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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 3, 2004

OR

For the transition period from              to             

Commission File Number: 1-04404

THE STRIDE RITE CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (617) 824-6000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

As of May 28, 2004, the aggregate market value of the 37,447,567 shares of common stock held by non-affiliates of the Registrant was $395,071,832 based upon the closing price of $10.55 on the New York Stock Exchange composite tape on such date. (For this computation, the Registrant has excluded the market value of all shares of common stock reported as beneficially owned by executive officers and directors of the Registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.) As of February 8, 2005, there were 36,155,267 shares of common stock outstanding.

Documents Incorporated By Reference

Certain information contained in the Registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to be held on April 14, 2005 is incorporated by reference in Part III, Items 10, 11,12, 13 and 14.

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PART I

Item 1.    Business.

General

The Stride Rite Corporation, a Massachusetts corporation founded in 1919, is a leading designer and marketer of high quality children’s footwear in the United States and is a major designer and marketer of athletic and casual footwear for children and adults. The business was founded on the strength of the Stride Rite^® children’s brand, but today includes a portfolio of well known American brands addressing different market segments within the footwear industry. In addition to the Stride Rite^® brand, we design and market footwear under the following owned or licensed brands: Keds^®, PRO-Keds^®, Grasshoppers^®, Sperry Top-Sider^®, Sperry^®, Munchkin^®, Tommy Hilfiger^®, Baby Smart^™ and Børn^®.

We are predominantly a wholesaler of footwear, selling our products nationally in a wide variety of retail formats including department stores, independent shoe stores, value retailers, catalog retailers, e-commerce sites, mass retailers and specialty stores. We market products in countries outside the United States and Canada through independent distributors and licensees. We import substantially all of our products from independent resources in China, which manufacture footwear according to each brand’s specifications and quality standards.

We also market our products directly to consumers by selling children’s footwear through our Stride Rite children’s shoe stores, for all our brands through our “Stride Rite Family Footwear” and “Stride Rite, Keds, Sperry” outlet stores which are located in selected factory outlet centers and through our e-commerce sites.

Unless the context otherwise requires, all references to “we”, “us”, “our”, the “Company”, “Stride Rite” or “The Stride Rite Corporation” in this report refer to The Stride Rite Corporation and all of its wholly owned subsidiaries.

Our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, are available free of charge on our Internet website, www.strideritecorp.com.

Products

Our wholly-owned subsidiary, Stride Rite Children’s Group, Inc., designs and markets children’s footwear, primarily for consumers between the ages of six months and ten years, including dress and recreational shoes, boots, sandals, athletic shoes and sneakers, in traditional and contemporary styles. Those products are marketed under the Stride Rite^®, Munchkin^®, Sperry^®, Sperry Top-Sider^® and Tommy Hilfiger^® trademarks in medium to high price ranges and under our Baby Smart^™ trademark in medium to lower price ranges.

The Keds Corporation designs and markets sneakers and casual footwear for adults and children under the Keds^® trademark and casual footwear for women under the Grasshoppers^® label.

Sperry Top-Sider, Inc. designs and markets marine footwear and outdoor recreational, hand-sewn, dress and casual footwear for adults under our Sperry Top-Sider^®, Sperry^® and Mainsail^® trademarks. Products sold under the Sperry Top-Sider^® label also include sneakers and sandals for men and women.

Tommy Hilfiger Footwear, Inc. designs and markets dress casual, sport casual and athletic footwear for adults using the Tommy Hilfiger^®, Tommy Girl ^® and H Hilfiger ^® brand names under a license agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2003, the design and marketing of the PRO-Keds^® product line was transferred to the Tommy Hilfiger footwear unit. Subsequently, during fiscal 2004, the Company entered into a licensing agreement with an independent third party for the distribution of footwear under the PRO-Keds brand. This agreement expires in November 2007.

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Sales and Distribution

We sell our products nationwide to customers operating retail outlets, including premier department stores, value retailers and specialty stores, as well as to Stride Rite children’s shoe stores and other shoe stores operated by independent retailers. We maintain an in-stock inventory of certain styles of our various branded footwear in a wide range of sizes and widths for shipment to our wholesale customers. In addition, we sell footwear products to consumers through Stride Rite-owned stores, including children’s shoe stores, manufacturers’ outlet stores, Keds retail stores, and through the children’s leased footwear departments in selected Macy’s department stores. We also sell products directly to consumers through our e-commerce sites, www.striderite.com, www.keds.com, www.grasshoppers.com and www.sperrytopsider.com. Additionally, we have agreements with various licensed and trade partners to sell our products. The Spring selling season which corresponds with our first and second quarters is our most important sales period. Our largest single customer in each year accounted for approximately 5%, 6% and 7% of consolidated net sales for the fiscal years ended 2004, 2003 and 2002, respectively. Information about geographic and segment operations appears in Note 14 to the consolidated financial statements.

We provide assistance to a limited number of qualified specialty retailers to enable them to operate independent Stride Rite children’s shoe stores. Such assistance sometimes includes the sublease of a desirable retail site by us to an independent dealer. There are approximately three independent dealers who currently sublease store locations from us.

We own two distribution centers, one located in Louisville, Kentucky with 520,000 square feet of space and the other in Huntington, Indiana with 409,000 square feet of space. Our Canadian subsidiary, Stride Rite Canada Limited, leases 29,000 square feet of warehouse and office space in Mississauga, Ontario.

Generally, we use independent distributors and licensees to market our various product lines outside of the United States and Canada. International revenues, including sales of our Canadian subsidiary, represented approximately 5%, 4% and 5% of consolidated net sales for the fiscal years ended 2004, 2003 and 2002, respectively.

We are also a party to foreign license agreements in which independent companies operate Stride Rite retail stores outside the United States. A total of six stores are currently operating in El Salvador, Guatemala, Haiti, Honduras and Kuwait pursuant to such agreements. We also distribute all of our brands and products in Canada through our Canadian subsidiary.

International Sourcing

We purchase substantially all of our products from sources in China. We currently maintain a staff of approximately 94 professional and technical personnel in China to supervise a substantial portion of our canvas and leather footwear production. During fiscal year 2004, our Taiwan office was closed and their functions moved to China. We anticipate that overseas resources will continue to be utilized in the future. In addition, we use the services of buying agents to source merchandise.

Approximately 99% of our footwear products are manufactured by independently owned footwear manufacturers in China. Historically, China’s political and economic environment has not had a material adverse effect on our financial condition or results of operations. We cannot predict, however, the effect that future changes in economic or political conditions in China and the United States could have on the economics of doing business with our Chinese manufacturers.

Retail Operations

As of December 3, 2004, we operated 178 Stride Rite children’s shoe stores, 64 manufacturers’ outlet stores under the names “Stride Rite Family Footwear” and “Stride Rite, Keds, Sperry” which sell in-line products,

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closeouts and prior season goods for all of our owned and licensed brands, 7 leased children’s shoe departments in leading department stores, 2 “Shoe Buzz” stores (a new retail concept that carries a wide assortment of national brands for infants and children up to age 10), and 4 Keds retail stores which sell a full range of Keds products and certain other Company products. The Stride Rite children’s shoe stores carry a significant portion of the lines for our Stride Rite^® and Sperry Top-Sider^® children’s footwear and a portion of the Keds^® children’s product line and the Tommy Hilfiger^® boys’ and girls’ lines. Our stores are located primarily in larger regional shopping centers, clustered generally in the major marketing areas of the United States. Most of our manufacturers’ outlet stores are located in shopping centers consisting only of outlet stores. The product and merchandising formats of the Stride Rite children’s shoe stores are utilized in the 7 leased children’s shoe departments that we operate in selected Macy’s department stores.

