SHOE PAVILION INC, 424B4, 1998-02-24

SHOE PAVILION INC
424B4, 1998-02-24
SHOE STORES

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<PAGE>

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-41877

2,000,000 SHARES

LOGO

COMMON STOCK

All 2,000,000 shares of Common Stock offered hereby are being sold by Shoe
Pavilion, Inc. ("Shoe Pavilion" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock. See "Underwriting" for a
discussion of the factors considered in determining the initial public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "SHOE."

Following completion of this offering, Dmitry Beinus, the Company's Chairman
of the Board, President and Chief Executive Officer, will own approximately
69.2% of the Company's outstanding Common Stock (66.2% if the Underwriters'
over-allotment option is exercised in full). The Company will use $7.8 million
of the proceeds of this offering to fund a distribution to Mr. Beinus.

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $7.00 $0.49 $6.51
- --------------------------------------------------------------------------------
Total(3)................................... $14,000,000 $980,000 $13,020,000
================================================================================
</TABLE>
(1) Excludes a non-accountable expense allowance payable to the representative
of the Underwriters (the "Representative"). See "Underwriting" for
information relating to indemnification of the Underwriters.

(2) Before deducting offering expenses payable by the Company, estimated at
$800,000, including the Representative's non-accountable expense
allowance.

(3) The Company has granted the Underwriters a 45-day option to purchase up to
300,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Proceeds to Company will be $16,100,000 $1,127,000 and
$14,973,000, respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It
is expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Van Kasper & Company, San Francisco,
California, on or about February 27, 1998.

VAN KASPER & COMPANY

FEBRUARY 23, 1998
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[ART WORK]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

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Gatefold Left:

IF YOU DIDN'T BUY YOUR SHOES AT SHOE PAVILION YOU PAID TOO MUCH!

[Photographs of selected brands of shoes offered by the Company.]

Shoe Pavilion stores offer a bright, clean, low maintenance and functional
shopping environment to customers interested in purchasing men's and women's
value priced footwear.

[Photographs showing the interiors of certain of the COmpany's stores.]

The Company offers a broad selection of quality footwear from over 75 brand
names such as Amalfi, Clarks, Dexter, Fila, Florsheim, Naturalizer and Rockport.

<PAGE>

Gatefold Right:

[Photograph showing an interior of one of the Company's stores.]
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. The statements
contained in this Prospectus which are not historical facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed elsewhere in this
Prospectus.

THE COMPANY

Shoe Pavilion, Inc., founded in 1979, is the largest independent off-price
footwear retailer on the West Coast that offers a broad selection of women's
and men's designer label and name brand merchandise. The Company was among the
first footwear retailers on the West Coast to expand the off-price concept into
the designer and name brand footwear market. As of February 23, 1998, the
Company operated 55 retail stores in California, Washington, Oregon and Nevada
under the trade names Shoe Pavilion and Shoe Pavilion's Designer Shoe
Warehouse. From 1993 through 1997, net sales and income before income taxes
increased at compound annual growth rates of 23.0% and 99.3%, respectively. In
1997, net sales increased 48.7% to $45.1 million and income before income taxes
increased 150.4% to $3.7 million compared to 1996.

The Company offers quality designer and name brand footwear such as Amalfi,
Clarks, Dexter, Fila, Florsheim, Naturalizer and Rockport, typically at 30% to
70% below department store regular prices for the same shoes. Such price
discounts appeal to value-oriented consumers seeking quality brand name
footwear not typically found at other off-price retailers or mass
merchandisers. The Company is able to offer lower prices by (i) selectively
purchasing large blocks of production over-runs, over-orders, mid- and late-
season deliveries and last season's stock from manufacturers and other
retailers at significant discounts, (ii) sourcing in-season name brand and
branded design merchandise directly from factories in Italy, Brazil and China
and (iii) negotiating favorable prices with manufacturers by ordering
merchandise during off-peak production periods and taking delivery at one
central warehouse.

During 1997, the Company purchased its merchandise from over 50 domestic and
international vendors, independent resellers, manufacturers and other retailers
that have frequent excess inventory for sale. Budgeted production over-runs due
to the long lead-times associated with the design and manufacturing of new
shoes, as well as retail overstock, provide the Company with a wide selection
of branded merchandise. Women's dress and casual shoes, men's dress and casual
shoes and athletic footwear comprised approximately 60%, 27% and 13%,
respectively, of net sales for 1997. The Company emphasizes brand name
merchandise that it believes has long-term consumer appeal.

The Company's stores utilize a self-service format that allows inventory to
be stored directly under a displayed shoe, thereby eliminating the need for a
stockroom and significantly increasing retail floor space. The functionality
and simplicity of this format enable flexible store layouts that can be easily
reconfigured to accommodate a new mix of merchandise. Moreover, this format
allows customers to locate all available sizes of a particular shoe and to try
them on for comfort and fit without a salesperson's assistance, thereby
reducing in-store staffing needs and allowing customers to make independent,
rapid purchasing decisions.

The Company's stores are strategically located in strip malls, outlet centers
and downtown locations, frequently in close proximity to other off-price
apparel retailers that attract similar customers. Stores generally range in
size from 3,000 to 14,000 square feet and offer between 15,000 and 25,000 pairs
of shoes. The Company opened, net of closures, two stores in 1995, three stores
in 1996, and 14 stores in 1997. In early 1997, the Company entered the Los
Angeles market by assuming the leasehold interests of Standard Shoes, a Los
Angeles based footwear retailer. The Company subsequently converted nine
Standard Shoes locations to Shoe Pavilion's Designer Shoe Warehouse stores.

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The Company's objective is to be the leading off-price retailer of designer
label and name brand footwear in each of the markets it serves. The Company
intends to create greater name recognition and presence by opening new stores
in existing markets, moving into new markets with multiple store openings and
pursuing opportunities to acquire local and regional footwear retailers. The
Company intends to open ten to 20 new stores, primarily in its existing
markets, in 1998.

The Company's executive offices are located at 3200-F Regatta Boulevard,
Richmond, California 94804, and its telephone number is (510) 970-9775.

THE OFFERING

Common Stock offered................ 2,000,000 shares

Common Stock to be outstanding
after the offering.................
6,500,000 shares(1)

Use of proceeds..................... To fund a distribution of S corporation
earnings to the Company's current sole
stockholder and reduce bank borrowings.
See "Use of Proceeds."

Nasdaq National Market symbol....... SHOE
- --------------------
(1) Excludes 296,500 shares of Common Stock issuable upon exercise of stock
options to be granted upon the completion of this offering. Also excludes
718,500 shares and 85,000 shares of Common Stock reserved for future
issuance under the Company's 1998 Equity Incentive Plan (the "1998 Plan")
and Directors' Stock Option Plan (the "Directors' Plan"), respectively.

Unless otherwise indicated, all information in this Prospectus (i) assumes
that the Underwriters' over-allotment option is not exercised and (ii) gives
effect to the reorganization of the Company's capital structure. The Company
was incorporated in Delaware in November 1997 as the holding company for Shoe
Inn, Inc., a Washington corporation formed in 1983. Shoe Inn, Inc. is a wholly-
owned subsidiary of Shoe Pavilion, Inc. Unless otherwise stated, all references
in this Prospectus to the Company include Shoe Pavilion, Inc. and its
subsidiary Shoe Inn, Inc. The Shoe Pavilion name and logo are registered
trademarks of the Company. This Prospectus also includes trademarks and service
marks of other companies.

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital ......................................... $ 6,045 $10,465
Total assets ............................................ 22,646 23,131
Total indebtedness (including current portion) .......... 7,658 3,238
Stockholders' equity..................................... 7,328 12,233
</TABLE>
- --------------------
(1) For all periods indicated, the Company operated as an S corporation and was
not subject to federal and certain state income taxes. Prior to the
completion of this offering, the Company will become subject to federal and
state income taxes. Pro forma net income (loss) reflects federal and state
income taxes as if the Company had not elected S corporation status for
income tax purposes. Pro forma net income per share is based on the
weighted average number of shares of common stock outstanding during the
period plus the estimated portion of the shares being offered by the
Company (1,276,596 shares) which would be necessary to fund the $7.8
million distribution of estimated undistributed taxable S corporation
earnings. See "Prior S Corporation Status" and Note 3 of Notes to
Consolidated Financial Statements.
(2) The Company believes that the decreases in comparable store sales in 1994
and 1995 were due, in part, to temporary store closures and business
disruptions resulting from the reconfiguration of the Company's stores from
a traditional retail format to the current self-service format. The Company
believes that the increase in comparable store sales in 1996 was due, in
part, to the completion of the reconfiguration of the Company's comparable
stores.
(3) As adjusted to reflect (i) the sale of the shares of Common Stock offered
hereby after deducting the underwriting discount and commissions and
estimated offering expenses and the application of the estimated net
proceeds therefrom, including the S corporation distribution of $7.8
million to the Company's current stockholder and (ii) a nonrecurring tax
benefit, which would have been $485,000 had the termination of the
Company's S corporation status occurred as of December 31, 1997. See "Prior
S Corporation Status" and "Use of Proceeds."

5
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RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus. The statements contained in
this Prospectus which are not historical facts are forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those set forth in or implied by forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this
Prospectus.

RISKS ASSOCIATED WITH EXPANSION

The Company has experienced rapid and substantial growth in net sales as
well as in its employee base. The Company's continued growth will depend to a
significant degree on its ability to expand its operations through the opening
of new stores, to operate these stores on a profitable basis and to increase
comparable store sales. The success of the Company's planned expansion will be
significantly dependent upon the Company's ability to locate suitable store
sites and negotiate acceptable lease terms. In addition, several other factors
could affect the Company's ability to expand, including the adequacy of the
Company's capital resources, the ability to hire, train and integrate
employees and the ability to adapt the Company's distribution and other
operational systems. There can be no assurance that the Company will achieve
its planned expansion or that any such expansion will be profitable. In
addition, there can be no assurance that the Company's expansion within its
existing markets will not adversely affect the individual financial
performance of the Company's existing stores or its overall operating results,
or that new stores will achieve net sales and profitability levels consistent
with existing stores, or at all. To manage its planned expansion, the Company
regularly evaluates the adequacy of its existing systems and procedures,
including product distribution facilities, store management, financial
controls and management information systems. However, there can be no
assurance that the Company will anticipate all of the changing demands that
expanded operations may impose on such systems. Failure to adapt its
distribution capabilities or other internal systems or procedures as required
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company expects a portion of its 1998 store openings to be in markets
where the Company currently does not have extensive operations. Entry into a
new market carries special risks, including market acceptance, product mix and
competitive positioning strategies. The success of the Company's expansion
plan will depend upon the Company's ability to penetrate new markets
successfully. For example, the Company's recent expansion into the Los Angeles
market is dependent, to a significant extent, on the successful integration of
the converted Standard Shoes stores. If the conversion of these stores to Shoe
Pavilion's Designer Shoe Warehouse stores is not well received by customers or
the integration is otherwise unsuccessful, the Company's operating results
would be adversely affected. Management does not have prior experience in
conversions of this size, and there can be no assurance that the Company will
be able to successfully operate these or any other converted locations.

The Company actively monitors individual store performance and has closed
underperforming stores in the past, including four in 1995, six in 1996 and
two in 1997. The Company intends to continue to close underperforming stores
in the future, and if it were to close a number of stores, it could incur
significant closure costs and reductions in net sales. In addition, the
Company may be unable to close certain underperforming stores on a timely
basis because of lease terms. A significant increase in closure costs or the
inability to close one or more underperforming stores on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations.

INVENTORY AND SOURCING RISK

The Company's future success will be significantly dependent on its ability
to obtain merchandise that consumers want to buy, particularly name brand
merchandise with long-term retail appeal, and to acquire such merchandise
under favorable terms and conditions. In 1997, the Company's top ten suppliers
accounted for 44.5%

6
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of inventory purchases, of which purchases from Nine West Group, Inc. and The
Rockport Company, Inc. accounted for 9.7% and 7.5% of total inventory
purchases, respectively. The deterioration of the Company's relationship with
any key vendor could result in delivery delays, merchandise shortages or less
favorable terms than the Company currently enjoys. The Company deals with its
suppliers on an order-by-order basis and has no long-term purchase contracts
or other contractual assurances of continued supply or pricing. As the
Company's operations expand, its demand for off-price inventory will continue
to increase. The Company's products typically are manufacturing over-runs,
over-orders, mid- or late-season deliveries or last season's stock. The
inability of the Company to obtain a sufficient supply of readily salable,
high margin inventory, to negotiate favorable discount and payment agreements
with its suppliers or to sell large inventory purchases without markdowns
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Sourcing and Purchasing."

RELIANCE ON KEY PERSONNEL

The Company's future success will be dependent, to a significant extent, on
the efforts and abilities of its executive officers, particularly Dmitry
Beinus, the Company's Chairman of the Board, President and Chief Executive
Officer. The Company has obtained key man life insurance in the amount of $3.0
million on Mr. Beinus. The Company's Chief Financial Officer joined the
Company in September 1997. Accordingly, the Company's management team has not
had extensive experience working together. The loss of the services of any one
of the Company's executive officers could have a material adverse effect on
the Company's operating results. In addition, the Company's continued growth
will depend, in part, on its ability to attract, motivate and retain
additional skilled managerial and merchandising personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be able to retain its existing personnel or attract additional qualified
personnel in the future. See "Management."

UNCERTAINTY OF FUTURE OPERATING RESULTS; FLUCTUATIONS IN COMPARABLE STORE
SALES

Although the Company recently has been profitable, there can be no assurance
that the Company will remain profitable in the future. Future operating
results will depend upon many factors, including general economic conditions,
the level of competition and the ability of the Company to acquire sufficient
inventory, achieve its expansion plans and effectively monitor and control
costs. There can be no assurance that the Company's recent gross margin levels
will be sustainable in the future. Historically, the Company's growth in net
sales has resulted primarily from new store openings, and the Company expects
that the primary source of future sales growth, if any, will continue to be
new store openings.

