 6 to the condensed consolidated financial statements, we initiated a strategic earnings enhancement program designed to increase earnings through cost reductions and efficiency initiatives and reallocating resources and investment to drive consumer preference. Key elements of the plan include: i) restructuring administrative and support areas; ii) redesigning logistics and distribution platforms; iii) reorganizing to eliminate operational redundancies; iv) realigning strategic priorities; and v) refining the supply chain process and enhancing inventory utilization. We are in the early stages of developing these earnings improvement initiatives, but estimate that these initiatives will generate a minor amount of after-tax savings in 2006, $10-12 million in 2007 with continuing annual after-tax savings of approximately $17-20 million, beginning in 2008. The costs to implement these programs are estimated to be in the range of $32-$37 million ($20-$23 million on an after-tax basis) with these costs incurred in the second half of 2006 and in 2007. In addition, it is expected that incremental capital costs will be required to implement several of the initiatives, but additional planning is required to estimate the level of such expenditures. We incurred charges of approximately $2.0 million ($1.2 million on an after-tax basis) in the second quarter of 2006, related to this program.

As described in the Overview section, we reached agreements with certain insurance carriers to recover environmental remediation costs associated with our Redfield facility. We recorded income related to these recoveries, net of related legal expenses, of $7.3 million, in the second quarter of 2006. We continue to pursue recovery of additional remediation costs from other insurance carriers. However, the amount of such future recoveries and the timing of receipt of such recoveries is not certain.

At the end of fiscal 2006, our license to market Bass footwear expires. As described in the Overview section, we recently announced that we will not renew the license and will accordingly exit this business at the end of 2006. We estimate that we will incur incremental after-tax losses of approximately $2.1 million in the second half of 2006 to exit this business.

We paid dividends of $0.08 and $0.067 per share in the second quarter of 2006 and the second quarter of 2005, respectively.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information, see Item 7 of our Annual Report on Form 10-K for the year ended January 28, 2006.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the Company will adopt the new requirements in its fiscal first quarter of 2007. The cumulative effects, if any, of adopting FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company has not yet determined the impact, if any, of adopting FIN 48 on its consolidated financial statements.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements and expectations regarding the Company’s future performance and the future performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These include (i) the preliminary nature of estimates of the costs and benefits of the strategic earnings enhancement plan, which are subject to change as the Company refines these estimates over time; (ii) intense competition within the footwear industry; (iii) rapidly changing consumer demands and fashion trends and purchasing patterns, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (iv) customer concentration and increased consolidation in the retail industry; (v) the Company's ability to successfully implement its strategic earnings enhancement plan; (vi) political and economic conditions or other threats to continued and uninterrupted flow of inventory from China and Brazil, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (vii) the Company's ability to attract and retain licensors and protect its intellectual property; (viii) the Company's ability to secure leases on favorable terms; (ix) the Company's ability to maintain relationships with current suppliers; and (x) the uncertainties of pending litigation. The Company’s reports to the Security and Exchange Commission contain detailed information relating to such factors. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change. In Item 1A of the Company’s Annual Report on Form 10-K for the year ended January 28, 2006, detailed risk factors that could cause variations in results to occur are listed and further described. Such description is incorporated herein by reference.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Item 7A of the Company's Annual Report on Form 10-K for the year ended January 28, 2006.

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ITEM 4 CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

It is the Chief Executive Officer's and Chief Financial Officer's ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly, quarterly and annual results, an established system of internal controls and internal control reviews by our internal auditors.

A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected. Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved. As of July 29, 2006, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting during the quarter ended July 29, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position. All legal costs associated with litigation are expensed as incurred.

Information regarding Legal Proceedings is set forth within Note 12 of the condensed consolidated financial statements and incorporated by reference herein.

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ITEM 1A RISK FACTORS

Changes to our risk factors since the most recent fiscal year end are shown below. No other material changes have occurred since the end of the most recent fiscal year. For further information, see Item 1A of our Annual Report on Form 10-K for the year ended January 28, 2006.

We may be unable to successfully implement our strategic earnings enhancement plan.

As previously announced, we have begun to review and implement strategic initiatives as part of our strategic earning enhancement plan, with the goal of increasing earnings and reallocating resources and investment to drive consumer preference. If we are not able to implement our strategic earnings enhancement plan effectively by, among other things:

·   restructuring administrative and support areas;

·   redesigning logistics and distribution platforms;

·   eliminating operational redundancies;

·   realigning strategic priorities; and

·   refining the supply chain process and enhancing inventory utilization,

our business and results of operations could be adversely affected.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information relating to our repurchases of common stock during the second quarter of 2006:

Fiscal Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Program (1)
April 30, 2006 - May 27, 2006	105,554	(2)	$	37.74	(2)	-		1,606,650
May 28, 2006 - July 1, 2006	-			-		-		1,606,650
July 2, 2006 - July 29, 2006	-			-		-		1,606,650
Total	105,554		$	37.74		-		1,606,650

(1)   In May 2000, the Board of Directors authorized a stock repurchase program authorizing the repurchase of up to 3 million shares of our outstanding common stock. We can utilize the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase program does not have an expiration date. Under this plan, 1,393,350 shares have been repurchased and the remaining availability is 1,606,650 shares as of the end of the period.

(2)   Represents shares that were tendered by employees related to certain share-based awards. These shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy minimum tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards. Accordingly, these share purchases are not considered a part of our publicly announced stock repurchase program.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The information in Item 4 of Part II of our Form 10-Q for the quarterly period ended April 29, 2006 is incorporated herein by reference.

ITEM 5 OTHER INFORMATION

As previously reported, Andrew M. Rosen, Executive Vice President and Chief Financial Officer of the Company, notified the Company of his decision to retire effective on February 3, 2007 (the “Retirement Date”). Mr. Rosen will continue in his present position until the earlier of the Retirement Date or the date the Company hires an individual to fill Mr. Rosen’s role.

ITEM 6 EXHIBITS

Exhibit No.
3.1	Certificate of Incorporation of the Company incorporated herein by reference from Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 4, 2002 and filed June 14, 2002.
3.2	Bylaws of the Company as amended through May 25, 2006, incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K filed May 26, 2006.
10.1*	Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of 2002, as amended, incorporated by reference to Exhibit B to the registrant’s definitive proxy statement dated April 17, 2006.
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Denotes management contract or compensatory plan arrangements.

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SIGNATURES

Pursuant to the requirements 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.

	BROWN SHOE COMPANY, INC.
Date: September 5, 2006	/s/ Andrew M. Rosen
	Executive Vice President and Chief Financial Officer on behalf of the Registrant and as the Principal Financial Officer

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