During fiscal 2004, we opened 10 Stride Rite children’s shoe stores, 5 manufacturers’ outlet stores, 7 leased children’s shoe departments and 2 Shoe Buzz stores. During fiscal 2004, we closed 5 children’s shoe stores and 1 Keds retail store. We currently plan to open approximately 20 retail stores in fiscal 2005. We will also continue our efforts to close underperforming retail locations in fiscal 2005, and expect to cease operations of approximately 5 stores during the year.

Sales through our retail operations accounted for approximately 28%, 25% and 24% of consolidated net sales for the fiscal years ended 2004, 2003 and 2002, respectively.

Apparel and Accessory Licensing Activities

License royalties accounted for approximately 1% of our consolidated net sales in each of the three most recent fiscal years ended in 2004. We have license agreements with a number of third parties pursuant to which apparel and accessories are designed, manufactured and sold under the Keds^®, Stride Rite ^® and Sperry Top-Sider^® trademarks and footwear through the Champion^® trademark. We continue to pursue new license opportunities.

Backlog

As of December 3, 2004 and November 28, 2003, we had a backlog of orders amounting to approximately $125,800,000 and $127,300,000, respectively. To a significant extent, the backlog at the end of each fiscal year represents orders for our Spring footwear styles. Substantially all of these orders are delivered or canceled during the first two quarters of the next fiscal year.

In all of our wholesale businesses, reorders from retail customers are an important source of revenue to supplement the orders taken in advance of the season. Over the years, the importance of reorder activity to a season’s success has grown as customers, especially larger retailers, have placed increased reliance on orders during the season which are transmitted via electronic data interchange (EDI) programs. Due to the shift from year-to-year, between future orders and reorders, backlog does not necessarily translate directly into sales trends.

Competition

We compete with a number of suppliers of children’s footwear, a few of which are divisions of companies that have substantially greater net worth or sales revenue than us. Management believes, however, that on the basis of sales, we are the largest supplier of nationally branded higher-end, non-athletic children’s footwear in the United States.

In the highly fragmented sneaker, casual and recreational footwear industry, numerous domestic and foreign competitors, some of which have substantially greater net worth or sales revenue than us, produce or market goods that are comparable to and compete with our products in terms of price and general level of quality.

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Management believes that the creation of attractive styles, in multiple widths, together with specialized engineering for fit, durability, comfort, quality and high service standards including open stock positions are significant factors in competing successfully in the marketing of all types of footwear. Management believes that we are competitive in all such respects.

In operating our own retail outlets, we compete in the children’s retail shoe industry with numerous businesses, ranging from large retail chains to single store operators.

Employees

As of December 3, 2004, we employed approximately 2,500 full-time and part-time employees. One collective bargaining unit represents a small number of these employees. Management believes that its relations with employees are good.

Environmental Matters

Compliance with federal, state, local and foreign regulations with respect to the environment has had, and is expected to have, no material effect on our capital expenditures, earnings or competitive position.

Patents, Trademarks and Licenses

We have an existing trademark license agreement with Tommy Hilfiger Licensing, Inc., pursuant to which we design, market and sell footwear to adults and children. This license agreement will run through March 2007. Refer to the “Retention of Major Brand License” section in the “Certain Risk Factors Which May Affect Future Operating Results” heading, below, for additional discussion regarding the Tommy Hilfiger license agreement.

We also announced in December 2003 a licensing arrangement with H.H. Brown Shoe Company, Inc. to develop, market and sell an exclusive line of children’s footwear under the Børn name. This license agreement will run through March 2007 and covers the United States and Puerto Rico.

We believe that our patents and trademarks are important to our business and are generally sufficient to permit us to carry on our business as presently conducted.

Research and Development

We depend principally upon our design, engineering and marketing skills and the quality of our products for our ability to compete successfully. We conduct research and development for footwear products. However, the level of expenditures with respect to such activity is not material and is expensed as incurred.

Certain Risk Factors Which May Affect Future Operating Results

This form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. We caution investors that any forward-looking statements presented in this report and presented elsewhere by management from time to time are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “plan”, “estimate”, “project”, “should”, “will be” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update forward-looking statements. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

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Mature Markets; Competition; Consumer Trends

Our strategy for growth depends upon increasing the acceptance of our current brands in our major markets, expanding into new markets and increasing the number of footwear products and brands that we sell. There can be no assurance that we will be able to successfully develop new branded products or acquire existing brands from third parties. The bulk of our sales are in the United States and Canada where the market is mature for many of our products. To grow our business, we must increase our market share at the expense of our competitors, and there can be no assurance we will be successful. Our efforts to expand sales outside the United States and Canada may not succeed.

Both the footwear industry specifically, and the fashion industry in general, are subject to rapid and substantial shifts in consumer tastes and preferences. There are many competitors in our markets with substantially greater financial resources, production, marketing and product development capabilities. Our performance may be hurt by our competitors’ product development, sourcing, pricing, innovation and marketing strategies. In addition, we expect the footwear marketplace in the United States to continue to experience the entry of brands from foreign companies.

The fashion and retail industries are subject to sudden shifts in consumer trends and consumer spending, on which our results are, in part, dependent. Consumer spending may be influenced by consumers’ disposable income, which may fluctuate upon a number of factors, including general economic conditions, consumer confidence and business conditions. Moreover, consumer acceptance of our new products may fall below expectations and the launch of new product lines may be delayed. The results of our wholesale businesses are affected by the buying plans of our customers, which include large department stores, as well as smaller retailers. Our wholesale customers may not inform us of changes in their buying plans until it is too late for us to make the necessary adjustments to our product lines and marketing strategies. While we believe that purchasing decisions in many cases are made independently by individual stores or store chains, we are exposed to decisions by the controlling owner of a store chain, to decrease the amount of footwear products purchased from us. Moreover, the retail industry periodically experiences consolidation. We face a risk that our wholesale customers may consolidate, restructure, reorganize or realign in ways that could decrease the number of stores or the amount of shelf space that carry our products. We also face a risk that our wholesale customers could develop in-house brands or utilize the private labeling of footwear products. The impact that e-commerce will have on the retail industry in the future is uncertain and may adversely affect our business. Additionally, the strength or weakness of the overall economy as well as severe weather conditions can have a substantial effect on our business.

Stride Rite-owned retail stores are increasingly significant to our business, especially with respect to the Stride Rite brand. We are currently evaluating the operating strategies of Keds retail stores in four locations and Shoe Buzz retail stores in two locations. In the future, we may also evaluate new retail concepts to market the other footwear brands owned by us. The management of our Stride Rite Children’s Group does extensive research on potential sites for new stores, including demographic studies and an evaluation of the impact that potential locations would have on the results of our existing Stride Rite-owned stores and our network of locations operated by independent licensed dealers. Despite this careful evaluation, new Stride Rite stores may not meet sales expectations and new retail concepts may not achieve the expected financial results. The opening of new stores may also be delayed for a variety of reasons. During fiscal 2005, we plan to open approximately 20 retail stores.