The Company's comparable store sales have fluctuated widely, and the Company
does not expect that comparable store sales will contribute significantly, if
at all, to future growth in net sales. The Company defines comparable stores
as those stores that have been open for at least 14 consecutive months. Stores
open less than 14 consecutive months are treated as new stores, and stores
closed during the period are excluded from comparable store sales. The
Company's comparable store sales decreased 9.1% in 1993, 12.4% in 1994 and
1.0% in 1995 and increased 8.0% in 1996 and 4.6% in 1997. The Company believes
that the decreases in comparable store sales in 1994 and 1995 were due, in
part, to temporary store closures and business disruptions resulting from the
reconfiguration of the Company's stores from a traditional retail format to
the current self-service format. The Company believes that the increase in
comparable store sales in 1996 was due, in part, to the completion of the
reconfiguration of the Company's comparable stores. The Company does not
anticipate realizing similar increases in subsequent periods, and no assurance
can be given as to the Company's ability to maintain recent comparable store
sales growth. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS

The Company expects to pursue the acquisition of companies and assets that
complement its existing business. Acquisitions involve a number of special
risks, including the diversion of management's attention to the assimilation
of the operations and personnel of the acquired businesses, potential adverse
short-term effects

7
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on the Company's operating results and amortization of acquired intangible
assets. The Company has limited experience in identifying, completing and
integrating acquisitions. The Company does not have any current plans to
acquire any other companies, and there can be no assurance that the Company
will identify attractive acquisition candidates, that acquisitions will be
consummated on acceptable terms or that any acquired companies will be
integrated successfully into the Company's operations.

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company has experienced, and expects to continue to experience, seasonal
fluctuations in its net sales and net income. Historically, net sales and net
income have been weakest during the first quarter and a majority of the
Company's net sales and net income has been realized during the second and
third quarters. In anticipation of increased sales activity during these
quarters, the Company increases inventory purchases in advance of these
quarters. If, for any reason, the Company's net sales were below seasonal
norms during the second or third quarter, the Company's business, financial
condition and results of operations could be materially adversely affected.
Because the Company's operations are geographically concentrated, it is
vulnerable to adverse weather conditions and natural disasters in the regions
in which it operates stores, including the San Francisco Bay Area, Seattle and
Los Angeles. If one of these regions were to experience prolonged adverse
weather conditions or a natural disaster, the Company's business, financial
condition and results of operations could be materially adversely affected.
The Company's quarterly results of operations may also fluctuate significantly
as a result of a variety of factors, including timing of new store openings,
the level of net sales contributed by new stores, merchandise mix the timing
and level of price markdowns, availability of inventory, store closures,
advertising costs, competitive pressures and changes in the demand for off-
price footwear. Any such fluctuations could have a material adverse effect on
the market price of the Company's Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Quarterly
Operating Results."

DEPENDENCE ON CONSUMER SPENDING AND PREFERENCES

The success of the Company's operations depends upon a number of factors
relating to consumer spending, including employment levels, business
conditions, interest rates, inflation and taxation. There can be no assurance
that consumer spending will not decline in response to economic conditions,
thereby adversely affecting the Company's operating results.

All of the Company's products are subject to changing consumer preferences.
Consumer preferences could shift to types of footwear other than those that
the Company currently offers. Any such shift could have a material adverse
effect on the Company's operating results. The Company's future success will
depend, in part, on its ability to anticipate and respond to changes in
consumer preferences, and there can be no assurance that the Company will be
able to anticipate effectively or respond to such changes on a timely basis or
at all. Failure to anticipate and respond to changing consumer preferences
could lead to, among other things, lower net sales, excess inventory and lower
gross margins, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.

INTERNATIONAL PURCHASING

The Company purchases in-season name brand and branded-design merchandise
directly from factories in Italy, Brazil and China. Directly-sourced goods
accounted for approximately 13.4% and 15.7% of net sales in 1996 and 1997,
respectively. The Company has no long-term contracts with direct manufacturing
sources and competes with other companies for production facilities. All of
the manufacturers with which the Company conducts business are located outside
of the United States, and the Company is subject to the risks generally
associated with an import business, including foreign currency fluctuations,
unexpected changes in foreign regulatory requirements, disruptions or delays
in shipments and the risks associated with United States import laws and
regulations, including quotas, duties, taxes, tariffs and other restrictions.
There can be no assurance that the foregoing factors will not disrupt the
Company's supply of directly-sourced goods or otherwise adversely impact the
Company's business, financial condition and results of operations in the
future. See "Business--Sourcing and Purchasing."

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INVENTORY SHRINKAGE

The retail industry is subject to theft by customers and employees. By
converting to a self-service format, where shoppers have access to both shoes
of a pair, the Company substantially increased the need for store security.
Although the Company has implemented enhanced security procedures, there can
be no assurance that the Company will not suffer from significant inventory
shrinkage in the future, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Video Merchandising and Security Systems."

COMPETITION

The retail footwear market is highly competitive, and the Company expects
the level of competition to increase. The Company competes with off-price and
discount retailers (e.g., Nordstrom Rack, Payless ShoeSource, Ross Dress for
Less and Famous Footwear), branded retail outlets (e.g., Nine West), national
retail stores (e.g., Nordstrom, Marshalls, Macy's, Sears, J.C. Penney,
Loehmann's, Robinsons-May and Mervyn's), traditional shoe stores and mass
merchants. Many of these competitors have stores in the markets in which the
Company now operates and in which it plans to expand. Many of the Company's
competitors have significantly greater financial, marketing and other
resources than the Company. In addition, there can be no assurance that future
participants will not enter the off-price segment of the footwear market.
Competitive pressures resulting from competitors' pricing policies could
materially adversely affect the Company's gross margins. There can be no
assurance that the Company will not face greater competition from other
national, regional or local retailers or that the Company will be able to
compete successfully with existing and new competitors. The inability of the
Company to respond to such competition could have a material adverse effect on
the Company's business, financial condition and results of operations.

FUTURE CAPITAL NEEDS

The Company expects that after the application of the estimated net proceeds
of this offering, as described under "Use of Proceeds," anticipated cash flow
from operations and available borrowings under the Company's credit facility
will satisfy its cash requirements for at least the next 12 months. However,
the Company may incur significant working capital requirements and capital
expenditures in connection with its growth strategy and otherwise. To the
extent that the foregoing cash resources are insufficient to fund the
Company's activities, including new store openings planned for 1998,
additional funds will be required. There can be no assurance that additional
financing will be available on reasonable terms or at all. Failure to obtain
such financing could delay or prevent the Company's planned expansion, which
could adversely affect the Company's business, financial condition and results
of operations. In addition, if additional capital is raised through the sale
of additional equity or convertible securities, dilution to the Company's
stockholders could occur. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

PRIOR S CORPORATION STATUS AND OTHER TAX MATTERS

Since August 1988, the Company has been an S corporation for federal income
tax purposes. Unlike a C corporation, an S corporation is generally not
subject to income tax at the corporate level. The Company intends to terminate
its status as an S corporation and become a C corporation as of a date shortly
before completion of this offering. If S corporation status were denied for
any period prior to this termination by reason of a failure to satisfy the S
corporation requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), the Company would be subject to income tax as a C corporation for
such periods. Prior to the Termination Date (as defined below), the Company
will make a distribution in the amount of $7.8 million to its sole
stockholder, which approximately equals the amount of the Company's estimated
earned and previously undistributed taxable S corporation income through the
day preceding the date of termination of the Company's S corporation status
(the "Termination Date"). The distribution will be made in the form of a note
payable to the sole stockholder and will be due and payable by the Company
shortly after the completion of this offering. The $7.8 million note

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previously distributed to this stockholder will be funded from the net
proceeds of this offering. No distributions will be made to the purchasers of
the Company's Common Stock in this offering. See "Prior S Corporation Status,"
"Dividend Policy" and "Use of Proceeds."

SUBSTANTIAL CONTROL BY SINGLE STOCKHOLDER

Following completion of the offering, Dmitry Beinus, the Company's Chairman
of the Board, President and Chief Executive Officer, will own approximately
69.2% of the Company's outstanding Common Stock (66.2% if the Underwriters'
over-allotment option is exercised in full). As a result, Mr. Beinus will be
able to decide all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
Concentration of stock ownership could also have the effect of delaying or
preventing a change in control of the Company. See "Principal Stockholder" and
"Description of Capital Stock."

NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market will develop
or be sustained after the offering. The initial public offering price will be
determined by negotiations between the Company and the Underwriters based upon
a number of factors. Upon commencement of this offering, the Common Stock will
be quoted on the Nasdaq National Market, which has experienced and is likely
to experience in the future significant price and volume fluctuations, either
of which could adversely affect the market price of the Common Stock without
regard to the operating performance of the Company. In addition, the trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to quarterly variations in operating results, fluctuations in the
Company's comparable store sales, announcements by other footwear retailers,
the failure of the Company's earnings to meet the expectations of securities
analysts and investors, as well as other events or factors. See "--Seasonality
and Quarterly Fluctuations" and "Underwriting."

DILUTION AND BENEFITS TO EXISTING STOCKHOLDER

Purchasers of the Common Stock offered by this Prospectus will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. The completion of the
offering will result in certain benefits to the Company's current stockholder.
The Company intends to use $7.8 million of the net proceeds from the offering
to fund a distribution to the existing stockholder, which is intended as a
distribution of previously undistributed S corporation earnings. See
"Dilution" and "Prior S Corporation Status."

SHARES ELIGIBLE FOR FUTURE SALE

The sale of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon completion of this offering, the Company will have
outstanding an aggregate of 6,500,000 shares of Common Stock. All of the
shares of Common Stock sold in this offering will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities
Act"), unless acquired by affiliates of the Company. All of the remaining
outstanding shares of Common Stock are "Restricted Shares." The Company and
the sole stockholder of the Company have agreed not to sell or otherwise
dispose of any shares of Common Stock for a period of one year after the date
of this Prospectus without the prior written consent of Van Kasper & Company,
except that the Company may (i) issue the shares of Common Stock offered
hereby, (ii) grant options under the Company's stock option plans, so long as
none of such options become exercisable during said one-year period and (iii)
45 days after the completion of this offering sell up to 500,000 shares of
Common Stock pursuant to a registration statement. See "Underwriting." Van
Kasper & Company may release all or any portion of the shares subject to the
lock-up agreement, in its discretion, at any time without public announcement.
All of the Restricted Shares held by the sole stockholder will become
available for sale in the public market immediately following expiration of
the one-year lock-up period subject to the volume and other limitations of
Rule 144 under the Securities Act.

10
<PAGE>

The Company intends to file registration statements covering the sale of
1,000,000 shares and 100,000 shares of Common Stock reserved for issuance
under its 1998 Plan and Directors' Plan, respectively, shortly after the
completion of this offering. See "Shares Eligible for Future Sale" and
"Management--Stock Plans."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS

Upon completion of this offering, the Board of Directors will have the
authority to issue up to 1,000,000 shares of Preferred Stock, and to determine
the rights, preferences and restrictions of such shares, without further
stockholder approval. The rights of holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company. In addition, certain provisions of the Company's Certificate of
Incorporation and Bylaws and of Delaware law could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price above the
then-current market value of the Common Stock. Among other things, these
provisions (i) provide that only the Board of Directors or certain members
thereof or officers of the Company may call special meetings of the
stockholders; (ii) eliminate the ability of the stockholders to take action
without a meeting; and (iii) authorize the issuance of "blank check" preferred
stock having such designations, rights and preferences as may be determined
from time to time by the Board of Directors. See "Description of Capital
Stock."

FORWARD-LOOKING STATEMENTS

This Prospectus contains forward-looking statements. These forward-looking
statements include, but are not limited to, statements concerning the
Company's plans to: open or acquire additional stores; enter new markets;
purchase sizable quantities of off-price inventory; close underperforming
stores and utilize the Company's capital resources and the net proceeds from
this offering and the time periods related thereto. These forward-looking
statements may be found in the "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Forward-looking statements not
specifically set forth above may also be found in these and other sections of
this Prospectus. Actual results could differ materially from those discussed
in the forward-looking statements as a result of certain factors, including
those discussed in "Risk Factors" and elsewhere in this Prospectus.

PRIOR S CORPORATION STATUS

Since August 1988, the Company has been treated for federal income tax
purposes as a corporation subject to taxation under Subchapter S of the Code,
and comparable state tax laws. As a result, the Company's earnings through the
day preceding the Termination Date, have been or will be, as the case may be,
taxed, with certain exceptions, for federal and certain state income tax
purposes directly to the Company's current stockholder. The Termination Date
will occur prior to the completion of this offering.

The Company has previously made distributions to its stockholder to provide
the stockholder with funds to assist in paying federal and state income taxes
on the undistributed earnings of the Company. Prior to the Termination Date,
the Company will make an additional S corporation distribution of $7.8 million
to the Company's current stockholder, which approximately equals the estimated
earned and previously undistributed taxable S corporation income of the
Company through the day preceding the Termination Date. The distribution will
be made in the form of a note payable to the Company's current stockholder and
will be due and payable by the Company shortly after the completion of this
offering. Payment of the note will be funded from the net proceeds of this
offering. See "Use of Proceeds" and Note 3 of Notes to Consolidated Financial
Statements. As of the Termination Date, the Company will no longer be treated
as an S corporation and will be fully taxable pursuant to federal and state
income tax laws. The Company and its current stockholder have entered into an
agreement (the "Tax Indemnification Agreement") providing that the Company
will be indemnified by the

11
<PAGE>

Company's current stockholder with respect to any federal, state or local
corporate income taxes the Company is required to pay as a result of the
Company's failure to qualify as an S corporation with respect to tax returns
in which the Company reported its income as an S corporation. The Tax
Indemnification Agreement further provides that the Company will indemnify the
Company's current stockholder on an after-tax basis with respect to any
federal, state or local income taxes (plus interest and penalties) paid or
required to be paid by such stockholder, and such stockholder will pay to the
Company any refunds of federal, state or local income taxes (including
interest received thereon) received by (or credited to) such stockholder, as a
result of a subsequent adjustment in income of the Company with respect to any
tax return in which the Company reported its income as an S corporation.

In connection with Shoe Pavilion's conversion to C corporation status, the
Company will record a nonrecurring tax benefit, which would have been $485,000
had the conversion occurred as of December 31, 1997. See "Risk Factors--Prior
S Corporation Status and Other Tax Matters."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares
offered hereby (after deducting the underwriting discount and commissions and
estimated offering expenses) are expected to be approximately $12.2 million
($14.2 million if the Underwriters' over-allotment option is exercised in
full). The Company will use $7.8 million of such proceeds to fund the payment
of the distribution that will be made prior to the Termination Date to its
sole stockholder of certain previously undistributed taxable income of the
Company as a result of the Company's S corporation status. See "Prior S
Corporation Status." In addition, approximately $4.4 million will be used to
reduce the outstanding balance on the revolving line of credit portion of the
Company's credit facility. At December 31, 1997, the revolving line of credit
had aggregate principal outstanding of approximately $7.4 million and bore
interest at a rate of 8 3/4%. The line of credit expires on April 30, 1999.
See Note 4 of Notes to Consolidated Financial Statements. Until the proceeds
are employed for such purposes, they will be invested in short-term, interest-
bearing, investment-grade instruments. The Company expects that after the
application of the estimated net proceeds of this offering, anticipated cash
flow from operations and available borrowings under the Company's credit
facility will satisfy its cash requirements for at least the next 12 months.
See "Risk Factors--Future Capital Needs."

