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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

¨    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

OR            

x    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from March 3, 2002 through February 1, 2003

Commission File Number 0-21915

COLDWATER CREEK INC.

(Exact name of registrant as specified in its charter)

One Coldwater Creek Drive, Sandpoint, Idaho 83864

(Address of principal executive offices)

(208) 263-2266

(Registrant’s telephone number)

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

None

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

Common Stock, $.01 par value

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 the Registrant’s knowledge, in a definitive proxy or information statement incorporated by reference to 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 Rule 12b-2 of the Exchange Act):  Yes  x  No  ¨

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $79,100,000 as of April 16, 2003, based upon the closing price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each executive officer and director and by each person who beneficially owns more than 5% of the outstanding Common Stock have been excluded in that such person may under certain circumstances be deemed to be affiliates. This determination for executive officer or affiliate status is not necessarily a conclusive determination for other purposes. As of April 16, 2003, 15,976,417 shares of the Registrant’s $.01 par value Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or portions thereof) are incorporated by reference into the Parts of this Form 10-K noted:

Part III incorporates by reference from the definitive proxy statement for the registrant’s 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form.

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Coldwater Creek Inc.

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003

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PART I

The following discussion contains various statements regarding our current strategies, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as “anticipate,” “believe,” “estimate,” “expect,” and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements. Please refer to our “Risk Factors” in this Form 10-K Annual Report. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance. The Company maintains an internet web site at http://www.coldwatercreek.com. (This web site address is for information only and is not intended to be an active link or to incorporate any web site information into this document.) We make available, free of charge, through our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with the SEC.

Coldwater Creek Profile

Coldwater Creek is a triple-sales channel, two-operating segment retailer of women’s apparel, jewelry, footwear, gift items and home merchandise. Our Direct Segment encompasses our traditional catalog business and Internet-based, e-commerce business, as well as our merchandise clearance outlet stores, whereas our Retail Segment encompasses our expanding base of full-line retail stores throughout the United States (“U.S.”). Our long-standing mission has been to differentiate our company from other retailers by offering exceptional value through superior customer service and a merchandise assortment that reflects a truly relaxed and casual lifestyle. We endeavor to continually offer unique assortments of merchandise primarily targeted to our core customer demographic of women between the ages of 30 to 60 with household incomes in excess of $75,000.

Our long-established catalog business currently consists of regular targeted mailings of our three catalog titles and merchandise lines, Northcountry, Spirit and Elements, as well as periodic targeted mailings of specialty and seasonal catalogs such as our Gifts-To-Go holiday catalog. Our catalogs remain our most efficient and effective medium for building Coldwater Creek brand recognition and deploying our various sales growth and merchandising initiatives. Accordingly, we design each of our catalogs to promote our triple-sales channel structure and to encourage each customer to place her order utilizing whichever sales channel she deems most convenient and pleasurable.

Our catalog business provides a marketing platform from which to broadly promote our www.coldwatercreek.com web site to existing catalog customers with minimal incremental marketing costs. Our web site features our entire full-price merchandise line and also serves as an effective and efficient promotional vehicle for the disposition of excess inventory. As approximately one in four individuals currently patronizing our web site have no previous purchasing history with us, we continue to devote substantial effort towards attracting both new customers and our existing catalog and retail store customers to this convenient, secure and cost effective shopping medium.

Our full-line retail store business currently is, and for the foreseeable future is expected to remain, our fastest growing sales channel on a percentage of net sales basis. Four years ago, we embarked on a long-term program of establishing full-line retail stores in major metropolitan areas throughout the U.S. We did so based on our continuing belief that the ability to “touch and feel” merchandise will

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remain a coveted aspect of the American woman’s shopping experience. We view our retail stores not only as revenue centers, but as geographically dispersed marketing vehicles by which to build further brand recognition and introduce both current and prospective customers to our catalogs and e-commerce web site.

In summary, our primary corporate strategy is to use our well-established catalog infrastructure to generate sales across all three channels, target new customers and introduce new merchandise concepts. Although there can be no assurance of such, we believe that over time this strategy will build broad brand recognition and help us to increase market share.

The Company was incorporated in Idaho in 1988 and became a Delaware corporation in 1996.

Our History and Philosophy

Our Company was founded in 1984 by Dennis and Ann Pence. Operating out of a small apartment in Sandpoint, Idaho equipped with a single telephone line, Dennis and Ann initially sold a small number of nature-related items, such as binoculars and birdfeeders, through sales flyers and magazine advertisements. Their initial customer database consisted of handwritten customer information on 3x5 index cards.

Since our inception, we have remained committed to Dennis and Ann’s vision of building a loyal customer base through extraordinary customer service and quality merchandise. In that regard, our customer service has always emphasized, among other things, quick telephone answer speeds and rapid order fulfillment. As we grew, Dennis and Ann sought employees who shared their unwavering commitment to providing extraordinary customer service.

We have always believed that we are more than just a purveyor of goods. Our corporate philosophy is closely aligned with the romance of wide open spaces and the casual, unhurried approach to living and familiarity found in small town settings. Our apparel and other merchandise is selected and displayed to promote our corporate philosophy and to enhance our brand image. Our overall merchandise offering has significantly evolved over the subsequent eighteen years away from our original emphasis on nature-related products and gifts to providing a broader range of apparel, footwear, jewelry, gifts and soft home accessories which meet the ongoing needs of our growing customer base.

By maintaining our core operations in small town settings such as Sandpoint, Idaho and Mineral Wells, West Virginia, we believe that we are able to draw upon unique workforces that excel in delivering an enjoyable shopping and buying experience to our customers. Our corporate philosophy is team-oriented, friendly, honest and casual, with a long-term commitment to building a loyal, actively purchasing customer base within a growing, financially successful enterprise.

Direct and Retail Segments

Our Direct operating segment encompasses our traditional catalog business, Internet-based e-commerce business and merchandise clearance outlet stores whereas the Retail operating segment encompasses our expanding base of full-line retail stores. Although continuing to offer customers substantially similar merchandise, our Direct and Retail operating segments have distinct management, marketing and operating strategies and processes.

Our products are principally marketed to individuals within the United States. Net sales realized from other geographic markets, primarily Canada and Japan, have collectively been less than 5% of consolidated net sales in each reported period. No single customer accounts for ten percent or more of

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consolidated net sales. Apparel sales have constituted approximately three-quarters of our consolidated net sales during fiscal 2002, 2001 and 2000, with sales of jewelry, footwear, gift items and home merchandise constituting the respective balances. Please specifically refer to Note 17 – “Segment Reporting” of our consolidated financial statements for further details.

Our Current Merchandise Lines

We currently feature the following three primary merchandise lines:

Additionally, to serve the gift-giving needs of our customers and generate incremental sales during the important Holiday shopping season, each year we assemble a “Gifts-to-Go” merchandise line which is featured in a spirited holiday catalog and on our e-commerce web site. Among other items, Gifts-to-Go generally features a varied assortment of the most popular items featured in our primary merchandise lines described above. Gifts-to-Go has not been material to the annual sales of any fiscal year reported herein.

Please note that, in the fiscal 2001 fourth quarter, we made the decision to eliminate our stand-alone “Home” catalog by the fall of 2002. Consistent with that decision, we ceased mailing Home catalogs at the end of the fiscal 2002 second quarter. Please also see “Management’s Discussion and Analysis – “Future Outlook” for further details.

Our Primary Business Strategies

Our continuing primary business strategies are as follows:

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Our Primary Growth Initiatives

Our current primary growth initiatives are as follows:

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Our Current Marketing Initiatives

Our current marketing initiatives, which are designed to achieve our ongoing goals of attracting new customers and generating incremental sales from existing customers, are as follows.

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Our Current Merchandising Initiatives

Our current merchandising initiatives, aimed at providing a differentiated selection of high quality, casual merchandise that reflects a uniquely relaxed and casual lifestyle, are as follows:

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Our Customer Service and Order Fulfillment Operations

We believe that our focus on providing extraordinary customer service and maintaining excellent customer relations is critical to our longer term ability to expand our customer base and build brand recognition. Our focus on customer service is evident at every level of our operations, including our

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customer service call center operations, our e-commerce web site operations, our order entry and fulfillment processes, our employee training programs and our merchandise return policy. In addition, our continuing infrastructure investments, such as our investments in telephone and web site technologies and management information systems, have enabled us to continue to provide high levels of customer service and adhere to strict operating standards.

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During fiscal 2002, we shipped over 4.6 million packages with approximately 95% of in-stock orders being shipped within one day of order processing. Despite this volume, we achieved a distribution error rate of only 0.08%. We adjust our employee headcount, processing system and distribution hours to meet variable demand levels, particularly during the peak November/December holiday selling season. To meet increased order volume, we utilize temporary employees and plan to continue this practice in the future. Our consolidated shipping capacity is approximately 70,000 packages per day.

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Our Technology

Our primary hardware and software systems are as follows:

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During fiscal 2002, we installed a dedicated retail inventory planning software (“SVI”) that enable us to better perform detailed analysis of the historical performance of store merchandise items by store as well as by item attribute. This capability has allowed us to realize increased accuracy in our product performance forecasting, and as such, better manage our retail inventory, reduce product overstocks and backorders, and realize additional distribution efficiencies.

Employees

As of February 1, 2003, we had 2,170 full-time employees and 510 part-time or temporary employees. During the peak retail selling season, which for us includes the months of November and December, we utilize a substantial number of temporary employees. None of our employees currently are covered by collective bargaining agreements. We consider our employee relations to be satisfactory.

Trademarks

Coldwater Creek^® and Spirit^® are registered trademarks of the Company. We believe that our registered and common law trademarks have significant value and that our Coldwater Creek^® and Spirit^® trademarks are instrumental to our ability to create and sustain demand for and market our merchandise.

Risk Factors

Continuing Economic Weakness and Uncertainty

As of the date of this report, we have not seen a sustained improvement in the U.S. economy. As a consequence of this and possibly other factors, our catalog business has been particularly adversely affected. At the same time, however, our Internet and retail businesses have performed reasonably well during fiscal 2002 given the current difficult economic environment. If demand for our products is less than anticipated, the mix of our sales will be weighted more toward clearance merchandise than to full price merchandise, which would have a negative impact on our gross margins. We currently do not anticipate any significant and sustained improvement in the U.S. economy prior to early fall of 2003, if then. In an effort to address the relatively weak U.S. economy, we have maintained conservative

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inventory levels, which we believe will make us less vulnerable to sales shortfalls. However, low inventory levels also carry the risk that, if demand is stronger than we anticipate, we will be forced to backorder merchandise, which may result in lost sales and low customer satisfaction. Also, during fiscal 2002 we implemented various cost control measures to reduce operating expenses, including general salary freezes, reductions in work force and the closure of our Sandpoint, Idaho distribution center. There can be no assurance that these cost reduction measures will have a significant positive impact on overall expense structure. Moreover, our cost-cutting measures may have a negative effect on customer service and employee morale. Should the U.S. economy not recover in a timely manner, or should we not sufficiently participate in any such recovery, our overall business, financial condition, results of operations and cash flows would be materially adversely impacted. Further, lower than anticipated sales or higher than anticipated costs could adversely affect our liquidity (including compliance with our debt covenants) and, therefore, the pace of our retail expansion.

Our Dependence on Key Personnel

Our future success depends largely on the efforts of our executive management team, which consists of Dennis Pence, Chairman and Chief Executive Officer; Georgia Shonk-Simmons, President and Chief Merchandising Officer and Mel Dick, Executive Vice-President and Chief Financial Officer. The loss of any of these individuals could have a material adverse effect on our business. Continuing to attract and retain well-qualified key personnel is crucial to our successful continued operations and expansion. In addition, our location may make it more difficult to replace key employees who leave us, or to add the employees required to manage our further growth. Further, if we experience vacancies in key roles, it could have a material adverse impact upon of our ability to properly conduct our business operations and pursue our growth initiatives, and as a result, could have a material adverse impact on our overall business, financial condition, results of operations and cash flows.

Prior to joining our Company, Mr. Dick, our Executive Vice-President and Chief Financial Officer, was the Partner in-charge of the Technology, Telecommunications and Media practice of Arthur Andersen LLP. Mr. Dick served as the lead engagement partner for Andersen’s audit of WorldCom’s consolidated financial statements for the fiscal year ended December 31, 2001 and its subsequent review of WorldCom’s condensed consolidated financial statements for the fiscal quarter ended March 31, 2002. In connection with the government’s investigation into WorldCom’s restatement of its financial statements and earnings, Mr. Dick voluntarily testified in a hearing before the U.S. House of Representative’s Finance Committee regarding Andersen’s audit of WorldCom’s consolidated financial statements. The ongoing investigation of the WorldCom matter may impair Mr. Dick’s ability to devote his full time and attention to our Company. Further, Mr. Dick’s association with the WorldCom matter may adversely affect customers’ or investors’ perception of our Company.

