10-Q

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 31, 2004

OR

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

For the transition period from to

Commission file number 1-14035

Stage Stores, Inc.

(Exact name of registrant as specified in its charter)

NEVADA (State or other jurisdiction of incorporation or organization)	91-1826900 (I.R.S. Employer Identifications No.)
10201 Main Street, Houston, Texas (Address of principal executive offices)	77025 (Zip Code)

(800) 579-2302

Registrant's telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

As of August 26, 2004, there were 17,809,184 shares of the registrant's common stock outstanding.

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION	Page
	Number
Item 1.  Financial Statements
Condensed Consolidated Balance Sheets - July 31, 2004 and
January 31, 2004	3
Condensed Consolidated Statements of Income - Thirteen and Twenty-Six Weeks
Ended July 31, 2004 and August 2, 2003	4
Condensed Consolidated Statements of Cash Flows - Twenty-Six Weeks
Ended July 31, 2004 and August 2, 2003	5
Condensed Consolidated Statement of Stockholders' Equity
for the Twenty-Six Weeks Ended July 31, 2004	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3. Quantitative and Qualitative Disclosures About Market Risk	16
Item 4. Controls and Procedures	16
PART II. OTHER INFORMATION
Item 1.  Legal Proceedings	17
Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	18
Item 3.  Defaults Upon Senior Securities	18
Item 4.  Submission of Matters to a Vote of Security Holders	18
Item 5.  Other Information	19
Item 6.  Exhibits and Reports on Form 8-K	19
Signatures	21

References to a particular year are to Stage Stores, Inc.'s fiscal year, which is the 52 or 53 week period ending on the Saturday closest to January 31st of the following calendar year. For example, a reference to "2003" is a reference to the fiscal year ended January 31, 2004 and a reference to "2004" is a reference to the fiscal year ending January 29, 2005. Fiscal years 2003 and 2004 consist of 52 weeks.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Stage Stores, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par values)
(unaudited)
	July 31, 2004	January 31, 2004
ASSETS
Cash and cash equivalents	$ 17,367	$ 14,733
Accounts receivable	-	35,112
Merchandise inventories, net	286,988	259,687
Current deferred tax assets	24,897	27,701
Prepaid expenses and other current assets	19,840	26,071
Total current assets	349,092	363,304
Property, equipment and leasehold improvements, net	189,514	190,958
Goodwill	80,054	80,054
Intangible asset	14,910	14,910
Other long-term assets	10,962	10,021
Total assets	$ 644,532	$ 659,247
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$ 70,766	$ 75,685
Income taxes payable	8,989	2,598
Current portion of long-term debt	150	381
Accrued expenses and other current liabilities	55,958	54,083
Total current liabilities	135,863	132,747
Long-term debt	18,490	11,242
Deferred taxes	13,628	14,028
Other long-term liabilities	28,032	28,156
Total liabilities	196,013	186,173
Commitments and contingencies
Common stock, par value $0.01, 50,000 shares authorized,
20,868 and 20,579 shares issued	209	206
Additional paid-in capital	382,300	374,645
Less treasury stock - at cost (2,947 and 1,414 shares, respectively)	(90,187)	(33,127)
Retained earnings	156,197	131,350
Stockholders' equity	448,519	473,074
Total liabilities and stockholders' equity	$ 644,532	$ 659,247

                               The accompanying notes are an integral part of this statement.

Stage Stores, Inc.
Condensed Consolidated Statements of Income
(in thousands, except earnings per share)
(unaudited)
	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 31, 2004	August 2, 2003	July 31, 2004	August 2, 2003
Net sales	$ 279,872	$ 207,721	$ 569,530	$ 405,708
Cost of sales and related buying,
occupancy and distribution expenses	206,559	149,397	399,147	284,883
Gross profit	73,313	58,324	170,383	120,825
Selling, general and administrative expenses	63,359	43,303	129,672	83,818
Store opening costs	27	247	341	756
Interest, net of income of $0 and $27 for the thirteen
weeks and $13 and $65 for the twenty-six weeks,
respectively	518	411	931	808
Income before income tax	9,409	14,363	39,439	35,443
Income tax	3,481	5,243	14,592	12,937
Net income	$ 5,928	$ 9,120	$ 24,847	$ 22,506
Basic earnings per share data:
Basic earnings per share	$ 0.33	$ 0.48	$ 1.34	$ 1.19
Basic weighted average shares outstanding	18,194	18,905	18,559	18,891
Diluted earnings per share data:
Diluted earnings per share	$ 0.30	$ 0.45	$ 1.22	$ 1.14
Diluted weighted average shares outstanding	20,016	20,048	20,381	19,800

                                             The accompanying notes are an integral part of this statement.

Stage Stores, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
	Twenty-Six	Twenty-Six
	Weeks Ended	Weeks Ended
	July 31, 2004	August 2, 2003
Cash flows from operating activities:
Net income	$ 24,847	$ 22,506
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization	15,787	10,597
Amortization of debt issue costs	223	667
Deferred stock compensation	115	-
Provision for bad debts	311	13,943
Deferred income taxes	2,403	3,228
Proceeds from sale of private label credit card portfolio, net	34,764	-
Changes in operating assets and liabilities:
Decrease in accounts receivable and retained interest in receivables sold	3,537	33,303
Increase in merchandise inventories	(27,301)	(11,904)
Decrease in other assets	4,996	230
Increase (decrease) in accounts payable and other liabilities	2,806	(3,835)
Total adjustments	37,641	46,229
Net cash provided by operating activities	62,488	68,735
Cash flows from investing activities:
Additions to property, equipment and leasehold improvements	(14,272)	(12,678)
Net cash used in investing activities	(14,272)	(12,678)
Cash flows from financing activities:
Proceeds from (payments on):
Revolving credit facility, net	7,790	-
Long-term debt	(773)	(200)
Repurchase of common stock	(57,060)	-
Exercise of stock options	4,461	740
Repurchase of accounts receivable from accounts receivable trust	-	(57,000)
Net cash used in financing activities	(45,582)	(56,460)
Net increase (decrease) in cash and cash equivalents	2,634	(403)
Cash and cash equivalents:
Beginning of period	14,733	20,886
End of period	$ 17,367	$ 20,483
Supplemental disclosures:
Interest paid	$ 716	$ 463
Income taxes paid	$ 3,176	$ 3,286

                                          The accompanying notes are an integral part of this statement.

Stage Stores, Inc.
Condensed Consolidated Statement of Stockholders' Equity
For the Twenty-Six Weeks Ended July 31, 2004
(in thousands)
(unaudited)
	Common		Additional	Treasury
	Stock		Paid-in	Stock		Retained
	Shares	Amount	Capital	Shares	Amount	Earnings	Total
Balance, January 31, 2004	20,579	$ 206	$ 374,645	(1,414)	$ (33,127)	$ 131,350	$ 473,074
Net income	-	-	-	-	-	24,847	24,847
Repurchases of common stock	-	-	-	(1,533)	(57,060)	-	(57,060)
Deferred compensation	-	-	115	-	-	-	115
Stock options exercised,
including tax benefit	289	3	7,540	-	-	-	7,543
Balance, July 31, 2004	20,868	$ 209	$ 382,300	(2,947)	$ (90,187)	$ 156,197	$ 448,519

                                       The accompanying notes are an integral part of this statement.

Stage Stores, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Stage Stores, Inc. ("Stage Stores" or the "Company") have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Those adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of the results of operations for a full year. The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto filed with Stage Stores' Annual Report on Form 10-K for the year ended January 31, 2004. References to a particular year are to Stage Stores' fiscal year, which is the 52 or 53 week period ending on th e Saturday closest to January 31^st of the following calendar year. For example, a reference to "2003" is a reference to the fiscal year ended January 31, 2004 and a reference to "2004" is a reference to the fiscal year ending January 29, 2005.

Stage Stores, through its wholly-owned subsidiaries Specialty Retailers (TX) LP and SRI Limited Partner LLC, operates family apparel stores under the Stage, Bealls and Palais Royal names throughout the South Central states, and under the Peebles name throughout the Mid-Atlantic, Southeastern and Midwestern states. The Company offers moderately priced nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family. As of July 31, 2004, the Company operated 516 stores in 27 states.

2. Stock-Based Compensation

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-based employee compensation cost related to stock options is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share assuming the Company had applied the fair value recognition provisions as contained in the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", for the grant of stock options (in thousands, except per share amounts):

	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 31,	August 2,	July 31,	August 2,
	2004	2003	2004	2003
Net income, as reported	$ 5,928	$ 9,120	$ 24,847	$ 22,506
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects	(682)	(569)	(1,298)	(1,134)
Pro forma net income	$ 5,246	$ 8,551	$ 23,549	$ 21,372
Earnings per share:
Basic - as reported	$ 0.33	$ 0.48	$ 1.34	$ 1.19
Basic - pro forma	0.29	0.45	1.27	1.13
Diluted - as reported	$ 0.30	$ 0.45	$ 1.22	$ 1.14
Diluted - pro forma	0.26	0.43	1.16	1.08

The following tables provide the significant assumptions used in the determination of the estimated fair value under the Black-Scholes option-pricing model of each option granted through the second quarter of the current and prior year:

	Twenty-Six Weeks Ended
	July 31, 2004	August 2, 2003
Expected volatility	27.8-36.0%	40.5-41.5%
Risk free rate	1.94-3.55%	2.03-2.36%
Expected life of options (in years)	3.0-4.0	3.0
Expected dividend yield	0%	0%

3. Deferred Compensation

On June 14, 2004, the Company granted performance shares under the Amended and Restated 2001 Equity Incentive Plan to members of senior management as a means of retaining and rewarding them for long-term performance based on shareholder return performance measures. Under terms of the grant which have a three year cliff vesting, the actual number of shares to be issued at no cost to the grant recipient in exchange for performance shares will be based on the level of attainment, at the end of the three year performance period, of specific shareholder return performance measures. An aggregate target grant of 18,440 shares was made effective February 1, 2004, the start of the Company's 2004 fiscal year. Depending on actual shareholder return performance at the end of the three year performance period, the actual aggregate number of shares that could be issued ranges from zero to a maximum of 36,880. Compensation expense based on the anticipated number of shares of the Company's common stock and the relate d market value to be awarded at the end of the performance period is being recorded ratably over the performance period based on total shareholder return relative to performance measures through that date. The Company recorded $0.1 million of compensation expense during the three months ended July 31, 2004 related to this grant that is reflected as a component of selling, general, and administrative expense. During the performance period, grant recipients do not have any rights of a shareholder in the Company with respect to common shares issuable under the grant until the shares have been issued.

