Item 1. BUSINESS.

Steven Madden, Ltd. (together with its subsidiaries, the "Company") designs, sources, markets and sells fashion-forward footwear brands for women, men and children. The Company distributes products through its retail stores, its e-commerce websites, catalogs and department and specialty store locations in the United States and Canada. The Company's product line includes core products, which are sold year-round, complemented by a broad range of updated styles which are designed to establish or capitalize on market trends.

The Company's business is comprised of three (3) distinct segments. The wholesale division includes five (5) brands: Steve Madden(R), David Aaron(R),
l.e.i.(R), Stevies(TM) and the recently introduced Steve Madden Mens brand. Steven Madden Retail, Inc., the Company's wholly owned retail subsidiary, operates Steve Madden and David Aaron retail stores as well as the Company's outlet stores and e-commerce web sites. The Company's wholly owned private label subsidiary, Adesso-Madden, Inc., designs and sources footwear products under private labels for many of the country's largest mass merchandisers. The Company also licenses its Steve Madden(R) and Stevies(TM) trademarks for several accessory and apparel categories.

Steven Madden, Ltd., was incorporated as a New York corporation on July 9, 1990 and reincorporated under the same name in Delaware in November 1998. The Company was founded and developed by Steven Madden, its principal designer, and Chief Executive Officer and former Chairman of the Board, which has established a reputation for its creative designs, popular styles and quality products at accessible price points. The Company completed its initial public offering in December 1993 and its shares of Common Stock currently trade on The Nasdaq National Market under the symbol "SHOO".

RECENT DEVELOPMENTS

In January 2000, the Company announced the launch of its new Stevies(TM) brand which is marketed to girls ages 6 to 12 years old. The new footwear line mirrors some of the design concepts and attitudes present in the Steve Madden(R) brand and is distributed through moderate and better department stores and footwear specialty stores. The Company commenced shipping Stevies' products in time for the most recent back-to-school season.

During the Spring and Summer of 2000, the Company also licensed the Stevies(TM) trademark for additional product categories and launched the e-commerce website, WWW.STEVIES.COM. In light of the fact that the Company believed that licensing opportunities were not being fully exploited, in January 2001 the Company engaged Jassin O'Rourke Group, LLC, a consulting firm, to enhance the Company's licensing efforts. In February 2001, the Company terminated existing licensing agreements for jewelry and hair accessories for the Steve Madden(R) and Stevies(TM) brands, and sportswear for the Stevies(TM) brand. The Company expects that, with the assistance of Jassin O'Rourke, it will be successful in improving its licensed product business.

On October 2, 2000, the Company announced the engagement of Bear Stearns & Company as financial advisor to the Company. Bear Stearns was engaged to explore strategic alternatives for the Company.

In November 2000, the Company announced its plans to launch the Steve Madden Mens footwear line. The line is managed by the Company's wholesale division and is designed and marketed with the signature Steve Madden(R) brand name. A preview of the new line debuted at the FFANY Shoe Show in December 2000 and select styles were shipped to retail customers for the Spring 2001 selling season. The full collections were unveiled in February 2001 at the MAGIC and WSA Shoe Shows in Las Vegas. The new men's collection is targeted towards stylish male consumers between the ages of 20 and 35. The line incorporates similar design themes present in the Steve Madden women's footwear collection with retail price points ranging from $79-$99 a pair.

The Company maintains its principal executive offices at 52-16 Barnett Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.

STEVEN MADDEN - WHOLESALE DIVISION

The wholesale division sources, sells and markets the Company's Steve Madden(R) brand to major department stores, better specialty stores, and shoe stores throughout the country and Canada. During the last few years the Steve Madden(R) product line has become a leading footwear brand in the fashion conscious junior marketplace. By the end of 2000, the Steve Madden brand was sold in approximately 3,000 doors throughout the country. To serve its customers (primarily women ages 16 to 25), the wholesale division creates and markets fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at reasonable prices. In November 2000, the wholesale division expanded its marketing plan to include a men's footwear line which targets fashion conscious men ages 20 to 35.

As the Company's largest division, the Steve Madden(R) wholesale division accounted for $87,977,000 in sales in 2000, or approximately 43% of the Company's total revenues. Many of the wholesale division's newly created styles are test marketed at the Company's retail stores. Within a few days, the Company can determine if a test product appeals to customers. This enables the Company to use its flexible sourcing model to rapidly respond to changing preferences which the Company believes is essential for success in the fashion footwear marketplace.

DIVA ACQUISITION CORP. - THE DAVID AARON(R) WHOLESALE DIVISION

Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to women under the "David Aaron(R)" trademark through major department stores and better footwear specialty stores and two (2) Company owned retail shoe stores located in the Soho area of Manhattan and in Paramus, NJ. Priced a tier above the Steve Madden(R) brand, Diva's products are designed to appeal principally to fashion conscious women, ages 26 to 45, who shop at department stores and footwear boutiques. As of December 31, 2000, the David Aaron brand was sold in approximately 652 doors across the country. The Company recorded sales from the David Aaron(R) brand of $3,616,000 for the year ended December 31, 2000, or approximately 1.8% of the Company's total revenues. Revenues from the sale of

David Aaron footwear decreased by approximately 55% compared to the preceding year due to the repositioning and reorganization of the David Aaron brand. The Company intentionally planned to reduce its volume in 2000 enabling the David Aaron Division to use its two retail stores to test the popularity of new products. The Company intends to sell its most successful David Aaron products at wholesale beginning in Spring 2001.

l.e.i. (R) - WHOLESALE DIVISION

In September, 2000, the Company renewed its license agreement with R.S.V. Sport, Inc. pursuant to which the Company continues to have the right to use the l.e.i.(R) trademark in connection with the sale and marketing of footwear. The l.e.i.(R) trademark is well known for jeanswear in the junior marketplace and nationally through department and specialty stores. The Company's l.e.i.(R) footwear products were targeted to attract girls ages 6 to 11 years old and young women ages 12 to 20 years old, a majority of which are younger than the typical Steve Madden(R) brand customer. At year end, l.e.i. footwear products were sold in major department shores and footwear specialty shops (approximately 3,500 doors ) across the country, an increase of 40% over the year ending December 31, 1999. The l.e.i. Wholesale Division generated revenue of $37,741,000 for the year ended December 31, 2000, or approximately 18.4% of the Company's total revenues.