Risks Associated with Our Relatively New Retail Store Business and Its Continued Expansion

During fiscal years 1999, 2000 and 2001, we opened two, six and 19 new full-line retail stores, respectively. During fiscal 2002, we opened 14 additional stores. We currently plan to open 23 full-line retail stores during fiscal 2003 including three stores which will serve to test a smaller footprint than our current store model. Opening each new store involves several steps, including site selection, lease negotiation and build-out, and each of these steps presents new risks. Competition remains high for premium retail space in many areas and we may encounter difficulty in identifying acceptable sites for our stores, which could delay our expansion. We are also subject to possible delays in negotiating leases and to construction delays and cost overruns associated with the build-out of our stores.

Additionally, our expansion continues to add significant costs, not only with respect to leasehold costs and capital improvements, but also with respect to management and administrative resources, which must keep pace with our expansion. To be successful, we must therefore generate sufficient

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incremental sales to support our new cost structure. There can be no assurance that our retail expansion will be successful or that we will be able to address the risks and challenges associated with this relatively new and rapidly expanding business. As such, any investor in our Company must consider the fact that our efforts in this relatively new business remain largely unproven to date, and that our retail model continues to evolve. In March of fiscal 2002, we refined our store model to incorporate a smaller footprint and what we believe to be significant improvements in construction processes, materials and fixtures, and our retail model may undergo further refinements as we gain experience owning and operating more stores. For example, as discussed in the preceding paragraph, we currently plan to open three smaller sized test stores in fiscal 2003. Additionally, you should consider that any miscalculations in our retail strategies, shortcomings in our planning, implementation, management and control, or our inability to sufficiently leverage incremental costs will likely have a material adverse impact on our overall business, financial condition, results of operations and cash flows.

Risks Associated with Our Catalog Sales and E-commerce Sales Businesses

Our overall success as a Company for the foreseeable future will remain dependent on the success of our well-established catalog sales business. We also continue to primarily rely on our catalogs to promote our www.coldwatercreek.com e-commerce web site and full-line retail stores. We believe that the future success of our catalog sales business will continue to be predicated upon the effective targeting of our catalog mailings, a high volume of prospect catalog mailings, when market conditions permit, appropriate shifts in our merchandise mix and our ability to achieve adequate response rates to our mailings. Catalog mailings entail substantial paper, postage, merchandise acquisition and human resource costs, including costs associated with catalog development, production and circulation and increased inventories, virtually all of which are incurred prior to the mailing of each catalog. As a result, we are not able to adjust the costs being incurred in connection with a particular catalog mailing to reflect the actual subsequent performance of the catalog. If, for any reason, we were to experience a significant shortfall in anticipated net sales from a particular catalog mailing, our overall business, financial condition, results of operations and cash flows would likely be materially adversely affected. In addition, response rates to our catalog mailings and, as a result, the net sales generated by each catalog mailing, can be affected, by factors beyond our control such as weak economic conditions and uncertainty and unseasonable weather in key demographic markets. Other influencing factors may include, but not be limited to, unpredictable and changing consumer preferences, the timing and mix of catalog mailings and changes in our merchandise mix. Any one or more of these factors could result in lower-than-expected full-priced sales and higher-than-expected clearance sales at substantially reduced margins. These factors could also result in increased merchandise returns, slower turning or obsolete inventories, inventory write-downs and working capital constraints. Any performance shortcomings experienced by our catalog business would likely have a material adverse effect on our overall business, financial condition, results of operations and cash flows.

Our ability to attract and retain users and customers to our e-commerce web site depends on the performance, reliability and availability of our web site and network infrastructure. We have periodically experienced service interruptions caused by temporary problems in our own systems or software or in the systems or software of third parties. While we continue to implement procedures to improve the reliability of our systems, these interruptions may continue to occur from time to time. Third parties may not be liable to us for any damage or loss they may cause to our business, and we may be unable to seek reimbursement from them for losses that they cause. Our users also depend on third party Internet service providers for access to our web site. These entities have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures in the future that are unrelated to our systems, but which could nonetheless adversely affect our business.

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Risks Associated with Our Growth Strategy

Our growth strategy primarily includes the following components: (i) further development of our retail store, catalog and e-commerce businesses, (ii) the possible introduction of new merchandise lines, (iii) expansion of our existing merchandise lines, and (iv) increased catalog/e-mail circulation (when market conditions permit) and increased response rates. Our growth strategy involves various risks, including a reliance on a high degree of prospect mailings, when market conditions permit, which may lead to less predictable response rates. Any failure on our part to successfully implement any or all of our growth strategies would likely have a material adverse effect on our financial condition, results of operations and cash flows. We believe our past growth has been attributable in large part to our success in meeting the merchandise, timing and service demands of an expanding customer base with certain demographic characteristics. There can be no assurance that we will be able to continually identify and offer new merchandise that appeals to our customer base or that the introduction of new merchandise categories or new marketing or distribution strategies, such as the sale of our merchandise in retail stores or through new catalog titles, will be successful or profitable, or that any such efforts will achieve sustained acceptance in the marketplace. Any substantial inability on our part to further develop and grow our retail store and catalog and e-commerce businesses, to maintain our historical average order size and response rates and to leverage the success of existing catalog titles to new merchandise lines would likely have a material adverse effect on our financial condition, results of operations and cash flows.

We initially identified through the use of our Direct Channel’s extensive customer database a total of 80 potential “metropolitan” retail store sites in 29 states where a prerequisite level of Coldwater Creek brand awareness existed. During our fiscal 2002 first quarter we began deploying our refined store model to reduce our initial capital investment per store. We believe that our refined store model may ultimately allow us to access many attractive middle-market areas in addition to the 80 major metropolitan markets, although there can be no assurance of such. We remain fully committed at this time to further growing our Retail Channel. Our current schedule contemplates the opening of 23 full-line retail stores during fiscal 2003, including three 3,500 square foot test stores. We have had limited experience operating geographically dispersed retail stores. In addition, retail store operations entail substantial fixed costs, including costs associated with real estate leases, inventory maintenance, staffing, leasehold improvements and fixture additions. There can be no assurance that these stores will be opened, will be opened in a timely manner, or, if opened, that these stores will be profitable. Failure to successfully implement this store-based strategy, or the implementation of this strategy during a prolonged economic downturn, could result in significant write-offs of leasehold improvements, inventory and fixtures and would likely have a material adverse effect on our financial condition, results of operations and cash flows. We may need to raise additional funds in order to support greater expansion, develop enhanced services, respond to competitive pressures, acquire complementary businesses or respond to unanticipated or seasonal requirements. There can be no assurance that additional debt or equity capital will be available to us to meet these needs on acceptable terms, or at all. In addition, various elements of our growth strategies, including our catalog-mailing program, our e-commerce growth strategy, our plans to introduce new merchandise and our plans to broaden existing merchandise lines, may require additional capital. There can be no assurance that funds will be available to us on terms satisfactory to us when needed.

Ability to Manage Expanding Operations

Our growth has resulted in an increased demand on our managerial, operational and administrative resources. In order to manage currently anticipated levels of future demand, we will be required to continue, among other things, to (i) improve and integrate our management information systems and controls, including inventory management, (ii) adjust our distribution capabilities and (iii) attract and retain qualified personnel, including middle and upper management. In addition, there

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can be no assurance that any upgrades, improvements and expansions in our overall infrastructure and operations will increase the productivity or efficiency of our operations or that the same will be adequate to meet our present or future needs. Continued growth could result in a strain on our management, financial, merchandising, marketing, distribution and other resources and we may experience operating difficulties, including difficulties in training and managing an increasing number of employees, difficulties in obtaining sufficient materials and manufacturing capacity from vendors to produce our merchandise, problems in upgrading our management information systems and delays in production and shipments. There can be no assurance that we will be able to manage future growth effectively and any failure to manage growth effectively could have a material adverse effect on our financial condition, results of operations and cash flows.

Merchandise Returns

As part of our customer service commitment, we maintain a liberal merchandise return policy that allows customers to return any merchandise, virtually at any time and for any reason, and regardless of merchantable condition. We make allowances in our financial statements for anticipated merchandise returns based on historical return rates and our future expectations. While we believe our allowances are adequate, there can be no assurance that actual merchandise returns will not exceed our allowances. In addition, there can be no assurance that the introduction of new merchandise through our sales channels, changes in the merchandise mix, consumer confidence or other factors will not cause actual returns to exceed return allowances. Any significant increase in merchandise returns or merchandise returns that exceed our allowances could materially adversely affect our financial condition, results of operations and cash flows.

Quarterly Results of Operations and Seasonal Influences

As with many apparel retailers, our net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as an annual basis, as a result of a number of factors, including, but not limited to, the following: the composition, magnitude and timing of our various merchandise offerings, including our recognition of related sales and costs; the number and timing of our full-line retail store openings; customer responsiveness, including the impact of economic and weather-related influences; merchandise return rates, including the impact of actual or perceived service and quality issues; market price fluctuations in critical materials and services, including paper, production, postage and telecommunications costs; the timing of merchandise receiving and shipping, including any delays resulting from adverse weather conditions or national security measures; and chronological shifts in the timing of important holiday selling seasons, including Valentine’s Day, Easter, Mother’s Day, Thanksgiving and Christmas. We alter the composition, magnitude and timing of our merchandise offerings based upon our then understanding of prevailing consumer demand, preferences and trends. The timing of our merchandise offerings may be further impacted by, among other factors, the performance of various third parties to which we are dependent and the day of the week on which certain important holidays fall. Additionally, the net sales we realize from a particular merchandise offering may transcend fiscal quarters and years and the amount and pattern of the sales realization may differ from that realized by a similar merchandise offering in a prior fiscal quarter or year. The majority of net sales from a merchandise offering generally is realized within the first several weeks after its introduction with an expected significant decline in customer orders thereafter.

Particularly notable is our continuing material dependency on sales and profits from the November and December holiday shopping season. In anticipation of traditionally increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. Additionally, as gift items and accessories are more prominently represented in our November and December holiday season merchandise

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offerings, we typically expect, absent offsetting factors, to realize higher consolidated gross margins in the second half of our fiscal year. If, for any reason, we were to realize significantly lower-than-expected sales or profits during the November and December holiday selling season our financial condition, results of operations, including related gross margins, and cash flows for the entire fiscal year will be materially adversely affected. Please note that, due to our change in fiscal year end, the November and December holiday season now falls into our fiscal fourth quarter. Previously, the November portion of the holiday season fell into our fiscal third quarter, whereas the December portion of the holiday season fell into our fiscal fourth quarter.

Changing Consumer Preferences

Although we believe that our business has historically benefited from increased consumer interest in merchandise that reflects a casual and relaxed lifestyle, there can be no assurance that this belief is correct or that, if correct, such trend will continue. Any change in this trend could have a material adverse effect on our overall financial condition, results of operations and cash flows. In addition, although we believe that the sale of our merchandise historically has not been primarily driven by fashion trends, all of our merchandise is subject to changing consumer preferences. A shift in consumer preferences away from the merchandise that we offer could have a material adverse effect on our overall financial condition, results of operations and cash flows. Our future success depends largely on our ability to anticipate and respond to changes in consumer preferences and there can be no assurance that we will respond in a timely or commercially appropriate manner to such changes. Failure to anticipate and respond to changing consumer preferences could lead to, among other things, lower sales of our products, significant markdowns or write-offs of inventory, increased merchandise returns, and lower margins, which would likely have a material adverse effect on our overall financial condition, results of operations and cash flows.

Competition

The markets for our merchandise are highly competitive, and the perceived growth opportunities within these markets has encouraged the entry of many new competitors as well as increased competition from established companies. Although we believe that we do not compete directly with any single company with respect to our entire range of merchandise, within each merchandise category we have significant competitors and may face additional competition from new entrants or existing competitors who focus on market segments currently served by us. These domestic and international competitors range from large multi-sales channel retailers with catalog, e-commerce and retail store operations and more substantial financial, marketing and other resources than us to small single-sales channel catalog, e-commerce and retail store companies. With respect to the women’s apparel merchandise offered by us, we are in direct competition with certain more established catalog, e-commerce and retail store operations, many with substantially greater experience in selling women’s apparel merchandise. Some of these competitors seek to attract customers that share one or more of the demographic characteristics common to both our existing and prospective customers. In addition, because we continue to source a significant percentage of our merchandise from suppliers and manufacturers located in the United States and Canada, where labor and production costs, on average, tend to be higher, there can be no assurance that our merchandise will or can be competitively priced when compared with merchandise offered by competing retailers. While we believe that we have been able to compete successfully because of our brand recognition, the exclusivity and broad range and quality of our merchandise, including our private label merchandise offerings, and our superior customer service policies, there can be no assurance that we will be able to compete successfully in the future. Any failure on our part to sufficiently compete in the future would likely have a material adverse effect on our overall customer retention, customer prospecting, future sales growth and market share, and as a consequence, could adversely affect our overall financial condition, results of operations and cash flows.