4. Sale of Peebles' Private Label Credit Card Portfolio

On November 4, 2003, the Company acquired Peebles Inc. ("Peebles"), a privately held, similarly focused retail company headquartered in South Hill, Virginia (the "Acquisition"), which then operated 136 stores in 17 Mid-Atlantic, Southeastern and Midwestern states under the Peebles name. With the Acquisition, the Company also acquired Peebles' private label credit card portfolio. On March 5, 2004, the Company sold this private label credit card portfolio to World Financial Network National Bank (the "Bank"). At closing, the Company received consideration of approximately $34.8 million, which approximated the amount of account balances outstanding at the time of closing. Under the terms of the Amended and Restated Program Agreement dated March 5, 2004, the Company is obligated to reimburse the Bank up to a total of $3.5 million based on the non-attainment of a defined net portfolio yield performance and has recorded this obligation.

5. Long-Term Debt

Long-term debt consists of the following (in thousands):

	July 31,	January 31,
	2004	2004
Revolving Credit Facility borrowings	$ 18,490	$ 10,700
Other debt	150	923
Subtotal	18,640	11,623
Less: Current portion of long-term debt	150	381
Long-term debt	$ 18,490	$ 11,242

On August 21, 2003, the Company entered into a $175.0 million senior secured revolving credit facility that matures August 21, 2008. On November 4, 2003, in conjunction with the Acquisition, the Company increased the Revolving Credit Facility commitment from $175.0 million to $250.0 million. Borrowings under the Revolving Credit Facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Revolving Credit Facility agreement. The daily interest rates under the Revolving Credit Facility are equal to the applicable prime rate or Eurodollar rate plus an applicable margin as set forth in the Revolving Credit Facility agreement. Inventory, accounts receivable, cash and cash equivalents are pledged as collateral under the Revolving Credit Facility. The Revolving Credit Facility is used by the Company to provide financing for working capital, capital expenditures, interest payments and other general corporate purposes, as well as to support its outstanding letters of credit requirements. The outstanding borrowings at July 31, 2004 were $18.5 million. Excess borrowing availability under the Revolving Credit Facility, net of letters of credit outstanding of $27.9 million, was $134.5 million at July 31, 2004. During the first half of 2004, the weighted average interest rate on outstanding borrowings, and the average daily borrowings under the Revolving Credit Facility were 3.1% and $7.2 million, respectively.

The Revolving Credit Facility contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the amount of capital expenditures, payment of dividends and repurchase of common stock under certain circumstances, and (iii) related party transactions. The Company continually monitors its liquidity position and compliance with those covenants. At July 31, 2004, the Company was in compliance with all of the debt covenants of the Revolving Credit Facility.

At July 31, 2004, the Company had one capital lease obligation in the amount of $0.2 million, which is classified as short-term.

6. Income Taxes

The provision for income taxes is computed based on the pretax income included in the Unaudited Condensed Consolidated Statements of Income. The asset and liability approach is used to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of assets and liabilities. The classification of the tax provision between current and deferred taxes on the interim period financials is based on the expected relationship of these classifications on the tax provision for the full fiscal year.

7. Earnings per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and all of the potentially dilutive common share equivalents outstanding during the period. Stock options and warrants are the only potentially dilutive share equivalents that the Company has outstanding.

The following table illustrates the components used to determine total diluted shares (in thousands):

	Thirteen weeks ended		Twenty-Six weeks ended
	July 31,	August 2,	July 31,	August 2,
	2004	2003	2004	2003
Basic weighted average shares outstanding	18,194	18,905	18,559	18,891
Effect of dilutive securities:
Stock options	1,020	792	1,020	667
Warrants	802	351	802	242
Diluted weighted average shares outstanding	20,016	20,048	20,381	19,800

The increase in the number of dilutive securities in each of the current year periods over the prior year periods is primarily due to a higher weighted average market price of the Company's common stock in the current year as compared to the prior year. The weighted average market price for the current and prior year second quarter was $37.11 and $23.59, respectively. The weighted average market price for the twenty-six week current and prior year periods was $37.09 and $21.69, respectively.

The following table illustrates the number of stock options that were outstanding, but not included in the computation of diluted weighted average shares outstanding, because the exercise price of these stock options was greater than the weighted average market price of the Company's common stock for each applicable period.

	Thirteen weeks ended		Twenty-Six weeks ended
	July 31,	August 2,	July 31,	August 2,
	2004	2003	2004	2003
Number of options outstanding	194,700	40,000	194,700	67,500

8. Stock Repurchase Program

On October 1, 2003, the Company's Board of Directors approved a stock repurchase program authorizing the Company to buy, from time to time, up to $50.0 million of its common stock. The $50.0 million Stock Repurchase Program, which was completed during the current year second quarter, was funded by the Company's cash flow and other liquidity sources. In addition, the Company has and expects to continue to repurchase its outstanding stock from time to time using the proceeds that it receives from the exercise of employee stock options under its Amended and Restated 2001 Equity Incentive Plan, including the tax benefits that accrue to the Company from the exercise of these options, as well as proceeds that it receives from the exercise of its outstanding warrants. The Company has purchased 1,533,256 shares of its common stock, at a cost of approximately $57.1 million during the twenty-six weeks ended July 31, 2004. At July 31, 2004, approximately $4.2 million was available to the Comp any for stock repurchase, of which the entire amount relates to proceeds from stock option exercises.

9. Retirement Plans

The Company sponsors two defined benefit plans. One was frozen effective June 30, 1998, and the other was closed to new participants at February 1, 1998 (the "Retirement Plans"). Information regarding the Retirement Plans is as follows (in thousands):

Components of Net Periodic Pension Costs

	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 31, 2004	August 2, 2003	July 31, 2004	August 2, 2003
Service cost	$ 14	$ -	$ 28	$ -
Interest cost	557	535	1,114	1,070
Expected return on plan assets	(550)	(451)	(1,100)	(902)
Net loss amortization	-	2	-	4
Net periodic pension cost	$ 21	$ 86	$ 42	$ 172

Employer Contribution

The Company expects to contribute approximately $2.0 million to its Retirement Plans in 2004. As of July 31, 2004, $1.4 million of contributions have been made, of which $0.8 million was contributed during the second quarter.

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

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995

Certain statements in this Form 10-Q contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the ability of the Company and its subsidiaries to maintain normal trade terms with vendors, the ability of the Company and its subsidiaries to comply with the various covenant requirements contained in the Company's Revolving Credit Facility (as defined below), the demand for apparel and other factors. The demand for apparel and sales volume can be affected by a n economic downturn, a decline in consumer confidence, unusual weather patterns, an increase in the level of competition in the Company's market areas, competitors' marketing strategies, changes in fashion trends, changes in the average cost of merchandise purchased for resale, availability of product on normal payment terms and the failure to achieve the expected results of the Company's merchandising and marketing plans as well as its store opening plans. The occurrence of any of the above could have a material and adverse impact on the Company's operating results. Most of these factors are difficult to predict accurately and are generally beyond the Company's control. Readers should consider the areas of risk described in the Company's Annual Report on Form 10-K for the year ended January 31, 2004 (the "Form 10-K"). Readers should carefully review the Form 10-K in its entirety including, but not limited to, the Company's financial statements and the notes thereto and the risks described under "Risk Fa ctors" in Item 1 of the Form 10-K. Except for the Company's ongoing obligations to disclose material information under the federal securities laws, the Company undertakes no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, the Company claims the protection of the safe harbor provisions for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995.

General

Stage Stores is a Houston, Texas-based regional, specialty department store retailer offering moderately priced, nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family. As of July 31, 2004, the Company operated 516 stores located in 27 states. The Company operates under the Stage, Bealls and Palais Royal names throughout the South Central states, and under the Peebles name throughout the Mid-Atlantic, Southeastern and Midwestern states. The Company's principal focus is on consumers in small and mid-size markets which the Company believes are under-served and less competitive. The Company believes that it is able to differentiate itself from the competition in the small and mid-size markets in which it operates by offering consumers access to basic as well as fashionable, brand name merchandise not typically carried by other retailers in the same market area. In the highly competitive metropolitan markets in which it operate s, the Company competes against national department store chains, which similarly offer moderately priced, brand name and private label merchandise. As a way of differentiating itself from the competition in these larger markets, the Company offers consumers a high level of customer service in convenient locations.

During 2003, the Company made the strategic decision to sell the Stage private label credit card portfolio. On September 12, 2003, the Company sold the Stage portfolio of private label credit card accounts, as well as other assets related to its private label credit card program, to World Financial Network National Bank (the "Bank") and ADS Alliance Data Systems, Inc., subsidiaries of Alliance Data Systems Corporation, and realized proceeds of approximately $172.0 million, which included prepaid marketing funds.

