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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended: November 3, 2007 or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 1-13113



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SAKS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)



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|                                               |  |                                  
|---------------------------------------------- |  | ---------------------------------
|TENNESSEE                                      |  | 62-0331040                       
|(State or other jurisdiction of incorporation) |  | (IRS Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|12 East 49thStreet New York, New York    |  | 10017     
|(Address of principal executive offices) |  | (Zip Code)

212-940-5305

(Registrants telephone number, including area code)



---

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer ̈Non-accelerated filer ̈

Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

As of November 30, 2007, the number of shares of
the Registrants Common Stock outstanding was 141,738,894.



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TABLE OF CONTENTS



|                              |  |         |  |                                                                                                                 |  |         
|----------------------------- |  | ------- |  | --------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |         |  |                                                                                                                 |  | Page No.
|PART I. FINANCIAL INFORMATION |  |        
|                              |  |         | 
|                              |  | Item 1. |  | Financial Statements (Unaudited)                                                                                |  |         
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Balance Sheets  November 3, 2007, February 3, 2007 and October 28, 2006                 |  | 3       
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Income  Three and Nine Months Ended November 3, 2007 and October 28, 2006 |  | 4       
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Cash Flows  Nine Months Ended November 3, 2007 and October 28, 2006       |  | 5       
|                              |  |         | 
|                              |  |         |  | Notes to Condensed Consolidated Financial Statements                                                            |  | 6       
|                              |  |         | 
|                              |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 27      
|                              |  |         | 
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 43      
|                              |  |         | 
|                              |  | Item 4. |  | Controls and Procedures                                                                                         |  | 43      
|                              | 
|PART II. OTHER INFORMATION    |  |        
|                              |  |         | 
|                              |  | Item 1. |  | Legal Proceedings                                                                                               |  | 44      
|                              |  |         | 
|                              |  | Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                     |  | 44      
|                              |  |         | 
|                              |  | Item 5. |  | Other Information                                                                                               |  | 45      
|                              |  |         | 
|                              |  | Item 6. |  | Exhibits                                                                                                        |  | 45      
|                              | 
|SIGNATURES                    |  | 46     



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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)



|                                               |  |                 |           |                 |   |                 |  |   |          
|---------------------------------------------- |  | --------------- | --------- | --------------- | - | --------------- |  | - | ---------
|                                               |  | November 3,2007 |           | February 3,2007 |   | October 28,2006
|ASSETS                                         |  |                 |           |                 |   |                 |  |   |          
|Current Assets                                 |  |                 |           |                 |   |                 |  |   |          
|Cash and cash equivalents                      |  | $               | 63,464    |                 | $ | 277,883         |  | $ | 767,393  
|Merchandise inventories                        |  |                 | 976,880   |                 |   | 785,302         |  |   | 823,699  
|Other current assets                           |  |                 | 102,172   |                 |   | 146,893         |  |   | 159,363  
|Deferred income taxes, net                     |  |                 | 23,509    |                 |   | 40,763          |  |   | 31,521   
|                                               |  |                 |           |                 |   |                 |  |   |          
|Total current assets                           |  |                 | 1,166,025 |                 |   | 1,250,841       |  |   | 1,781,976
|                                               |  |                 |          
|Property and Equipment, net                    |  |                 | 1,091,196 |                 |   | 1,099,331       |  |   | 1,108,330
|Goodwill and Intangibles, net                  |  |                 | 304       |                 |   | 324             |  |   | 331      
|Deferred Income Taxes, net                     |  |                 | 144,224   |                 |   | 152,754         |  |   | 158,370  
|Other Assets                                   |  |                 | 35,862    |                 |   | 41,053          |  |   | 34,798   
|                                               |  |                 |           |                 |   |                 |  |   |          
|TOTAL ASSETS                                   |  | $               | 2,437,611 |                 | $ | 2,544,303       |  | $ | 3,083,805
|                                               |  |                 |           |                 |   |                 |  |   |          
|                                               |  |                 |          
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                 |           |                 |   |                 |  |   |          
|Current Liabilities                            |  |                 |           |                 |   |                 |  |   |          
|Trade accounts payable                         |  | $               | 264,450   |                 | $ | 231,038         |  | $ | 283,972  
|Accrued expenses and other current liabilities |  |                 | 278,025   |                 |   | 382,346         |  |   | 390,632  
|Dividend payable                               |  |                 | 2,653     |                 |   | 12,729          |  |   | 564,987  
|Current portion of long-term debt              |  |                 | 260,433   |                 |   | 236,667         |  |   | 6,890    
|                                               |  |                 |           |                 |   |                 |  |   |          
|Total current liabilities                      |  |                 | 805,561   |                 |   | 862,780         |  |   | 1,246,481
|                                               |  |                 |          
|Long-Term Debt                                 |  |                 | 338,554   |                 |   | 450,010         |  |   | 681,670  
|Other Long-Term Liabilities                    |  |                 | 166,031   |                 |   | 135,374         |  |   | 135,090  
|                                               |  |                 |           |                 |   |                 |  |   |          
|Total liabilities                              |  |                 | 1,310,146 |                 |   | 1,448,164       |  |   | 2,063,241
|                                               |  |                 |          
|Commitments and Contingencies                  |  |                 |          |                 |   |                |  |   |         
|                                               |  |                 |          
|Shareholders Equity                           |  |                 | 1,127,465 |                 |   | 1,096,139       |  |   | 1,020,564
|                                               |  |                 |           |                 |   |                 |  |   |          
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY     |  | $               | 2,437,611 |                 | $ | 2,544,303       |  | $ | 3,083,805
|                                               |  |                 |           |                 |   |                 |  |   |          

See notes to condensed consolidated financial statements.



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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts)

(Unaudited)



|                                                        |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | --------------- |  | - | --------------- | - |  | - | --------- | -
|                                                        |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                        |  | November 3,2007    |         |   | October 28,2006   |   |         | November 3,2007 |  |   | October 28,2006 |  
|NET SALES                                               |  | $                  | 796,063 |   |                   | $ | 697,041 |                 |  | $ | 2,282,916       |   |  | $ | 1,985,003 |  
|Cost of sales (excluding depreciation and amortization) |  |                    | 462,001 |   |                   |   | 404,610 |                 |  |   | 1,373,808       |   |  |   | 1,211,210 |  
|                                                        |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|Gross margin                                            |  |                    | 334,062 |   |                   |   | 292,431 |                 |  |   | 909,108         |   |  |   | 773,793   |  
|                                                        |  |                    |         |  
|Selling, general and administrative expenses            |  |                    | 205,981 |   |                   |   | 182,327 |                 |  |   | 613,084         |   |  |   | 563,698   |  
|Other operating expenses:                               |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|Property and equipment rentals                          |  |                    | 28,086  |   |                   |   | 29,963  |                 |  |   | 83,635          |   |  |   | 85,106    |  
|Depreciation and amortization                           |  |                    | 33,555  |   |                   |   | 30,617  |                 |  |   | 100,081         |   |  |   | 93,089    |  
|Taxes other than income taxes                           |  |                    | 20,137  |   |                   |   | 20,547  |                 |  |   | 62,106          |   |  |   | 61,918    |  
|Store pre-opening costs                                 |  |                    | 436     |   |                   |   | 70      |                 |  |   | 697             |   |  |   | 359       |  
|Impairments and dispositions                            |  |                    | 413     |   |                   |   | 2,420   |                 |  |   | 4,111           |   |  |   | 8,010     |  
|                                                        |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|OPERATING INCOME (LOSS)                                 |  |                    | 45,454  |   |                   |   | 26,487  |                 |  |   | 45,394          |   |  |   | (38,387   | )
|                                                        |  |                    |         |  
|Interest expense                                        |  |                    | (10,199 | ) |                   |   | (12,108 | )               |  |   | (32,100         | ) |  |   | (37,751   | )
|Gain (Loss) on extinguishment of debt                   |  |                    |        |   |                   |   |        |                 |  |   | (5,634          | ) |  |   | 7         |  
|Other income, net                                       |  |                    | 2,333   |   |                   |   | 6,197   |                 |  |   | 6,903           |   |  |   | 21,948    |  
|                                                        |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|INCOME (LOSS) BEFORE INCOME TAXES                       |  |                    | 37,588  |   |                   |   | 20,576  |                 |  |   | 14,563          |   |  |   | (54,183   | )
|                                                        |  |                    |         |  
|Provision (benefit) for income taxes                    |  |                    | 15,998  |   |                   |   | 8,098   |                 |  |   | 6,562           |   |  |   | (25,225   | )
|                                                        |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                |  |                    | 21,590  |   |                   |   | 12,478  |                 |  |   | 8,001           |   |  |   | (28,958   | )
|DISCONTINUED OPERATIONS:                                |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|Income (loss) from discontinued operations              |  |                    |        |   |                   |   | (17,485 | )               |  |   |                |   |  |   | 193,535   |  
|Provision (benefit) for income taxes                    |  |                    |        |   |                   |   | (11,185 | )               |  |   |                |   |  |   | 132,356   |  
|                                                        |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|INCOME (LOSS) FROM DISCONTINUED OPERATIONS              |  |                    |        |   |                   |   | (6,300  | )               |  |   |                |   |  |   | 61,179    |  
|                                                        |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|NET INCOME                                              |  | $                  | 21,590  |   |                   | $ | 6,178   |                 |  | $ | 8,001           |   |  | $ | 32,221    |  
|                                                        |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|Per-Share amounts - Basic                               |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|Income (Loss) from continuing operations                |  | $                  | 0.15    |   |                   | $ | 0.09    |                 |  | $ | 0.06            |   |  | $ | (0.21     | )
|Income (Loss) from discontinued operations              |  | $                  |        |   |                   | $ | (0.05   | )               |  | $ |                |   |  | $ | 0.45      |  
|Net Income                                              |  | $                  | 0.15    |   |                   | $ | 0.05    |                 |  | $ | 0.06            |   |  | $ | 0.24      |  
|                                                        |  |                    |         |  
|Per-Share Amounts - Diluted                             |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|Income (Loss) from continuing operations                |  | $                  | 0.14    |   |                   | $ | 0.09    |                 |  | $ | 0.05            |   |  | $ | (0.21     | )
|Income (Loss) from discontinued operations              |  | $                  |        |   |                   | $ | (0.05   | )               |  | $ |                |   |  | $ | 0.45      |  
|Net Income                                              |  | $                  | 0.14    |   |                   | $ | 0.05    |                 |  | $ | 0.05            |   |  | $ | 0.24      |  
|                                                        |  |                    |         |  
|Weighted average common shares:                         |  |                    |         |   |                   |   |         |                 |  |   |                 |   |  |   |           |  
|Basic                                                   |  |                    | 141,102 |   |                   |   | 135,646 |                 |  |   | 141,077         |   |  |   | 135,043   |  
|Diluted                                                 |  |                    | 153,049 |   |                   |   | 137,131 |                 |  |   | 153,853         |   |  |   | 135,043   |  

See notes to condensed consolidated financial statements.



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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)



|                                                                                      |  |                   |          |   |                 |   |           |  
|------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | --------------- | - | --------- | -
|                                                                                      |  | Nine Months Ended |         
|                                                                                      |  | November 3,2007   |          |   | October 28,2006 |  
|Operating Activities:                                                                 |  |                   |          |   |                 |   |           |  
|Net Income                                                                            |  | $                 | 8,001    |   |                 | $ | 32,221    |  
|Income from discontinued operations                                                   |  |                   |         |   |                 |   | 61,179    |  
|                                                                                      |  |                   |          |   |                 |   |           |  
|Income (loss) from continuing operations                                              |  |                   | 8,001    |   |                 |   | (28,958   | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities:  |  |                   |          |   |                 |   |           |  
|Depreciation and amortization                                                         |  |                   | 100,081  |   |                 |   | 93,089    |  
|Impairments and dispositions                                                          |  |                   | 4,111    |   |                 |   | 7,466     |  
|Equity compensation                                                                   |  |                   | 4,641    |   |                 |   | 33,404    |  
|Deferred income taxes                                                                 |  |                   | 7,425    |   |                 |   | 121,147   |  
|Excess tax benefit from stock-based compensation                                      |  |                   | (8,747   | ) |                 |   | (3,212    | )
|Loss (Gain) on extinguishment of debt                                                 |  |                   | 5,634    |   |                 |   | (7        | )
|Change in operating assets and liabilities, net                                       |  |                   | (156,397 | ) |                 |   | (121,919  | )
|                                                                                      |  |                   |          |   |                 |   |           |  
|Net Cash (Used In) Provided By Operating Activities - Continuing Operations           |  |                   | (35,251  | ) |                 |   | 101,010   |  
|Net Cash Used In Operating Activities - Discontinued Operations                       |  |                   |         |   |                 |   | (120,494  | )
|                                                                                      |  |                   |          |   |                 |   |           |  
|Net Cash Used In Operating Activities                                                 |  |                   | (35,251  | ) |                 |   | (19,484   | )
|                                                                                      |  |                  
|Investing Activities:                                                                 |  |                   |          |   |                 |   |           |  
|Purchases of property and equipment                                                   |  |                   | (102,177 | ) |                 |   | (78,515   | )
|Proceeds from the sale of property and equipment                                      |  |                   | 7,806    |   |                 |   | 171       |  
|                                                                                      |  |                   |          |   |                 |   |           |  
|Net Cash Used In Investing Activities - Continuing Operations                         |  |                   | (94,371  | ) |                 |   | (78,344   | )
|Net Cash Provided By Investing Activities - Discontinued Operations                   |  |                   |         |   |                 |   | 1,307,230 |  
|                                                                                      |  |                   |          |   |                 |   |           |  
|Net Cash (Used In) Provided By Investing Activities                                   |  |                   | (94,371  | ) |                 |   | 1,228,886 |  
|                                                                                      |  |                  
|Financing Activities:                                                                 |  |                   |          |   |                 |   |           |  
|Proceeds from revolving credit facility                                               |  |                   | 25,000   |   |                 |   |          |  
|Payments on long-term debt and capital lease obligations                              |  |                   | (117,560 | ) |                 |   | (5,430    | )
|Cash dividends paid                                                                   |  |                   | (7,421   | ) |                 |   | (542,766  | )
|Excess tax benefit from stock-based compensation                                      |  |                   | 8,747    |   |                 |   | 3,212     |  
|Purchases and retirements of common stock                                             |  |                   | (27,464  | ) |                 |   | (6,531    | )
|Proceeds from issuance of common stock                                                |  |                   | 33,901   |   |                 |   | 29,255    |  
|                                                                                      |  |                   |          |   |                 |   |           |  
|Net Cash Used In Financing Activities - Continuing Operations                         |  |                   | (84,797  | ) |                 |   | (522,260  | )
|Net Cash Used In Financing Activities - Discontinued Operations                       |  |                   |         |   |                 |   | (149      | )
|                                                                                      |  |                   |          |   |                 |   |           |  
|Net Cash Used In Financing Activities                                                 |  |                   | (84,797  | ) |                 |   | (522,409  | )
|                                                                                      |  |                  
|Increase (Decrease) in Cash and Cash Equivalents                                      |  |                   | (214,419 | ) |                 |   | 686,993   |  
|                                                                                      |  |                  
|Cash and cash equivalents at beginning of period                                      |  |                   | 277,883  |   |                 |   | 77,312    |  
|Plus: Cash and cash equivalents included in assets held for sale at beginning of year |  |                   |         |   |                 |   | 3,088     |  
|Less: Cash and cash equivalents included in assets held for sale at end of year       |  |                   |          |   |                 |   |          |  
|                                                                                      |  |                   |          |   |                 |   |           |  
|Cash and cash equivalents at end of period                                            |  | $                 | 63,464   |   |                 | $ | 767,393   |  
|                                                                                      |  |                   |          |   |                 |   |           |  

See notes to condensed consolidated financial statements.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 1 
GENERAL

BASIS OF PRESENTATION

The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and in compliance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair statement have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Operating results for the three and nine months ended November 3, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 2008 (fiscal year 2007).
The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the Company). All intercompany amounts and transactions have been eliminated.