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Risks Affecting Our Ability to Fulfill Orders

Our ability to provide superior customer service, effectively and efficiently target our merchandise offerings, and fulfill customer orders depends, to a large degree, on the efficient and uninterrupted operation of our two customer service call centers, distribution center, management information systems and on the timely performance of third parties such as shipping companies and the U.S. Postal and Customs Services. Although we believe we have built redundancy into our telephone, Internet and management information systems and maintain relationships with several different shipping companies, any material disruption or slowdown in our order processing or fulfillment resulting from the recently increased security measures implemented by U.S. Customs, or by strikes or labor disputes, homeland security measurers, telephone or Internet down times, electrical outages, mechanical problems, human error or accidents, fire, natural disasters or comparable events could cause delays in our ability to receive and distribute orders and may cause orders to be lost or to be shipped or delivered late. As a result, customers may cancel or refuse to receive orders due to late shipments that would result in a reduction of net sales and could result in increased administrative and shipping costs. Excess order volume could result in telephone or Internet answer delays and delays in placing orders. There can be no assurance that volumes will not exceed present telephone or Internet system capacities and that, as a result, answer delays and delays in placing orders will not occur. Additionally, merchandise is stored and shipped for all of our channels from our sole distribution center in Mineral Wells, West Virginia. We believe that our success to date has been based in part on our reputation for superior customer service, and any impairment of our customer service reputation could have a material adverse effect on our overall business. Any material disruption in or destruction of part or all of our call centers or distribution center caused by strike, fire or natural disaster would likely have a material adverse effect on our ability to provide the timely delivery of merchandise and on our overall financial condition, results of operations and cash flows.

Potential Business-Related Liabilities and Expenses

As a result of doing business through our catalogs, e-commerce web sites and retail stores, we may be exposed to legal risks and uncertainties, including potential liabilities to consumers of such products. These legal risks and uncertainties may include, among others, product liability or other tort claims relating to goods; claims of consumer fraud and false or deceptive advertising or sales practices; breach of contract claims relating to merchant transactions; and claims relating to any failure to appropriately collect and remit sales or other taxes arising from electronic commerce transactions. Even to the extent that such claims do not result in material liability, investigating and defending such claims could have a material adverse effect on our overall business, financial condition, results of operations and cash flows.

Possible Volatility of Our Stock Price

The market price for our common stock has been and will continue to be significantly affected by, among other factors, our quarterly operating results, changes in any earnings estimates publicly announced by us or by analysts, announcements of new merchandise offerings by us or our competitors, seasonal effects on sales and various factors affecting the economy in general. In addition, the Nasdaq National Market has experienced a high level of price and volume volatility and market prices for the stock of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies.

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Item 2.    PROPERTIES

Our principal executive and administrative offices are located at One Coldwater Creek Drive, Sandpoint, Idaho 83864. Our telephone number is (208) 263-2266. The general location, use and approximate size of our principal properties as of February 1, 2003 are set forth below:

We believe that our corporate offices, distribution center and call centers will meet our operational needs for the foreseeable future.

We are periodically involved in litigation and administrative proceedings primarily arising in the normal course of our business. In particular, during fiscal 2002, we recorded costs of approximately $0.9 million associated with settling a dispute with a former merchandise vendor. In the opinion of management, our gross liability, if any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or administrative proceedings, except

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for the aforementioned settled litigation, would not materially affect our consolidated financial position, results of operations or cash flows.

The direct response business as conducted by us is subject to the Merchandise Mail Order Rule and related regulations promulgated by the Federal Trade Commission. While we believe we are in material compliance with such regulations, no assurance can be given that new laws or regulations will not be enacted or adopted which might adversely affect our operations.

We collect sales taxes from customers transacting purchases in states in which we have physically based some portion of our retailing business. We also pay applicable corporate income, franchise and other taxes, to states in which retail or outlet stores are physically located. Upon entering a new state, we accrue and remit the applicable taxes. In addition, we accrue use taxes on catalogs mailed to states where the Company has a presence. For many states, the language related to this tax and the costs to which it applies are ambiguous. We have accrued for these taxes based on our current interpretation of the tax code as written. Failure to properly determine or to timely remit these taxes may result in additional interest and related penalties being assessed. Various states have attempted to collect back sales and use taxes from direct marketers whose only contacts with the taxing state are solicitations through the mail or the Internet, and whose subsequent delivery of purchased goods is by mail or interstate common carriers. The United States Supreme Court has held that these states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order or Internet company. We anticipate that any legislative changes regarding direct marketers, if adopted, would be applied only on a prospective basis.

No matters were brought to a vote of our stockholders in the fourth quarter of the fiscal year ended February 1, 2003.

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MANAGEMENT

Directors and Executive Officers

Below is a table setting forth the current name, age and position of our directors and executive officers:

Dennis C. Pence co-founded the Company in 1984 and has served as a Director since the Company’s incorporation in 1988, serving as the Board’s Chairman since July 1999 and as its Vice-Chairman prior thereto. Since September 26, 2002, Mr. Pence has served as the Company’s Chief Executive Officer. From June 4, 2002 to September 25, 2002, Mr. Pence provided his executive management services to the Company. From January 5, 2002 to June 3, 2002, Mr. Pence served as the Company’s Interim Chief Financial Officer and Treasurer. Mr. Pence has also served as Chairman of the Board’s Executive Committee since its formation on May 20, 2000 and, as Secretary to the Company since July 1998. From 1984 through 2000, Mr. Pence served as the Company’s President and Chief Executive Officer. From April 1999 to December 2000, Mr. Pence also served as President of the Company’s then newly formed Internet Commerce Division. Prior to co-founding Coldwater Creek, Mr. Pence was employed by Sony Corp. of America, a publicly held manufacturer of audio, video, communication, and information technology products, from 1975 to 1983, where his final position was National Marketing Manager—Consumer Video Products.

Georgia Shonk-Simmons has served as a Director, as well as the Company’s President, since January 1, 2001. Since September 26, 2002, Ms. Shonk-Simmons has served as the Company’s Chief Merchandising Officer. From January 1, 2001 to September 25, 2002, Ms. Shonk-Simmons served as the Company’s Chief Executive Officer. From April 1999 to December 2000, Ms. Shonk-Simmons served as President of the Company’s Catalog & Retail Sales Division. Ms. Shonk-Simmons joined the Company as its Chief Merchant and Vice President of Merchandising in June 1998. From 1994 to 1998, Ms. Shonk-Simmons was Executive Vice President of the Newport News Catalog Division of Spiegel, Inc., a publicly held international retailer. Prior to that, from 1981 to 1994, Ms. Shonk-Simmons held a number of other positions of increasing responsibility with Spiegel, including Vice-President of Merchandising for Spiegel Catalog beginning in 1991. Prior to joining Spiegel, Ms. Shonk- Simmons held various buyer positions with Lytton’s, Carson Pirie Scott and Hahne’s.

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Melvin Dick has served as an Executive Vice President and Chief Financial Officer for the Company since June 2002. Prior to joining the Company, Mr. Dick was employed by and was a partner at Arthur Andersen LLP from 1974 through May 2002. While at Arthur Andersen LLP he held a number of progressively responsible positions including serving as the global managing partner of Andersen’s technology, media and communications practice and as a member of Andersen’s Worldwide Board of Partners.

Dan Griesemer has served as the Company’s Senior Vice President of Retail since October 1, 2001. Prior to joining the Company, from 1989 to 2000, Mr. Griesemer held a number of progressively responsible positions with, and ultimately served as Divisional Merchandise Manager for Gap, Inc. Prior thereto, from 1983 to 1989, Mr. Griesemer worked in a variety of positions at Federated Department Stores.

Karen Reed has served as the Company’s Senior Vice President of Marketing since November 2001 and, prior to that, as its Vice President of Internet Sales since September 1999. From March 1997 to September 1999, Ms. Reed served as the Company’s Vice President of Marketing and from 1995 to 1997 as the Company’s Director of Circulation. From 1990 to 1995, Ms. Reed served as the Company’s Circulation Manager. Prior to joining the Company, from 1988 to 1990, Ms. Reed served as a computer programmer for Serac, a ski clothing manufacturer. Prior to that, she worked in the accounting profession in various capacities.

Tom Scott has served as a Senior Vice President of the Company since December 2002. From January 1, 2001 to November 2002, Mr. Scott served as an Executive Vice President of the Company. Mr. Scott continues to serve as Chief Information Officer as he has since November 1997. Mr. Scott served as the Company’s Chief Operating Officer from April 1999 to December 2002. From April 1999 to December 2000, Mr. Scott served as a Senior Vice President of the Company. . Prior to joining the Company, Mr. Scott was President of Gestalt Technologies, Inc., a developer of high technology business systems. From May 1992 to January 1996, Mr. Scott served as Vice President of Business Systems for VF Corporation, an international apparel manufacturer. Prior thereto, from 1984 to 1992, Mr. Scott worked in a variety of positions at Nordstrom, Inc., an apparel retailer. From 1981 to 1984, he was a consultant for Arthur Andersen & Co.

Duane Huesers has served as the Company’s Vice President of Finance since September 2002. His duties include all controllership, external reporting and other finance related matters. Prior to joining the Company, Mr. Huesers had a 25-year career in the retail industry, most recently with Tuesday Morning Corporation where he served as Vice President of Finance. Prior to that, Mr. Huesers served as Vice President and Controller for the Maison Blanche department store chain, as well as Senior Vice President and Chief Financial Officer for Bookstop, Inc.

James R. Alexander has served as a Director since March 2000, as well as a member of the Board’s Audit Committee since July 2000 and as a member of the Board’s Compensation Committee since November 9, 2002. From July 2000 to July 2001, Mr. Alexander also served as a member of the Board’s Compensation Committee. Mr. Alexander had previously served as a Director, as well as Chairman of the Board’s Compensation Committee, from 1994 to 1998 before declining to stand for re-election due to other professional obligations. Mr. Alexander has been an independent catalog consultant for over 20 years, serving a variety of mail order retailers of apparel, gifts and home decor. Mr. Alexander is a joint venture partner in the firm of Tucker Alexander, which is an affiliate of Tucker Capital.

Michelle Collins has served as a Director, as well as a member of the Board’s Compensation Committee, since September 1997 and as a member of the Board’s Audit Committee since November 9, 2002. From July 1998 to July 2001, Ms. Collins served as the Chairman of the Board’s Compensation Committee. Ms. Collins also served as a member of the Board’s Executive Committee from its formation on May 20, 2000 until July 2001. In January 1998, Ms. Collins co-founded Svoboda,

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Collins L.L.C, a private equity firm, for which she serves as Managing Director. Previously thereto, Ms. Collins was a principal in the corporate finance department of William Blair & Company, L.L.C., overseeing the firm’s specialty retail sector. During the Company’s initial public offering of common shares in January 1997, Ms. Collins represented William Blair & Company as co-underwriter. Ms. Collins, joined William Blair & Company, L.L.C., an independent investment firm, as an associate in 1986 after obtaining a Masters in Business Administration from the Harvard Business School. Ms. Collins also serves as a director on the boards of directors of CDW Computer Centers, Inc., a publicly held provider of technology solutions for businesses, government agencies and educational institutions, and Molex Incorporated, a publicly held manufacturer of electronic, electrical and fiber optic interconnection products and systems, as well as a number of privately held companies.

Curt Hecker has served as a Director, as well as a member of the Board’s Audit Committee, since August 1995. Mr. Hecker has also served as Chairman of the Board’s Compensation Committee and as a member of the Board’s Executive Committee since July 2001. Since October 1997, Mr. Hecker has served as President, Chief Executive Officer and a Board member of publicly held Intermountain Community Bancorp as well as Chief Executive Officer and a Board member of Panhandle State Bank, Intermountain Community Bancorp’s wholly-owned subsidiary. From August 1995 to October 2001, Mr. Hecker also served as President of Panhandle State Bank. Prior to joining Panhandle State Bank, Mr. Hecker held various management positions with West One Bank.