On November 4, 2003, the Company redeployed the proceeds from the sale of its private label credit card portfolio and acquired Peebles Inc. ("Peebles"), a privately held, similarly focused retail company headquartered in South Hill, Virginia (the "Acquisition"). The purchase price paid for Peebles Inc. was $174.6 million, including acquisition costs and net of cash acquired and debt assumed. The Acquisition has been accounted for under the purchase method of accounting, and accordingly, the results of operations of Peebles have been included in the Company's consolidated financial statements from the date of acquisition. In order to maximize the potential of the Acquisition, the Company has maintained the highly recognizable Peebles name on the stores, and key members of Peebles management team are continuing in their same capacities in South Hill. With the addition of Peebles, the Company believes that it has strengthened its position as one of the leading retailers of branded family apparel in small town America. The Company further believes that the Acquisition creates new opportunities for unit growth and geographical expansion and improves its competitive position.

As a result of the above transactions, the Company's current year results include the sales and earnings contribution from the acquired Peebles stores, but do not include any net credit income. Conversely, the Company's prior year results include net credit income, which was treated as a reduction to selling, general and administrative expense, but had no sales and earnings contribution from the acquired Peebles stores.

The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements as included in the Form 10-K.

Results of Operations

The following table sets forth the results of operations as a percentage of sales for the periods indicated:

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31, 2004		August 2, 2003		July 31, 2004		August 2, 2003
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and related buying,
occupancy and distribution expenses	73.8		71.9		70.1		70.2
Gross profit margin	26.2		28.1		29.9		29.8
Selling, general and administrative expenses	22.6		20.8		22.8		20.7
Store opening costs	0.0		0.1		0.1		0.2
Interest, net	0.2		0.2		0.2		0.2
Income before income tax	3.4		6.9		6.9		8.7
Income tax expense	1.2		2.5		2.6		3.2
Net income*	2.1	%	4.4	%	4.4	%	5.5	%
*Total may not foot due to rounding

Thirteen Weeks Ended July 31, 2004 Compared to Thirteen Weeks Ended August 2, 2003

Sales for the thirteen weeks ended July 31, 2004 (the "current year second quarter") increased 34.8% to $279.9 million from $207.7 million for the thirteen weeks ended August 2, 2003 (the "prior year second quarter"). The increase in total sales is almost entirely due to the inclusion of the Peebles stores, which contributed sales of $72.1 million in the current year second quarter. Comparable store sales, which include comparable store sales for the Peebles stores in both periods, decreased 3.2% as compared to a 2.4% decrease in the prior year second quarter. These comparable store sales decreases in the current year second quarter were offset by the 14 net new stores opened since the end of the prior year second quarter. In the current year second quarter, sales were negatively impacted by unseasonably cooler weather and inclement conditions that occurred in May and June in the Company's key market areas. In addition, sales in the current year second quarter were negatively impacted by the calendar shift in the Texas sales tax holiday weekend to the third quarter in 2004, which resulted in a sales loss of approximately $8.0 million as compared to the prior year second quarter. Conversely, sales in the third quarter of 2004 should benefit from this calendar shift. The Company responded to these circumstances by aggressively promoting its full price and clearance products, by holding store-wide sales events and by increasing the level of markdowns.

For the current year second quarter, the Company achieved comparable store sales increases in its special sizes, misses sportswear, men's and accessories departments as compared to the prior year second quarter. The Company had comparable store sales declines in all of its other departments. By market, the Company experienced the strongest sales performance as compared to the prior year second quarter in its smaller markets, which the Company defines as those markets with population within a 10-mile radius of the stores of less than 50,000 people.

Gross profit increased 25.7% to $73.3 million for the current year second quarter from $58.3 million for the prior year second quarter. Gross profit, as a percent of sales, decreased to 26.2% for the current year second quarter from 28.1% for the prior year second quarter. The following is a summary of the changes between the current year second quarter and the prior year second quarter in the components of cost of sales, expressed as a percent of sales:

	Increase
	(decrease)
	Quarter 2
Cost Component	2004
Merchandise cost of sales	1.7	%
Shrink expense	(0.4)
Buying, occupancy and distribution expenses	0.6
Total cost of sales, and related buying, occupancy
and distribution expenses	1.9	%

Gross profit during the current year second quarter was negatively impacted by the Company's increased level of markdowns to stimulate sales and a higher mix of clearance sales, which resulted in lower maintained merchandise margins, as well as higher aggregate buying, occupancy and distribution expenses, which are included in cost of sales. These negative variances were offset somewhat by lower shrink expense. The increase in buying, occupancy, and distribution expenses was principally driven by higher store occupancy costs associated with higher rent and incremental depreciation expense, associated with the inclusion of the Peebles stores in 2004 and the 14 net new stores that have been added since the end of the prior year second quarter. Approximately one half of the 0.6% rate increase in buying, occupancy and distribution components of cost of goods is reflective of the $8.0 million loss in sales versus the prior year second quarter due to the calendar shift in the Texas sales tax holiday weekend, thus creating a loss of leverage of these fixed costs.

Selling, general and administrative ("SG&A") expenses for the current year second quarter increased 46.3% to $63.4 million from $43.3 million in the prior year second quarter and, as a percent of sales, increased to 22.6% from 20.8% in the comparable period last year. SG&A expenses for the current year second quarter increased from the prior year second quarter primarily as a result of the increase in the number of stores in operation in the current year second quarter, including the acquired Peebles stores, and the fact that there was no Net Credit Income (as defined below) from the Company's private label credit card program in the current year second quarter as compared to the prior year second quarter. SG&A expenses in the prior year second quarter included, as an offset to SG&A expenses, the net income contribution from Stage's private label credit card program prior to its sale on September 12, 2003, which included service charge and late fee income, operating e xpenses incurred by the Company in origination of credit, customer service and collection activities, interest expense on securitization facility borrowings and certain other items (collectively "Net Credit Income"). Net Credit Income in the prior year second quarter was $4.4 million, or 2.1% of sales. SG&A expenses in the prior year second quarter, excluding the $4.4 million of Net Credit Income, would have been $47.7 million, or 22.9% of sales. As compared to the adjusted rate of 22.9% for the prior year second quarter, the current year second quarter's rate of 22.6% represents an improvement of 0.3%. The improvement is primarily due to a decrease in incentive compensation expense in the current year second quarter, which is reflective of a shortfall in the Company's operating results relative to targets established for the current year.

There were no stores opened during the current year second quarter as compared to 4 new stores opened in the prior year second quarter with associated costs incurred of $0.2 million.

Net interest expense was $0.5 million in the current year second quarter as compared to $0.4 million in the prior year second quarter. The Company's primary source of funding is its Revolving Credit Facility, as discussed in "Liquidity and Capital Resources".

The Company's effective tax rate in 2004 is estimated to be 37%, resulting in income tax expense of $3.5 million in the current year second quarter, as compared to income tax expense of $5.2 million in the prior year second quarter, during which its effective tax rate was 36.5%.

As a result of the foregoing, the Company had net income of $5.9 million for the current year second quarter as compared to net income of $9.1 million for the prior year second quarter, a decrease of 35.2%.

Twenty-Six Weeks Ended July 31, 2004 Compared to Twenty-Six Weeks Ended August 2, 2003

Sales for the twenty-six weeks ended July 31, 2004 (the "current year") increased 40.4% to $569.5 million from $405.7 million for the twenty-six weeks ended August 2, 2003 (the "prior year"). Comparable store sales, which include comparable store sales for the Peebles stores in both years, increased 0.6% in the current year as compared to a 4.6% decrease in the prior year. The increase in total sales primarily reflects the impact of sales from the Peebles stores, which contributed $142.5 million for the current year, as well as the 14 net new stores opened since the end of the prior year second quarter.

For the current year, the Company achieved the largest comparable store sales increases in its special sizes, misses sportswear, men's, shoes, cosmetics and accessories departments. On a market population basis, the Company achieved overall comparable store sales increases during the current year in its smaller markets.

Gross profit increased 41.0% to $170.4 million for the current year from $120.8 million for the prior year. Gross profit, as a percent of sales, increased to 29.9% for the current year from 29.8% for the prior year. The following is a summary of the changes between the current year and the prior year in the components of cost of sales, expressed as a percent of sales:

	Increase
	(decrease)
Cost Component	YTD 2004
Merchandise cost of sales	(0.3)	%
Shrink expense	(0.3)
Buying, occupancy and distribution expenses	0.5
Total cost of sales, and related buying, occupancy
and distribution expense	(0.1)	%

Gross profit in the current year benefited from lower inventory shrink expense, higher maintained merchandise margins associated with improved consumer demand for products in the first quarter offset by the increased level of markdowns in the second quarter and higher aggregate occupancy, buying and distribution expenses, which are included in cost of sales. The increase in occupancy, buying and distribution expenses was primarily attributable to higher occupancy costs associated with higher rent, taxes, and common area charges and incremental depreciation expense associated with the inclusion of the Peebles stores in 2004 and the 14 net new stores that have been added since the end of the prior year second quarter.