The accompanying condensed consolidated balance sheet at February 3, 2007 has been derived from the audited financial statements at that date but does not include
all disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Companys 2006 Annual Report on Form
10-K for the fiscal year ended February 3, 2007.

ORGANIZATION

The Companys operations consist of Saks Fifth Avenue (SFA), Off Fifth, and Club Libby Lu. Previously, the Company also operated Saks Department Store Group (SDSG), which consisted of Proffitts
and McRaes (Proffitts) (sold to Belk, Inc. (Belk) in July 2005), the Northern Department Store Group (NDSG) (operated under the nameplates of Bergners, Boston Store, Carson Pirie Scott,
Herbergers and Younkers and sold to The Bon-Ton Stores, Inc. (Bon-Ton) in March 2006), and Parisian (sold to Belk in October 2006). The sold businesses are presented as discontinued operations in the condensed consolidated
statements of income, and the condensed consolidated statements of cash flows for the prior year periods and are discussed in Note 2 Discontinued Operations.



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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Net Sales  Net sales include sales of merchandise (net of returns and exclusive of sales taxes), commissions from leased departments, shipping and handling revenues related to merchandise sold and
breakage income from unredeemed gift cards. Commissions from leased departments were $5,983 and $5,143 for the three months ended November 3, 2007 and October 28, 2006, respectively. Leased department sales were $43,174 and $36,413 for the
three months ended November 3, 2007 and October 28, 2006, respectively, and were excluded from net sales. Commissions from leased departments were $19,290 and $17,154 for the nine months ended November 3, 2007 and October 28,
2006, respectively. Leased department sales were $136,272 and $121,141 for the nine months ended November 3, 2007 and October 28, 2006, respectively, and were excluded from net sales.

Cash and Cash Equivalents Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with banks, and investments with banks
and financial institutions that have original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash equivalents totaled $50,337 and $754,715 at November 3, 2007 and October 28, 2006,
respectively, primarily consisting of money market funds, demand and time deposits. Income earned on cash equivalents was $788 and $6,130 for the three-month periods ended November 3, 2007 and October 28, 2006, respectively, and is
reflected in Other Income. For the nine-month periods ended November 3, 2007 and October 28, 2006, income earned on these cash equivalents was $5,234 and $21,599, respectively, which was reflected in Other Income.

Income Taxes The effective income tax rate for the three and nine-month periods ended November 3, 2007 was 42.6% and 45.1%, respectively, as
compared to 39.4% and 46.6% for continuing operations, for the three and nine-month periods ended October 28, 2006. The increase in the effective rate for the three-month period ended November 3, 2007 was primarily due to an adjustment
resulting from a state audit issue. The decrease in the effective tax rate for the nine-month period ended November 3, 2007 was primarily the result of the settlement of certain state tax examinations as well as other state tax reserve
adjustments recorded in the nine-month period ended October 28, 2006.

For discontinued operations, the effective income tax rate for the three and
nine-month periods ended October 28, 2006 was 64.0% and 68.4%, respectively. This effective income tax rate was higher than the expected rate due to the write-off of non-deductible goodwill related to the sale of NDSG.

Components of the Companys income tax expense for the three and nine-month periods ended November 3, 2007 and October 28, 2006 were as follows:



|                                                               |  |                    |        |                 |                   |         |                 |  |   |                 |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------ | ------ | --------------- | ----------------- | ------- | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                               |  | Three Months Ended |        |                 | Nine Months Ended |        
|                                                               |  | November 3,2007    |        | October 28,2006 |                   |         | November 3,2007 |  |   | October 28,2006 |  
|Continuing Operations:                                         |  |                    |        |                 |                   |         |                 |  |   |                 |   |  |   |         |  
|Expected federal income taxes at 35%                           |  |                    | 13,156 |                 |                   | 7,202   |                 |  |   | 5,097           |   |  |   | (18,953 | )
|State income taxes, net of federal benefit                     |  |                    | 1,767  |                 |                   | 1,488   |                 |  |   | 936             |   |  |   | (4,945  | )
|Effect of settling tax exams and other tax reserve adjustments |  |                    | 872    |                 |                   |        |                 |  |   | 565             |   |  |   | (2,450  | )
|Other items, net                                               |  |                    | 203    |                 |                   | (592    | )               |  |   | (36             | ) |  |   | 1,123   |  
|                                                               |  |                    |        |                 |                   |         |                 |  |   |                 |   |  |   |         |  
|Provision (benefit) for income taxes                           |  | $                  | 15,998 |                 | $                 | 8,098   |                 |  | $ | 6,562           |   |  | $ | (25,225 | )
|                                                               |  |                    |        |                 |                   |         |                 |  |   |                 |   |  |   |         |  
|Discontinued Operations:                                       |  |                    |        |                 |                   |         |                 |  |   |                 |   |  |   |         |  
|Expected federal income taxes at 35%                           |  |                    |       |                 |                   | (6,120  | )               |  |   |                |   |  |   | 67,726  |  
|State income taxes, net of federal benefit                     |  |                    |       |                 |                   | (1,173  | )               |  |   |                |   |  |   | 17,323  |  
|Non-deductible goodwill                                        |  |                    |       |                 |                   |        |                 |  |   |                |   |  |   | 51,192  |  
|Parisian stock basis benefit                                   |  |                    |       |                 |                   | (3,895  | )               |  |   |                |   |  |   | (3,895  | )
|Other items, net                                               |  |                    |       |                 |                   | 3       |                 |  |   |                |   |  |   | 10      |  
|                                                               |  |                    |        |                 |                   |         |                 |  |   |                 |   |  |   |         |  
|Provision (benefit) for income taxes                           |  | $                  |       |                 | $                 | (11,185 | )               |  | $ |                |   |  | $ | 132,356 |  
|                                                               |  |                    |        |                 |                   |         |                 |  |   |                 |   |  |   |         |  



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The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation 48,
Accounting for Uncertainty in Income Taxes (FIN 48) effective as of the beginning of fiscal year 2007. As a result of this adoption, the Company recorded a $33,672 decrease in the liability for unrecognized tax benefits which was accounted for as an
increase to beginning shareholders equity. As of February 4, 2007, the Company had total gross unrecognized tax benefits of $43,956. Of this total, $12,575 represents the amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months
as a result of settling uncertain tax positions. However, the Company does not anticipate this to result in any material change to the amount of unrecognized tax benefits.

As a result of the analysis of uncertain tax positions (due to the adoption of FIN 48), the net deferred tax asset related to the state net operating loss carryforwards increased. Therefore, the Company performed a
valuation allowance analysis to determine the realization of this asset. This analysis resulted in an additional valuation allowance of $19,258 with the offset recorded to shareholders equity in accordance with Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. The Company is subject to the provisions of Statement of Position 90-7 for these net operating losses since these losses were acquired through the
acquisition of a company that had previously filed bankruptcy.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits
in income tax expense. The Company had approximately $2,443 in interest and penalties related to unrecognized tax benefits accrued as of February 4, 2007.



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The Company files a consolidated U.S. Federal income tax return as well as state tax returns in multiple state
jurisdictions. The Company has completed examinations by the Internal Revenue Service for taxable years through January 29, 2005 with no significant adjustments. With respect to the state and local jurisdictions, the Company has completed
examinations in many jurisdictions through the same period and currently has examinations in progress for several jurisdictions.

NOTE 2 
DISCONTINUED OPERATIONS

On March 6, 2006, the Company sold to Bon-Ton all outstanding equity interests of certain of the Companys
subsidiaries that owned NDSG (operating under the nameplates of Bergners, Boston Store, Carson Pirie Scott, Herbergers and Younkers), either directly or indirectly. The consideration received consisted of approximately $1,115,000 in cash
(reduced as described below based on changes in working capital), plus the assumption by Bon-Ton of approximately $35,000 of unfunded benefits liabilities and approximately $35,000 of capital leases. A working capital adjustment based on working
capital as of the effective time of the transaction reduced the amount of cash proceeds by approximately $75,000 resulting in net cash proceeds to the Company of approximately $1,040,000. The disposition included NDSGs operations consisting
of, among other things, the following: the real and personal property, operating leases and inventory associated with 142 NDSG units (31 Carson Pirie Scott stores, 14 Bergners stores, 10 Boston Store stores, 40 Herbergers stores,
and 47 Younkers stores), administrative/headquarters facilities in Milwaukee, Wisconsin, and distribution centers located in Rockford, Illinois, Naperville, Illinois, Green Bay, Wisconsin, and Ankeny, Iowa. NDSG stores generated fiscal year 2005
revenues of approximately $2,168,000. The Company realized a net gain of $204,729 on the sale.

Bon-Ton entered into a Transition Service Agreement with
the Company (NDSG TSA), whereby the Company continued to provide, for varying transition periods, back office services related to the NDSG operations. The back-office services included certain information technology, telecommunications,
credit, accounting and store planning services, among others. Bon-Ton compensated the Company for these services, as outlined in the NDSG TSA. The results of the NDSG operations are reflected as discontinued operations in the accompanying condensed
consolidated statements of income and the condensed consolidated statements of cash flows for the prior year periods presented.

On October 2, 2006,
the Company sold to Belk all of the outstanding equity interests of the Companys subsidiaries that conducted the Parisian business. The consideration received consisted of approximately $285,000 in cash (increased in accordance with a working
capital adjustment). A working capital adjustment based on working capital as of the effective time of the transaction increased the amount of cash proceeds by approximately $14,200. In addition, Belk reimbursed the Company at closing for
approximately $6,700 in capital expenditures incurred in connection with the construction of four new Parisian stores. Belk also paid the Company a premium associated with the purchase of accounts and accounts receivable from Household Bank (SB),
N.A. (now known as HSBC Bank Nevada, N.A., HSBC), in the amount of approximately $2,300. The foregoing resulted in total net cash proceeds to the Company of approximately $308,200.



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The disposition included Parisians operations consisting of, among other things, the following: real and personal
property, operating leases and inventory associated with 38 Parisian stores (which generated fiscal year 2005 revenues of approximately $740,000), a 125,000 square foot administrative/headquarters facility in Birmingham, Alabama and a 180,000 square
foot distribution center located in Steele, Alabama. The Company realized a net loss of $12,811 on the sale.

In connection with the consummation of the
Parisian transaction, the Company entered into a Transition Services Agreement with Belk (Parisian TSA). Pursuant to the Parisian TSA, the Company provided, for varying transition periods, back-office services related to the
Companys former Parisian specialty department store business. The back-office services included information technology, telecommunications, credit, accounting and store planning services, among others. The results of the Parisian operations
are reflected as discontinued operations in the accompanying condensed consolidated statements of income and the condensed consolidated statements of cash flows for the prior year periods presented.

Net sales of the aforementioned businesses that are included within discontinued operations in the accompanying condensed consolidated statements of income for the three
and nine months ended October 28, 2006 are $111,843 and $624,290, respectively.

NOTE 3  EARNINGS PER COMMON SHARE

Calculations of earnings per common share (EPS) for the three and nine months ended November 3, 2007 and October 28, 2006 are as follows (income and
shares in thousands):



|                                                            |  |                                             |        |                         |                                             |                  |   |       |            |  |                         |        |                  |         |  |   |     
|----------------------------------------------------------- |  | ------------------------------------------- | ------ | ----------------------- | ------------------------------------------- | ---------------- | - | ----- | ---------- |  | ----------------------- | ------ | ---------------- | ------- |  | - | ----
|                                                            |  | For the Three Months Ended November 3, 2007 |        |                         | For the Three Months Ended October 28, 2006
|                                                            |  | Net Income                                  |        | Weighted Average Shares |                                             | Per Share Amount |   |       | Net Income |  | Weighted Average Shares |        | Per Share Amount
|Basic EPS                                                   |  | $                                           | 21,590 |                         | 141,102                                     |                  | $ | 0.15  |            |  | $                       | 6,178  |                  | 135,646 |  | $ | 0.05
|Effect of dilutive stock options and convertible debentures |  |                                             |       |                         | 11,947                                      |                  |   | (0.01 | )          |  |                         |       |                  | 1,485   |  |   |    
|                                                            |  |                                             |        |                         |                                             |                  |   |       |            |  |                         |        |                  |         |  |   |     
|Diluted EPS                                                 |  | $                                           | 21,590 |                         | 153,049                                     |                  | $ | 0.14  |            |  | $                       | 6,178  |                  | 137,131 |  | $ | 0.05
|                                                            |  |                                             |        |                         |                                             |                  |   |       |            |  |                         |        |                  |         |  |   |     
|                                                            |  |                                            
|                                                            |  | For the Nine Months Ended November 3, 2007  |        |                         | For the Nine Months Ended October 28, 2006 
|                                                            |  | Net Income                                  |        | Weighted Average Shares |                                             | Per Share Amount |   |       | Net Income |  | Weighted Average Shares |        | Per Share Amount
|Basic EPS                                                   |  | $                                           | 8,001  |                         | 141,077                                     |                  | $ | 0.06  |            |  | $                       | 32,221 |                  | 135,043 |  | $ | 0.24
|Effect of dilutive stock options and convertible debentures |  |                                             |       |                         | 12,776                                      |                  |   | (0.01 | )          |  |                         |       |                  |        |  |   |    
|                                                            |  |                                             |        |                         |                                             |                  |   |       |            |  |                         |        |                  |         |  |   |     
|Diluted EPS                                                 |  | $                                           | 8,001  |                         | 153,853                                     |                  | $ | 0.05  |            |  | $                       | 32,221 |                  | 135,043 |  | $ | 0.24
|                                                            |  |                                             |        |                         |                                             |                  |   |       |            |  |                         |        |                  |         |  |   |     



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The Company had 1,269 and 3,052 option and performance share awards of potentially dilutive common stock outstanding as
of November 3, 2007 and October 28, 2006, respectively, that were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares for the period or
the performance condition has not been met. There were also 19,219 and 15,413 of potentially exercisable shares under the convertible notes at November 3, 2007 and October 28, 2006, respectively, that were not included in the computation
of diluted EPS due to the assumption of net share settlement as discussed below (See Note 4). Additionally, included in the computation of diluted EPS as of November 3, 2007 are 11,327 potentially dilutive shares associated with shares the
Company would issue to settle the difference between the fair value and the par value of the convertible notes upon conversion and the shares to be issued upon the exercise of a call option the Company sold at the time of issuance of the convertible
debentures.