Inventory Obsolescence

The fashion-oriented nature of our industry, the rapid changes in customer preferences and the extended product development and sourcing lead times also leave us vulnerable to an increased risk of inventory obsolescence. While we have successfully managed this risk in the past, and believe we can successfully manage it in the future, our revenue and operating margins will suffer if we are unable to do so.

Retention of Major Brand License

We have derived significant revenues and earnings in the past from our exclusive licensing agreement with Tommy Hilfiger Licensing, Inc. to produce and sell Tommy Hilfiger branded footwear. Our Tommy Hilfiger

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license was amended and renewed for a term expiring March 31, 2007. Whether our license with Tommy Hilfiger will remain in effect depends on our achieving certain minimum sales levels for the licensed products. Although we currently are exceeding these minimum sales levels, there can be no assurance that we will in the future. We believe we enjoy a good relationship with Tommy Hilfiger Licensing, Inc. and it is our intention to continue this license. The loss of the Tommy Hilfiger license would have a material adverse effect on our business.

Overseas Production and Raw Material Procurement

We purchase substantially all of our product lines and raw materials overseas and expect to do so for the foreseeable future. Our international sourcing subjects us to the risks of doing business abroad. Such risks include expropriation, acts of war or terrorism, political disturbances, strikes or other labor disputes, political instability and similar events, including trade sanctions, loss of normalized trade relations status, export duties, import controls, quotas, West Coast port strikes, port congestion, port capacity, strikes, delays, availability of ships, availability of containers, truck availability, rail availability and other trading restrictions, as well as fluctuations in currency values. Moreover, we rely heavily on independent third-party manufacturing facilities, primarily located in China, to produce our products. While we believe our relationships with such third-party manufacturing facilities are strong, if trade relations between the United States and China or other countries in which we manufacture our products deteriorate or are threatened by instability, our business may be adversely affected. We cannot predict the effect that changes in the economic and political conditions in China could have on the economics of doing business with Chinese manufacturers. Although we believe that we could find alternative manufacturing sources for our products with independent third-party manufacturing facilities in other countries, the loss of a substantial portion of our Chinese manufacturing capacity could have a material adverse effect on our business. Due to the substantial quantity of footwear manufactured in China and its importance to the footwear industry, a major disruption would make it difficult to find capacity elsewhere in the short-term that could accommodate the overall industry-wide demand. Also, if we were required to relocate a substantial portion of our manufacturing outside of China, there can be no assurance that we could obtain as favorable economic terms, which could adversely affect our performance.

Dependence on Logistical Systems

Our business operations are dependent on our logistical systems, which include our order management system and our computerized warehouse network. The logistical systems enable us to procure our footwear products from overseas manufacturers, transport it to our distribution facilities, store it and timely deliver it to our customers, in the correct sizes and styles. A disruption to the logistical systems could have a material adverse impact on our business.

Intellectual Property Risk

We believe that our patents and trademarks are important to our business and are generally sufficient to permit us to carry on our business as presently conducted. We cannot, however, know whether we will be able to secure patents or trademark protection for our intellectual property in the future or whether that protection will be adequate for future products. Further, we face the risk of ineffective protection of intellectual property rights in the countries where we source and distribute our products. Finally, we cannot be sure that our activities will not infringe on the proprietary rights of others. If we are compelled to prosecute infringing parties, defend our intellectual property or defend ourselves from intellectual property claims made by others, we may face significant expenses and liabilities.

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Item 2.    Properties.

We own an automated distribution center located in Louisville, Kentucky with 520,000 square feet of space and a distribution center located in Huntington, Indiana with 409,000 square feet of space. Our Canadian subsidiary leases 29,000 square feet for administrative offices and warehousing in Mississauga, Ontario.

We lease approximately 163,000 square feet for our headquarters and administrative offices in Lexington, Massachusetts in a single tenant office building. We also lease 24,000 square feet of space in Richmond, Indiana for our customer service, order processing, consumer services and tele-sales functions, and 25,000 square feet of space for our offices in China. In addition, we lease smaller facilities for local sales offices and showrooms in various locations in the United States. During fiscal 2004, the Taiwan office closed and their functions moved to China.

As of December 3, 2004, we operated 255 retail stores throughout the country on leased premises that, in the aggregate, covered approximately 422,000 square feet of space. In addition, we are the lessee of three retail locations with a total of approximately 4,000 square feet that are subleased to independent Stride Rite dealers and other tenants.

For further information concerning our lease obligations, see Note 8 to our consolidated financial statements, which are contained in Item 8 to this report. Management believes that all of our properties and facilities are suitable, adequate and fulfill their intended purposes, including our current productive capacity requirements.

Item 3.    Legal Proceedings.

We are involved in legal proceedings and litigation arising in the normal course of business. Management does not believe the ultimate resolution of any legal proceeding or litigation will have a material adverse effect on our financial position or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders.

None.

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PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the New York Stock Exchange under the symbol “SRR”. The following table sets forth the high and low closing sales prices on the New York Stock Exchange – Composite Tape. As of February 3, 2005, we had approximately 3,500 stockholders of record. We have paid a quarterly dividend of $.05 per share of common stock during our two most recent fiscal years. We expect to continue to pay this quarterly dividend in the future. There are generally no restrictions on our ability to continue to pay this quarterly dividend, except that our revolving credit agreement contains a debt covenant limiting distributions to $40 million in a fiscal year. We do not, however, believe that this restriction will impact our ability to continue to make dividend payments.

COMMON STOCK PRICES

Our repurchases of equity securities for the fourth quarter of fiscal 2004 were as follows:

In September 2002, the Board of Directors authorized a stock repurchase program allowing the repurchase of up to five million shares of our outstanding common stock. In June 2004, the Board of Directors increased the authorization under the existing stock repurchase program by five million shares. Under the authorization, the Company can repurchase shares in the open market or through privately negotiated transactions. The repurchase program does not have an expiration date. All shares repurchased during the period covered by this report were purchased under a publicly announced plan.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 3, 2004 regarding compensation plans (including individual compensation arrangements) under which equity securities of Stride Rite are authorized for issuance.

EQUITY COMPENSATION PLAN INFORMATION

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Item 6.    Selected Financial Data.

The selected financial data for Stride Rite, for the last five fiscal years set forth below, should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and the notes thereto and the other information contained elsewhere in this report.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

The following discusses The Stride Rite Corporation’s results of operations and liquidity and capital resources. The discussion including known trends and uncertainties identified by management should be read in conjunction with the consolidated financial statements and related notes. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. We caution investors that any forward-looking statements presented in this report and presented elsewhere by management from time to time are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “plan”, “estimate”, “project”, “should”, “will be” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary

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materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update forward-looking statements. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Risks and uncertainties that may affect future performance are detailed from time to time in reports filed by the Company with the SEC, including Forms 10-Q and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall footwear and general retail market; intense competition among designers, marketers, distributors and sellers of footwear; demographic changes; changes in consumer fashion trends that may shift to footwear styling not currently included in our product lines; popularity of particular designs and categories of products; seasonal and geographic demand for the Company’s products; difficulties in anticipating or forecasting changes in consumer preferences; delays in the opening of new stores; difficulties in implementing, operating and maintaining the Company’s complex information systems and controls, including, without limitation, the systems related to the Company’s retail stores, systems related to demand and supply planning, and inventory control; interruptions in data and communications systems; fluctuations and difficulty in forecasting operating results; the ability of the Company to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of the Company’s products; the underperformance or delay of new products; the possible failure to retain the Tommy Hilfiger footwear license; the ability to secure and protect trademarks, patents and other intellectual property; performance and reliability of products; customer service; adverse publicity; the loss of significant suppliers or customers, such as department stores and specialty retailers, the consolidation or restructuring of such customers, including large department stores, which may result in unexpected store closings; dependence on China manufacturing; the ability to secure raw materials; delays and increased costs of freight and transportation to meet delivery deadlines; the impact on product development or manufacturing as a result of health risks; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, import duties, tariffs, quotas and political and economic instability; changes in government regulations; liability and other claims asserted against the Company; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports.