Selling, general and administrative ("SG&A") expenses for the current year increased 54.7% to $129.7 million from $83.8 in the prior year and, as a percent of sales, increased to 22.8% from 20.7% in the prior year. SG&A expenses for the current year increased from the prior year primarily as a result of the increase in the number of stores in operation in the current year, including the acquired Peebles stores, and the fact that there was no net credit income from the Company's private label credit card program in the current year as compared to the prior year. SG&A expenses in the prior year included, as an offset to SG&A expenses, the net income contributions from Stage's private label credit card program prior to its sale on September 12, 2003, which included service charge and late fee income, operating expenses incurred by the Company in origination of credit, customer service and collection activities, interest expense on securitization facility borrowings and c ertain other items (collectively "Net Credit Income"). Net Credit Income in the prior year was $10.8 million, or 2.7% of sales. SG&A expenses in the prior year, excluding the $10.8 million of Net Credit Income, would have been $94.6 million, or 23.3% of sales. As compared to the adjusted rate of 23.3% for the prior year, the current year rate of 22.8% represents an improvement of 0.5%. The improvement is primarily due to better overall leverage from this year's higher sales and lower advertising expense as a rate of sales. Advertising expenses, as a percent of sales, benefited from the relatively lower advertising costs at the Peebles stores.

Store opening costs in the current year of $0.3 million relate to the 6 new stores opened during the current year as compared to $0.8 million incurred in the prior year related to the 12 new stores opened. The Company has opened stores in smaller markets during the current year and as a result these stores have had lower average store opening costs.

Net interest expense for the current year increased to $0.9 million from $0.8 million in the prior year. The Company's primary source of funding is its Revolving Credit Facility, as discussed in "Liquidity and Capital Resources".

The Company's effective tax rate in 2004 is estimated to be 37%, resulting in income tax expense of $14.6 million in the current year, as compared to income tax expense of $12.9 million in the prior year, during which its effective tax rate was 36.5%.

As a result of the foregoing, the Company had net income of $24.8 million for the current year as compared to net income of $22.5 million for the prior year, an increase of 10.7%.

Seasonality and Inflation

Historically, the Company's business is seasonal and sales traditionally are lower during the first three quarters of the year (February through October) and higher during the last three months of the year (November through January). The fourth quarter usually accounts for about 30% of the Company's annual sales, with the other quarters accounting for approximately 22% to 24% each. The sales levels and gross profit margins achieved on a quarterly basis are impacted by the changes in seasonal weather patterns as well as the level of promotions associated with the traditional holiday period or other sales events (e.g., back-to-school sales) which tend to impact consumer demand for apparel.

Liquidity and Capital Resources

The Company's liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows, (iii) normal trade credit terms from the vendor and factor community, and (iv) its Revolving Credit Facility. During the current year, the Company's cash flow also benefited from the sale of the Peebles' private label credit card portfolio.

With the Acquisition, the Company also acquired Peebles' private label credit card portfolio. On March 5, 2004, the Company sold this private label credit card portfolio to the Bank. At closing, the Company received consideration of approximately $34.8 million, which approximated the amount of account balances outstanding at the time of closing. Under the terms of the Amended and Restated Program Agreement dated March 5, 2004, the Company is obligated to reimburse the Bank up to a total of $3.5 million based on the non-attainment of a defined net portfolio yield performance.

On August 21, 2003, the Company entered into a $175.0 million senior secured revolving credit facility that matures August 21, 2008. On November 4, 2003, in conjunction with the Acquisition, the Company increased the Revolving Credit Facility commitment from $175.0 million to $250.0 million. Borrowings under the Revolving Credit Facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Revolving Credit Facility agreement. The daily interest rates under the Revolving Credit Facility are equal to the applicable prime rate or Eurodollar rate plus an applicable margin as set forth in the Revolving Credit Facility agreement. Inventory, accounts receivable, cash and cash equivalents are pledged as collateral under the Revolving Credit Facility. The Revolving Credit Facility is used by the Company to provide financing for working capital, capital expenditures, interest payments and other general corporate purposes, as well as to support its outstanding letters of credit requirements. The outstanding borrowings at July 31, 2004 were $18.5 million. Excess borrowing availability under the Revolving Credit Facility, net of letters of credit outstanding of $27.9 million, was $134.5 million at July 31, 2004. During the first half of 2004, the weighted average interest rate on outstanding borrowings, and the average daily borrowings under the Revolving Credit Facility were 3.1% and $7.2 million, respectively.

The Revolving Credit Facility contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the amount of capital expenditures, payment of dividends and repurchase of common stock under certain circumstances, and (iii) related party transactions. The Company continually monitors its liquidity position and compliance with those covenants. At July 31, 2004, the Company was in compliance with all of the debt covenants of the Revolving Credit Facility.

The Company had $62.5 million in cash provided from operating activities in the current year. In addition to the $34.8 million of proceeds that it received from the sale of Peebles' private label credit card portfolio, net income, plus non-cash expenses such as depreciation, deferred tax, provision for bad debts, amortization of debt issue costs and deferred stock compensation provided cash of approximately $43.7 million. Other operating cash flow changes used net cash of approximately $16.0 million which was primarily attributed to a $27.3 million increase in merchandise inventories due to seasonal build of inventories as well as the calendar shift in the Texas sales tax holiday weekend.

On October 1, 2003, the Company's Board of Directors approved a stock repurchase program authorizing the Company to buy, from time to time, up to $50.0 million of its common stock. The $50.0 million Stock Repurchase Program, which was completed during the current year second quarter, was funded by the Company's cash flow and other liquidity sources. In addition, the Company has and expects to continue to repurchase its outstanding stock from time to time using the proceeds that it receives from the exercise of employee stock options under its Amended and Restated 2001 Equity Incentive Plan, including the tax benefits that accrue to the Company from the exercise of these options, as well as proceeds that it receives from the exercise of its outstanding warrants. The Company has purchased 1,533,256 shares of its common stock, at a cost of approximately $57.1 million during the twenty-six weeks ended July 31, 2004. At July 31, 2004, approximately $4.2 million was available to the Comp any for stock repurchase, of which the entire amount relates to proceeds from stock option exercises.

Capital expenditures are generally for new store openings, remodeling of existing stores and facilities, customary store maintenance and operating and information system enhancements and upgrades. Capital expenditures were $14.3 million in the current year as compared to $12.7 million in the prior year. Management currently estimates that capital expenditures will be approximately $40.0 to $45.0 million during 2004, principally for the opening of 22 new stores, remodels and upgrades of existing stores and enhancements in the Company's infrastructure in support of business strategies to improve merchandise planning and forecasting, logistics support and store operations.

While there can be no assurances, management believes that there should be sufficient liquidity to cover both the Company's short-term and long-term funding needs.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Borrowings under the Company's Revolving Credit Facility bear a floating rate of interest. As of July 31, 2004, there were $18.5 million outstanding borrowings under the Company's Revolving Credit Facility. A hypothetical 10% change in interest rates from the July 31, 2004 levels would have an approximate $0.06 million effect on the Company's results of operations and cash flows.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures. Based on this evaluation, they have concluded that the Company's disclosure controls and procedures were effective as of July 31, 2004.

Internal Control Over Financial Reporting

As defined in Rule 13a-15(f) of the Exchange Act, the term "internal control over financial reporting" means a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

                    (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

                    (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the Unites States of America, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

                    (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material adverse effect on the financial statements.

The Company's management has established and maintains internal control over financial reporting. No changes in the Company's internal control over financial reporting occurred during the quarter ended July 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

During the fiscal quarter ended July 31, 2004, the Company did not have any material legal proceedings brought against it, its subsidiaries or their properties.

Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

ISSUER PURCHASES OF EQUITY SECURITIES
			Total Number of	Approximate
			Shares Purchased	Dollar Value of
	Total Number	Average Price	as Part of Publicly	Shares that May
	of	Paid	Announced	Yet Be Purchased
Period	Shares Purchased	Per Share	Plan (1)	Under the Plan (1)
Balance May 1, 2004	722,756	$37.90	722,756	$32,036,845
May 2, 2004, to
May 29, 2004	443,600	$36.64	443,600	$15,934,984
May 30, 2004, to
July 3, 2004	128,000	$39.52	128,000	$12,182,698
July 4, 2004, to
July 31, 2004	238,900	$34.96	238,900	$4,180,833
Total	1,533,256	$37.22	1,533,256

(1) On October 1, 2003, the Company's Board of Directors approved a stock repurchase program authorizing the Company to buy, from time to time, up to $50.0 million of its common stock. The $50.0 million Stock Repurchase Program, which was completed during the current year second quarter, was funded by the Company's cash flow and other liquidity sources. In addition, the Company has and expects to continue to repurchase its outstanding stock from time to time using the proceeds that it receives from the exercise of employee stock options under its Amended and Restated 2001 Equity Incentive Plan, including the tax benefits that accrue to the Company from the exercise of these options, as well as proceeds that it receives from the exercise of its outstanding warrants. The Company has purchased 1,533,256 shares of its common stock, at a cost of approximately $57.1 million during the twenty-six weeks ended July 31, 2004. At July 31, 2004, approximately $4.2 million was available to the Company for stock repurchase, of which the entire amount relates to proceeds from stock option exercises.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

The 2004 Annual Meeting of Shareholders of the Company was held on June 3, 2004. The following matters were submitted to a vote of the Company's shareholders:

1. Election of Directors. The election of nine directors (constituting the entire board of directors) for the ensuing year and until their successors are duly elected and qualified. The results of the election for each such director were as follows:

Directors	Votes For	Votes Withheld
Scott Davido	17,468,797	383,379
Alan Gilman	17,200,916	651,260
Michael Glazer	17,103,853	748,323
Michael McCreery	17,451,407	400,769
John Mentzer	17,468,897	383,279
Margaret Monaco	17,533,497	318,679
William Montgoris	17,533,497	318,679
Walter Salmon	17,397,302	454,874
James Scarborough	17,238,966	613,210

2. Ratification of the Appointment of Auditors. With respect to the ratification of the appointment of the firm of Deloitte & Touche LLP as the independent auditors to audit the consolidated financial statements of the Company and the financial statements of certain of its subsidiaries for the fiscal year ending January 29, 2005:

In Favor Of                                             Against                                         Abstain

17,783,888                                                67,325                                            963

3. Approval of Material Terms of Executive Officer Performance Goals. With respect to the approval of Material Terms of Executive Officer Performance Goals:

In Favor Of                                             Against                                         Abstain

13,754,450                                               467,428                                           15,254

4. Approval of the Amended and Restated 2001 Equity Incentive Plan. With respect to the approval of the Amended and Restated 2001 Equity Incentive Plan:

In Favor Of                                             Against                                         Abstain

10,164,948                                               4,063,357                                        8,827

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

            (a)  Exhibits

                  The following documents are the exhibits to this Form 10-Q. For convenient reference, each exhibit is listed according to the Exhibit Table of Item 601 of Regulation S-K.