DIVIDEND POLICY

The Company currently intends to retain its future earnings for use in its
business and does not currently anticipate paying cash dividends in the
foreseeable future, other than the distribution to the current stockholder in
connection with the termination of the Company's S corporation status. Since
August 1988, the Company has made distributions to its stockholder primarily
to allow the stockholder to pay taxes on earnings of the Company included or
includable in the taxable income of the stockholder as a result of the
Company's S corporation status. The Company's credit agreement prohibits the
payment of cash dividends without the lender's consent, other than payments to
its stockholder, as necessary, to satisfy the stockholder's income tax
requirements. See "Prior S Corporation Status."

12
<PAGE>

DILUTION

As of December 31, 1997, the net tangible book value of the Company was
approximately $7.3 million, or approximately $1.63 per share. Net tangible
book value per share is determined by dividing the net tangible book value
(total net tangible assets less total liabilities) of the Company by the
number of shares of Common Stock outstanding. After giving effect to (i) the
sale of the shares of Common Stock offered hereby after deducting the
underwriting discount and commissions and estimated offering expenses, (ii)
the distribution to be made to the sole stockholder of undistributed taxable S
corporation earnings and (iii) a nonrecurring tax benefit, which would have
been $485,000 had the termination of the Company's S corporation status
occurred as of December 31, 1997, the pro forma tangible book value of the
Company as of December 31, 1997 would have been $12.2 million, or $1.88 per
share. This represents an immediate increase in net tangible book value of
$0.25 per share to the existing sole stockholder and an immediate dilution in
net tangible book value of $5.12 per share to new investors purchasing shares
in the offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $7.00
Net tangible book value per share as of December 31, 1997........ $1.63
Increase per share attributable to the offering.................. 0.25
-----
Pro forma net tangible book value per share after the offering.... 1.88
-----
Dilution per share to new investors............................... $5.12
=====
</TABLE>

The following table summarizes, on a pro forma basis as of December 31,
1997, the difference between the existing stockholder and the new investors
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder........ 4,500,000 69.2% $ 817,000 5.5% $0.18
New investors............... 2,000,000 30.8 14,000,000 94.5 7.00
--------- ----- ----------- -----
Total...................... 6,500,000 100.0% $14,817,000 100.0%
========= ===== =========== =====
</TABLE>

The foregoing tables exclude options to purchase 296,500 shares of Common
Stock to be granted at the initial public offering price to certain employees
and non-employee directors of the Company upon the closing of this offering.
See "Management--Stock Plans." If any additional options were exercised, there
could be further dilution to new investors. See "Risk Factors--Dilution and
Benefits to Existing Stockholder."

13
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1997, (i) on an actual basis, (ii) on a pro forma basis to
reflect termination of the Company's S corporation status, including the $7.8
million distribution of undistributed taxable S corporation earnings to the
Company's current stockholder and a nonrecurring tax benefit, which would have
been $485,000 had the termination of the Company's S corporation status
occurred as of December 31, 1997 and (iii) on a pro forma as adjusted basis to
reflect the issuance and sale of the shares of Common Stock offered hereby
after deducting the underwriting discounts and commissions and estimated
offering expenses and the application of the estimated net proceeds therefrom.
See "Prior S Corporation Status," "Use of Proceeds" and Note 3 of Notes to
Consolidated Financial Statements.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings, including current portion
of long-term debt (1)............................ $7,455 $7,455 $ 3,035
====== ====== =======
Long-term debt, net of current portion(1)......... 203 203 203
------ ------ -------
Stockholders' equity:
Preferred stock, $.001 par value: 1,000,000
shares authorized; no shares outstanding........ -- -- --
Common stock, $.001 par value: 15,000,000 shares
authorized; 4,500,000 shares outstanding, actual
and pro forma; 6,500,000 shares outstanding, pro
forma as adjusted(2)............................ 4 4 7
Additional paid-in capital....................... 812 9 12,226
Retained earnings................................ 6,512 -- --
------ ------ -------
Total stockholders' equity...................... 7,328 13 12,233
------ ------ -------
Total capitalization........................... $7,531 $ 216 $12,436
====== ====== =======
</TABLE>
- ---------------------
(1) For a description of the Company's debt, see Notes 4 and 5 of Notes to
Consolidated Financial Statements.

(2) Excludes 296,500 shares of Common Stock issuable upon exercise of stock
options to be granted upon the completion of this offering. Also excludes
718,500 shares and 85,000 shares of Common Stock reserved for future
issuance under the Company's 1998 Plan and the Directors' Plan,
respectively.

14
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

The selected consolidated financial and operating data set forth below
should be read in conjunction with the Consolidated Financial Statements of
the Company and related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. The selected statement of operations and balance sheet
data of the Company as of and for each of the fiscal years in the five-year
period ended December 31, 1997 are derived from the Company's audited
consolidated financial statements. Such consolidated financial statements as
of December 31, 1996 and 1997 and for each of the three fiscal years in the
period ended December 31, 1997 are included elsewhere in this Prospectus and
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report included herein. The pro forma information and the information
under the caption "Selected Operating Data" for all periods set forth below
are derived from unaudited data.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $19,687 $21,515 $25,539 $30,315 $45,074
Cost of sales and related
occupancy expenses............ 13,201 15,007 17,723 20,318 29,336
------- ------- ------- ------- -------
Gross profit................... 6,486 6,508 7,816 9,997 15,738
------- ------- ------- ------- -------
Selling expenses............... 4,525 4,976 4,835 5,592 8,242
General and administrative
expenses...................... 1,500 1,638 1,809 2,630 3,250
------- ------- ------- ------- -------
Income (loss) from operations.. 461 (106) 1,172 1,775 4,246
Interest and other expense,
net........................... (225) (404) (524) (287) (520)
------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 236 (510) 648 1,488 3,726
Pro forma (provision) benefit
for income taxes(1)........... (85) 183 (246) (566) (1,435)
------- ------- ------- ------- -------
Pro forma net income (loss)(1). $ 151 $ (327) $ 402 $ 922 $ 2,291
======= ======= ======= ======= =======
Pro forma net income per
share(1)...................... $ 0.40
=======
Weighted average common shares
outstanding................... 5,777
=======
SELECTED OPERATING DATA:
Number of stores:
Opened during period.......... 7 9 6 9 16
Closed during period.......... 0 0 4 6 2
Open at end of period......... 27 36 38 41 55
Comparable store sales increase
(decrease)(2)................. (9.1)% (12.4)% (1.0)% 8.0% 4.6%
<CAPTION>
DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997(3)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................ $ 3,020 $ 1,964 $ 2,876 $ 3,783 $ 6,045
Total assets................... 7,956 10,079 9,473 15,146 22,646
Total indebtedness (including
current portion).............. 3,306 4,912 3,872 3,673 7,658
Stockholder's equity........... 2,740 2,083 2,695 4,567 7,328
</TABLE>
- ---------------------
(1) For all periods indicated, the Company operated as an S corporation and
was not subject to federal and certain state income taxes. Prior to the
completion of this offering, the Company will become subject to federal
and state income taxes. Pro forma net income (loss) reflects federal and
state income taxes as if the Company had not elected S corporation status
for income tax purposes. Pro forma net income per share is based on the
weighted average number of shares of common stock outstanding during the
period plus the estimated portion of the shares being offered by the
Company (1,276,596 shares) which would be necessary to fund the $7.8
million distribution of estimated undistributed taxable S corporation
earnings . See "Prior S Corporation Status" and Note 3 of Notes to
Consolidated Financial Statements.
(2) The Company believes that the decreases in comparable store sales in 1994
and 1995 were due, in part, to temporary store closures and business
disruptions resulting from the reconfiguration of the Company's stores
from a traditional retail format to the current self-service format. The
Company believes that the increase in comparable store sales in 1996 was
due, in part, to the completion of the reconfiguration of the Company's
comparable stores.
(3) See Note 3 of Notes to Consolidated Financial Statements.

15
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto and the other
financial information included elsewhere in this Prospectus. Except for the
historical information contained herein, the discussions in this Prospectus
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below and in the section entitled "Risk
Factors" as well as those discussed elsewhere in this Prospectus.

OVERVIEW

Shoe Pavilion, founded in 1979, is the largest independent off-price
footwear retailer on the West Coast that offers a broad selection of women's
and men's designer label and name brand merchandise. The Company was among the
first footwear retailers on the West Coast to expand the off-price concept
into the designer and name brand footwear market. As of February 23, 1998, the
Company operated 55 retail stores in California, Washington, Oregon and Nevada
under the trade names Shoe Pavilion and Shoe Pavilion's Designer Shoe
Warehouse.

The Company opened, net of closures, two stores in 1995, three stores in
1996 and 14 stores in 1997. In early 1997, the Company entered the Los Angeles
market by assuming the leasehold interests of Standard Shoes, a Los Angeles
based footwear retailer. In connection therewith, the Company purchased the
inventory of Standard Shoes at 60% of Standard Shoes' cost. The Company
subsequently converted nine Standard Shoes locations to Shoe Pavilion's
Designer Shoe Warehouse stores. The Company intends to open ten to 20 new
stores, primarily in its existing markets, in 1998.

The Company's growth in net sales historically has resulted primarily from
new store openings, and the Company expects that the primary source of future
sales growth, if any, will continue to be new store openings. The Company's
comparable store sales have fluctuated widely, and the Company does not expect
that comparable store sales will contribute significantly, if at all, to
future growth in net sales. The Company defines comparable stores as those
stores that have been open for at least 14 consecutive months. Stores open
less than 14 consecutive months are treated as new stores, and stores closed
during the period are excluded from comparable store sales. The Company's
comparable store sales decreased 9.1% in 1993, 12.4% in 1994 and 1.0% in 1995
and increased 8.0% in 1996 and 4.6% in 1997. The Company believes that the
decreases in comparable store sales in 1994 and 1995 were due, in part, to
temporary store closures and business disruptions resulting from the
reconfiguration of the Company's stores from a traditional retail format to
the current self-service format. The Company believes that the increase in
comparable store sales in 1996 was due, in part, to the completion of the
reconfiguration of the Company's comparable stores. The Company does not
anticipate realizing similar increases in subsequent periods, and no assurance
can be given as to the Company's ability to maintain recent comparable store
sales growth. See "Risk Factors--Uncertainty of Future Operating Results;
Fluctuations in Comparable Store Sales."

Between late 1993 and 1995, the Company reconfigured substantially all of
its stores from a traditional retail format to the current self-service
format. This reconfiguration resulted in increased expenses associated with
the conversion and decreased net sales due to the temporary closure of the
stores. The majority of the reconfigurations occurred during 1994 and
contributed to a loss before income taxes of $510,000 in 1994.

The Company acquires merchandise opportunistically to obtain favorable terms
and in quantities large enough to support future growth, which results in
increased inventory levels at various times throughout the year. As a result,
similar to other off-price retailers, the Company's inventory turnover rates
are typically less than full-price retailers. The Company's inventory levels
have increased from $13.5 million to $19.8 million at December 31, 1996 and
1997, respectively. This increase is due in part to the substantial increase
in the number

16
<PAGE>

of the Company's stores. To the extent that the Company's current or future
inventory is comprised of older or obsolescent shoes, the Company will be
required to mark-down the sale price of those shoes, which could have a
material adverse effect on operating margins in affected periods. See "Risk
Factors--Inventory and Sourcing Risk."

Shoe Pavilion has been treated as an S corporation for federal and certain
state income tax purposes since August 1988. As a result, the Company's
earnings from August 1988 through the date preceding the Termination Date have
been taxed, with certain exceptions, directly to the Company's stockholder
rather than to the Company. The Company's S corporation status will terminate
on the Termination Date, and the Company will be subject to state and federal
income taxes as a C corporation. The pro forma adjustments reflect federal and
state income taxes as if the Company had not elected S corporation status for
income tax purposes. See "Prior S Corporation Status" and Note 3 of Notes to
Consolidated Financial Statements.

In connection with its conversion to C corporation status, the Company will
record a nonrecurring tax benefit, which would have been $485,000 had the
conversion occurred as of December 31, 1997.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0%
Gross profit............................................ 30.6 33.0 34.9
Selling expenses........................................ 18.9 18.4 18.3
General and administrative expenses..................... 7.1 8.7 7.2
----- ----- -----
Income from operations.................................. 4.6 5.9 9.4
Interest and other expense, net......................... (2.0) (1.0) (1.1)
----- ----- -----
Income before income taxes.............................. 2.6 4.9 8.3
Pro forma provision for income taxes.................... (1.0) (1.9) (3.2)
----- ----- -----
Pro forma net income.................................... 1.6% 3.0% 5.1%
===== ===== =====
</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996

Net Sales. Net sales increased 48.7% to $45.1 million for 1997 from $30.3
million for 1996. This increase in net sales was primarily attributable to new
store sales, including sales from 16 stores opened during 1997, which
contributed $15.0 million and a 4.6% increase in comparable store sales of
$1.2 million. Stores closed during 1996 and 1997 had contributed an additional
$1.4 million to net sales during 1996.

Gross Profit. Gross profit increased 57.4% to $15.7 million for 1997 from
$10.0 million for 1996, and increased as a percentage of net sales to 34.9%
from 33.0%. The increase in gross profit was primarily attributable to the
Company's ability to purchase merchandise in larger quantities at a lower cost
per unit in 1997 as well as favorable gross profit margins on the inventory
purchased from Standard Shoes. Cost of sales includes landed merchandise costs
and occupancy costs. See "--Quarterly Operating Results."

Selling Expenses. Selling expenses consist of payroll and related costs,
advertising and promotional expenses. Selling expenses increased 47.4% to $8.2
million for 1997 from $5.6 million for 1996, and decreased slightly as a
percentage of net sales to 18.3% from 18.4%. The increase in selling expenses
was primarily attributable to increases in payroll and related expenses as a
result of new stores and, to a lesser extent, advertising expenses. The
Company anticipates that selling expenses will increase in absolute dollars in
1998.