The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect the Company’s business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Investors should also be aware that while the Company does communicate with securities analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Therefore, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

Overview

The Stride Rite Corporation (NYSE: SRR) is a leading designer and marketer of high quality athletic and casual footwear for children and adults in the United States. The Company was founded in 1919 on the strength of the Stride Rite children’s brand, but has since expanded to a portfolio of well known American brands that serve different market segments within the footwear industry.

The Company is primarily a wholesaler of footwear, selling its products nationally in a variety of retail formats. In addition the Company also markets its products directly to consumers by selling children’s footwear through its Stride Rite children’s shoe stores and all of its brands through its outlet stores.

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The Company has developed a long-term strategy, which is to be a premier lifestyle company. We believe that as a unique collection of well-known and loved brands, we are positioned to grow within our current sales channels as well as developing sales opportunities in new channels. We are continually working to expand new product offerings within footwear and beyond footwear through licensing. If successfully executed, this should lead to sustainable long-term growth for the Company. Within this overarching strategy, each of our principal brands has integrated strategic operating plans and initiatives.

Stride Rite Children’s Group is a fully integrated concept that faces several strategic challenges to its business including competition from lower priced products, customers cross-shopping various retail formats and a decline in the number of small independent shoe retailers. Stride Rite Children’s Group made progress in executing their strategy to increase their market share of the premium non-athletic footwear market segments in fiscal year 2004 by increasing Company-owned retail stores while optimizing wholesale distribution channels. Strategic initiatives for fiscal year 2005 will be focusing on the continued improvement of our position in the marketplace and to enhance our presence on the selling floor. We also plan to introduce easy to understand, child friendly product concepts in key categories. Current plans call for the opening of approximately 20 new retail stores during the fiscal year.

Keds has been repositioned in 2004 to focus on its core products and athletic heritage. Keds has a number of strategic initiatives planned for 2005 encompassing brand positioning, consumer demand creation, product strategy, and marketplace management. The Keds strategy relies on building an aspirational brand position. To personify the aspirational attributes of the brand Keds has signed an endorsement contract with the actress Mischa Barton. Keds is re-emphasizing the updated core product platforms by segregating product lines by channel of distribution to meet various consumer needs.

Sperry Top-Sider is continuing to successfully implement its core brand strategy to develop and market year-round footwear for consumers with great affinity for the water. Sperry intends to build upon their boat shoe product strategy to maintain the brands position as a leading brand of performance boat shoes for men and women and also to influence and broaden the appeal of its casual shoe product offerings. Sperry also plans to increase its share of the women’s market. Additionally Sperry intends to design and develop innovative performance product for the outdoor and marine channels capitalizing on the brand’s heritage and authenticity.

Tommy Hilfiger Footwear had a challenging fiscal year 2004, due to weakness in the men’s product. In fiscal 2004 we launched new footwear lines; a junior line under the Tommy Girl name and in conjunction with the introduction of the H apparel line, a collection of complimentary footwear styles. The Flag products have been repositioned to target the 25 – 45 year old consumer. In the men’s product line we intend to develop core products in key athletic and dress – casual categories, which should improve sales. During fiscal year 2004, we licensed the PRO-Keds brand to an independent third party. We expect that these products will begin to ship in the Spring selling season. In conjunction with a change in strategy of the Tommy USA Apparel Brand, we will be transitioning the Tommy “H” Hilfiger product line out of department stores in fiscal 2005.

The Company’s International Division currently sells its brands in numerous countries around the world, predominantly through distributor and licensing arrangements. In fiscal year 2005, we intend to add several new distributors in key countries. Due to the abolishment of the quota system on China made goods, an area of primary focus will be Western Europe.

For 2005, the Company based its projections on the continued positive momentum of the Stride Rite Children’s and Sperry Top-Sider brands, in conjunction with the stabilization of the Keds and Tommy Hilfiger footwear business. Our International performance is expected to remain on trend. The results of these projections, which may be affected by future performance, are all subject to changes in fashion trends, economic conditions and other risks and uncertainties, which are more fully described elsewhere in this document.

Critical Accounting Policies and Estimates

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles

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generally accepted in the United States. The preparation of these financial statements requires us 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 periods.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, therefore we consider these to be our critical accounting estimates. The most significant estimates included in these financial statements include valuation allowances and reserves for accounts receivable, inventory and income taxes. These areas are subject to the risks and uncertainties described above. Actual results, therefore, could differ from those estimates.

Revenue Recognition

Revenues consist of sales to customers and royalty income. Wholesale revenues are recognized when title passes and the risks and rewards of ownership have transferred to the customer, based on the shipping terms. Retail store revenues are recognized at the time of sale. Royalty income, which accounted for approximately $7.9 million, $6.4 million and $6.2 million in fiscal years 2004, 2003 and 2002, respectively, is recognized when earned. We permit merchandise returns from our customers under certain circumstances and engage in buy-down programs with certain retailers, principally in the form of product markdown allowances for obsolete and slow moving products that are in the retailer’s inventory. Allowances for markdowns and product returns are estimated and recorded at the time revenue is recognized. The buy-down programs are accounted for as a reduction in revenues. The returns allowance is recorded as a reduction to revenues for the estimated sales value of the projected merchandise returns and as a reduction in cost of products for the corresponding cost amount. Our procedure for estimating product returns and markdown allowances is based upon our historical experience, product sell-through performance by product and by customer, current and historical trends in the footwear industry and changes in demand for our products. From time to time actual results will vary from the estimates that were previously established. Due to the existence of good monitoring systems, visibility into our customers’ inventory levels and ongoing communication with our customers, we believe we are able to identify and reflect in our financial statements in a timely manner variances from previously established estimates.

Reserve for Uncollectable Accounts Receivable

We make ongoing estimates relating to the collectability of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. These evaluations, which are performed by our corporate credit department, include, but are not limited to, analyzing our customer’s financial statements, maintaining a credit watch list to monitor accounts receivable exposure and reviewing the customer’s prior payment history. We predominantly sell our products to large retailers. Historically, we have not experienced significant losses related to trade receivables. However, there is a risk that some of these retail customers could experience financial difficulties, particularly in a weak economy, that may cause them to extend payment times or to default on their obligations to us. If actual losses differ from estimated losses there will be an effect on net income and liquidity. We believe we have sufficient financial resources and proper tools to mitigate the effect that a large default would have on our ability to continue to operate our business; however, if a large customer were to default on its financial obligation to us, we could experience a decrease in liquidity. In addition to the impact on liquidity, we could also experience a decrease in future revenues and operating margins related to this loss of business.

Inventory Reserves

The fashion oriented nature of our business, along with the potential for changes in customer preferences and the extended product development lead times, leave us vulnerable to the risk of inventory obsolescence both at our own stores and within our wholesale inventories. We are also exposed to the risk of inventory markdowns

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for excess or obsolete products, both at Stride Rite-owned retail stores and from independent retailers. We make ongoing estimates relating to the net realizable value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. We have continually managed these risks in the past and believe we can successfully manage them in the future. However, our revenues and operating margins may suffer if we are unable to effectively manage these risks.