Exhibit Number	Description
10*	Employment Agreement between Cynthia Murray and Stage Stores, Inc. dated August 2, 2004.
31.1*	Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Exchange Act
31.2*	Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Exchange Act
32*	Certifications Pursuant to 18 U.S.C. Section 1350

____________________________________

* Filed electronically herewith

                (b)   Reports on Form 8-K

During the current year second quarter, the Company filed the following reports on Form 8-K:

On May 11, 2004, the Company filed an 8-K which reported under Item 7 and 12 that on May 6, 2004, the Company issued a news release announcing sales for April 2003 and reaffirming first quarter 2004 earnings outlook. A copy of the news release is attached to the Form 8-K.

On May 18, 2004, the Company filed an 8-K which reported under Item 5 and 7 that on May 13, 2004, the Company issued a news release announcing the first quarter results release date and conference call information. A copy of the news release is attached to the Form 8-K.

On May 25, 2004, the Company filed an 8-K which reported under Item 7 and 12 that on May 20, 2004, the Company issued a news release announcing results for the first quarter ended May 1, 2004 and providing second quarter and full year earnings guidance. A copy of the news release is attached to the Form 8-K.

On June 4, 2004, the Company filed an 8-K which reported under Item 7 and 12 that on June 3, 2004, the Company issued a news release announcing sales for May 2004, providing stock repurchase program update and announcing the Company's participation at the Piper Jaffray Consumer Conference. A copy of the news release is attached to the Form 8-K.

On July 12, 2004, the Company filed an 8-K which reported under Item 7 and 12 that on July 8, 2004, the Company issued a news release announcing sales for June 2004, updating second quarter and full year guidance and announcing the Company's participation at CIBC World Markets Fourth Annual Consumer Growth Conference. A copy of the news release is attached to the Form 8-K.

On July 29, 2004, the Company filed an 8-K which reported under Item 5 and 7 that on July 27, 2004, the Company issued a news release announcing the appointment of Cynthia "Cinny" Murray to the position of Executive Vice President, General Merchandise Manager, effective August 2, 2004.

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.

                                                                                                                                                        STAGE STORES, INC.

August 27, 2004                                                                                                                            /s/ James R. Scarborough

(Date)                                                                                                                                              James R. Scarborough

                                                                                                                                                         Chief Executive Officer and President

August 27, 2004                                                                                                                             /s/ Michael E. McCreery

(Date)                                                                                                                                              Michael E. McCreery

                                                                                                                                                         Executive Vice President, Chief Financial Officer 

                                                                                                                                                         and Corporate Secretary

EX-10

EXHIBIT 10

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of the 2nd day of August, 2004, by and between STAGE STORES, INC., a Nevada corporation (the "Company"), and CYNTHIA STREICH MURRAY, an individual (the "Executive").

WITNESSETH:

WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company to hire the Executive to the position of Executive Vice President, General Merchandise Manager (the "Position"), subject to the terms and conditions of this Agreement; and

WHEREAS, the Executive desires to be hired and appointed to the Position by the Company, subject to the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the promises and mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. EMPLOYMENT; TERM.  Company hereby hires and appoints Executive to the Position, and Executive hereby accepts such employment with the Company and appointment to the Position, subject to the terms and conditions set forth in this Agreement. Subject to earlier termination in accordance with Section 4 below, this Agreement shall continue in effect for a period of thirty-six (36) months commencing from the date hereof (the "Initial Term"). Upon the expiration of the Initial Term or any Renewal Period (as hereafter described), the term of Executive's employment under this Agreement shall automatically be extended for an additional thirty-six (36) month period (a "Renewal Period"), unless either the Company or Executive notifies the other party in writing at least thirty (30) days prior to the expiration of the Initial Term or the then current Renewal Period that the Employment Period shall not be extended upon such expiration.

1.1 Failure to Extend by Company.  In the event the Company notifies Executive that the Employment Period shall not be extended at the expiration of the Initial Term or the then current Renewal Period in accordance with Section 1 hereof, such failure to extend shall constitute termination of this Agreement by the Company without Good Cause (as hereafter defined), and the Company and Executive agree that Executive shall be entitled to receive the payments described in Section 4.3 hereof.

1.2 Failure to Extend by Executive.  In the event Executive notifies the Company that the Employment Period shall not be extended at the expiration of the Initial term or the then current Renewal Period in accordance with Section 1 hereof, such failure to extend shall constitute termination of this Agreement by Executive without Good Reason (as hereafter defined), and the Company and Executive agree that Executive shall be entitled to receive the payments described in Section 4.5 hereof.

2. POSITION AND DUTIES.  During such time as Executive is employed with the Company (the "Employment Period"), Executive shall serve in the Position and shall have the normal duties, responsibilities and authority associated with or related to such Position, subject to the power and authority of the Board and executive officers of the Company to expand or limit such duties, responsibilities and authority and to override actions of Executive. Executive shall report to the Board and executive management of the Company. Executive shall devote her best efforts and her full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) exclusively to the business and affairs of the Company and its Subsidiaries (as hereafter defined) and any duty, task or responsibility assigned or given to Executive by the Board or executive management, and Executive shall perform her duties and responsibilities to the best of her abilities in a diligent, trustworthy, businesslike and efficient manner. As used in this Agreement, "Subsidiaries" shall mean any entity of which the securities having a majority of the voting power in electing directors or managers are, at the time of determination, owned by the Company either directly or through one or more Subsidiaries.

2.1 Outside Directorships.  In the event Executive is invited, solicited or otherwise asked to become a director, advisor or consultant for any entity or organization of any type or function whatsoever other than the Company or its Subsidiaries, Executive shall notify the Board in writing of such invitation, the entity or organization extending such invitation and the capacity to be served by Executive for such entity or organization. The Board shall have the sole power and authority to authorize Executive to accept such invitation based on such criteria and standards as the Board may determine, and Executive shall not accept such invitation without the Board's prior written consent, which consent shall not be unreasonably withheld.

2.2 Delegation by Board.  Whenever this Agreement calls for action on the part of the Board, the Board may delegate responsibility for such action to a duly appointed committee of the Board, including but not limited to the Compensation Committee of the Board, and Executive agrees to treat, comply with and be bound by any action taken by such committee as if the Board had taken such action directly.

3. COMPENSATION AND BENEFITS.  During the Employment Period, Executive shall be paid or receive compensation and benefits as follows:

3.1 Base Salary.  The base salary for Executive shall be $375,000 per year, or such other rate as the Board may designate from time to time (the "Base Salary"). The Base Salary shall be payable in regular installments in accordance with the Company's general payroll practices and shall be subject to withholdings for applicable taxes.

3.2 Incentive Compensation.  For any fiscal year ending during the Employment Period, the Board may, but is not obligated to, award incentive compensation to Executive based upon the Company's operating results for such fiscal year (the "Incentive Compensation"). The amount of any such Incentive Compensation shall be calculated as a percentage of the Base Salary in effect during such fiscal year, which percentage shall be determined and may be adjusted by the Board (the "Target Rate") based on such results. In addition to such results, the Board may take into account any extraordinary, unusual or non-recurring items realized or incurred by the Company during any such fiscal year deemed appropriate by the Board in determining any Incentive Compensation. The Company shall pay to Executive any such Incentive Compensation on or before April 1 following the end of the fiscal year for which such Incentive Compensation was based; provided, that Executive was employed in the Position as of such fiscal year end, and any such Incentive Compensation shall be subject to withholdings for applicable taxes.

3.3 Medical, Dental and Other Benefits.  Upon completion of any applicable requisite waiting period, Executive shall be eligible to enroll and participate in any and all benefits plans the Company provides to its executive officers and employees including, but not limited to, medical and dental insurance coverage for Executive and family, life insurance policy (with a face amount equal to two (2) times the Base Salary), long term disability insurance, stock options, and retirement plans and arrangements. The premiums, costs and expenses for any such benefit plans under which Executive is participating shall be borne by Company. Executive shall receive four (4) weeks of paid vacation each year, which if not taken may not be carried forward to any subsequent year and Executive shall not receive any compensation for any unused vacation days. Any and all benefits provided for hereunder shall not be included in the definition of the term "Base Salary" as such term is used in this Agreement. All such benefits shall immediately cease and terminate upon the later of (1) the termination date of the Employment Period or (2) the expiration date of coverage for such benefits by the Company as described in Section 4 hereof; provided, that upon such termination, Executive shall have the right to elect to continue any or all of such health benefits, programs or coverage, at her sole cost and expense, in accordance with and subject to the terms and limitations set forth in the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and the regulations promulgated in connection therewith.

3.4 Automobile Allowance.  Company shall provide Executive with an automobile allowance in the amount of $1,000.00 per month to be allocated at Executive's discretion, or such other monthly amount designated by the Board, and such allowance shall be payable in regular installments in accordance with the Company's general payroll practices.