The FASB is contemplating an amendment to SFAS No. 128, Earnings Per Share, that would require the Company to ignore the cash
presumption of net share settlement and to assume share settlement for purposes of calculating diluted earnings per share. Although the Company is now required to ignore the contingent conversion provision on its convertible notes under the Emerging
Issues Task Force (EITF) 04-08, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share, it can still presume that it will satisfy the net share settlement of the par value upon conversion of the
notes in cash, and thus exclude the effect of the conversion of the notes in its calculation of diluted earnings per share. If and when the FASB amends SFAS No. 128, the effect of the changes would require the Company to use the if-converted
method in calculating diluted earnings per share except when the effect would be anti-dilutive. The effect of adopting the amendment to SFAS No. 128 would increase the number of shares in the Companys diluted calculation by 19,219 shares.

NOTE 4  DEBT AND SHARE ACTIVITY

At the
Companys request, due to the sale of NDSG, the revolving credit facility was reduced from $800,000 to $500,000 in March 2006. In September 2006, the maturity date of the revolving credit facility was extended to September 2011.

During June 2006, the Company repurchased a total of approximately $193 in principal amount of senior notes. The repurchase of these notes resulted in a gain on
extinguishment of debt of $7.

On April 12, 2007, the Company announced final results of its modified Dutch Auction tender offer to
purchase a portion of its 8.25% senior notes due November 15, 2008 for an aggregate purchase price not to exceed $100,000 (the offer cap). The offer expired on April 11, 2007. The aggregate principal amount of notes validly
tendered at or above the clearing spread exceeded the offer cap, and the Company accepted $95,872 aggregate principal amount of the notes, resulting in an aggregate purchase price of $100,000 (plus an additional $3,230 in aggregate accrued interest
on such notes). The Company accepted for purchase first, all notes tendered at spreads above the clearing spread, and thereafter, the notes validly tendered at the clearing spread on a prorated basis according to the principal amount of such notes.
During the three months ended May 5, 2007, the Company recorded a loss on extinguishment of debt of approximately $5,222 related to the repurchase of the notes.



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During June and July 2007, the Company repurchased an additional $10,420 in principal amount primarily relating to its
8.25% senior notes. The repurchase of these notes resulted in a loss on extinguishment of debt of approximately $412.

On October 3, 2007, the Company
gave notice that holders of its $230,000 2.0% convertible senior unsecured notes due March 15, 2024 were entitled to convert the convertible notes into shares of the Companys common stock due to the closing price of the Companys
common stock exceeding 120% of the convertible senior notes conversion price for at least 20 out of the last 30 consecutive trading days in the third calendar quarter of 2007. The holders of the convertible notes have until December 31,
2007 to convert their notes into shares of the Companys common stock in accordance with, and subject to, the terms of the convertible notes indenture. Since the holders of the convertible notes have the ability to exercise their conversion
rights, the convertible notes were classified within current portion of long-term debt on the Companys November 3, 2007 balance sheet. As of December 4, 2007, no note holders had converted their notes into the
Companys common stock.

During the three months ended November 3, 2007, the Company repurchased 1,722 shares of its common stock at a cost of
approximately $27,464. At November 3, 2007, there were 35,658 shares remaining available for repurchase under the Companys existing share repurchase program.

NOTE 5  EMPLOYEE BENEFIT PLANS

The Company sponsors a defined benefit cash balance pension plan for many
employees of the Company. In conjunction with the sale of NDSG, the Company sold to Bon-Ton the assets, and Bon-Ton assumed the liabilities, of the Carson Pirie Scott cash balance pension plan. The Company generally funds pension costs currently,
subject to regulatory funding requirements. The components of net periodic pension expense related to the Companys remaining pension plan for the three and nine months ended November 3, 2007 and October 28, 2006 were as follows:



|                                                   |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |        |  
|-------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------ | -
|                                                   |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                   |  | November 3,2007    |        |   | October 28,2006   |   |        | November 3,2007 |  |   | October 28,2006 |  
|Service cost                                       |  | $                  | 331    |   |                   | $ | 1,200  |                 |  | $ | 993             |   |  | $ | 3,906  |  
|Interest cost                                      |  |                    | 1,838  |   |                   |   | 2,095  |                 |  |   | 5,514           |   |  |   | 7,568  |  
|Expected return on plan assets                     |  |                    | (2,782 | ) |                   |   | (2,324 | )               |  |   | (8,346          | ) |  |   | (8,243 | )
|Net amortization of losses and prior service costs |  |                    | 813    |   |                   |   | 935    |                 |  |   | 2,439           |   |  |   | 3,515  |  
|                                                   |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |        |  
|Net periodic pension expense                       |  | $                  | 200    |   |                   | $ | 1,906  |                 |  | $ | 600             |   |  | $ | 6,746  |  
|                                                   |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |        |  

The Company expects minimal or no funding requirements in 2007 and 2008.



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NOTE 6  SHAREHOLDERS EQUITY

On March 6, 2006, the Companys Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $547,500, and the Company reduced shareholders equity by that amount.
Approximately $539,000 of the dividend was paid on May 1, 2006 to shareholders of record as of April 14, 2006. The remaining portion of the dividend payable will be paid prospectively as, and to the extent, awards of restricted stock and
performance shares vest.

On October 3, 2006, the Companys Board of Directors declared a cash dividend of $4.00 per common share totaling
approximately $558,600, and the Company reduced shareholders equity by that amount. Approximately $552,000 of the dividend was paid on November 30, 2006 to shareholders of record as of November 15, 2006. The remaining portion of the
dividend payable will be paid prospectively as, and to the extent, awards of restricted stock and performance shares vest.

The following table summarizes
the changes in shareholders equity for the nine months ended November 3, 2007:



|                                                   |  |                     |   |  |                     |        |   |                            |   |           |                   |  |   |                                      |   |  |                            |         |   |  |   |           |  
|-------------------------------------------------- |  | ------------------- | - |  | ------------------- | ------ | - | -------------------------- | - | --------- | ----------------- |  | - | ------------------------------------ | - |  | -------------------------- | ------- | - |  | - | --------- | -
|                                                   |  | Common Stock Shares |   |  | Common Stock Amount |        |   | Additional Paid-In Capital |   |           | Retained Earnings |  |   | Accumulated Other Comprehensive Loss |   |  | Total Shareholders Equity |        
|Balance at February 3, 2007                        |  | 140,440             |   |  | $                   | 14,048 |   |                            | $ | 1,097,817 |                   |  | $ | 12,620                               |   |  | $                          | (28,346 | ) |  | $ | 1,096,139 |  
|Adoption of FIN 48                                 |  |                     |   |  |                     |        |   |                            |   | 36,528    |                   |  |   | (2,856                               | ) |  |                            |         |   |  |   | 33,672    |  
|Increase valuation allowance                       |  |                     |   |  |                     |        |   |                            |   | (19,258   | )                 |  |   |                                      |   |  |                            |         |   |  |   | (19,258   | )
|Net income                                         |  |                     |   |  |                     |        |   |                            |   |           |                   |  |   | 8,001                                |   |  |                            |         |   |  |   | 8,001     |  
|Dividend adjustment - cancelled restricted shares  |  |                     |   |  |                     |        |   |                            |   | 2,655     |                   |  |   |                                      |   |  |                            |         |   |  |   | 2,655     |  
|Issuance of common stock                           |  | 2,897               |   |  |                     | 290    |   |                            |   | 33,611    |                   |  |   |                                      |   |  |                            |         |   |  |   | 33,901    |  
|Income tax benefit related to employee stock plans |  |                     |   |  |                     |        |   |                            |   | 8,278     |                   |  |   |                                      |   |  |                            |         |   |  |   | 8,278     |  
|Net activity under stock compensation plans        |  | 664                 |   |  |                     | 66     |   |                            |   | 294       |                   |  |   |                                      |   |  |                            |         |   |  |   | 360       |  
|Restricted shares withheld for taxes               |  | (594                | ) |  |                     | (62    | ) |                            |   | (13,398   | )                 |  |   |                                      |   |  |                            |         |   |  |   | (13,460   | )
|Stock-based compensation                           |  |                     |   |  |                     |        |   |                            |   | 4,641     |                   |  |   |                                      |   |  |                            |         |   |  |   | 4,641     |  
|Repurchase of common stock                         |  | (1,722              | ) |  |                     | (172   | ) |                            |   | (27,292   | )                 |  |   |                                      |   |  |                            |         |   |  |   | (27,464   | )
|                                                   |  |                     |   |  |                     |        |   |                            |   |           |                   |  |   |                                      |   |  |                            |         |   |  |   |           |  
|Balance at November 3, 2007                        |  | 141,685             |   |  | $                   | 14,170 |   |                            | $ | 1,123,876 |                   |  | $ | 17,765                               |   |  | $                          | (28,346 | ) |  | $ | 1,127,465 |  
|                                                   |  |                     |   |  |                     |        |   |                            |   |           |                   |  |   |                                      |   |  |                            |         |   |  |   |           |  

NOTE 7  STOCK-BASED COMPENSATION

The Company maintains an equity stock plan for the granting of options, stock appreciation rights, performance shares, restricted stock, and other forms of equity awards to employees and directors. Options granted
generally vest over a four-year period after grant and have an exercise life of seven to ten years from the grant date. Restricted stock and performance shares generally vest one to three years after the grant date, although applicable plans permit
accelerated vesting in certain circumstances at the discretion of the Human Resources and Compensation Committee of the Board of Directors.

In December
2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.123 (revised 2004), Share-Based Payments.



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This statement, referred to as SFAS No. 123R, revised SFAS No. 123, and requires companies to expense the value of employee stock
options and similar awards. Effective January 29, 2006, the Company adopted SFAS No. 123R. The adoption of this standard had an immaterial effect on the Companys fiscal year 2006 consolidated financial statements. Total stock-based
compensation expense, net of related tax effects, for the three and nine months ended November 3, 2007 was $983 and $2,784, respectively, and total stock-based compensation expense for the three and nine months ended October 28, 2006 was
$2,319 and $20,377, respectively.

As of November 3, 2007, the Company had unearned compensation amounts related to restricted stock of $16,972
included in Additional Paid-In Capital, which will be recognized over a weighted average period of less than three years.

NOTE 8  CONTINGENCIES

LEGAL CONTINGENCIES

Investigations

At managements request, the Audit Committee of the Companys Board of Directors conducted an internal investigation in 2004 and 2005. In 2004,
the Company informed the SEC of the Audit Committees internal investigation. Thereafter, the Company was informed by the SEC that it issued a formal order of private investigation. Thereafter, the Company was informed that the Office of the
United States Attorney for the Southern District of New York had instituted an inquiry. On September 5, 2007, the SEC filed a complaint in United States District Court for the Southern District of New York related to improper collections of
vendor markdown allowances in one of six Saks Fifth Avenue merchandising divisions prior to 2004 and a 2002 internal investigation into these collections, the improper timing of the recording of inventory markdowns at Saks Fifth Avenue in 1999 and
2001 and related accounting and disclosure issues. The Company consented to the entry of a final judgment by the Court without admitting or denying the allegations of the complaint filed by the SEC. The final judgment permanently enjoins the Company
and its officers and employees from violating the federal securities laws related to the Companys reporting, record-keeping and internal controls. No fines or other monetary sanctions were levied against the Company. The Company fully
cooperated with the SEC during the course of the SECs investigation.

Vendor Litigations

On May 17, 2005, International Design Concepts, LLC (IDC) commenced litigation against the Company in the United States District Court for the Southern
District of New York raising various claims, including breach of contract, fraud and unjust enrichment. The suit alleges that from 1996 to 2003 the Company improperly took chargebacks and deductions for vendor markdowns, which resulted in IDC going
out of business.



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##### Table of Contents

The suit seeks damages in the amount of the unauthorized chargebacks and deductions. IDC filed a second amended complaint
on June 14, 2005 asserting an additional claim for damages under the Uniform Commercial Code for vendor compliance chargebacks. On November 2, 2007 the Company and the plaintiff settled all of the claims, which were dismissed with
prejudice by the court.

On October 25, 2005 the Chapter 7 trustee for the bankruptcy estate of Kleinerts Inc. filed a complaint against the
Company and several of its subsidiaries in the United States Bankruptcy Court for the Southern District of New York. In its initial complaint the plaintiff, as assignee, alleged breach of contract, fraud, and unjust enrichment, among other causes of
action, and seeks compensatory and punitive damages due to the Companys assessment of alleged improper chargebacks against Kleinerts Inc. totaling approximately $4 million which wrongful acts the plaintiff alleges caused the insolvency
and bankruptcy of Kleinerts Inc. On August 15, 2006 the plaintiff, as assignee, filed an amended complaint in which it asserted several claims including, but not limited to, the Companys allegedly unauthorized chargebacks. The
Company and plaintiff entered into a settlement agreement, which was approved by the Bankruptcy Court on November 14, 2007, and all of the claims were dismissed with prejudice.

On December 8, 2005 Adamson Apparel, Inc. filed a purported class action lawsuit against the Company in the United States District Court for the Northern District of Alabama. In its complaint the plaintiff
asserts breach of contract claims and alleges that the Company improperly assessed chargebacks, timely payment discounts, and deductions for merchandise returns against members of the plaintiff class. The lawsuit seeks compensatory and incidental
damages and restitution.

Other

The Company is
involved in legal proceedings arising from its normal business activities and has accruals for losses where appropriate. Management believes that none of these legal proceedings will have a material adverse effect on the Companys consolidated
financial position, results of operations, or liquidity.

NOTE 9  NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FIN 48, an interpretation of SFAS No. 109, Accounting for Income Taxes. This interpretation clarifies the application of
Statement 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprises financial statements. For a benefit to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. The benefit to be recognized for a tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of
tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. FIN 48 also provides guidance on derecognition, classification of interest and
penalties, accounting in interim periods, and disclosure. The Company adopted FIN 48 as of February 4, 2007.



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##### Table of Contents

During September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which clarifies the
principle that fair value should be based on the assumptions market participants would use when pricing an asset or a liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS
No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this Statement.

On September 29, 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans (SFAS No. 158). The Company adopted SFAS No. 158 prospectively on February 3, 2007. SFAS No. 158 requires an employer that sponsors one or more defined benefit pension plans or other postretirement plans
to 1) recognize the funded status of a plan, measured as the difference between plan assets at fair value and the benefit obligation, in the balance sheet; 2) recognize as a component of other comprehensive income, net of tax, the gains or losses
and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; 3) measure defined benefit plan assets and obligations as of the date of the employers fiscal year-end balance
sheet; and 4) disclose in the notes to the financial statements additional information about the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or
credits, and transition assets or obligations. The adoption of SFAS No. 158 did not have a material effect on the Companys results of operations or financial position for the fiscal year ended February 3, 2007. Additionally,
SFAS No. 158 will require the Company to change the measurement date for the assets and liabilities of its employee benefit plans from November 1 to the Companys fiscal year end beginning with the fiscal year ending
January 31, 2009.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that currently are not required to be measured at fair value. This Statement is effective no later than fiscal
years beginning on or after November 15, 2007. The Company is currently evaluating the impact this standard may have on its financial statements.