Robert H. McCall, a Certified Public Accountant, has served as a Director since 1994, and as Chairman of the Board’s Audit Committee since February 1995. Mr. McCall has also served as a member of the Board’s Executive Committee since its formation on May 20, 2000. From February 1995 to July 2000, Mr. McCall also served as a member of the Board’s Compensation Committee. Since 1981, Mr. McCall has been President of McCall & Landwehr, P.A., an accounting firm based in Hayden Lake, Idaho.

Ann Pence co-founded the Company in 1984, and served as its Executive Creative Director until September 1, 2002 when she retired. Mrs. Pence has served as a Director since the Company’s incorporation in 1988, serving as the Board’s Vice-Chairman since July 1999 and as its Chairman prior thereto. Prior to co-founding Coldwater Creek, Mrs. Pence had an eleven year career in retail advertising, and was employed by Macy’s California from 1974 to 1982 where her final position was Copy Director.

Dennis and Ann Pence are married to each other.

Other Key Management Employees

Below is a table setting forth the current name, age and position of our other key management employees:

Gerard El Chaar has served as the Company’s Vice President and Director of Operations since January 2001. From October 2000 to January 2001, Mr. El Chaar served as the Company’s Director of Distribution. Prior to joining Coldwater Creek, Mr. El Chaar was Managing Director of European operations for eToys from February 1999 to September 2000, and, prior to that, Mr. El Chaar was the Director of Engineering for Amazon.com from January 1998 to January 1999.

Kristy Gehling has served as the Company’s Vice President of Customer Service since December 2002. From December 2000 to November 2002, she served as the Company’s Divisional Vice President and Director of the Coeur d’Alene facility. From February 1998 to December 2000, Ms. Gehling managed the Company’s Coeur d’Alene call center.

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PART II

STOCK PRICE HISTORY

Our common stock has been quoted on the NASDAQ under the symbol “CWTR” since our initial public offering on January 29, 1997. On February 1, 2003, we had 149 stockholders of record and 15,976,011 shares of $.01 par value common stock outstanding. Please note that on December 19, 2002, our Board of Directors declared a 50% stock dividend having the effect of a 3-for-2 stock split on our issued common stock, par value $0.01 per share (the “Common Stock”). Stockholders of record as of the close of business on January 8, 2003, received one share of Common Stock for every two shares they owned on that date. The new shares were distributed on January 30, 2003. The stock prices below reflect the effect of this stock dividend.

The following table sets forth certain sales price and trading volume data for our common stock for the periods indicated:

The Company does not pay regular dividends and does not anticipate the declaration of a cash dividend in the foreseeable future.

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Item 6.    SELECTED FINANCIAL AND OPERATING DATA

The selected financial and operating data in the following table sets forth (i) balance sheet data as of February 1, 2003 and statement of operations data for the 11-month period then ended, derived from our consolidated financial statements audited by KPMG LLP, independent auditors, which are included elsewhere in this Form 10-K Annual Report, (ii) balance sheet data as of March 2, 2002 and statement of operations data for the fiscal years ended March 2, 2002 and March 3, 2001, derived from our consolidated financial statements audited by Arthur Andersen LLP, independent auditors, which are included elsewhere in this Form 10-K Annual Report, (iii) balance sheet data as of March 3, 2001, February 26, 2000 and February 27, 1999, and statement of operations data for the fiscal years ended February 26, 2000 and February 27, 1999, derived from our consolidated financial statements audited by Arthur Andersen LLP which are not presented herein and (iv) selected operating data as of and for the periods indicated. The information below should be read in conjunction with “‘Item 7—Management’s Discussion and Analysis” and “Item 8—Consolidated Financial Statements” included elsewhere.

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Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS

The following discussion contains various statements regarding our current strategies, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as “anticipate,” “believe,” “estimate,” “expect,” and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements. These risks and uncertainties include, but are not limited to, the prolonged weakness and uncertainty in the U.S. economy, and its pronounced effect on the apparel industry; the difficulties inherent in forecasting unpredictable, and often volatile, customer tastes and buying trends, particularly in light of the current state of the U.S. economy and the possibility that any recent improvements in our product margins, or in customer response to our fall merchandise, may not be sustained; the various risks associated with the expansion of our business into retail, an area in which we have relatively limited experience, and the possibility that the expansion may strain our financial and management resources, as well as our administrative, reporting and internal control infrastructure; the possibility that either lower sales or higher than anticipated costs could effect our liquidity (including compliance with our debt covenants) and, therefore, the pace of our retail expansion; unexpected or increased costs or delays in the development and expansion of our retail chain and our potential inability to recover these costs due to sluggish sales; our potential inability to continue to locate, and negotiate on acceptable terms, leases of sites for store development; potential cost overruns and delays associated with site acquisition, build-out and launch of multiple retail stores; our inability to continue to fund our retail expansion with operating cash as a result of either lower sales or higher than anticipated costs, or both; the difficulties inherent in successful catalog management, including timing, mailing and postal delivery delays, as well as uncertainties associated with effective targeting of customers, and the high costs associated with prospect mailings; potential system interruptions associated with our e-commerce business; the various risks inherent in offering apparel and other merchandise, such as long lead times, difficult to forecast inventory requirements, merchandise returns, and shipping costs; fluctuations in paper, postage and telecommunication costs; difficulties inherent in sizing and merchandising; potential problems correlating inventory to customer demand, especially in connection with clearance activities; uncertainties related to our shift to a multi-channel model, in particular, the effects of shifting patterns of e-commerce or retail purchases versus catalog purchases, and our potential failure to generate significantly increased sales; the possibility of a material disruption or slowdown in operations at our distribution center in Mineral Wells, West Virginia, at which our merchandise is stored and shipped for all of our sales channels; substantial, and increasing, competition in the women’s apparel industry; uncertainty of demand for our products, which may require us to significantly increase promotional costs to increase sales; the possibility that we may not be able to achieve targeted cost reductions, or that significant cost reductions may impair customer service; our ability to hire and retain qualified personnel, especially considering the strain on our personnel resources caused by the expansion of our business, the changes on our business model, and our company-wide cost cutting efforts; our inability to realize the full value of merchandise currently in inventory as a result of sluggish sales, ever-changing customer tastes and buying trends, and the current economic climate, which continues to adversely affect the retail sector; the cost of additional overhead that may be required to expand our brand; the possibility that our unproven buy now/wear now strategy will not be appealing to customers, and that it could be impacted by unseasonable weather patterns, the difficult selling environment or other factors beyond our control; unexpected costs associated with our physical consolidation, such as increases in shipping and receiving expenses; as well as other factors discussed elsewhere in this Annual Report on Form 10-K. We assume no future obligation to update our forward-looking statements or to provide periodic updates or guidance.

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Introductory Note

The following discussions are intended to be read in conjunction with our accompanying consolidated financial statements and notes thereto. In the discussions and tables that follow, please note that certain minor arithmetical variances may arise due to the effects of rounding.

References to a fiscal year refer to the calendar year in which such fiscal year commences. Historically, our fiscal year ended on the Saturday nearest February 28^th. However, on December 16, 2002, our board of directors approved a change in our fiscal year end from the Saturday nearest February 28^th to the Saturday nearest January 31^st, effective in 2003. This report covers the 11-month transition period of March 3, 2002 through February 1, 2003. We made this decision to align our reporting schedule with the majority of other national retail companies.

Additionally, the common stock outstanding, retained earnings and net income per share amounts have been adjusted for all periods presented to reflect a 50% stock dividend having the effect of a 3-for-2 stock split, declared by our Board of Directors on December 19, 2002. Please refer to Note 10—“Net Income Per Share” to our accompanying consolidated financial statements for further details.

Coldwater Creek Profile

Coldwater Creek is a triple-sales channel, two-operating segment retailer of women’s apparel, jewelry, footwear, gift items and home merchandise. Our Direct Segment encompasses our traditional catalog business and Internet-based, e-commerce business, as well as our merchandise clearance outlet stores, whereas our Retail Segment encompasses our expanding base of full-line retail stores throughout the United States (“U.S.”). Our long-standing mission has been to differentiate our company from other retailers by offering exceptional value through superior customer service and a merchandise assortment that reflects a truly relaxed and casual lifestyle. We endeavor to continually offer unique assortments of merchandise primarily targeted to our core customer demographic of women between the ages of 30 to 60 with household incomes in excess of $75,000.

Our long-established catalog business currently consists of regular targeted mailings of our three catalog titles and merchandise lines, Northcountry, Spirit and Elements, as well as periodic targeted mailings of specialty and seasonal catalogs such as our Gifts-To-Go holiday catalog. Our catalogs remain our most efficient and effective medium for building Coldwater Creek brand recognition and deploying our various sales growth and merchandising initiatives. Accordingly, we design each of our catalogs to promote our triple-sales channel structure and to encourage each customer to place her order utilizing whichever sales channel she deems most convenient and pleasurable. Please note that, in the fiscal 2001 fourth quarter, we made the decision to eliminate our stand-alone “Home” catalog by the fall of 2002. Consistent with that decision, we ceased mailing Home catalogs at the end of the fiscal 2002 second quarter. Please also see “Management’s Discussion and Analysis—Future Outlook” for further details.

Our catalog business provides a marketing platform from which to broadly promote our www.coldwatercreek.com web site to existing catalog customers with minimal incremental marketing costs. Our web site features our entire full-price merchandise line and also serves as an effective and efficient promotional vehicle for the disposition of excess inventory. As approximately one in four individuals currently patronizing our web site have no previous purchasing history with us, we continue to devote substantial effort towards attracting both new customers and our existing catalog and retail store customers to this convenient, secure and cost effective shopping medium.

Our full-line retail store business currently is, and for the foreseeable future is expected to remain, our fastest growing sales channel on a percentage of net sales basis. Four years ago, we embarked on a long-term program of establishing full-line retail stores in major metropolitan areas throughout the

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U.S. We did so based on our continuing belief that the ability to “touch and feel” merchandise will remain a coveted aspect of the American woman’s shopping experience. We view our retail stores not only as revenue centers, but as geographically dispersed marketing vehicles by which to build further brand recognition and introduce both current and prospective customers to our catalogs and e-commerce web site.

In summary, our primary corporate strategy is to use our well-established catalog infrastructure to generate sales across all three channels, target new customers and introduce new merchandise concepts. Although there can be no assurance of such, we believe that over time this strategy will build broad brand recognition and help us to increase market share.

Fiscal 2002 Overview

During fiscal 2002, we remained focused on further deploying and refining our triple-sales channel marketing strategy. We opened 14 new full-line retail stores utilizing a refined store model, while maintaining a balance sheet with no short- or long-term debt. Our refined store model, which we introduced in the beginning of fiscal 2002, features a slightly smaller sized store (approximately 5,000 to 6,000 square feet) and what we believe to be significant improvements in construction processes, materials and fixtures, thereby allowing us to reduce our initial capital investment per store. We currently plan to open 23 full-line retail stores during fiscal 2003, including three stores which will serve to test a smaller sized store than our refined store model. These smaller sized test stores will be approximately 3,500 square feet. Our goal is to use our refined store model and smaller sized test stores to access attractive middle-market areas in addition to the 80 major metropolitan markets identified by us in fiscal 1999 as having significant existing Coldwater Creek brand awareness. Further retail store openings will ultimately be influenced primarily by, among other factors, the prevailing economic environment, our available working capital, and if necessary, external financing, and our ability to timely procure optimum locations within attractive metropolitan malls and lifestyle centers.

Also, during fiscal 2002, we completed the implementation of our “buy now/wear now” strategy by timing the arrival of our fall assortment in our full-line stores to better coincide with our customers’ seasonal apparel needs. This move was in conjunction with the change in our mailing strategy whereby we shifted the timing for mailing our fall catalogs nearer to the end of the fiscal 2002 second quarter than in previous years.

Furthermore, we continued to deploy a fiscal 2001 marketing initiative to make our e-commerce business more self-sufficient with respect to new customer prospecting, thereby reducing its historical dependency on our catalogs and stores. Most significantly, we continue to participate in a net sales commission-based program whereby numerous popular Internet search engines and consumer and charitable web sites promote the Coldwater Creek brand to their visitors and provide convenient hotlink access to our www.coldwatercreek.com web site. These “affiliate” web sites, which currently number approximately 8,700, accounted for approximately $19.0 million in net sales during fiscal 2002, with approximately one-fifth of the buyers being new to our house file. Our participation in this program complements our promotional e-mailings to our 1.8 million customer e-mail address database and our advertising in national publications popular with our targeted demographic.