3.5 Financial Planning Allowance.  Company shall reimburse Executive for any expenses incurred by Executive in connection with the preparation of taxes, estate planning or financial counseling up to a maximum amount of $5,000.00 per year, or such other annual amount designated by the Board, which amount may not be carried forward to any subsequent year. Such expenses shall be reimbursed in accordance with the standard policies and procedures of the Company in effect from time to time related to such reimbursable expenses.

3.6 Business Expense.  Company shall reimburse Executive for all reasonable travel, entertainment and other business expenses incurred by Executive in the course of performing the duties of the Position. Such expenses shall be reimbursed in accordance with the standard policies and procedures of the Company in effect from time to time related to such reimbursable expenses.

4. TERMINATION; EFFECTS OF TERMINATION.  This Agreement may be terminated upon the occurrence of any of the following events:

4.1 Terminable At Will.  Notwithstanding any other provision of this Agreement including, but not limited to Section 1, this Agreement and Executive's employment with the Company or its Subsidiaries shall be terminable at will at any time for any reason by either party, and this Agreement shall expire automatically when Executive ceases to hold the Position with the Company for any reason. Upon such termination, the rights of Executive to receive the monies and benefits from the Company shall be determined in accordance with the terms and provisions contained in this Section 4, and Executive agrees that such monies and benefits are fair and reasonable and are the sole monies and benefits which shall be due to her from the Company in the event of termination.

4.2 By Company For Good Cause.  Upon written notice to Executive, Company may immediately terminate this Agreement at any time during the Employment Period for "Good Cause" (as hereafter defined).

4.2.1 Monies and Payments to Executive.  Upon such termination, Executive shall be entitled to receive any Base Salary earned and unpaid, and fringe benefits described in Section 3.3 hereof accrued and unpaid, through the date of such termination, and no other monies or benefits shall be payable or owed to Executive under this Agreement.

4.2.2 Forfeiture of Options.  Effective as of such termination date, any and all stock options, stock appreciation rights, restricted stock options, warrants and other similar rights granted to or received by Executive under any option or incentive plan of the Company to which Executive is participating or enrolled shall immediately be terminated and forfeited, except for such options or rights granted to or received by Executive which have fully and completely vested prior to such termination date. Any and all such options and rights to which Executive has become fully and completely vested prior to such termination date shall expire as set forth in the respective plan document or agreement granting such options and rights.

4.2.3 Good Cause Defined.  For purposes of this Agreement, "Good Cause" means (i) Executive's conviction of, or plea of nolo contendere or guilty to, any criminal violation involving dishonesty, fraud or moral turpitude; (ii) Executive's gross negligence; (iii) Executive's willful and serious misconduct; (iv) Executive's breach of trust or fiduciary duty in the performance of her duties or responsibilities; (v) Executive's willful failure to comply with reasonable directives and policies of the Board; or (vi) Executive's breach of any term or provision of this Agreement.

4.3 By Company Without Good Cause.  Upon ten (10) days prior written notice to Executive, Company may terminate this Agreement at any time during the Employment Period without Good Cause.

4.3.1 Monies and Benefits to Executive.  Upon such termination, Executive shall be entitled to receive: (i) any Base Salary earned and unpaid, and fringe benefits described in Section 3.3 hereof accrued and unpaid, through the date of such termination; (ii) one (1) times the aggregate of (x) the Base Salary plus (y) the Incentive Compensation at the Target Rate in effect as of the date of such termination; (iii) any Incentive Compensation for the fiscal year in which such termination occurs pro-rated through the date of such termination; provided, however, Executive shall not receive any portion of the Incentive Compensation under this Section 4.31.(iii) unless the Board determines in good faith that Executive would have been entitled to receive any Incentive Compensation for the fiscal year in which such termination occurred in accordance with Section 3.2 hereof; (iv) continuation of the fringe benefits described in Section 3.3 hereof under which Executive is participating as of the date of such termination for a period of twelve (12) months from the date of such termination; and (v) payment of outplacement services for Executive for a period of twelve (12) months from the date of such termination; provided, however, the aggregate amount of such payments shall not exceed $15,000.00.

4.3.2 Payment of Monies and Benefits.  The payment described in Section 4.3.1(i) hereof shall be paid to Executive within thirty (30) days from the date of such termination and shall be subject to withholdings for applicable taxes. The payment described in Section 4.3.1(ii) hereof shall be paid to Executive in regular installments commencing from the date of such termination in accordance with the Company's general payroll practices and shall be subject to withholdings for applicable taxes. The payment described in Section 4.3.1(iii) hereof shall be payable in a lump sum on or before April 1 following the end of the fiscal year in which such termination occurred and shall be subject to withholdings for applicable taxes. The benefits described in Section 4.3.1(iv) hereof shall be provided in accordance with the Company's standard policies and practices. The payments described in Section 4.3.1(v) hereof shall be paid directly to the entity providing outplacemen t services to Executive within ten (10) days of receipt of an invoice or statement from such entity.

4.3.3 Forfeiture of Options.  Effective as of such termination date, any and all stock options, stock appreciation rights, restricted stock options, warrants and other similar rights granted to or received by Executive under any option or incentive plan of the Company to which Executive is participating shall immediately be terminated and forfeited, except for such options or rights granted to or received by Executive which have fully and completely vested prior to such termination date. Any and all such options and rights to which Executive has become fully and completely vested prior to such termination date shall expire as set forth in the respective plan document or agreement granting such options and rights.

4.4 By Executive for Good Reason.  Upon thirty (30) days prior written notice to Company, Executive may terminate this Agreement at any time during the Employment Period for "Good Reason" (as hereafter defined), and if requested by Company, Executive shall continue to work exclusively for the Company during such thirty (30) day period; provided, however, the Company shall have the right, in its sole discretion, to terminate this Agreement at any time during such thirty (30) day period upon written notice to Executive.

4.4.1 Monies and Benefits to Executive.  Upon such termination, Executive shall be entitled to receive: (i) any Base Salary earned and unpaid, and fringe benefits described in Section 3.3 hereof accrued and unpaid, through the date of such termination or the date on which the Company terminates this Agreement during such thirty (30) day period; (ii) one (1) times the aggregate of (x) the Base Salary plus (y) the Incentive Compensation at the Target Rate in effect as of the date of such termination; (iii) any Incentive Compensation for the fiscal year in which such termination occurs pro-rated through the date of such termination; provided, however, Executive shall not receive any portion of the Incentive Compensation under this Section 4.4.1(iii) unless the Board determines in good faith that Executive would have been entitled to receive any Incentive Compensation for the fiscal year in which such termination occurred in accordance with S ection 3.2 hereof; (iv) continuation of the fringe benefits described in Section 3.3 hereof under which Executive is participating as of the date of such termination for a period of twelve (12) months from the date of such termination; and (v) payment of outplacement services for Executive for a period of twelve (12) months; provided, the aggregate amount of such payments shall not exceed $15,000.00.

4.4.2 Payment of Monies and Benefits.  The payment described in Section 4.4.1(i) hereof shall be paid to Executive within thirty (30) days from the date of such termination and shall be subject to withholdings for applicable taxes. The payment described in Section 4.4.1(ii) hereof shall be paid to Executive in regular installments commencing from the date of such termination in accordance with the Company's general payroll practices and shall be subject to withholdings for applicable taxes. The payment described in Section 4.4.1(iii) hereof shall be payable in a lump sum on or before April 1 following the end of the fiscal year in which such termination occurred and shall be subject to withholdings for applicable taxes. The benefits described in Section 4.4.1(iv) hereof shall be provided in accordance with the Company's standard policies and practices. The payments described in Section 4.4.1(v) shall be paid directly to the entity providing outplacement servi ces to Executive within ten (10) days of receipt of an invoice or statement from such entity.

4.4.3 Forfeiture of Options.  Effective as of such termination date, any and all stock options, stock appreciation rights, restricted stock options, warrants and other similar rights granted to or received by Executive under any option of incentive plan of the Company to which Executive is participating shall immediately be terminated and forfeited, except for such options or rights granted to or received by Executive which have fully and completely vested prior to such termination date. Any and all such options and rights to which Executive has become fully and completely vested prior to such termination date shall expire as set forth in the respective plan document or agreement granting such options and rights.

4.4.4 Good Reason Defined.  For purposes of this Agreement, "Good Reason" shall exist if, without Executive's express written consent, the Company: (i) materially reduces or decreases Executive's Base Salary from the level in effect on the date hereof; (ii) fails to include Executive in any incentive compensation plans, bonus plans, or other plans and benefits provided by the Company to other executive level executive; (iii) materially reduces, decreases or diminishes the nature, status or duties and responsibilities of the Position from those in effect on the date hereof, and such reduction, decrease or diminution is not reasonably related to or the result of an adverse change in Executive's performance of assigned duties and responsibilities or the hiring by Company of an executive senior to Executive; or (iv) requires Executive to regularly perform the duties and responsibilities of the Position at a location which is more than fifty (50) miles from the location of Executive's principal place of employment. notwithstanding the above, Good Reason shall not include the death, disability or voluntary retirement of Executive or any other voluntary action taken by or agreed to by Executive related to the Position or its employment with the Company or its Subsidiaries.

4.5 By Executive Without Good Reason.  Upon thirty (30) days prior written notice to Company, Executive may terminate this Agreement at any time during the Employment Period without Good Reason, and if requested by the Company, Executive shall continue to work exclusively for the Company during such thirty (30) day period; provided, however, the Company shall have the right, in its sole discretion, to terminate this Agreement at any time during such thirty (30) day period upon written notice to Executive.

4.5.1 Monies and Benefits to Executive.  Executive shall be entitled to receive any Base Salary earned and unpaid, and fringe benefits described in Section 3.3 hereof accrued and unpaid, through the date of such termination or the date on which the Company terminates this Agreement during such thirty (30) day period, and no other monies or benefits shall be payable or owed to Executive under this Agreement.