17
<PAGE>

General and Administrative Expenses. General and administrative expenses
consist primarily of corporate and administrative expenses, including payroll,
employee benefits and warehousing costs. General and administrative expenses
increased 23.6% to $3.2 million for 1997 from $2.6 million for 1996, and
decreased as a percentage of net sales to 7.2% from 8.7%, primarily as a
result of improved expense leverage. The Company anticipates that general and
administrative expenses will increase in absolute dollars in 1998.

Interest and Other Expense, Net. Interest and other expense, net, increased
81.0% to $520,000 for 1997 from $287,000 for 1996. The increase was
attributable to higher borrowings outstanding on the Company's revolving line
of credit to support increased inventory levels, including inventory purchased
from Standard Shoes.

Pro Forma Taxes. The pro forma taxes on income for 1997 were $1.4 million
compared to $566,000 for 1996. The pro forma effective tax rate for 1997 was
38.5% compared to 38.0% for 1996.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995

Net Sales. Net sales increased 18.7% to $30.3 million for 1996 from $25.5
million for 1995. This increase in net sales for 1996 was primarily
attributable to new store sales, including sales from nine stores opened
during the period, which contributed $4.8 million and an 8.0% increase in
comparable store sales of $1.7 million. Stores closed during 1995 and 1996 had
contributed an additional $1.7 million to net sales during 1995.

Gross Profit. Gross profit increased 27.9% to $10.0 million for 1996 from
$7.8 million for 1995, and increased as a percentage of net sales to 33.0%
from 30.6%, primarily as a result of the Company's ability to purchase
merchandise in larger quantities at a lower cost per unit in 1996 and the
closure of certain underperforming stores in 1996.

Selling Expenses. Selling expenses increased 15.7% to $5.6 million for 1996
from $4.8 million for 1995, and decreased slightly as a percentage of net
sales to 18.4% from 18.9%, primarily due to a decrease in sales payroll as a
result of the reconfiguration of the Company's stores to a self-service
format.

General and Administrative Expenses. General and administrative expenses
increased 45.3% to $2.6 million for 1996 from $1.8 million for 1995, and
increased as a percentage of net sales to 8.7% from 7.1%, primarily as a
result of higher corporate payroll expenses, including a payment to the
Company's sole stockholder to fund income taxes.

Interest and Other Expense, Net. Interest and other expense, net, decreased
45.2% to $287,000 for 1996 from $524,000 for 1995, primarily due to lower
borrowings outstanding on the Company's line of credit.

Pro Forma Taxes. The pro forma taxes on income for 1996 were $566,000
compared to $246,000 for 1995. The pro forma effective tax rate for 1996 and
1995 was 38.0%.

18
<PAGE>

QUARTERLY OPERATING RESULTS

The following table presents certain unaudited actual and pro forma
financial data for each of the Company's last eight fiscal quarters. This data
has been derived from the Company's unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information for the periods presented when read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
The operating results for any quarter are not necessarily indicative of
results to be expected for any subsequent period. The pro forma adjustments
reflect federal and state income taxes as if the Company had not elected S
corporation status for income tax purposes. See "Prior S Corporation Status"
and Note 3 of Notes to Consolidated Financial Statements.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
SEPT.
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 30 DEC. 31
1996 1996 1996 1996 1997 1997 1997 1997
-------- ------- -------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $6,073 $7,980 $7,883 $8,379 $8,155 $12,174 $11,856 $12,889
Gross profit............ 1,763 2,759 2,561 2,914 2,680 4,509 3,906 4,643
Income from operations.. 134 671 504 466 646 1,393 699 1,508
Income before income
taxes.................. 40 607 453 388 533 1,266 600 1,327
Pro forma provision for
income taxes........... (15) (230) (173) (148) (201) (478) (226) (530)
------ ------ ------ ------ ------ ------- ------- -------
Pro forma net income.... $ 25 $ 377 $ 280 $ 240 $ 332 $ 788 $ 374 $ 797
====== ====== ====== ====== ====== ======= ======= =======
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 29.0 34.6 32.5 34.8 32.9 37.0 32.9 36.0
Income from operations.. 2.2 8.4 6.4 5.6 7.9 11.4 5.9 11.7
Income before income
taxes.................. 0.7 7.6 5.7 4.6 6.5 10.4 5.1 10.3
Pro forma provision for
income taxes........... (0.3) (2.9) (2.1) (1.7) (2.4) (3.9) (1.9) (4.1)
------ ------ ------ ------ ------ ------- ------- -------
Pro forma net income.... 0.4% 4.7% 3.6% 2.9% 4.1% 6.5% 3.2% 6.2%
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>

Net Sales and Gross Profit. In April 1997, the Company assumed the leasehold
interests of Standard Shoes and purchased Standard Shoes' inventory at 60% of
Standard Shoes' cost. During the quarter ended June 30, 1997, the Company
liquidated that inventory, which resulted in net sales of $2.8 million and an
increase in gross profit as a percentage of net sales of 3.3 percentage
points.

Income from Operations. In December 1996, the Company paid its sole
stockholder $264,000 to fund income taxes. The Company does not expect to make
similar payments in the future.

The Company has experienced, and expects to continue to experience, seasonal
fluctuations in its net sales and net income. Historically, net sales and net
income have been weakest during the first quarter and a majority of the
Company's net sales and net income has been realized during the second and
third quarters. In anticipation of increased sales activity during these
quarters, the Company increases inventory purchases in advance of these
quarters. If, for any reason, the Company's net sales were below seasonal
norms during the second or third quarter, the Company's business, financial
condition and results of operations could be materially adversely affected.
Because the Company's operations are geographically concentrated, it is
vulnerable to adverse weather conditions and natural disasters in the regions
in which it operates stores, including the San Francisco Bay Area, Seattle and
Los Angeles. If one of these regions were to experience prolonged adverse
weather conditions or a natural disaster, the Company's business, financial
condition and results of operations could be materially adversely affected.
The Company's quarterly results of operations may also fluctuate significantly
as a result of a variety of factors, including timing of new store openings,
the level of net sales contributed by new stores, merchandise mix, the timing
and level of price markdowns, availability of inventory, store closures,
advertising costs, competitive pressures and changes in the demand for off-
price footwear. Any such fluctuations could have a material adverse effect on
the market price of the Company's Common Stock.

19
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company had $6.0 million in working capital as of December 31, 1997,
compared to $3.8 million as of December 31, 1996. The Company's capital
requirements relate primarily to merchandise inventory and leasehold
improvements. The Company's working capital needs are typically higher in the
second and third quarters as a result of increased inventory purchases for
spring and fall selling seasons.

Historically, the Company has funded its cash requirements primarily through
cash flow from operations and borrowings under its credit facility. Net cash
provided by (used in) operating activities was $1.1 million, $566,000 and
($1.8) million for 1995, 1996 and 1997, respectively. Net cash provided by
(used in) operating activities historically has been driven primarily by net
income and fluctuations in inventory and accounts payable. Inventory levels
have increased throughout these periods due to a net increase in the number of
stores. During 1998, the Company anticipates that cash will be used primarily
for merchandise inventory and capital expenditures.

Capital expenditures were $336,000, $569,000 and $1.2 million in 1995, 1996
and 1997, respectively. Expenditures for 1997 were primarily for the build-out
of 16 new stores and the relocation of the Company's corporate office and
distribution center. Expenditures for 1996 were primarily for the build-out of
nine new stores. The Company estimates that capital expenditures for 1998,
excluding the cost of any acquisitions, will total approximately $2.5 million,
primarily for the build-out of approximately ten to 20 new stores and an
upgrade of the Company's management information systems. Since the Company
does not communicate electronically with its suppliers, the Company does not
need to upgrade legacy operating systems to address many of the more complex
Year 2000 issues. While the Company's software used internally is not fully
Year 2000 compliant, the Company believes that software that is fully
compliant is currently available for purchase on reasonable terms and that
such software can be implemented without undue expense.

Financing activities provided (used) cash of ($1.0) million, $93,000 and
$3.2 million in 1995, 1996 and 1997, respectively. The increase in cash
provided by financing activities for 1997, primarily reflects additional
borrowings under the Company's credit facility to fund increased working
capital requirements as a result of a larger store base. This increase was
partially offset by increased stockholder distributions. Financing activities
relate primarily to borrowings and payments on the Company's credit facility
and distributions to the sole stockholder as a result of the Company's S
corporation status. During 1995, 1996 and 1997, the Company made distributions
to its sole stockholder of $0, $300,000 and $704,000, respectively. Prior to
the Termination Date, the Company will make an S corporation distribution in
the amount of $7.8 million to its sole stockholder, which approximately equals
the estimated earned and previously undistributed taxable S corporation income
of the Company through the day preceding the Termination Date. See "Use of
Proceeds," "Certain Transactions" and Note 3 of Notes to Consolidated
Financial Statements.

The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $10.0 million expiring on April 30,
1999 along with a $500,000 term line available for the purchase or lease of
equipment. This line of credit is also available for the issuance of
commercial and standby letters of credit up to $3.0 million and $100,000,
respectively. The Company pays interest on outstanding amounts at a rate of
0.25% over the bank's prime rate or LIBOR plus 300 basis points at the
Company's option. Further, reductions in the interest rate are available
depending upon the borrowing base in relationship to the advance rate on the
credit facility. Borrowings under the credit facility are secured by inventory
and the sole stockholder's guarantee. The agreement contains restrictive
covenants that require, among other things, that the Company maintain working
capital of at least $4.0 million, tangible net worth of at least $5.5 million
and that total indebtedness may not exceed 3.0 times tangible net worth. As of
December 31, 1997, the unused and available portion of the credit facility was
approximately $2.6 million. The Company will use a portion of the net proceeds
of the offering to reduce outstanding indebtedness under this credit facility.
See "Use of Proceeds."

As part of its growth strategy, the Company plans to pursue opportunities to
acquire complementary businesses, although no such transactions are being
considered as of the date of this Prospectus. To the extent that cash
resources are insufficient to fund the purchase price of future acquisitions,
if any, or the operations of

20
<PAGE>

any acquired business, additional external capital may be required. There can
be no assurance that additional financing will be available on reasonable
terms or at all. The Company expects that after the application of the
estimated net proceeds of this offering, as described under "Use of Proceeds,"
anticipated cash flow from operations and available borrowings under the
Company's credit facility will satisfy its cash requirements for at least the
next 12 months. The Company's capital requirements program may vary
significantly from those anticipated depending upon such factors as operating
results, the number and timing of new store openings, and the number and size
of any future acquisitions.

IMPACT OF INFLATION

The Company does not believe that inflation has had a material impact on its
results of operations. However, there can be no assurance that inflation will
not have such an effect in future periods.

21
<PAGE>

BUSINESS

The statements contained in this Prospectus which are not historical facts
are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set forth in
or implied by forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Prospectus.

GENERAL

During 1997, the Company purchased its merchandise from over 50 domestic and
international vendors, independent resellers, manufacturers and other
retailers that have frequent excess inventory for sale. Budgeted production
over-runs due to the long lead-times associated with the design and
manufacturing of new shoes, as well as retail overstock, provide the Company
with a wide selection of branded merchandise. Women's dress and casual shoes,
men's dress and casual shoes and athletic footwear comprised approximately
60%, 27% and 13%, respectively, of net sales for 1997. The Company emphasizes
brand name merchandise that it believes has long-term consumer appeal.

In early 1997, the Company entered the Los Angeles market by assuming the
leasehold interests of Standard Shoes, a Los Angeles based footwear retailer.
The Company subsequently converted nine Standard Shoes locations to Shoe
Pavilion's Designer Shoe Warehouse stores.

INDUSTRY BACKGROUND

According to published industry sources, total retail footwear sales in the
United States during 1996 were approximately $36.8 billion, representing a
3.4% increase over 1995 retail footwear sales, and are projected to increase
to over $43.0 billion in 2000. The footwear industry can be divided into high,
moderate, and value-priced segments. The high-priced segment, dominated by
department stores, generated 39.4% of total footwear sales in 1996. The value-
priced segment, which consists of discount and off-price retailers like Shoe
Pavilion, generated 40.9% of total footwear sales or $15.1 billion in 1996.
The value-priced segment was the largest retail footwear segment in 1996 and
continues to gain market share from the moderate-priced segment.

Distribution of footwear has undergone substantial changes since the early
1980s. During the past decade, consumers increasingly have sought "value" at
the retail level. The National Retail Federation reports that over the past
ten years, off-price sales accounted for 60% of all footwear sales. Footwear
analysts believe that the use

22
<PAGE>

of brand names within the retail environment may be the most powerful
marketing tool that retailers possess to attract consumers into stores and
that, while fashions and expectations change from season to season, several
top brands remain a stabilizing factor within the retail footwear market.

In addition to becoming more value-oriented, consumers are becoming more
time-efficient, and, consequently, convenience and selection have become
significant factors in purchasing decisions. The Company believes that
consumers prefer stores that offer a wide selection of high quality value-
priced shoes from an assortment of manufacturers, to retailers that specialize
in one particular brand. The Company believes that the off-price name brand
footwear market is currently under served, and that the Company is one of the
few retailers dedicated to this growing niche.

OPERATING STRATEGY

The Company's objective is to be the leading off-price retailer of designer
label and name brand footwear in each of the markets it serves. The Company's
operating strategy is designed to allow the Company to offer its customers
quality footwear typically at 30% to 70% below department store prices for the
same shoes. The following summarizes key elements of the Company's operating
strategy:

. Off-Price Concept, Premium Name Brands. The Company differentiates
itself from other off-price retailers and deep discount chains by
focusing on higher price point merchandise, extending the off-price
concept into the designer and name brand footwear market. As such, the
Company generally does not compete with other discount stores in
obtaining the majority of its merchandise. Similarly, while some
department store and brand name retail chains operate discount outlets,
such operations generally obtain merchandise from existing inventory of
their retail affiliates rather than from external sources. The Company's
focus on premium brand name footwear also enables store openings in
close proximity to other off-price footwear retailers. Some of the
Company's most successful stores have benefited from the heightened
consumer awareness and preference to shop at discount malls or outlet
centers, both of which typically include other off-price retailers.