We were pleased to be able to achieve the above while confronting the significant business challenges that continue to be presented by a less-than-robust U.S. economy. In summary, our consolidated results for fiscal year 2002 depict significantly improved operating profitability on a relatively modest net sales increase. You are encouraged to fully read the following discussions which analyze our fiscal year 2002 consolidated results of operations, liquidity and capital resources, as well as our individual operating segment results, in much greater detail. Please also see “Management’s Discussion and Analysis—Future Outlook” for further details.

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Results of Operations

The following table sets forth certain information regarding our costs and expenses expressed as a percentage of consolidated net sales:

Fiscal 2002 Compared to Fiscal 2001:

Consolidated Results

Please note that the following discussions compare an 11-month fiscal year 2002 with a 12-month fiscal year 2001. Fiscal year 2002 is an 11-month transition period attributable to the change in our fiscal year end. On December 16, 2002, our board of directors approved a change in our fiscal year end from the Saturday nearest February 28^th to the Saturday nearest January 31^st, effective in 2003. We made this decision to align our reporting schedule with the majority of other national retail companies.

The following table, which sets forth our unaudited results of operations for the one-month period ended March 2, 2002, is provided to assist the reader in assessing differences in our overall fiscal 2001 and 2002 performance.

Our consolidated net sales for fiscal 2002 were $473.2 million, an increase of $9.1 million, or 2.0%, compared with the consolidated net sales of $464.0 million during fiscal 2001. Note that our consolidated net sales increased even though we are comparing an 11-month fiscal year 2002 to a

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12-month fiscal year 2002. To illustrate, our consolidated net sales increased $37.4 million, or 8.6% from consolidated net sales of $435.7 in the comparable 11-month period in the prior year. This increase is primarily due to the incremental net sales from the 19 stores that were open during the entirety of fiscal 2002 but that were open during only a portion of fiscal 2001. The addition of 14 retail stores during fiscal 2002 and, to a lesser extent, stronger customer response during the Holiday season also contributed to this increase. These positive impacts were partially offset by significantly decreased full-priced sales by our Direct Segment’s catalog business. Please refer to “Fiscal 2002 Compared to Fiscal 2001—Operating Segment Results” below for further details.

Our consolidated cost of sales primarily consists of merchandise acquisition costs, including related buying and freight-in costs, as well as warehousing and distribution costs, shipping and handling costs, returned merchandise processing costs, and retail and outlet store occupancy costs. Our consolidated cost of sales for fiscal 2002 were $284.4 million, an increase of $11.7 million, or 4.3%, from $272.7 million in fiscal 2001. Our consolidated gross profit decreased by $2.6 million, or 1.4%, to $188.8 million for fiscal 2002 from $191.4 million for fiscal 2001, and our consolidated gross margin decreased to 39.9% for fiscal 2002 from 41.2% for fiscal 2001.

The decrease in our consolidated gross profit dollars was primarily attributable to there being one less month in fiscal 2002 than in fiscal 2001 partially offset by the aforementioned increase in consolidated net sales. To a lesser extent, the decrease was mitigated by rebates received from merchandise vendors. These rebates, which were credited to cost of sales as the related merchandise was sold, totaled $2.0 million in fiscal 2002 versus $0.8 in fiscal 2001. The decrease in gross profit percentage was primarily attributable to our decision in the fiscal 2002 fourth quarter to conduct a concentrated effort to clear obsolete inventory and, to a lesser extent, diminished leveraging of retail occupancy costs. These negative impacts were partially offset by improved margins on full-price sales by our Retail Segment.

Our consolidated selling, general & administrative (“SG&A”) expenses consist primarily of general and administrative expense and, to a slightly lesser extent, selling and marketing expenses. Our consolidated SG&A expenses for fiscal 2002 were $173.3 million, a decrease of $15.6 million, or 8.2%, from $188.9 million for fiscal 2001. Our consolidated SG&A expenses as a percentage of our consolidated net sales decreased to 36.6% for fiscal 2002 from 40.7% for fiscal 2001.

For fiscal 2002, our SG&A expenses were positively affected by reduced catalog cost amortization related to the mailing of 24.8 million, or 15.4% fewer catalogs and by there being one less month in fiscal 2002 compared with fiscal 2001. These positive impacts were partially offset by incremental personnel and infrastructure costs incurred in connection with the continued development and expansion of our Retail Segment. The associated personnel costs primarily included administrative and technical support salaries, store employee wages, and related taxes and employee benefits. The associated infrastructure costs primarily consisted of depreciation and other costs associated with incremental administrative support facilities and hardware and software technology. Additionally, our fiscal 2002 SG&A expenses were negatively affected by costs of approximately $0.9 million associated with settling a dispute with a former merchandise vendor. Our SG&A rate was positively impacted principally by improved response rates to catalogs mailed to the company’s house file and, to a lesser extent, the company’s leveraging of reduced catalog production costs. These positive impacts were partially offset by increased customer prospecting from which we historically elicit diminished customer response rates and lower average order dollars. Please refer to 16—“Contingencies” to our accompanying consolidated financial statements for further details regarding the settling of the dispute with a merchandise vendor.

We view each of our catalog mailings as an integral part of our ongoing overall marketing investment in current and future customer growth across all of our sales channels. Traditionally, we had pursued an aggressive catalog circulation strategy, with vigorous new customer prospecting, when

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market conditions permitted. However, we continued to maintain a conservative circulation strategy during fiscal 2002, as we did during fiscal 2001, pending indications of a sustained recovery of the U.S. economy. As a result, our fiscal 2002 catalog mailings were 136.2 million, a decrease of 24.8 million catalogs, or 15.4%, from our 161.0 million catalog mailings in fiscal 2001. Although curtailed, our fiscal 2002 catalog mailings resulted in our proprietary catalog mailing list growing to 14.0 million names at February 1, 2003 from 12.5 million names at March 2, 2002. Our active customers, being those customers who have purchased merchandise from us through any of our three sales channels during the preceding twelve months, increased slightly to 2.7 million at February 1, 2003 from 2.6 million at March 2, 2002.

As a result of the foregoing, our consolidated income from operations was $15.4 million for fiscal 2002, an increase of $13.0 million, or 528.2%, compared with the consolidated income from operations of $2.5 million for fiscal 2001. Expressed as a percentage of net sales, our consolidated income from operations was 3.3% for fiscal 2002 compared with 0.5% for fiscal 2001.

Our consolidated net interest and other income was minimal during both fiscal 2002 and fiscal 2001 as we continued to utilize excess working capital to fund the continued expansion of our Retail Segment.

For fiscal 2002 our consolidated provision for income taxes was $6.3 million, an increase of $5.1 million, or 448.2%, compared with a consolidated provision for income taxes of $1.1 million for fiscal 2001. Our effective income tax rate for fiscal 2002 increased to 40.0% from 38.8% for fiscal 2001. The increase in our income tax expense was primarily the result of higher pre-tax income. The increase in our effective income tax rate was primarily the result of our Retail Segment’s expansion into and within states with higher corporate income tax rates and, to a lesser extent, the non-deductibility for tax purposes of the imputation into our SG&A expenses of the fair market value salaries related to the contributed services of the founders, Dennis and Ann Pence. Please see “Management’s Discussion & Analysis- Other Matters – Related Party Transactions” for further details.

We completed fiscal 2002 realizing consolidated net income of $9.4 million (net income per basic and diluted share of $0.59 and $0.58, respectively, as adjusted for the 50% stock dividend having the effect of a 3-for-2 stock split) as compared to consolidated net income of $1.8 million (net income per basic and diluted share of $0.11, as adjusted for the 50% stock dividend having the effect of a 3-for-2 stock split) in fiscal 2001, an increase of $7.6 million or 419.8%.

Operating Segment Results

The following table, which sets forth the unaudited impact on net sales by business channel of the one-month period ended March 2, 2002, is provided to assist the reader in assessing differences in our net sales by business channel.

Our Direct Segment contributed $365.7 million in net sales for fiscal 2002, a decrease of $35.1 million, or 8.8%, from the $400.8 million contributed in fiscal 2001. Our Direct Segment constituted 77.3% and 86.4% of our consolidated net sales for fiscal 2002 and 2001, respectively.

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Our Direct Segment’s catalog and outlet store businesses, on a stand-alone basis, contributed $215.9 million in net sales for fiscal 2002, a decrease of $41.6 million, or 16.2%, from the $257.5 million contributed in fiscal 2001. Our catalog and outlet store businesses constituted 45.6% and 55.5% of our consolidated net sales, and 59.0% and 64.3% of our Direct Segment’s net sales, for fiscal 2002 and 2001, respectively.

The above decreases in catalog and outlet store net sales primarily reflect our significantly lower full-price catalog sales which we primarily attribute to the mailing of 24.8 million, or 15.4%, fewer catalogs, by there being one less month in fiscal 2002 compared with fiscal 2001 and, to a lesser extent, soft consumer demand for women’s apparel stemming from the generally weak U.S. economy. Better-than-expected catalog sales returns experience mitigated this sales decrease.

We attribute a measure of the above decrease in catalog and outlet store net sales to our migration of full-price merchandise orders out of our catalog sales channel and into our e-commerce sales channel. Our ongoing efforts to promote our www.coldwatercreek.com web site in all of our catalogs and stores is intended to encourage such migration as our e-commerce business is an efficient and cost effective sales channel.

Our Direct Segment’s e-commerce business, on a stand-alone basis, contributed $149.8 million in net sales for fiscal 2002, an increase of $6.5 million, or 4.5%, from the $143.2 million in net sales contributed in fiscal 2001. Our e-commerce business constituted 31.7% and 30.9% of our consolidated net sales, and 41.0% and 35.7% of our Direct Segment’s net sales, for fiscal 2002 and 2001, respectively.

We primarily attribute the above increase in e-commerce net sales to incremental business generated from new customers obtained through our increased participation in affiliate web site programs, our ongoing e-mail promotional efforts with existing customers, and migrating catalog customers and catalog-initiated web site orders. Increased e-commerce clearance sales and, to a lesser extent, better-than-anticipated e-commerce sales returns experience also contributed to the e-commerce net sales increase. We also believe that our e-commerce business is increasingly realizing sales from customers initially obtained by us through our retail store openings. The mailing of 24.8 million, or 15.4%, fewer catalogs mitigated the aforementioned increases as did the fact that there was one less month in fiscal 2002 compared with fiscal 2001. Our proprietary e-mail address database consisted of 1.8 million names at February 1, 2003 compared with 1.5 million names at March 2, 2002.

Our Retail Segment contributed $107.5 million in net sales for fiscal 2002, an increase of $44.3 million, or 70.0%, from the $63.2 million contributed in fiscal 2001. Our Retail Segment constituted 22.7% and 13.6% of our consolidated net sales for fiscal 2002 and 2001, respectively.

The above increase in net sales primarily reflects incremental sales from the 19 stores that were open during the entirety of fiscal 2002, but were open during only a portion of fiscal 2001 and, to a lesser extent, the addition of 14 full-line retail stores since fiscal 2001. These increases were partially offset by there being one less month in fiscal 2002 compared with fiscal 2001.

Our Direct Segment’s operating contribution, as defined, for fiscal 2002 was $53.1 million as compared with $50.9 million for fiscal 2001. We primarily attribute the increase in our Direct Segment’s operating contribution, as defined, to substantially reduced catalog marketing expenses and better-than-anticipated sales returns experience. These positive impacts were partially offset by decreased full-price net sales from our catalog business and, to a lesser extent, reduced margins on clearance sales by our e-commerce business.

Our Retail Segment’s operating contribution, as defined, for fiscal 2002 was $9.8 million as compared to $(0.4) million for fiscal 2001. We primarily attribute the improvement in our Retail

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Segment’s operating contribution, as defined, to increased margins on our full-price sales and reduced retail store pre-opening expenses. The retail store pre-opening expenses decreased as a result of our opening 14 stores in fiscal 2002 compared with 19 stores in fiscal 2001 combined with overall cost savings in the store pre-opening process. These positive impacts were partially offset by reduced leveraging of the Retail Segment’s fixed occupancy costs.