The
FASB is contemplating an amendment to SFAS No. 128, Earnings Per Share, that would require the Company to ignore the cash presumption of net share settlement and to assume share settlement for purposes of calculating diluted
earnings per share. Although the Company is now required to ignore the contingent conversion provision on its convertible notes under EITF 04-08, it can still presume that it will satisfy the net share settlement of the par value upon conversion of
the notes in cash, and thus exclude the effect of the conversion of the notes in its calculation of diluted earnings per share. If and when the FASB amends SFAS No. 128, the effect of the changes would require the Company to use the
if-converted method in calculating diluted earnings per share except when the effect would be anti-dilutive. The effect of adopting the amendment to SFAS No. 128 would increase the number of shares in the Companys diluted calculation by
19,219 shares.



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NOTE 10  STORE DISPOSITIONS AND OTHER ACTIVITIES

The Company continuously evaluates its real estate portfolio and closes underproductive stores in the normal course of business as leases expire or as other circumstances
indicate. The Company also performs an asset impairment analysis at each fiscal year end. During the three and nine months ended November 3, 2007, the Company incurred net charges of $413 and $4,111, respectively, primarily related to asset
impairments in the normal course of business. During the three and nine months ended October 28, 2006, the Company incurred net charges of $2,420 and $8,010, respectively, primarily related to asset impairments. Asset impairments are included
in Impairments and Dispositions in the accompanying Condensed Consolidated Statements of Income.

During the three and nine months ended November 3,
2007, the Company incurred expenses of approximately $882 and $26,843, respectively, for severance, retention and transition costs in connection with the Company downsizing following the disposition of its SDSG businesses (discussed in Note 2).
Expenses for severance, retention and transition costs for the three and nine months ended October 28, 2006 were $8,085 and $20,327, respectively. Severance, retention and transition costs are included in Selling, General &
Administrative Expenses in the accompanying Condensed Consolidated Statements of Income. There was a $15,115 payable related to these charges at November 3, 2007.

NOTE 11  CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following tables present condensed consolidating
financial information for: (1) Saks Incorporated and (2) on a combined basis, the guarantors of Saks Incorporateds senior notes (which are all of the wholly owned subsidiaries of Saks Incorporated).

The condensed consolidating financial statements presented as of and for the three and nine-month periods ended November 3, 2007 and October 28, 2006 and as of
February 3, 2007 reflect the legal entity compositions at the respective dates.

Separate financial statements of the guarantor subsidiaries are not
presented because the guarantors are jointly, severally, fully and unconditionally liable under the guarantees. Borrowings and the related interest expense under the Companys revolving credit agreement are allocated to Saks Incorporated and
the guarantor subsidiaries under an intercompany revolving credit arrangement. There are also management and royalty fee arrangements among Saks Incorporated and the subsidiaries. At November 3, 2007, Saks Incorporated was the sole obligor for
a majority of the Companys long-term debt and maintained a small group of corporate employees.



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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT NOVEMBER 3, 2007

(Dollar Amounts In Thousands)



|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|---------------------------------------------- |  | ----------------- | --------- | ---------------------- | - | ------------ |  | -- | ------------ | - |  | - | ---------
|                                               |  | Saks Incorporated |           | Guarantor Subsidiaries |   | Eliminations |  |    | Consolidated
|ASSETS                                         |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Current Assets                                 |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Cash and cash equivalents                      |  | $                 | 50,337    |                        | $ | 13,127       |  |    |              |   |  | $ | 63,464   
|Merchandise inventories                        |  |                   |           |                        |   | 976,880      |  |    |              |   |  |   | 976,880  
|Other current assets                           |  |                   |           |                        |   | 102,172      |  |    |              |   |  |   | 102,172  
|Deferred income taxes, net                     |  |                   |           |                        |   | 23,509       |  |    |              |   |  |   | 23,509   
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Current Assets                           |  |                   | 50,337    |                        |   | 1,115,688    |  |    |             |   |  |   | 1,166,025
|                                               |  |                   |           |                       
|Property and Equipment, net                    |  |                   |           |                        |   | 1,091,196    |  |    |              |   |  |   | 1,091,196
|Goodwill and Intangibles, net                  |  |                   |           |                        |   | 304          |  |    |              |   |  |   | 304      
|Deferred Income Taxes, net                     |  |                   |           |                        |   | 144,224      |  |    |              |   |  |   | 144,224  
|Other Assets                                   |  |                   | 8,658     |                        |   | 27,204       |  |    |              |   |  |   | 35,862   
|Investment in and Advances to Subsidiaries     |  |                   | 1,606,269 |                        |   |              |  | ($ | 1,606,269    | ) |  |   |          
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Assets                                   |  | $                 | 1,665,264 |                        | $ | 2,378,616    |  | ($ | 1,606,269    | ) |  | $ | 2,437,611
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|                                               |  |                   |           |                       
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Current Liabilities                            |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Trade accounts payable                         |  |                   |           |                        | $ | 264,450      |  |    |              |   |  | $ | 264,450  
|Accrued expenses and other current liabilities |  | $                 | 3,772     |                        |   | 274,253      |  |    |              |   |  |   | 278,025  
|Dividend payable                               |  |                   | 2,653     |                        |   |              |  |    |              |   |  |   | 2,653    
|Current portion of long-term debt              |  |                   | 255,000   |                        |   | 5,433        |  |    |              |   |  |   | 260,433  
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Current Liabilities                      |  |                   | 261,425   |                        |   | 544,136      |  |    |             |   |  |   | 805,561  
|                                               |  |                   |           |                       
|Long-Term Debt                                 |  |                   | 276,374   |                        |   | 62,180       |  |    |              |   |  |   | 338,554  
|Other Long-Term Liabilities                    |  |                   |           |                        |   | 166,031      |  |    |              |   |  |   | 166,031  
|Investment by and Advances from Parent         |  |                   |           |                        |   | 1,606,269    |  | ($ | 1,606,269    | ) |  |   |          
|Shareholders Equity                           |  |                   | 1,127,465 |                        |   |              |  |    |              |   |  |   | 1,127,465
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Liabilities and Shareholders Equity     |  | $                 | 1,665,264 |                        | $ | 2,378,616    |  | ($ | 1,606,269    | ) |  | $ | 2,437,611
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED NOVEMBER 3, 2007

(Dollar Amounts In Thousands)



|                                                   |  |                   |        |   |                        |   |         |              |  |    |              |   |  |   |         |  
|-------------------------------------------------- |  | ----------------- | ------ | - | ---------------------- | - | ------- | ------------ |  | -- | ------------ | - |  | - | ------- | -
|                                                   |  | Saks Incorporated |        |   | Guarantor Subsidiaries |   |         | Eliminations |  |    | Consolidated |  
|Net sales                                          |  |                   |        |   |                        | $ | 796,063 |              |  |    |              |   |  | $ | 796,063 |  
|Costs and expenses                                 |  |                   |        |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Cost of sales                                      |  |                   |        |   |                        |   | 462,001 |              |  |    |              |   |  |   | 462,001 |  
|Selling, general and administrative expenses       |  | $                 | 698    |   |                        |   | 205,283 |              |  |    |              |   |  |   | 205,981 |  
|Other operating expenses                           |  |                   | 12     |   |                        |   | 81,766  |              |  |    |              |   |  |   | 81,778  |  
|Store pre-opening costs                            |  |                   |        |   |                        |   | 436     |              |  |    |              |   |  |   | 436     |  
|Impairments and dispositions                       |  |                   |        |   |                        |   | 413     |              |  |    |              |   |  |   | 413     |  
|                                                   |  |                   |        |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Operating Income (loss)                            |  |                   | (710   | ) |                        |   | 46,164  |              |  |    |             |   |  |   | 45,454  |  
|                                                   |  |                   |        |  
|Other income (expense)                             |  |                   |        |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Equity in earnings of subsidiaries                 |  |                   | 26,359 |   |                        |   |         |              |  | ($ | 26,359       | ) |  |   |         |  
|Interest expense                                   |  |                   | (7,966 | ) |                        |   | (2,233  | )            |  |    |              |   |  |   | (10,199 | )
|Other income, net                                  |  |                   | 2,333  |   |                        |   |         |              |  |    |              |   |  |   | 2,333   |  
|                                                   |  |                   |        |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Income before provision (benefit) for income taxes |  |                   | 20,016 |   |                        |   | 43,931  |              |  |    | (26,359      | ) |  |   | 37,588  |  
|Provision (benefit) for income taxes               |  |                   | (1,574 | ) |                        |   | 17,572  |              |  |    |              |   |  |   | 15,998  |  
|                                                   |  |                   |        |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Net Income                                         |  | $                 | 21,590 |   |                        | $ | 26,359  |              |  | ($ | 26,359       | ) |  | $ | 21,590  |  
|                                                   |  |                   |        |   |                        |   |         |              |  |    |              |   |  |   |         |  



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED NOVEMBER 3, 2007

(Dollar Amounts In Thousands)



|                                              |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|--------------------------------------------- |  | ----------------- | ------- | - | ---------------------- | - | --------- | ------------ |  | -- | ------------ | - |  | - | --------- | -
|                                              |  | Saks Incorporated |         |   | Guarantor Subsidiaries |   |           | Eliminations |  |    | Consolidated |  
|Net sales                                     |  |                   |         |   |                        | $ | 2,282,916 |              |  |    |              |   |  | $ | 2,282,916 |  
|Costs and expenses                            |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Cost of sales                                 |  |                   |         |   |                        |   | 1,373,808 |              |  |    |              |   |  |   | 1,373,808 |  
|Selling, general and administrative expenses  |  | $                 | 3,296   |   |                        |   | 609,788   |              |  |    |              |   |  |   | 613,084   |  
|Other operating expenses                      |  |                   | 63      |   |                        |   | 245,759   |              |  |    |              |   |  |   | 245,822   |  
|Store pre-opening costs                       |  |                   |         |   |                        |   | 697       |              |  |    |              |   |  |   | 697       |  
|Impairments and dispositions                  |  |                   |         |   |                        |   | 4,111     |              |  |    |              |   |  |   | 4,111     |  
|                                              |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Operating Income (Loss)                       |  |                   | (3,359  | ) |                        |   | 48,753    |              |  |    |             |   |  |   | 45,394    |  
|                                              |  |                   |         |  
|Other income (expense)                        |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Equity in earnings of subsidiaries            |  |                   | 25,198  |   |                        |   |           |              |  | ($ | 25,198       | ) |  |   |           |  
|Interest expense                              |  |                   | (25,343 | ) |                        |   | (6,757    | )            |  |    |              |   |  |   | (32,100   | )
|Loss on extinguishment of debt                |  |                   | (5,634  | ) |                        |   |           |              |  |    |              |   |  |   | (5,634    | )
|Other income, net                             |  |                   | 6,903   |   |                        |   |           |              |  |    |              |   |  |   | 6,903     |  
|                                              |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Income (loss) before benefit for income taxes |  |                   | (2,235  | ) |                        |   | 41,996    |              |  |    | (25,198      | ) |  |   | 14,563    |  
|Provision (Benefit) for income taxes          |  |                   | (10,236 | ) |                        |   | 16,798    |              |  |    |              |   |  |   | 6,562     |  
|                                              |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Net Income                                    |  | $                 | 8,001   |   |                        | $ | 25,198    |              |  | ($ | 25,198       | ) |  | $ | 8,001     |  
|                                              |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED NOVEMBER 3, 2007

(Dollar Amounts In Thousands)



|                                                                              |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|----------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------------- | - | -------- | ------------ |  | -- | ------------ | - |  | - | -------- | -
|                                                                              |  | Saks Incorporated |          |   | Guarantor Subsidiaries |   |          | Eliminations |  |    | Consolidated |  
|OPERATING ACTIVITIES                                                          |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|Net Income                                                                    |  | $                 | 8,001    |   |                        | $ | 25,198   |              |  | ($ | 25,198       | ) |  | $ | 8,001    |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|Equity in earnings of subsidiaries                                            |  |                   | (25,198  | ) |                        |   |          |              |  |    | 25,198       |   |  |   |         |  
|Excess tax benefit from exercise of stock options                             |  |                   | (8,747   | ) |                        |   |          |              |  |    |              |   |  |   | (8,747   | )
|Depreciation and amortization                                                 |  |                   |          |   |                        |   | 100,081  |              |  |    |              |   |  |   | 100,081  |  
|Provision for employee stock compensation                                     |  |                   | 4,641    |   |                        |   |          |              |  |    |              |   |  |   | 4,641    |  
|Deferred income taxes                                                         |  |                   |          |   |                        |   | 7,425    |              |  |    |              |   |  |   | 7,425    |  
|Impairments and dispositions                                                  |  |                   |          |   |                        |   | 4,111    |              |  |    |              |   |  |   | 4,111    |  
|Loss on extinguishment of debt                                                |  |                   | 5,634    |   |                        |   |          |              |  |    |              |   |  |   | 5,634    |  
|Changes in operating assets and liabilities, net                              |  |                   | 6,994    |   |                        |   | (163,391 | )            |  |    |              |   |  |   | (156,397 | )
|                                                                              |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|Net Cash Used In Operating Activities                                         |  |                   | (8,675   | ) |                        |   | (26,576  | )            |  |    |             |   |  |   | (35,251  | )
|                                                                              |  |                   |          |  
|INVESTING ACTIVITIES                                                          |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|Purchases of property and equipment                                           |  |                   |          |   |                        |   | (102,177 | )            |  |    |              |   |  |   | (102,177 | )
|Proceeds from the sale of assets                                              |  |                   |          |   |                        |   | 7,806    |              |  |    |              |   |  |   | 7,806    |  
|                                                                              |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|Net Cash Used In Investing Activities                                         |  |                   |         |   |                        |   | (94,371  | )            |  |    |             |   |  |   | (94,371  | )
|                                                                              |  |                   |          |  
|FINANCING ACTIVITIES                                                          |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|Intercompany borrowings, contributions and distributions                      |  |                   | (128,427 | ) |                        |   | 128,427  |              |  |    |              |   |  |   |         |  
|Payments on long-term debt and capital lease obligations                      |  |                   | (110,832 | ) |                        |   | (6,728   | )            |  |    |              |   |  |   | (117,560 | )
|Borrowings under credit/receivables facility                                  |  |                   | 25,000   |   |                        |   |          |              |  |    |              |   |  |   | 25,000   |  
|Payment of dividend                                                           |  |                   | (7,421   | ) |                        |   |          |              |  |    |              |   |  |   | (7,421   | )
|Excess tax benefit from exercise of stock options                             |  |                   | 8,747    |   |                        |   |          |              |  |    |              |   |  |   | 8,747    |  
|Repurchase and retirement of common stock                                     |  |                   | (27,464  | ) |                        |   |          |              |  |    |              |   |  |   | (27,464  | )
|Proceeds from issuance of common stock                                        |  |                   | 33,901   |   |                        |   |          |              |  |    |              |   |  |   | 33,901   |  
|                                                                              |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|Net Cash Provided By (Used In) Financing Activities                           |  |                   | (206,496 | ) |                        |   | 121,699  |              |  |    |             |   |  |   | (84,797  | )
|                                                                              |  |                   |          |  
|Increase (Decrease) In Cash and Cash Equivalents                              |  |                   | (215,171 | ) |                        |   | 752      |              |  |    |             |   |  |   | (214,419 | )
|Cash and Cash Equivalents at beginning of period                              |  |                   | 265,508  |   |                        |   | 12,375   |              |  |    |              |   |  |   | 277,883  |  
|                                                                              |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  
|Cash and Cash Equivalents at end of period                                    |  | $                 | 50,337   |   |                        | $ | 13,127   |              |  |    |             |   |  | $ | 63,464   |  
|                                                                              |  |                   |          |   |                        |   |          |              |  |    |              |   |  |   |          |  