Property and Equipment

Property and equipment is recorded at cost and is depreciated over its estimated useful life. When events or circumstances indicate that the carrying value of property and equipment may be impaired, we estimate the future undiscounted cash flows to be derived from the asset to determine its fair market value and whether or not a potential impairment exists. If the carrying value exceeds the estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over the estimate of its fair market value. Any impairment charges are recorded as part of selling and administrative expenses. We estimate future undiscounted cash flows using assumptions about their expected future operating performance. The estimates of undiscounted cash flows may change in future periods due to, among other things, technological changes, economic conditions, changes in business operations or inability to meet business plans. Such changes may result in impairment charges in the period in which such changes in estimates are made.

Defined Benefit Pension Plan

We sponsor a defined benefit pension plan. Major assumptions used in the accounting for this employee benefit plan include the discount rate, expected return on plan assets and rate of increase in employee compensation levels. Assumptions are determined based on our data and appropriate market indicators, and are evaluated each year as of the plan’s measurement date. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in the consolidated financial statements.

In fiscal 2004, the discount rate was lowered to 5.75% to better reflect current market conditions. The expected return on plan assets will remain at 8.5% in fiscal 2005, reflecting current economic conditions. Pension expense in 2005 is expected to increase approximately $0.6 million. See Note 9 to the consolidated financial statements for further discussion.

Taxes

We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine if a valuation allowance is necessary. A valuation allowance has not been assigned to our deferred tax assets since we believe it is more likely than not that we will fully realize the benefits of such tax assets. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflects the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to a future valuation allowance. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances known at that time, while the actual effective tax rate is calculated at year-end. This estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the period in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate. The preparation of federal and

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state tax returns requires interpretations, judgments and estimates which are subject to the review and audit of taxing authorities. We believe that the results of audits will not materially affect earnings.

Contingencies

The sale of Tommy Hilfiger branded footwear is a significant portion of our business. The Tommy Hilfiger footwear sales are contingent on our licensing agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2003, we renewed the agreement for an additional term, which will expire in March 2007. Whether our license with Tommy Hilfiger will remain in effect depends on our achieving certain minimum sales levels for the licensed products. We expect to continue to meet the minimum sales levels required by the Tommy Hilfiger license agreement. We believe that no provision is currently required for costs related to the potential loss of this license. If we lose the Tommy Hilfiger license, our business would be materially and adversely affected.

Results of Operations

(53 weeks in 2004 and 52 weeks in 2003 and 2002)

Fiscal 2004 Compared to Fiscal 2003

Net Sales

The breakdown of net sales is as follows:

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The 2004 fiscal year contained 53 weeks compared to 52 weeks in fiscal 2003.

The overall retail climate was challenging and inconsistent in 2004. In addition, concerns around higher oil prices and global unrest weighed on the consumer, particularly as it affected soft goods sales. Our 2004 financial results reflect this difficult business climate. More specifically, fashion trends continued not to favor canvas and leather sneaker styles, which also weakened our sales results, particularly in our Keds and Tommy Hilfiger brands.

During fiscal 2004, consolidated net sales increased $8.2 million to $558.3 million, or 1.5% above the sales level achieved in fiscal 2003. Revenues related to the Company’s wholesale brands decreased $9.9 million while overall retail sales increased $18.1 million or 12.7% when compared to fiscal 2003. Unit shipments of current line merchandise during fiscal 2004 for the Company’s wholesale brands were 2.4% below the prior year. The average first quality wholesale selling price remained flat with fiscal 2003.

First quality wholesale gross sales decreased by $12.7 million, or 3.7% below the wholesale gross sales level achieved in fiscal 2003. In addition, closeout sales decreased $4.9 million from the comparable period in 2003. Offsetting these decreases was a $2.1 million increase in the sale of promotional products, a $1.5 million increase in royalties and a $3.3 million decrease in returns and allowances compared to the 2003 fiscal year. The decrease in returns and allowances was a result of fewer product conversions and better product performance with our retailers. This net decrease from wholesale net sales was offset by the strong retail store sales comparisons to last year which resulted in an overall increase of $8.2 million in consolidated net sales. The increase in royalty income was primarily the result of the Champion footwear license.

The overall increase in net sales of the Stride Rite Children’s Group was primarily attributable to increased sales from Children’s Group company-owned retail stores, which were up 12.5% from the comparable period last year. In fiscal 2004, sales to independent retailers remained flat when compared to last year. During the fourth quarter of 2004 wholesale sales increased 5% with the increase primarily attributable to increased sales of promotional and closeout products as well as fewer returns and allowances. Stride Rite Children’s Group’s wholesale sales have increased over the comparable prior periods during the last three quarters of fiscal 2004. We expect that the Stride Rite Children’s Group wholesale sales will continue this positive trend in 2005. Sales at comparable Children’s Group retail stores (stores open for 52 weeks in each fiscal year) increased 6.9% in fiscal 2004. Both newer and older stores were responsible for the strong comparable store sales results. At the end of fiscal 2004, the Stride Rite Children’s Group operated 251 stores. This is a net increase of 19 stores, or 8.2% from the end of fiscal 2003. In fiscal 2004, ten children’s shoe stores, five outlet stores, seven leased children’s shoe departments and two Shoe Buzz stores were opened and five children’s shoe stores were closed. Current plans call for the opening of approximately 20 retail stores and the closing of approximately 3 underperforming stores during the 2005 fiscal year. We anticipate another positive year for the Stride Rite Children’s Group in 2005.

The decrease in the sales of Keds branded products was primarily the result of weaknesses in the women’s fashion styles and Grasshoppers product lines, as well as decreased sales of closeouts and promotional products. Partially offsetting these decreases was an increase in the children’s product line and a decrease in returns and allowances. Keds closed one retail store in fiscal 2004, with no new store openings, to bring the total Keds retail store count to four. We are currently evaluating the overall performance of these four remaining retail stores and plan to close two stores in 2005. No additional Keds retail stores are planned to open in the next year. In December 2004, Keds entered into an exclusive worldwide footwear license with the Red Hat Society to manufacture and distribute women’s footwear under the Grasshoppers line. In 2005, we are repositioning Keds by returning it to its historical position as a sneaker brand with an athletic heritage and targeting the younger consumer with our new brand spokeswoman, Mischa Barton.

The decrease in the Tommy Hilfiger Footwear net sales can be attributed to declines in the men’s athletic and casual businesses, a decrease in the sales of closeouts, as well as an increase in returns and allowances. The department store channel continues to be challenging due to increased price pressure and the demand for lower

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priced merchandise. The introduction of the Tommy Girl and “H” Hilfiger product lines offset a portion of the sales declines in other components of the Tommy Hilfiger division. For 2005, we anticipate improvement in the women’s and Tommy Girl sales and the stabilizing of the Tommy men’s business in the second half of the year. In conjunction with a recent change in strategy of the Tommy USA Apparel Brand, we will be transitioning the Tommy “H” Hilfiger product line out of department stores in 2005.