. Broad Selection of Designer Footwear. The Company offers a broad
selection of quality footwear from over 75 name brands such as Amalfi,
Clarks, Dexter, Fila, Florsheim, Naturalizer and Rockport. The
availability and wide variety of premium brand names distinguish Shoe
Pavilion and serve to attract first time buyers and consumers who
otherwise might shop at more expensive department stores. The wide
variety of brand names also enables the Company to tailor its
merchandise from store to store to accommodate consumer preferences that
may vary by location.

. Selective Bulk Purchases; Diverse Vendor Network. The Company is able to
offer lower prices by selectively purchasing large blocks of over-runs,
over-orders, mid- and late-season deliveries and last season's stock
from over 50 domestic and international vendors, independent resellers,
manufacturers and other retailers at significant discounts. The
diversity and scope of its vendor network helps to provide a constant
source of quality merchandise, and the purchase of name brand,
traditional styles mitigates the likelihood of inventory writedowns. To
augment available merchandise with the latest in-season styles, the
Company purchases branded design footwear directly from factories in
Italy, Brazil and China.

. Self-Service Stores. Between late 1993 and 1995, the Company
reconfigured its stores from a traditional retail format to the current
self-service format. The Company believes that the self-service format
reinforces its off-price strategy and appeals to value-oriented
consumers. The Company's format allows inventory to be stored directly
under a displayed shoe, thereby eliminating the need for a stockroom and
significantly increasing retail floor space. The functionality and
simplicity of this format enable flexible store layouts that can be
easily rearranged to complement the current merchandise. Moreover, this
format allows customers to locate all available sizes of a particular
shoe and to try them on for comfort and fit without a salesperson's
assistance, thereby reducing in-store staffing needs and allowing
customers to make independent, rapid purchasing decisions.

23
<PAGE>

. Operating Efficiency and Controls. The Company is dedicated to
continually optimizing its operations and reducing costs. The Company
seeks to leverage its size, name recognition and market presence in
negotiating leases with landlords. In March 1997, the Company relocated
its headquarters and central distribution facility to Richmond,
California to improve efficiency and facilitate timely deliveries. The
Company believes that this 58,000 square foot facility can accommodate
the Company's planned growth for the foreseeable future. In 1994, the
Company installed a centralized video monitoring system which enables
remote viewing of a majority of the Company's stores.

GROWTH STRATEGY

Since opening its first store in 1979, the Company has grown through
internal expansion and operated 55 stores as of February 23, 1998. The Company
intends to continue to expand by opening new stores, enhancing comparable
store sales and pursuing acquisition opportunities.

. Continue New Store Openings. The Company intends to increase its
presence in its current markets and to enter new markets by selectively
opening new stores which can be served by the Company's distribution
infrastructure. When entering a new market, the Company prefers to open
multiple stores, thereby creating an immediate market presence and
enabling television advertising costs to be spread economically across a
number of stores. The Company opened six stores in 1995, nine stores in
1996 and 16 stores in 1997 and closed four stores in 1995, six stores in
1996 and two stores in 1997. The Company intends to open ten to 20
stores, primarily in its existing markets, in 1998. Management believes
that new store openings in the Company's current markets will further
increase name recognition which, in turn, will facilitate expansion into
new markets.

. Increase Comparable Store Sales. Management intends to continue to seek
additional comparable store growth through a continuing refinement of
its store locations and merchandise selection. However, there can be no
assurance that the Company will experience comparable store growth in
the future.

. Pursue Acquisition Opportunities. The retail footwear industry is highly
fragmented and includes family and specialty shoe stores which represent
approximately 20% of total retail footwear sales. Accordingly,
management believes that a number of opportunities exist to acquire one
or more regional or local footwear retailers. The Company intends to
evaluate opportunities to acquire existing footwear retailers and
convert the acquired stores to the Company's off-price merchandising
concept.

The Company's ability to execute its operating and growth strategy is
subject to numerous risks and uncertainties. There can be no assurance that
the Company will be successful in implementing its strategy or that its
strategy, even if implemented, will lead to successful achievement of the
Company's objectives. If the Company were unable to implement its strategy
effectively, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Risk Factors."

MERCHANDISING

Unlike deep-discount retailers, Shoe Pavilion offers high quality
merchandise and a consistent selection of name brand dress and casual shoes
for men and women. List prices generally range between $19.99 and $69.99 for
women's shoes, and between $39.99 and $99.99 for men's shoes.

24
<PAGE>

Women's dress and casual shoes, men's dress and casual shoes and athletic
footwear comprised approximately 60%, 27% and 13%, respectively, of net sales
for 1997. The principal categories of footwear offered by Shoe Pavilion
stores, and selected brands for each, are summarized in the following table:

<TABLE>
<CAPTION>
WOMEN'S MEN'S ATHLETIC
------------ ----------- -----------
<S> <C> <C>
Amalfi Bally Adidas
Esprit Bass Asics
Evan-Picone Bostonian Avia
Hush Puppies Clarks Brooks
Life Stride Dexter Fila
Naturalizer Florsheim New Balance
Nickels Mario Bruni Riddell
Rockport Nunn Bush Saucony
Van Eli Rockport
Via Spiga Skechers
</TABLE>

THE SHOE PAVILION CONCEPT AND STORE DESIGN

Shoe Pavilion is a standardized concept that offers a bright, clean, low
maintenance and functional shopping environment to customers interested in
purchasing quality men's and women's value priced footwear. When opening
stores in markets where Shoe Pavilion stores currently exist, the Company
continues to use the store name Shoe Pavilion, whereas in other markets, the
Company uses the more descriptive store name Shoe Pavilion's Designer Shoe
Warehouse. The Company's stores carry between 15,000 and 25,000 pairs of shoes
and generally range in size from 3,000 to 14,000 square feet.

Between late 1993 and 1995, the Company reconfigured its stores from a
traditional retail format to the current self-service format. The Company
believes that the self-service format reinforces its off-price strategy and
appeals to value-oriented consumers. The Company's format allows inventory to
be stored directly under a displayed shoe, thereby eliminating the need for a
stockroom and significantly increasing retail floor space. The functionality
and simplicity of this format enable flexible store layouts that can be easily
rearranged to complement the current merchandise. Moreover, this format allows
customers to locate all available sizes of a particular shoe and to try them
on for comfort and fit without the need of a salesperson's assistance, thereby
reducing in-store staffing needs and allowing customers to make independent,
rapid purchasing decisions. The Company believes that these efficiencies and
selling strategies have improved the Company's financial performance while
addressing a shift in consumer buying patterns towards independent, value-
priced shopping. See "Risk Factors--Inventory Shrinkage."

SITE SELECTION, OPENING COSTS AND LEASES

The Company uses a number of brokers throughout the West Coast to identify
potential retail sites as well as possible acquisition candidates. Before
entering a new market, management reviews detailed reports on demographics;
spending, traffic, and consumption patterns; and other site and market related
data. As of February 23, 1998, 21 of the Company's stores were located in
strip malls, 14 were located in outlet centers, 13 were located in free
standing stores and seven were located in other types of facilities.

Opening costs for stores are typically minimal, excluding the initial
stocking of inventory. The Company estimates that its total cash requirements
to open a typical new store average $250,000 to $400,000, consisting of
approximately $40,000 to $50,000 for fixtures, equipment and leasehold
improvements; $200,000 to $325,000 for inventory; and the balance for working
capital needs. Costs vary from store to store depending on, among other
things, the location, size, property condition, and the tenant improvement
package offered by the landlord. The Company has been able to renegotiate some
of its existing leases to be more heavily revenue-based. The Company does not
own any of its real estate.

25
<PAGE>

The Company actively monitors individual store performance and has closed
underperforming stores, including four stores in 1995, six stores in 1996 and
two stores in 1997. The relatively small investment required to open new
stores affords the Company the flexibility to close stores more quickly than
other retailers. The Company intends to continue to close underperforming
stores in the future. If the Company were to close a number of stores, it
could incur significant termination costs and reductions in net sales. In
addition, the Company may not be able to close certain underperforming stores
on a timely basis because of lease terms. A significant increase in
termination costs, or the inability to close one or more underperforming
stores on a timely basis, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Risks Associated with Expansion."

STORE LOCATIONS

As of February 23, 1998, the Company operated 55 retail stores in the states
of California, Washington, Oregon and Nevada. The number of stores in each
geographic area is set forth below:

<TABLE>
<CAPTION>
STORES AT YEAR END
-----------------------------
LOCATION 1992 1993 1994 1995 1996 1997
-------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Northern California............................ 9 16 22 22 22 24
Southern California............................ 0 0 2 2 4 16
Nevada......................................... 0 0 1 1 1 1
Oregon......................................... 0 0 0 0 2 2
Washington..................................... 11 11 11 13 12 12
--- --- --- --- --- ---
Total......................................... 20 27 36 38 41 55
=== === === === === ===
</TABLE>

SOURCING AND PURCHASING

Vendors. During 1997, the Company purchased its inventory from over 50
domestic and international vendors, independent resellers and other retailers
who have over bought merchandise. Name brands sold include Amalfi, Clarks,
Dexter, Fila, Florsheim, Naturalizer and Rockport, among others. Since the
Company has locations in a number of markets along the West Coast, Shoe
Pavilion can accommodate and distribute a wide variety of merchandise that
meets the needs of customers in different geographic areas. In 1997, the
Company's top ten suppliers accounted for 44.5% of inventory purchases, of
which purchases from Nine West Group, Inc. and The Rockport Company, Inc.
accounted for 9.7% and 7.5% of total inventory purchases, respectively. The
Company purchases from its suppliers on an order-by-order basis and has no
long-term purchase contracts or other contractual assurances of continued
supply or pricing. Management believes that the strength and variety of its
supplier network mitigates much of the Company's exposure to inventory supply
risks, attracts first time buyers, and encourages repeat shopping. See "Risk
Factors--Inventory and Sourcing Risk."

Direct Sourcing. The Company purchases in-season name brand and branded
design merchandise directly from factories in Italy, Brazil and China. These
purchases include both labeled and non-labeled goods and provide a consistent
base of in-season merchandise. Directly sourced goods accounted for
approximately 13.4% and 15.7% of the Company's net sales in 1996 and 1997,
respectively. The Company purchases from its manufacturing sources on an
order-by-order basis and has no long-term purchase contracts or other
contractual assurances of continued supply or pricing. See "Risk Factors--
International Purchasing."

MARKETING

In 1996 and 1997, the Company spent approximately 4.2% of net sales, or
$1.3 million, and 4.5% of net sales, or $2.0 million, respectively, on
television advertising. The Company believes that television advertising
benefits all stores in a common viewing market. The Company believes that
advertising costs for a particular market will be more effectively and
economically leveraged as the number of stores increases in that market.

26
<PAGE>

The Company generally does not use print advertising which it has found to be
less effective than television advertising. Shoe Pavilion's signage is
consistent among all of the locations, and highly visible at the front and,
when appropriate, rear of the store. See "Risk Factors--Dependence on Consumer
Spending Preferences."

MERCHANDISE DISTRIBUTION

In March 1997, the Company relocated from a 20,000 square foot distribution
facility in Bellevue, Washington to a larger and more centrally located
facility in Richmond, California. This new 58,000 square foot distribution
facility also houses the Company's executive and administrative headquarters.
Vendors ship all products to this distribution center where the merchandise is
inspected, verified against the original purchase order, ticketed and
repackaged for shipment to stores. The Company believes that its distribution
facility can accommodate the Company's planned growth for the foreseeable
future.

VIDEO MERCHANDISING AND SECURITY SYSTEMS

During 1994, the Company installed a remote computer-based video system,
which allows management to monitor a majority of its stores. The operator of
the system can move the camera and view the entire retail floor without the
need for on-site assistance. A second stationary camera monitors the back door
at all times, sending pictures to headquarters whenever the door is opened.
Management believes that the security system provides the following benefits:

. Improved Merchandising and Store Appearance. Management can review the
condition of the store and its readiness for business. The operator can
insure that all merchandise is appropriately displayed, aisles are
clear, the checkout counter is uncluttered and deliveries have been
processed.

. Heightened Level of Security and Theft Deterrence. Management believes
that security cameras have served as a deterrent to theft and, as a
result, reduced in-store shrinkage. Management can monitor cash register
activities and any entry to the store.

During 1996, the Company installed "Checkpoint" security systems in all of
its stores as a further deterrent to shoplifters. By converting to a self-
service format, where shoppers have access to both shoes of a pair, the need
for store security greatly increased. Checkpoint is an electronic article
merchandising system that uses an advanced application of radio frequency
technology and an integrated alarm system to provide both audible and visible
signals of unauthorized removal of goods from the store. In addition to using
standard external reusable hard tags, the Company arranges for manufacturers
to embed detection devices within the soles of shoes. The tags and detection
devices must be deactivated at the checkout counter. Shoe Pavilion's system
allows the Company to combine various detection devices within one
comprehensive system. Shrinkage decreased from 1.8% of net sales for 1996 to
1.1% for 1997. See "Risk Factors--Inventory Shrinkage."

MANAGEMENT INFORMATION SYSTEMS

The Company's management information systems include a network of PC-based
workstations, host terminals and servers at the corporate office to support
corporate decision-making, along with PC-based point of sale (POS) systems at
each store. The POS system accumulates sales transaction data that are polled
via modem by the Company's main computer system nightly and reviewed by
management daily. The system's perpetual inventory feature enables the
Company's buyers to review and analyze daily the inventory levels at each
individual store by department, class and stock keeping unit to replenish
fast-selling items on a timely basis.

COMPETITION

27
<PAGE>

traditional shoe stores and mass merchants. Many of these competitors have
stores in the markets in which the Company now operates and in which it plans
to expand. Many of the Company's competitors have significantly greater
financial, marketing and other resources than the Company. In addition, there
can be no assurance that future participants will not enter the off-price
segment of the footwear market. Competitive pressures resulting from
competitors' pricing policies could materially adversely affect the Company's
gross margins. There can be no assurance that the Company will not face
greater competition from other national, regional or local retailers or that
the Company will be able to compete successfully with existing and new
competitors. The inability of the Company to respond to such competition could
have a material adverse effect on the Company's business, financial condition
and results of operations.

PROPERTIES

The Company's corporate offices and distribution facility are located in a
58,000 square foot facility in Richmond, California, which the Company
occupies under a lease expiring in 2002. As of February 23, 1998, the
Company's 55 stores occupied an aggregate of approximately 350,000 square feet
of space. The Company leases all of its stores, with leases expiring between
1998 and 2002. The Company has options to renew most of its leases. See "--
Store Locations" and "Risk Factors--Risks Associated with Expansion."