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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT OCTOBER 28, 2006

(Dollar Amounts In Thousands)



|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|---------------------------------------------- |  | ----------------- | --------- | ---------------------- | - | ------------ |  | -- | ------------ | - |  | - | ---------
|                                               |  | Saks Incorporated |           | Guarantor Subsidiaries |   | Eliminations |  |    | Consolidated
|ASSETS                                         |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Current Assets                                 |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Cash and cash equivalents                      |  | $                 | 754,715   |                        | $ | 12,678       |  |    |              |   |  | $ | 767,393  
|Merchandise inventories                        |  |                   |           |                        |   | 823,699      |  |    |              |   |  |   | 823,699  
|Other current assets                           |  |                   |           |                        |   | 159,363      |  |    |              |   |  |   | 159,363  
|Deferred income taxes, net                     |  |                   |           |                        |   | 31,521       |  |    |              |   |  |   | 31,521   
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Current Assets                           |  |                   | 754,715   |                        |   | 1,027,261    |  |    |             |   |  |   | 1,781,976
|                                               |  |                   |           |                       
|Property and Equipment, net                    |  |                   |           |                        |   | 1,108,330    |  |    |              |   |  |   | 1,108,330
|Goodwill and Intangibles, net                  |  |                   |           |                        |   | 331          |  |    |              |   |  |   | 331      
|Deferred Income Taxes, net                     |  |                   |           |                        |   | 158,370      |  |    |              |   |  |   | 158,370  
|Other Assets                                   |  |                   | 11,905    |                        |   | 22,893       |  |    |              |   |  |   | 34,798   
|Investment in and Advances to Subsidiaries     |  |                   | 1,442,163 |                        |   |              |  | ($ | 1,442,163    | ) |  |   |          
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Assets                                   |  | $                 | 2,208,783 |                        | $ | 2,317,185    |  | ($ | 1,442,163    | ) |  | $ | 3,083,805
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|                                               |  |                   |           |                       
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Current Liabilities                            |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Trade accounts payable                         |  |                   |           |                        | $ | 283,972      |  |    |              |   |  | $ | 283,972  
|Accrued expenses and other current liabilities |  | $                 | 10,471    |                        |   | 380,161      |  |    |              |   |  |   | 390,632  
|Dividend payable                               |  |                   | 564,987   |                        |   |              |  |    |              |   |  |   | 564,987  
|Current portion of long-term debt              |  |                   |           |                        |   | 6,890        |  |    |              |   |  |   | 6,890    
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Current Liabilities                      |  |                   | 575,458   |                        |   | 671,023      |  |    |             |   |  |   | 1,246,481
|                                               |  |                   |           |                       
|Long-Term Debt                                 |  |                   | 612,278   |                        |   | 69,392       |  |    |              |   |  |   | 681,670  
|Other Long-Term Liabilities                    |  |                   | 483       |                        |   | 134,607      |  |    |              |   |  |   | 135,090  
|Investment by and Advances from Parent         |  |                   |           |                        |   | 1,442,163    |  | ($ | 1,442,163    | ) |  |   |          
|Shareholders Equity                           |  |                   | 1,020,564 |                        |   |              |  |    |              |   |  |   | 1,020,564
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Liabilities and Shareholders Equity     |  | $                 | 2,208,783 |                        | $ | 2,317,185    |  | ($ | 1,442,163    | ) |  | $ | 3,083,805
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED OCTOBER 28, 2006

(Dollar Amounts In Thousands)



|                                                                              |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------------- | - | ------- | ------------ |  | -- | ------------ | - |  | - | ------- | -
|                                                                              |  | Saks Incorporated |         |   | Guarantor Subsidiaries |   |         | Eliminations |  |    | Consolidated |  
|Net sales                                                                     |  |                   |         |   |                        | $ | 697,041 |              |  |    |              |   |  | $ | 697,041 |  
|Costs and expenses                                                            |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Cost of sales                                                                 |  |                   |         |   |                        |   | 404,610 |              |  |    |              |   |  |   | 404,610 |  
|Selling, general and administrative expenses                                  |  | $                 | 1,843   |   |                        |   | 180,484 |              |  |    |              |   |  |   | 182,327 |  
|Other operating expenses                                                      |  |                   | 21      |   |                        |   | 81,106  |              |  |    |              |   |  |   | 81,127  |  
|Store pre-opening costs                                                       |  |                   |         |   |                        |   | 70      |              |  |    |              |   |  |   | 70      |  
|Impairments and dispositions                                                  |  |                   |         |   |                        |   | 2,420   |              |  |    |              |   |  |   | 2,420   |  
|                                                                              |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Operating Income (loss)                                                       |  |                   | (1,864  | ) |                        |   | 28,351  |              |  |    |             |   |  |   | 26,487  |  
|                                                                              |  |                   |         |  
|Other income (expense)                                                        |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Equity in earnings of subsidiaries                                            |  |                   | 15,947  |   |                        |   |         |              |  | ($ | 15,947       | ) |  |   |         |  
|Interest expense                                                              |  |                   | (10,072 | ) |                        |   | (2,036  | )            |  |    |              |   |  |   | (12,108 | )
|Other income, net                                                             |  |                   | 6,197   |   |                        |   |         |              |  |    |              |   |  |   | 6,197   |  
|                                                                              |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Income from continuing operations before provision (benefit) for income taxes |  |                   | 10,208  |   |                        |   | 26,315  |              |  |    | (15,947      | ) |  |   | 20,576  |  
|Provision (benefit) for income taxes                                          |  |                   | (2,270  | ) |                        |   | 10,368  |              |  |    |              |   |  |   | 8,098   |  
|                                                                              |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Income from continuing operations                                             |  |                   | 12,478  |   |                        |   | 15,947  |              |  |    | (15,947      | ) |  |   | 12,478  |  
|                                                                              |  |                   |         |  
|Discontinued operations:                                                      |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Equity in earnings of subsidiaries - discontinued operations (net of tax)     |  |                   | (6,300  | ) |                        |   |         |              |  |    | 6,300        |   |  |   |         |  
|Loss from discontinued operations                                             |  |                   |         |   |                        |   | (17,485 | )            |  |    |              |   |  |   | (17,485 | )
|Benefit for income taxes                                                      |  |                   |         |   |                        |   | (11,185 | )            |  |    |              |   |  |   | (11,185 | )
|                                                                              |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Loss from discontinued operations                                             |  |                   | (6,300  | ) |                        |   | (6,300  | )            |  |    | 6,300        |   |  |   | (6,300  | )
|                                                                              |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  
|Net income                                                                    |  | $                 | 6,178   |   |                        | $ | 9,647   |              |  | ($ | 9,647        | ) |  | $ | 6,178   |  
|                                                                              |  |                   |         |   |                        |   |         |              |  |    |              |   |  |   |         |  



23



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED OCTOBER 28, 2006

(Dollar Amounts In Thousands)



|                                                                             |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|---------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------------- | - | --------- | ------------ |  | -- | ------------ | - |  | - | --------- | -
|                                                                             |  | Saks Incorporated |         |   | Guarantor Subsidiaries |   |           | Eliminations |  |    | Consolidated |  
|Net sales                                                                    |  |                   |         |   |                        | $ | 1,985,003 |              |  |    |              |   |  | $ | 1,985,003 |  
|Costs and expenses                                                           |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Cost of sales                                                                |  |                   |         |   |                        |   | 1,211,210 |              |  |    |              |   |  |   | 1,211,210 |  
|Selling, general and administrative expenses                                 |  | $                 | 5,171   |   |                        |   | 558,527   |              |  |    |              |   |  |   | 563,698   |  
|Other operating expenses                                                     |  |                   | 102     |   |                        |   | 240,011   |              |  |    |              |   |  |   | 240,113   |  
|Store pre-opening costs                                                      |  |                   |         |   |                        |   | 359       |              |  |    |              |   |  |   | 359       |  
|Impairments and dispositions                                                 |  |                   |         |   |                        |   | 8,010     |              |  |    |              |   |  |   | 8,010     |  
|                                                                             |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Operating loss                                                               |  |                   | (5,273  | ) |                        |   | (33,114   | )            |  |    |             |   |  |   | (38,387   | )
|                                                                             |  |                   |         |  
|Other income (expense)                                                       |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Equity in earnings of subsidiaries - continuing operations                   |  |                   | (21,607 | ) |                        |   |           |              |  | $  | 21,607       |   |  |   |           |  
|Interest expense                                                             |  |                   | (30,403 | ) |                        |   | (7,348    | )            |  |    |              |   |  |   | (37,751   | )
|Gain on extinguishment of debt                                               |  |                   | 7       |   |                        |   |           |              |  |    |              |   |  |   | 7         |  
|Other income, net                                                            |  |                   | 21,948  |   |                        |   |           |              |  |    |              |   |  |   | 21,948    |  
|                                                                             |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Loss from continuing operations before                                       |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Benefit for income taxes                                                     |  |                   | (35,328 | ) |                        |   | (40,462   | )            |  |    | 21,607       |   |  |   | (54,183   | )
|Benefit for income taxes                                                     |  |                   | (6,370  | ) |                        |   | (18,855   | )            |  |    |              |   |  |   | (25,225   | )
|                                                                             |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Loss from continuing operations                                              |  |                   | (28,958 | ) |                        |   | (21,607   | )            |  |    | 21,607       |   |  |   | (28,958   | )
|                                                                             |  |                   |         |  
|Discontinued operations:                                                     |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Equity in earnings of subsidiaries - discontinued operations (net of tax)    |  |                   | 61,179  |   |                        |   |           |              |  |    | (61,179      | ) |  |   |           |  
|Income from discontinued operations (including gain on disposal of $192,076) |  |                   |         |   |                        |   | 193,535   |              |  |    |              |   |  |   | 193,535   |  
|Provision for income taxes                                                   |  |                   |         |   |                        |   | 132,356   |              |  |    |              |   |  |   | 132,356   |  
|                                                                             |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Income from discontinued operations                                          |  |                   | 61,179  |   |                        |   | 61,179    |              |  |    | (61,179      | ) |  |   | 61,179    |  
|                                                                             |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  
|Net income                                                                   |  | $                 | 32,221  |   |                        | $ | 39,572    |              |  | ($ | 39,572       | ) |  | $ | 32,221    |  
|                                                                             |  |                   |         |   |                        |   |           |              |  |    |              |   |  |   |           |  



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 28, 2006

(Dollar Amounts In Thousands)



|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|------------------------------------------------------------------------------------------- |  | ---------------- | --------- | - | --------------------- | - | ---------- | ------------ |  | -- | ------------ | - |  | - | --------- | -
|                                                                                            |  | SaksIncorporated |           |   | GuarantorSubsidiaries |   |            | Eliminations |  |    | Consolidated |  
|OPERATING ACTIVITIES                                                                        |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Net income                                                                                  |  | $                | 32,221    |   |                       | $ | 39,572     |              |  | ($ | 39,572       | ) |  | $ | 32,221    |  
|Income from discontinued operations                                                         |  |                  | 61,179    |   |                       |   | 61,179     |              |  |    | (61,179      | ) |  |   | 61,179    |  
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Loss from continuing operations                                                             |  |                  | (28,958   | ) |                       |   | (21,607    | )            |  |    | 21,607       |   |  |   | (28,958   | )
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Equity in earnings of subsidiaries - continuing operations                                  |  |                  | 21,607    |   |                       |   |            |              |  |    | (21,607      | ) |  |   |          |  
|Excess tax benefit from exercise of stock options                                           |  |                  | (3,212    | ) |                       |   |            |              |  |    |              |   |  |   | (3,212    | )
|Depreciation and amortization                                                               |  |                  |           |   |                       |   | 93,089     |              |  |    |              |   |  |   | 93,089    |  
|Equity compensation                                                                         |  |                  | 33,404    |   |                       |   |            |              |  |    |              |   |  |   | 33,404    |  
|Deferred income taxes                                                                       |  |                  |           |   |                       |   | 121,147    |              |  |    |              |   |  |   | 121,147   |  
|Impairments and dispositions                                                                |  |                  |           |   |                       |   | 7,466      |              |  |    |              |   |  |   | 7,466     |  
|Loss on extinguishment of debt                                                              |  |                  | (7        | ) |                       |   |            |              |  |    |              |   |  |   | (7        | )
|Changes in operating assets and liabilities, net                                            |  |                  | 4,191     |   |                       |   | (126,110   | )            |  |    |              |   |  |   | (121,919  | )
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Net Cash Provided by Operating Activities - Continuing Operations                           |  |                  | 27,025    |   |                       |   | 73,985     |              |  |    |             |   |  |   | 101,010   |  
|Net Cash Used In Operating Activities - Discontinued Operations                             |  |                  |           |   |                       |   | (120,494   | )            |  |    |              |   |  |   | (120,494  | )
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Net Cash Provided By (Used In) Operating Activities                                         |  |                  | 27,025    |   |                       |   | (46,509    | )            |  |    |             |   |  |   | (19,484   | )
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|                                                                                            |  |                  |           |  
|INVESTING ACTIVITIES                                                                        |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Purchases of property and equipment                                                         |  |                  |           |   |                       |   | (78,515    | )            |  |    |              |   |  |   | (78,515   | )
|Proceeds from the sale of assets                                                            |  |                  |           |   |                       |   | 171        |              |  |    |              |   |  |   | 171       |  
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Net Cash Used In Investing Activities - Continuing Operations                               |  |                  |          |   |                       |   | (78,344    | )            |  |    |             |   |  |   | (78,344   | )
|Net Cash Provided by Investing Activities - Discontinued Operations                         |  |                  |           |   |                       |   | 1,307,230  |              |  |    |              |   |  |   | 1,307,230 |  
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Net Cash Provided By Investing Activities                                                   |  |                  |          |   |                       |   | 1,228,886  |              |  |    |             |   |  |   | 1,228,886 |  
|                                                                                            |  |                  |           |  
|FINANCING ACTIVITIES                                                                        |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Intercompany borrowings, contributions and distributions                                    |  |                  | 1,198,783 |   |                       |   | (1,198,783 | )            |  |    |              |   |  |   |           |  
|Payments on long-term debt and capital lease obligations                                    |  |                  | (263      | ) |                       |   | (5,167     | )            |  |    |              |   |  |   | (5,430    | )
|Payment of Dividend                                                                         |  |                  | (542,766  | ) |                       |   |            |              |  |    |              |   |  |   | (542,766  | )
|Purchases and retirements of common stock                                                   |  |                  | (6,531    | ) |                       |   |            |              |  |    |              |   |  |   | (6,531    | )
|Proceeds from issuance of common stock                                                      |  |                  | 29,255    |   |                       |   |            |              |  |    |              |   |  |   | 29,255    |  
|Excess tax benefit from exercise of stock options                                           |  |                  | 3,212     |   |                       |   |            |              |  |    |              |   |  |   | 3,212     |  
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Net Cash Provided by (Used) In Financing Activities - Continuing Operations                 |  |                  | 681,690   |   |                       |   | (1,203,950 | )            |  |    |             |   |  |   | (522,260  | )
|Net Cash Used In Financing Activities - Discontinued Operations                             |  |                  |           |   |                       |   | (149       | )            |  |    |              |   |  |   | (149      | )
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Net Cash Provided By (Used In) Financing Activities                                         |  |                  | 681,690   |   |                       |   | (1,204,099 | )            |  |    |             |   |  |   | (522,409  | )
|                                                                                            |  |                  |           |  
|Increase In Cash and Cash Equivalents                                                       |  |                  | 708,715   |   |                       |   | (21,722    | )            |  |    |              |   |  |   | 686,993   |  
|Cash and Cash Equivalents at beginning of period                                            |  |                  | 46,000    |   |                       |   | 31,312     |              |  |    |              |   |  |   | 77,312    |  
|Plus: Cash and Cash Equivalents included in assets held for sale at beginning of year       |  |                  |           |   |                       |   | 3,088      |              |  |    |              |   |  |   | 3,088     |  
|Less: Cash and Cash Equivalents included in assets held for sale at end of year             |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  
|Cash and Cash Equivalents at end of period                                                  |  | $                | 754,715   |   |                       | $ | 12,678     |              |  |    |             |   |  | $ | 767,393   |  
|                                                                                            |  |                  |           |   |                       |   |            |              |  |    |              |   |  |   |           |  