STEVIES INC. - WHOLESALE DIVISION

In the first quarter, the Company introduced a new brand, Stevies(TM). Stevies(TM) is a fashion brand which targets girls ages 6-9 and "tweens" ages 10-12. The Company's new Stevies Wholesale Division ("Stevies Wholesale") commenced shipping to department stores throughout the country in the second quarter of 2000. Stevies Wholesale generated revenue of $6,147,000 for the year ended December 31, 2000, or approximately 3% of the Company's total revenues. Stevies(TM) now sells in over 1,000 doors, including store groups such as Nordstroms, Federated Department Stores, May Company stores, Belks, Dillards, Limited Too, as well as independent children's stores throughout the country. The Stevies(TM) brand ended the year with over 800 Stevies(TM) concept shop locations and over 500 Stevies(TM) accessories concept locations which display accessories and slippers. The web site for Stevies (TM) at www.stevies.com went live in March of 2000 and commenced e-commerce operation in July 2000.

STEVEN MADDEN RETAIL, INC. - RETAIL DIVISION

As of December 31, 2000, the Company owned and operated fifty-six (56) retail shoe stores under the Steve Madden(R) name, two (2) under the David Aaron(R) name, six (6) outlet stores and one (1) Internet store (through the www.stevemadden.com, www.stevies.com, and www.stevemaddenmens.com) web sites. Most of the Steve Madden stores are located in major shopping malls in California, Colorado, District of Columbia, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Texas and Virginia. Each of the Steve Madden(R) stores has been designed to appeal to young fashion conscious women by creating a "nightclub" type atmosphere. The retail stores have been very successful for the Company, generating annual sales in excess of $700 per square foot. Sales are primarily from the sale of the Company's Steve Madden(R) product line. Same store sales increased 10% in 2000 over 1999 sales and total sales for

the retail division were $70 million compared to $49 million for 1999. Sales from the retail division for year ended December 31, 2000 were approximately 34% of the Company's total sales.

The Company believes that the Retail Division will continue to enhance overall sales and profits while building equity in the Steve Madden brand. It is for these reasons that the Company intends to add approximately ten (10) new retail stores during the 2001 calendar year. Additionally, the expansion of the Retail Division enables the Company to test and react to new products and classifications which strengthens the product development efforts of the Steve Madden wholesale division.

THE ADESSO-MADDEN, INC. - PRIVATE LABEL DIVISION

In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass market merchandisers, shoe store chains and other off-price retailers in connection with their purchase of private label shoes. As a buying agent, A-M arranges with shoe manufacturers in Asia and South America for them to manufacture private label shoes to the specifications of its clients. The Company believes that by operating in the private label, mass merchandising market, the Company is able to maximize additional non-branded sales opportunities. This leverages the Company's overall sourcing, design and distribution capabilities. Currently, this division serves as a buying agent for the procurement of women's footwear for large retailers including J.C. Penny, Sears, Mervyn's, Payless, Wal-Mart and Target. A-M receives commissions in connection with the purchase of private label shoes by its clients. A-M also sources and sells footwear under the Soho Cobbler(R) brand name. The private label division generated commission revenue of $3.6 million for the year ended December 31, 2000.

PRODUCTS AND LICENSING

The Company's products emphasize youthful styling and contemporary design and are marketed at moderate to better price points. The Company's primary products include Steve Madden(R), l.e.i.(R), Stevies (TM) and David Aaron(R) branded footwear, and in 2001, Steve Madden Mens. In addition, the Company has a private label shoe operation, Adesso-Madden, Inc., and has also entered into strategic licensing agreements for Steve Madden(R) and Stevies branded products.

STEVE MADDEN(R)

Steve Madden(R) branded products are designed to appeal to style conscious consumers in the junior market (ages 16 to 25 years). The Steve Madden(R) line emphasizes up-to-date fashion and includes a wide range of women's footwear including boots, sneakers, evening shoes, slippers, casual and tailored shoes and sandals. Steve Madden(R) brand shoes sell at retail price points generally ranging from $48 to $70 for shoes and up to $99 for boots.

In order to reduce the impact of changes in fashion trends on the Steve Madden(R) brand product sales, the Company designs and classifies its product line into three categories: Core, Core-plus, and Fashion. The Company's Core line is available year round and consists of classic products which have proven to be consistent sellers over several seasons. The Core line currently includes eight (8) style/color combinations each of which can be reordered using the Company's EDI system and shipped to retailers within one to two weeks. This

results in rapid replenishment of the most popular Steve Madden styles. The Company's Core-plus line consists of basic styles whose patterns and colors are updated each season to keep pace with changing trends. Finally, the Company's Fashion line consists of styles that are designed close to or in season and capitalize on the Company's ability to design, test, manufacture and market products quickly. Core and Core-plus products account for a majority of Steve Madden(R) brand sales.

STEVE MADDEN MENS

After announcing the launch of Steve Madden Mens in November 2000, the Company's new men's footwear line of products met with enthusiastic responses from buyers at tradeshows in November, 2000 and February, 2001. The Steve Madden Men's footwear products will be designed to capitalize on the Company's success for designing, sourcing and marketing popular fashion forward footwear. Many of the men's products will be built in the same spirit as present in the Steve Madden women's footwear line. With retail price points ranging from $79 to $99 a pair, the Company expects to sell Steve Madden Mens to department store and footwear specialty stores throughout the country. In order to enhance sales, the Company expects to have at least 50 men's concept shops located in major department stores by year end. By using appropriate signs, logos and display fixtures, the Company has created concept shops located in department stores, specialty stores and independent shoe stores that segregate and distinguish the Company's products from other footwear brands.

