To Our Shareholders:

It is with great enthusiasm that I write our annual letter describing the condition of our company, our performance in 2005 and our future prospects.

2005 was a year of significant accomplishment and growth at our Walking Company division where we attained all of the goals we had set forth for ourselves at the outset of the year. At the Big Dogs division, we continue to move closer to our goal of unlocking the value of our brand by reducing our commitments in the outlet mall channel while upgrading our product line and the price points it commands at retail. As always, we continue to place importance on maintaining a strong balance sheet while improving our financial performance over the prior year. We entered 2006 poised for significant growth at The Walking Company (“TWC”) and with the opportunity to continue to generate improved year-over-year financial results.

Our goal at TWC is to be the world’s leading retailer of comfort shoes. We are proud to have attained this goal during 2005. The next largest chain of specialty stores selling comfort shoes was less than one third of our size and about half of our store count when we acquired it (Steve’s Shoes) in early 2006. The brand of TWC continues to expand in name recognition as we open stores in high profile locations around the country. We continue to work to build the brand of TWC to relate our specialty niche to our customers: Authentic Comfort and The Best Brands from Around the World. In our marketing, branding, visual presentation, etc., our priority is to convey to our customers that we carry a specialty product that is not widely available...and that we are the leading company in this field.

In 2005, we opened 12 new stores in upscale malls around the country. More importantly, we have refined our store model economics and created a new store design. We believe our new store is a leading look and design for any specialty store operating in upscale malls. We also began retrofitting some of our older and more productive stores to this design with excellent initial results. We believe we will open about 20 new stores in 2006, focusing on our proven model of 1,500 sq. ft. stores that generate approximately $700 per sq. ft. in sales and located in highly visible locations in upscale malls. We also intend to explore new types of locations for TWC such as high profile freestanding stores and quality-oriented lifestyle centers. We will also continue our program of upgrading and retrofitting our current portfolio, particularly with respect to the new stores we acquired from Steve’s Shoes.

We made two significant acquisitions recently, the Footworks chain and Steve’s Shoes. We acquired Footworks, a chain of 7 stores located primarily in very high profile Las Vegas locations, last Fall for approximately $10 million. We believe that it will be accretive to earnings in 2006. Further, we acquired significant brand exposure for our TWC name by putting ourselves in front of the tens of millions of tourists that visit Las Vegas annually. The Footworks stores are not reported in our comparable store sales but after a 90 day period of integrating them into our operations and direction, the results of the chain improved and the stores are currently performing above the levels previously achieved.

We acquired Steve’s Shoes out of chapter 11 bankruptcy in early 2006 for approximately $4.5 million. Steve’s operated 45 stores under 3 different retail trade names, located mainly in the Midwest. Under the terms of the transaction, we have some flexibility in how many stores we are required to operate. As there are a few duplications with existing TWC stores, we will probably end up acquiring approximately 35 net stores in the transaction. The Steve’s chain was severely distressed and had been operating in a sub-standard fashion for several years. While we believe we have significant upside opportunity in this transaction, we have a lot of work to do to fix and improve the stores. It should also be noted that although the purchase price seems low, we need to invest at least that much money (if not more) in inventories and capital improvements in order to achieve our objectives. It is hard to predict how long it will take to turn around the results at the Steve’s Stores. However, we are looking to stabilize the operation within 6 months of the acquisition.

At Big Dogs, we continue to see the same trends we have experienced and reported upon for several years; decreased traffic in our malls, deflation in apparel prices, declines in sales of commodity products and improvement in sales of more graphically-oriented products. We believe that these trends will continue and we have made a strong effort in recent years to close unprofitable (or marginally profitable) stores and reduce our financial commitment in secondary or tertiary malls. Despite this difficult environment, I am pleased to report improvements in margin as well as improved retail metrics such as increased units per transaction and dollars per transaction. These improvements are in large part a result of our focus on improving the brand, the products we sell and the price points we can achieve. Our goal is to unlock the value of our brand outside of its current distribution channel.


Financial Highlights

We improved over 2004 in almost every financial measurement, largely a result of the continued growth and improvement at TWC. Sales increased approximately 11%, EBITDA grew nearly 23%, Net Income increased approximately 28% and Earnings Per Share increased approximately 23%. Our balance sheet continues to remain strong with a net debt (less our cash) of just over $5 million versus a book value of over $46 million. We are very pleased that the net effect of our acquisition of Footworks and our internal growth at TWC did not reduce the financial strength of our balance sheet. We also note that our improved financial performance has led to an improvement in our stock price and its trading liquidity. We hope to continue to run our business to create value for our shareholders in the long run.

We are excited by the opportunities that lie ahead and continue to invest in our infrastructure, our management team and in our personnel in order to profitably manage the substantial growth we see for the next several years. On behalf of the Board of Directors, we thank all of our employees for their dedicated efforts, our customers for their ongoing loyalty to our brands, our vendors for their long-term support of our enterprise and our shareholders for believing in our future.