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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT FEBRUARY 3, 2007

(Dollar Amounts In Thousands)



|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|---------------------------------------------- |  | ----------------- | --------- | ---------------------- | - | ------------ |  | -- | ------------ | - |  | - | ---------
|                                               |  | Saks Incorporated |           | Guarantor Subsidiaries |   | Eliminations |  |    | Consolidated
|ASSETS                                         |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Current Assets                                 |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Cash and cash equivalents                      |  | $                 | 265,508   |                        | $ | 12,375       |  |    |              |   |  | $ | 277,883  
|Merchandise inventories                        |  |                   |           |                        |   | 785,302      |  |    |              |   |  |   | 785,302  
|Other current assets                           |  |                   |           |                        |   | 146,893      |  |    |              |   |  |   | 146,893  
|Deferred income taxes, net                     |  |                   |           |                        |   | 40,763       |  |    |              |   |  |   | 40,763   
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Current Assets                           |  |                   | 265,508   |                        |   | 985,333      |  |    |             |   |  |   | 1,250,841
|                                               |  |                   |           |                       
|Property and Equipment, net                    |  |                   |           |                        |   | 1,099,331    |  |    |              |   |  |   | 1,099,331
|Goodwill and Intangibles, net                  |  |                   |           |                        |   | 324          |  |    |              |   |  |   | 324      
|Deferred Income Taxes, net                     |  |                   |           |                        |   | 152,754      |  |    |              |   |  |   | 152,754  
|Other Assets                                   |  |                   | 11,126    |                        |   | 29,927       |  |    |              |   |  |   | 41,053   
|Investment in and Advances to Subsidiaries     |  |                   | 1,454,660 |                        |   |              |  | ($ | 1,454,660    | ) |  |   |          
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Assets                                   |  | $                 | 1,731,294 |                        | $ | 2,267,669    |  | ($ | 1,454,660    | ) |  | $ | 2,544,303
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|                                               |  |                   |           |                       
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Current Liabilities                            |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Trade accounts payable                         |  |                   |           |                        | $ | 231,038      |  |    |              |   |  | $ | 231,038  
|Accrued expenses and other current liabilities |  | $                 | 22,552    |                        |   | 372,523      |  |    |              |   |  |   | 395,075  
|Current portion of long-term debt              |  |                   | 230,000   |                        |   | 6,667        |  |    |              |   |  |   | 236,667  
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Current Liabilities                      |  |                   | 252,552   |                        |   | 610,228      |  |    |             |   |  |   | 862,780  
|                                               |  |                   |           |                       
|Long-Term Debt                                 |  |                   | 382,336   |                        |   | 67,674       |  |    |              |   |  |   | 450,010  
|Other Long-Term Liabilities                    |  |                   | 267       |                        |   | 135,107      |  |    |              |   |  |   | 135,374  
|Investment by and Advances from Parent         |  |                   |           |                        |   | 1,454,660    |  | ($ | 1,454,660    | ) |  |   |          
|Shareholders Equity                           |  |                   | 1,096,139 |                        |   |              |  |    |              |   |  |   | 1,096,139
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          
|Total Liabilities and Shareholders Equity     |  | $                 | 1,731,294 |                        | $ | 2,267,669    |  | ($ | 1,454,660    | ) |  | $ | 2,544,303
|                                               |  |                   |           |                        |   |              |  |    |              |   |  |   |          



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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Managements
Discussion and Analysis (MD&A) is intended to provide an analytical view of the business from managements perspective and has four major components:



| |  |  | Managements Overview
| | - |  | ---------------------



| |  |  | Results of Operations
| | - |  | ---------------------



| |  |  | Liquidity and Capital Resources
| | - |  | -------------------------------



| |  |  | Critical Accounting Policies
| | - |  | ----------------------------

MD&A should be
read in conjunction with the condensed consolidated financial statements and related notes thereto contained elsewhere in this report.

MANAGEMENTS OVERVIEW

GENERAL

The operations of Saks Incorporated and its subsidiaries (together the Company) consist of Saks Fifth Avenue (SFA), Off Fifth, and Club Libby Lu (CLL). Previously, the Company also
operated Saks Department Store Group (SDSG), which consisted of Proffitts and McRaes (Proffitts) (sold to Belk, Inc. (Belk) in July 2005), the Northern Department Store Group (NDSG)
(operated under the nameplates of Bergners, Boston Store, Carson Pirie Scott, Herbergers and Younkers and sold to The Bon-Ton Stores, Inc. (Bon-Ton) in March 2006), and Parisian (sold to Belk in October 2006). The sold
businesses are presented as discontinued operations in the condensed consolidated statements of income and the condensed consolidated statements of cash flows for the prior year periods and are discussed below at Discontinued Operations.

SFA stores are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls, and the stores typically
offer a wide assortment of distinctive luxury fashion apparel, shoes, accessories, jewelry, cosmetics and gifts. Customers may also purchase SFA products offered in catalogs or online at www.saks.com. Off Fifth is intended to be the premier luxury
off-price retailer in the United States and also provides an outlet for the sale of end-of-season clearance merchandise. Off Fifth stores are primarily located in upscale mixed-use and off-price centers and offer luxury apparel, shoes, accessories,
cosmetics and decorative home furnishings, targeting the value-conscious customer. CLL consists of mall-based specialty stores, targeting girls aged 4-12 years old. As of November 3, 2007, Saks operated 54 SFA stores with
6.0 million square feet, 49 Off 5th units with 1.4 million square feet, and 93 CLL specialty stores, which includes 73 standalone stores and 20 store-in-stores in the former SDSG businesses, with 0.1 million square feet.



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DISCONTINUED OPERATIONS

On July 5, 2005, Belk acquired from the Company for $622.7 million in cash substantially all of the assets directly involved in the Companys Proffitts business operations, plus the assumption of
approximately $1 million in capitalized lease obligations and the assumption of certain other ordinary course liabilities associated with the acquired assets. The assets sold included the real and personal property and inventory associated with
22 Proffitts stores and 25 McRaes stores that generated fiscal 2004 revenues of approximately $784 million. The Company realized a net gain of $155.5 million on the sale.

On March 6, 2006, the Company sold to Bon-Ton all outstanding equity interests of certain of the Companys subsidiaries that owned NDSG, either directly or indirectly. The consideration received consisted of
approximately $1.12 billion in cash (reduced as described below based on changes in working capital), plus the assumption by Bon-Ton of approximately $35 million of unfunded benefit liabilities and approximately $35 million of capital leases. A
working capital adjustment based on working capital as of the effective time of the transaction reduced the amount of cash proceeds by approximately $75 million resulting in net cash proceeds to the Company of approximately $1.04 billion. The
disposition included NDSGs operations consisting of, among other things, the following: the real and personal property, operating leases and inventory associated with 142 NDSG units (31 Carson Pirie Scott stores, 14 Bergners stores, 10
Boston Store stores, 40 Herbergers stores, and 47 Younkers stores), administrative/headquarters facilities in Milwaukee, Wisconsin, and distribution centers located in Rockford, Illinois, Naperville, Illinois, Green Bay, Wisconsin, and Ankeny,
Iowa. NDSG generated fiscal year 2005 revenues of approximately $2.2 billion. The Company realized a net gain of $204.7 million on the sale.

On
October 2, 2006, the Company sold to Belk all of the outstanding equity interests of the Companys subsidiaries that conducted the Parisian specialty department store business (Parisian). The consideration received consisted of
$285.0 million in cash (increased in accordance with a working capital adjustment described below). In addition, Belk reimbursed the Company at closing for $6.7 million in capital expenditures incurred in connection with the construction of four new
Parisian stores. Belk also paid the Company an additional amount associated with the purchase of accounts and accounts receivable from Household Bank (SB), N.A. (now known as HSBC Bank Nevada, N.A., HSBC), in the amount of $2.3 million.
A working capital adjustment based on working capital as of the effective time of the transaction increased the amount of cash proceeds by $14.2 million resulting in net cash proceeds of $308.2 million. The disposition included Parisians
operations consisting of, among other things, the following: real and personal property, operating leases and inventory associated with 38 Parisian stores (which generated fiscal 2005 revenues of approximately $740 million), an
administrative/headquarters facility in Birmingham, Alabama and a distribution center located in Steele, Alabama. The Company realized a net loss of $12.8 million on the sale.



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FINANCIAL PERFORMANCE SUMMARY

The Company recorded net income of $21.6 million, or $0.14 per share for the three months ended November 3, 2007. For the three months ended October 28, 2006, the Company recorded income from continuing
operations of $12.5 million or $0.09 per share. After recognition of the Companys after-tax loss from discontinued operations of $6.3 million, or $0.05 per share, related to the sale of Parisian, net income totaled $6.2 million, or $0.05 per
share, for the third quarter ended October 28, 2006.

The three-month period ended November 3, 2007 included legal and investigation costs of
approximately $2.7 million (net of taxes), or $.02 per share, associated with the previously disclosed investigation by the Securities and Exchange Commission (SEC) (which has been concluded) and the investigation by the Office of the
United States Attorney for the Southern District of New York as well as the settlement of two related vendor lawsuits. The current year third quarter also included after tax charges of approximately $0.5 million related to retention, severance and
transition costs due to the Company downsizing and consolidation following the disposition of the SDSG businesses, $0.3 million due to asset impairment and dispositions and $0.8 million, or $.01 per share, resulting from an increase in income tax
reserves related to certain tax examinations.

The three-month period ended October 28, 2006 included after tax expenses of approximately $4.9
million, or $.04 per share, for retention, severance and transition costs, $0.4 million related to the aforementioned investigations and $1.5 million, or $.01 per share, due to asset impairments and dispositions. The latter expenses were partially
offset by a one-time gain of approximately $2.6 million (net of taxes), or $.02 per share, related to modifications made to the SFA pension plan.

The
Company believes that an understanding of its reported financial condition and results of operations is not complete without considering the effect of all other components of MD&A included herein.



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RESULTS OF OPERATIONS

The following table shows, for the periods indicated, items from the Companys Condensed Consolidated Statements of Income expressed as percentages of net sales. (numbers may not total due to rounding)



|                                                                 |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|---------------------------------------------------------------- |  | ------------------ | - |  | ----------------- | - |  | --------------- | - |  | --------------- | -
|                                                                 |  | Three Months Ended |   |  | Nine Months Ended |  
|                                                                 |  | November 3,2007    |   |  | October 28,2006   |   |  | November 3,2007 |   |  | October 28,2006 |  
|Net sales                                                        |  | 100.0              | % |  | 100.0             | % |  | 100.0           | % |  | 100.0           | %
|Costs and expenses:                                              |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|Cost of sales (excluding depreciation and amortization)          |  | 58.0               | % |  | 58.0              | % |  | 60.2            | % |  | 61.0            | %
|Selling, general & administrative expenses                       |  | 25.9               | % |  | 26.2              | % |  | 26.9            | % |  | 28.4            | %
|Other operating expenses                                         |  | 10.3               | % |  | 11.6              | % |  | 10.8            | % |  | 12.1            | %
|Store pre-opening costs                                          |  | 0.1                | % |  | 0.0               | % |  | 0.0             | % |  | 0.0             | %
|Impairments and dispositions                                     |  | 0.1                | % |  | 0.3               | % |  | 0.2             | % |  | 0.4             | %
|                                                                 |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|Operating Income (loss)                                          |  | 5.7                | % |  | 3.8               | % |  | 2.0             | % |  | -1.9            | %
|Other income (expense):                                          |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|Interest expense                                                 |  | -1.3               | % |  | -1.7              | % |  | -1.4            | % |  | -1.9            | %
|Loss on extinguishment of debt                                   |  | 0.0                | % |  | 0.0               | % |  | -0.2            | % |  | 0.0             | %
|Other income, net                                                |  | 0.3                | % |  | 0.9               | % |  | 0.3             | % |  | 1.1             | %
|                                                                 |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|Income (loss) before income taxes                                |  | 4.7                | % |  | 3.0               | % |  | 0.6             | % |  | -2.7            | %
|Provision (benefit) for income taxes                             |  | 2.0                | % |  | 1.2               | % |  | 0.3             | % |  | -1.3            | %
|                                                                 |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|Income (loss) from continuing operations                         |  | 2.7                | % |  | 1.8               | % |  | 0.4             | % |  | -1.5            | %
|Discontinued operations:                                         |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|Income from discontinued operations (including gain on disposal) |  | 0.0                | % |  | -2.5              | % |  | 0.0             | % |  | 9.7             | %
|Provision (benefit) for income taxes                             |  | 0.0                | % |  | -1.6              | % |  | 0.0             | % |  | 6.7             | %
|                                                                 |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|Income (loss) from discontinued operations                       |  | 0.0                | % |  | -0.9              | % |  | 0.0             | % |  | 3.1             | %
|                                                                 |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|Net income                                                       |  | 2.7                | % |  | 0.9               | % |  | 0.4             | % |  | 1.6             | %
|                                                                 |  |                    |   |  |                   |   |  |                 |   |  |                 |  



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THREE MONTHS ENDED NOVEMBER 3, 2007 COMPARED TO THREE MONTHS ENDED OCTOBER 28, 2006

DISCUSSION OF OPERATING INCOME

The following table shows the
changes in operating income from the three-month period ended October 28, 2006 to the three-month period ended November 3, 2007:



|                                            |  |               |       |  
|------------------------------------------- |  | ------------- | ----- | -
|(In Millions)                               |  | Total Company |      
|For the three months ended October 28, 2006 |  | $             | 26.5  |  
|Store sales and margin                      |  |               | 41.6  |  
|Operating expenses                          |  |               | (24.7 | )
|Impairments and dispositions                |  |               | 2.0   |  
|                                            |  |               |       |  
|Increase                                    |  |               | 18.9  |  
|                                            |  |               |       |  
|For the three months ended November 3, 2007 |  | $             | 45.4  |  
|                                            |  |               |       |  

For the three-month period ended November 3, 2007, operating income improved to $45.4 million, a 71.6%
improvement from operating income of $26.5 million for the same period last year. The improvement in operating income for the quarter was driven by an 11.4% increase in comparable store sales and expense management which resulted in a 160 basis
point improvement in the expense rate as a percent of sales. The Company achieved approximately 30 basis points of improvement in the third quarter SG&A expense rate as a percentage of sales. The Company also reduced Other Operating Expenses
(rents, depreciation, taxes other than income taxes and store pre-opening costs) by 130 basis points in the quarter. Gross margin remained flat year-over-year as a result of modest downward pressure on merchandise margins which was offset by revenue
from unredeemed gift cards.