DAVID AARON(R)

The Company acquired the David Aaron(R) brand in 1996, and David Aaron(R) products are marketed through the Company's Diva subsidiary. David Aaron(R) branded products are designed to appeal to more sophisticated, career and fashion oriented consumers (ages 26 to 45 years) in the better market segment. David Aaron(R) products are priced at a tier above the Steve Madden(R) brand and have retail price points generally ranging from $70 to $85 for shoes and up to $150 for boots. Similar to the Steve Madden(R) line, the Company's David Aaron(R) line is organized into Core, Core-plus, and Fashion categories with Core and Core-plus products accounting for a large majority of David Aaron(R) brand sales.

l.e.i.(R)

In September 2000, the Company renewed its license agreement with R.S.V. Sport, Inc. pursuant to which the Company has the right to use the
l.e.i.(R)trademark in connection with the sale and marketing of footwear in exchange for which the Company is required, among other things, to make periodic royalty payments based on its net sales of l.e.i.(R)footwear. The
l.e.i.(R)trademark is well known for jeanswear in the junior marketplace and
l.e.i.(R)jeans are sold in department and specialty stores nationwide. The Company's l.e.i.(R)footwear products were targeted to attract girls ages 6 to 11 years old and young women ages 12 to 20 years old, the majority of which are younger than the typical Steve Madden(R)brand customer. Despite having only started selling l.e.i.(R) products at retail in August, 1998, sales of
l.e.i.(R)products increased considerably in 1999 and 2000. By December 31, 2000,
l.e.i. footwear products were sold in approximately 3,500 doors nationwide, an increase of approximately 40% over 1999.

STEVIES(TM)

Stevies(TM) is a fashion brand which targets girls ages 6-9 and "tweens" ages 10-12. The Stevies footwear line mirrors some of the design concepts and attitude present in the Steve Madden(R) brand and is distributed through moderate and better department stores and footwear specialty stores. The Company commenced shipping Stevies' products in time for the most recent back-to-school season. By year end Stevies(TM) sold in over 1,200 doors across the country, including store groups such as Nordstroms, Federated Department Stores, May Company stores, Belk, Dillards, Limited Too, as well as children's independent stores throughout the country. In addition, Stevies concept shops have been established in approximately 815 department stores, and the Company expects approximately 1000 Steve's concept shops to be installed by the end of 2001.

LICENSING

The Company believes that strategic licensing will enhance the Steve Madden and Stevies(R) brands, leverage brand equity and increase customer loyalty. During 1997, the Company began to license the Steve Madden(R) trademark selectively while attempting to maintain strict design, merchandising and marketing control over its licensees. In 2000, the Company commenced licensing the Stevies trademark shortly after announcing the launch of the Stevies footwear brand.

As of December 31, 2000, the Company licensed the Steve Madden trademark for use in connection with the manufacturing, marketing and sale of outerwear (including leather sportswear), belts, handbags, sunglasses, hosiery, hair accessories and jewelry. Each license agreement requires the licensee to pay to the Company a royalty based on net sales, a minimum royalty in the event that net sales fail to reach specified targets and a percentage of sales for advertising of the Steve Madden(R) brand.

As of March 15, 2000, the Company and its sportswear licensee, Iron Will Group, Inc. executed a Termination Agreement with respect to that certain License Agreement dated as of January 1, 1999. Iron Will Group is an affiliate of Jordache enterprises. The Termination Agreement required that Iron Will terminate its sale and distribution of Steve Madden Sportswear products on or before June 15, 2000.

During 2000, the Company licensed the Stevies trademark for use in connection with manufacturing marketing and sale of sportswear; outerwear, belts, handbags, sunglasses, hosiery, fashion accessories, jewelry, hair accessories. In February 2001, the Company terminated existing licensing agreements for jewelry and hair accessories for the Steve Madden(R) and Stevies(TM) brands, and sportswear for the Stevies(TM) brand.

In order to enhance the performance of the Company's licensing business, in January 2001 the Company engaged Jassin O'Rourke Group, LLC, a consulting firm specializing in marketing, management and licensing for the apparel industry.

DESIGN

The Company has established a reputation for its creative designs, popular styles and quality products at accessible price points. Steve Madden has been involved in the footwear industry for over twenty (20) years and is responsible for the Company's overall fashion direction, maintaining direct, day-to-day supervision of the Company's eleven (11) person product design and development team.

The Company believes that its future success will depend in substantial part on its ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, the Company has developed a unique design process that allows it to recognize and adapt quickly to changing consumer demands. The Company's design team works together to create designs which they believe fit the Company's image, reflect current or approaching trends and can be manufactured in a timely and cost-effective manner. Once the initial design is complete, a prototype is developed, which is reviewed and refined prior to the commencement of limited production. Most new Steve Madden designs are then tested in the Steve Madden(R) retail stores. Designs that prove popular are then scheduled for mass production overseas and wholesale and retail distribution nationwide. The Company believes that its unique design and testing process and flexible sourcing model is a significant competitive advantage allowing the Company to cut mass production lead times and avoid the costly production and distribution of unpopular designs.

PRODUCT SOURCING AND DISTRIBUTION

The Company sources each of its product lines separately based on the individual design, styling and quality specifications of such products. The Company does not own or operate any mass manufacturing facilities and sources its branded products directly or indirectly through independently owned manufacturers in Brazil, China, Italy, Mexico, Spain, Taiwan and the United States. The Company has established relationships with a number of manufacturers in each country. The Company believes that this sourcing of footwear products minimizes its investment and inventory risk, and enables efficient and timely introduction of new product designs. Although the Company has not entered into any long-term manufacturing or supply contracts, the Company believes that a sufficient number of alternative sources exist for the manufacture of its products. The principal materials used in the Company's footwear are available from any number of sources, both within the United States and in foreign countries.