Fiscal 2001 Compared to Fiscal 2000:

Consolidated Results

Our consolidated net sales for fiscal 2001 were $464.0 million, an increase of $5.6 million, or 1.2%, from $458.4 million in fiscal 2000. Excluding consolidated net sales of approximately $8.1 million attributable to the additional fifty-third week in fiscal 2000, our consolidated net sales for fiscal 2001 increased by $13.7 million, or 3.0%. On a comparative fifty-two week basis, the fiscal 2001 increase in our consolidated net sales primarily was attributable to increased full-priced, first-line sales by our Retail Segment and, to a lesser extent, our Direct Segment’s e-commerce business. Significantly increased clearance sales by our e-commerce business also contributed measurably to the overall increase, although at diminished gross margins. These sales increases were substantially offset primarily by decreased full-priced, first-line sales by our Direct Segment’s catalog business and, to a significantly lesser extent, decreased clearance sales by our catalog business and outlet stores.

Our cost of sales primarily consists of merchandise acquisition costs, including related buying and freight-in costs, as well as warehousing and distribution costs, shipping and handling costs, returned merchandise processing costs, and retail and outlet store occupancy costs. Our consolidated cost of sales for fiscal 2001 were $272.7 million, an increase of $17.5 million, or 6.8%, from $255.2 million in fiscal 2000. Our consolidated gross profit decreased by $11.9 million, or 5.9%, to $191.4 million for fiscal 2001 from $203.3 million in fiscal 2000, and our consolidated gross margin decreased to 41.2% for fiscal 2001 from 44.3% in fiscal 2000. The fiscal 2001 decreases in our consolidated gross profit dollars and margin primarily were attributable to our significantly lower-than-expected full-priced, first-line apparel sales. This sales shortfall undermined our planned leveraging of the incremental occupancy costs incurred from the opening of 19 new stores during fiscal 2001, particularly from the opening of 15 new stores during our fiscal 2001 third quarter. To a lesser extent, our consolidated gross margin for fiscal 2001 was adversely impacted by the increased clearance sales made by our e-commerce business in order to maintain our conservative inventory position.

Our consolidated SG&A expenses primarily consist of selling and marketing expenses and, to a slightly lesser extent, general and administrative expenses. Our consolidated SG&A expenses for fiscal 2001 were $188.9 million, an increase of $6.1 million, or 3.4%, from $182.8 million in fiscal 2000. Our consolidated SG&A expenses as a percentage of consolidated net sales increased to 40.7% for fiscal 2001 from 39.9% in fiscal 2000. The fiscal 2001 increase in our consolidated SG&A expenses primarily was attributable to incremental personnel and infrastructure costs incurred in connection with the continued development and expansion of our Retail Segment and, to a significantly lesser extent, our Direct Segment’s e-commerce business. The associated personnel costs primarily included administrative and technical support salaries, store wages, and related taxes and employee benefits. The associated infrastructure costs primarily consisted of depreciation and other costs associated with incremental administrative support facilities and hardware and software technology. Partially offsetting these incremental costs primarily were decreases in catalog development, production and circulation costs due to our reduced mailings, as discussed below, and, to a substantially lesser extent, decreases in incentive performance-based compensation, Direct Segment wages, and education and training. The fiscal 2001 increase in our consolidated SG&A rate primarily was attributable to our inability, in light of the aforementioned sales shortfall, to leverage our incremental costs. Our fiscal 2001 SG&A expenses also reflect an aggregate $0.3 million charge for asset write-downs and outside service costs incurred in connection with our fiscal 2001 fourth quarter decision to close our Sandpoint distribution

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center, as previously discussed. Additionally, the SG&A expenses reflect a $0.8 million charge for asset write-off relating to obsolete Internet e-commerce software that was recorded in the fiscal 2001 fourth quarter. We also recorded a $0.2 million charge related to executive severance during the fiscal 2001 fourth quarter.

Traditionally, a key element of our ongoing marketing strategy has been to pursue an aggressive catalog circulation strategy, with vigorous new customer prospecting, when market conditions permit. However, with our initial noting of diminished consumer demand in mid-January 2001, we downwardly revised our planned catalog circulation for the upcoming fiscal 2001 year. We subsequently made further adjustments to our circulation plan as fiscal 2001 progressed and the U.S. economy further weakened. As a result, after excluding 5.5 million catalogs mailed during the additional fifty-third week in fiscal 2000, our fiscal 2001 catalog mailings were 161.0 million, a decrease of 17.1 million catalogs, or 9.6%, from our 178.1 million catalog mailings in fiscal 2000. However, we did not realize a corresponding decrease in our catalog marketing expenses for fiscal 2001 primarily due to the timing of certain large catalog mailings, including a significant number of prospect mailings, made just prior to our preceding fiscal 2000 year-end, the related costs of which were substantially amortized into our fiscal 2001 first quarter SG&A expenses. To a lesser extent, we also incurred incremental catalog circulation costs in fiscal 2001 as a result of a postal rate increase. Although curtailed for fiscal 2001, this ongoing marketing investment in current and future customer growth across all sales channels resulted in our proprietary catalog mailing list growing to 12.5 million names at March 2, 2002, an increase of 1.7 million names, or 15.7%, from 10.8 million names at March 3, 2001. However, our active customers, being those customers who have purchased merchandise from us through any of our three sales channels during the preceding twelve months, remained constant at 2.6 million.

As a result of the foregoing, our consolidated income from operations decreased by $18.0 million, or 88.0%, to $2.5 million for fiscal 2001 from $20.5 million in fiscal 2000. Expressed as a percentage of consolidated net sales, our consolidated income from operations was 0.5% for fiscal 2001 versus 4.5% for fiscal 2000.

We realized consolidated net interest and other income of $0.5 million for fiscal 2001 as compared to $1.1 million in fiscal 2000. This decrease primarily is attributable to decreased interest income from lower average cash balances and, to a lesser extent, lower interest rates during fiscal 2001.

Consistent with the 86.4% decrease in our consolidated pre-tax income, our consolidated provision for income taxes decreased $7.2 million, or 86.4%, to $1.1 million for fiscal 2001 from $8.4 million in fiscal 2000. Our effective income tax rate for fiscal 2001 was 38.8% as compared to 38.7% for fiscal 2000. Our effective aggregate state income tax rate increased over the prior fiscal year due to our opening of new stores in additional states which was substantially offset primarily by a decrease in our federal income tax rate due to our significantly decreased pre-tax income in fiscal 2001.

We completed fiscal 2001 realizing consolidated net income of $1.8 million (net income per basic and diluted share of $0.11, as adjusted for the 50% stock dividend having the effect of a 3-for-2 stock split) as compared to $13.2 million (net income per basic and diluted share of $0.84 and $0.81, respectively, as adjusted for the 50% stock dividend having the effect of a 3-for-2 stock split) in fiscal 2000, a decrease of $11.4 million or 86.4%.

Operating Segment Results

Our Direct Segment contributed $400.8 million in net sales for fiscal 2001, a decrease of $23.5 million, or 5.5%, from the $424.3 million contributed in fiscal 2000. Excluding net sales of approximately $7.4 million attributable to the additional fifty-third week in fiscal 2000, our Direct Segment’s net sales for fiscal 2001 decreased by $16.1 million, or 3.9%. Our Direct Segment constituted 86.4% and 92.6% of our consolidated net sales for fiscal 2001 and 2000, respectively.

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Our Direct Segment’s catalog business and outlet stores, on a stand-alone basis, contributed $257.5 million, or 55.5% of our consolidated net sales for fiscal 2001, as compared to $311.9 million, or 68.0%, of our consolidated net sales for fiscal 2000. Excluding net sales of approximately $5.3 million attributable to the additional fifty-third week in fiscal 2000, our catalog and outlet net sales for fiscal 2001 decreased by $49.1 million, or 16.0%. Our catalog business and outlet stores constituted 64.3% and 73.5% of our Direct Segment’s net sales for fiscal 2001 and 2000, respectively.

Our Direct Segment’s e-commerce business, on a stand-alone basis, contributed $143.2 million, or 30.9%, of our consolidated net sales for fiscal 2001, as compared to $112.4 million, or 24.5%, of our consolidated net sales for fiscal 2000. Excluding net sales of approximately $2.1 million attributable to the additional fifty-third week in fiscal 2000, our e-commerce net sales for fiscal 2001 increased by $32.9 million, or 29.8%. Our e-commerce business constituted 35.7% and 26.5% of our Direct Segment’s net sales for fiscal 2001 and 2000, respectively.

Our Retail Segment contributed $63.2 million in net sales for fiscal 2001, an increase of $29.0 million, or 84.8%, from the $34.2 million contributed in fiscal 2000. Excluding net sales of approximately $0.6 million attributable to the additional fifty-third week in fiscal 2000, our Retail Segment’s net sales for fiscal 2001 increased by $29.6 million, or 88.1%. Our Retail Segment constituted 13.6% and 7.5% of our consolidated net sales for fiscal 2001 and 2000, respectively. We primarily attribute the net sales growth realized by our Retail Channel to the addition of 19 full-line retail stores during fiscal 2001.

We believe that the fiscal 2001 decrease in net sales by our Direct Segment’s catalog business primarily reflects our sought after migration of full-priced, first-line merchandise orders out of our catalog sales channel and into our e-commerce sales channel. Our ongoing efforts to promote our www.coldwatercreek.com web site in all of our catalogs and stores is intended to encourage such migration as our e-commerce business is an efficient and cost effective sales channel. As such, we realize increased profitability whenever an existing catalog customer chooses to utilize our web site, whether it be for an entire shopping experience or just to place a catalog or store-initiated order. We primarily attribute the balance of the fiscal 2001 net sales decrease realized by our catalog business to our reduced catalog circulation and, to a lesser extent, a combination of lower average response rates and lower average order dollars, which we primarily attribute to the weak economic environment. We primarily attribute the balance of the fiscal 2001 net sales increase realized by our e-commerce business to new customers obtained through our participation in affiliate web site programs, our targeted advertising in national magazines popular with our core demographic and our ongoing e-mail promotional efforts. With respect to the latter, we grew our proprietary e-mail address database to 1.5 million names at March 2, 2002, including 140,000 purchased names, from 1.2 million names at March 3, 2001. To a significantly lesser extent, we believe that our e-commerce business is increasingly realizing net sales from customers initially obtained by us through our retail store openings.

Our Direct Segment’s operating contribution, as defined, for fiscal 2001 was $50.9 million as compared to $64.4 million for fiscal 2000 and our Retail Segment’s operating contribution, as defined, for fiscal 2001 was $(0.4) million as compared to $1.6 million for fiscal 2000. We primarily attribute these fiscal 2001 decreases to each segment’s inability, in light of their full-priced, first-line sales shortfalls, to leverage their respective infrastructure costs. Our Direct Segment’s lower operating contribution additionally reflects increased clearance sales at reduced margins by its e-commerce business whereas our Retail Segment’s negative operating contribution additionally reflects significant pre-opening costs for its 19 new stores.

Quarterly Results of Operations and Seasonal Influences

As with many apparel retailers, our net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as an annual basis, as a result of

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a number of factors, including, but not limited to, the following: the composition, magnitude and timing of our various merchandise offerings, including our recognition of related sales and costs; the number and timing of our full-line retail store openings; customer responsiveness, including the impact of economic and weather-related influences; merchandise return rates, including the impact of actual or perceived service and quality issues; market price fluctuations in critical materials and services, including paper, production, postage and telecommunications costs; the timing of merchandise receiving and shipping, including any delays resulting from adverse weather conditions or national security measures; and chronological shifts in the timing of important holiday selling seasons, including Valentine’s Day, Easter, Mother’s Day, and Christmas. We alter the composition, magnitude and timing of our merchandise offerings based upon our then understanding of prevailing consumer demand, preferences and trends. The timing of our merchandise offerings may be further impacted by, among other factors, the performance of various third parties to which we are dependent and the day of the week on which certain important holidays fall. Additionally, the net sales we realize from a particular merchandise offering may transcend fiscal quarters and years and the amount and pattern of the sales realization may differ from that realized by a similar merchandise offering in a prior fiscal quarter or year. The majority of net sales from a merchandise offering generally is realized within the first several weeks after its introduction with an expected significant decline in customer orders thereafter.

Particularly notable is our continuing material dependency on sales and profits from the November and December holiday shopping season. In anticipation of traditionally increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. Additionally, as gift items and accessories are more prominently represented in our November and December holiday season merchandise offerings, we typically expect, absent offsetting factors, to realize higher consolidated gross margins in the second half of our fiscal year. If, for any reason, we were to realize significantly lower-than-expected sales or profits during the November and December holiday selling season our financial condition, results of operations, including related gross margins, and cash flows for the entire fiscal year will be materially adversely affected. Please note that, due to our change in fiscal year end, the November and December holiday season falls into our fiscal fourth quarter. Previously, the November portion of the holiday season fell into our fiscal third quarter whereas the December portion of the holiday season fell into our fiscal fourth quarter. See Management’s Discussion and Analysis—“Future Outlook” for further details.