The major contributors to the increase in net sales of Sperry Top-Sider products were the strong sales of men’s performance boat shoes and casual shoes as well as promotional items. Sales in the outdoor and department store channels also showed growth over 2003. Closeout sales declined in fiscal 2004 as a result of the lower closeout inventory levels due to the strong performance of the overall first quality business. Sales declines in basic boat shoes and canvas casual products offset a portion of the net sales growth. In 2005, we are projecting continued growth in the men’s performance boat shoe category and establishing a stronger spring women’s business.

The Stride Rite International division’s net sales growth was the result of the addition of new distributors in Asia and the Middle East as well as continued strong sales of Tommy Hilfiger footwear in both Asia and Latin America. We anticipate this continued positive momentum in fiscal 2005.

Gross Profit

In fiscal year 2004, our gross profit of $212.6 million increased $3.1 million or 1.5% above fiscal 2003. Our gross profit rate of 38.1% was flat to fiscal 2003. The significant factors contributing to the improved gross profit dollars were the additional gross margin related to the higher level of retail sales, which generally produce a higher gross profit margin than the Company’s wholesale brands, combined with declines in returns and allowances and increased royalties. Offsetting a portion of these increases were the lower gross margin dollars caused by the decline in wholesale sales, certain higher product costs and increased inventory obsolescence costs.

Operating Costs

Selling and administrative expenses in fiscal 2004 increased $1.3 million to $172.2 million or 0.8% above the expense level incurred in fiscal 2003. As a percent of net sales, selling and administrative costs were 30.8% in fiscal 2004 compared to 31.1% in fiscal 2003. The increase in operating expenses was primarily attributable to company-owned retail store expansion costs, including the addition of 24 stores in 2004 and the additional expenses related to compliance with Sarbanes-Oxley 404 requirements. Somewhat offsetting these increased costs were lower bad debt and freight costs. Pension expense of $2.9 million remained flat to fiscal 2003, although pension expense for fiscal 2005 is expected to increase approximately $0.6 million primarily due to the change in the discount rate. During fiscal 2004, advertising costs were 4.7% of net sales versus 4.8% in fiscal 2003. The decrease in advertising was primarily attributable to decreased contractual spending by Tommy Hilfiger, which is sales based. Operating costs are planned to increase in fiscal 2005 due to retail store expansion and advertising costs.

In fiscal year 2005 operating costs will also be negatively impacted by the expensing of share based compensation brought about by both the expected adoption in the fiscal 2005 fourth quarter of the new accounting standard, SFAS No. 123R, “Share-Based Payment”, and the decision by the Company to issue performance based restricted stock to certain executives in the fiscal 2005 first quarter.

Other Income and Taxes

Non-operating income (expense) increased our pre-tax earnings by $0.5 million in fiscal 2004 compared to $1.6 million in fiscal 2003. Investment income decreased by $0.4 million in fiscal 2004. Comparisons of investment income are negatively impacted by the receipt in fiscal year 2003 of $0.7 million related to Stride Rite’s sale of its interest in a joint venture footwear manufacturing facility as well as a gain on a prior year investment of $0.3 million. Investment income related to the Company’s cash equivalents increased $0.6 million in fiscal 2004 due to higher average interest rates. Interest expense, which is related to the revolving credit agreement’s facility fee, remained flat in fiscal 2004 with fiscal 2003, as there were no short-term borrowings during either year. Other expense, net was higher in fiscal 2004 due to the performance of a Company owned life insurance program as compared to the prior year.

In fiscal 2004, the provision for income taxes increased $0.5 million due to an increase in pre-tax income combined with a higher effective tax rate. Our effective income tax rate was 37.3% in fiscal 2004 versus 36.7%

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in fiscal 2003. The higher tax rate in fiscal 2004 as compared to fiscal 2003 was due principally to less tax efficient investment vehicles. The effective income tax rate is expected to increase in fiscal 2005 to 38.0%.

Net Income

We earned $25.7 million in fiscal 2004, $0.2 million or 0.7% above fiscal 2003’s net income amount. The increase in earnings in fiscal 2004 resulted from the higher net sales being effected by a flat gross profit percentage. This was then somewhat offset by higher selling and administrative expenses and a higher effective income tax rate.

Fiscal 2003 Compared to Fiscal 2002

Net Sales

The breakdown of net sales is as follows:

During fiscal 2003, consolidated net sales increased $17.7 million to $550.1 million, or 3.3% above the sales level achieved in fiscal 2002. Revenues related to the Company’s wholesale brands increased $1.7 million while overall retail sales increased $13.5 million or 10.4% when compared to fiscal 2002. Unit shipments of current line merchandise during fiscal 2003 for the Company’s wholesale brands were 4.5% above the prior year. The average first quality wholesale selling price declined 5.3% from fiscal 2002.

First quality wholesale gross sales decreased by $15.4 million, or 4.2% below the wholesale gross sales level achieved in fiscal 2002. Offsetting this decrease was a $6.0 million increase in the sale of promotional products, a $7.6 million increase in closeout sales and a $3.3 million decrease in returns and allowances compared to the 2002 fiscal year, which resulted in the overall increase in wholesale net sales. This, combined with the strong retail store sales comparisons to fiscal year 2002, contributed to the overall increase of $17.7 million in consolidated net sales.

The overall increase in net sales of the Stride Rite Children’s Group was primarily attributable to increased sales from Children’s Group company-owned retail stores. In fiscal 2003, sales to independent retailers decreased 3.7% when compared to fiscal year 2002. This decrease reflects a trend of consistent sales declines in the Children’s Group wholesale sales primarily attributable to the negative impact of the economy on certain licensed partners and trade accounts as well as reductions in sales of the department store channel. Offsetting this decrease were sales levels of Children’s Group’s company-owned retail stores, which were up 10.4% from the comparable period in 2002. Sales at comparable Children’s Group retail stores (stores open for 52 weeks in each fiscal year) increased 4.7% in fiscal 2003. Driving this increase in the comparable stores category was a greater proportion of newer stores that are now included in the computation. These newer comparable stores generally have had greater comparable sales increases than our more mature stores. At the end of fiscal 2003, the Stride Rite Children’s Group operated

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232 stores. This is a net increase of three stores, or 1.3% from the end of fiscal 2002. In fiscal 2003, ten children’s shoe stores and one outlet store were opened and five children’s shoe stores and three outlet stores were closed.

The decrease in the sales of Keds branded products was primarily the result of weaknesses in the women’s and children’s basic product lines, which were adversely affected by the cold spring, poor economy and a soft canvas sneaker market. The Grasshopper product line was also unfavorably affected, decreasing $2.8 million or 12% from fiscal 2002. Also contributing to the decline in Keds sales in 2003 was the disappointing performance of some new major product offerings and, to a lesser degree, the Keds children’s line. Somewhat offsetting these decreases was an increase in closeout sales. Keds closed one retail store in fiscal 2003, with no new store openings, to bring the total Keds retail store count to five.

In fiscal 2003, the overall Tommy Hilfiger Footwear net sales growth can be attributed to the growth in the independent store channel achieved through the initial sales to large chains in the family footwear category slightly offset by a decline in the department stores. This increase in Tommy Hilfiger Footwear net sales was the result of growth in the women’s outdoor and dress casual styles in independent channels along with a similar growth pattern in the men’s dress and athletic styles. Also contributing to the overall increase in Tommy Hilfiger Footwear net sales was an increase of $1.2 million in the PRO-Keds product line, which remains relatively small.

The major contributors to the increase in net sales of Sperry Top-Sider products were strong sales of both men’s and women’s performance boat shoes as well as promotional items. Sales in the department store and marine/outdoor channels showed growth over fiscal 2002.