The Company's design and distribution processes are intended to be flexible, allowing the Company to respond to and accommodate changing consumer demand. The Company's production staff tracks warehouse inventory on a daily basis, monitors sell through data and incorporates input on product demand from wholesale customers. The Company can use product feedback to adjust production or manufacture new products in as little as five weeks. Constant inventory tracking allows the Company to manage inventory on a continuous flow basis with the goal of optimizing inventory turns. More specifically, all inventory is classified into three categories: Core products, which are sold year round, Core-plus products which are in-season styles that are experiencing unusually strong sell through, and Fashion products. The Company strives to only have reorder inventory in selected Core and Core-plus products that are proven best-sellers.

The Company distributes its products primarily from three (3) third party distribution warehouse centers located in California, Michigan and New Jersey and its own distribution facility located in Florida. By utilizing distribution facilities that specialize in distributing products to certain customers (wholesale accounts, Steve Madden retail stores and Internet fulfillment), the Company believes that its customers are better served.

In 1999, the Company expanded its use of electronic data interchange ("EDI") quick replenishment system to its department store accounts on designated Core items and offered EDI to all of its significant wholesale accounts. Sales resulting from EDI replenishment remained unchanged during 2000 compared to 1999. The Company believes that its flexible product introduction schedule and perpetual inventory control system are competitive advantages in an industry that is subject to high fashion risks.

CUSTOMERS

The Company's customers purchasing shoes consist principally of department stores and specialty stores, including shoe boutiques. Presently, the Company sells approximately sixty two percent (62%) of its products to department stores, including Federated Department Stores (Bloomingdales, Bon Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May), Dillard's, Dayton-Hudson and Nordstrom; and approximately thirty eight percent (38%) to specialty stores, including Journey's, Limited Too and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut. Federated Department Stores, May Department Stores and Nordstrom presently account for approximately twenty one percent (21%), and eighteen percent (18%) and eleven percent (11%) of the Company's wholesale sales, respectively.

DISTRIBUTION CHANNELS

The Company sells it products principally through its Company-owned retail stores, better department stores and specialty shoe stores in the United States and abroad. Retail stores and wholesale sales account for approximately thirty four percent (34%) and sixty six percent (66%) of total sales, respectively. The following paragraphs describe each of these distribution channels:

STEVE MADDEN AND DAVID AARON RETAIL STORES

As of December 31, 2000, the Company operated fifty six (56) Company-owned retail stores under the Steve Madden(R) name and two (2) under the David Aaron(R) name. The Company believes that its retail stores will continue to enhance overall sales, profitability, and its ability to react to changing consumer trends. The design, format and environment of the Steve Madden(R) retail stores resemble a nightclub type atmosphere which has become a popular destination and gathering place for young women. The David Aaron(R) store has a more sophisticated design and format styled to appeal to its more mature target audience. These stores are used as a marketing tool which allow the Company to strengthen brand recognition and to showcase certain of its full line of branded and licensed products. Furthermore, the retail stores provide the Company with a venue to test and introduce new products and merchandising strategies. Specifically, the Company often tests new designs at its Steve Madden(R) retail

stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, the Company has been able to leverage sales information gathered at Steve Madden(R) retail stores to assist its wholesale accounts in order placement and inventory management.

A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet and is located in malls and street locations which attract the highest concentration of the Company's core demographic -- style-conscious young women ages 16 to 25 years old. In addition to carefully analyzing mall demographics, the Company also sets profitability guidelines for each potential store site. Specifically, the Company targets sites at which the demographics fit the consumer profile, the positioning of the site is well trafficked and the projected fixed annual rent expense does not exceed a specified percentage of sales over the life of the lease. By setting these standards, the Company believes that each store will contribute to the Company's overall profits both in the near- and longer-terms.

OUTLET STORES

In May 1998, Shoe Biz, Inc. (formerly known as Steven Madden Outlets, Inc.) a wholly owned subsidiary of the Company ("Shoe Biz"), purchased certain assets from and assumed certain liabilities of, Daniel Scott, Inc. with respect to its Shoe Biz outlet store located in Mineola, New York. In connection with the transaction, the Company hired Robert Schmertz, the former President and sole stockholder of Daniel Scott, as the President of Shoe Biz. Shoe Biz operates the six (6) outlet stores in New Jersey and New York, four (4) of which operate under the Shoe Biz name and two (2) of which operate as Steve Madden Outlet stores. Shoe Biz sells many product lines, including Steve Madden, David Aaron, Stevies and l.e.i.(R) footwear, at significantly lower prices than prices typically charged by other "full price" retailers.

DEPARTMENT STORES

The Company currently sells to over 2,500 locations of twenty (20) better department stores throughout the United States and Canada. The Company's top accounts include Federated Department Stores (Bloomingdale's, Bon Marche, Burdine's, Macy's and Rich's), May Department Stores (Hecht's, Famous Barr, Filene's, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinson's May), Dillard's, Dayton-Hudson and Nordstrom.

Department store accounts are offered merchandising support which includes in-store fixtures and signage, supervision of displays and merchandising of the Company's various product lines. An important development in the Company's wholesale merchandising effort is the creation of in-store concept shops, where a broader collection of the Company's branded products are showcased. These in-store concept shops create an environment that is consistent with the Company's image and enable the retailer to display and stock a greater volume of the Company's products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to the Company's products and enhance consumer brand awareness. As of December 31, 2000, the Steve Madden(R) and Stevies brands were featured in over 1,200 and 815 in-store concept shops, respectively, in leading department and specialty stores.

In addition to merchandising support, the Company's customer service representatives maintain weekly communications with their accounts to guide them in placing orders and to assist them in managing inventory, assortment and

retail sales. The Company leverages its sell-through data gathered at its retail stores to assist department stores in allocating their open-to-buy dollars to the most popular styles in the product line and to phase out styles with poor sales records. In addition to this account order support, the Company has implemented an electronic data interchange ("EDI") program which allows top accounts rapid size replenishment of eight (8) style/color combinations of certain core products within one to two weeks. EDI replenishment of key core styles is offered to all of the Company's retail customer accounts.