EMPLOYEES

As of December 31, 1997, the Company had approximately 222 full-time
employees and 142 part-time employees. The number of part-time employees
fluctuates depending upon seasonal needs. The Company's 13 warehouse employees
are represented by Local 315, International Brotherhood of Teamsters. The
Company is in the process of meeting with Local 315 to negotiate a collective
bargaining agreement. The Company generally considers its relationship with
its employees to be good. See "Risk Factors--Reliance on Key Personnel."

LEGAL PROCEEDINGS

In February 1998, the International Brotherhood of Teamsters filed unfair
labor practice charges and the National Labor Relations Board issued a
complaint alleging that the Company terminated approximately 19 employees
because of their union activities. The Company denies these allegations and
intends to vigorously defend its position. An adverse finding could result in
an order that the Company reinstate these employees and provide them back pay
from mid-October 1997.

28
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL

The executive officers, directors and certain key personnel of the Company
and their ages as of the date of this Prospectus are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Dmitry Beinus............. 45 Chairman of the Board, President and Chief
Executive Officer
Robert R. Hall............ 45 Vice President and Chief Operating Officer
Gary A. Schwartz.......... 46 Vice President of Finance, Chief Financial
Officer, Secretary and Director
Keith C. Gossett, Jr. .... 40 Vice President of Operations
Linda C. Hickey........... 34 Vice President of Administration
Peter G. Hanelt(1)........ 52 Director
David H. Folkman(1)....... 63 Director
</TABLE>
- ---------------------
(1) Member of Audit and Compensation Committee.

Dmitry Beinus has served as Chairman of the Board, President and Chief
Executive Officer of the Company and has been its sole stockholder since
founding the Company in 1979. From 1976 to 1978, Mr. Beinus was employed in
the shoe department of Nordstrom, Inc. Mr. Beinus' current responsibilities
include overseeing the growth of the operations, maintaining its competitive
position within the marketplace, and facilitating the acquisition of
inventory. See "Risk Factors--Reliance on Key Personnel."

Robert R. Hall has served as Vice President and Chief Operating Officer of
the Company since January 1997. Mr. Hall joined the Company as a Regional
Manager in 1990, and has held various positions within the Company including
Operations Manager and Vice President of Merchandising. Mr. Hall's current
responsibilities are to oversee the Regional Managers as well as the Company's
centralized warehouse operations. From 1976 to 1990, Mr. Hall held various
positions with Nordstrom, Inc., most recently as Merchandising Manager for the
shoe departments within the San Francisco Bay Area stores.

Gary A. Schwartz has served as Vice President of Finance and Chief Financial
Officer of the Company since September 1997 and as a director since November
1997. From January 1997 until April 1997, Mr. Schwartz served as Vice
President, Retail and Licensing of Jessica McClintock, Inc., a women's apparel
and fragrance company. From 1979 to 1996, Mr. Schwartz served as Vice
President and Chief Financial Officer of Byer California, an apparel
manufacturer and commercial real estate company. Mr. Schwartz is a Certified
Public Accountant.

Keith C. Gossett, Jr., has served as Vice President of Operations since
April 1997. From 1994 to April 1997, Mr. Gossett was President of Easy Street
Shoe Co., a division of Colby Footwear. From 1990 to 1994, Mr. Gossett served
as Vice President of Sales and Marketing for Mark Lemp Footwear, and from 1986
to 1990, he was the National Sales Manager for the Women's Division of
Florsheim.

Linda C. Hickey has served as Vice President of Administration since January
1997. Ms. Hickey joined the Company in 1984 as a Sales Associate and has held
various positions during her 13 years with the Company. From 1985 to 1992, Ms.
Hickey held various positions that included inventory control, accounting,
payroll, and personnel, and from 1992 to 1996, she served as Director of
Administration. Ms. Hickey's current responsibilities include overseeing
internal administrative functions as well as assisting Mr. Beinus with lease
and vendor negotiations.

29
<PAGE>

Peter G. Hanelt has served as a director of the Company since November 1997.
Mr. Hanelt is a Principal with Regent Pacific Management Corporation, a
management consulting firm. From 1993 to February 1997, Mr. Hanelt served as
Chief Operating Officer and Chief Financial Officer of Espirit De Corp, an
apparel manufacturer, wholesaler and retailer, and as President, Retail
Division from 1995 to 1996. Mr. Hanelt served as Vice President, Finance and
Operations of Saint Francis Memorial Hospital, a private teaching hospital
from 1992 to 1993, and, from 1990 to 1992, he served as acting Chief Operating
Officer and Chief Financial Officer of Post Tool, Inc., a retailer of power
and hand tools. Mr. Hanelt is a director of Natural Wonders, Inc. and 3 Day
Blinds, Inc.

David H. Folkman has served as a director of the Company since November
1997. Mr. Folkman has been a Principal with Regent Pacific Management
Corporation, a management consulting firm, since 1995, a position he also held
from 1991 to 1993. From 1993 to 1995, Mr. Folkman served as President and
Chief Executive Officer of Espirit De Corp, an apparel manufacturer,
wholesaler and retailer. From 1982 to 1987, Mr. Folkman served as the
President and Chief Executive Officer of Emporium, a 22-store division of
Carter Hawley Hale Stores, Inc. (now owned by Federated Department Stores,
Inc.).

BOARD COMMITTEES AND COMPENSATION

In November 1997, the Company's Board of Directors established an Audit and
Compensation Committee. The Audit and Compensation Committee will (i)
recommend the annual employment of the Company's auditors and review the scope
of audit and non-audit assignments, related fees, the accounting principles
used by the Company in financial reporting, internal financial auditing
procedures and adequacy of the Company's internal control procedures, (ii)
determine officers' salaries and bonuses and (iii) administer the Company's
1998 Plan. The Audit and Compensation Committee consists of the Company's
two independent outside directors, Mr. Hanelt and Mr. Folkman. Officers are
appointed by, and serve at the discretion of, the Board of Directors. There
are no family relationships among any directors or executive officers of the
Company.

Each director who is not an employee of the Company will receive an annual
fee of $8,000. Directors are also reimbursed for out-of-pocket expenses
incurred in attending meetings. The Company's Directors' Plan provides that,
at the time of his or her initial election or appointment to the Board of
Directors or upon completion of this offering, each director who is not an
employee of the Company will automatically be granted an option to purchase
7,500 shares of Common Stock. In addition, each outside director will
automatically be granted an option to purchase 2,500 shares of Common Stock on
the date of each annual meeting. The exercise price of all options granted
under the Directors' Plan must be equal to the fair market value of the Common
Stock at the time the option is granted.

AUDIT AND COMPENSATION COMMITTEE

The Audit and Compensation Committee consists of the Company's two
independent outside directors. In 1996 and 1997, all compensation was
determined by the Board of Directors, which consisted solely of Mr. Beinus.
See "--Executive Officers and Directors."

EXECUTIVE COMPENSATION

The following table sets forth information with respect to the compensation
of the Company's Chief Executive Officer. None of the Company's other
executive officers' annual salaries and bonuses exceeded $100,000 during the
fiscal year ended December 31, 1997:

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
SALARY BONUS OTHER
-------- ------- ----------
<S> <C> <C> <C>
Dmitry Beinus, President and Chief Executive
Officer..................................... $250,000 -- $27,666(2)
Robert R. Hall, Vice President and Chief
Operating Officer........................... 95,000 $10,738 34,963(2)
Gary A. Schwartz, Vice President of Finance
and Chief Financial Officer................. 31,437(1) -- --
</TABLE>
- ---------------------
(1)Represents salary received from September 22, 1997. Mr. Schwartz's annual
salary is currently $125,000.

(2)Represents primarily moving and relocation expenses.

30
<PAGE>

STOCK PLANS

1998 Equity Incentive Plan. In January 1998, the Company adopted the 1998
Equity Incentive Plan (the "1998 Plan"), pursuant to which an aggregate of
1,000,000 shares of Common Stock are reserved for issuance to key employees
and consultants of the Company. The 1998 Plan provides for awards of both
nonqualified stock options and incentive stock options within the meaning of
Section 422A of the Code, stock appreciation rights, restricted stock subject
to forfeiture and restrictions on transfer, and performance awards entitling
the recipient to receive cash or Common Stock in the future following the
attainment of performance goals determined by the Board of Directors.

The 1998 Plan is administered by the Audit and Compensation Committee of the
Board of Directors (the "Committee"), which has the sole discretion to select
the persons to whom awards will be made, to determine the nature and amounts
of such awards and to interpret, construe and implement the 1998 Plan. Members
of the Committee are not eligible to receive awards under the 1998 Plan.

Upon completion of this offering, the Company intends to grant options to
purchase an aggregate of 281,500 shares of Common Stock under the 1998 Plan,
at an exercise price equal to the initial public offering price, to certain of
its executive officers and key personnel in the amounts set forth below:

<TABLE>
<CAPTION>
NUMBER
OF
NAME OPTIONS
---- -------
<S> <C>
Robert R. Hall....................................................... 50,000
Gary A. Schwartz..................................................... 50,000
Keith C. Gossett, Jr................................................. 30,000
Linda C. Hickey...................................................... 25,000
All Others........................................................... 126,500
</TABLE>

Directors' Stock Option Plan. In January 1998, the Company adopted the
Directors' Stock Option Plan (the "Directors' Plan"), pursuant to which an
aggregate of 100,000 shares of Common Stock are reserved for issuance to non-
employee directors of the Company. The Directors' Plan is intended to further
the interests of the Company by providing recognition and compensation to its
outside directors for their time, effort and participation in the growth and
protection of the Company's business. The Directors' Plan provides that, at
the time of his or her initial election or appointment to the Board of
Directors or upon completion of this offering, each director who is not an
employee of the Company will automatically be granted an option to purchase
7,500 shares of Common Stock. In addition, each outside director will
automatically be granted an option to purchase 2,500 shares of Common Stock on
the date of each annual meeting. The exercise price of all options granted
under the Directors' Plan must be equal to the fair market value of the Common
Stock at the time the option is granted. The Directors' Plan will be
administered by a committee consisting of at least two members of the Board of
Directors.

CERTAIN TRANSACTIONS

The Company and its current stockholder have entered into an agreement (the
"Tax Indemnification Agreement") providing that the Company will be
indemnified by the Company's current stockholder with respect to any federal,
state or local corporate income taxes the Company is required to pay as a
result of the Company's failure to qualify as an S corporation with respect to
tax returns in which the Company reported its income as an S corporation. The
Tax Indemnification Agreement further provides that the Company will indemnify
the Company's current stockholder on an after-tax basis with respect to any
federal, state or local income taxes (plus interest and penalties) paid or
required to be paid by such stockholder, and such stockholder will pay to the
Company any refunds of federal, state or local income taxes (including
interest received thereon) received by (or credited to) such stockholder, as a
result of a subsequent adjustment in income of the Company with respect to any
tax return in which the Company reported its income as an S corporation.

The Company's sole stockholder is a guarantor of the Company's credit
facility. The Company intends to renegotiate the terms of the existing credit
facility so that the stockholder is no longer a guarantor.

31
<PAGE>

PRINCIPAL STOCKHOLDER

The following table sets forth, as of December 31, 1997, certain information
regarding the beneficial ownership of the Company's Common Stock as of the
date of this Prospectus and as adjusted to reflect the reorganization of the
Company's capital structure and the sale of the shares of Common Stock offered
hereby for (i) each person known by the Company to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock, (ii) each
director of the Company, (iii) each executive officer of the Company and (iv)
all directors and executive officers of the Company as a group. Unless
otherwise indicated, the address of each person listed is 3200-F Regatta
Boulevard, Richmond, California 94804, and the persons listed have sole voting
and investment power with respect to their shares of Common Stock, except to
the extent authority is shared by spouses under applicable law.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
OUTSTANDING
-----------------
NUMBER OF SHARES BEFORE AFTER
BENEFICIAL OWNERS BENEFICIALLY OWNED OFFERING OFFERING
----------------- ------------------ -------- --------
<S> <C> <C> <C>
Dmitry Beinus.......................... 4,500,000 100% 69.2%
Robert R. Hall (1)..................... -- -- --
Gary A. Schwartz (1)................... -- -- --
Peter G. Hanelt (2).................... -- -- --
David H. Folkman (2)................... -- -- --
All directors and executive officers as
a group............................... 4,500,000 100% 69.2%
</TABLE>
- ---------------------
(1)Excludes options to purchase 50,000 shares of Common Stock, which will be
granted upon completion of this offering.
(2)Excludes options to purchase 7,500 shares of Common Stock, which will be
granted upon completion of this offering.

32
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, the authorized capital stock of the
Company will consist of 15,000,000 shares of common stock, par value $0.001
per share ("Common Stock"), and 1,000,000 shares of preferred stock, par value
$0.001 per share ("Preferred Stock").

COMMON STOCK

As of December 31, 1997 and after giving effect to the reorganization, there
were 4,500,000 shares of Common Stock outstanding held of record by one
stockholder. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to preferences that may be applicable to any outstanding shares of the
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors in its discretion from
funds legally available therefor. In the event of a liquidation, dissolution
or winding up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive or redemption rights and have no right to convert
their Common Stock into any other securities. The outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
offering will be, validly issued, fully paid and nonassessable.

PREFERRED STOCK

Upon the completion of this offering, 1,000,000 shares of Preferred Stock
will be authorized and no shares will be outstanding. The Board of Directors
will have the authority, without any further vote or action by the
stockholders, to cause the Company to issue up to 1,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences and the
number of shares constituting any series or the designation of such series.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of Common Stock,
including the loss of voting control to others. The Company currently has no
plans to issue any shares of Preferred Stock.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. This statute generally prohibits, under certain
circumstances, a Delaware corporation whose stock is publicly traded from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to the time the stockholder
became an interested stockholder, the board of directors approved either the
business combination or the transaction which resulted in the person becoming
an interested stockholder, (ii) the stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding shares held by
directors who were also officers or held in certain employee stock plans) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder or (iii) the business combination was approved by the
board of directors and by two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). The
restrictions contained in Section 203 do not apply if a corporation has
elected in its certificate of incorporation or bylaws not to be governed by
this Delaware law (the Company has not made such an election). An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or any time within the prior three years did own) 15% or more of the
corporation's outstanding voting stock. The term "business combination" is
defined generally to include mergers, consolidations, stock sales, asset-based
transactions, and other transactions resulting in a financial benefit to the
interested stockholder.