The Stride Rite International division continued to be affected by weakness in the global economy, particularly in South America and the Middle East. This negatively impacted their net sales in fiscal 2003.

Gross Profit

In fiscal year 2003, our gross profit of $209.5 million increased $15.1 million or 7.7% above fiscal 2002. Our gross profit rate improved 1.6 percentage points to 38.1% as compared to the 36.5% rate achieved in fiscal 2002. The significant factors contributing to the improved gross margin were $3.1 million in lower closeout, excess inventory and obsolescence costs primarily achieved through improved inventory management, a decline in returns and allowances of $2.8 million, combined with an additional $9.4 million in gross margin related to the wholesale/retail mix of revenue that was positively impacted by the growth of revenues from our Company-owned retail stores which have somewhat higher gross profit margin than our wholesale businesses.

Operating Costs

Selling and administrative expenses in fiscal 2003 increased $11.4 million to $170.9 million or 7.2% above the expense level incurred in fiscal 2002. As a percent of sales, selling and administrative costs were 31.1% in fiscal 2003 compared to 29.9% in fiscal 2002. These increases were primarily attributable to increased pension expense of $2.3 million, increased advertising costs of $3.8 million and higher retail store expenses of $4.1 million. The increase in pension expense was primarily due to investment losses and changes in plan assumptions to the discount rate and the expected return on plan assets. During fiscal 2003, advertising costs were 4.8% of net sales versus 4.3% in fiscal 2002. Most of this increase was attributable to increased spending by both Keds and Sperry. Retail store expenses increased 7.0% in fiscal 2003 as compared to the prior fiscal year. The primary cause of this increase was the full year impact of the 58 new Children’s Group stores opened throughout fiscal 2002 as well as the addition of 11 stores in fiscal 2003.

Other Income and Taxes

Non-operating income (expense) increased our pre-tax earnings by $1.6 million in fiscal 2003 compared to $0.3 million in fiscal 2002. Investment income increased by $0.7 million in fiscal 2003, the result of the $750,000 gain on the sale of the Company’s minority interest in the Thailand factory joint venture, as well as a

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gain on a prior year investment, offset by lower investment income. Higher average investments were unable to offset lower average interest rates. Interest expense in fiscal 2003 decreased $0.4 million from fiscal 2002, as there were no short-term borrowings during fiscal 2003.

In fiscal 2003, the provision for income taxes increased $3.4 million due to an increase in pre-tax income combined with a higher effective tax rate. Our effective income tax rate was 36.7% in fiscal 2003 versus 31.9% in fiscal 2002. The higher tax rate in fiscal 2003 as compared to fiscal 2002 was due principally to a lower 2002 effective income tax rate which reflected a reduction in previously established tax accruals which were no longer needed. The Company’s 2003 tax rate reflects the return to more normalized state and federal reserve levels.

Net Income

We earned $25.5 million in fiscal 2003, $1.4 million or 5.7% above fiscal 2002’s net income amount. The higher earnings in fiscal 2003 resulted from higher net sales and an increased gross profit percentage somewhat offset by higher selling and administrative expenses and a higher effective income tax rate.

Liquidity and Capital Resources

At the end of fiscal 2004, our balance sheet reflected a current ratio of 4.4 to 1 with no debt. Our cash and cash equivalents totaled $90.9 million at December 3, 2004, a decrease of $12.4 million from the total cash and cash equivalents of $103.3 million at the end of fiscal 2003. This decrease in our cash balance was primarily the result of the repurchase of common shares as well as an increase in inventory.

During fiscal 2004, our operations generated $40.6 million of cash, less than the operating cash flows of $46.8 million in fiscal 2003 and $56.8 million in fiscal 2002. Our accounts receivable balance of $47.7 million, decreased $3.3 million from the year earlier levels. The decrease in accounts receivable was primarily the result of shortened average collection times which are reflected in the reduction in our average day’s sales outstanding (DSO). At December 3, 2004, our DSO totaled 37 days, favorable compared to both the DSO of 40 days at year-end 2003 and the DSO of 41 days at year-end 2002. Much of this improvement in DSO is attributable to more effectively pursuing past due receivables and reductions in customer chargebacks. Year-end inventories totaled $87.8 million, which was $5.9 million or 7.2% higher than the $81.9 million at fiscal year-end 2003. The inventory increase in fiscal 2004 related primarily to the timing of product receipts and the higher number of retail stores. During fiscal year 2004, our inventory turnover averaged 4.2 times which compares to a similar turnover rate of 4.3 times during fiscal 2003 and favorably to the lower 3.9 times realized in fiscal 2002.

Additions to property and equipment totaled $7.1 million in fiscal 2004 compared with $6.7 million in fiscal 2003 and $12.1 million in fiscal 2002. This increase in capital spending versus last year is primarily attributable to the higher number of store openings in fiscal 2004. Capital expenditures in fiscal 2004 included $3.4 million related to both new retail stores and the renovation of existing retail locations and $1.3 million related to information technology and e-commerce. During fiscal 2004 we opened 24 Children’s Group retail stores. In fiscal years 2003 and 2002 we opened 11 and 59 new retail stores, respectively. During the 2005 fiscal year, our current plans call for the addition of approximately 20 new retail stores. In fiscal year 2005, we are planning capital expenditures of approximately $9.0 million. The opening of new stores, renovation of existing stores, the next phase of a new retail merchandise planning system and increased spending with information technology are the most significant capital expenditure items planned. Funding for our capital expenditures is expected to be provided from internal sources. If business conditions are not favorable and do not allow for the funding of capital purchases internally, our plans will be re-evaluated.

Our pension liabilities increased $2.9 million in fiscal 2004 primarily due to declines in interest rates. These pension liabilities are developed from actuarial calculations and valuations. Inherent in these valuations are assumptions, including discount rates and the expected return on plan assets. The expected long-term rate of return on our plan assets was developed by examining historical return rates based on the pension plan’s asset allocation and considering such factors as return differentials for active investment management. The expected rate of return remained constant in fiscal 2004 at 8.5%. Due to the long-term nature of this assumption, it is not

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expected that the rate of return percentage will vary yearly. The expected long-term rate of return for fiscal year 2005 will be 8.5%, which is the same rate used in the prior fiscal year. The discount rate used for the calculation of plan liabilities at fiscal year end 2004 was 5.75%, which is 50 basis points below the 6.25% rate used in fiscal 2003. We consider market conditions, including changes in interest and investment rates, in developing these assumptions. At fiscal year end 2004, our non-cash minimum pension liability totaled $16.0 million. This liability was created by the shortfall of plan assets versus the accumulated benefit obligation. Pension expense, a non-cash item, for fiscal 2004 was $2.9 million and it is expected to increase in fiscal 2005 to approximately $3.5 million, primarily due to the change in the discount rate. During the 2004 fiscal year, we contributed $1.0 million to the Company’s defined benefit pension plan. Current plans for fiscal year 2005 anticipate total pension contributions of approximately $3.0 million.