INTERNET SALES

In 2000, the Company updated its web site, www.stevemadden.com, and introduced its Stevies web site www.stevies.com in March 2000. Customers can purchase numerous styles of the Company's Steve Madden and Stevies footwear, accessory and clothing products. As a result of the Company's increased focus on e-commerce, sales in 2000 derived from www.stevemadden.com increased 196% compared with sales in 1999. For the year ended December 31, 2000, the Company's stevemadden.com web site recorded 156.3 million hits, 866,000 unique users and a sales conversions rate of approximately 7%. In August 1999, the Company signed an agreement with America Online pursuant to which the Company has a significant presence in the Shop AOL area of AOL, specifically in the footwear areas.

As a result of the increased sales activity on the Company's web sites,
[the Company] entered an agreement with Progressive Distribution in April 2000. Under the terms of the Agreement, Progressive Distribution provides direct-to-customer and other fulfillment services the Company's web sites customers, including validation of customer credit, picking, packing and shipment of footwear products to customers of the Company.

In February 2001, the Company launched the SteveMaddenMens.com web site. Already e-commerce enabled, this newest Madden web site allows customers to view Steve Madden Mens products three dimensionally simply by moving a computer mouse.

SPECIALTY STORES/CATALOG SALES

The Company currently sells to specialty store locations throughout the United States and Canada. The Company's top specialty store accounts include Journey's, Limited Too and Mandees. The Company offers specialty store accounts the same merchandising, sell-through and inventory tracking support offered to its department store accounts. Sales of the Company's products are also made through various catalogs, such as Fingerhut and Victoria's Secret.

COMPETITION

The fashionable footwear industry is highly competitive. The Company's competitors include specialty shoe companies as well as companies with diversified footwear product lines. The recent substantial growth in the sales of fashionable footwear has encouraged the entry of many new competitors and increased competition from established companies. Most of these competitors, including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have significantly greater financial and other resources than the Company. The Company believes effective advertising and marketing, fashionable styling, high

quality and value are the most important competitive factors and intends to continue to employ these elements as it develops its products.

In 2001, the Company launched the Steve Madden Mens brand which will compete with several brands that are more established with greater consumer awareness, including Kenneth Cole Reaction, Skechers Collection, Tommy Hilfiger and Nautica.

MARKETING AND SALES

Prior to 1997, the Company's marketing plans relied heavily on its few Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the Company continued to focus on creating a more integrated brand building program to establish Steve Madden as the leading designer of fashion footwear for style-conscious young women. As a result, the Company developed a national advertising campaign for lifestyle and fashion magazines which was also used in regional marketing programs such as radio advertisements, television commercials, outdoor media, college event sponsorship and live online chat forums. The Company also continues to promote its web sites (WWW.STEVEMADDEN.COM and WWW.STEVIES.COM) where consumers can purchase Steve Madden(R) and Stevies products and interact with both the Company and other customers.

In 2000, the Company reinforced the link between Steve Madden footwear and the hip young music scene by joining with Atlantic Records, Sam Goody and Glamour magazine for the first annual Girl Band Search: a major cross-marketing campaign with retail stores and wholesale partners to crown the next hot girl band. The Company assisted in marketing this year's winner, Jill Joia, who publicized her Steve Madden affiliation on the David Letterman Show, and performed the opening act at the launch party for Steve Madden Mens in Las Vegas in February 2001. For the second year running, the Company also co-sponsored the 2000 Music Video Awards.

The Company also increased the marketing of the Steve Madden brand to college students in 2000. The Company targeted universities for a series of lively promotions, many of them tied in with musical performances, and the Company was one of seven vendors visiting top ten universities in the Glamour magazine sponsored "Venus Tour". Other promotional initiatives reached 40 universities.

The Company commenced an aggressive marketing campaign for the Stevies brand with separate marketing, advertising, promotional events and in-store displays targeting the new Stevies customer. In August, 2000, the Company initiated a nationwide, three month Stevies Model Search featuring a six-city mall tour and in-store promotions with Filene's, Foley, Hecht's, FAO Schwartz and Macy's East. Supported by strong advertising and on-line promotions, these in-store events featured Stevies fashion shows, Radio Disney personality appearances, and performances by such crowd-drawers as the boyband, DreamStreet. The 11-year old winner of the model search will be the subject of the 2001 ad campaign for consumer and trade publications, and will be featured on the Stevies website. As for Steve Madden Mens, the Company supported the brand's roll-out with strategic marketing and advertising initiatives.

In order to service its wholesale accounts, the Company retains a sales force of twelve independent sales representatives. These sales representatives work on a commission basis and are responsible for placing the Company's products with its principal customers, including better department and specialty stores. The sales representatives are supported by the Company's Vice President,

a staff of twelve account executives, four merchandise coordinators and twenty five customer service representatives who continually cultivate relationships with wholesale customers. This staff assists accounts in merchandising and assessing customer preferences and inventory requirements, which ultimately serves to increase sales and profitability.

MANAGEMENT INFORMATION SYSTEMS (MIS) OPERATIONS

Sophisticated information systems are essential to the Company's ability to maintain its competitive position and to support continued growth. The Company operates on a dual AS/400 system which provides system support for all aspects of its business including manufacturing purchase orders; customer purchase orders; order allocations; invoicing; accounts receivable management; real time inventory management; quick response replenishment; point-of-sale support; and financial and management reporting functions. The Company has a PKMS bar coded warehousing system which is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for its customers. In addition, the Company has installed an EDI system which provides a computer link between the Company and certain wholesale customers that enables both the customer and the Company to monitor purchases, shipments and invoicing. The EDI system also improves the Company's ability to respond to customer inventory requirements on a weekly basis.

In 2000, a new AS400 computer platform was implemented to support the Company's wholesale division, and at the retail division , a new system was installed by Applied Digital Solutions, formally STR. This in-store point-of-sale system is a fully functional system governing a broad range of transactions including layaway, gift certificates, store credit, customer profiles, and preferred customer packages. The Company also installed a loss prevention system named "Trade Watch", and a retail marketing system, Corema, which is fully integrated into the in-store POS system. A new retail inventory management system was also installed to support the Company's just-in-time inventory flow.