The following tables contain selected unaudited quarterly consolidated financial data for fiscal 2002 and fiscal 2001. In our opinion, this unaudited information has been prepared on the same basis as the audited financial statements presented elsewhere and includes all adjustments necessary to present fairly, in all material respects, the information set forth therein on a consistent basis. Please note that the aggregate of certain of the following quarterly amounts may differ from that reported for the full fiscal year due to the effects of rounding.

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We primarily attribute the fiscal 2002 third quarter increase in our consolidated net sales to increased Retail Segment net sales. Our third quarter Retail Segment net sales increased from the addition of 14 full-line stores since the same period in the prior year. We principally ascribe the slight decrease in fiscal 2002 fourth quarter consolidated net sales to there being one less month in the fiscal 2002 fourth quarter than in the fiscal 2001 fourth quarter. However, on comparative two month periods for both the fiscal 2002 and fiscal 2001 fourth quarters, our consolidated net sales increased by $26.2 million, or 29.7%. When considered in that light, we attribute the increase in fiscal 2002 fourth quarter net sales to strong customer response during the holiday season and increased Retail Segment net sales from the addition of 14 full-line stores since the same period in the prior year.

We attribute the decrease in our fiscal 2002 second quarter gross profit dollars and rate to diminished leveraging of our retail occupancy costs partially offset by better-than-anticipated catalog returns experience. We attribute our fiscal 2002 third quarter increase in gross profit dollars to the aforementioned increase in our consolidated net sales. We deem the decrease in our fiscal 2002 third quarter gross profit rate to be the result of diminished leveraging of our retail occupancy costs partially offset by better-than-anticipated catalog returns experience. We principally ascribe the decrease in fiscal 2002 fourth quarter gross profit dollars to there being one less month in the fiscal 2002 fourth quarter than in the fiscal 2001 fourth quarter. However, on comparative two month periods for both the fiscal 2002 and fiscal 2001 fourth quarters, our gross profit dollars increased by $8.3 million, or 27.7% primarily as a result of the aforementioned increase in consolidated net sales for these comparative two month periods. Our fiscal 2002 fourth quarter gross profit rate decreased primarily as a result of our concentrated effort to clear obsolete inventory.

The decrease in our fiscal 2002 third quarter SG&A expenses was primarily due to the mailing of 12.5 million, or 19.8%, fewer catalogs partially offset by an accrual of $0.4 million for costs associated with settling a dispute with a former merchandise vendor. The decrease in our fiscal 2002 third quarter SG&A rate was primarily due to improved response rates to catalog mailings to our house file partially offset by diminished leveraging of our retail occupancy costs. We primarily attribute the decrease in fiscal 2002 fourth quarter SG&A expenses to there being one less month in the fiscal 2002 fourth quarter than in the fiscal 2001 fourth quarter. However, on comparative two month periods for both the fiscal 2002 and fiscal 2001 fourth quarters, our SG&A expenses increased by $4.2 million, or 13.4% primarily as a result of the mailing 3.0 million, or 18.8%, more catalogs and, to a lesser extent, by the recording of approximately $0.5 million associated with settling a dispute with a former merchandise vendor. These impacts were mitigated by the reversal of a $1.0 million employee incentive bonus accrual—payment of which was predicated upon the company achieving specific financial goals for fiscal 2002. Our fiscal 2002 fourth quarter SG&A rate decreased primarily as a result of improved response rates to catalogs mailed to our house file and, to a lesser extent, our leveraging of reduced catalog production costs. These impacts were partially offset by increased customer prospecting.

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As a result of the foregoing, we realized improved operating and net income for the fiscal 2002 first, third and fourth quarters and incurred an operating and net loss in our fiscal 2002 second quarter. See Management’s Discussion and Analysis—“Fiscal 2002 Overview,” “Fiscal 2002 Compared to Fiscal 2001” and “Future Outlook” for further details. Please also refer to Note 16—“Contingencies” to our accompanying consolidated financial statements for further details regarding the settling of the dispute with a merchandise vendor.

Liquidity and Capital Resources

In recent fiscal years, we have funded our ongoing operations and growth initiatives primarily using cash generated by our operations and 60-day trade credit arrangements. However, as we produce catalogs, open retail stores and purchase inventory in anticipation of future sales realization and our operating cash flows and working capital experience seasonal fluctuations, we may occasionally utilize short-term bank credit.

We were party to an agreement with a consortium of banks that provided us with an $80.0 million unsecured revolving credit facility (with a sub-limit of $10.0 million for letters of credit) and a term standby letter of credit of $1.1 million. The credit facility had a maturity date of July 31, 2003. However, we entered into a new credit agreement (the Agreement) with a consortium of banks effective March 5, 2003, that provides us with a $60.0 million unsecured revolving credit facility (with a sub-limit of $20.0 million for letters of credit and a $5.0 million sub-limit for same day advances) and a term standby letter of credit of $1.1 million. The interest rate under the agreement is LIBOR Rate [i.e., LIBOR divided by one minus the reserve requirement, increased or decreased by a margin based upon our leverage ratio, as defined in the Agreement]. The Agreement provides that we must satisfy certain specified EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), EBITDAR (i.e., EBITDA before rental/lease expenses), fixed charge coverage ratio, leverage ratio, current ratio and minimum net worth requirements, as defined in the Agreement. The Agreement also places restrictions on our ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, and make investments or guarantees. The credit facility has a maturity date of March 4, 2006.

Our operating activities generated $38.4 million, $38.8 million and $18.9 million of positive cash flow during fiscal 2002, 2001 and 2000, respectively. On a comparative fiscal year-to-date basis, the fiscal 2002 slight decrease primarily reflects the negative cash flow effects of decreased accounts payable and prepaid and deferred catalog costs and increased receivables almost entirely offset primarily by the positive cash flow effects of significantly improved net income and, to a lesser extent, increased income taxes payable and accrued liabilities. The fiscal 2001 increase primarily reflects the positive cash flow effects of decreased prepaid and deferred catalog costs, increased accounts payable and, to a significantly lesser extent, decreased inventories and receivables. Our fiscal 2001 operating cash flow also benefited from increased non-cash charges primarily for depreciation and amortization and asset impairment charges. Partially offsetting the above primarily was our substantially lower net income and, to a significantly lesser extent, the negative cash flow effects of decreased accrued liabilities.

Our investing activities consumed $17.8 million, $34.9 million and $25.7 million of cash during fiscal 2002, 2001 and 2000, respectively, with cash outlays principally being for capital expenditures. Our fiscal 2002 capital expenditures principally reflect the cost of leasehold improvements for 14 new retail stores and, to a substantially lesser extent, various technology hardware and software additions and upgrades for both the Direct and Retail Segments and the cost of leasehold improvements for six new outlet stores. Our fiscal 2001 capital expenditures primarily reflect the cost of leasehold improvements for 19 new retail stores and, to a substantially lesser extent, various technology hardware and software additions and upgrades, principally for our Retail Segment, and the retrofitting of a portion of our existing Sandpoint Distribution Center into additional administrative space, including related furnishings and equipment. Our fiscal 2000 capital expenditures primarily reflect the cost of

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hardware and software additions and upgrades for our corporate systems and e-commerce web sites, a new point-of-sale computer system for our Retail Segment, leasehold improvements for six new retail stores and leasehold improvements, furnishings and equipment for our newly leased Coeur d’Alene Customer Service Call Center.

Our financing activities provided $1.1 million and $3.9 million of cash during fiscal 2002 and fiscal 2000, respectively, whereas they utilized $3.5 million during fiscal 2001. Fiscal 2002 primarily reflects $1.1 million in net proceeds from exercises of stock options. Fiscal 2001 primarily reflects the outlay of $4.7 million for treasury stock repurchases, partially offset by $1.3 million in net proceeds from exercises of stock options. Fiscal 2000 primarily reflects $3.9 million in net proceeds from exercises of stock options.

As a result of the foregoing, we had $37.4 million in consolidated working capital at February 1, 2003 as compared to $26.7 million at March 2, 2002. Our consolidated current ratio was 1.5 at February 1, 2003 as compared to 1.4 at March 2, 2002. We had no outstanding short-term or long-term bank debt at February 1, 2003 or March 2, 2002.

As previously discussed, we embarked on a long-term program during fiscal 1999 of selectively establishing for the first time full-line retail stores in major metropolitan areas throughout the U.S. Our 41 full-line “metropolitan” retail stores at February 1, 2003 are in addition to our two previously existing full-line “destination” or “resort” retail stores. We currently plan to open 23 full-line retail stores during fiscal 2003 including three stores which will serve to test a smaller sized store than our current store model. Each of these retail stores will be leased, as are all of our existing stores, with an average initial cash investment per store, including leasehold improvements and inventory, in the approximate range of $0.7 million to $1.0 million depending upon size and design elements. Further retail store openings will ultimately be influenced primarily by, among other factors, the prevailing economic environment, our available working capital, and if necessary, external financing, and our ability to timely procure optimum locations on favorable terms within attractive metropolitan malls and lifestyle centers.

We currently estimate between $24.0 million and $28.0 million in total capital expenditures for fiscal 2003, primarily being leasehold improvements for 23 new retail stores and, to a substantially lesser extent, various technology additions and upgrades and the cost of leasehold improvements for eight additional outlet stores. These expenditures are expected to be primarily funded from operating cash flows and working capital, and to the extent necessary, our new bank credit facility. However, the above planned capital expenditures will ultimately be influenced by, among other factors, the prevailing economic environment and our financial condition, results of operations and cash flows.

On March 31, 2001, our Board of Directors authorized a stock repurchase program under which we may repurchase in the open market up to 300,000 outstanding shares of our common stock to be held in treasury. During fiscal 2001, the Company repurchased 209,100 common shares at an average market price of $22.55 per share. We currently do not anticipate any additional share repurchases. The 209,100 common shares repurchased were not impacted by the 50% stock dividend having the effect of a 3-for-2 stock split declared by our board of directors on December 19, 2002.

We believe that our cash flow from operations and available borrowing capacity under our bank credit facility will be sufficient to fund our current operations and growth initiatives for fiscal 2003. Thereafter, we may be required to seek additional sources of funds for continued or accelerated growth and there can be no assurance that such funds will be available on satisfactory terms. Failure to obtain such financing could delay or prevent our planned growth, which could adversely affect our business, financial position, results of operations and cash flows.

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Future Outlook

As of the date of this report, we have not seen a sustained improvement in the U.S. economy. As a consequence of this and possibly other factors, our catalog business has been particularly adversely affected. At the same time, however, our Internet and retail businesses have performed reasonably well during fiscal 2002 given the current difficult economic environment. In an effort to address the relatively weak U.S. economy, we have taken several cost containment measures, as described more fully below, which are reflected in our fiscal 2002 performance. While we believe that, based on current economic conditions, fiscal year 2003 as a whole should be profitable, we expect that this will be heavily dependent upon our performance in the second half of the fiscal year. Should the economy further deteriorate we would have to take additional cost containment measures and our financial position, results of operations and cash flows could be adversely impacted.

Beginning in January 2002, we undertook certain restructuring measures in response to the continuing economic uncertainty and to more appropriately align our business going forward. Most significant was our decision to close our Sandpoint, Idaho distribution center and to consolidate its operations, which during fiscal 2001 had been substantially limited to fulfilling the inventory requirements of our limited base of retail stores, into our 600,000 square foot East Coast Operations Center in Mineral Wells, West Virginia. This consolidation, which included the elimination of approximately 120 salaried and hourly employees, was completed by the end of March 2002. As a result, all of our receiving and distribution functions are now conducted under one roof. Additionally, we identified approximately 20 salaried positions for elimination from our administrative headquarters in Sandpoint and approximately 80 salaried and hourly positions for elimination from our national retail store staff. While we believe we realized cost efficiencies from these measures, we experienced various mitigating events that resulted in certain savings being offset by other cost increases. For example, while there was reduction in the number of costly “split-shipments”, wherein multiple packages are sent to the same customer from different distribution centers, there were offsetting increases in postage rates and in levels of shipping service. However, we have realized cost savings in other expense categories such as Direct Segment and Retail Segment wages.

We also decided during our fiscal 2001 fourth quarter to eliminate our stand-alone “Home” catalog and merchandise line by the fall of 2002 and instead incorporate its most popular product categories into our remaining catalog titles and merchandise lines. The elimination of the “Home” catalog as a stand-alone title was completed at the end of the fiscal 2002 second quarter, and we did not mail any “Home” catalogs during the fiscal 2002 third or fourth quarters. Additionally, during our fiscal 2001 fourth quarter, we decided to eliminate our “Gallery” web site (www.galleryatcoldwatercreek.com) and specialty merchandise line, and instead incorporate its most popular items into our retail stores. During the fiscal 2002 third quarter the Gallery web site was shut down after the Gallery inventory was depleted.