33
<PAGE>

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Certificate of Incorporation and By-laws of the
Company may be deemed to have anti-takeover effects and may delay, deter or
prevent a change in control of the Company that a stockholder might consider
in his/her best interest. Among other things, these provisions (i) provide
that only the Board of Directors or certain members thereof or officers of the
Company may call special meetings of the stockholders; (ii) eliminate the
ability of the stockholders to take action without a meeting; and (iii)
authorize the issuance of "blank check" preferred stock having such
designations, rights and preferences as may be determined from time to time by
the Board of Directors.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation provides that its directors will
not be liable to the Company or its stockholders for monetary damages for
breaches of fiduciary duty, to the fullest extent permitted by law. This
provision is intended to allow the Company's directors the benefit of the
Delaware General Corporation Law which provides that directors of Delaware
corporations may be relieved of monetary liability for breaches of their
fiduciary duty of care except under certain circumstances, including breach of
the duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct or known violation of law or any transaction from which
the director derived an improper personal benefit.

The Company has entered into separate indemnification agreements with each
of the directors and executive officers, whereby the Company agrees, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors or officers, to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, and to obtain directors' and officers' insurance, if
available at reasonable terms. There is no pending litigation or proceeding
involving a director, officer, employee or other agent of the Company as to
which indemnification is being sought, nor is the Company aware of any pending
or threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.

TRANSFER AGENT AND REGISTRAR

ChaseMellon Shareholder Services, L.L.C. has been appointed as the transfer
agent and registrar for the Company's Common Stock.

34
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, the sale of
shares or the availability of shares for sale will have on the market price
for the Common Stock prevailing from time to time. Sales of substantial
amounts of the Common Stock in the public market could aversely affect
prevailing market prices and the future ability of the Company to raise equity
capital and complete any acquisitions for Common Stock.

Upon completion of this offering, the Company will have outstanding an
aggregate of 6,500,000 shares of Common Stock. All of the shares of Common
Stock sold in this offering will be freely tradeable without restrictions
under the Securities Act of 1933, as amended (the "Securities Act"), unless
acquired by affiliates of the Company. All of the remaining outstanding shares
of Common Stock are "restricted shares" as that term is defined in Rule 144
under the Securities Act (the "Restricted Shares"). The Company and the sole
stockholder of the Company have agreed not to sell or otherwise dispose of any
shares of Common Stock for a period of one year after the date of this
Prospectus without the prior written consent of Van Kasper & Company, except
that the Company may (i) issue the shares of Common Stock offered hereby, (ii)
grant options under the Company's stock option plans, so long as none of such
options become exercisable during said one-year period and (iii) 45 days after
the completion of this offering sell up to 500,000 shares of Common Stock
pursuant to a registration statement. See "Underwriting." Van Kasper & Company
may release all or any portion of the shares subject to the lock-up agreement,
in its discretion, at any time without public announcement. All of the
Restricted Shares held by the sole stockholder will become available for sale
in the public market immediately following expiration of the one-year lock-up
period, subject to the volume and other limitations of Rule 144.

In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired
from the Company or the date on which they were acquired from an affiliate,
the holder of such restricted securities (including an affiliate) is entitled
to sell a number of shares within any three-month period that does not exceed
the greater of (i) 1% of the then-outstanding shares of the Common Stock
(approximately 65,000 shares upon completion of this offering) or (ii) the
average weekly reported volume of trading of the Common Stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission. Sales
under Rule 144 are also subject to certain requirements pertaining to the
manner of sales, notice and availability of current public information
concerning the Company. Affiliates may sell shares not constituting restricted
securities in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period. Under Rule
144(k), if a period of at least two years has elapsed between the later of the
date on which restricted securities were acquired from the Company and the
date on which they were acquired from an affiliate, a holder of such
restricted securities who is not an affiliate at the time of the sale and has
not been an affiliate for at least three months prior to the sale is entitled
to sell the shares immediately without regard to volume limitations and other
conditions described above.

The Company intends to file registration statements covering the sale of
1,000,000 and 100,000 shares of Common Stock reserved for issuance under its
1998 Plan and Directors' Plan, respectively, shortly after the completion of
this offering.

35
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representative,
Van Kasper & Company (the "Representative") have severally agreed to purchase
from the Company, the number of shares of Common Stock set forth opposite
their respective names below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Van Kasper & Company............................................... 945,000
Pacific Crest Securities........................................... 80,000
BT Alex. Brown Incorporated........................................ 65,000
Cowen & Company.................................................... 65,000
Hambrecht & Quist LLC ............................................. 65,000
CIBC Oppenheimer Corp. ............................................ 65,000
Jensen Securities Co. ............................................. 65,000
Paine Webber Incorporated.......................................... 65,000
Sanders Morris Mundy Inc........................................... 65,000
Brean Murray & Co., Inc. .......................................... 40,000
First Albany Corporation........................................... 40,000
Fechtor, Detwiler & Co., Inc. ..................................... 40,000
First of Michigan Corporation...................................... 40,000
Gaines, Berland, Inc. ............................................. 40,000
Gerard Klauer Mattison & Co., Inc. ................................ 40,000
Needham & Company.................................................. 40,000
Ragen Mackenzie Incorporated....................................... 40,000
The Seidler Company Incorporated................................... 40,000
Sutro & Co. Incorporated........................................... 40,000
Tucker Anthony Incorporated........................................ 40,000
Wedbush Morgan Securities Inc...................................... 40,000
Ormes Capital Markets, Inc......................................... 40,000
---------
Total............................................................ 2,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby (other than those
subject to the Underwriters' over-allotment option described below) if any are
purchased.

The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock directly to the public at the initial public
offering price and to certain dealers at this price less a discount not in
excess of $0.25 per share. The Underwriters may allow, and these dealers may
reallow, a discount not in excess of $0.10 per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representative.

The Company has granted to the Underwriters an option, exercisable no later
than 45 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discounts set forth on the cover page of this Prospectus,
solely to cover over-allotments. To the extent that the Underwriters exercise
this option, each of the Underwriters will have a firm commitment to purchase
such additional shares in approximately the same proportion as set forth in
the table above. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 2,000,000 shares are
being sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Company's sole stockholder against certain
civil liabilities, including liabilities under the Securities Act.

36
<PAGE>

The Company has agreed to pay the Representative a non-accountable expense
allowance equal to one percent (1%) of the gross proceeds of the offering.

Pursuant to the terms of a lock-up agreement, the Company's sole stockholder
has agreed with the Underwriters that, for a period of one year after the date
of this Prospectus, he will not offer, directly or indirectly, sell, contract
to sell, pledge, grant any option to purchase, or otherwise dispose of or
grant any rights with respect to any shares of Common Stock (or any securities
convertible into, exchange for or exercisable for Common Stock), now owned or
hereafter acquired directly or indirectly by such holder, without the prior
written consent of the Representative. The Company also has agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or any options or warrants to purchase Common Stock for a period
of one year after the date of this Prospectus without the prior written
consent of the Representative, except that the Company may (i) issue the
Shares of Common Stock offered hereby, (ii) grant options under the Company's
stock option plans, so long as none of such options become exercisable during
said one-year period and (iii) 45 days after the completion of the offering
sell up to 500,000 shares of Common Stock pursuant to a registration
statement.

The Representative has advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with this offering. A "penalty bid"
is an arrangement permitting the Representative to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with this offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representative in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representative has advised the
Company that such transactions may be affected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price was determined
through negotiations between the Company and the Representative. Among the
factors considered in such negotiations are prevailing market conditions,
certain financial information of the Company, market valuations of other
companies that the Company and the Representative believe to be comparable to
the Company, estimates of the business potential of the Company, the current
state of the economy as a whole and other factors deemed relevant. See "Risk
Factors--No Prior Market; Possible Volatility of Stock Price."

37
<PAGE>

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Orrick, Herrington & Sutcliffe LLP, San Francisco, California.
Certain legal matters related to this offering will be passed upon for the
Underwriters by Cooley Godward LLP, San Francisco, California.

EXPERTS

The consolidated financial statements as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report included herein and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a registration statement (which
term shall encompass any and all amendments thereto) on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered by this Prospectus. This Prospectus, which is part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto, certain
items of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). Statements made in this Prospectus
as to the contents of any contract, agreement or other document referred to
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
hereby made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. For further information with respect to the Company, reference
is hereby made to the Registration Statement and such exhibits and schedules
filed as a part thereof, which may be inspected, without charge, at the Public
Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The SEC maintains a web site that contains reports, proxy and
information statements regarding registrants that file electronically with the
SEC. The address of this web site is (http://www.sec.gov). Copies of all or
any portion of the Registration Statement may be obtained from the Public
Reference Section of the SEC, upon payment of the prescribed fees.

38
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Stockholder's Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Shoe Pavilion, Inc.

We have audited the accompanying consolidated balance sheets of Shoe
Pavilion, Inc. and subsidiary (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholder's equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Shoe Pavilion, Inc. and
subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP

San Francisco, California
January 16, 1998 (February 23, 1998 as to
the reorganization discussed in Note 1 and the
last sentence of the first paragraph of Note 4)

F-2
<PAGE>

SHOE PAVILION, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, 1997
PRO FORMA
DECEMBER 31, (NOTE 3)
------------------------ -----------------
1996 1997
----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ 201,797 $ 394,660 $ 394,660
Inventories........................ 13,485,726 19,795,599 19,795,599
Prepaid expenses................... 61,121 32,795 32,795
Other current assets............... 4,139 40,160 40,160
----------- ------------ -----------
Total current assets.............. 13,752,783 20,263,214 20,263,214
FIXED ASSETS:
Store fixtures and equipment....... 1,759,524 2,258,480 2,258,480
Leasehold improvements............. 656,682 1,499,813 1,499,813
----------- ------------ -----------
Total............................. 2,416,206 3,758,293 3,758,293
Less accumulated depreciation...... 1,039,842 1,683,604 1,683,604
----------- ------------ -----------
Net fixed assets................... 1,376,364 2,074,689 2,074,689
DEFERRED INCOME TAXES............... -- -- 485,000
OTHER ASSETS........................ 16,806 307,955 307,955
----------- ------------ -----------
TOTAL............................. $15,145,953 $ 22,645,858 $23,130,858
=========== ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 5,694,569 $ 5,920,980 $ 5,920,980
Accrued expenses................... 772,822 842,812 842,812
Distributions payable to
stockholder....................... -- -- 7,800,000
Short-term borrowings.............. 3,400,000 7,387,125 7,387,125
Current portion of long-term
obligations....................... 102,805 67,542 67,542
----------- ------------ -----------
Total current liabilities......... 9,970,196 14,218,459 22,018,459
DEFERRED RENT....................... 438,425 896,277 896,277
LONG-TERM OBLIGATIONS, less current
portion............................ 170,663 203,066 203,066
COMMITMENTS AND CONTINGENCIES (Notes
4 and 5)........................... -- -- --
STOCKHOLDER'S EQUITY:
Common stock--$.001 par value;
15,000,000 shares authorized;
4,500,000 shares issued and
outstanding....................... 4,500 4,500 4,500
Preferred stock--$.001 par value;
1,000,000 shares authorized; no
shares issued or outstanding ..... -- -- --
Additional capital................. 812,033 812,033 8,556
Retained earnings.................. 3,750,136 6,511,523 --
----------- ------------ -----------
Total stockholder's equity........ 4,566,669 7,328,056 13,056
----------- ------------ -----------
TOTAL............................. $15,145,953 $ 22,645,858 $23,130,858
=========== ============ ===========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>

SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................... $25,538,939 $30,315,326 $45,074,041
COST OF SALES AND RELATED OCCUPANCY
EXPENSES............................... 17,722,690 20,317,844 29,336,485
----------- ----------- -----------
Gross profit.......................... 7,816,249 9,997,482 15,737,556
SELLING EXPENSES........................ 4,835,104 5,592,472 8,242,269
GENERAL AND ADMINISTRATIVE EXPENSES..... 1,809,487 2,630,044 3,249,687
----------- ----------- -----------
Income from operations................ 1,171,658 1,774,966 4,245,600
OTHER INCOME (EXPENSE):
Interest............................... (487,502) (259,281) (575,471)
Other--net............................. (36,378) (27,934) 55,601
----------- ----------- -----------
Total other expense--net.............. (523,880) (287,215) (519,870)
----------- ----------- -----------
Income before income taxes.............. 647,778 1,487,751 3,725,730
PROVISION FOR INCOME TAXES.............. (35,000) (98,000) (260,800)
----------- ----------- -----------
NET INCOME.............................. $ 612,778 $ 1,389,751 $ 3,464,930
=========== =========== ===========
PRO FORMA (Unaudited--Note 3):
Historical income before taxes on
income................................ $ 647,778 $ 1,487,751 $ 3,725,730
Pro forma provision for income taxes... (246,156) (565,345) (1,434,406)
----------- ----------- -----------
Pro forma net income................... $ 401,622 $ 922,406 $ 2,291,324
=========== =========== ===========
Pro forma net income per share......... $ 0.40
===========
Weighted average shares outstanding.... 5,776,596
===========
</TABLE>

See notes to consolidated financial statements

F-4
<PAGE>

SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
----------------
NUMBER ADDITIONAL RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995. 4,500,000 $4,500 $ 30,500 $2,047,607 $2,082,607
Net income................ 612,778 612,778
--------- ------ -------- ---------- ----------
Balance at December 31,
1995..................... 4,500,000 4,500 30,500 2,660,385 2,695,385
Net income................ 1,389,751 1,389,751
Conversion of note payable
to equity (Note 4)....... 781,533 781,533
Distributions to stock-
holder................... (300,000) (300,000)
--------- ------ -------- ---------- ----------
Balance at December 31,
1996..................... 4,500,000 4,500 812,033 3,750,136 4,566,669
Net income................ 3,464,930 3,464,930
Distributions to stock-
holder................... (703,543) (703,543)
--------- ------ -------- ---------- ----------
BALANCE AT DECEMBER 31,
1997...................... 4,500,000 $4,500 $812,033 $6,511,523 $7,328,056
========= ====== ======== ========== ==========
</TABLE>