RECEIVABLES FINANCING; LINE OF CREDIT

Under the terms of a factoring agreement with Capital Factors, Inc., the Company is permitted to draw down 80% of its invoiced receivables at an interest rate of one point below the Prime Rate (as defined). The agreement provides that Capital Factors is not required to purchase all the Company's receivables and requires that the Company to pay an unused line fee of .25% of the average daily unused portion of the maximum amount of the credit line. On September 1, 1998, the Company and Capital Factors amended its Factoring Agreement to, among other things, provide the Company with a credit line of up to $15,000,000, subject to certain limitations. The Company has not recently borrowed funds under its credit line with Capital Factors. The agreement with Capital Factors was renewed as of December 31, 2000 for an additional one year term. Capital Factors maintains a lien on all of the Company's inventory and receivables and assumes the credit risk for all assigned accounts approved by it.

TRADEMARKS AND SERVICE MARKS

The STEVE MADDEN and STEVE MADDEN plus Design trademarks/service marks have been registered in numerous International Classes (25 clothing and shoes; 18 leather goods, such as handbags and wallets; 9 eye wear; 14 jewelry; 3 cosmetics and perfume; 20 picture frames and furniture; 16, paper goods; 24

bedding; and, 35 retail store services) in the United States. The Company also has trademark registrations in the U.S. for the marks EYESHADOWS BY STEVE MADDEN (Int'l Cl. 9 eye wear), ICE TEA (Int'l Cl. 25 clothing), SOHO COBBLER (Int. Cl. 9; eye wear; and, 25 clothing and shoes), SHOE BIZ By STEVE MADDEN (Int'l Cls. 25 for shoes and clothing; and, Int'l Cl. 35 for retail store services)

The Company further owns registrations for the STEVE MADDEN and STEVE MADDEN plus Design trademarks/service marks in various International Classes in Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Hong Kong, Israel, Italy, Japan, Korea, Mexico, Panama, South Africa, Taiwan, the 15 cooperating countries of Europe and the Benelux countries and has pending applications for registration for the STEVE MADDEN and STEVE MADDEN plus Design trademarks/service marks in Malaysia, Peru, Saudi Arabia, Thailand and Venezuela. There can be no assurance, however, that the Company will be able to effectively obtain rights to the STEVE MADDEN mark throughout all of the countries of the world. Moreover, no assurance can be given that others will not assert rights in, or ownership of, trademarks and other proprietary rights of the Company or that the Company will be able to successfully resolve such conflicts. The failure of the Company to protect such rights from unlawful and improper appropriation may have a material adverse effect on the Company's business and financial condition.

Additionally, the Company through its Diva Acquisition Corp. subsidiary owns registrations for the DAVID AARON trademark and service mark in various International Classes in the United States (Int'l Cl. 25 clothes, shoes; 18 leather goods, handbags, wallets; and, 35 retail store services), Australia, Canada, Hong Kong, Israel, Japan, South Africa, Spain and the 15 cooperating countries in Europe. The Company further has pending application for registration of the DAVID AARON trademark and service mark in Panama. The Company believes that the DAVID AARON trademark has a significant value and is important to the marketing of the Company's products.

The Company through its Stevies, Inc. subsidiary also has several pending trademark and service mark applications for registration of the STEVIES and STEVIES plus Design marks in various International Classes in the United States (Int'l Cl. 25 clothes, shoes, 18 leather goods, handbags, wallets; 9 eye wear; 14 jewelry; and, 35 retail store services) and in Canada, Mexico and the 15 cooperating countries of Europe.

EMPLOYEES

At March 9, 2001, the Company employed approximately 1,017 employees, of whom approximately 394 work on a full-time basis and approximately 623 work on a part-time basis. The management of the Company considers relations with its employees to be good.

RISK FACTORS

In addition to other information in this Annual Report on Form 10-K, the following important factors should be carefully considered in evaluating the Company and its business because such factors currently have a significant impact on the Company's business, prospects, financial condition and results of operations.

Dependence on Key Personnel. Although the Company has strengthened its senior management team, the Company is dependent, in particular, upon the services of Steven Madden, its Chief Executive Officer and chief designer, and Rhonda Brown, its President. In June 2000, Mr. Madden was indicted in the Southern District and Eastern District of New York for his alleged involvement in securities fraud and money laundering activities. If Mr. Madden is convicted of, or pleads guilty to, these charges (or related offenses), and/or is required to devote a substantial portion of his time and attention to the defense of the allegations contained in the indictments, the Company may be deprived of his services for an extended period of time. In addition, the Securities and Exchange Commission filed a complaint against Mr. Madden alleging securities law violations and seeking certain remedies against Mr. Madden, including an injunction prohibiting him from serving as an officer or director of a public company. The action initiated by the Securities and Exchange Commission has been stayed pending resolution of the indictments. If Mr. Madden is prohibited from serving as an officer or director of the Company, the Company may be deprived of certain or all of Mr. Madden's services. If Mr. Madden or Ms. Brown are unable to provide services to the Company for whatever reason, the Company's business, prospects and financial condition may be adversely affected.

The Company maintains a key person life insurance policy on Mr. Madden with coverage in the amount of $10,000,000; however, the Company does not maintain a policy on Ms. Brown. The Company has employment contracts with each of Mr. Madden and Ms. Brown that expire on December 31, 2009 and December 31, 2003, respectively. Under the terms of their respective employment contracts, if Mr. Madden or Ms. Brown are terminated for other than cause, death or total disability, the Company will be required to pay the remaining salary due under the contract, half of which must be paid upon termination. Mr. Madden is also entitled during the term of the contract to an annual $50,000 non-accountable expense account. In the event of a change in control, Mr. Madden and Ms. Brown may choose to continue their employment with the Company or terminate employment and receive the remaining salary under their respective contracts.