NET SALES

For the
three months ended November 3, 2007, total sales increased 14.2% to $796.1 million from $697.0 million for the three months ended October 28, 2006. Similarly, consolidated comparable store sales increased 11.4% year-over-year. The net
effect of sales from new and closed stores resulted in a $.7 million increase and the effect of the reopening of the New Orleans store resulted in a $12 million increase.

Comparable store sales are calculated on a rolling 13-month basis. Thus, to be included in the comparison, a store must be open for 13 months. The additional month is used to transition the first month impact of a new
store opening. Correspondingly, closed stores are removed from the comparable store sales comparison when they begin liquidating merchandise. Expanded, remodeled and converted stores are included in the comparable store sales comparison, except for
the periods in which they are closed for remodeling and renovation.



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GROSS MARGIN

For the three months ended November 3, 2007, gross margin was $334.1 million, or 42.0% of net sales, compared to $292.4 million, or 42.0% of net sales, for the three months ended October 28, 2006. The flat year-over-year gross
margin was the result of modest downward pressure on merchandise margins which was offset by revenue from unredeemed gift cards.

SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES (SG&A)

For the three months ended November 3, 2007, SG&A was $206.0 million, or 25.9% of net
sales, compared to $182.3 million, or 26.2% of net sales, for the three months ended October 28, 2006. The $23.7 million increase was principally related to higher variable expenses associated with the $99 million sales increase, an increase in
legal and investigation costs and legal settlements of approximately $3.8 million and an increase due to a one-time gain of approximately $4.3 million related to modifications made to SFAs pension plan during the third quarter ending
October 28, 2006. This was partially offset by a decrease in severance, retention, and transition costs of approximately $7.2 million. As a percentage of sales, SG&A decreased by 30 basis points over the prior year.

OTHER OPERATING EXPENSES

For the three months ended
November 3, 2007, other operating expenses, including store pre-opening costs, were $82.2 million, or 10.3% of net sales, compared to $81.2 million, or 11.6% of net sales, for the three months ended October 28, 2006. This increase of $1.0
million was driven primarily by higher depreciation. As a percent of sales, other operating expenses decreased 130 basis points in 2007, reflecting the ability to leverage primarily fixed costs on the increased sales.

IMPAIRMENTS AND DISPOSITIONS

For the three months ended
November 3, 2007, the Company realized losses from impairments and dispositions of $0.4 million, or 0.1% of net sales, compared to a loss of $2.4 million, or 0.3% of net sales, for the three months ended October 28, 2006. The current and
prior quarter net charges were primarily due to asset impairments in the normal course of business.



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INTEREST EXPENSE

For the three months ended November 3, 2007, interest expense was $10.2 million, or 1.3% of net sales, compared to $12.1 million, or 1.7% of net sales, for the three months ended October 28, 2006. The improvement of $1.9 million
was primarily due to the reduction in debt resulting from the repurchase of $106.3 million of senior notes during the nine months ending November 3, 2007.

INCOME TAXES

For continuing operations, the effective income tax rates for the three-month periods ended November 3, 2007 and
October 28, 2006 was 42.6% and 39.4%, respectively. The increase in the effective rate for the three-month period ended November 3, 2007 was primarily due to an adjustment resulting from a state audit issue. The effective income tax
rate for discontinued operations for the three-month period ended October 28, 2006 was 64.0%. The effective income tax rate was higher than the expected rate due to the write-off of non-deductible goodwill related to the sale of NDSG.

NINE MONTHS ENDED NOVEMBER 3, 2007 COMPARED TO NINE MONTHS ENDED OCTOBER 28, 2006

DISCUSSION OF OPERATING INCOME

The following table shows the
changes in operating income from the nine-month period ended October 28, 2006 to the nine-month period ended November 3, 2007:



|                                           |  |               |       |  
|------------------------------------------ |  | ------------- | ----- | -
|(In Millions)                              |  | Total Company |      
|For the nine months ended October 28, 2006 |  | $             | (38.4 | )
|Store sales and margin                     |  |               | 135.3 |  
|Operating expenses                         |  |               | (55.4 | )
|Impairments and dispositions               |  |               | 3.9   |  
|                                           |  |               |       |  
|Increase                                   |  |               | 83.8  |  
|                                           |  |               |       |  
|For the nine months ended November 3, 2007 |  | $             | 45.4  |  
|                                           |  |               |       |  

For the nine-month period ended November 3, 2007, operating income improved to $45.4 million from an
operating loss of $38.4 million for the nine-month period ended October 28, 2006. The improvement in operating income for the nine months ended November 3, 2007 was driven by a 13.0% increase in comparable store sales and expense
management which resulted in a 290 basis point improvement in the expense rate as a percentage of sales. Additionally, the gross margin rate improved 80 basis points for the nine months ended November 3, 2007. The improvement in gross margin
dollars and the gross margin rate was principally attributable to the higher sales driven by the strengthening of merchandise assortments by store and enhancements to the merchandise planning and allocation process.



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NET SALES

For
the nine months ended November 3, 2007, total sales increased 15.0% to $2,282.9 million from $1,985.0 million for the nine months ended October 28, 2006. Similarly, consolidated comparable store sales increased 13.0% year-over-year. The
net effect of sales from new and closed stores resulted in a $1.0 million reduction, while the net effect of the reopening of the New Orleans store resulted in a $37.8 million increase.

GROSS MARGIN

For the nine months ended November 3, 2007, gross margin was $909.1 million, or 39.8% of
net sales, compared to $773.8 million, or 39.0% of net sales, for the nine months ended October 28, 2006. The improvement in gross margin dollars and the gross margin rate was principally attributable to the higher sales driven by the
strengthening of merchandise assortments by store and enhancements to the merchandise planning and allocation process.

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (SG&A)

For the nine months ended November 3, 2007, SG&A was $613.1 million, or 26.9% of net sales,
compared to $563.7 million, or 28.4% of net sales, for the nine months ended October 28, 2006. The net increase of $49.4 million in expenses was primarily driven by higher variable expenses associated with the year over year sales increase of
$297.9 million and an increase of $6.5 million of severance, retention and transition costs due to the Company downsizing and consolidation following the disposition of its SDSG businesses. This is partially offset by a decrease in SG&A as the
prior year period included a $19.6 million charge associated with the anti-dilution adjustment made to outstanding options related to the Companys $4 per share dividend paid on May 1, 2006. As a percentage of sales, SG&A decreased by
150 basis points over the prior year; however, excluding the anti-dilution adjustment noted above, SG&A expenses would have declined approximately 50 basis points over the prior year.

OTHER OPERATING EXPENSES

For the nine months ended
November 3, 2007, other operating expenses, including store pre-opening costs, were $246.5 million, or 10.8% of net sales, compared to $240.5 million, or 12.1% of net sales, for the nine months ended October 28, 2006. The increase of $6.0
million was principally driven by higher depreciation and amortization expense of $7.0 million. The depreciation and amortization increase was offset in part by a decrease in property and equipment rentals of $1.5M for the nine months ended
November 3, 2007.



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IMPAIRMENTS AND DISPOSITIONS

For the nine months ended November 3, 2007, the Company realized losses from impairments and dispositions of $4.1 million, or 0.2% of net sales, compared to a loss of $8.0 million, or 0.4% of net sales, for the
nine months ended October 28, 2006. The current and prior quarter net charges were primarily due to asset impairments in the normal course of business.

INTEREST EXPENSE

For the nine months ended November 3, 2007, interest expense was $32.1 million, or 1.4% of net sales, compared
to $37.8 million, or 1.9% of net sales, for the nine months ended October 28, 2006. The decrease of $5.7 million was primarily due to the reduction in debt resulting from the repurchase of $106.3 million of senior notes during the nine months
ended November 3, 2007.

INCOME TAXES

For
continuing operations, the effective income tax rates for the nine-month periods ended November 3, 2007 and October 28, 2006 was 45.1% and 46.6%, respectively. The decrease in the effective rate for the nine-month period ended
November 3, 2007 was primarily the result of the settlement of certain state tax examinations as well as other state tax benefits during the nine-month period ended October 28, 2006. The effective income tax rate for discontinued
operations for the nine-month period ended October 28, 2006 was 68.4%. The effective income tax rate was higher than the expected rate due to the write-off of non-deductible goodwill related to the sale of NDSG.

The Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48) effective as of the beginning of fiscal
year 2007. As a result of the implementation the Company recorded a $33.7 million decrease in the liability for unrecognized tax benefits which was accounted for as an increase to the beginning shareholders equity. As of February 4, 2007
the Company had total gross unrecognized tax benefits of $44.0 million. Of this total, $12.6 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months as a result of settling uncertain tax
positions. However, the Company does not anticipate this to result in any material change to the amount of unrecognized tax benefits.

As a result of the
analysis of uncertain tax positions (due to the adoption of FIN 48), the net deferred tax asset related to the state net operating loss carryforwards increased. Therefore, the Company performed a valuation allowance analysis to determine the
realization of this asset. This analysis resulted in an additional valuation allowance of $19.3 million with the offset recorded to shareholders equity in accordance with Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code.



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The Company is under the provisions of Statement of Position 90-7 for these net operating losses since these losses were acquired through the acquisition of
a company that had previously filed bankruptcy.

The Company files a consolidated U.S. Federal income tax return as well as state tax returns in multiple
state jurisdictions. The Company has completed examinations by the Internal Revenue Service for taxable years through January 29, 2005 with no significant adjustments. With respect to the state and local jurisdictions, the Company has completed
examinations in many jurisdictions through the same period and currently has examinations in progress for several jurisdictions.

LIQUIDITY AND
CAPITAL RESOURCES

CASH FLOW

The primary
needs for cash are to acquire or construct new stores, renovate and expand existing stores, provide working capital for new and existing stores and service debt. The Company anticipates that available cash, cash generated from operating activities
and borrowings under its revolving credit agreement will be sufficient to meet its financial commitments and provide opportunities for future growth.

Cash
(used in) provided by operating activities from continuing operations was $(35.3) million for the nine months ended November 3, 2007 and $101.0 million for the nine months ended October 28, 2006. Cash (used in) provided by operating
activities principally represents income (loss) before depreciation and non-cash charges and after changes in working capital. The $136.3 million decrease in 2007 from 2006 was largely due to the non-cash changes in deferred income taxes and equity
compensation.

Inventory, accounts payable and debt balances fluctuate throughout the year due to the seasonal nature of the Companys business.
Merchandise inventory balances at November 3, 2007 increased from October 28, 2006 due to planned increased inventories at SFA. Consolidated comparable inventories increased approximately 17% over last year, attributable to the
Companys ongoing initiative of a targeted inventory reinvestment strategy.

Cash used in investing activities from continuing operations was $94.4
million for the nine months ended November 3, 2007 and $78.3 million for the nine months ended October 28, 2006. Cash used in investing activities principally consists of construction of new stores and renovation and expansion of existing
stores and investments in support areas (e.g., technology and distribution centers). The $16.1 million increase in cash used is primarily due to an increase in capital expenditures of approximately $23.7 million, partially offset by the increase in
proceeds from the sale of SFA property of approximately $7.6 million.



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Property and equipment amounts at November 3, 2007 decreased from October 28, 2006 amounts primarily due to
depreciation on existing assets during the last twelve months, sale of SFA property, and store closings and impairments, partially offset by capital expenditures related to new store additions, expansions, replacements and the remodeling of existing
stores. Intangibles at November 3, 2007 also decreased from October 28, 2006 due to amortization expense during the last twelve months.

Cash
used in financing activities from continuing operations was $84.8 million for the nine months ended November 3, 2007 and $522.3 million for the nine months ended October 28, 2006. The current period use primarily relates to the repurchase
of approximately $106.3 million in principal amount of senior notes, which was partially offset by $25.0 million of proceeds from the revolving credit facility, while the prior period use primarily relates to the payment of cash dividends totaling
$542.8 million.

CASH BALANCES AND LIQUIDITY

The Companys primary sources of short-term liquidity are cash on hand and availability under its revolving credit facility. At the Companys request, due to the sale of NDSG, the revolving credit facility was reduced from $800
million to $500 million in March 2006. In September 2006, the maturity date of the revolving credit facility was extended to September 2011. At November 3, 2007 and October 28, 2006, the Company maintained cash and cash equivalent balances
of $63.5 million and $767.4 million, respectively. Exclusive of approximately $13.1 million and $12.7 million of store operating cash at November 3, 2007 and October 28, 2006, respectively, cash was invested principally in various money
market funds at November 3, 2007 and October 28, 2006, respectively. There was no restricted cash as of November 3, 2007 and October 28, 2006.

On March 6, 2006, the Companys Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $547,500, and the Company reduced shareholders equity by that amount. Approximately $539,000 of the
dividend was paid on May 1, 2006 to shareholders of record as of April 14, 2006. The remaining portion of the dividend payable will be paid prospectively as, and to the extent, awards of restricted stock and performance shares vest.

On August 30, 2006, the Company repurchased 450 thousand shares of Saks common stock at a cost of approximately $6.5 million.

On October 3, 2006 the Companys Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $558,600, and the Company
reduced shareholders equity by that amount. Approximately $552,000 of the dividend was paid on November 30, 2006 to shareholders of record as of November 15, 2006. The remaining portion of the dividend payable will be paid
prospectively as, and to the extent, awards of restricted stock and performance shares vest.



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During the three months ended November 3, 2007, the Company repurchased 1.7 million shares of its common stock
at a cost of approximately $27.5 million. At November 3, 2007, there were 35.7 million shares remaining available for repurchase under the Companys existing share repurchase program.