See notes to consolidated financial statements

F-5
<PAGE>

SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................. $ 612,778 $ 1,389,751 $ 3,464,930
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation.......................... 412,464 449,864 617,878
Other................................. 68,097 32,134 701
Cash provided (used) by changes in:
Inventories.......................... 92,972 (5,303,009) (6,309,873)
Prepaid expenses..................... 10,737 1,542 28,326
Other assets......................... 78,523 (4,139) (327,170)
Accounts payable..................... (204,251) 3,780,250 226,411
Accrued expenses and deferred rent... 26,258 219,501 527,842
----------- ----------- -----------
Net cash provided (used) by
operating activities............... 1,097,578 565,894 (1,770,955)
----------- ----------- -----------
INVESTING ACTIVITIES--
Purchase of fixed assets............... (336,177) (569,228) (1,210,911)
----------- ----------- -----------
FINANCING ACTIVITIES:
(Payments) proceeds on short-term
borrowings, net....................... (1,163,722) 459,577 3,987,125
Proceeds from long-term debt........... 208,659 23,129 --
Principal payments on capital leases... -- (21,067) (38,220)
Principal payments on long-term debt... (50,000) (68,511) (70,633)
Distributions paid to stockholder...... -- (300,000) (703,543)
----------- ----------- -----------
Net cash (used) provided by
financing activities............... (1,005,063) 93,128 3,174,729
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH......... (243,662) 89,794 192,863
CASH, BEGINNING OF PERIOD............... 355,665 112,003 201,797
----------- ----------- -----------
CASH, END OF PERIOD..................... $ 112,003 $ 201,797 $ 394,660
=========== =========== ===========
INTEREST PAID........................... $ 487,502 $ 259,281 $ 571,764
INCOME TAXES PAID....................... $ 35,000 $ 28,031 $ 332,262
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Note payable to stockholder converted
to equity (Note 4).................... $ 781,533
Capital lease obligations for store
equipment............................. 189,918 $ 105,993
</TABLE>

See notes to consolidated financial statements

F-6
<PAGE>

SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND OPERATIONS

General--Shoe Pavilion, Inc. (the "Company"), a Delaware corporation, is the
successor to Shoe Inn, Inc. ("Shoe Inn"), which was incorporated in the State
of Washington in 1983. In connection with a proposed initial public offering,
the stockholder of Shoe Inn entered into an agreement providing for a
reorganization prior to the offering. Under the terms of this agreement all of
the common stock of Shoe Inn was exchanged for common stock of the Company and
Shoe Inn became a wholly owned subsidiary. The Company was incorporated in
November 1997 for this purpose. The terms of the reorganization provided for
the issuance of 9,000 shares of the Company's common stock for every one share
of Shoe Inn common stock. The accompanying financial statements reflect the
reorganization as if Shoe Inn had always been a wholly owned subsidiary of the
Company. However, the accompanying financial statements do not reflect the
termination of Shoe Inn's S corporation status. All shares and per share
information have been retroactively restated to reflect the reorganization.

Operations--The Company operates off-price shoe stores located in
California, Washington, Oregon and Nevada, under the names Shoe Pavilion and
Shoe Pavilion's Designer Shoe Warehouse. In March 1997, the Company moved its
corporate headquarters and distribution center to Richmond, California, from
Bellevue, Washington. The Company had 38, 41, and 55 stores open as of
December 31, 1995, 1996 and 1997, respectively. The Company purchases
inventory from international and domestic vendors. For 1997, the Company's top
ten suppliers accounted for 44.5% of inventory purchases of which purchases
from Nine West Group and the Rockport Company, Inc. accounted for 9.7% and
7.5%, respectively, of inventory purchases.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Consolidation Policy--The consolidated financial statements include the
Company and its wholly-owned subsidiary, Shoe Inn. All significant
intercompany balances and transactions have been eliminated.

Cash represents cash on hand and cash held in banks.

Inventories are stated at the lower of average cost (determined on a first-
in, first-out basis) or market.

Fixed assets are stated at cost and depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
assets ranging from three to five years. Leasehold improvements are amortized
on the straight-line method over the shorter of the useful lives of the assets
or lease term, generally five years.

Other assets at December 31, 1997 primarily represent costs incurred in
connection with an initial public offering anticipated to occur in February
1998 and will be netted against the proceeds from the offering.

Income Taxes--The Company has elected to be taxed as an S corporation for
federal income tax reporting purposes, which provides that taxable income or
loss of the Company is generally passed through to the individual
stockholders. Accordingly, no provision for federal income taxes has been
recorded in the accompanying financial statements. The Company has elected to
be a C corporation in the state of California. Accordingly, taxes are provided
for income attributable to the Company's operations in these states.

F-7
<PAGE>

SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Deferred Rent--Certain of the Company's store leases provide for free or
reduced rent during an initial portion of the lease term. Deferred rent
consists of the aggregate obligation for lease payments under these leases
amortized on a straight-line basis over the lease term, in excess of amounts
paid. In addition, deferred rent includes construction allowances received
from landlords, which are amortized on a straight-line basis over the initial
lease term.

Preopening Costs--Store preopening costs are charged to expense as incurred.

Long-lived Assets--The Company periodically reviews long-lived assets for
impairment to determine whether any events or circumstances indicate that the
carrying amount of the assets may not be recoverable. Such review includes
estimating expected future cash flows. No impairment loss provisions have been
required to date.

Stockholder Distributions--The Company has historically distributed a
portion of its earnings to the stockholder, as necessary, to satisfy the
stockholder's income tax requirements as well as for other purposes.

Earnings Per Share--In February 1997, The Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per Share ("EPS"). SFAS No. 128 requires dual presentation of
basic EPS and diluted EPS on the face of all income statements issued after
December 15, 1997 for all entities with complex capital structures. Basic EPS
is computed as net income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options, warrants
and other convertible securities. As the Company does not have any stock
options, warrants or other convertible securities outstanding, basic and
diluted EPS are the same, and only basic EPS is presented.

New Accounting Pronouncements--In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 130 requires that an
enterprise report, by major components and as a single total, the change in
its net assets during the period from nonowner sources; and SFAS No. 131
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of these statements will not
impact the Company's financial position, results of operations or cash flows
and any effect will be limited to the form and content of its disclosures.
Both statements are effective for fiscal years beginning after December 15,
1997, with earlier application permitted.

3. PRO FORMA INFORMATION (UNAUDITED)

Since August 1988, the Company has been treated as an S corporation for
federal income tax purposes. The objective of the pro forma financial
information is to show what the significant effects on the historical
financial information might have been had the Company not been treated as an S
corporation for income tax purposes since that time. The following pro forma
adjustments have been made.

Pro Forma Balance Sheet Information

. Distributions--The Company intends to make an S corporation distribution
in the amount of $7,800,000 to its current stockholder which
approximately equals the estimated earned and previously undistributed S
corporation earnings through the termination date of the Company's
status as an S corporation. The pro forma adjustments reflect a
distribution of $7,800,000.

. Deferred Income Taxes--The Company will record a deferred income tax
asset upon termination of the Company's S corporation status. The pro
forma adjustments reflect this asset of $485,000 as of December 31,
1997.

F-8
<PAGE>

SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The condensed balance sheet of the Company as of December 31, 1997
(unaudited) reflecting these pro forma adjustments is as follows:

<TABLE>
<CAPTION>
DECEMBER DECEMBER 31,
31, 1997 PRO FORMA 1997
ACTUAL ADJUSTMENTS PRO FORMA
----------- ----------- ------------
<S> <C> <C> <C>
Current assets........................... $20,263,214 $20,263,214
Long-term assets......................... 2,382,644 $ 485,000 2,867,644
----------- ----------- -----------
Total assets............................ $22,645,858 $ 485,000 $23,130,858
=========== =========== ===========
Current liabilities...................... $14,218,459 $ 7,800,000 $22,018,459
Long-term liabilities.................... 1,099,343 -- 1,099,343
----------- ----------- -----------
Total liabilities....................... 15,317,802 7,800,000 23,117,802
----------- ----------- -----------
Common stock and additional capital ..... 816,533 (803,477) 13,056
Retained earnings........................ 6,511,523 (6,511,523) --
----------- ----------- -----------
Total stockholder's equity.............. 7,328,056 (7,315,000) 13,056
----------- ----------- -----------
Total liabilities and stockholder's
equity................................. $22,645,858 $ 485,000 $23,130,858
=========== =========== ===========
</TABLE>

Pro Forma Income Statement Information

. Income Taxes--Since August 1988, the Company has not been subject to
federal income taxes. Prior to the closing of the proposed public
offering, the Company will terminate its status as an S corporation. The
pro forma information presented on the statements of operations reflect
a provision for income taxes at an effective rate of 38.0%, 38.0% and
38.5% for the years ended December 31, 1995, 1996 and 1997,
respectively.

. Pro Forma Net Income Per Share is based on the weighted average number
of shares of common stock outstanding during the period plus the
estimated number of the shares being offered by the Company (1,276,596
shares) which would be necessary to fund the $7,800,000 distribution to
the Company's current stockholder.

4. FINANCING AGREEMENTS

Short-term borrowings represent amounts drawn under the Company's line of
credit. In October 1997, the line of credit was increased to $10,000,000, and
the Company obtained a $500,000 term line available for the purchase or lease
of equipment. This line of credit expires on April 30, 1999, and the Company
pays interest on outstanding amounts at a rate of 0.25% over the bank's prime
rate (8.75% at December 31, 1997) or LIBOR plus 300 basis points. This line of
credit is also available for issuance of commercial and standby letters of
credit of up to $3,000,000 and $100,000, respectively. As of December 31,
1997, $2,612,875 was available on the line of credit. Borrowings are secured
by inventory and the stockholder's guarantee. The agreement contains
restrictive covenants that require, among other things, that the Company
maintain working capital of at least $4,000,000, tangible net worth of at
least $5,500,000 and that total indebtedness may not exceed 3.0 times tangible
net worth. The line of credit prohibits the payment of cash dividends, other
than payments to the stockholder, as necessary, to satisfy the stockholder's
income tax requirements. The Company was in compliance with all covenants for
the period ended December 31, 1997. With respect to the distribution of
previously undistributed S corporation earnings discussed in Note 3, the
Company has obtained a waiver from the lender for the restriction prohibiting
payment of cash dividends.

F-9
<PAGE>

SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Long-term debt:
Note payable to bank, interest at 0.25% over the bank's
prime rate (8.75% at December 31, 1997), secured by
equipment, due in equal monthly installments through
January 30, 1998........................................... $ 83,333 $ 16,667
Note payable, interest at 9.67%, secured by vehicle, due in
equal monthly installments through May 30, 2001............ 21,284 17,317
-------- --------
Total...................................................... 104,617 33,984
Less current portion......................................... 70,633 21,035
-------- --------
Total long-term portion...................................... $ 33,984 $ 12,949
======== ========
</TABLE>

During the year ended December 31, 1996, the note payable to the stockholder
was converted to capital in lieu of repayment. At the time of conversion, the
note payable had an unpaid balance of $781,533. Interest on the note payable
to the stockholder was $61,458 and $0 for the years ended December 31, 1995
and 1996, respectively.

The bank debt and notes payable are at currently available rates for such
debt instruments with similar terms and maturities. The fair value of bank
debt and notes payable approximates carrying value.

Principal repayment requirements on the long-term debt are:

<TABLE>
<S> <C>
Year ending December 31:
1998................................................................ $21,035
1999................................................................ 4,809
2000................................................................ 5,295
2001................................................................ 2,845
-------
Total.............................................................. $33,984
=======
</TABLE>

5. COMMITMENTS AND CONTINGENCIES

Leases--The Company is obligated under operating leases for store and
warehouse locations and equipment. While most of the agreements provide for
minimum lease payments, certain of the store leases provide for additional
rentals contingent upon prescribed sales volumes. Additionally, the Company is
required to pay common area maintenance ("CAM") and other costs associated
with the centers in which the stores operate. Most of the leases provide for
renewal at the option of the Company and certain leases include rent
escalation clauses.

During 1996 and 1997, the Company entered into capital leases for certain
store and other equipment. The Company's assets under capital leases as of
December 31, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Total assets under capital leases............................ $189,918 $295,911
Less accumulated amortization................................ 29,190 74,160
-------- --------
Total....................................................... $160,728 $221,751
======== ========
</TABLE>

F-10
<PAGE>

SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Future minimum lease payments required under these leases are:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
Year ending December 31:
1998..................................................... $ 69,831 $ 4,871,626
1999..................................................... 69,831 4,364,657
2000..................................................... 69,831 3,270,937
2001..................................................... 33,529 2,606,115
2002..................................................... 47,613 1,309,193
Thereafter.............................................. 2,580,707
-------- -----------
Total minimum lease commitments........................... 290,635 $19,003,235
===========
Less amounts representing interest........................ 54,011
--------
Present value of capital lease obligations................ 236,624
Less current portion...................................... 46,507
--------
Total long-term portion................................... $190,117
========
</TABLE>

Rental expense for the years ended December 31, 1995, 1996 and 1997 was
$3,580,770, $3,768,318 and $5,438,395, respectively, including contingent
rentals of $80,584, $204,587 and $278,740, respectively.

Letters of Credit--The Company has obtained letters of credit in connection
with overseas purchase arrangements. The total amount outstanding was
$1,463,424 and $317,645 as of December 31, 1996 and 1997, respectively. The
Company also has standby letters of credit relating to rental agreements of
$33,236 and $53,236 as of December 31, 1996 and 1997, respectively.

Contingencies--The Company is party to various legal proceedings arising
from normal business activities. Management believes that the resolution of
these matters will not have an adverse material affect on the Company's
financial statements.

******

F-11
<PAGE>

Inside Back:

SHOE PAVILION

[Map illustrating the location of the Company's stores and corporate
headquarters.]

Shoe Pavilion is the largest independent off-price footwear retailer on the West
Coast that offers a broad selection of women's and men's designer label and name
brand merchandise. As of December 31, 1997, the Company operated 55 stores.
<PAGE>

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

NO DEALER, SALESPERSON OR ANY PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPEC-
TUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURIS-
DICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Forward-Looking Statements................................................ 11
Prior S Corporation Status................................................ 11
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Consolidated Financial and Operating Data........................ 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 22
Management................................................................ 29
Certain Transactions...................................................... 31
Principal Stockholder..................................................... 32
Description of Capital Stock.............................................. 33
Shares Eligible For Future Sale........................................... 35
Underwriting.............................................................. 36
Legal Matters............................................................. 38
Experts................................................................... 38
Additional Information.................................................... 38
Index to Consolidated Financial Statements................................ F-1
</TABLE>

UNTIL MARCH 20, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.

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

2,000,000 SHARES

LOGO

COMMON STOCK

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

PROSPECTUS

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

VAN KASPER & COMPANY

FEBRUARY 23, 1998

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