Since Mr. Madden and Ms. Brown are involved in many material aspects of the Company's business, there can be no assurance that a suitable replacement for either Mr. Madden or Ms. Brown could be found if either were unable to perform services for the Company. As a consequence, the loss of Mr. Madden, Ms. Brown or other key management personnel could have a material adverse effect upon the Company's business, results of operations and financial condition. In addition, the Company's ability to market its products and to maintain profitability will depend, in large part, on its ability to attract and retain qualified personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain such personnel. The inability of the Company to attract and retain such qualified personnel would have a material adverse effect on the Company's business, financial condition and results of operations.

Fashion Industry Risks. The success of the Company will depend in significant part upon its ability to anticipate and respond to product and fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. There can be no assurance that the Company's products will correspond to the changes in taste and demand or that the Company will be able to successfully market products which respond to such trends. If the Company misjudges the market for its products, it may be faced with significant excess inventories for some products and missed opportunities with others. In addition, misjudgments in merchandise selection could adversely affect the Company's image with its customers and weak sales and resulting

markdown requests from customers could have a material adverse effect on the Company's business, financial condition and results of operations.

The industries in which the Company operates are cyclical, with purchases tending to decline during recessionary periods when disposable income is low. Purchases of contemporary shoes and accessories tend to decline during recessionary periods and also may decline at other times. While the Company has fared well in recent years in a difficult retail environment, there can be no assurance that the Company will be able to maintain its historical rate of growth in revenues and earnings, or remain profitable in the future. A recession in the national or regional economies or uncertainties regarding future economic prospects, among other things, could affect consumer spending habits and have a material adverse effect on the Company's business, financial condition and results of operations.

In recent years, the retail industry has experienced consolidation and other ownership changes. In addition, some of the Company's customers have operated under the protection of the federal bankruptcy laws. In the future, retailers in the United States and in foreign markets may consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry the Company's products or increase the ownership concentration within the retail industry. While such changes in the retail industry to date have not had a material adverse effect on the Company's business or financial condition, there can be no assurance as to the future effect of any such changes.

Inventory Management. The Company's ability to manage its inventories properly is an important factor in its operations. Inventory shortages can adversely affect the timing of shipments to customers and diminish brand loyalty. Conversely, excess inventories can result in increased interest costs as well as lower gross margins due to the necessity of providing discounts to retailers. The inability of the Company to effectively manage its inventory would have a material adverse effect on the Company's business, financial condition and results of operations.

Dependence Upon Customers and Risks Related to Extending Credit to Customers. The Company's customers purchasing shoes consist principally of department stores and specialty stores, including shoe boutiques. Certain of the Company's department store customers, including some under common ownership, account for significant portions of the Company's wholesale net sales. Presently, the Company sells approximately sixty two percent (62%) of its products to department stores, including Federated Stores (Bloomingdales, Burdines, Macy's and Bullocks), Dillards, Nordstrom, Dayton Hudson and May Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinson's May) and approximately [thirty eight (38%)] percent to specialty stores, including shoe boutiques. The Company's largest customers, Federated Stores, May Department Stores, account for approximately twenty one percent (21%), eighteen percent (18%) and eleven percent (11%) of the Company's wholesale sales, respectively.

The Company believes that a substantial portion of sales of the Company's licensed products by its domestic licensing partners are also made to the Company's largest department store customers. The Company generally enters into a number of purchase order commitments with its customers for each of its lines every season and does not enter into long-term agreements with any of its customers. Therefore, a decision by Federated Stores, Nordstrom or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from

the Company or its licensing partners, or to change its manner of doing business could have a material adverse effect on the Company's business, financial condition and results of operations. The Company sells its products primarily to retail stores across the United States and extends credit based on an evaluation of each customer's financial condition, usually without requiring collateral. While various retailers, including some of the Company's customers, have experienced financial difficulties in the past few years which increased the risk of extending credit to such retailers, the Company's losses due to bad debts have been limited. However, financial difficulties of a customer could cause the Company to curtail business with such customer or require the Company to assume more credit risk relating to such customer's receivables.

Pending Litigation. In connection with the indictments filed against Mr. Madden in June 2000, certain class action lawsuits were commenced against the Company, Mr. Madden, the Company's Chief Executive Officer, Rhonda Brown, the Company's President, and Arvind Dharia, the Company's Chief Financial Officer. The complaint alleges that the Company and the individual defendants issued false and misleading statements and failed to disclose material adverse information relating to matters arising from Mr. Madden's indictment. In the event that resolution of this action exceeds coverage available under the Company's directors and officers insurance policy, the Company's business, prospects and financial condition could be materially and adversely affected.

Impact of Foreign Manufacturers. Substantially all of the Company's products are currently sourced outside the United States through arrangements with a number of foreign manufacturers in four different countries. During the year ended December 31, 2000, approximately [90%] of the Company's products were purchased from sources outside the United States, including Mexico, China, Brazil, Italy and Spain.

Risks inherent in foreign operations include work stoppages, transportation delays and interruptions, changes in social, political and economic conditions which could result in the disruption of trade from the countries in which the Company's manufacturers or suppliers are located, the imposition of additional regulations relating to imports, the imposition of additional duties, taxes and other charges on imports, significant fluctuations of the value of the dollar against foreign currencies, or restrictions on the transfer of funds, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not believe that any such economic or political conditions will materially affect the Company's ability to purchase products, since a variety of materials and alternative sources exist. The Company cannot be certain, however, that it will be able to identify such alternative sources without delay or without greater cost to the Company, if ever. The Company's inability to identify and secure alternative sources of supply in this situation would have a material adverse effect on the Company's business, financial condition and results of operations.

The Company's imported products are also subject to United States customs duties. The United States and the countries in which the Company's products are produced or sold may, from time to time, impose new quotas, duties, tariffs, or other restrictions, or may adversely adjust prevailing quota, duty or tariff levels, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.

Possible Adverse Impact of Unaffiliated Manufacturers' Inability to Manufacture in a Timely Manner, to Meet Quality Standards or to Use Acceptable Labor Practices. As is common in the footwear industry, the Company contracts

for the manufacture of a majority of its products to its specifications through foreign manufacturers. The Company does not own or operate any manufacturing facilities and is therefore dependent upon independent third parties for the manufacture of all of its products. The Company's products are manufactured to its specifications by both domestic and international manufacturers. The inability of a manufacturer to ship orders of the Company's products in a timely manner or to meet the Company's quality standards could cause the Company to miss the delivery date requirements of its customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.