Furthermore, during fiscal 2002, we completed the implementation of our “buy now/wear now” merchandising strategy by timing the arrival of our fall assortment in our full-line stores to better coincide with our customers seasonal apparel needs. This move was in conjunction with the change in our mailing strategy whereby we shifted the timing for mailing our fall catalogs nearer to the end of the fiscal 2002 second quarter than in previous years. Additionally, in an attempt to reduce our future sales susceptibility to unseasonable weather conditions in key demographic markets, we have recently begun to alter our apparel offerings to include a broader assortment of fabrics, designs and colors suitable for multiple seasons. We attribute a portion of our fiscal 2002 third and fourth quarter performance improvements to the implementation of our “buy now/wear now” merchandising strategy.

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Other Matters

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect:

These estimates and assumptions are based on our historical results as well as our future expectations. Our actual results could vary from our estimates and assumptions.

The accounting policies discussed below are those that we believe are the most critical to a materially accurate portrayal of our financial condition and results of operations. They are also the accounting policies that typically require our most difficult, subjective and complex judgments and estimates, often for matters that are inherently uncertain. However, it must be noted, that with respect to our critical accounting policies, even a relatively minor variance between our actual and expected experience can potentially have a materially favorable or unfavorable impact on our subsequent results of operations.

Revenue Recognition

We recognize sales and the related cost of sales either at the time merchandise ordered from a catalog or web site is shipped to the customer or at the time a sale is consummated with a customer in a store. We reduce our sales and costs of sales, and establish and maintain a corresponding accrual, for expected sales returns based on our historical experience and our future expectations. Our ability to reasonably estimate sales returns is made more complex by the fact that we offer our customers a return policy whereby they may return merchandise for any reason and at any time without any restrictions as to condition or time. The actual amount of sales returns we subsequently realize may fluctuate from our estimates due to several factors including, but not necessarily limited to, size and fit, actual or perceived quality, physical approximation to that depicted in our catalog or web site, timeliness of delivery and competitive offerings. We continually track our subsequent sales return experience, compile customer feedback to identify any pervasive issues, reassess the marketplace, compare our findings to our previous estimates and adjust our sales return accrual and cost of sales accordingly.

Inventories

Our inventories consist of merchandise purchased for resale and are reflected, in the aggregate, on our balance sheet at the lower of cost or market. The nature of our business requires that we make substantially all of our merchandising and marketing decisions, and corresponding inventory purchase commitments with vendors, months in advance of the time in which a particular merchandise item is intended to be included in our merchandise offerings. These decisions and commitments are based on, among other possible considerations, our historical sell-through experience with identical or similar merchandise, our understanding of fashion trends and influences as well as our assessment of likely economic conditions and various competitive factors. We continually make subjective assessments as to whether the carrying cost of our inventory exceeds its market value, and if so, by what dollar amount. The carrying value of our inventory is reduced to its realizable value with a corresponding charge to our costs of sales.

Catalog Costs

We accumulate all direct costs incurred in the development, production and circulation of our direct mail catalogs on our balance sheet until such time as the related catalog is mailed, at which time,

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they are subsequently amortized into the marketing component of our SG&A expenses over the expected sales realization cycle, typically several weeks. Our initial estimation of the expected sales realization cycle for a particular catalog merchandise offering is based on, among other possible considerations, our historical sales and sell-through experience with identical or similar catalog merchandise offerings, our understanding of then prevailing fashion trends and influences, our assessment of prevailing economic conditions, and various competitive factors. We continually track our subsequent sales realization, compile customer feedback for indications of future performance, reassess the marketplace, compare our findings to our previous estimate and adjust our amortization going forward.

Recently Issued Accounting Standards Not Yet Adopted

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”), which sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We will adopt SFAS No. 143, as required, effective February 2, 2003 for our fiscal 2003 consolidated financial statements. We currently believe that adoption of SFAS No. 143 will not have a material impact on our consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”). SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements and amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions and by making technical corrections to existing pronouncements. We adopted the provisions of SFAS No. 145 that amended SFAS No. 13 for transactions occurring after May 15, 2002 in our consolidated financial statements for the fiscal 2002 first quarter with no material impact. We will adopt all other provisions of SFAS No. 145, as required, effective February 2, 2003 for our fiscal 2003 consolidated financial statements. We currently believe that adoption of SFAS No. 145 will not have a material impact on our consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF No. 94-3”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and initially measured at fair value. EITF No. 94-3 required that a liability for an exit cost (as defined in EITF No. 94-3) was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. We would be impacted by SFAS No. 146 only if we were to commit to a plan for an exit or disposal activity. Currently, we have not committed to a plan for an exit or disposal activity.

Off-Balance Sheet Liabilities

Our off-balance sheet liabilities primarily are limited to lease payment obligations incurred under operating leases, which are required to be excluded from our consolidated balance sheet by generally accepted accounting principles in the United States. Our only individually significant operating lease is for our East Coast Distribution Center. All of our other operating leases pertain to our retail and outlet stores, our Coeur d’Alene call center and to various equipment and technology.

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As of February 1, 2003, our minimum lease payment requirements, excluding contingent rental payments, are as follows (in thousands):

Subsequent to February 1, 2003, we entered into additional retail leases with minimum lease payment requirements, excluding contingent rental payments, as follows (in thousands):

Additionally, we had inventory purchase commitments of approximately $84.0 million and $52.0 million at February 1, 2003 and March 2, 2002.

See Note 15—“Commitments” to our accompanying consolidated financial statements for further details.

Related Party Transactions

Incentive Based Compensation and Executive Loan Program

Prior to the enactment of the Sarbanes-Oxley Act (“the Act”), we maintained an Executive Loan Program under which we made, at our sole discretion and with prior approvals from the Chief Executive Officer and the Board of Directors’ Compensation Committee, secured long-term loans to key executives other than our founders, Dennis and Ann Pence. Each loan is secured by the executive’s personal net assets, inclusive of all vested stock options in our Company, bears interest at three percent per annum, and becomes due and payable on the earlier of (i) the date ten days before the date on which the vested stock options serving as partial security expire or (ii) ninety days from the date on which the executive’s employment with us terminates for any reason. Outstanding loans were $0.5 million and $0.8 million at February 1, 2003 and March 2, 2002, respectively. None of the loans outstanding prior to enactment of the Act have had any of their terms modified.

During fiscal 2000 and 2001, the Compensation Committee of our Board of Directors authorized compensation bonus pools totaling $250,000 and $75,000, respectively, as additional incentives to retain certain designated key employees. We are accruing the related compensation expense to each designated key employee on a straight-line basis over a twenty-four month period based on specified performance criteria. On March 25, 2002, $200,000 of the $250,000 compensation bonus pool was considered earned and subsequently paid in full. On September 25, 2002, the remaining $50,000 of the $250,000 compensation bonus pool was considered earned and subsequently paid in full. The balance in the remaining pool will be payable provided certain specified performance criteria are met over the preceding 24-month period.

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On March 15, 2002, the Compensation Committee of the Board of Directors authorized retention compensation incentive agreements for two designated key employees in the aggregate amount of $900,000. On September 1, 2002, the Compensation Committee of the Board of Directors amended the agreements for the two previously designated key employees and authorized one additional key employee to receive a retention compensation incentive. Currently, the aggregate amount of the now three agreements is $1,875,000. We accrued the compensation expense related to the original aggregate amount of $900,000 on a straight-line basis through September 1, 2002. We are accruing the remaining portion of the original aggregate amount of $900,000 and the additional amount of $975,000 on a straight-line basis over the re-established thirty-six month retention period based on specified performance criteria and the current expectation that the specified performance criteria will be met.

Arrangements with Principal Shareholders

In light of our not achieving our financial goals for fiscal 2001, our principal shareholders, Dennis and Ann Pence, declined to accept any salaries for their executive management services from the beginning of fiscal 2002 through September 26, 2002 and through September 1, 2002, respectively. As required by generally accepted accounting principles in the United States, we imputed on a straight-line basis into our consolidated SG&A expenses fair market value salaries for Mr. and Mrs. Pence for these periods with corresponding offsetting credits to our consolidated additional paid-in capital. During the fiscal 2002 first quarter the imputed salaries were equivalent to Mr. and Mrs. Pence’s respective $300,000 salaries for fiscal 2001. However, based on diminished participation by Mr. and Mrs. Pence during the fiscal 2002 second quarter, the imputed salaries were reduced to one-half of Mr. Pence’s and one-quarter of Mrs. Pence’s fiscal 2001 salaries. During the fiscal 2002 third quarter, Mr. Pence’s imputed salary expense continued at one-half of his fiscal 2001 salary through September 26, 2002 after which date Mr. Pence began receiving cash remuneration for his executive management services. Effective September 1, 2002, Mrs. Pence retired from her position as our Executive Creative Director. Accordingly, no salary expense related to Mrs. Pence’s contributed services was imputed during the fiscal 2002 third or fourth quarters.

Dennis and Ann Pence personally participate in a jet timeshare program. For flights by them and other corporate executives made exclusively for official corporate purposes, we reimburse Mr. and Mrs. Pence for (i) a usage based pro rata portion of the financing costs, (ii) a usage based pro rata portion of monthly maintenance fees, and (iii) actual hourly usage fees. Aggregate expense reimbursements totaled $725,000 and $278,000 for fiscal 2002 and 2001, respectively.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not been materially impacted by fluctuations in foreign currency exchange rates as substantially all of our business is transacted in, and is expected to continue to be transacted in, U.S. dollars or U.S. dollar-based currencies. We have only been minimally impacted by fluctuations in interest rates as a result of our relatively modest bank borrowings in recent fiscal years. However, as any future borrowings under our new bank credit facility will be at a variable rate of interest, we could potentially be materially adversely impacted should we require significant borrowings in the future, particularly during a period of rising interest rates. We have not used, and currently do not anticipate using, any derivative financial instruments.

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Item 8.    CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

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INDEPENDENT AUDITORS’ REPORT

To the Stockholders of Coldwater Creek Inc.:

We have audited the accompanying consolidated balance sheet of Coldwater Creek Inc. (a Delaware corporation) and subsidiaries as of February 1, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for the eleven-month period then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated balance sheet of Coldwater Creek Inc. and subsidiaries as of March 2, 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for the fiscal years ended March 2, 2002 and March 3, 2001, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements, before the restatement described in Note 2 to the financial statements, in their report dated April 10, 2002.

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

In our opinion, the fiscal 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Coldwater Creek Inc. and subsidiaries as of February 1, 2003, and the results of their operations and their cash flows for the eleven-month period then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed above, the consolidated balance sheet of Coldwater Creek Inc. and subsidiaries as of March 2, 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for the fiscal years ended March 2, 2002 and March 3, 2001 were audited by other auditors who have ceased operations. As described in Note 2 to the financial statements, the common stock outstanding, retained earnings, and net income per share amounts for fiscal 2001 and fiscal 2000, as well as certain amounts in the 1996 stock option plan and employee stock purchase plan disclosures, have been adjusted to reflect a 50 percent stock dividend in the form of a 3-for-2 stock split declared by the Board of Directors on December 19, 2002. We audited the adjustments that were applied to restate certain of the amounts and disclosures related to the Company’s 50 percent stock dividend reflected in the fiscal 2001 and fiscal 2000 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the fiscal 2001 and fiscal 2000 consolidated financial statements of Coldwater Creek Inc. and subsidiaries other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the fiscal 2001 and fiscal 2000 financial statements taken as a whole.

/s/    KPMG LLP

Boise, Idaho

March 10, 2003

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This is the report of Arthur Andersen LLP from the prior year and this report has not been reissued.

REPORT OF INDEPENDENT AUDITORS

To the Stockholders of Coldwater Creek Inc.:

We have audited the accompanying consolidated balance sheets of Coldwater Creek Inc. (a Delaware corporation) and subsidiaries as of March 2, 2002 and March 3, 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for the fiscal years ended March 2, 2002, March 3, 2001 and February 26, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coldwater Creek Inc. and subsidiaries as of March 2, 2002 and March 3, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended March 2, 2002, in conformity with accounting principles generally accepted in the United States.

/s/    ARTHUR ANDERSEN LLP

Boise, Idaho

April 10, 2002

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COLDWATER CREEK INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share data)