4.5.2 Forfeiture of Options.  Effective as of such termination date, any and all stock options, stock appreciation rights, restricted stock options, warrants and other similar rights granted to or received by Executive under any option or incentive plan of the Company to which Executive is participating or enrolled shall immediately be terminated and forfeited, except for such options or rights granted to or received by Executive which have fully and completely vested prior to such termination date. Any and all such options and rights to which Executive has become fully and completely vested prior to such termination date shall expire as set forth in the respective plan document or agreement granting such options and rights.

4.6 By Company Due to Change in Control.  In the event a Change in Control (as hereafter defined) occurs and Executive is not employed in the Position with the Company or its successor thereafter, Executive shall be entitled to receive, and Company or its successor shall be obligated to pay, the monies and benefits described in this Section 4.6.

4.6.1 Monies and Benefits to Executive.  Upon such Change in Control, Executive shall be entitled to receive: (i) any Base Salary earned and unpaid, and fringe benefits described in Section 3.3 hereof accrued and unpaid, through the date of such Change in Control; (ii) two (2) times the aggregate of (x) the Base Salary plus (y) the Incentive Compensation at the Target Rate in effect as of the date of such Change in Control; (iii) any Incentive Compensation for the fiscal year in which such Change in Control occurs pro-rated through the date of such Change in Control; provided, however, Executive shall not receive any portion of the Incentive Compensation under this Section 4.6.1(iii) unless the Board determines in good faith that Executive would have been entitled to receive any Incentive Compensation for the fiscal year in which such Change in Control occurred in accordance with Section 3.2 hereof; (iv) continuation of the frin ge benefits described in Sections 3.3 hereof under which Executive is participating as of the date of such Change in Control for a period of twelve (12) months from the date of such Change in Control; (v) payment of outplacement services for Executive for a period of twelve (12) months from the date of such Change in Control; provided, however, the aggregate amount of such payments shall not exceed $15,000.00; and (vi) continuation of the financial planning allowance described in Section 3.5 hereof for a period of twelve (12) months from the date of such Change in Control.

4.6.2 Payment of Monies and Benefits.  The payments described in Sections 4.6.1(i) and 4.6.1(ii) hereof shall be paid to Executive in a lump sum within thirty (30) days of the date of such Change in Control and shall be subject to withholdings for applicable taxes. The payment described in Section 4.6.1(iii) hereof shall be payable in a lump sum on or before April 1 following the end of the fiscal year in which such Change in Control occurred and shall be subject to withholdings for applicable taxes. The benefits described in Section 4.6.1(iv) hereof shall be provided in accordance with the Company's or its successor's standard policies and practices. The payments described in Section 4.6.1(v) hereof shall be paid directly to the entity providing outplacement services to Executive within ten (10) days of receipt of an invoice or statement from such entity. The reimbursement of the expenses related to Section 4.6.1(vi) shall be made to Executive in accordance with the Company's or its successor's policies and procedures.

4.6.3 Vesting of Options.  Effective as of the date of such Change in Control, any and all stock options, stock appreciation rights, restricted stock options, warrants and other similar rights granted to or received by Executive under any option or incentive plan of the Company to which Executive is participating or enrolled shall immediately become fully and completely vested and exercisable as if Executive had satisfied any and all terms, conditions or requirements described or contained in such plan. In the event Executive has not previously exercised, or does not exercise, all or any portion of such options or rights within sixty (60) days of the date of such Change in Control (the "Exercise Period"), Executive shall be entitled to receive, and Company or its successor shall be obligated to pay, compensation for such unexercised options or rights in an amount equal to (i) the number of shares not exercised by Executive under such options or rights multi plied by (ii) the closing price of the common stock of the Company as of the day immediately prior to such Change in Control minus the exercise price of Executive described in such options or rights (the "Option Compensation"). The Option Compensation shall be payable in a lump sum within thirty (30) days after the expiration of the Exercise Period, and shall be subject to withholdings for applicable taxes. Executive shall take any and all actions, and execute and deliver to Company or its successor any and all agreements, certificates or instruments, necessary or required to consummate the transactions contemplated under this Section 4.6.3 including, but not limited to, the assignment, transfer or conveyance of any and all shares to be acquired by the Company or its successor and the cancellation, revocation or termination of any options or rights Executive has or may have under any such option or incentive plan.

4.6.4 Change in Control Defined.  For purpose of this Agreement, a "Change in Control" shall be deemed to have occurred as of the date (i) any "person" or "group" (as such terms are used in Section 13(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities, and within one (1) year after such "person" or "group" becomes the beneficial owner of twenty-five percent (25%) or more of the combined voting power of the Company (the "Trigger Date"), the members of the Board immediately prior to the Trigger Date cease to constitute a majority of the Board, (ii) the consummation of a consolidation or merger of the Company in which the Company is not the surviving or continuing cor poration, or pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger have (directly or indirectly) at least a fifty one percent (51%) ownership interest in the outstanding common stock of the surviving corporation immediately after the merger, or (iii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, except for any sale, lease exchange or transfer resulting from any action taken by any creditor of the Company in enforcing its rights or remedies against any assets of the Company in which such creditor holds a security interest.

4.6.5 Payments from Tax Implications.  

(a) Gross-Up Payment.  Notwithstanding anything to the contrary in this Agreement, in the event it shall be determined that any payment or distribution made, or benefit provided (including, but not limited to, Section 4.6.3 hereof), by the Company to or for the benefit of Executive under this Agreement but determined without regard to any additional payments required under this Section 4.6.5 (each, a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), or any similar excise tax, or any interest or penalties incurred by Executive with respect to such excise tax (such tax with any such interest and penalties being collectively referred to as the "Excise Tax"), Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") from the Company in an amount such that after payment by Executive of all taxes (including any Excise Tax, income tax or pay roll tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments.

(b) Determination of Gross-Up Payment.  Subject to the provisions of Section 4.6.5(c) hereof, all determinations required to be made under this Section 4.6.5, including a determination of the requirement for and amount of any Gross-Up Payment, shall be made by the independent public accounting firm which is then retained by the Company to audit its financial statements (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within thirty (30) business days of the date of such termination, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by Executive shall be made on the basis of substantial authority. Any initial Gross-Up Payment shall be paid to Executive within fifteen (15) business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, the Accounting Firm shall furnish Executive with a written opinion that she has substantial authority not to report any Excise Tax on her federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 4.6.5(b) shall be binding upon the Company and Executive; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments, including any interest and penalties, being collectively referred to as the "Gross-Up Underpayment"). In the event the Company exhausts its remedies pursuant to Section 4.6.5(c) hereof and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of Executive. T he fees and disbursements of the Accounting Firm shall be paid by the Company.

(c) Remedies to Company.  Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten (10) business days after Executive receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of thirty (30) days following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such thirty (30) day period that the Company desires to contest such claim at the Company's sole cost and expense and the Company will provide the indemnification as required by this S ection 4.6.5(c), Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim; (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, but not limited to, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to Executive; (3) cooperate with the Company in good faith in order effectively to contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim.

The Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax, income tax or payroll tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4.6.5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority with respect to such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial ju risdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax, income tax or payroll tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due shall be limited solely to such contested amount, unless Executive agrees otherwise. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be enti tled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(d) Refund of Excise Tax to Company.  If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 4.6.5(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 4.6.5(c) hereof) promptly pay to the Company the amount of such refund, together with any and all interest paid or credited thereon after taxes applicable thereto. If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 4.6.5(c) hereof a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then any obligation of Executive to repay such advance shall be forgiven and the amount of such advance shall offset, to t he extent thereof, the amount of Gross-Up Payment required to be paid by the Company.

4.7 Execution of Release by Executive.  Company shall not be obligated to pay any portion of the monies and benefits described above, if any, unless and until Executive shall have executed and delivered to the Company a release of all claims against the Company and its Subsidiaries and their respective shareholders, partners, member, directors, managers, officers, employees, agents and attorneys, arising out of or related to any act or omission which occurred on or prior to the date on which this Agreement was terminated, in form and substance reasonably satisfactory to the Company.

5. POST-EMPLOYMENT DUTIES.  For a period of three (3) years following the termination of this Agreement, Executive shall: (i) fully and truthfully cooperate and assist the Company and its Subsidiaries, to the fullest extent possible, in any and all issues, matters, legal proceedings or litigation related to or associated with the business, management or operation of or any other matter involving the Company or its Subsidiaries in any way or of any nature whatsoever arising from, related to or connected with any period in which Executive was employed by or otherwise provided services to the Company or its Subsidiaries or in which Executive has or may have past knowledge, information or experience or applicable expertise; and (ii) fully cooperate, assist, participate and work with the Company or its Subsidiaries on any and all issues or matters for which the Company or its Subsidiaries may seek her cooperation, assistance, participation, involvement or co nsultation. Such assistance shall be provided at such times and dates which shall not unreasonably interfere or conflict with Executive's then current employment. The Company shall reimburse Executive for any and all costs and expenses reasonably incurred by Executive in providing such assistance in accordance with the standard policies and procedures of the Company in effect from time to time related to such reimbursable expenses.