Although the Company enters into a number of purchase order commitments each season specifying a time frame for delivery, method of payment, design and quality specifications and other standard industry provisions, the Company does not have long-term contracts with any manufacturer. As a consequence, any of these manufacturing relationships may be terminated, by either party, at any time. Although the Company believes that other facilities are available for the manufacture of the Company's products, both within and outside of the United States, there can be no assurance that such facilities would be available to the Company on an immediate basis, if at all, or that the costs charged to the Company by such manufacturers will not be greater than those presently paid.

The Company requires its licensing partners and independent manufacturers to operate in compliance with applicable laws and regulations. While the Company promotes ethical business practices and the Company's staff periodically visits and monitors the operations of its independent manufacturers, the Company does not control such manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer of the Company or by one of the Company's licensing partners, or the divergence of an independent manufacturer's or licensing partner's labor practices from those generally accepted as ethical in the United States, could have a material adverse effect on the Company's business, financial condition and results of operations.

Intense Industry Competition. The fashionable footwear industry is highly competitive and barriers to entry are low. The Company's competitors include specialty companies as well as companies with diversified product lines. The recent substantial growth in the sales of fashionable footwear has encouraged the entry of many new competitors and increased competition from established companies. Most of these competitors, including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have significantly greater financial and other resources than the Company and there can be no assurance that the Company will be able to compete successfully with other fashion footwear companies. Increased competition could result in pricing pressures, increased marketing expenditures and loss of market share, and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes effective advertising and marketing, fashionable styling, high quality and value are the most important competitive factors and plans to employ these elements as it develops its products. The Company's inability to effectively advertise and market its products could have a material adverse effect on the Company's business, financial condition and results of operations.

Expansion of Retail Business. The Company's continued growth depends to a significant degree on further developing the Steve Madden(R), David Aaron(R), Stevies and l.e.i.(R) brands, creating new product categories and businesses and operating Company-owned stores on a profitable basis. The Company plans to open

approximately ten (10) Steve Madden retail stores in 2001. The Company's recent and planned expansion includes the opening of stores in new geographic markets as well as strengthening existing markets. New markets have in the past presented, and will continue to present, competitive and merchandising challenges that are different from those faced by the Company in its existing markets. There can be no assurance that the Company will be able to open new stores, and if opened, that such new stores will be able to achieve sales and profitability levels consistent with existing stores. The Company's retail expansion is dependent on a number of factors, including the Company's ability to locate and obtain favorable store sites, the performance of the Company's wholesale and retail operations, and the ability of the Company to manage such expansion and hire and train personnel. Past comparable store sales results may not be indicative of future results, and there can be no assurance that the Company's comparable store sales results will increase or not decrease in the future. In addition, there can be no assurance that the Company's strategies to increase other sources of revenue, which may include expansion of its licensing activities, will be successful or that the Company's overall sales or profitability will increase or not be adversely affected as a result of the implementation of such retail strategies.

The Company's growth has increased and will continue to increase demand on the Company's managerial, operational and administrative resources. The Company has recently invested significant resources in, among other things, its management information systems and hiring and training new personnel. However, in order to manage currently anticipated levels of future demand, the Company may be required to, among other things, expand its distribution facilities, establish relationships with new manufacturers to produce its products, and continue to expand and improve its financial, management and operating systems. There can be no assurance that the Company will be able to manage future growth effectively and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations.

Seasonal and Quarterly Fluctuations. The Company's quarterly results may fluctuate quarter to quarter as a result of the timing of holidays, weather, the timing of larger shipments of footwear, market acceptance of the Company's products, the mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, the timing of inventory write downs, the cost of materials, the mix between wholesale and licensing businesses, the incurrence of other operating costs and factors beyond the Company's control, such as general economic conditions and actions of competitors. In addition, the Company expects that its sales and operating results may be significantly impacted by (i) the opening of new retail stores,
(ii) the introduction of new products and (iii) the commencement of the Company's new Mens brand. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter.

Trademark and Service Mark Protection. The Company believes that its trademarks/service marks and other proprietary rights are important to its success and its competitive position. Accordingly, the Company devotes substantial resources to the establishment and protection of its trademarks on a worldwide basis. Nevertheless, there can be no assurance that the actions taken by the Company to establish and protect its trademarks and other proprietary rights will be adequate to prevent imitation of its products by others or to prevent others from seeking to block sales of the Company's products as violative of the trademarks and proprietary rights of others. Moreover, no assurance can be given that others will not assert rights in, or ownership of, trademarks and other proprietary rights of the Company or that the Company will be able to successfully resolve such conflicts. In addition, the laws of certain

foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. The failure of the Company to establish and then protect such proprietary rights from unlawful and improper appropriation could have a material adverse impact on the Company's business, financial condition and results of operations. See "Business - Trademarks and Service Marks".

Foreign Currency Fluctuations. The Company generally purchases its products in U.S. dollars. However, the Company sources substantially all of its products overseas and, as such, the cost of these products may be affected by changes in the value of the relevant currencies. Changes in currency exchange rates may also affect the relative prices at which the Company and foreign competitors sell their products in the same market. There can be no assurance that foreign currency fluctuations will not have a material adverse impact on the Company's business, financial condition and results of operations.

Absence of Dividends. The Company anticipates that all of its earnings in the foreseeable future will be retained to finance the continued growth and expansion of its business and has no current intention to pay cash dividends.

Outstanding Options. As of March 1, 2001, the Company had outstanding options to purchase an aggregate of approximately 2,592,900 shares of Common Stock. Holders of such options are likely to exercise them when, in all likelihood, the Company could obtain additional capital on terms more favorable than those provided by the options. Further, while its options are outstanding, they may adversely affect the terms in which the Company could obtain additional capital.