At November 3, 2007, the Company had borrowings of $25.0 million under its $500 million revolving credit facility, and had $39.9 million in unfunded letters of
credit, leaving unutilized availability under that facility of $435.1 million. The amount of cash on hand and borrowings under the facility are influenced by a number of factors, including sales, inventory levels, vendor terms, the level of capital
expenditures, cash requirements related to financing instruments, and the Companys tax payment obligations, among others.

The Company believes it
has sufficient cash on hand, availability under its revolving credit facility, and access to various capital markets to repay all of the Companys senior notes at maturity.

CAPITAL STRUCTURE

The Company continuously evaluates its debt-to-capitalization ratio in light of the
economic trends, business trends, levels of interest rates, and terms, conditions and availability of capital in the capital markets. At November 3, 2007, the Companys capital and financing structure was comprised of a revolving credit
agreement, senior unsecured notes, convertible senior unsecured notes, and capital and operating leases. On November 3, 2007, total debt was $599.0 million, representing a decrease of $89.6 million from the balance of $688.6 million at
October 28, 2006. This decrease in debt was primarily the result of the $106.3 million repurchase of senior notes, which was offset by the $25.0 million revolver borrowings. Additionally, the debt-to-capitalization ratio decreased to 34.7% from
40.3% in the prior year, as a result of the decrease in debt in the current year.

At November 3, 2007, the Company maintained a $500 million senior
revolving credit facility maturing in 2011, which is secured by inventory and certain third party credit card accounts receivable. Borrowings are limited to a prescribed percentage of eligible inventories and receivables. There are no debt
ratings-based provisions in the facility. The facility includes a fixed-charge coverage ratio requirement of 1 to 1 that the Company is subject to only if availability under the facility becomes less than $60 million. The facility contains default
provisions that are typical for this type of financing, including a provision that would trigger a default of the facility if a default were to occur in another debt instrument resulting in the acceleration of principal of more than $20 million in
that other instrument. At November 3, 2007, the Company had borrowings of $25.0 million under the revolving credit facility.



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At November 3, 2007, the Company had $276.4 million of senior notes outstanding, excluding the convertible notes,
comprised of five separate series having maturities ranging from 2008 to 2019 and interest rates ranging from 7.00% to 9.88%. The terms of each senior note call for all principal to be repaid at maturity. The senior notes have substantially
identical terms except for the maturity dates and interest rates payable to investors. Each senior note contains limitations on the amount of secured indebtedness the Company may incur. The Company believes it has sufficient cash on hand,
availability under its revolving credit facility and access to various capital markets to repay these notes at maturity.

On April 12, 2007, the
Company announced the results of its modified Dutch Auction tender offer to purchase a portion of its 8.25% senior notes due November 15, 2008 for an aggregate purchase price not to exceed $100 million (the offer cap).
The offer expired on April 11, 2007. The aggregate principal amount of notes validly tendered at or above the clearing spread exceeded the offer cap and the Company accepted $95.9 million aggregate principal amount of the notes, resulting in an
aggregate purchase price of $100 million (plus an additional $3.2 million in aggregate accrued interest on such notes). The Company accepted for purchase first, all notes tendered at spreads above the clearing spread, and thereafter, the notes
validly tendered at the clearing spread on a prorated basis according to the principal amount of such notes. During the three months ended May 5, 2007, the Company recorded a loss on extinguishment of debt of approximately $5.2 million related
to the repurchase of the notes.

During June and July 2007, the Company repurchased an additional $10.4 million in principal amount primarily relating to
its 8.25% senior notes. The repurchase of these notes resulted in a loss on extinguishment of debt of approximately $412 thousand.

At November 3,
2007, the Company had $230 million of convertible senior notes that bear interest of 2.0% and mature in 2024. The provisions of the convertible notes allow the holder to convert the notes to shares of the Companys common stock at a conversion
rate of 83.5609 shares per one thousand dollars in principal amount of notes. The most significant terms and conditions of the senior notes include: the Company can settle a conversion of the par value with shares and/or cash; the holder may put the
debt back to the Company in 2014 or 2019; the holder cannot convert until the Companys share price exceeds the conversion price by 20% for a certain trading period; the Company can call the debt on or after March 11, 2011; the conversion
rate is subject to a dilution adjustment; and the holder can convert upon a significant credit rating decline and upon a call. The Company used approximately $25 million of the proceeds from the issuances to enter into a convertible note hedge and
written call options on its common stock to reduce the exposure to dilution from the conversion of the notes. The Company believes it has sufficient cash on hand, availability under its revolving credit facility and access to various capital markets
to repay both the senior notes and convertible notes at maturity.



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During the quarter ended November 3, 2007, the aforementioned conversion criterion was met. The closing price of the
Companys common stock exceeded 120% of the convertible senior notes conversion price for at least 20 out of the last 30 consecutive trading days in the third calendar quarter of 2007. On October 3, 2007, the Company gave notice that
holders of the convertible notes could convert them into shares of the Companys common stock until December 31, 2007 in accordance with, and subject to, the terms of the convertible notes indenture. Since the holders of the convertible
notes had the ability to exercise their conversion rights, the convertible notes were classified within the current portion of long-term debt on the Companys November 3, 2007 balance sheet. As of December 4, 2007, no note
holders had converted their notes into shares of the Companys common stock.

At November 3, 2007 the Company had $67.6 million in capital leases
covering various properties and pieces of equipment. The terms of the capital leases provide the lessor with a security interest in the asset being leased and require the Company to make periodic lease payments, aggregating between $5 million and $7
million per year.

The Company is obligated to fund a cash balance pension plan. The Companys current policy is to maintain at least the minimum
funding requirements specified by the Employee Retirement Income Security Act of 1974. The Company expects minimal or no funding requirements in 2007. As part of the sale of NDSG to Bon-Ton, the NDSG pension assets and liabilities were acquired by
Bon-Ton. Additionally, the Company curtailed its SFA pension plan during 2006 which froze benefit accruals for all participants except those who have attained age 55 and completed 10 years of service as of January 1, 2007 and who continue to be
highly compensated employees.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into any off-balance sheet arrangements which would be reasonably likely to have a current or future material effect, such as obligations
under certain guarantees or contracts, retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements, obligations under certain derivative arrangements, or obligations under material variable interests.

There were no material changes in the Companys contractual obligations specified in Item 303(a)(5) of Regulation S-K during the three and nine
months ended November 3, 2007. For additional information regarding the Companys contractual obligations as of February 3, 2007, see the Managements Discussion and Analysis section of the 2006 Form 10-K.



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CRITICAL ACCOUNTING POLICIES

A summary of the Companys critical accounting policies is included in the Management Discussion and Analysis section of the Companys Form 10-K for the year ended February 3, 2007 filed with the
Securities and Exchange Commission.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FIN 48, an interpretation of SFAS No. 109, Accounting for Income Taxes. This interpretation clarifies the application of Statement 109 by defining a criterion that an
individual tax position must meet for any part of the benefit of that position to be recognized in an enterprises financial statements. For a benefit to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The benefit to be recognized for a tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. FIN 48 also provides guidance on derecognition, classification of interest and penalties, accounting in interim periods,
and disclosure. The Company adopted FIN 48 as of February 4, 2007.

During September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or a liability and establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating
the impact of this Statement.

On September 29, 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (SFAS No. 158). The Company adopted SFAS No. 158 prospectively on February 3, 2007. SFAS No. 158 requires an employer that sponsors one or more defined benefit pension plans or
other postretirement plans to 1) recognize the funded status of a plan, measured as the difference between plan assets at fair value and the benefit obligation, in the balance sheet; 2) recognize as a component of other comprehensive income, net of
tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; 3) measure defined benefit plan assets and obligations as of the date of the employers
fiscal year-end balance sheet; and 4) disclose in the notes to the financial statements additional information about the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior
service costs or credits, and transition assets or obligations. The adoption of SFAS No. 158 did not have a material effect on the Companys results of operations or financial position for the fiscal year ended February 3, 2007.
Additionally, SFAS No. 158 will require the Company to change the measurement date for the assets and liabilities of its employee benefit plans from November 1 to the Companys fiscal year end beginning with the fiscal year
ending January 31, 2009.



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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that currently are not required to be measured at fair value. This Statement is effective no later than fiscal
years beginning on or after November 15, 2007. The Company is currently evaluating the impact this standard may have on its financial statements.

The
FASB is contemplating an amendment to SFAS No. 128, Earnings Per Share, that would require the Company to ignore the cash presumption of net share settlement and to assume share settlement for purposes of calculating diluted
earnings per share. Although the Company is now required to ignore the contingent conversion provision on its convertible notes under EITF 04-08, it can still presume that it will satisfy the net share settlement of the par value upon conversion of
the notes in cash, and thus exclude the effect of the conversion of the notes in its calculation of diluted earnings per share. If and when the FASB amends SFAS No. 128, the effect of the changes would require the Company to use the
if-converted method in calculating diluted earnings per share except when the effect would be anti-dilutive. The effect of adopting the amendment to SFAS No. 128 would increase the number of shares in the Companys diluted calculation by
19,219 shares.

FORWARD-LOOKING INFORMATION

The
information contained in this Form 10-Q that addresses future results or expectations is considered forward-looking information within the definition of the Federal securities laws. Forward-looking information in this document can be
identified through the use of words such as may, will, intend, plan, project, expect, anticipate, should, would, believe,
estimate, contemplate, possible, and point. The forward-looking information is premised on many factors, some of which are outlined below. Actual consolidated results might differ materially from
projected forward-looking information if there are any material changes in managements assumptions.

The forward-looking information and statements
are or may be based on a series of projections and estimates and involve risks and uncertainties. These risks and uncertainties include such factors as: the level of consumer spending for apparel and other merchandise carried by the Company and its
ability to respond quickly to consumer trends; adequate and stable sources of merchandise; the competitive pricing environment within the retail sector; the effectiveness of planned advertising, marketing, and promotional campaigns; favorable
customer response to relationship marketing efforts of proprietary credit card loyalty programs; appropriate inventory management; effective expense control; successful operation of the Companys proprietary credit card strategic alliance with
HSBC Bank Nevada, N.A.; geo-political risks; and changes in interest rates.For additional information regarding these and other risk factors, please refer to the Companys Form 10-K for the fiscal year ended February 3, 2007 filed
with the SEC, which may be accessed via EDGAR through the Internet at www.sec.gov.



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Management undertakes no obligation to correct or update any forward-looking statements, whether as a result of new
information, future events, or otherwise. Persons are advised, however, to consult any further disclosures management makes on related subjects in its reports filed with the SEC and in its press releases.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys exposure to market risk
primarily arises from changes in interest rates and the U.S. equity and bond markets. The effects of changes in interest rates on earnings generally have been small relative to other factors that also affect earnings, such as sales and operating
margins. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities, and if appropriate, through the use of derivative financial instruments. Such derivative instruments can be used as
part of an overall risk management program in order to manage the costs and risks associated with various financial exposures. The Company does not enter into derivative instruments for trading purposes, as clearly defined in its risk management
policies. The Company is exposed to interest rate risk primarily through its borrowings, and derivative financial instrument activities.

Based on the
Companys market risk sensitive instruments (including variable rate debt) outstanding at November 3, 2007, the Company has determined that there was no material market risk exposure to the Companys consolidated financial position,
results of operations, or cash flows as of such date.

Item 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of
the period covered by this report. Based upon this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of such date. The
Companys disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and that such information is accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required
disclosures.



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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Companys internal controls over financial reporting that occurred during the quarter ended November 3, 2007 that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

The information in Part I  Financial Information, Note 8  Contingencies-
Legal Contingencies, is incorporated into this Item by reference.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended November 3, 2007,
the Company did not sell any equity securities which were not registered under the Securities Act.

The Company has a share repurchase program that
authorizes it to purchase shares of the Companys common stock in order to both distribute cash to stockholders and manage dilution resulting from shares issued under the Companys equity compensation plans. At November 3, 2007,
35.7 million shares remained available for repurchase under the Companys 70.0 million share repurchase authorization. The following are details of repurchases under this program for the third quarter of fiscal 2007:



|                                                           |  |                                    |  |                              |       |                                                                        |       |                                                                          |       
|---------------------------------------------------------- |  | ---------------------------------- |  | ---------------------------- | ----- | ---------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------ | ------
|(in thousands except average price paid per share)        
|Period                                                     |  | Total Number of Shares Repurchased |  | Average Price Paid per
Share |       | Total Number of Shares Repurchased as Part of Publicly Announced Plans |       | Maximum Number of Shares that May Yet Be Repurchased Under the Plans (a)
|Repurchases from August 5, 2007 through September 1, 2007  |  | 884                                |  | $                            | 16.03 |                                                                        | 884   |                                                                          | 36,496
|Repurchases from September 2, 2007 through October 6, 2007 |  | 838                                |  | $                            | 15.86 |                                                                        | 838   |                                                                          | 35,658
|Repurchases from October 7, 2007 through November 3, 2007  |  |                                   |  | $                            |      |                                                                        |      |                                                                          | 35,658
|                                                           |  |                                    |  |                              |       |                                                                        |       |                                                                          |       
|Total                                                      |  | 1,722                              |  | $                            | 15.95 |                                                                        | 1,722 |                                                                          |       
|                                                           |  |                                    |  |                              |       |                                                                        |       |                                                                          |       

---

|(a) | As of November 3, 2007, the Companys Board of Directors had previously authorized 70,025 total shares, of which 35,000 were authorized on December 8, 2005. The
Company has repurchased 34,367 of these shares to date. There is no expiration date for the repurchase plans.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 5. OTHER INFORMATION

On September 24, 2007, the Human Resources and Compensation Committee of the Company
approved a standard form of employment agreement for the Companys senior executives (the Employment Agreement), which is included as Exhibit 10.1 to this Report. The following executive officers of the Company have entered into an
Employment Agreement with the Company: Christine Morena, Michael Brizel, Michael Rodgers, Carolyn Biggs, Robert Wallstrom, Denise Incandela, Marc Metrick, Terron Schaefer and Thomas Matthews.

Item 6. EXHIBITS



|     |  |                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------
|10.1 |  | Form of Employment Agreement for Executive Officers                                                                 
|     | 
|10.2 |  | Saks Incorporated Severance Plan                                                                                    
|     | 
|31.1 |  | Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                 
|     | 
|31.2 |  | Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                 
|     | 
|32.1 |  | Certification of Chief Executive Officer, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
|     | 
|32.2 |  | Certification of Chief Financial Officer, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.



|                      |  |  |  |                                                                                                                  
|--------------------- |  |  |  | -----------------------------------------------------------------------------------------------------------------
|                      |  |  |  | SAKS INCORPORATED                                                                                                
|                      |  |  |  | Registrant                                                                                                       
|                      |  | 
|Date December 6, 2007 |  |  |  | /s/ Kevin G. Wills                                                                                               
|                      |  |  |  | Kevin G. Wills                                                                                                   
|                      |  |  |  | On behalf of registrant and as Executive Vice
President and Chief Financial Officer (Principal Financial Officer)



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