6. CONFIDENTIAL INFORMATION.  Executive acknowledges that Executive will have access or be privy to certain confidential business and proprietary information of the Company and its Subsidiaries as a result of Executive's employment with the Company or its Subsidiaries. Such confidential information may include but is not limited to business decisions, plans, procedures, strategies and policies, legal matters affecting Company and its Subsidiaries and their respective businesses, personnel, customer records information, trade secrets, bid prices, evaluations of bids, contractual terms and arrangements (prospective purchases and sales), pricing strategies, financial and business forecasts and plans and other information affecting the value or sales of products, goods, services or securities of the Company or its Subsidiaries, and personal information regarding employees (collectively, the "Confidential Information"). Executive acknowledges and agrees the Confiden tial Information is and shall remain the sole and exclusive property of the Company or such Subsidiary. Executive shall not disclose to any unauthorized person, or use for Executive's own purposes, any Confidential Information without the prior written consent of the Board, which consent may be withheld by the Board at its sole discretion, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Executive's acts or omissions. Executive agrees to maintain the confidentiality of the Confidential Information after the termination of Executive's employment; provided, further, that if at any time Executive or any person or entity to which Executive has disclosed any Confidential Information becomes legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar process) to disclose any of the Confidential Information, Executive shall provide the Company with prompt, pri or written notice of such requirement so the Company, in its sole discretion, may seek a protective order or other appropriate remedy and/or waive compliance with the terms hereof. In the event that such protective order or other remedy is not obtained or the Company waives compliance with the provisions hereof, Executive shall ensure that only the portion of the Confidential Information which Executive or such person is advised by written opinion of the Company's counsel that Executive is legally required to disclose is disclosed, and Executive further covenants and agrees to exercise reasonable efforts to obtain assurance that the recipient of such Confidential Information shall not further disclose such Confidential Information to others, except as required by law, following such disclosure. In addition Executive covenants and agrees to deliver to the Company upon termination of this Agreement, and at any other time as the Company may request, any and all property of the Company including, but not limit ed to, keys, computers, credit cards, company car, memoranda, notes, plans, records, reports, computer tapes, printouts and software, Confidential Information in any form whatsoever, and other documents and data (and copies thereof) and relating to the Company or any Subsidiary which she may then posses or have under her control or to which Executive had access to or possession of in the course of such employment.

7. COVENANT NOT TO COMPETE, SOLICIT OR DISPARAGE .  Executive hereby agrees that for a period of three (3) years following the expiration or termination of this Agreement (the "Non-Compete Period"), Executive shall not: (i) directly or indirectly, either individually or for any other person or entity (whether as an officer, director, employee, owner, stockholder, consultant, agent, advisor, general partner, limited partner or otherwise), or as a part of a group, own, operate, manage, control, participate in, consult with, render services for, or in any manner engage in any business competing with any part of the business presently engaged in by the Company within any geographical area in which the Company engages or has proposed to engage in such business (or solicit any person to engage in any of the foregoing activities); (ii) directly or indirectly, individually or for any other person or entity induce or attempt to induce any employee of the Company to leave the employ of the Company, hire any person who is an employee of the Company as of or immediately prior to the time of such hiring, or induce or attempt to induce any manufacturers' representative, customer, supplier, licensee, agent or any other person or entity having a business relationship with the Company to cease doing business with or reduce the volume of its business with the Company; or (iii) initiate, participate or engage in any communication whatsoever with any current or former customer, supplier, vendor or competitor of the Company or its Subsidiaries or any of their respective shareholders, partners, members, directors, managers, officers, employees or agents, or with any current or former shareholder, partner, member, director, manager, officer, employee or agent of the Company or its Subsidiaries, or with any third party, which communication could reasonably be interpreted as derogatory or disparaging to the Company or its Subsidiaries, including but not limited to the busines s, practices, policies, shareholders, partners, members, directors, managers, officers, employees, agents, advisors and attorneys of the Company or its Subsidiaries. Provided, however, nothing herein shall prohibit Executive from being a passive owner of or controlling, directly or indirectly, not more than five percent (5%) in the aggregate of the outstanding stock of any class of a corporation which is publicly traded and which competes in the business of the Company so long as Executive has no direct or indirect participation in the management of such corporation. Executive acknowledges that the foregoing restriction is reasonable in all respects and that there is no less restrictive provision in terms of duration, prohibited activities or geographic area which would adequately protect the Company's assets and other legitimate business interests. For purposes of the foregoing, a business shall be deemed to be competing with the business of the Company if such business (a) operates apparel stores i n small markets (populations of less than 25,000) and (b) operates a significant number of its apparel stores (75% or more of its total apparel stores) in 10,000 to 30,000 square foot formats. Notwithstanding the foregoing, in the event any part of this covenant set forth in this provision shall be held invalid, illegal or unenforceable by a court of competent jurisdiction, Executive and the Company hereby agree that such invalid, illegal or unenforceable provision or section hereof shall be severed from this Agreement without affecting the remaining portions hereof in any manner. In the event any portion of this provision related to the time or geographical area restrictions hereof shall be declared by a court of competent jurisdiction to exceed the maximum time or geographical area restrictions such court deems reasonable or enforceable, said time or geographic area restriction shall be deemed to become and thereafter shall be such time or geographic area which such court shall deem reasonable and e nforceable.

8. ARBITRATION.  Should any dispute arise relating to the meaning, interpretation, enforcement or application of this Agreement, such dispute shall be settled in Harris County, Texas, in accordance with the terms, conditions and requirements described or contained in the Company's arbitration policy, if any, and the employment dispute arbitration rules of the American Arbitration Association, and all costs of such arbitration including, but not limited to reasonable attorney's fees and costs, shall be borne by the losing party.

9. NOTICES.  Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address indicated below:

To Executive:

To Company: Stage Stores, Inc.

10201 Main Street

Houston, Texas 77025

Attention: Chief Financial Officer

With a copy to: McKinney & Stringer, P.C.

101 North Robinson, Suite 1300

Oklahoma City, Oklahoma 73102

Attn: N. Martin Stringer, Esq.

or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement shall be deemed to have been given when so delivered or mailed.

10. GOVERNING LAW.  All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Texas. In furtherance of the foregoing, the internal law of the State of Texas shall control the interpretation and construction of this Agreement, even though under the jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply.

11. SEVERABILITY.  Each section, subsection and lesser section of this Agreement constitutes a separate and distinct undertaking, covenant or provision hereof. In the event that any provision of this Agreement shall be determined to be invalid or unenforceable, such provision shall be deemed limited by construction in scope and effect to the minimum extent necessary to render the same valid and enforceable, and, in the event such a limiting construction is impossible, such invalid or unenforceable provision shall be deemed severed from this Agreement, but every other provision of this Agreement shall remain in full force and effect.

12. AMENDMENTS; MODIFICATIONS.  Neither this Agreement nor any term or provision in it may be changed, waived, discharged, rescinded or terminated orally, but only by an agreement in writing signed by the party against whom or which the enforcement of such change, waiver, discharge, rescission or termination is sought.

13. WAIVER.  No failure on the part of either party to this Agreement to exercise, and no delay in exercising, any right, power or remedy created hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy by any such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver by any party hereto to any breach of, or default in, any term or condition of this Agreement shall constitute a waiver of or assent to any succeeding breach of or default in the same or any other term or condition hereof. The terms and provisions of this Agreement, whether individually or in their entirety, may only be waived in writing and signed by the party against whom or which the enforcement of such waiver is sought.

14. SUCCESSORS AND ASSIGNS.  This Agreement shall be binding upon and inure to the benefits of the successors, assigns, heirs, legatees, devisees, executors, administrators, receivers, trustees and representatives of Executive and the Company and its Subsidiaries and their respective successors, assigns, administrators, receivers, trustees and representatives.

15. HEADINGS.  The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

16. MULTIPLE COUNTERPARTS.  This Agreement may be executed in two or more counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

17. FEES AND EXPENSES.  All costs and expenses incurred by either party in the preparation, negotiation or performance of this Agreement shall be borne solely by the party incurring such expense without right of reimbursement.

18. FURTHER ASSURANCES.  Executive and the Company covenant and agree that each will execute any additional instruments and take any actions as may be reasonably requested by the other party to confirm or perfect or otherwise to carry out the intent and purpose of this Agreement.

19. CONSTRUCTION.  In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by Executive and the Company, and no presumption or burden of proof shall arise favoring or disfavoring either by virtue of the authorship of any of the provisions of this Agreement.

20. SURVIVAL.  Executive and the Company agree that the terms and conditions of Sections 4 through 15 (inclusive), 19, 20 and 21 hereof shall survive and continue in full force and effect, notwithstanding any expiration or termination of the Employment Period or this Agreement.

21. ENTIRE AGREEMENT.  This Agreement contains and constitutes the entire agreement between Executive and the Company and supersedes and cancels any prior agreements, representations, warranties, or communications, whether oral or written, between Executive and the Company relating to the subject matter hereof in any way.

22. GENDER; NUMBER PLURALITY.  Unless the context otherwise requires, whenever used in this Agreement the singular shall include the plural, the plural shall include the singular, and the masculine gender shall include the neuter or feminine gender and vice versa.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written.

"COMPANY" STAGE STORES, INC.,

a Nevada corporation

By:

Name: James R. Scarborough

Title: Chairman, President & CEO

"EXECUTIVE"

Cynthia Streich Murray,an individual

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, James R. Scarborough, Chief Executive Officer of Stage Stores, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Stage Stores, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant, and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

  5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date August 27, 2004

/s/ James R. Scarborough

James R. Scarborough

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Michael E. McCreery, Chief Financial Officer of Stage Stores, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Stage Stores, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant, and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

     5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 27, 2004

/s/ Michael E. McCreery

Michael E. McCreery

Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Stage Stores, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, James R. Scarborough and Michael E. McCreery, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. Section 1350, that to our knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 27, 2004

/s/ James R. Scarborough
James R. Scarborough
Chief Executive Officer

/s/ Michael E. McCreery
Michael E. McCreery
Chief Financial Officer