During fiscal year 2004 we returned $49.9 million to stockholders through share repurchases and cash dividends. We spent $42.2 million in fiscal 2004 to repurchase approximately 4.0 million common shares under our share repurchase program. Over the three-year period ended December 3, 2004, we repurchased a total of approximately 7.5 million common shares at an aggregate cost of $69.9 million. As of December 3, 2004, we have approximately 4.5 million shares remaining on our share repurchase authorization approved by the Board of Directors in June 2004. We believe that share repurchases are a good investment and an effective means of providing value to our stockholders. We will continue to evaluate opportunistic share repurchases during the 2005 fiscal year. We have paid a dividend to our stockholders each quarter since we became a public company in 1960. We used $7.7 million of cash for dividend payments during fiscal 2004, which was a decrease from the $7.9 million used in fiscal 2003 and the $8.3 million in fiscal 2002 due to a lower share number as a result of stock repurchases. Funds for these share repurchases and dividends were provided from internal sources. Under the terms of our revolving credit agreement, we are not allowed to make annual distributions to stockholders in excess of $40 million; however, an amendment was approved by the bank group in 2004 allowing a one-time increase in the distribution amount to $50 million for the 2004 fiscal year. Under the terms of the credit agreement both dividend payments and share repurchases are considered distributions to stockholders.

During the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including the market risk associated with interest rate movements on short-term borrowings and cash equivalents. Additionally, economic conditions in countries where we source our products could negatively affect future inventory purchase commitments. We purchase substantially all of our inventory from outside the United States. As these purchases are primarily denominated in U.S. dollars, we are not directly subject to foreign currency exchange rate fluctuations. Accordingly, we do not engage in forward foreign exchange and other similar contracts because the associated risk is not considered significant. If circumstances should change and we conclude that the hedging of foreign exchange risks becomes appropriate, we will begin to do so. We utilize cash from operations, short-term investments and, if necessary, short-term borrowings to fund our working capital and investment needs.

In addition to internal sources of funding, we maintain a bank line of credit to satisfy the seasonal borrowing requirements that are imposed by the sales patterns that are characteristic of Stride Rite and of the footwear industry. Due to these seasonal demands, there are times during the year when our cash needs increase. During fiscal 2000, we entered into a three-year, revolving credit agreement with five banks providing for loans of up to $75 million. During the fourth quarter of fiscal 2002, we renewed this line of credit with substantially the same group of banks through October 31, 2005. We will begin discussions with the bank group during fiscal 2005 for the renewal of this credit agreement. The revolving credit agreement requires us to meet certain financial ratios and covenants and to maintain a minimum consolidated tangible net worth. Under the terms of the revolving credit agreement, we may borrow at interest rates that vary with LIBOR. In addition, the agreement calls for facility fees of 0.375% per annum on the committed line. At year-end 2004, we had no outstanding borrowings under this credit line, leaving the entire $75 million available for use. During fiscal 2004 and 2003, we did not make any borrowings under our revolving credit agreement. During fiscal 2002, our borrowings averaged $14.6 million. As of December 3, 2004, letters of credit for $51.1 million were outstanding for the purchase of inventories. All letters of credit generally expire within one year.

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Our significant financial obligations as of December 3, 2004 are as follows:

Cash Payments Due During the Fiscal Years

(in thousands)

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN 46) which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities, or Variable Interest Entities (“VIE”), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIE that are deemed significant, even if consolidation is not required. In December 2003, a modification to FIN 46 was issued (FIN 46R) which delayed the effective date until no later than fiscal periods ending after March 31, 2004 and provided additional technical clarifications to implementation issues. The Company does not currently have any variable interest entities as defined in FIN 46R. The adoption of this statement did not have any impact on our consolidated financial statements.

In December 2003, the FASB issued a revision to SFAS No. 132, “Employers’ Disclosure about Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 88 and 106 and a revision of FASB Statement No. 132” (SFAS 132R). This statement requires additional disclosure in relation to the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized during interim periods. The provisions of this statement are effective for financial statements with fiscal years ending after December 15, 2003. The interim period disclosures are effective for interim periods beginning after December 15, 2003. The Company adopted SFAS 132R in the first quarter of fiscal 2004.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R). This statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The provisions of this statement are effective for interim or annual periods beginning after June 15, 2005. The Company is currently evaluating the provisions of this revision to determine the impact on its consolidated financial statements. It is, however, expected to have a negative effect on consolidated net income.

In December 2004, the FASB decided to defer the issuance of their final standard on earnings per share (EPS) entitled “Earnings per Share – an Amendment to FAS 128.” The final standard will be effective in 2005 and will require retrospective application for all prior periods presented. The significant proposed changes to the EPS computation are changes to the treasury stock method and contingent share guidance for computing year-to-date diluted EPS, removal of the ability to overcome the presumption of share settlement when computing diluted EPS when there is a choice of share or cash settlement and inclusion of mandatorily convertible securities in basic EPS. The Company is currently evaluating the proposed provisions of this amendment to determine the impact on its consolidated financial statements.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets, liabilities and income. We regularly assess these risks and have established policies and business practices to protect against the adverse effect of these and other potential exposures.

We utilize cash from operations and short-term borrowings to fund our working capital and investment needs. Cash balances are normally invested in high-grade securities with terms shorter than three months. Due to the short-term nature of these investments, changes in interest rates would not materially affect the fair value of these financial instruments.

We have available a $75 million unsecured committed revolving line of credit as a source of financing for our working capital requirements. Borrowings under this revolving credit agreement bear interest at variable rates based on LIBOR plus an applicable spread. At December 3, 2004, we had no borrowings outstanding under this credit facility.

Assets and liabilities outside the United States are primarily located in Canada. Our investment in foreign subsidiaries with a functional currency other than the U.S. dollar, are generally considered long-term. We do not generally hedge these net investments.

Item 8.    Financial Statements and Supplementary Data.

The Financial Statements and Supplementary Data required by Item 8 is included in pages F-1 through F-23 and page S-1 attached to this report. An index to the Financial Statements appears in Item 15 to this report.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the evaluation date, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 3, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we

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conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 3, 2004.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 3, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Item 9B.    Other Information.

None.

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PART III

Item 10.    Directors and Executive Officers of the Registrant.

The information concerning our Directors, additional information regarding certain executive officers, information regarding the Company’s Code of Ethics, and other information required by Item 10 of Part III of this report shall be included in the Proxy Statement relating to our 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year and is incorporated herein by reference. The information with respect to our executive officers listed below is as of February 3, 2005.

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These executive officers are generally elected at the Board of Directors’ meeting held in conjunction with our Annual Meeting of Stockholders and serve at the pleasure of the Board.

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Item 11.    Executive Compensation.

The information concerning Executive Compensation required by Item 11 shall be included in the Proxy Statement to be filed relating to our 2005 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information concerning Security Ownership of Certain Beneficial Owners and Management required by Item 12 shall be included in our Proxy Statement to be filed relating to the 2005 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions.

None.

Item 14.    Principal Accountant Fees and Services.

The information concerning Principal Accountant Fees and Services required by Item 14 shall be included in the Proxy Statement to be filed relating to our 2005 Annual Meeting of Stockholders and is incorporated herein by reference.

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PART IV

Item 15.    Exhibits, Financial Statements and Schedules.

15(a)1 and 15(a)2.    Financial Statements and Schedules. The following financial statements and financial statement schedules are included as a part of this report in the pages indicated:

15(a)3.    Exhibits. The following exhibits are contained herein or are incorporated herein by reference:

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15(c).    Exhibits. See Item 15(a)3 above.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:    February 3, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

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THE STRIDE RITE CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements.

F-1

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THE STRIDE RITE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of the consolidated financial statements.

F-2

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THE STRIDE RITE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS