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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: October 29, 2005



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 of Incorporation)                  |  | (I.R.S. Employer Identification Number)
|                                          | 
|750 Lakeshore Parkway Birmingham, Alabama |  | 35211                                  
|(Address of Principal Executive Offices)  |  | (Zip Code)                             



Registrants
telephone number, including area code: (205) 940-4000



---



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



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, 2005, the number of shares of the Registrants Common Stock outstanding was 138,983,849



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##### Table of Contents

TABLE OF CONTENTS



|                                                                                                                |  |         
|--------------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                                |  | Page No.
|PART I. FINANCIAL INFORMATION                                                                                   |  |         
|                                                                                                                | 
|Item 1. Financial Statements (Unaudited)                                                                        |  |         
|Condensed Consolidated Balance Sheets  October 29, 2005, January 29, 2005 and October 30, 2004                 |  | 3       
|                                                                                                                | 
|Condensed Consolidated Statements of Income  Three and Nine Months Ended October 29, 2005 and October 30, 2004 |  | 4       
|                                                                                                                | 
|Condensed Consolidated Statements of Cash Flows  Nine Months ended October 29, 2005 and October 30, 2004       |  | 5       
|                                                                                                                | 
|Notes to Condensed Consolidated Financial Statements                                                            |  | 6       
|                                                                                                                | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  | 54      
|                                                                                                                | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                              |  | 96      
|                                                                                                                | 
|Item 4.
Controls and Procedures                                                                                 |  | 96      
|                                                                                                                | 
|PART II.
OTHER INFORMATION                                                                                      |  |         
|                                                                                                                | 
|Item 1.
Legal Proceedings                                                                                       |  | 99      
|                                                                                                                | 
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                             |  | 99      
|                                                                                                                | 
|Item 6.
Exhibits                                                                                                |  | 99      
|                                                                                                                | 
|SIGNATURES                                                                                                      |  | 100     



2



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##### Table of Contents

SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)



|                                               |  |                 |           |                 |   |                         |  |   |          
|---------------------------------------------- |  | --------------- | --------- | --------------- | - | ----------------------- |  | - | ---------
|                                               |  | October 29,2005 |           | January 29,2005 |   | RestatedOctober 30,2004
|ASSETS                                         |  |                 |           |                 |   |                         |  |   |          
|                                               |  |                 |          
|Current Assets                                 |  |                 |           |                 |   |                         |  |   |          
|Cash and cash equivalents                      |  | $               | 27,886    |                 | $ | 257,104                 |  | $ | 81,095   
|Merchandise inventories                        |  |                 | 1,011,064 |                 |   | 1,516,271               |  |   | 1,841,916
|Other current assets                           |  |                 | 129,822   |                 |   | 127,082                 |  |   | 147,931  
|Deferred income taxes, net                     |  |                 | 71,211    |                 |   | 178,558                 |  |   | 87,215   
|Current assets - held for sale                 |  |                 | 654,123   |                 |   |                        |  |   |         
|                                               |  |                 |           |                 |   |                         |  |   |          
|Total current assets                           |  |                 | 1,894,106 |                 |   | 2,079,015               |  |   | 2,158,157
|                                               |  |                 |          
|Property and Equipment, net                    |  |                 | 1,358,694 |                 |   | 2,046,839               |  |   | 2,069,558
|Property and Equipment, net - held for sale    |  |                 | 436,163   |                 |   |                        |  |   |         
|Goodwill and Intangibles, net                  |  |                 | 235,162   |                 |   | 323,761                 |  |   | 325,561  
|Deferred Income Taxes, net                     |  |                 | 250,158   |                 |   | 166,364                 |  |   | 151,909  
|Other Assets                                   |  |                 | 43,705    |                 |   | 88,100                  |  |   | 89,268   
|Other Assets - held for sale                   |  |                 | 12,072    |                 |   |                        |  |   |         
|                                               |  |                 |           |                 |   |                         |  |   |          
|TOTAL ASSETS                                   |  | $               | 4,230,060 |                 | $ | 4,704,079               |  | $ | 4,794,453
|                                               |  |                 |           |                 |   |                         |  |   |          
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                 |           |                 |   |                         |  |   |          
|                                               |  |                 |          
|Current Liabilities                            |  |                 |           |                 |   |                         |  |   |          
|Trade accounts payable                         |  | $               | 298,080   |                 | $ | 378,394                 |  | $ | 593,208  
|Accrued expenses and other current liabilities |  |                 | 399,027   |                 |   | 553,911                 |  |   | 465,951  
|Current portion of long-term debt              |  |                 | 7,519     |                 |   | 7,715                   |  |   | 77,708   
|Current liabilities - held for sale            |  |                 | 290,971   |                 |   |                        |  |   |         
|                                               |  |                 |           |                 |   |                         |  |   |          
|Total current liabilities                      |  |                 | 995,597   |                 |   | 940,020                 |  |   | 1,136,867
|                                               |  |                 |          
|Long-Term Debt                                 |  |                 | 718,083   |                 |   | 1,346,222               |  |   | 1,426,510
|Long-Term Debt - held for sale                 |  |                 | 33,819    |                 |   |                        |  |   |         
|Other Long-Term Liabilities                    |  |                 | 236,089   |                 |   | 333,420                 |  |   | 311,347  
|Long-Term Liabilities - held for sale          |  |                 | 90,833    |                 |   |                        |  |   |         
|                                               |  |                 |           |                 |   |                         |  |   |          
|Total liabilities                              |  |                 | 2,074,421 |                 |   | 2,619,662               |  |   | 2,874,724
|                                               |  |                 |          
|Commitments and Contingencies                  |  |                 |          |                 |   |                        |  |   |         
|                                               |  |                 |          
|Shareholders Equity                           |  |                 | 2,155,639 |                 |   | 2,084,417               |  |   | 1,919,729
|                                               |  |                 |           |                 |   |                         |  |   |          
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY     |  | $               | 4,230,060 |                 | $ | 4,704,079               |  | $ | 4,794,453
|                                               |  |                 |           |                 |   |                         |  |   |          



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       |  
|                                                        |  | October 29,2005    |           |   | RestatedOctober 30,2004 |   |           | October 29,2005 |  |   | RestatedOctober 30,2004 |  
|Net sales                                               |  | $                  | 1,315,218 |   |                         | $ | 1,481,645 |                 |  | $ | 4,180,529               |   |  | $ | 4,372,195 |  
|Cost of sales (excluding depreciation and amortization) |  |                    | 802,793   |   |                         |   | 904,485   |                 |  |   | 2,605,026               |   |  |   | 2,690,716 |  
|                                                        |  |                    |           |   |                         |   |           |                 |  |   |                         |   |  |   |           |  
|Gross margin                                            |  |                    | 512,425   |   |                         |   | 577,160   |                 |  |   | 1,575,503               |   |  |   | 1,681,479 |  
|                                                        |  |                    |           |  
|Selling, general and administrative expenses            |  |                    | 366,848   |   |                         |   | 412,877   |                 |  |   | 1,151,805               |   |  |   | 1,170,270 |  
|Other operating expenses                                |  |                    | 136,770   |   |                         |   | 150,274   |                 |  |   | 428,849                 |   |  |   | 443,578   |  
|Store pre-opening costs                                 |  |                    | 2,585     |   |                         |   | 3,453     |                 |  |   | 3,443                   |   |  |   | 4,399     |  
|Impairments and dispositions                            |  |                    | (9,350    | ) |                         |   | 26,415    |                 |  |   | (169,290                | ) |  |   | 33,786    |  
|                                                        |  |                    |           |   |                         |   |           |                 |  |   |                         |   |  |   |           |  
|Operating income (loss)                                 |  |                    | 15,572    |   |                         |   | (15,859   | )               |  |   | 160,696                 |   |  |   | 29,446    |  
|                                                        |  |                    |           |  
|Other income (expense):                                 |  |                    |           |   |                         |   |           |                 |  |   |                         |   |  |   |           |  
|Interest expense                                        |  |                    | (16,398   | ) |                         |   | (28,400   | )               |  |   | (70,922                 | ) |  |   | (84,361   | )
|Loss on extinguishment of debt                          |  |                    | (29       | ) |                         |   |          |                 |  |   | (29,020                 | ) |  |   |          |  
|Other income (expense), net                             |  |                    | 1,224     |   |                         |   | 472       |                 |  |   | 6,449                   |   |  |   | 2,947     |  
|                                                        |  |                    |           |   |                         |   |           |                 |  |   |                         |   |  |   |           |  
|Income (loss) before income taxes                       |  |                    | 369       |   |                         |   | (43,787   | )               |  |   | 67,203                  |   |  |   | (51,968   | )
|                                                        |  |                    |           |  
|Provision (benefit) for income taxes                    |  |                    | 144       |   |                         |   | (13,397   | )               |  |   | 42,613                  |   |  |   | (16,413   | )
|                                                        |  |                    |           |   |                         |   |           |                 |  |   |                         |   |  |   |           |  
|Net income (loss)                                       |  | $                  | 225       |   |                         | $ | (30,390   | )               |  | $ | 24,590                  |   |  | $ | (35,555   | )
|                                                        |  |                    |           |   |                         |   |           |                 |  |   |                         |   |  |   |           |  
|Earnings (loss) per common share                        |  | $                  | 0.00      |   |                         | $ | (0.22     | )               |  | $ | 0.18                    |   |  | $ | (0.25     | )
|Diluted earnings (loss) per common share                |  | $                  | 0.00      |   |                         | $ | (0.22     | )               |  | $ | 0.17                    |   |  | $ | (0.25     | )
|                                                        |  |                    |           |  
|Weighted average common shares:                         |  |                    |           |   |                         |   |           |                 |  |   |                         |   |  |   |           |  
|Basic                                                   |  |                    | 139,541   |   |                         |   | 138,249   |                 |  |   | 138,996                 |   |  |   | 140,289   |  
|Diluted                                                 |  |                    | 146,067   |   |                         |   | 138,249   |                 |  |   | 144,937                 |   |  |   | 140,289   |  



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 |         
|                                                                                         |  | October 29,2005   |          |   | RestatedOctober 30,2004 |  
|Operating Activities:                                                                    |  |                   |          |   |                         |   |          |  
|Net income (loss)                                                                        |  | $                 | 24,590   |   |                         | $ | (35,555  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                   |          |   |                         |   |          |  
|Depreciation and amortization                                                            |  |                   | 161,630  |   |                         |   | 167,721  |  
|Impairments and dispositions                                                             |  |                   | (169,290 | ) |                         |   | 31,786   |  
|Loss on extinguishment of debt                                                           |  |                   | 29,020   |   |                         |   |         |  
|Equity compensation                                                                      |  |                   | 16,612   |   |                         |   | 7,942    |  
|Deferred income taxes                                                                    |  |                   | 23,554   |   |                         |   | (26,909  | )
|Change in operating assets and liabilities, net                                          |  |                   | (202,676 | ) |                         |   | (140,176 | )
|                                                                                         |  |                   |          |   |                         |   |          |  
|Net Cash Provided By (Used In) Operating Activities                                      |  |                   | (116,560 | ) |                         |   | 4,809    |  
|                                                                                         |  |                  
|Investing Activities:                                                                    |  |                   |          |   |                         |   |          |  
|Purchases of property and equipment                                                      |  |                   | (173,814 | ) |                         |   | (143,626 | )
|Proceeds from the sale of property and equipment                                         |  |                   | 13,236   |   |                         |   | 5,343    |  
|Proceeds from the sale of Proffitts/McRaes                                             |  |                   | 622,404  |   |                         |   |         |  
|Store cash transferred related to sale of Proffitts/McRaes                             |  |                   | (1,340   | ) |                         |   |         |  
|                                                                                         |  |                   |          |   |                         |   |          |  
|Net Cash Provided By (Used In) Investing Activities                                      |  |                   | 460,486  |   |                         |   | (138,283 | )
|                                                                                         |  |                  
|Financing Activities:                                                                    |  |                   |          |   |                         |   |          |  
|Proceeds from issuance of convertible senior notes                                       |  |                   |         |   |                         |   | 230,000  |  
|Payments for hedge and call options associated with convertible notes                    |  |                   |         |   |                         |   | (25,043  | )
|Proceeds from revolving credit facility                                                  |  |                   | 27,000   |   |                         |   | 75,000   |  
|Payments on long-term debt and capital lease obligations                                 |  |                   | (619,665 | ) |                         |   | (83,377  | )
|Cash dividends paid                                                                      |  |                   | (505     | ) |                         |   | (282,719 | )
|Purchases and retirements of common stock                                                |  |                   |         |   |                         |   | (85,397  | )
|Proceeds from issuance of common stock                                                   |  |                   | 23,109   |   |                         |   | 20,232   |  
|                                                                                         |  |                   |          |   |                         |   |          |  
|Net Cash Used In Financing Activities                                                    |  |                   | (570,061 | ) |                         |   | (151,304 | )
|                                                                                         |  |                  
|Decrease In Cash and Cash Equivalents                                                    |  |                   | (226,135 | ) |                         |   | (284,778 | )
|                                                                                         |  |                  
|Cash and cash equivalents at beginning of period                                         |  |                   | 257,104  |   |                         |   | 365,873  |  
|                                                                                         |  |                   |          |   |                         |   |          |  
|Cash and cash equivalents at end of period                                               |  | $                 | 30,969   |   |                         | $ | 81,095   |  
|                                                                                         |  |                   |          |   |                         |   |          |  



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 for interim financial information and 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 generally accepted accounting principles for complete financial statements. These financial statements are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine months ended October 29, 2005 are not necessarily indicative of the results that may be expected
for the year ending January 28, 2006. The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the Company). All intercompany amounts and transactions have been eliminated.



As described at Note 2, the Company restated its financial statements for the years ended
January 31, 2004; February 1, 2003; February 2, 2002 and February 3, 2001; the financial information for quarters ended May 1, July 31 and October 30, 2004; and the quarters ended
May 3, August 2, November 1, 2003 and January 31, 2004 in conjunction with filing its Form 10-K for the fiscal year ended January 29, 2005 (the 2004 Form 10-K). As a result of this restatement, the
Company was not able to file the 2004 Form 10-K in a timely manner. For further information, refer to the consolidated financial statements and footnotes thereto included in the 2004 Form 10-K filed on September 1, 2005, where this restatement
is more fully described. Accordingly, the Company has restated its financial statements for the fiscal quarter ended October 30, 2004, as included in this report on Form 10-Q herein.



The accompanying balance sheet at January 29, 2005 has been derived from the audited financial statements at that date but does not
include all disclosures required by generally accepted accounting principles.



ORGANIZATION



The Company is a retailer currently operating,
through its subsidiaries, traditional and luxury department stores. At October 29, 2005, the Company operated the Saks Department Store Group (SDSG), which consisted of stores operated under the following nameplates: Parisian,
Younkers, Herbergers, Carson Pirie Scott (Carsons), Bergners and Boston Store and Club Libby Lu specialty stores. The Company also operated Saks Fifth Avenue Enterprises (SFAE), which consisted of Saks Fifth
Avenue stores and Saks Off 5th stores.



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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 and shipping and handling revenues related to merchandise sold. Commissions from leased departments were $7,606 and $8,754 for the three months ended October 29, 2005 and October 30, 2004, respectively. Leased department sales
were $52,452 and $60,137 for the three months ended October 29, 2005 and October 30, 2004, respectively, and were excluded from net sales. Commissions from leased departments were $27,101 and $29,504 for the nine months ended
October 29, 2005 and October 30, 2004, respectively. Leased department sales were $187,823 and $198,440 for the nine months ended October 29, 2005 and October 30, 2004, 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. There were no cash
equivalents at October 29, 2005, and $44,000 of cash equivalents at October 30, 2004, which were invested in money market funds. Income earned on cash equivalents was $1,084 and $369 for the three-month periods ended October 29, 2005
and October 30, 2004, respectively. For the nine-month periods ended October 29, 2005 and October 30, 2004 income earned on these cash equivalents was $5,855 and $2,706, respectively. All interest income was reflected in Other Income
(Expense). At October 29, 2005, Current Assets  Held For Sale included $3,083 of NDSG store cash held for sale.



Income Taxes  The effective income tax rates for the three and nine-month periods ended October 29, 2005 increased to 39.0% and 63.4%,
respectively, from 30.6% and 31.6%, respectively, in the three and nine-month periods ended October 30, 2004. The increase in the effective rate for the nine-month period ended October 29, 2005 was primarily the result of the write-off of
approximately $88,000 of goodwill related to the sale of Proffitts and McRaes stores as discussed in Note 4, of which a portion is non-deductible for tax purposes. The increase was partially offset by a benefit recognized to increase the
state deferred tax rate to reflect the remaining business assets in various states after the sale of Proffitts. Excluding these items, the Companys effective tax rate was 39.0% for the nine-month period ended October 29, 2005. This
rate represents an increase from the prior period effective rate of 31.6% in the nine-month period ended October 30, 2004 primarily due to the prior period including a benefit for a reduction in the valuation allowance for state net operating
loss carryforwards. In addition, the prior three and nine-month period included an adjustment to tax reserves resulting from the conclusion of tax examinations.



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Components of the Companys income tax expense for the three and nine-month periods ended October 29, 2005 were
as follows:



|                                                   |  |                                    |     |                                   |   |        |  
|-------------------------------------------------- |  | ---------------------------------- | --- | --------------------------------- | - | ------ | -
|                                                   |  | Three Months EndedOctober 29, 2005 |     | Nine Months EndedOctober 29, 2005 |  
|Expected federal income taxes at 35%               |  | $                                  | 129 |                                   | $ | 23,521 |  
|State income taxes, net of federal benefit         |  |                                    | 7   |                                   |   | 5,001  |  
|Non-deductible goodwill                            |  |                                    |    |                                   |   | 17,663 |  
|Deferred tax rate increase, net of federal benefit |  |                                    |    |                                   |   | (3,279 | )
|Other items, net                                   |  |                                    | 8   |                                   |   | (293   | )
|                                                   |  |                                    |     |                                   |   |        |  
|Provision for income taxes                         |  | $                                  | 144 |                                   | $ | 42,613 |  
|                                                   |  |                                    |     |                                   |   |        |  



Other - During the three
months ended October 29, 2005, the Company recorded a pre-tax benefit of $900 related to the correction of errors that occurred in the second quarter of 2005. The Company considered the financial effect of these errors to be immaterial and thus
included this effect in the third quarter results.



NOTE 2 
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS



As discussed in the
2004 Form 10-K, at managements request, the Audit Committee of the Board of Directors conducted an internal investigation into alleged improper collections of vendor markdown allowances. The Audit Committees investigation and the
Companys supplemental review and analysis were completed in August 2005, and concluded that markdown allowances had been improperly collected from vendors during the 1996 through 2003 fiscal periods in one of SFAEs six merchandising
divisions.



Separately, the Company completed a review of its historical lease
accounting methods to determine whether these methods were in accordance with the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission (the SEC) on February 7, 2005 in a letter to the
American Institute of Certified Public Accountants regarding certain operating lease accounting issues and their application under Generally Accepted Accounting Principles (GAAP). As a result of its review, the Company determined that
its historical methods of accounting for rent holidays, tenant improvement allowances, and determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination for certain leased properties, were
not in accordance with GAAP.



The Company also conducted a review of certain
other items and made restatement adjustments to its previously issued condensed consolidated financial statements to correct for all of these items.



These condensed consolidated financial statements and notes thereto reflect adjustments to the Companys previously reported financial information for the quarter
ended October 30, 2004.



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##### Table of Contents

The following provides details of the adjustments included in the restatement of the Companys condensed
consolidated financial statements and the effect of the adjustments on the Companys Condensed Consolidated Balance Sheet at October 30, 2004 and its Condensed Consolidated Statement of Income and Condensed Consolidated Statement of Cash
Flows for the three and nine months ended October 30, 2004.



IMPROPER COLLECTION OF VENDOR ALLOWANCES



As previously
disclosed, at managements request, the Audit Committee of the Board of Directors conducted an internal investigation into alleged improper collections of vendor markdown allowances. The investigation concluded that markdown allowances had been
improperly collected from vendors.



The Company undertook a confirmatory
process related to the investigation by conducting its own review and analysis. The scope of the Companys review and analysis was broadened to also include additional fiscal periods and additional vendors within the one merchandising division
at SFAE where the improper collection had occurred as well as other merchandising divisions of SFAE.



The Company concluded that vendor allowances of approximately $34,100 had been improperly collected from vendors in periods from fiscal 1996 through 2003. These amounts are attributable to overcollections that
resulted from falsification by merchants in one SFAE merchandising division of information delivered to vendors. No improper collection was identified in fiscal 2004. The Company will pay interest at the rate of 7.25% per annum to the affected
vendors, totaling approximately $14,000. In aggregate, the Company expects to repay vendors a total of approximately $48,100 during fiscal 2005.



The effect of the restatement relating to these improper collections on the Companys condensed consolidated statement of income and condensed consolidated balance
sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                     |      |   |                                    |   |         |  
|---------------------------------------------- |  | ----------------------------------- | ---- | - | ---------------------------------- | - | ------- | -
|Increase (Decrease) (in
thousands)             |  | Three Months Ended October 30, 2004 |      |   | Nine Months Ended October 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                     |      |   |                                    |   |         |  
|Interest expense                               |  | $                                   | 748  |   |                                    | $ | 2,244   |  
|Net income                                     |  |                                     | (475 | ) |                                    |   | (1,425  | )
|                                               |  |                                    
|                                               |  |                                     |      |   | October 30, 2004                   |  
|Condensed Consolidated Balance Sheet:          |  |                                     |      |   |                                    |   |         |  
|Accounts payable                               |  |                                     |      |   |                                    | $ | 31,871  |  
|Accrued expenses and other current liabilities |  |                                     |      |   |                                    |   | (4,649  | )
|Total shareholders equity                     |  |                                     |      |   |                                    |   | (27,222 | )



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##### Table of Contents

The Company informed the SEC of the Audit Committees investigations and the SEC has notified the Company that it
has issued a formal order of private investigation. The Company was informed that the United States Attorney for the Southern District of New York had instituted an inquiry. The Company is fully cooperating with the SEC and the Office of the United
States Attorney.



OPERATING LEASES



On February 7, 2005, the Office of the Chief Accountant of the SEC issued a letter to
the American Institute of Certified Public Accountants (the SEC letter) regarding certain accounting principles relating to three aspects of lease accounting: accounting for landlord improvement incentives to tenants (tenant
allowances); the recognition of rent expense when the lease term in an operating lease contains a period of free or reduced rents commonly referred to as a rent holiday; and the period of time used for the depreciation of leasehold
improvements. Following the release of the SEC letter, many retailers reviewed their lease accounting and announced that they would restate their results for previous periods. Likewise, the Company determined that its historical methods of
accounting for rent holidays; tenant improvement allowances; and determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination for certain leased properties, were not in accordance with
GAAP.



Tenant Allowances  Tenant improvement incentives are
typically provided by landlords to pay a portion of the cost associated with constructing improvements on the leased premises. The Company historically recognized the allowance as a reduction in the capitalized amount of the leasehold improvements,
thereby reducing the related depreciation. The portion of tenant allowances in excess of the costs incurred associated with the property are considered to be the improvement incentives portion of the allowances. GAAP requires that such allowances be
recorded as deferred rent and amortized as reductions to rent expense over the lease term. The Company has made restatement adjustments to record these allowances as deferred rent.



10



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##### Table of Contents

The effect of the restatement relating to the improvement incentives portion of these tenant allowances on the
Companys condensed consolidated statement of income and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |      |   |                                   |   |         |  
|---------------------------------------------- |  | ---------------------------------- | ---- | - | --------------------------------- | - | ------- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |      |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |      |   |                                   |   |         |  
|Other operating expenses                       |  | $                                  | 354  |   |                                   | $ | 1,151   |  
|Net income                                     |  |                                    | (224 | ) |                                   |   | (731    | )
|                                               |  |                                   
|                                               |  |                                    |      |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |      |   |                                   |   |         |  
|Other current assets                           |  |                                    |      |   |                                   | $ | 2,205   |  
|Property and equipment, net                    |  |                                    |      |   |                                   |   | 29,078  |  
|Accrued expenses and other current liabilities |  |                                    |      |   |                                   |   | (6,578  | )
|Other long-term liabilities                    |  |                                    |      |   |                                   |   | 48,838  |  
|Total shareholders equity                     |  |                                    |      |   |                                   |   | (10,977 | )



Consistent with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), the Company annually evaluates the recoverability of its property and equipment and records any impairment
loss as the difference between the carrying amount and fair value of the asset. As tenant allowances have historically resulted in an improper reduction in the capitalized amount of leasehold improvements, the carrying value of property and
equipment used in the impairment charge has been understated in certain instances. Consequently, the Company has made restatement adjustments to correct for the understatement of impairment charges taken in prior periods.



The effect of the restatement relating to these impairment charges on the Companys
condensed consolidated statement of income and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |        |   |                                   |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |        |   |                                   |   |        |  
|Other operating expenses                       |  | $                                  | (98    | ) |                                   | $ | (295   | )
|Impairments and dispositions                   |  |                                    | (1,867 | ) |                                   |   | (1,867 | )
|Net income                                     |  |                                    | 1,248  |   |                                   |   | 1,373  |  
|                                               |  |                                   
|                                               |  |                                    |        |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |        |   |                                   |   |        |  
|Property and equipment, net                    |  |                                    |        |   |                                   | $ | 2,032  |  
|Accrued expenses and other current liabilities |  |                                    |        |   |                                   |   | (4,624 | )
|Other long-term liabilities                    |  |                                    |        |   |                                   |   | 14,054 |  
|Total shareholders equity                     |  |                                    |        |   |                                   |   | (7,398 | )



11



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##### Table of Contents

Rent Holiday  Pursuant to paragraph 2 of Financial Accounting Standards Board (FASB)
Technical Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent Increases, rent holidays in an operating lease should be recognized by the lessee on a straight-line basis over the lease term (including any rent holiday period) unless
another systematic and rational allocation is more representative of the time pattern in which leased property is physically employed. The period from when leased property is made available to the Company for the construction of a new store and when
the lease payments begin is a rent holiday. Since the Company did not previously recognize rent expense during the rent holiday period, it was understating rent expense during the construction period, and overstating rent during subsequent periods.
The Company has made restatement adjustments to recognize straight-line rent expense beginning on the date that the Company took possession of the leased land or premises.



The effect of the restatement relating to rent holidays on the Companys condensed consolidated statement of income and condensed
consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |      |   |                                   |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ---- | - | --------------------------------- | - | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |      |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |      |   |                                   |   |        |  
|Store pre-opening costs                        |  | $                                  | (115 | ) |                                   | $ | (408   | )
|Net income                                     |  |                                    | 73   |   |                                   |   | 259    |  
|                                               |  |                                   
|                                               |  |                                    |      |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |      |   |                                   |   |        |  
|Accrued expenses and other current liabilities |  |                                    |      |   |                                   | $ | (2,510 | )
|Other long-term liabilities                    |  |                                    |      |   |                                   |   | 6,679  |  
|Total shareholders equity                     |  |                                    |      |   |                                   |   | (4,169 | )



Symmetry of Lease Terms
 Leasehold improvements are required to be depreciated on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term unless another systematic and rational basis is more representative of the time
pattern of the users benefit. In the case of certain leases with renewal options, the Company is permitted to include the renewal option period in the lease term for purposes of the depreciation analysis if renewal is reasonably assured as
contemplated in SFAS No. 13, Accounting for Leases (FAS 13).



In some
cases, the Company historically recognized depreciation expense for leasehold improvements using economic lives that exceeded the time period used for straight-line rent calculations on the underlying leases; however, the Company failed to include
the renewal option period in its straight-line rent analysis. Thus, the Company was understating rent expense for the straight-line effect of not including all renewal periods within the lease term as defined by FAS 13. The restated financial
statements reflect the addition of renewal periods such that the lease term is symmetrical to the depreciation lives of leasehold improvements.



12



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##### Table of Contents

The effect of the restatement relating to the symmetry of lease terms on the Companys condensed consolidated
statement of income and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |     |   |                                   |   |      |  
|---------------------------------------------- |  | ---------------------------------- | --- | - | --------------------------------- | - | ---- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |     |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |     |   |                                   |   |      |  
|Other operating expenses                       |  | $                                  | 17  |   |                                   | $ | 53   |  
|Net income                                     |  |                                    | (11 | ) |                                   |   | (35  | )
|                                               |  |                                   
|                                               |  |                                    |     |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |     |   |                                   |   |      |  
|Property and equipment, net                    |  |                                    |     |   |                                   | $ | (165 | )
|Accrued expenses and other current liabilities |  |                                    |     |   |                                   |   | (246 | )
|Other long-term liabilities                    |  |                                    |     |   |                                   |   | 504  |  
|Total shareholders equity                     |  |                                    |     |   |                                   |   | (423 | )



OTHER ITEMS



Reclassifications  The Company has reclassified certain amounts from its
previously issued condensed consolidated financial statements in order to ensure consistency and comparability among periods presented, in addition to correcting for the improper presentation of certain historical transactions. The correction of
this presentation did not have an effect on net income or shareholders equity.



13



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##### Table of Contents

The effect of the restatement relating to these errors on the Companys condensed consolidated statement of income
and condensed consolidated balance sheet accounts is as follows:



|                                               |  |                                    |        |   |                                   |   |         |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |        |   |                                   |   |         |  
|Cost of sales                                  |  | $                                  | (1,675 | ) |                                   | $ | (4,265  | )
|Selling, general and administrative expenses   |  |                                    | 1,675  |   |                                   |   | 4,265   |  
|Interest expense                               |  |                                    | (369   | ) |                                   |   | (2,706  | )
|Other income (expense), net                    |  |                                    | 369    |   |                                   |   | 2,706   |  
|                                               |  |                                   
|                                               |  |                                    |        |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |        |   |                                   |   |         |  
|Cash and cash equivalents                      |  |                                    |        |   |                                   | $ | 6,585   |  
|Other current assets                           |  |                                    |        |   |                                   |   | (20,505 | )
|Accrued expenses and other current liabilities |  |                                    |        |   |                                   |   | (13,920 | )
|Current portion of long-term debt              |  |                                    |        |   |                                   |   | 1,585   |  
|Long-term debt                                 |  |                                    |        |   |                                   |   | (1,585  | )



Tax Items  As part
of the restatement process, the Company made adjustments to the provision for income taxes, accrued expenses and deferred tax assets and liabilities to give effect to all of the restatement items described herein including the deductibility of
interest related to tax reserve exposure items.



The effect of the restatement
relating to these errors on the Companys condensed consolidated statement of income and condensed consolidated balance sheet accounts is as follows:



|                                               |  |                                    |        |   |                                   |   |         |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Consolidated Statement of Income:              |  |                                    |        |   |                                   |   |         |  
|Provision for income taxes                     |  | $                                  | 3,755  |   |                                   | $ | 3,755   |  
|Net income                                     |  |                                    | (3,755 | ) |                                   | $ | (3,755  | )
|                                               |  |                                   
|                                               |  |                                    |        |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |        |   |                                   |   |         |  
|Current deferred income taxes, net             |  |                                    |        |   |                                   | $ | 13,441  |  
|Non-current deferred income taxes, net         |  |                                    |        |   |                                   |   | (1,517  | )
|Accrued expenses and other current liabilities |  |                                    |        |   |                                   |   | (15,627 | )
|Total shareholders equity                     |  |                                    |        |   |                                   |   | 27,551  |  



Purchase Discounts
 The Company receives discounts from its vendors on merchandise purchases when it meets certain payment specifications. Historically, the Company has treated a portion of these purchase discounts as prompt payment discounts and recognized that
portion immediately into earnings through a reduction of Cost of Sales. This portion of the discount, however, should have been considered a cost purchase adjustment along with the remaining discount and included as a reduction in the cost of the
inventory.



14



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##### Table of Contents

The effect of the restatement relating to this error on the Companys condensed consolidated balance sheet accounts
is as follows (amounts include income tax effect):



|                                               |  |                                    |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |       
|Condensed Consolidated Balance Sheet:          |  |                                    |        |  
|Merchandise inventories                        |  | $                                  | (8,198 | )
|Accrued expenses and other current liabilities |  |                                    | (3,108 | )
|Total shareholders equity                     |  |                                    | (5,090 | )



Store Stock Supplies
 Until 2003, the Company expensed certain costs associated with store stock supplies as it incurred such costs. In the fourth quarter of 2003, the Company recognized as an asset the portion of these costs that it deemed to be supplies on hand
in the stores. Accordingly, the Company has restated its condensed consolidated financial statements to include these store stock supplies in all prior periods.



The effect of the restatement relating to store stock supplies on the Companys condensed consolidated statement of income and condensed consolidated balance
sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |     |   |                                   |   |        |  
|---------------------------------------------- |  | ---------------------------------- | --- | - | --------------------------------- | - | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |     |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |     |   |                                   |   |        |  
|Selling, general and administrative expenses   |  | $                                  | (51 | ) |                                   | $ | (78    | )
|Net income                                     |  |                                    | 32  |   |                                   |   | 50     |  
|                                               |  |                                   
|                                               |  |                                    |     |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |     |   |                                   |   |        |  
|Other current assets                           |  |                                    |     |   |                                   | $ | (2,371 | )
|Accrued expenses and other current liabilities |  |                                    |     |   |                                   |   | (761   | )
|Total shareholders equity                     |  |                                    |     |   |                                   |   | (1,610 | )



Other  In addition
to the aforementioned restatement items, the Company has also made adjustments to its previously issued condensed consolidated financial statements to correct for certain other items.



15



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##### Table of Contents

The effect of the restatement relating to these errors on the Companys condensed consolidated statement of income
and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |        |   |                                   |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |        |   |                                   |   |        |  
|Cost of sales                                  |  | $                                  | 4,878  |   |                                   | $ | 1,663  |  
|Selling, general and administrative expenses   |  |                                    | 2,538  |   |                                   |   | 830    |  
|Other operating expenses                       |  |                                    | (3,585 | ) |                                   |   | (3,183 | )
|Net income                                     |  |                                    | (2,463 | ) |                                   |   | 438    |  
|                                               |  |                                   
|                                               |  |                                    |        |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |        |   |                                   |   |        |  
|Cash and cash equivalents                      |  |                                    |        |   |                                   | $ | (11    | )
|Merchandise inventories                        |  |                                    |        |   |                                   |   | (6,244 | )
|Other current assets                           |  |                                    |        |   |                                   |   | (989   | )
|Property and equipment, net                    |  |                                    |        |   |                                   |   | 3,917  |  
|Goodwill and intangibles, net                  |  |                                    |        |   |                                   |   | 1,198  |  
|Accounts payable                               |  |                                    |        |   |                                   |   | (1,153 | )
|Accrued expenses and other current liabilities |  |                                    |        |   |                                   |   | 2,344  |  
|Total shareholders equity                     |  |                                    |        |   |                                   |   | (3,320 | )



The effect of these errors on net
income included the following components:



|                    |  |                                    |        |   |                                   |   |        |  
|------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|(in thousands)      |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Inventory valuation |  | $                                  | (3,098 | ) |                                   | $ | (1,029 | )
|Other, net          |  |                                    | 635    |   |                                   |   | 1,467  |  
|                    |  |                                    |        |   |                                   |   |        |  
|Total               |  | $                                  | (2,463 | ) |                                   | $ | 438    |  
|                    |  |                                    |        |   |                                   |   |        |  



16



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##### Table of Contents

The following tables summarize the effect of the adjustments included in the restatement on significant statement
of income and balance sheet components.



CONDENSED CONSOLIDATED
STATEMENT OF INCOME ACCOUNTS



Net Income



|                                             |  |                                    |         |   |                                   |   |         |  
|-------------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|(in thousands)                               |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Net income, as previously reported           |  | $                                  | (24,815 | ) |                                   | $ | (31,729 | )
|Adjustments:                                 |  |                                    |         |   |                                   |   |         |  
|Vendor Allowances                            |  |                                    | (475    | ) |                                   |   | (1,425  | )
|Operating Leases:                            |  |                                    |         |   |                                   |   |         |  
|Tenant Allowances - Improvement Incentives   |  |                                    | (224    | ) |                                   |   | (731    | )
|Tenant Allowances - Impairments              |  |                                    | 1,248   |   |                                   |   | 1,373   |  
|Rent Holiday                                 |  |                                    | 73      |   |                                   |   | 259     |  
|Depreciation Lives of Leasehold Improvements |  |                                    | (11     | ) |                                   |   | (35     | )
|Other Items:                                 |  |                                    |         |   |                                   |   |         |  
|Tax Items                                    |  |                                    | (3,755  | ) |                                   |   | (3,755  | )
|Store Stock Supplies                         |  |                                    | 32      |   |                                   |   | 50      |  
|Other                                        |  |                                    | (2,463  | ) |                                   |   | 438     |  
|                                             |  |                                    |         |   |                                   |   |         |  
|Total adjustments                            |  |                                    | (5,575  | ) |                                   |   | (3,826  | )
|                                             |  |                                    |         |   |                                   |   |         |  
|Net income, as restated                      |  | $                                  | (30,390 | ) |                                   | $ | (35,555 | )
|                                             |  |                                    |         |   |                                   |   |         |  



Cost of Sales (excluding
depreciation and amortization)



|                                      |  |                                    |         |   |                                   |   |           |  
|------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | --------- | -
|(in thousands)                        |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Cost of sales, as previously reported |  | $                                  | 901,282 |   |                                   | $ | 2,693,318 |  
|Adjustments:                          |  |                                    |         |   |                                   |   |           |  
|Other Items:                          |  |                                    |         |   |                                   |   |           |  
|Reclassifications                     |  |                                    | (1,675  | ) |                                   |   | (4,265    | )
|Other                                 |  |                                    | 4,878   |   |                                   |   | 1,663     |  
|                                      |  |                                    |         |   |                                   |   |           |  
|Total adjustments                     |  |                                    | 3,203   |   |                                   |   | (2,602    | )
|                                      |  |                                    |         |   |                                   |   |           |  
|Cost of sales, as restated            |  | $                                  | 904,485 |   |                                   | $ | 2,690,716 |  
|                                      |  |                                    |         |   |                                   |   |           |  



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##### Table of Contents

Selling, General and Administrative Expenses



|                                                                     |  |                                    |         |   |                                   |   |           |  
|-------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | --------- | -
|(in thousands)                                                       |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Selling, general and administrative expenses, as previously reported |  | $                                  | 408,715 |   |                                   | $ | 1,165,253 |  
|Adjustments:                                                         |  |                                    |         |   |                                   |   |           |  
|Other Items:                                                         |  |                                    |         |   |                                   |   |           |  
|Reclassifications                                                    |  |                                    | 1,675   |   |                                   |   | 4,265     |  
|Store Stock Supplies                                                 |  |                                    | (51     | ) |                                   |   | (78       | )
|Other                                                                |  |                                    | 2,538   |   |                                   |   | 830       |  
|                                                                     |  |                                    |         |   |                                   |   |           |  
|Total adjustments                                                    |  |                                    | 4,162   |   |                                   |   | 5,017     |  
|                                                                     |  |                                    |         |   |                                   |   |           |  
|Selling, general and administrative expenses, as restated            |  | $                                  | 412,877 |   |                                   | $ | 1,170,270 |  
|                                                                     |  |                                    |         |   |                                   |   |           |  



Other Operating Expenses



|                                                 |  |                                    |         |   |                                   |   |         |  
|------------------------------------------------ |  | ---------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|(in thousands)                                   |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Other operating expenses, as previously reported |  | $                                  | 153,586 |   |                                   | $ | 445,852 |  
|Adjustments:                                     |  |                                    |         |   |                                   |   |         |  
|Operating Leases:                                |  |                                    |         |   |                                   |   |         |  
|Tenant Allowances - Improvement Incentives       |  |                                    | 354     |   |                                   |   | 1,151   |  
|Tenant Allowances - Impairments                  |  |                                    | (98     | ) |                                   |   | (295    | )
|Depreciation Lives of Leasehold Improvements     |  |                                    | 17      |   |                                   |   | 53      |  
|Other Items:                                     |  |                                    |         |   |                                   |   |         |  
|Other                                            |  |                                    | (3,585  | ) |                                   |   | (3,183  | )
|                                                 |  |                                    |         |   |                                   |   |         |  
|Total adjustments                                |  |                                    | (3,312  | ) |                                   |   | (2,274  | )
|                                                 |  |                                    |         |   |                                   |   |         |  
|Other operating expenses, as restated            |  | $                                  | 150,274 |   |                                   | $ | 443,578 |  
|                                                 |  |                                    |         |   |                                   |   |         |  



18



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##### Table of Contents

Store Pre-Opening Costs



|                                                |  |                                    |       |   |                                   |   |       |  
|----------------------------------------------- |  | ---------------------------------- | ----- | - | --------------------------------- | - | ----- | -
|(in thousands)                                  |  | Three Months EndedOctober 30, 2004 |       |   | Nine Months EndedOctober 30, 2004 |  
|Store pre-opening costs, as previously reported |  | $                                  | 3,568 |   |                                   | $ | 4,807 |  
|Adjustments:                                    |  |                                    |       |   |                                   |   |       |  
|Operating Leases:                               |  |                                    |       |   |                                   |   |       |  
|Rent Holiday                                    |  |                                    | (115  | ) |                                   |   | (408  | )
|                                                |  |                                    |       |   |                                   |   |       |  
|Total adjustments                               |  |                                    | (115  | ) |                                   |   | (408  | )
|                                                |  |                                    |       |   |                                   |   |       |  
|Store pre-opening costs, as restated            |  | $                                  | 3,453 |   |                                   | $ | 4,399 |  
|                                                |  |                                    |       |   |                                   |   |       |  



Impairments and Dispositions



|                                                     |  |                                    |        |   |                                   |   |        |  
|---------------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|(in thousands)                                       |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Impairments and dispositions, as previously reported |  | $                                  | 28,282 |   |                                   | $ | 35,653 |  
|Adjustments:                                         |  |                                    |        |   |                                   |   |        |  
|Operating Leases:                                    |  |                                    |        |   |                                   |   |        |  
|Tenant Allowances - Impairments                      |  |                                    | (1,867 | ) |                                   |   | (1,867 | )
|                                                     |  |                                    |        |   |                                   |   |        |  
|Total adjustments                                    |  |                                    | (1,867 | ) |                                   |   | (1,867 | )
|                                                     |  |                                    |        |   |                                   |   |        |  
|Impairments and dispositions, as restated            |  | $                                  | 26,415 |   |                                   | $ | 33,786 |  
|                                                     |  |                                    |        |   |                                   |   |        |  



Interest Expense



|                                         |  |                                    |         |   |                                   |   |         |  
|---------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|(in thousands)                           |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Interest expense, as previously reported |  | $                                  | (27,283 | ) |                                   | $ | (79,411 | )
|Adjustments:                             |  |                                    |         |   |                                   |   |         |  
|Vendor Allowances                        |  |                                    | (748    | ) |                                   |   | (2,244  | )
|Other Items:                             |  |                                    |         |   |                                   |   |         |  
|Reclassifications                        |  |                                    | (369    | ) |                                   |   | (2,706  | )
|                                         |  |                                    |         |   |                                   |   |         |  
|Total adjustments                        |  |                                    | (1,117  | ) |                                   |   | (4,950  | )
|                                         |  |                                    |         |   |                                   |   |         |  
|Interest expense, as restated            |  | $                                  | (28,400 | ) |                                   | $ | (84,361 | )
|                                         |  |                                    |         |   |                                   |   |         |  



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##### Table of Contents

Other Income (Expense)



|                                                    |  |                                    |     |                                   |   |      
|--------------------------------------------------- |  | ---------------------------------- | --- | --------------------------------- | - | -----
|(in thousands)                                      |  | Three Months EndedOctober 30, 2004 |     | Nine Months EndedOctober 30, 2004
|Other income (expense), net, as previously reported |  | $                                  | 103 |                                   | $ | 241  
|Adjustments:                                        |  |                                    |     |                                   |   |      
|Other Items:                                        |  |                                    |     |                                   |   |      
|Reclassifications                                   |  |                                    | 369 |                                   |   | 2,706
|                                                    |  |                                    |     |                                   |   |      
|Total adjustments                                   |  |                                    | 369 |                                   |   | 2,706
|                                                    |  |                                    |     |                                   |   |      
|Other income (expense), net, as restated            |  | $                                  | 472 |                                   | $ | 2,947
|                                                    |  |                                    |     |                                   |   |      



Provision for Income Taxes



|                                                   |  |                                    |         |   |                                   |   |         |  
|-------------------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|(in thousands)                                     |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Provision for income taxes, as previously reported |  | $                                  | (16,153 | ) |                                   | $ | (20,129 | )
|Adjustments:                                       |  |                                    |         |   |                                   |   |         |  
|Vendor Allowances                                  |  |                                    | (273    | ) |                                   |   | (819    | )
|Operating Leases:                                  |  |                                    |         |   |                                   |   |         |  
|Tenant Allowances - Improvement Incentives         |  |                                    | (130    | ) |                                   |   | (420    | )
|Tenant Allowances - Impairments                    |  |                                    | 717     |   |                                   |   | 789     |  
|Rent Holiday                                       |  |                                    | 42      |   |                                   |   | 149     |  
|Depreciation Lives of Leasehold Improvements       |  |                                    | (6      | ) |                                   |   | (18     | )
|Other Items:                                       |  |                                    |         |   |                                   |   |         |  
|Tax Items                                          |  |                                    | 3,755   |   |                                   |   | 3,755   |  
|Store Stock Supplies                               |  |                                    | 19      |   |                                   |   | 28      |  
|Other                                              |  |                                    | (1,368  | ) |                                   |   | 252     |  
|                                                   |  |                                    |         |   |                                   |   |         |  
|Total adjustments                                  |  |                                    | 2,756   |   |                                   |   | 3,716   |  
|                                                   |  |                                    |         |   |                                   |   |         |  
|Provision for income taxes, as restated            |  | $                                  | (13,397 | ) |                                   | $ | (16,413 | )
|                                                   |  |                                    |         |   |                                   |   |         |  



20



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##### Table of Contents

CONDENSED CONSOLIDATED BALANCE SHEET ACCOUNTS



Total Assets



|                                             |  |                 |           |  
|-------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                               |  | October 30,2004 |          
|Total assets, as previously reported         |  | $               | 4,775,997 |  
|Adjustments:                                 |  |                 |           |  
|Operating Leases:                            |  |                 |           |  
|Tenant Allowances - Improvement Incentives   |  |                 | 31,283    |  
|Tenant Allowances - Impairments              |  |                 | 2,032     |  
|Depreciation Lives of Leasehold Improvements |  |                 | (165      | )
|Other Items:                                 |  |                 |           |  
|Reclassifications                            |  |                 | (13,920   | )
|Tax Items                                    |  |                 | 11,924    |  
|Purchase Discounts                           |  |                 | (8,198    | )
|Store Stock Supplies                         |  |                 | (2,371    | )
|Other                                        |  |                 | (2,129    | )
|                                             |  |                 |           |  
|Total adjustments                            |  |                 | 18,456    |  
|                                             |  |                 |           |  
|Total assets, as restated                    |  | $               | 4,794,453 |  
|                                             |  |                 |           |  



Cash and Cash Equivalents



|                                                  |  |                 |        |  
|------------------------------------------------- |  | --------------- | ------ | -
|(in thousands)                                    |  | October 30,2004 |       
|Cash and cash equivalents, as previously reported |  | $               | 74,521 |  
|Adjustments:                                      |  |                 |        |  
|Other Items:                                      |  |                 |        |  
|Reclassifications                                 |  |                 | 6,585  |  
|Other                                             |  |                 | (11    | )
|                                                  |  |                 |        |  
|Total adjustments                                 |  |                 | 6,574  |  
|                                                  |  |                 |        |  
|Cash and cash equivalents, as restated            |  | $               | 81,095 |  
|                                                  |  |                 |        |  



21



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##### Table of Contents

Merchandise Inventories



|                                                |  |                 |           |  
|----------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                                  |  | October 30,2004 |          
|Merchandise inventories, as previously reported |  | $               | 1,856,358 |  
|Adjustments:                                    |  |                 |           |  
|Other Items:                                    |  |                 |           |  
|Purchase Discounts                              |  |                 | (8,198    | )
|Other                                           |  |                 | (6,244    | )
|                                                |  |                 |           |  
|Total adjustments                               |  |                 | (14,442   | )
|                                                |  |                 |           |  
|Merchandise inventories, as restated            |  | $               | 1,841,916 |  
|                                                |  |                 |           |  



Other Current Assets



|                                             |  |                 |         |  
|-------------------------------------------- |  | --------------- | ------- | -
|(in thousands)                               |  | October 30,2004 |        
|Other current assets, as previously reported |  | $               | 169,591 |  
|Adjustments:                                 |  |                 |         |  
|Operating Leases:                            |  |                 |         |  
|Tenant Allowances - Improvement Incentives   |  |                 | 2,205   |  
|Other Items:                                 |  |                 |         |  
|Reclassifications                            |  |                 | (20,505 | )
|Store Stock Supplies                         |  |                 | (2,371  | )
|Other                                        |  |                 | (989    | )
|                                             |  |                 |         |  
|Total adjustments                            |  |                 | (21,660 | )
|                                             |  |                 |         |  
|Other current assets, as restated            |  | $               | 147,931 |  
|                                             |  |                 |         |  



Current Deferred Income Taxes,
Net



|                                                           |  |                 |       
|---------------------------------------------------------- |  | --------------- | ------
|(in thousands)                                             |  | October 30,2004
|Current deferred income taxes, net, as previously reported |  | $               | 73,774
|Adjustments:                                               |  |                 |       
|Other Items:                                               |  |                 |       
|Tax Items                                                  |  |                 | 13,441
|                                                           |  |                 |       
|Total adjustments                                          |  |                 | 13,441
|                                                           |  |                 |       
|Current deferred income taxes, net, as restated            |  | $               | 87,215
|                                                           |  |                 |       



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Property and Equipment, Net of Depreciation



|                                                    |  |                 |           |  
|--------------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                                      |  | October 30,2004 |          
|Property and equipment, net, as previously reported |  | $               | 2,034,696 |  
|Adjustments:                                        |  |                 |           |  
|Operating Leases:                                   |  |                 |           |  
|Tenant Allowances - Improvement Incentives          |  |                 | 29,078    |  
|Tenant Allowances - Impairments                     |  |                 | 2,032     |  
|Depreciation Lives of Leasehold Improvements        |  |                 | (165      | )
|Other Items:                                        |  |                 |           |  
|Other                                               |  |                 | 3,917     |  
|                                                    |  |                 |           |  
|Total adjustments                                   |  |                 | 34,862    |  
|                                                    |  |                 |           |  
|Property and equipment, net, as restated            |  | $               | 2,069,558 |  
|                                                    |  |                 |           |  



Goodwill and Intangibles, Net of
Amortization



|                                                      |  |                 |        
|----------------------------------------------------- |  | --------------- | -------
|(in thousands)                                        |  | October 30,2004
|Goodwill and intangibles, net, as previously reported |  | $               | 324,363
|Adjustments:                                          |  |                 |        
|Other Items:                                          |  |                 |        
|Other                                                 |  |                 | 1,198  
|                                                      |  |                 |        
|Total adjustments                                     |  |                 | 1,198  
|                                                      |  |                 |        
|Goodwill and intangibles, net, as restated            |  | $               | 325,561
|                                                      |  |                 |        



Non-current Deferred Income
Taxes, Net



|                                                               |  |                 |         |  
|-------------------------------------------------------------- |  | --------------- | ------- | -
|(in thousands)                                                 |  | October 30,2004 |        
|Non-current deferred income taxes, net, as previously reported |  | $               | 153,426 |  
|Adjustments:                                                   |  |                 |         |  
|Other Items:                                                   |  |                 |         |  
|Tax Items                                                      |  |                 | (1,517  | )
|                                                               |  |                 |         |  
|Total adjustments                                              |  |                 | (1,517  | )
|                                                               |  |                 |         |  
|Non-current deferred income taxes, net, as restated            |  | $               | 151,909 |  
|                                                               |  |                 |         |  



23



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##### Table of Contents

Total Current Liabilities



|                                                  |  |                 |           |  
|------------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                                    |  | October 30,2004 |          
|Total current liabilities, as previously reported |  | $               | 1,154,243 |  
|Adjustments:                                      |  |                 |           |  
|Vendor Allowances                                 |  |                 | 27,222    |  
|Operating Leases:                                 |  |                 |           |  
|Tenant Allowances - Improvement Incentives        |  |                 | (6,578    | )
|Tenant Allowances - Impairments                   |  |                 | (4,624    | )
|Rent Holiday                                      |  |                 | (2,510    | )
|Depreciation Lives of Leasehold Improvements      |  |                 | (246      | )
|Other Items:                                      |  |                 |           |  
|Reclassifications                                 |  |                 | (12,335   | )
|Tax Items                                         |  |                 | (15,627   | )
|Purchase Discounts                                |  |                 | (3,108    | )
|Store Stock Supplies                              |  |                 | (761      | )
|Other                                             |  |                 | 1,191     |  
|                                                  |  |                 |           |  
|Total adjustments                                 |  |                 | (17,376   | )
|                                                  |  |                 |           |  
|Total current liabilities, as restated            |  | $               | 1,136,867 |  
|                                                  |  |                 |           |  



Accounts Payable



|                                         |  |                 |         |  
|---------------------------------------- |  | --------------- | ------- | -
|(in thousands)                           |  | October 30,2004 |        
|Accounts payable, as previously reported |  | $               | 562,490 |  
|Adjustments:                             |  |                 |         |  
|Vendor Allowances                        |  |                 | 31,871  |  
|Other Items:                             |  |                 |         |  
|Other                                    |  |                 | (1,153  | )
|                                         |  |                 |         |  
|Total adjustments                        |  |                 | 30,718  |  
|                                         |  |                 |         |  
|Accounts payable, as restated            |  | $               | 593,208 |  
|                                         |  |                 |         |  



24



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##### Table of Contents

Accrued Expenses and Other Current Liabilities



|                                                                       |  |                 |         |  
|---------------------------------------------------------------------- |  | --------------- | ------- | -
|(in thousands)                                                         |  | October 30,2004 |        
|Accrued expenses and other current liabilities, as previously reported |  | $               | 515,630 |  
|Adjustments:                                                           |  |                 |         |  
|Vendor Allowances                                                      |  |                 | (4,649  | )
|Operating Leases:                                                      |  |                 |         |  
|Tenant Allowances - Improvement Incentives                             |  |                 | (6,578  | )
|Tenant Allowances - Impairments                                        |  |                 | (4,624  | )
|Rent Holiday                                                           |  |                 | (2,510  | )
|Depreciation Lives of Leasehold Improvements                           |  |                 | (246    | )
|Other Items:                                                           |  |                 |         |  
|Reclassifications                                                      |  |                 | (13,920 | )
|Tax Items                                                              |  |                 | (15,627 | )
|Purchase Discounts                                                     |  |                 | (3,108  | )
|Store Stock Supplies                                                   |  |                 | (761    | )
|Other                                                                  |  |                 | 2,344   |  
|                                                                       |  |                 |         |  
|Total adjustments                                                      |  |                 | (49,679 | )
|                                                                       |  |                 |         |  
|Accrued expenses and other current liabilities, as restated            |  | $               | 465,951 |  
|                                                                       |  |                 |         |  



Current Portion of Long-Term
Debt



|                                                          |  |                 |       
|--------------------------------------------------------- |  | --------------- | ------
|(in thousands)                                            |  | October 30,2004
|Current portion of long-term debt, as previously reported |  | $               | 76,123
|Adjustments:                                              |  |                 |       
|Other Items:                                              |  |                 |       
|Reclassifications                                         |  |                 | 1,585 
|                                                          |  |                 |       
|Total adjustments                                         |  |                 | 1,585 
|                                                          |  |                 |       
|Current portion of long-term debt, as restated            |  | $               | 77,708
|                                                          |  |                 |       



Long-Term Debt



|                                       |  |                 |           |  
|-------------------------------------- |  | --------------- | --------- | -
|(in thousands)                         |  | October 30,2004 |          
|Long-term debt, as previously reported |  | $               | 1,428,095 |  
|Adjustments:                           |  |                 |           |  
|Other Items:                           |  |                 |           |  
|Reclassifications                      |  |                 | (1,585    | )
|                                       |  |                 |           |  
|Total adjustments                      |  |                 | (1,585    | )
|                                       |  |                 |           |  
|Long-term debt, as restated            |  | $               | 1,426,510 |  
|                                       |  |                 |           |  



25



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##### Table of Contents

Other Long-Term Liabilities



|                                                    |  |                 |        
|--------------------------------------------------- |  | --------------- | -------
|(in thousands)                                      |  | October 30,2004
|Other long-term liabilities, as previously reported |  | $               | 241,272
|Adjustments:                                        |  |                 |        
|Operating Leases:                                   |  |                 |        
|Tenant Allowances - Improvement Incentives          |  |                 | 48,838 
|Tenant Allowances - Impairments                     |  |                 | 14,054 
|Rent Holiday                                        |  |                 | 6,679  
|Depreciation Lives of Leasehold Improvements        |  |                 | 504    
|                                                    |  |                 |        
|Total adjustments                                   |  |                 | 70,075 
|                                                    |  |                 |        
|Other long-term liabilities, as restated            |  | $               | 311,347
|                                                    |  |                 |        



Total Shareholders Equity



|                                                   |  |                 |           |  
|-------------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                                     |  | October 30,2004 |          
|Total shareholders equity, as previously reported |  | $               | 1,952,387 |  
|Adjustments:                                       |  |                 |           |  
|Vendor Allowances                                  |  |                 | (27,222   | )
|Operating Leases:                                  |  |                 |           |  
|Tenant Allowances - Improvement Incentives         |  |                 | (10,977   | )
|Tenant Allowances - Impairments                    |  |                 | (7,398    | )
|Rent Holiday                                       |  |                 | (4,169    | )
|Depreciation Lives of Leasehold Improvements       |  |                 | (423      | )
|Other Items:                                       |  |                 |           |  
|Tax Items                                          |  |                 | 27,551    |  
|Purchase Discounts                                 |  |                 | (5,090    | )
|Store Stock Supplies                               |  |                 | (1,610    | )
|Other                                              |  |                 | (3,320    | )
|                                                   |  |                 |           |  
|Total adjustments                                  |  |                 | (32,658   | )
|                                                   |  |                 |           |  
|Total shareholders equity, as restated            |  | $               | 1,919,729 |  
|                                                   |  |                 |           |  



26



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##### Table of Contents

The following tables present the effect of the aforementioned adjustments on the Condensed Consolidated Financial
Statements, including the percentage of increase (decrease) as a result of the adjustments by line item.



CONDENSED CONSOLIDATED STATEMENT OF INCOME

Three Months Ended October 30, 2004



|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|------------------------------------------------------- |  | ------------------ | --------- | - | ----------- | - | ------ | ----------- |  | - | ------------- | - |  | ----- | -
|(In Thousands, except per share amounts)                |  | PreviouslyReported |           |   | Adjustments |   |        | As Restated |  |   | PercentChange |  
|NET SALES                                               |  | $                  | 1,481,645 |   |             | $ |       |             |  | $ | 1,481,645     |   |  | 0.0   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Cost of sales (excluding depreciation and amortization) |  |                    | 901,282   |   |             |   | 3,203  |             |  |   | 904,485       |   |  | 0.4   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Gross margin                                            |  |                    | 580,363   |   |             |   | (3,203 | )           |  |   | 577,160       |   |  | -0.6  | %
|                                                        |  |                    |           |  
|Selling, general and administrative expenses            |  |                    | 408,715   |   |             |   | 4,162  |             |  |   | 412,877       |   |  | 1.0   | %
|Other operating expenses                                |  |                    | 153,586   |   |             |   | (3,312 | )           |  |   | 150,274       |   |  | -2.2  | %
|Store pre-opening costs                                 |  |                    | 3,568     |   |             |   | (115   | )           |  |   | 3,453         |   |  | -3.2  | %
|Impairments and dispositions                            |  |                    | 28,282    |   |             |   | (1,867 | )           |  |   | 26,415        |   |  | -6.6  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|OPERATING INCOME (LOSS)                                 |  |                    | (13,788   | ) |             |   | (2,071 | )           |  |   | (15,859       | ) |  | 15.0  | %
|                                                        |  |                    |           |  
|Interest expense                                        |  |                    | (27,283   | ) |             |   | (1,117 | )           |  |   | (28,400       | ) |  | 4.1   | %
|Other income (expense), net                             |  |                    | 103       |   |             |   | 369    |             |  |   | 472           |   |  | NM    |  
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|INCOME (LOSS) BEFORE INCOME TAXES                       |  |                    | (40,968   | ) |             |   | (2,819 | )           |  |   | (43,787       | ) |  | 6.9   | %
|Provision (benefit) for income taxes                    |  |                    | (16,153   | ) |             |   | 2,756  |             |  |   | (13,397       | ) |  | -17.1 | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|NET INCOME (LOSS)                                       |  | $                  | (24,815   | ) |             | $ | (5,575 | )           |  | $ | (30,390       | ) |  | 22.5  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Earnings (loss) per common share:                       |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Basic earnings (loss) per common share                  |  | $                  | (0.18     | ) |             | $ | (0.04  | )           |  | $ | (0.22         | ) |  | 22.2  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Diluted earnings (loss) per common share                |  | $                  | (0.18     | ) |             | $ | (0.04  | )           |  | $ | (0.22         | ) |  | 22.2  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Weighted average common shares:                         |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Basic                                                   |  |                    | 138,249   |   |             |   |        |             |  |   | 138,249       |   |  |       |  
|Diluted                                                 |  |                    | 138,249   |   |             |   |        |             |  |   | 138,249       |   |  |       |  
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  

---

NM is defined as
Not Meaningful



27



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##### Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF INCOME

Nine Months Ended October 30, 2004



|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|------------------------------------------------------- |  | ------------------ | --------- | - | ----------- | - | ------ | ----------- |  | - | ------------- | - |  | ----- | -
|(In Thousands, except per share amounts)                |  | PreviouslyReported |           |   | Adjustments |   |        | As Restated |  |   | PercentChange |  
|NET SALES                                               |  | $                  | 4,372,195 |   |             | $ |       |             |  | $ | 4,372,195     |   |  | 0.0   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Cost of sales (excluding depreciation and amortization) |  |                    | 2,693,318 |   |             |   | (2,602 | )           |  |   | 2,690,716     |   |  | -0.1  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Gross margin                                            |  |                    | 1,678,877 |   |             |   | 2,602  |             |  |   | 1,681,479     |   |  | 0.2   | %
|                                                        |  |                    |           |  
|Selling, general and administrative expenses            |  |                    | 1,165,253 |   |             |   | 5,017  |             |  |   | 1,170,270     |   |  | 0.4   | %
|Other operating expenses                                |  |                    | 445,852   |   |             |   | (2,274 | )           |  |   | 443,578       |   |  | -0.5  | %
|Store pre-opening costs                                 |  |                    | 4,807     |   |             |   | (408   | )           |  |   | 4,399         |   |  | -8.5  | %
|Impairments and dispositions                            |  |                    | 35,653    |   |             |   | (1,867 | )           |  |   | 33,786        |   |  | -5.2  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|OPERATING INCOME (LOSS)                                 |  |                    | 27,312    |   |             |   | 2,134  |             |  |   | 29,446        |   |  | 7.8   | %
|                                                        |  |                    |           |  
|Interest expense                                        |  |                    | (79,411   | ) |             |   | (4,950 | )           |  |   | (84,361       | ) |  | 6.2   | %
|Other income (expense), net                             |  |                    | 241       |   |             |   | 2,706  |             |  |   | 2,947         |   |  | NM    |  
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|INCOME (LOSS) BEFORE INCOME TAXES                       |  |                    | (51,858   | ) |             |   | (110   | )           |  |   | (51,968       | ) |  | 0.2   | %
|Provision (benefit) for income taxes                    |  |                    | (20,129   | ) |             |   | 3,716  |             |  |   | (16,413       | ) |  | -18.5 | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|NET INCOME (LOSS)                                       |  | $                  | (31,729   | ) |             | $ | (3,826 | )           |  | $ | (35,555       | ) |  | 12.1  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Earnings (loss) per common share:                       |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Basic earnings (loss) per common share                  |  | $                  | (0.23     | ) |             | $ | (0.02  | )           |  | $ | (0.25         | ) |  | 8.7   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Diluted earnings (loss) per common share                |  | $                  | (0.23     | ) |             | $ | (0.02  | )           |  | $ | (0.25         | ) |  | 8.7   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Weighted average common shares:                         |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Basic                                                   |  |                    | 140,289   |   |             |   |        |             |  |   | 140,289       |   |  |       |  
|Diluted                                                 |  |                    | 140,289   |   |             |   |        |             |  |   | 140,289       |   |  |       |  
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  

---

NM is defined as
Not Meaningful



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CONDENSED CONSOLIDATED BALANCE SHEET

October 30, 2004



|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|---------------------------------------------- |  | ------------------ | --------- | ----------- | - | ------- | ----------- |  | ------------- | --------- |  | ----- | -
|(In Thousands)                                 |  | PreviouslyReported |           | Adjustments |   |         | As Restated |  | PercentChange |          
|ASSETS                                         |  |                    |           |             |   |         |             |  |               |           |  |       |  
|                                               |  |                    |           |            
|CURRENT ASSETS                                 |  |                    |           |             |   |         |             |  |               |           |  |       |  
|Cash and cash equivalents                      |  | $                  | 74,521    |             | $ | 6,574   |             |  | $             | 81,095    |  | 8.8   | %
|Merchandise inventories                        |  |                    | 1,856,358 |             |   | (14,442 | )           |  |               | 1,841,916 |  | -0.8  | %
|Other current assets                           |  |                    | 169,591   |             |   | (21,660 | )           |  |               | 147,931   |  | -12.8 | %
|Deferred income taxes, net                     |  |                    | 73,774    |             |   | 13,441  |             |  |               | 87,215    |  | 18.2  | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL CURRENT ASSETS                           |  |                    | 2,174,244 |             |   | (16,087 | )           |  |               | 2,158,157 |  | -0.7  | %
|                                               |  |                    |           |            
|PROPERTY AND EQUIPMENT, NET OF DEPRECIATION    |  |                    | 2,034,696 |             |   | 34,862  |             |  |               | 2,069,558 |  | 1.7   | %
|GOODWILL AND INTANGIBLES, NET OF AMORTIZATION  |  |                    | 324,363   |             |   | 1,198   |             |  |               | 325,561   |  | 0.4   | %
|DEFERRED INCOME TAXES, NET                     |  |                    | 153,426   |             |   | (1,517  | )           |  |               | 151,909   |  | -1.0  | %
|OTHER ASSETS                                   |  |                    | 89,268    |             |   |        |             |  |               | 89,268    |  | 0.0   | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL ASSETS                                   |  | $                  | 4,775,997 |             | $ | 18,456  |             |  | $             | 4,794,453 |  | 0.4   | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                    |           |             |   |         |             |  |               |           |  |       |  
|                                               |  |                    |           |            
|CURRENT LIABILITIES                            |  |                    |           |             |   |         |             |  |               |           |  |       |  
|Accounts payable                               |  | $                  | 562,490   |             | $ | 30,718  |             |  | $             | 593,208   |  | 5.5   | %
|Accrued expenses and other current liabilities |  |                    | 515,630   |             |   | (49,679 | )           |  |               | 465,951   |  | -9.6  | %
|Current portion of long-term debt              |  |                    | 76,123    |             |   | 1,585   |             |  |               | 77,708    |  | 2.1   | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL CURRENT LIABILITIES                      |  |                    | 1,154,243 |             |   | (17,376 | )           |  |               | 1,136,867 |  | -1.5  | %
|                                               |  |                    |           |            
|LONG-TERM DEBT                                 |  |                    | 1,428,095 |             |   | (1,585  | )           |  |               | 1,426,510 |  | -0.1  | %
|OTHER LONG-TERM LIABILITIES                    |  |                    | 241,272   |             |   | 70,075  |             |  |               | 311,347   |  | 29.0  | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL LIABILITIES                              |  |                    | 2,823,610 |             |   | 51,114  |             |  |               | 2,874,724 |  | 1.8   | %
|                                               |  |                    |           |            
|COMMITMENTS AND CONTINGENCIES                  |  |                    |          |             |   |        |             |  |               |          |  | 0.0   | %
|                                               |  |                    |           |            
|SHAREHOLDERS EQUITY                           |  |                    | 1,952,387 |             |   | (32,658 | )           |  |               | 1,919,729 |  | -1.7  | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY     |  | $                  | 4,775,997 |             | $ | 18,456  |             |  | $             | 4,794,453 |  | 0.4   | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  



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SUMMARY OF CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS



|                                                    |  |                    |          |   |             |   |        |             |  |   |               |   |  |        |  
|--------------------------------------------------- |  | ------------------ | -------- | - | ----------- | - | ------ | ----------- |  | - | ------------- | - |  | ------ | -
|Nine Months Ended July 31, 2004 (In
Thousands)      |  | PreviouslyReported |          |   | Adjustments |   |        | As Restated |  |   | PercentChange |  
|Net cash provided by (used in) operating activities |  | $                  | (4,602   | ) |             | $ | 9,411  |             |  | $ | 4,809         |   |  | -204.5 | %
|Net cash used in investing activities               |  |                    | (135,407 | ) |             |   | (2,876 | )           |  |   | (138,283      | ) |  | 2.1    | %
|Net cash used in financing activities               |  |                    | (151,304 | ) |             |   |       |             |  |   | (151,304      | ) |  | 0.0    | %
|                                                    |  |                    |          |   |             |   |        |             |  |   |               |   |  |        |  
|Change in cash and cash equivalents                 |  |                    | (291,313 | ) |             |   | 6,535  |             |  |   | (284,778      | ) |  | -2.2   | %
|Cash and cash equivalents at beginning of year      |  |                    | 365,834  |   |             |   | 39     |             |  |   | 365,873       |   |  | 0.0    | %
|                                                    |  |                    |          |   |             |   |        |             |  |   |               |   |  |        |  
|Cash and cash equivalents at end of year            |  | $                  | 74,521   |   |             | $ | 6,574  |             |  | $ | 81,095        |   |  | 8.8    | %
|                                                    |  |                    |          |   |             |   |        |             |  |   |               |   |  |        |  



NOTE 3 - EARNINGS PER COMMON SHARE



Calculations of earnings per common share (EPS) for the three
and nine months ended October 29, 2005 and October 30, 2004 are as follows (income (loss) and shares in thousands):



|                                 |  |                                           |        |                       |                                           |                |   |       |              |  |   |                       |   |                        |         |  |   |       |  
|-------------------------------- |  | ----------------------------------------- | ------ | --------------------- | ----------------------------------------- | -------------- | - | ----- | ------------ |  | - | --------------------- | - | ---------------------- | ------- |  | - | ----- | -
|                                 |  | For the Nine Months EndedOctober 29, 2005 |        |                       | For the Nine Months EndedOctober 30, 2004 |               
|                                 |  | Income                                    |        | WeightedAverageShares |                                           | PerShareAmount |   |       | RestatedLoss |  |   | WeightedAverageShares |   | RestatedPerShareAmount |        
|Basic EPS                        |  | $                                         | 225    |                       | 139,541                                   |                | $ | 0.00  |              |  | $ | (30,390               | ) |                        | 138,249 |  | $ | (0.22 | )
|Effect of dilutive stock options |  |                                           |        |                       | 6,526                                     |                |   |      |              |  |   |                       |   |                        |        |  |   |      |  
|                                 |  |                                           |        |                       |                                           |                |   |       |              |  |   |                       |   |                        |         |  |   |       |  
|Diluted EPS                      |  | $                                         | 225    |                       | 146,067                                   |                | $ | 0.00  |              |  | $ | (30,390               | ) |                        | 138,249 |  | $ | (0.22 | )
|                                 |  |                                           |        |                       |                                           |                |   |       |              |  |   |                       |   |                        |         |  |   |       |  
|                                 |  |                                          
|                                 |  | For the Nine Months EndedOctober 29, 2005 |        |                       | For the Nine Months EndedOctober 30, 2004 |               
|                                 |  | Income                                    |        | WeightedAverageShares |                                           | PerShareAmount |   |       | RestatedLoss |  |   | WeightedAverageShares |   | PerShareAmount         |        
|Basic EPS                        |  | $                                         | 24,590 |                       | 138,996                                   |                | $ | 0.18  |              |  | $ | (35,555               | ) |                        | 140,289 |  | $ | (0.25 | )
|Effect of dilutive stock options |  |                                           |       |                       | 5,941                                     |                |   | (0.01 | )            |  |   |                      |   |                        |        |  |   |      |  
|                                 |  |                                           |        |                       |                                           |                |   |       |              |  |   |                       |   |                        |         |  |   |       |  
|Diluted EPS                      |  | $                                         | 24,590 |                       | 144,937                                   |                | $ | 0.17  |              |  | $ | (35,555               | ) |                        | 140,289 |  | $ | (0.25 | )
|                                 |  |                                           |        |                       |                                           |                |   |       |              |  |   |                       |   |                        |         |  |   |       |  



Additionally, the Company had 4,472
and 22,978 share awards of potentially dilutive common stock outstanding at October 29, 2005 and October 30, 2004, respectively, that were not included in the computation of diluted EPS because either the Company had a loss for the period
or the exercise prices of the options were greater than the average market price of the common shares for



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the period. There were also 12,307 of potentially exercisable shares under convertible debt at October 29, 2005 and
October 30, 2004, that were not included in the computation of diluted EPS because the market price was less than the conversion price.



The Companys convertible debt includes a contingent conversion price provision and the option for a settlement in either cash or shares, known as net share
settlement. Under current generally accepted accounting principles, these two provisions individually influence application of the if-converted method of calculating earnings per share. The Emerging Issues Task Force (EITF) recently reached a
consensus, EITF 04-08, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share, whereby the contingent conversion provisions should be ignored and therefore an issuer should apply the if-converted method in
calculating dilutive earnings per share. This consensus became effective for periods ending after December 15, 2004, and requires retroactive application to all periods presented.



Furthermore, 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 upon conversion of the notes in cash, and thus exclude the effect of the conversion of the notes in its calculation of dilutive 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 dilutive 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 dilutive calculation by 12,307 shares. A final Statement is expected to be issued in the first quarter of 2006.



NOTE 4  SALE OF BUSINESSES



On July 5, 2005, the Company consummated a transaction with Belk, Inc. (Belk), whereby Belk acquired from the Company for $622,404 in cash substantially
all of the assets directly involved in the Companys Proffitts and McRaes business operations (hereafter described as Proffitts), plus the assumption of approximately $1,000 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 which generated
fiscal 2004 revenues of approximately $700,000.



Upon the closing of the
transaction, the Company and Belk entered into a fee for services agreement, whereby the Company will continue to provide, for varying transition periods, certain back office services related to the Proffitts operations. Such operations
include certain information technology, telecommunications, credit, store planning and distribution services, among others. The services provided will cease as Belk becomes able to absorb the operations within its back office infrastructure. The fee
for services agreement qualifies as continuing involvement in accordance with FAS 144, and therefore, precludes the presentation of the sold business as discontinued operations within the accompanying consolidated financial statements.



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The following table provides details of the disposed operations of the Proffitts business, had it operated on a
stand-alone basis, that are included within the accompanying condensed consolidated balance sheets at January 29, 2005 and October 30, 2004 and the condensed consolidated statements of income for the three and nine-month periods ended
October 29, 2005 and October 30, 2004.



|                                              |  |                 |         |                 |   |        
|--------------------------------------------- |  | --------------- | ------- | --------------- | - | -------
|                                              |  | January 29,2005 |         | October 30,2004
|Merchandise inventory                         |  | $               | 164,306 |                 | $ | 225,960
|Property and equipment                        |  | $               | 270,922 |                 | $ | 265,840
|Goodwill                                      |  | $               | 88,000  |                 | $ | 88,000 
|Other current assets                          |  | $               | 3,895   |                 | $ | 4,748  
|                                              |  |                
|Accounts payable and other current liablities |  | $               | 45,935  |                 | $ | 103,913
|Long-term liabilities                         |  | $               | 4,761   |                 | $ | 4,875  



|                           |  |                    |   |                 |                   |         |                 |  |                 |         |  |   |        
|-------------------------- |  | ------------------ | - | --------------- | ----------------- | ------- | --------------- |  | --------------- | ------- |  | - | -------
|                           |  | Three Months Ended |   |                 | Nine Months Ended
|                           |  | October 29,2005    |   | October30, 2004 |                   |         | October29, 2005 |  | October 30,2004
|Net sales                  |  | $                  |  |                 | $                 | 149,979 |                 |  | $               | 263,257 |  | $ | 438,509
|Net income                 |  | $                  |  |                 | $                 | (3,525  | )               |  | $               | 1,898   |  | $ | 3,937  
|Diluted earnings per share |  | $                  |  |                 | $                 | (0.03   | )               |  | $               | 0.01    |  | $ | 0.03   



After considering the assets and
liabilities sold, liabilities settled, transaction fees and severance, the Company realized a net gain of $155,518 on the sale. Asset impairments (gains), transaction fees and other costs are included in Impairments and Dispositions, and severance
costs are included in Selling, General & Administrative Expenses in the accompanying Condensed Consolidated Statements of Income. The components of these charges and the status of the related liability are as follows:



|                                 |  |                      |          |   |                         |   |          |               |  |                            |         |  |   |  
|-------------------------------- |  | -------------------- | -------- | - | ----------------------- | - | -------- | ------------- |  | -------------------------- | ------- |  | - | -
|                                 |  | 2005 Charges/(Gains) |          |   | Cash(Proceeds)/Payments |   |          | Non-Cash Uses |  | Payable atOctober 29, 2005
|Asset Impairments (Gains)        |  | $                    | (161,168 | ) |                         | $ | (622,404 | )             |  | $                          | 461,236 |  | $ | 
|Transaction Fees and Other Costs |  |                      | 4,849    |   |                         |   | 4,849    |               |  |                            |        |  |   | 
|Severance                        |  |                      | 801      |   |                         |   | 801      |               |  |                            |        |  |   | 
|                                 |  |                      |          |   |                         |   |          |               |  |                            |         |  |   |  
|                                 |  | $                    | (155,518 | ) |                         | $ | (616,754 | )             |  | $                          | 461,236 |  | $ | 
|                                 |  |                      |          |   |                         |   |          |               |  |                            |         |  |   |  



Additionally, on October 31,
2005, the Company announced the planned sale of its Northern Department Store Group (NDSG) as a single business operation, operating under the nameplates of Bergners, Boston Store, Carson Pirie Scott, Herbergers and Younkers
(which



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generated fiscal 2004 revenues of approximately $2,200,000) to The Bon-Ton Stores, Inc. (Bon-Ton) for $1.1
billion in cash plus the assumption of approximately $85 million of liabilities. Closing of the transaction is subject to certain conditions, including Bon-Tons financing for the transaction, the expiration or termination of all waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act, and various other customary conditions. Bank of America, N.A. has executed a commitment letter with Bon-Ton to provide for the financing of the transaction, subject to the conditions
that are contained in the commitment letter. The transaction is expected to be completed in the first fiscal quarter of 2006. As part of the transaction, the Company will enter into a fee for services agreement to provide Bon-Ton with specified
support services, including information technology, credit services, and other back office support functions, for a limited period of time. The assets and liabilities associated with NDSG have been appropriately classified as held for sale at
October 29, 2005 in the accompanying condensed consolidated balance sheet.



NOTE 5 - DEBT AND SHARE ACTIVITY



On April 13, 2005, the
Company received from the lenders in its revolving credit facility a waiver of any events of default that might arise under the revolving credit agreement from the Companys failure to timely deliver to the lenders the 2004 Form 10-K. On
June 6, 2005 the Company also received from the lenders in the revolving credit facility (i) consent to the sale of certain assets to Belk, Inc. (as previously described), and (ii) a waiver, until September 1, 2005, of any events
of default that might arise under the revolving credit agreement from the Companys failure to timely deliver to the lenders the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2005. On
August 31, 2005, the Company received from the lenders in the revolving credit facility a waiver, through October 31, 2005, of any events of default that may arise from the Companys failure to timely deliver to the lenders the
Companys Quarterly Reports on Form 10-Q for the fiscal quarters ended April 30, 2005 and July 30, 2005.



On June 14, 2005, the Company received a notice of default with respect to its convertible notes. The notice of default was given by a note holder that stated that
it owned more than 25% of the convertible notes. The notice of default stated that the Company breached covenants in the indenture for the convertible notes that require the Company to (1) file with the Securities and Exchange Commission and
the trustee for the convertible notes Annual Reports on Form 10-K and other reports, and (2) deliver to the trustee for the convertible notes, within a 120-day period after the end of the Companys fiscal year ended January 29, 2005,
a compliance certificate specified by the convertible notes indenture. In response to this receipt of a notice of default, on June 20, 2005, the Company announced that it would commence cash tender offers and consent solicitations for three
issues of its outstanding senior notes and consent solicitations with respect to two additional issues of its outstanding senior notes and its outstanding convertible notes.



On July 19, 2005 the Company completed these cash tender offers and consent solicitations. The consent solicitations (including those
that were part of the tender offers) offered holders a one-time fee in exchange for their consent to proposed amendments to the indenture for each issue of notes that would, among other things, extend to October 31, 2005, for purposes of the
indentures, the Companys deadlines to file the 2004 Form 10-K and the Companys Quarterly Report on



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Form 10-Q for the first and second quarters of 2005. Upon completion of the tender offers and consent solicitations, the
Company repurchased a total of approximately $585,700 in principal amount of senior notes and received consents from holders of a majority of every issue of its senior notes and of its convertible notes. The notes were repurchased at par, which
included a consent fee. The repurchase of these notes resulted in a loss on extinguishment of debt of $28,991 related principally to the write-off of deferred financing costs and a premium on previously exchanged notes.



Additionally, the Company repurchased $21,400 of additional senior notes at par through
unsolicited open market repurchases during August 2005. The repurchase of these notes resulted in a loss on extinguishment of debt of $29.



At October 30, 2004, the Company had interest rate swap agreements with notional amounts of $150,000 and $100,000, which swapped coupon rates of 8.25% and 7.50%,
respectively, for floating rates. The fair value of these swaps at October 30, 2004 was a loss of $724. During 2004 the Company cancelled all remaining interest rate swap agreements resulting in net losses. When combined with net gains from
other previously cancelled interest swap agreements, the Company had total unamortized net gains/(losses) of ($593) and $3,843 at October 29, 2005 and October 30, 2004, respectively, which are being amortized as a component of interest
expense through 2010. There were no swap agreements outstanding at October 29, 2005.



During the nine months ended October 29, 2005 the Company did not purchase any shares of Saks common stock. At October 29, 2005, there were 15,689 shares remaining available for repurchase under the
Companys existing share repurchase program. Subsequent to the end of the quarter, the Company repurchased 8,019 shares of Saks common stock at a cost of approximately $140,800, which left 7,670 shares available for repurchase under
authorized programs. In addition, the Company announced on December 8, 2005 that in anticipation of the closing of the NDSG transaction, its Board of Directors had approved a 35,000 share increase in its common share repurchase program, bringing the
total available for repurchase to 42,670 shares. Shares may be purchased in open-market, negotiated, and other transactions as may be available. Implementation of the increased buyback program will depend on market conditions, the Companys
other cash requirements, and other factors.



NOTE 6  EMPLOYEE BENEFIT
PLANS



The Company sponsors defined benefit pension plans for a
significant portion of its employees. The Company generally funds pension costs currently, subject to regulatory funding requirements. The components of net periodic pension expense for the three and nine months ended October 29, 2005 and
October 30, 2004 were as follows:



|                                                   |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|-------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                   |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                   |  | October 29,2005    |        |   | October 30,2004   |   |        | October 29,2005 |  |   | October 30,2004 |  
|Service cost                                       |  | $                  | 1,913  |   |                   | $ | 1,731  |                 |  | $ | 5,739           |   |  | $ | 5,193   |  
|Interest cost                                      |  |                    | 5,442  |   |                   |   | 5,557  |                 |  |   | 16,326          |   |  |   | 16,671  |  
|Expected return on plan assets                     |  |                    | (5,761 | ) |                   |   | (5,983 | )               |  |   | (17,283         | ) |  |   | (17,949 | )
|Net amortization of losses and prior service costs |  |                    | 2,599  |   |                   |   | 1,469  |                 |  |   | 7,797           |   |  |   | 4,407   |  
|                                                   |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net periodic pension expense                       |  | $                  | 4,193  |   |                   | $ | 2,774  |                 |  | $ | 12,579          |   |  | $ | 8,322   |  
|                                                   |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  



The Company expects minimal funding
requirements in 2005 and 2006.



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NOTE 7  STOCK-BASED COMPENSATION



The Company recorded compensation expense for all stock-based compensation plan issuances prior to 2003 using the intrinsic value method.
Compensation expense, if any, was measured as the excess of the market price of the stock over the exercise price of the award on the measurement date. In 2003, the Company began expensing the fair value of all stock-based grants over the vesting
period on a prospective basis utilizing the Black-Scholes model.



Had
compensation cost for the Companys stock-based compensation plan issuances prior to 2003 been determined under the fair value method, the Companys net income and earnings per share would have been reduced to the pro forma amounts
indicated below.



|                                                                                                |  |                    |        |   |                         |   |         |                 |  |   |                         |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------------- | - | ------- | --------------- |  | - | ----------------------- | - |  | - | ------- | -
|                                                                                                |  | Three Months Ended |        |   | Nine Months Ended       |  
|                                                                                                |  | October 29,2005    |        |   | RestatedOctober 30,2004 |   |         | October 29,2005 |  |   | RestatedOctober 30,2004 |  
|Net income (loss) as reported                                                                   |  | $                  | 225    |   |                         | $ | (30,390 | )               |  | $ | 24,590                  |   |  | $ | (35,555 | )
|                                                                                                |  |                    |        |  
|Add: Stock-based compensation expense included in net income (loss), net of related tax effects |  |                    | 3,355  |   |                         |   | 1,789   |                 |  |   | 10,982                  |   |  |   | 5,185   |  
|                                                                                                |  |                    |        |  
|Deduct: Total stock-based employee compensation expense determined under the fair value method  |  |                    | (4,022 | ) |                         |   | (5,227  | )               |  |   | (13,606                 | ) |  |   | (15,976 | )
|                                                                                                |  |                    |        |   |                         |   |         |                 |  |   |                         |   |  |   |         |  
|Pro forma net income (loss)                                                                     |  | $                  | (442   | ) |                         | $ | (33,828 | )               |  | $ | 21,966                  |   |  | $ | (46,346 | )
|                                                                                                |  |                    |        |   |                         |   |         |                 |  |   |                         |   |  |   |         |  
|Basic earnings (loss) per common share                                                          |  |                    |        |   |                         |   |         |                 |  |   |                         |   |  |   |         |  
|As reported                                                                                     |  | $                  | 0.00   |   |                         | $ | (0.22   | )               |  | $ | 0.18                    |   |  | $ | (0.25   | )
|Pro forma                                                                                       |  | $                  | 0.00   |   |                         | $ | (0.24   | )               |  | $ | 0.16                    |   |  | $ | (0.33   | )
|                                                                                                |  |                    |        |  
|Diluted earnings (loss) per common share                                                        |  |                    |        |   |                         |   |         |                 |  |   |                         |   |  |   |         |  
|As reported                                                                                     |  | $                  | 0.00   |   |                         | $ | (0.22   | )               |  | $ | 0.17                    |   |  | $ | (0.25   | )
|Pro forma                                                                                       |  | $                  | 0.00   |   |                         | $ | (0.24   | )               |  | $ | 0.15                    |   |  | $ | (0.33   | )



NOTE 8 - CONTINGENCIES



LEGAL CONTINGENCIES



Investigations



As previously disclosed at Note 2 herein and in its 2004 Form 10-K, the Company has informed the SEC of the Audit Committees
investigation into improper collection of vendor markdown allowances in one of SFAEs six merchandising divisions, and the SEC notified the Company that it has issued a formal order of private investigation. On October 11, 2005, the
Company received a subpoena from the SEC for information concerning, among other items, SFAEs



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allocations to vendors of a portion of markdown costs associated with certain of SFAEs customer loyalty and other
promotional activities, as well as information concerning markdowns, earnings, and other financial data for fiscal years 1999-2003. The Company is providing the requested information to the SEC. Also as previously disclosed, the Company has been
informed that the Office of the United States Attorney for the Southern District of New York had instituted an inquiry. The Company is fully cooperating with both the SEC and the Office of the United States Attorney.



Vendor Litigation



On May 17, 2005, International Design Concepts, LLC (IDC), filed suit
against the Company raising various claims, including ones for 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. The suit seeks damages in the amount of such unauthorized chargebacks and deductions. A second amended complaint was filed by IDC on June 14, 2005 asserting an additional claim for damages under the Uniform Commercial
Code for vendor compliance chargebacks.



On May 20, 2004, Onward Kashiyama
USA, Inc. (Onward) filed a breach of contract claim against the Company and SFAE. The suit alleged that, starting in 1999, the Company took unauthorized chargebacks with respect to Onwards delivery of merchandise to the Company.
The suit sought damages in the amount of such allegedly improper chargebacks. The Company determined that it had improperly collected markdown allowances from Onward. The Company and Onward settled the claim on August 23, 2005.



Shareholders Derivative Suits



Three shareholder derivative actions have been filed in state court (one in Birmingham,
Alabama and two in Nashville, Tennessee) for the putative benefit of the Company against the members of the Board of Directors and certain executive officers generally alleging breach of their fiduciary duties in failing to correct or prevent
problems with the Companys accounting and internal control practices and procedures, among other allegations. The actions generally seek unspecified damages and disgorgement by the executive officers named in the complaints of cash and equity
compensation received by them.



On July 12, 2005, the Board of Directors
created a Special Litigation Committee (SLC) to investigate the derivative claims and to determine whether the litigation is in the best interests of the Company. The SLC includes one director and two individuals who are not directors
and who have no other affiliation with the Company. On August 1, 2005, the Company filed a motion to stay the Alabama action pending the outcome of the SLCs investigation, and all of the parties to that case subsequently agreed to a stay
for ninety days. On August 19, 2005, the Company filed an agreed motion in the Tennessee actions to stay all proceedings for a period of ninety days pending the recommendation of the SLC as to whether the Company should pursue the litigation.
The SLCs investigation is ongoing and it does not appear that the SLC will complete its work prior to the end of the 90 day period . Therefore, the Company expects that the SLC will seek an
extension of the stays.



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Other



The Company is involved in several 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.



INCOME TAXES



The Company is routinely under audit by federal, state or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the timing and amount of deductions
and the allocation of income among various tax jurisdictions. Based on annual evaluations of tax filing positions, the Company believes it has appropriately accrued for exposures.



OTHER



The terms of a customer proprietary credit card program with Household Bank (SB), N.A. (now HSBC Bank Nevada, N.A., an affiliate of Household International
(HSBC)) allow each party to terminate the Program Agreement upon the occurrence of specified events. If HSBC were to terminate the Program Agreement, the Company might be required to return to HSBC a declining portion of the premium it
received when the credit card portfolio was sold to HSBC in 2003. The maximum contingent payment had the program been terminated early at October 29, 2005 would have been approximately $88,000. If the Company were to terminate the program, the
Company would have the right to purchase the credit card accounts and associated accounts receivable from HSBC at their fair value.



NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS



As further discussed in Note 3, The Emerging Issues Task Force (EITF) recently reached a consensus, EITF 04-08, The Effect of Contingently Convertible Instruments
on Diluted Earnings Per Share, whereby the contingent conversion provisions should be ignored and therefore an issuer should apply the if-converted method in calculating dilutive earnings per share. This consensus became effective for periods
ending after December 15, 2004, and requires retroactive application to all periods presented. Furthermore, the Financial Accounting Standards Board (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 upon conversion of the notes in cash, and thus exclude the effect of the conversion of the notes in its calculation of dilutive
earnings per share. If and when the FASB amends SFAS No. 128, the effect of the changes would



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require the Company to use the if-converted method in calculating dilutive earnings per share except when the effect
would be anti-dilutive. A final Statement is expected to be issued in the first quarter of 2006.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs  An Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and is required to be
adopted by the Company in the first quarter of fiscal 2006. The Company does not expect SFAS No. 151 to have a material effect on the Companys financial position or its results of operations.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. This statement, referred to as SFAS No. 123R, revised SFAS No. 123, Accounting for Stock-Based compensation, and requires companies to expense the value of employee stock options and similar awards.
The effective date of this standard is annual periods beginning after June 15, 2005.



Until 2003, the Company recorded compensation expense for all stock-based compensation plan issuances prior to 2003 using the intrinsic value method. Compensation expense, if any, was measured as the excess of the
market price of the stock over the exercise price of the award on the measurement date. In 2003, in accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement
No. 123, the Company began expensing the fair value of all stock-based grants over the vesting period on a prospective basis utilizing the Black-Scholes model.



Upon the adoption of SFAS No. 123R, the Company will be required to expense all stock options over the vesting period in its statement
of operations, including the remaining vesting period associated with unvested options outstanding as of January 28, 2006. For the three-month periods ended October 29, 2005 and October 30, 2004, total stock-based employee
compensation expense, net of related tax effects, determined under this new standard would have been approximately $4,000, and $5,000, respectively, and for the nine-month periods ended October 29, 2005 and October 30, 2004, total
stock-based employee compensation expense, net of related tax effects, would have been approximately $14,000, and $16,000, respectively. The Company will be required to adopt SFAS No. 123R in the first quarter of 2006. The Company is still
evaluating the effect of the adoption of this standard, but does not expect that it will have a material effect on the Companys financial position or its results of operations.



In March 2005, the FASB staff issued guidance on SFAS No. 123R. Additionally, the SEC issued Staff Accounting Bulletin No. 107
(SAB 107) to assist preparers by simplifying some of the implementation challenges of SFAS No. 123R while enhancing the information that investors receive. SAB 107 creates a framework that reinforces the flexibility allowed, specifically when
valuing employee stock options and permits individuals, acting in good faith, to conclude differently on the fair value of employee stock options.



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In June 2005, the FASBs Emerging Issues Task Force reached a consensus on Issue No. 05-6,
Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination (EITF 05-6). EITF 05-6 provides guidance on the amortization period for leasehold improvements in
operating leases that are either acquired after the beginning of the initial lease term or acquired as the result of a business combination. This guidance requires leasehold improvements purchased after the beginning of the initial lease term
to be amortized over the shorter of the assets useful life or a term that includes the original lease term plus any renewals that are reasonably assured at the date the leasehold improvements are purchased. This guidance is effective for
reporting periods beginning after June 29, 2005. The adoption of this guidance did not have an impact on our net earnings, cash flows or financial position.



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NOTE 10 - SEGMENT INFORMATION



The following tables represent summary segment financial information and are consistent with managements view of the business
operating structure.



|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|------------------------------ |  | ------------------ | --------- | - | ----------------------- | - | --------- | --------------- |  | ----------------------- | --------- |  | - | --------- | -
|                               |  | Three Months Ended |           |   | Nine Months Ended       |  
|                               |  | October 29,2005    |           |   | RestatedOctober 30,2004 |   |           | October 29,2005 |  | RestatedOctober 30,2004 |          
|Net sales:                     |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Saks Department Stores Group   |  | $                  | 680,556   |   |                         | $ | 846,571   |                 |  | $                       | 2,250,146 |  | $ | 2,474,762 |  
|Saks Fifth Avenue Enterprises  |  |                    | 634,662   |   |                         |   | 635,074   |                 |  |                         | 1,930,383 |  |   | 1,897,433 |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|                               |  | $                  | 1,315,218 |   |                         | $ | 1,481,645 |                 |  | $                       | 4,180,529 |  | $ | 4,372,195 |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Operating Income (Loss):       |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Saks Department Stores Group   |  | $                  | 13,300    |   |                         | $ | 3,753     |                 |  | $                       | 35,797    |  | $ | 36,428    |  
|Saks Fifth Avenue Enterprises  |  |                    | 16,740    |   |                         |   | 21,362    |                 |  |                         | 14,744    |  |   | 60,760    |  
|Items not allocated            |  |                    | (14,468   | ) |                         |   | (40,974   | )               |  |                         | 110,155   |  |   | (67,742   | )
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|                               |  | $                  | 15,572    |   |                         | $ | (15,859   | )               |  | $                       | 160,696   |  | $ | 29,446    |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Depreciation and Amortization: |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Saks Department Stores Group   |  | $                  | 26,042    |   |                         | $ | 30,846    |                 |  | $                       | 84,221    |  | $ | 91,677    |  
|Saks Fifth Avenue Enterprises  |  |                    | 24,664    |   |                         |   | 24,548    |                 |  |                         | 75,516    |  |   | 74,183    |  
|Other                          |  |                    | 640       |   |                         |   | 768       |                 |  |                         | 1,893     |  |   | 1,861     |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|                               |  | $                  | 51,346    |   |                         | $ | 56,162    |                 |  | $                       | 161,630   |  | $ | 167,721   |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Total Assets:                  |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Saks Department Stores Group   |  | $                  | 1,823,705 |   |                         | $ | 2,410,140 |                 |  | $                       | 1,823,705 |  | $ | 2,410,140 |  
|Saks Fifth Avenue Enterprises  |  |                    | 1,881,453 |   |                         |   | 1,819,432 |                 |  |                         | 1,881,453 |  |   | 1,819,432 |  
|Other                          |  |                    | 524,902   |   |                         |   | 564,881   |                 |  |                         | 524,902   |  |   | 564,881   |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|                               |  | $                  | 4,230,060 |   |                         | $ | 4,794,453 |                 |  | $                       | 4,230,060 |  | $ | 4,794,453 |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Capital Expenditures:          |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|Saks Department Stores Group   |  | $                  | 21,167    |   |                         | $ | 33,748    |                 |  | $                       | 66,378    |  | $ | 78,592    |  
|Saks Fifth Avenue Enterprises  |  |                    | 37,253    |   |                         |   | 11,376    |                 |  |                         | 77,670    |  |   | 27,346    |  
|Other                          |  |                    | 14,346    |   |                         |   | 13,715    |                 |  |                         | 29,766    |  |   | 37,688    |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  
|                               |  | $                  | 72,766    |   |                         | $ | 58,839    |                 |  | $                       | 173,814   |  | $ | 143,626   |  
|                               |  |                    |           |   |                         |   |           |                 |  |                         |           |  |   |           |  



Operating Income for the
segments includes net sales; cost of sales; direct selling, general, and administrative expenses; other direct operating expenses for the respective segment; and an allocation of certain operating expenses, including depreciation, shared by the two
segments. Items not allocated are those items not considered by the chief operating decision maker in measuring the assets and profitability of the segments. These amounts are generally represented by two categories: (1) general corporate
assets and expenses and other amounts including, but not limited to, treasury, investor relations, legal (except for the costs associated with the Audit Committee investigation which have been allocated to SFAE) and finance support services, and
general corporate management; and (2) certain items, while often times related to the operations



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of a segment, are not considered by segment operating management, corporate operating management and the chief operating
decision maker in assessing segment operating performance. During the three and nine-month periods ended October 29, 2005 and October 30, 2004, items not allocated were comprised of the following:



|                             |  |                    |         |   |                         |   |         |                 |  |   |                         |   |  |   |         |  
|---------------------------- |  | ------------------ | ------- | - | ----------------------- | - | ------- | --------------- |  | - | ----------------------- | - |  | - | ------- | -
|                             |  | Three Months Ended |         |   | Nine Months Ended       |  
|                             |  | October 29,2005    |         |   | RestatedOctober 30,2004 |   |         | October 29,2005 |  |   | RestatedOctober 30,2004 |  
|General corporate expenses   |  | $                  | (23,582 | ) |                         | $ | (13,406 | )               |  | $ | (56,398                 | ) |  | $ | (32,803 | )
|Impairments and dispositions |  |                    | 9,350   |   |                         |   | (26,415 | )               |  |   | 169,290                 |   |  |   | (33,786 | )
|Other items, net             |  |                    | (236    | ) |                         |   | (1,153  | )               |  |   | (2,737                  | ) |  |   | (1,153  | )
|                             |  |                    |         |   |                         |   |         |                 |  |   |                         |   |  |   |         |  
|Items not allocated          |  | $                  | (14,468 | ) |                         | $ | (40,974 | )               |  | $ | 110,155                 |   |  | $ | (67,742 | )
|                             |  |                    |         |   |                         |   |         |                 |  |   |                         |   |  |   |         |  



General corporate expenses increased
during the three and nine-month periods ending October 29, 2005 due to certain management equity compensation and retention costs associated with the contemplated strategic alternatives at SDSG. During the three-month period ended
October 29, 2005, impairment and dispositions primarily consisted of a gain associated with the estimated insurance settlement on the SFAE New Orleans store that was damaged by Hurricane Katrina, and during the nine-month period ending
October 29, 2005, impairments and dispositions primarily consisted of a gain associated with the sale of Proffitts. Other items during the three and nine-month periods ending October 29, 2005 principally related to severance and
other costs associated with the SFAE store closures and the sale of Proffitts.



During the three and nine-month periods ending October 30, 2004, impairments and dispositions primarily consisted of lease termination costs and asset impairments associated with the SFAE store closings and other store closings in the
normal course of business. Other items during the three and nine-month periods ending October 30, 2004 principally related to severance and other costs associated with the SFAE store closures.



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NOTE 11  STORE CLOSINGS AND OTHER ACTIVITIES



In October 2004, the Company announced its intention to close 12 SFAE stores. The net pre-tax charges resulting from closing these stores
are principally related to asset impairments, lease terminations, inventory write downs and severance costs, partially offset by gains on the disposition of one or more stores. During 2004, net charges related to these announced closings were
$30,008. In future periods, the Company expects total charges (primarily cash) to be approximately $25,000 to $35,000.



As it relates to these SFAE closings, the Company realized net gains of $597 during the nine months ended October 29, 2005, primarily resulting from net gains from
the sale of closed stores, offset by severance charges, markdowns and other costs associated with the closings. Severance costs represent the portion of accrued benefits for employees that will exit when the stores are closed. Lease termination
costs are included in Impairments and Dispositions, markdown charges are included in Gross Margin, and severance costs are included in Selling, General & Administrative Expenses in the accompanying Consolidated Statements of Income. The
components of these charges/gains and the status of any related liability are as follows:



|                                        |  |                       |        |   |                         |   |        |               |  |                            |       |  |   |    
|--------------------------------------- |  | --------------------- | ------ | - | ----------------------- | - | ------ | ------------- |  | -------------------------- | ----- |  | - | ---
|                                        |  | 2005 Charges /(Gains) |        |   | Cash(Proceeds)/Payments |   |        | Non-Cash Uses |  | Payable atOctober 29, 2005
|Asset Impairments (Gains)               |  | $                     | (2,639 | ) |                         | $ | (4,078 | )             |  | $                          | 1,439 |  | $ |   
|Lease Termination and Dead Rent Charges |  |                       | 540    |   |                         |   | 251    |               |  |                            | 289   |  |   |   
|Severance, Markdowns and Other Costs    |  |                       | 1,502  |   |                         |   | 1,157  |               |  |                            | 241   |  |   | 104
|                                        |  |                       |        |   |                         |   |        |               |  |                            |       |  |   |    
|                                        |  | $                     | (597   | ) |                         | $ | (2,670 | )             |  | $                          | 1,969 |  | $ | 104
|                                        |  |                       |        |   |                         |   |        |               |  |                            |       |  |   |    



The Company anticipates that the
remaining SFAE store closings will result in charges similar to its original estimates.



During the nine months ended October 29, 2005, the Company also incurred net charges of $494 associated with the sale of four Proffitts stores in North Carolina, which were sold separate to the 47 stores described at Note 4.
Asset impairments are included in Impairments and Dispositions and markdown charges are included in Gross Margin in the accompanying Consolidated Statements of Income. The components of these charges/gains and the status of any related liability are
as follows:



|                          |  |                       |     |   |                         |   |        |               |  |                            |       |  |   |  
|------------------------- |  | --------------------- | --- | - | ----------------------- | - | ------ | ------------- |  | -------------------------- | ----- |  | - | -
|                          |  | 2005 Charges /(Gains) |     |   | Cash(Proceeds)/Payments |   |        | Non-Cash Uses |  | Payable atOctober 29, 2005
|Asset Impairments (Gains) |  | $                     | (87 | ) |                         | $ | (9,100 | )             |  | $                          | 9,013 |  | $ | 
|Markdown Charges          |  |                       | 581 |   |                         |   |        |               |  |                            | 581   |  |   | 
|                          |  |                       |     |   |                         |   |        |               |  |                            |       |  |   |  
|                          |  | $                     | 494 |   |                         | $ | (9,100 | )             |  | $                          | 9,594 |  | $ | 
|                          |  |                       |     |   |                         |   |        |               |  |                            |       |  |   |  



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The Company continuously evaluates its real estate portfolio and closes individual underproductive stores in the normal
course of business as leases expire or as other circumstances indicate. During the nine months ended October 29, 2005, the Company incurred net charges of $5,566 related to asset impairments and other costs, primarily at its SDSG stores.



The components of these charges/gains and the
status of the related liability are as follows:



|                  |  |                       |       |   |                         |   |      |               |  |                            |       |  |   |  
|----------------- |  | --------------------- | ----- | - | ----------------------- | - | ---- | ------------- |  | -------------------------- | ----- |  | - | -
|                  |  | 2005 Charges /(Gains) |       |   | Cash(Proceeds)/Payments |   |      | Non-Cash Uses |  | Payable atOctober 29, 2005
|Asset Impairments |  | $                     | 5,715 |   |                         | $ | 123  |               |  | $                          | 5,592 |  | $ | 
|Other Costs       |  |                       | (149  | ) |                         |   | (149 | )             |  |                            |      |  |   | 
|                  |  |                       |       |   |                         |   |      |               |  |                            |       |  |   |  
|                  |  | $                     | 5,566 |   |                         | $ | (26  | )             |  | $                          | 5,592 |  | $ | 
|                  |  |                       |       |   |                         |   |      |               |  |                            |       |  |   |  



During the three and nine months ended
October 29, 2005, the Company also recorded a $16,514 gain related to the estimated insurance settlement on the SFAE store in New Orleans which suffered substantial water, fire, and other damage related to Hurricane Katrina. The SFAE New
Orleans store is covered by both property damage and business interruption insurance. The property damage coverage will pay to repair and/or replace the physical property damage and inventory loss, and the business interruption coverage will
reimburse the Company for lost profits as well as continuing expenses related to loss mitigation, recovery, and reconstruction for the full duration of the reconstruction period plus three months. The Company anticipates reopening the store in the
third fiscal quarter of 2006 after necessary repairs and renovations are made to the property. The gain, which represents the excess of the replacement cost over the net book value of the property, was included in Impairments and Dispositions in the
accompanying Consolidated Statements of Income.



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NOTE 12  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 subsidiaries of Saks Incorporated).



The condensed consolidating financial statements presented as of and for the three and nine-month periods ended October 29, 2005 and
October 30, 2004 and as of January 29, 2005 reflect the legal entity compositions at the respective dates. In December 2003, the non-guarantor subsidiaries associated with the Companys former proprietary credit card securitization
program were dissolved. Thus, there were no assets or liabilities associated with non-guarantor subsidiaries at October 29, 2005, January 29, 2005 or October 30, 2004.



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 October 29, 2005, Saks Incorporated was the sole obligor for a majority of the Companys long-term debt, owned one store
location and maintained a small group of corporate employees.



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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT OCTOBER 29, 2005

(Dollar Amounts In Thousands)



|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|---------------------------------------------- |  | ---------------- | --------- | --------------------- | - | ------------ |  | - | ------------ | - |  | - | ---------
|                                               |  | SaksIncorporated |           | GuarantorSubsidiaries |   | Eliminations |  |   | Consolidated
|ASSETS                                         |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Current Assets                                 |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Cash and cash equivalents                      |  |                  |           |                       | $ | 27,886       |  |   |              |   |  | $ | 27,886   
|Merchandise inventories                        |  | $                | 5,435     |                       |   | 1,005,629    |  |   |              |   |  |   | 1,011,064
|Other current assets                           |  |                  |           |                       |   | 129,822      |  |   |              |   |  |   | 129,822  
|Deferred income taxes, net                     |  |                  |           |                       |   | 71,211       |  |   |              |   |  |   | 71,211   
|Current assets - held for sale                 |  |                  |           |                       |   | 654,123      |  |   |              |   |  |   | 654,123  
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Current Assets                           |  |                  | 5,435     |                       |   | 1,888,671    |  |   |             |   |  |   | 1,894,106
|                                               |  |                  |           |                      
|Property and Equipment, net                    |  |                  | 4,053     |                       |   | 1,354,641    |  |   |              |   |  |   | 1,358,694
|Property and Equipment, net - held for sale    |  |                  |           |                       |   | 436,163      |  |   |              |   |  |   | 436,163  
|Goodwill and Intangibles, net                  |  |                  |           |                       |   | 235,162      |  |   |              |   |  |   | 235,162  
|Deferred Income Taxes, net                     |  |                  |           |                       |   | 250,158      |  |   |              |   |  |   | 250,158  
|Other Assets                                   |  |                  | 14,126    |                       |   | 29,579       |  |   |              |   |  |   | 43,705   
|Other Assets - held for sale                   |  |                  |           |                       |   | 12,072       |  |   |              |   |  |   | 12,072   
|Investment in and Advances to Subsidiaries     |  |                  | 2,756,854 |                       |   |              |  | $ | (2,756,854   | ) |  |   |          
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Assets                                   |  | $                | 2,780,468 |                       | $ | 4,206,446    |  | $ | (2,756,854   | ) |  | $ | 4,230,060
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Current Liabilities                            |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Trade accounts payable                         |  | $                | 1,359     |                       | $ | 296,721      |  |   |              |   |  | $ | 298,080  
|Accrued expenses and other current liabilities |  |                  | 10,514    |                       |   | 388,513      |  |   |              |   |  |   | 399,027  
|Current portion of long-term debt              |  |                  |           |                       |   | 7,519        |  |   |              |   |  |   | 7,519    
|Current liabilities - held for sale            |  |                  |           |                       |   | 290,971      |  |   |              |   |  |   | 290,971  
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Current Liabilities                      |  |                  | 11,873    |                       |   | 983,724      |  |   |             |   |  |   | 995,597  
|                                               |  |                  |           |                      
|Long-Term Debt                                 |  |                  | 612,356   |                       |   | 105,727      |  |   |              |   |  |   | 718,083  
|Long-Term Debt - held for sale                 |  |                  |           |                       |   | 33,819       |  |   |              |   |  |   | 33,819   
|Other Long-Term Liabilities                    |  |                  | 600       |                       |   | 235,489      |  |   |              |   |  |   | 236,089  
|Other Long-Term Liabilities - held for sale    |  |                  |           |                       |   | 90,833       |  |   |              |   |  |   | 90,833   
|Investment by and Advances from Parent         |  |                  |           |                       |   | 2,756,854    |  | $ | (2,756,854   | ) |  |   |          
|Shareholders Equity                           |  |                  | 2,155,639 |                       |   |              |  |   |              |   |  |   | 2,155,639
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Liabilities and Shareholders Equity     |  | $                | 2,780,468 |                       | $ | 4,206,446    |  | $ | (2,756,854   | ) |  | $ | 4,230,060
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          



45



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED OCTOBER 29, 2005

(Dollar Amounts In Thousands)



|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|-------------------------------------------- |  | ---------------- | ------- | - | --------------------- | - | --------- | ------------ |  | - | ------------ | - |  | - | --------- | -
|                                             |  | SaksIncorporated |         |   | GuarantorSubsidiaries |   |           | Eliminations |  |   | Consolidated |  
|Net sales                                    |  | $                | 6,335   |   |                       | $ | 1,308,883 |              |  |   |              |   |  | $ | 1,315,218 |  
|Costs and expenses                           |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Cost of sales                                |  |                  | 3,776   |   |                       |   | 799,017   |              |  |   |              |   |  |   | 802,793   |  
|Selling, general and administrative expenses |  |                  | 3,143   |   |                       |   | 363,705   |              |  |   |              |   |  |   | 366,848   |  
|Other operating expenses                     |  |                  | 465     |   |                       |   | 136,305   |              |  |   |              |   |  |   | 136,770   |  
|Store pre-opening costs                      |  |                  |         |   |                       |   | 2,585     |              |  |   |              |   |  |   | 2,585     |  
|Impairments and dispositions                 |  |                  |         |   |                       |   | (9,350    | )            |  |   |              |   |  |   | (9,350    | )
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Operating income (loss)                      |  |                  | (1,049  | ) |                       |   | 16,621    |              |  |   |             |   |  |   | 15,572    |  
|                                             |  |                  |         |  
|Other income (expense)                       |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Equity in earnings of subsidiaries           |  |                  | 8,491   |   |                       |   |           |              |  | $ | (8,491       | ) |  |   |           |  
|Interest expense                             |  |                  | (12,030 | ) |                       |   | (4,368    | )            |  |   |              |   |  |   | (16,398   | )
|Loss on extinguishment of debt               |  |                  | (29     | ) |                       |   |           |              |  |   |              |   |  |   | (29       | )
|Other income (expense), net                  |  |                  |         |   |                       |   | 1,224     |              |  |   |              |   |  |   | 1,224     |  
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Income (loss) before income taxes            |  |                  | (4,617  | ) |                       |   | 13,477    |              |  |   | (8,491       | ) |  |   | 369       |  
|                                             |  |                  |         |  
|Provision (benefit) for income taxes         |  |                  | (4,842  | ) |                       |   | 4,986     |              |  |   |              |   |  |   | 144       |  
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Net income                                   |  | $                | 225     |   |                       | $ | 8,491     |              |  | $ | (8,491       | ) |  | $ | 225       |  
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  



46



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##### Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED OCTOBER 29, 2005

(Dollar Amounts In Thousands)



|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|-------------------------------------------- |  | ---------------- | ------- | - | --------------------- | - | --------- | ------------ |  | - | ------------ | - |  | - | --------- | -
|                                             |  | SaksIncorporated |         |   | GuarantorSubsidiaries |   |           | Eliminations |  |   | Consolidated |  
|Net sales                                    |  | $                | 17,238  |   |                       | $ | 4,163,291 |              |  |   |              |   |  | $ | 4,180,529 |  
|Costs and expenses                           |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Cost of sales                                |  |                  | 10,222  |   |                       |   | 2,594,804 |              |  |   |              |   |  |   | 2,605,026 |  
|Selling, general and administrative expenses |  |                  | 9,132   |   |                       |   | 1,142,673 |              |  |   |              |   |  |   | 1,151,805 |  
|Other operating expenses                     |  |                  | 1,366   |   |                       |   | 427,483   |              |  |   |              |   |  |   | 428,849   |  
|Store pre-opening costs                      |  |                  |         |   |                       |   | 3,443     |              |  |   |              |   |  |   | 3,443     |  
|Impairments and dispositions                 |  |                  |         |   |                       |   | (169,290  | )            |  |   |              |   |  |   | (169,290  | )
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Operating income (loss)                      |  |                  | (3,482  | ) |                       |   | 164,178   |              |  |   |             |   |  |   | 160,696   |  
|                                             |  |                  |         |  
|Other income (expense)                       |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Equity in earnings of subsidiaries           |  |                  | 96,434  |   |                       |   |           |              |  | $ | (96,434      | ) |  |   |           |  
|Interest expense                             |  |                  | (53,365 | ) |                       |   | (17,557   | )            |  |   |              |   |  |   | (70,922   | )
|Loss on extinguishment of debt               |  |                  | (29,020 | ) |                       |   |           |              |  |   |              |   |  |   | (29,020   | )
|Other income (expense), net                  |  |                  |         |   |                       |   | 6,449     |              |  |   |              |   |  |   | 6,449     |  
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Income before income taxes                   |  |                  | 10,567  |   |                       |   | 153,070   |              |  |   | (96,434      | ) |  |   | 67,203    |  
|                                             |  |                  |         |  
|Provision (benefit) for income taxes         |  |                  | (14,023 | ) |                       |   | 56,636    |              |  |   |              |   |  |   | 42,613    |  
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Net income                                   |  | $                | 24,590  |   |                       | $ | 96,434    |              |  | $ | (96,434      | ) |  | $ | 24,590    |  
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  





47



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 29, 2005

(Dollar Amounts In Thousands)



|                                                                              |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|----------------------------------------------------------------------------- |  | ---------------- | -------- | - | --------------------- | - | -------- | ------------ |  | - | ------------ | - |  | - | -------- | -
|                                                                              |  | SaksIncorporated |          |   | GuarantorSubsidiaries |   |          | Eliminations |  |   | Consolidated |  
|OPERATING ACTIVITIES                                                          |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|Net income                                                                    |  | $                | 24,590   |   |                       | $ | 96,434   |              |  | $ | (96,434      | ) |  | $ | 24,590   |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|Equity in earnings of subsidiaries                                            |  |                  | (96,434  | ) |                       |   |          |              |  |   | 96,434       |   |  |   |          |  
|Extraordinary loss on extinguishment of debt                                  |  |                  | 29,020   |   |                       |   |          |              |  |   |              |   |  |   | 29,020   |  
|Depreciation and amortization                                                 |  |                  | 789      |   |                       |   | 160,841  |              |  |   |              |   |  |   | 161,630  |  
|Equity compensation                                                           |  |                  | 16,612   |   |                       |   |          |              |  |   |              |   |  |   | 16,612   |  
|Deferred income taxes                                                         |  |                  |          |   |                       |   | 23,554   |              |  |   |              |   |  |   | 23,554   |  
|Impairments and dispositions                                                  |  |                  |          |   |                       |   | (169,290 | )            |  |   |              |   |  |   | (169,290 | )
|Changes in operating assets and liabilities, net                              |  |                  | 18,275   |   |                       |   | (220,951 | )            |  |   |              |   |  |   | (202,676 | )
|                                                                              |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|Net Cash Used In Operating Activities                                         |  |                  | (7,148   | ) |                       |   | (109,412 | )            |  |   |             |   |  |   | (116,560 | )
|                                                                              |  |                  |          |  
|INVESTING ACTIVITIES                                                          |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|Purchases of property and equipment                                           |  |                  |          |   |                       |   | (173,814 | )            |  |   |              |   |  |   | (173,814 | )
|Proceeds from the sale of assets                                              |  |                  |          |   |                       |   | 13,236   |              |  |   |              |   |  |   | 13,236   |  
|Proceeds from the sale of Proffitts/McRaes                                  |  |                  |          |   |                       |   | 622,404  |              |  |   |              |   |  |   | 622,404  |  
|Cash paid related to sale of Proffitts                                       |  |                  |          |   |                       |   | (1,340   | )            |  |   |              |   |  |   | (1,340   | )
|                                                                              |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|Net Cash Provided by Investing Activities                                     |  |                  |          |   |                       |   | 460,486  |              |  |   |              |   |  |   | 460,486  |  
|                                                                              |  |                  |          |  
|FINANCING ACTIVITIES                                                          |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|Intercompany borrowings, contributions and distributions                      |  |                  | 352,701  |   |                       |   | (352,701 | )            |  |   |              |   |  |   |          |  
|Proceeds from revolving credit facility                                       |  |                  | 27,000   |   |                       |   |          |              |  |   |              |   |  |   | 27,000   |  
|Payments on long-term debt and capital lease obligations                      |  |                  | (607,158 | ) |                       |   | (12,507  | )            |  |   |              |   |  |   | (619,665 | )
|Payment of dividend                                                           |  |                  | (505     | ) |                       |   |          |              |  |   |              |   |  |   | (505     | )
|Proceeds from issuance of common stock                                        |  |                  | 23,109   |   |                       |   |          |              |  |   |              |   |  |   | 23,109   |  
|                                                                              |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|Net Cash Used In Financing Activities                                         |  |                  | (204,853 | ) |                       |   | (365,208 | )            |  |   |              |   |  |   | (570,061 | )
|                                                                              |  |                  |          |  
|Decrease In Cash and Cash Equivalents                                         |  |                  | (212,001 | ) |                       |   | (14,134  | )            |  |   |              |   |  |   | (226,135 | )
|                                                                              |  |                  |          |  
|Cash and Cash Equivalents at beginning of period                              |  |                  | 212,001  |   |                       |   | 45,103   |              |  |   |              |   |  |   | 257,104  |  
|                                                                              |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  
|Cash and Cash Equivalents at end of period                                    |  | $                | 0        |   |                       | $ | 30,969   |              |  |   |              |   |  | $ | 30,969   |  
|                                                                              |  |                  |          |   |                       |   |          |              |  |   |              |   |  |   |          |  



48



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##### Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT OCTOBER 30, 2004

(Dollar Amounts In Thousands)



|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|---------------------------------------------- |  | ---------------- | --------- | --------------------- | - | ------------ |  | - | ------------ | - |  | - | ---------
|                                               |  | Restated        
|                                               |  | SaksIncorporated |           | GuarantorSubsidiaries |   | Eliminations |  |   | Consolidated
|ASSETS                                         |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Current Assets                                 |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Cash and cash equivalents                      |  | $                | 44,000    |                       | $ | 37,095       |  |   |              |   |  | $ | 81,095   
|Merchandise inventories                        |  |                  | 4,766     |                       |   | 1,837,150    |  |   |              |   |  |   | 1,841,916
|Other current assets                           |  |                  |           |                       |   | 147,931      |  |   |              |   |  |   | 147,931  
|Deferred income taxes, net                     |  |                  |           |                       |   | 87,215       |  |   |              |   |  |   | 87,215   
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Current Assets                           |  |                  | 48,766    |                       |   | 2,109,391    |  |   |              |   |  |   | 2,158,157
|                                               |  |                  |           |                      
|Property and Equipment, net                    |  |                  | 5,049     |                       |   | 2,064,509    |  |   |              |   |  |   | 2,069,558
|Goodwill and Intangibles, net                  |  |                  |           |                       |   | 325,561      |  |   |              |   |  |   | 325,561  
|Deferred Income Taxes, net                     |  |                  |           |                       |   | 151,909      |  |   |              |   |  |   | 151,909  
|Other Assets                                   |  |                  | 45,740    |                       |   | 43,528       |  |   |              |   |  |   | 89,268   
|Investment in and Advances to Subsidiaries     |  |                  | 3,217,870 |                       |   |              |  | $ | (3,217,870   | ) |  |   |          
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Assets                                   |  | $                | 3,317,425 |                       | $ | 4,694,898    |  | $ | (3,217,870   | ) |  | $ | 4,794,453
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Current Liabilities                            |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Trade accounts payable                         |  | $                | 1,192     |                       | $ | 592,016      |  |   |              |   |  | $ | 593,208  
|Accrued expenses and other current liabilities |  |                  | 26,641    |                       |   | 439,310      |  |   |              |   |  |   | 465,951  
|Current portion of long-term debt              |  |                  | 70,363    |                       |   | 7,345        |  |   |              |   |  |   | 77,708   
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Current Liabilities                      |  |                  | 98,196    |                       |   | 1,038,671    |  |   |              |   |  |   | 1,136,867
|                                               |  |                  |           |                      
|Long-Term Debt                                 |  |                  | 1,298,104 |                       |   | 128,406      |  |   |              |   |  |   | 1,426,510
|Other Long-Term Liabilities                    |  |                  | 1,396     |                       |   | 309,951      |  |   |              |   |  |   | 311,347  
|Investment by and Advances from Parent         |  |                  |           |                       |   | 3,217,870    |  | $ | (3,217,870   | ) |  |   |          
|Shareholders Equity                           |  |                  | 1,919,729 |                       |   |              |  |   |              |   |  |   | 1,919,729
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Liabilities and Shareholders Equity     |  | $                | 3,317,425 |                       | $ | 4,694,898    |  | $ | (3,217,870   | ) |  | $ | 4,794,453
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          



49



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##### Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED OCTOBER 30, 2004

(Dollar Amounts In Thousands)



|                                             |  |                  |         |   |                       |   |           |              |  |              |        |  |   |           |  
|-------------------------------------------- |  | ---------------- | ------- | - | --------------------- | - | --------- | ------------ |  | ------------ | ------ |  | - | --------- | -
|                                             |  | Restated         |        
|                                             |  | SaksIncorporated |         |   | GuarantorSubsidiaries |   |           | Eliminations |  | Consolidated |       
|Net sales                                    |  | $                | 5,338   |   |                       | $ | 1,476,307 |              |  |              |        |  | $ | 1,481,645 |  
|Costs and expenses                           |  |                  |         |   |                       |   |           |              |  |              |        |  |   |           |  
|Cost of sales                                |  |                  | 3,278   |   |                       |   | 901,207   |              |  |              |        |  |   | 904,485   |  
|Selling, general and administrative expenses |  |                  | 2,818   |   |                       |   | 410,059   |              |  |              |        |  |   | 412,877   |  
|Other operating expenses                     |  |                  | 1,080   |   |                       |   | 149,194   |              |  |              |        |  |   | 150,274   |  
|Store pre-opening costs                      |  |                  |         |   |                       |   | 3,453     |              |  |              |        |  |   | 3,453     |  
|Impairments and dispositions                 |  |                  |         |   |                       |   | 26,415    |              |  |              |        |  |   | 26,415    |  
|                                             |  |                  |         |   |                       |   |           |              |  |              |        |  |   |           |  
|Operating loss                               |  |                  | (1,838  | ) |                       |   | (14,021   | )            |  |              |       |  |   | (15,859   | )
|                                             |  |                  |         |  
|Other income (expense)                       |  |                  |         |   |                       |   |           |              |  |              |        |  |   |           |  
|Equity in earnings of subsidiaries           |  |                  | (10,050 | ) |                       |   |           |              |  | $            | 10,050 |  |   |           |  
|Interest expense                             |  |                  | (24,091 | ) |                       |   | (4,309    | )            |  |              |        |  |   | (28,400   | )
|Other income (expense), net                  |  |                  |         |   |                       |   | 472       |              |  |              |        |  |   | 472       |  
|                                             |  |                  |         |   |                       |   |           |              |  |              |        |  |   |           |  
|Loss before income taxes                     |  |                  | (35,979 | ) |                       |   | (17,858   | )            |  |              | 10,050 |  |   | (43,787   | )
|                                             |  |                  |         |  
|Benefit for income taxes                     |  |                  | (5,589  | ) |                       |   | (7,808    | )            |  |              |        |  |   | (13,397   | )
|                                             |  |                  |         |   |                       |   |           |              |  |              |        |  |   |           |  
|Net loss                                     |  | $                | (30,390 | ) |                       | $ | (10,050   | )            |  | $            | 10,050 |  | $ | (30,390   | )
|                                             |  |                  |         |   |                       |   |           |              |  |              |        |  |   |           |  



50



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##### Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED OCTOBER 30. 2004

(Dollar Amounts In Thousands)



|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|-------------------------------------------- |  | ---------------- | ------- | - | --------------------- | - | --------- | ------------ |  | - | ------------ | - |  | - | --------- | -
|                                             |  | Restated         |        
|                                             |  | SaksIncorporated |         |   | GuarantorSubsidiaries |   |           | Eliminations |  |   | Consolidated |  
|Net sales                                    |  | $                | 14,254  |   |                       | $ | 4,357,941 |              |  |   |              |   |  | $ | 4,372,195 |  
|Costs and expenses                           |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Cost of sales                                |  |                  | 8,677   |   |                       |   | 2,682,039 |              |  |   |              |   |  |   | 2,690,716 |  
|Selling, general and administrative expenses |  |                  | 8,844   |   |                       |   | 1,161,426 |              |  |   |              |   |  |   | 1,170,270 |  
|Other operating expenses                     |  |                  | 3,393   |   |                       |   | 440,185   |              |  |   |              |   |  |   | 443,578   |  
|Store pre-opening costs                      |  |                  |         |   |                       |   | 4,399     |              |  |   |              |   |  |   | 4,399     |  
|Impairments and dispositions                 |  |                  |         |   |                       |   | 33,786    |              |  |   |              |   |  |   | 33,786    |  
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Operating income (loss)                      |  |                  | (6,660  | ) |                       |   | 36,106    |              |  |   |             |   |  |   | 29,446    |  
|                                             |  |                  |         |  
|Other income (expense)                       |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Equity in earnings of subsidiaries           |  |                  | 15,292  |   |                       |   |           |              |  | $ | (15,292      | ) |  |   |           |  
|Interest expense                             |  |                  | (67,676 | ) |                       |   | (16,685   | )            |  |   |              |   |  |   | (84,361   | )
|Other income (expense), net                  |  |                  |         |   |                       |   | 2,947     |              |  |   |              |   |  |   | 2,947     |  
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Income (loss) before income taxes            |  |                  | (59,044 | ) |                       |   | 22,368    |              |  |   | (15,292      | ) |  |   | (51,968   | )
|                                             |  |                  |         |  
|Provision (benefit) for income taxes         |  |                  | (23,489 | ) |                       |   | 7,076     |              |  |   |              |   |  |   | (16,413   | )
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  
|Net income (loss)                            |  | $                | (35,555 | ) |                       | $ | 15,292    |              |  | $ | (15,292      | ) |  | $ | (35,555   | )
|                                             |  |                  |         |   |                       |   |           |              |  |   |              |   |  |   |           |  



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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 30, 2004

(Dollar Amounts In Thousands)



|                                                                                                   |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|-------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | --------------------- | - | -------- | ------------ |  | -- | ------------ | - |  | -- | -------- | -
|                                                                                                   |  | Restated         |         
|                                                                                                   |  | SaksIncorporated |          |   | GuarantorSubsidiaries |   |          | Eliminations |  |    | Consolidated |  
|OPERATING ACTIVITIES                                                                               |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|Net income (loss)                                                                                  |  | ($               | 35,555   | ) |                       | $ | 15,292   |              |  | ($ | 15,292       | ) |  | ($ | 35,555   | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|Equity in earnings of subsidiaries                                                                 |  |                  | (15,292  | ) |                       |   |          |              |  |    | 15,292       |   |  |    | 0        |  
|Depreciation and amortization                                                                      |  |                  | 809      |   |                       |   | 166,912  |              |  |    |              |   |  |    | 167,721  |  
|Equity compensation                                                                                |  |                  | 7,942    |   |                       |   |          |              |  |    |              |   |  |    | 7,942    |  
|Deferred income taxes                                                                              |  |                  |          |   |                       |   | (26,909  | )            |  |    |              |   |  |    | (26,909  | )
|Impairments and dispositions                                                                       |  |                  |          |   |                       |   | 31,786   |              |  |    |              |   |  |    | 31,786   |  
|Changes in operating assets and liabilities, net                                                   |  |                  | 3,973    |   |                       |   | (144,149 | )            |  |    |              |   |  |    | (140,176 | )
|                                                                                                   |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|Net Cash Provided By (Used In) Operating Activities                                                |  |                  | (38,123  | ) |                       |   | 42,932   |              |  |    |             |   |  |    | 4,809    |  
|                                                                                                   |  |                  |          |  
|INVESTING ACTIVITIES                                                                               |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|Purchases of property and equipment                                                                |  |                  |          |   |                       |   | (143,626 | )            |  |    |              |   |  |    | (143,626 | )
|Proceeds from the sale of assets                                                                   |  |                  |          |   |                       |   | 5,343    |              |  |    |              |   |  |    | 5,343    |  
|                                                                                                   |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|Net Cash Used In Investing Activities                                                              |  |                  |          |   |                       |   | (138,283 | )            |  |    |              |   |  |    | (138,283 | )
|                                                                                                   |  |                  |          |  
|FINANCING ACTIVITIES                                                                               |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|Intercompany borrowings, contributions and distributions                                           |  |                  | (98,664  | ) |                       |   | 98,664   |              |  |    |              |   |  |    |          |  
|Proceeds from issuing convertible senior notes                                                     |  |                  | 230,000  |   |                       |   |          |              |  |    |              |   |  |    | 230,000  |  
|Proceeds from revolving credit facility                                                            |  |                  | 75,000   |   |                       |   |          |              |  |    |              |   |  |    | 75,000   |  
|Payments on long-term debt and capital lease obligations                                           |  |                  | (72,286  | ) |                       |   | (11,091  | )            |  |    |              |   |  |    | (83,377  | )
|Payments for hedge and call options associated with convertible notes                              |  |                  | (25,043  | ) |                       |   |          |              |  |    |              |   |  |    | (25,043  | )
|Purchases and retirements of common stock                                                          |  |                  | (85,397  | ) |                       |   |          |              |  |    |              |   |  |    | (85,397  | )
|Cash dividends paid                                                                                |  |                  | (282,719 | ) |                       |   |          |              |  |    |              |   |  |    | (282,719 | )
|Proceeds from issuance of common stock                                                             |  |                  | 20,232   |   |                       |   |          |              |  |    |              |   |  |    | 20,232   |  
|                                                                                                   |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|Net Cash Provided By (Used In) Financing Activities                                                |  |                  | (238,877 | ) |                       |   | 87,573   |              |  |    |              |   |  |    | (151,304 | )
|                                                                                                   |  |                  |          |  
|Decrease In Cash and Cash Equivalents                                                              |  |                  | (277,000 | ) |                       |   | (7,778   | )            |  |    |              |   |  |    | (284,778 | )
|                                                                                                   |  |                  |          |  
|Cash and Cash Equivalents at beginning of period                                                   |  |                  | 321,000  |   |                       |   | 44,873   |              |  |    |              |   |  |    | 365,873  |  
|                                                                                                   |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  
|Cash and Cash Equivalents at end of period                                                         |  | $                | 44,000   |   |                       | $ | 37,095   |              |  |    |              |   |  | $  | 81,095   |  
|                                                                                                   |  |                  |          |   |                       |   |          |              |  |    |              |   |  |    |          |  



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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT JANUARY 29, 2005

(Dollar Amounts In Thousands)



|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|---------------------------------------------- |  | ---------------- | --------- | --------------------- | - | ------------ |  | - | ------------ | - |  | - | ---------
|                                               |  | SaksIncorporated |           | GuarantorSubsidiaries |   | Eliminations |  |   | Consolidated
|ASSETS                                         |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Current Assets                                 |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Cash and cash equivalents                      |  | $                | 212,001   |                       | $ | 45,103       |  |   |              |   |  | $ | 257,104  
|Merchandise inventories                        |  |                  | 3,582     |                       |   | 1,512,689    |  |   |              |   |  |   | 1,516,271
|Other current assets                           |  |                  |           |                       |   | 127,082      |  |   |              |   |  |   | 127,082  
|Deferred income taxes, net                     |  |                  |           |                       |   | 178,558      |  |   |              |   |  |   | 178,558  
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Current Assets                           |  |                  | 215,583   |                       |   | 1,863,432    |  |   |              |   |  |   | 2,079,015
|                                               |  |                  |           |                      
|Property and Equipment, net                    |  |                  | 4,784     |                       |   | 2,042,055    |  |   |              |   |  |   | 2,046,839
|Goodwill and Intangibles, net                  |  |                  |           |                       |   | 323,761      |  |   |              |   |  |   | 323,761  
|Deferred Income Taxes, net                     |  |                  |           |                       |   | 166,364      |  |   |              |   |  |   | 166,364  
|Other Assets                                   |  |                  | 44,251    |                       |   | 43,849       |  |   |              |   |  |   | 88,100   
|Investment in and Advances to Subsidiaries     |  |                  | 3,062,237 |                       |   |              |  | $ | (3,062,237   | ) |  |   |          
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Assets                                   |  | $                | 3,326,855 |                       | $ | 4,439,461    |  | $ | (3,062,237   | ) |  | $ | 4,704,079
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Current Liabilities                            |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Trade accounts payable                         |  | $                | 896       |                       | $ | 377,498      |  |   |              |   |  | $ | 378,394  
|Accrued expenses and other current liabilities |  |                  | 20,974    |                       |   | 532,937      |  |   |              |   |  |   | 553,911  
|Current portion of long-term debt              |  |                  |           |                       |   | 7,715        |  |   |              |   |  |   | 7,715    
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Current Liabilities                      |  |                  | 21,870    |                       |   | 918,150      |  |   |              |   |  |   | 940,020  
|                                               |  |                  |           |                      
|Long-Term Debt                                 |  |                  | 1,219,968 |                       |   | 126,254      |  |   |              |   |  |   | 1,346,222
|Other Long-Term Liabilities                    |  |                  | 600       |                       |   | 332,820      |  |   |              |   |  |   | 333,420  
|Investment by and Advances from Parent         |  |                  |           |                       |   | 3,062,237    |  | $ | (3,062,237   | ) |  |   |          
|Shareholders Equity                           |  |                  | 2,084,417 |                       |   |              |  |   |              |   |  |   | 2,084,417
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          
|Total Liabilities and Shareholders Equity     |  | $                | 3,326,855 |                       | $ | 4,439,461    |  | $ | (3,062,237   | ) |  | $ | 4,704,079
|                                               |  |                  |           |                       |   |              |  |   |              |   |  |   |          



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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 of operating
the business and is considered to have 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 consolidated financial statements and related notes thereto contained elsewhere in this report.



MANAGEMENTS OVERVIEW



GENERAL



Saks Incorporated (and its subsidiaries, together the Company) is a U.S. retailer operating traditional and luxury department stores in 37 states. The Company operates its business through two principal
business segments: the Saks Department Store Group (SDSG) and Saks Fifth Avenue Enterprises (SFAE). The Companys merchandise offerings primarily consist of apparel, shoes, cosmetics and accessories, and to a lesser
extent, gifts and home items. The Company offers national branded merchandise complemented by differentiated product through exclusive merchandise from core vendors, assortments from unique and emerging suppliers, and proprietary brands. At
October 29, 2005 , Saks operated 182 SDSG stores (excluding Club Libby Lu) with 19.9 million square feet, 55 Saks Fifth Avenue stores with 6.0 million square feet, and 50 Off 5th units with 1.4
million square feet. During the quarter, the Company opened seven mall-based Club Libby Lu specialty stores, bringing the quarter-end total to 56.



RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS



The Company restated its financial statements for the years ended January 31, 2004; February 1, 2003; February 2, 2002 and February 3, 2001;
the financial information for quarters ended May 1, July 31 and October 30, 2004; and the quarters ended May 3, August 2, November 1, 2003 and January 31, 2004 in conjunction with filing its Form
10-K for the fiscal year ended January 29, 2005 (the 2004 Form 10-K). As a result of this restatement, the Company was not able to file the 2004 Form 10-K in a timely manner. For further information, refer to the consolidated
financial statements and footnotes thereto included in the 2004 Form 10-K filed on September 1, 2005, where this restatement is more fully described. Accordingly, the Company has restated its financial statements for the fiscal quarter ended
October 30, 2004, as included in this report on Form 10-Q herein.



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As discussed in the 2004 Form 10-K, at managements request, the Audit Committee of the Board of Directors conducted
an internal investigation into alleged improper collections of vendor markdown allowances. The Audit Committees investigation and the Companys supplemental review and analysis were completed in August 2005, and concluded that markdown
allowances had been improperly collected from vendors during the 1996 through 2003 fiscal periods in one of SFAEs six merchandising divisions.



Separately, the Company completed a review of its historical lease accounting methods to determine whether these methods were in accordance with the views expressed by
the Office of the Chief Accountant of the SEC on February 7, 2005 in a letter to the American Institute of Certified Public Accountants regarding certain operating lease accounting issues and their application under GAAP. As a result of its
review, the Company determined that its historical methods of accounting for rent holidays, tenant improvement allowances, and determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination
for certain leased properties, were not in accordance with GAAP.



The Company
has also conducted a review of certain other items and made restatement adjustments to its previously issued condensed consolidated financial statements to correct for all of these items.



These condensed consolidated financial statements and notes thereto reflect adjustments to the Companys previously reported financial
information for the quarter ended October 30, 2004.



The following
provides details of the adjustments included in the restatement of the Companys condensed consolidated financial statements and the effect of the adjustments on the Companys Condensed Consolidated Balance Sheet at October 30, 2004
and its Condensed Consolidated Statement of Income and Condensed Consolidated Statement of Cash Flows for the three and nine months ended October 30, 2004.



IMPROPER COLLECTION OF VENDOR ALLOWANCES



As previously disclosed, at managements request, the Audit Committee of the Board of Directors had been conducting an internal investigation into alleged improper
collections of vendor markdown allowances. The investigation concluded that markdown allowances had been improperly collected from vendors.



The Company undertook a confirmatory process related to the investigation by conducting its own review and analysis. The scope of the Companys review and analysis
was broadened to also include additional fiscal periods and additional vendors within the one merchandising division at SFAE where the improper collection had occurred as well as other merchandising divisions of SFAE.



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The Company concluded that vendor allowances of approximately $34,100 had been improperly collected from vendors in
periods from fiscal 1996 through 2003. These amounts are attributable to overcollections that resulted from falsification by merchants in one SFAE merchandising division of information delivered to vendors. No improper collection was identified in
fiscal 2004. The Company will pay interest at the rate of 7.25% per annum to the affected vendors, totaling approximately $14,000. In aggregate, the Company expects to repay vendors a total of approximately $48,100 during fiscal 2005.



The effect of the restatement relating to these improper collections on the
Companys condensed consolidated statement of income and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |      |   |                                   |   |         |  
|---------------------------------------------- |  | ---------------------------------- | ---- | - | --------------------------------- | - | ------- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |      |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |      |   |                                   |   |         |  
|Interest expense                               |  | $                                  | 748  |   |                                   | $ | 2,244   |  
|Net income                                     |  |                                    | (475 | ) |                                   |   | (1,425  | )
|                                               |  |                                   
|                                               |  |                                    |      |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |      |   |                                   |   |         |  
|Accounts payable                               |  |                                    |      |   |                                   | $ | 31,871  |  
|Accrued expenses and other current liabilities |  |                                    |      |   |                                   |   | (4,649  | )
|Total shareholders equity                     |  |                                    |      |   |                                   |   | (27,222 | )



The Company informed the SEC of the
Audit Committees investigations and the SEC has notified the Company that it has issued a formal order of private investigation. The Company was informed that the United States Attorney for the Southern District of New York had instituted an
inquiry. The Company is fully cooperating with the SEC and the Office of the United States Attorney.



OPERATING LEASES



On February 7,
2005, the Office of the Chief Accountant of the SEC issued a letter to the American Institute of Certified Public Accountants (the SEC letter) regarding certain accounting principles relating to three aspects of lease accounting:
accounting for landlord improvement incentives to tenants (tenant allowances); the recognition of rent expense when the lease term in an operating lease contains a period of free or reduced rents commonly referred to as a rent
holiday; and the period of time used for the depreciation of leasehold improvements. Following the release of the SEC letter, many retailers reviewed their lease accounting and announced that they would restate their results for previous
periods. Likewise, the Company determined that its historical methods of accounting for rent holidays; tenant improvement allowances; and



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determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination
for certain leased properties, were not in accordance with GAAP.



Tenant
Allowances  Tenant improvement incentives are typically provided by landlords to pay a portion of the cost associated with constructing improvements on the leased premises. The Company historically recognized the allowance as a
reduction in the capitalized amount of the leasehold improvements, thereby reducing the related depreciation. The portion of tenant allowances in excess of the costs incurred associated with the property are considered to be the improvement
incentives portion of the allowances. GAAP requires that such allowances be recorded as deferred rent and amortized as reductions to rent expense over the lease term. The Company has made restatement adjustments to record these allowances as
deferred rent.



The effect of the restatement relating to the improvement
incentives portion of these tenant allowances on the Companys condensed consolidated statement of income and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |      |   |                                   |   |         |  
|---------------------------------------------- |  | ---------------------------------- | ---- | - | --------------------------------- | - | ------- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |      |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |      |   |                                   |  
|Other operating expenses                       |  | $                                  | 354  |   |                                   | $ | 1,151   |  
|Net income                                     |  |                                    | (224 | ) |                                   |   | (731    | )
|                                               |  |                                   
|                                               |  |                                    |      |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |      |   |                                   |   |         |  
|Other current assets                           |  |                                    |      |   |                                   | $ | 2,205   |  
|Property and equipment, net                    |  |                                    |      |   |                                   |   | 29,078  |  
|Accrued expenses and other current liabilities |  |                                    |      |   |                                   |   | (6,578  | )
|Other long-term liabilities                    |  |                                    |      |   |                                   |   | 48,838  |  
|Total shareholders equity                     |  |                                    |      |   |                                   |   | (10,977 | )



Consistent with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company annually evaluates the recoverability of its property and equipment and records any impairment loss as the
difference between the carrying amount and fair value of the asset. As tenant allowances have historically resulted in an improper reduction in the capitalized amount of leasehold improvements, the carrying value of property and equipment used in
the impairment charge has been understated in certain instances. Consequently, the Company has made restatement adjustments to correct for the understatement of impairment charges taken in prior periods.



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The effect of the restatement relating to these impairment charges on the Companys condensed consolidated statement
of income and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |        |   |                                   |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |        |   |                                   |   |        |  
|Other operating expenses                       |  | $                                  | (98    | ) |                                   | $ | (295   | )
|Impairments and dispositions                   |  |                                    | (1,867 | ) |                                   |   | (1,867 | )
|Net income                                     |  |                                    | 1,248  |   |                                   |   | 1,373  |  
|                                               |  |                                   
|                                               |  |                                    |        |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |        |   |                                   |   |        |  
|Property and equipment, net                    |  |                                    |        |   |                                   | $ | 2,032  |  
|Accrued expenses and other current liabilities |  |                                    |        |   |                                   |   | (4,624 | )
|Other long-term liabilities                    |  |                                    |        |   |                                   |   | 14,054 |  
|Total shareholders equity                     |  |                                    |        |   |                                   |   | (7,398 | )



Rent Holiday 
Pursuant to paragraph 2 of Financial Accounting Standards Board (FASB) Technical Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent Increases, rent holidays in an operating lease should be recognized by the lessee on a
straight-line basis over the lease term (including any rent holiday period) unless another systematic and rational allocation is more representative of the time pattern in which leased property is physically employed. The period from when leased
property is made available to the Company for the construction of a new store and when the lease payments begin is a rent holiday. Since the Company did not previously recognize rent expense during the rent holiday period, it was understating rent
expense during the construction period, and overstating rent during subsequent periods. The Company has made restatement adjustments to recognize straight-line rent expense beginning on the date that the Company took possession of the leased land or
premises.



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The effect of the restatement relating to rent holidays on the Companys condensed consolidated statement of income
and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |      |   |                                   |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ---- | - | --------------------------------- | - | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |      |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |      |   |                                   |   |        |  
|Store pre-opening costs                        |  | $                                  | (115 | ) |                                   | $ | (408   | )
|Net income                                     |  |                                    | 73   |   |                                   |   | 259    |  
|                                               |  |                                   
|                                               |  |                                    |      |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |      |   |                                   |   |        |  
|Accrued expenses and other current liabilities |  |                                    |      |   |                                   | $ | (2,510 | )
|Other long-term liabilities                    |  |                                    |      |   |                                   |   | 6,679  |  
|Total shareholders equity                     |  |                                    |      |   |                                   |   | (4,169 | )



Symmetry of Lease Terms
 Leasehold improvements are required to be depreciated on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term unless another systematic and rational basis is more representative of the time
pattern of the users benefit. In the case of certain leases with renewal options, the Company is permitted to include the renewal option period in the lease term for purposes of the depreciation analysis if renewal is reasonably assured as
contemplated in SFAS No. 13, Accounting for Leases (FAS 13).



In some
cases, the Company historically recognized depreciation expense for leasehold improvements using economic lives that exceeded the time period used for straight-line rent calculations on the underlying leases; however, the Company failed to include
the renewal option period in its straight-line rent analysis. Thus, the Company was understating rent expense for the straight-line effect of not including all renewal periods within the lease term as defined by FAS 13. The restated financial
statements reflect the addition of renewal periods such that the lease term is symmetrical to the depreciation lives of leasehold improvements.



59



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The effect of the restatement relating to the symmetry of lease terms on the Companys condensed consolidated
statement of income and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |     |   |                                   |   |      |  
|---------------------------------------------- |  | ---------------------------------- | --- | - | --------------------------------- | - | ---- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |     |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |     |   |                                   |   |      |  
|Other operating expenses                       |  | $                                  | 17  |   |                                   | $ | 53   |  
|Net income                                     |  |                                    | (11 | ) |                                   |   | (35  | )
|                                               |  |                                   
|                                               |  |                                    |     |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |     |   |                                   |   |      |  
|Property and equipment, net                    |  |                                    |     |   |                                   | $ | (165 | )
|Accrued expenses and other current liabilities |  |                                    |     |   |                                   |   | (246 | )
|Other long-term liabilities                    |  |                                    |     |   |                                   |   | 504  |  
|Total shareholders equity                     |  |                                    |     |   |                                   |   | (423 | )



OTHER ITEMS



Reclassifications  The Company has reclassified certain amounts from its
previously issued condensed consolidated financial statements in order to ensure consistency and comparability among periods presented, in addition to correcting for the improper presentation of certain historical transactions. The correction of
this presentation did not have an effect on net income or shareholders equity.



The effect of the restatement relating to these errors on the Companys condensed consolidated statement of income and condensed consolidated balance sheet accounts is as follows:



|                                               |  |                                    |        |   |                                   |   |         |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |        |   |                                   |   |         |  
|Cost of sales                                  |  | $                                  | (1,675 | ) |                                   | $ | (4,265  | )
|Selling, general and administrative expenses   |  |                                    | 1,675  |   |                                   |   | 4,265   |  
|Interest expense                               |  |                                    | (369   | ) |                                   |   | (2,706  | )
|Other income (expense), net                    |  |                                    | 369    |   |                                   |   | 2,706   |  
|                                               |  |                                   
|                                               |  |                                    |        |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |        |   |                                   |   |         |  
|Cash and cash equivalents                      |  |                                    |        |   |                                   | $ | 6,585   |  
|Other current assets                           |  |                                    |        |   |                                   |   | (20,505 | )
|Accrued expenses and other current liabilities |  |                                    |        |   |                                   |   | (13,920 | )
|Current portion of long-term debt              |  |                                    |        |   |                                   |   | 1,585   |  
|Long-term debt                                 |  |                                    |        |   |                                   |   | (1,585  | )



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Tax Items  As part of the restatement process, the Company made adjustments to the provision for
income taxes, accrued expenses and deferred tax assets and liabilities to give effect to all of the restatement items described herein including the deductibility of interest related to tax reserve exposure items.



The effect of the restatement relating to these errors on the Companys condensed
consolidated statement of income and condensed consolidated balance sheet accounts is as follows:



|                                               |  |                                    |        |   |                                   |   |         |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------- | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Consolidated Statement of Income:              |  |                                    |        |   |                                   |   |         |  
|Provision for income taxes                     |  | $                                  | 3,755  |   |                                   | $ | 3,755   |  
|Net income                                     |  |                                    | (3,755 | ) |                                   | $ | (3,755  | )
|                                               |  |                                   
|                                               |  |                                    |        |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |        |   |                                   |   |         |  
|Current deferred income taxes, net             |  |                                    |        |   |                                   | $ | 13,441  |  
|Non-current deferred income taxes, net         |  |                                    |        |   |                                   |   | (1,517  | )
|Accrued expenses and other current liabilities |  |                                    |        |   |                                   |   | (15,627 | )
|Total shareholders equity                     |  |                                    |        |   |                                   |   | 27,551  |  



Purchase Discounts
 The Company receives discounts from its vendors on merchandise purchases when it meets certain payment specifications. Historically, the Company has treated a portion of these purchase discounts as prompt payment discounts and recognized that
portion immediately into earnings through a reduction of Cost of Sales. This portion of the discount, however, should have been considered a cost purchase adjustment along with the remaining discount and included as a reduction in the cost of the
inventory.



The effect of the restatement relating to this error on the
Companys condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |       
|Condensed Consolidated Balance Sheet:          |  |                                    |        |  
|Merchandise inventories                        |  | $                                  | (8,198 | )
|Accrued expenses and other current liabilities |  |                                    | (3,108 | )
|Total shareholders equity                     |  |                                    | (5,090 | )



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Store Stock Supplies  Until 2003, the Company expensed certain costs associated with store stock
supplies as it incurred such costs. In the fourth quarter of 2003, the Company recognized as an asset the portion of these costs that it deemed to be supplies on hand in the stores. Accordingly, the Company has restated its condensed consolidated
financial statements to include these store stock supplies in all prior periods.



The effect of the restatement relating to store stock supplies on the Companys condensed consolidated statement of income and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |     |   |                                   |   |        |  
|---------------------------------------------- |  | ---------------------------------- | --- | - | --------------------------------- | - | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |     |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |     |   |                                   |   |        |  
|Selling, general and administrative expenses   |  | $                                  | (51 | ) |                                   | $ | (78    | )
|Net income                                     |  |                                    | 32  |   |                                   |   | 50     |  
|                                               |  |                                   
|                                               |  |                                    |     |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |     |   |                                   |   |        |  
|Other current assets                           |  |                                    |     |   |                                   | $ | (2,371 | )
|Accrued expenses and other current liabilities |  |                                    |     |   |                                   |   | (761   | )
|Total shareholders equity                     |  |                                    |     |   |                                   |   | (1,610 | )



Other  In addition
to the aforementioned restatement items, the Company has also made adjustments to its previously issued condensed consolidated financial statements to correct for certain other items.



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The effect of the restatement relating to these errors on the Companys condensed consolidated statement of income
and condensed consolidated balance sheet accounts is as follows (amounts include income tax effect):



|                                               |  |                                    |        |   |                                   |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|Increase (Decrease) (in
thousands)             |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Condensed Consolidated Statement of Income:    |  |                                    |        |   |                                   |   |        |  
|Cost of sales                                  |  | $                                  | 4,878  |   |                                   | $ | 1,663  |  
|Selling, general and administrative expenses   |  |                                    | 2,538  |   |                                   |   | 830    |  
|Other operating expenses                       |  |                                    | (3,585 | ) |                                   |   | (3,183 | )
|Net income                                     |  |                                    | (2,463 | ) |                                   |   | 438    |  
|                                               |  |                                   
|                                               |  |                                    |        |   | October 30, 2004                  |  
|Condensed Consolidated Balance Sheet:          |  |                                    |        |   |                                   |   |        |  
|Cash and cash equivalents                      |  |                                    |        |   |                                   | $ | (11    | )
|Merchandise inventories                        |  |                                    |        |   |                                   |   | (6,244 | )
|Other current assets                           |  |                                    |        |   |                                   |   | (989   | )
|Property and equipment, net                    |  |                                    |        |   |                                   |   | 3,917  |  
|Goodwill and intangibles, net                  |  |                                    |        |   |                                   |   | 1,198  |  
|Accounts payable                               |  |                                    |        |   |                                   |   | (1,153 | )
|Accrued expenses and other current liabilities |  |                                    |        |   |                                   |   | 2,344  |  
|Total shareholders equity                     |  |                                    |        |   |                                   |   | (3,320 | )



The
effect of these errors on net income included the following components:



|                    |  |                                    |        |   |                                   |   |        |  
|------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|(in thousands)      |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Inventory valuation |  | $                                  | (3,098 | ) |                                   | $ | (1,029 | )
|Other, net          |  |                                    | 635    |   |                                   |   | 1,467  |  
|                    |  |                                    |        |   |                                   |   |        |  
|Total               |  | $                                  | (2,463 | ) |                                   | $ | 438    |  
|                    |  |                                    |        |   |                                   |   |        |  



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The following tables summarize the effect of the adjustments included in the restatement on significant statement
of income and balance sheet components.



CONDENSED CONSOLIDATED
STATEMENT OF INCOME ACCOUNTS



Net Income



|                                             |  |                                    |         |   |                                   |   |         |  
|-------------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|(in thousands)                               |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Net income, as previously reported           |  | $                                  | (24,815 | ) |                                   | $ | (31,729 | )
|Adjustments:                                 |  |                                    |         |   |                                   |   |         |  
|Vendor Allowances                            |  |                                    | (475    | ) |                                   |   | (1,425  | )
|Operating Leases:                            |  |                                    |         |   |                                   |   |         |  
|Tenant Allowances - Improvement Incentives   |  |                                    | (224    | ) |                                   |   | (731    | )
|Tenant Allowances - Impairments              |  |                                    | 1,248   |   |                                   |   | 1,373   |  
|Rent Holiday                                 |  |                                    | 73      |   |                                   |   | 259     |  
|Depreciation Lives of Leasehold Improvements |  |                                    | (11     | ) |                                   |   | (35     | )
|Other Items:                                 |  |                                    |         |   |                                   |   |         |  
|Tax Items                                    |  |                                    | (3,755  | ) |                                   |   | (3,755  | )
|Store Stock Supplies                         |  |                                    | 32      |   |                                   |   | 50      |  
|Other                                        |  |                                    | (2,463  | ) |                                   |   | 438     |  
|                                             |  |                                    |         |   |                                   |   |         |  
|Total adjustments                            |  |                                    | (5,575  | ) |                                   |   | (3,826  | )
|                                             |  |                                    |         |   |                                   |   |         |  
|Net income, as restated                      |  | $                                  | (30,390 | ) |                                   | $ | (35,555 | )
|                                             |  |                                    |         |   |                                   |   |         |  



Cost of Sales (excluding
depreciation and amortization)



|                                      |  |                                    |         |   |                                   |   |           |  
|------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | --------- | -
|(in thousands)                        |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Cost of sales, as previously reported |  | $                                  | 901,282 |   |                                   | $ | 2,693,318 |  
|Adjustments:                          |  |                                    |         |   |                                   |   |           |  
|Other Items:                          |  |                                    |         |   |                                   |   |           |  
|Reclassifications                     |  |                                    | (1,675  | ) |                                   |   | (4,265    | )
|Other                                 |  |                                    | 4,878   |   |                                   |   | 1,663     |  
|                                      |  |                                    |         |   |                                   |   |           |  
|Total adjustments                     |  |                                    | 3,203   |   |                                   |   | (2,602    | )
|                                      |  |                                    |         |   |                                   |   |           |  
|Cost of sales, as restated            |  | $                                  | 904,485 |   |                                   | $ | 2,690,716 |  
|                                      |  |                                    |         |   |                                   |   |           |  



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Selling, General and Administrative Expenses



|                                                                     |  |                                    |         |   |                                   |   |           |  
|-------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | --------- | -
|(in thousands)                                                       |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Selling, general and administrative expenses, as previously reported |  | $                                  | 408,715 |   |                                   | $ | 1,165,253 |  
|Adjustments:                                                         |  |                                    |         |   |                                   |   |           |  
|Other Items:                                                         |  |                                    |         |   |                                   |   |           |  
|Reclassifications                                                    |  |                                    | 1,675   |   |                                   |   | 4,265     |  
|Store Stock Supplies                                                 |  |                                    | (51     | ) |                                   |   | (78       | )
|Other                                                                |  |                                    | 2,538   |   |                                   |   | 830       |  
|                                                                     |  |                                    |         |   |                                   |   |           |  
|Total adjustments                                                    |  |                                    | 4,162   |   |                                   |   | 5,017     |  
|                                                                     |  |                                    |         |   |                                   |   |           |  
|Selling, general and administrative expenses, as restated            |  | $                                  | 412,877 |   |                                   | $ | 1,170,270 |  
|                                                                     |  |                                    |         |   |                                   |   |           |  



Other Operating Expenses



|                                                 |  |                                    |         |   |                                   |   |         |  
|------------------------------------------------ |  | ---------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|(in thousands)                                   |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Other operating expenses, as previously reported |  | $                                  | 153,586 |   |                                   | $ | 445,852 |  
|Adjustments:                                     |  |                                    |         |   |                                   |   |         |  
|Operating Leases:                                |  |                                    |         |   |                                   |   |         |  
|Tenant Allowances - Improvement Incentives       |  |                                    | 354     |   |                                   |   | 1,151   |  
|Tenant Allowances - Impairments                  |  |                                    | (98     | ) |                                   |   | (295    | )
|Depreciation Lives of Leasehold Improvements     |  |                                    | 17      |   |                                   |   | 53      |  
|Other Items:                                     |  |                                    |         |   |                                   |   |         |  
|Other                                            |  |                                    | (3,585  | ) |                                   |   | (3,183  | )
|                                                 |  |                                    |         |   |                                   |   |         |  
|Total adjustments                                |  |                                    | (3,312  | ) |                                   |   | (2,274  | )
|                                                 |  |                                    |         |   |                                   |   |         |  
|Other operating expenses, as restated            |  | $                                  | 150,274 |   |                                   | $ | 443,578 |  
|                                                 |  |                                    |         |   |                                   |   |         |  



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Store Pre-Opening Costs



|                                                |  |                                    |       |   |                                   |   |       |  
|----------------------------------------------- |  | ---------------------------------- | ----- | - | --------------------------------- | - | ----- | -
|(in thousands)                                  |  | Three Months EndedOctober 30, 2004 |       |   | Nine Months EndedOctober 30, 2004 |  
|Store pre-opening costs, as previously reported |  | $                                  | 3,568 |   |                                   | $ | 4,807 |  
|Adjustments:                                    |  |                                    |       |   |                                   |   |       |  
|Operating Leases:                               |  |                                    |       |   |                                   |   |       |  
|Rent Holiday                                    |  |                                    | (115  | ) |                                   |   | (408  | )
|                                                |  |                                    |       |   |                                   |   |       |  
|Total adjustments                               |  |                                    | (115  | ) |                                   |   | (408  | )
|                                                |  |                                    |       |   |                                   |   |       |  
|Store pre-opening costs, as restated            |  | $                                  | 3,453 |   |                                   | $ | 4,399 |  
|                                                |  |                                    |       |   |                                   |   |       |  



Impairments and Dispositions



|                                                     |  |                                    |        |   |                                   |   |        |  
|---------------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|(in thousands)                                       |  | Three Months EndedOctober 30, 2004 |        |   | Nine Months EndedOctober 30, 2004 |  
|Impairments and dispositions, as previously reported |  | $                                  | 28,282 |   |                                   | $ | 35,653 |  
|Adjustments:                                         |  |                                    |        |   |                                   |   |        |  
|Operating Leases:                                    |  |                                    |        |   |                                   |   |        |  
|Tenant Allowances - Impairments                      |  |                                    | (1,867 | ) |                                   |   | (1,867 | )
|                                                     |  |                                    |        |   |                                   |   |        |  
|Total adjustments                                    |  |                                    | (1,867 | ) |                                   |   | (1,867 | )
|                                                     |  |                                    |        |   |                                   |   |        |  
|Impairments and dispositions, as restated            |  | $                                  | 26,415 |   |                                   | $ | 33,786 |  
|                                                     |  |                                    |        |   |                                   |   |        |  



Interest Expense



|                                         |  |                                    |         |   |                                   |   |         |  
|---------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|(in thousands)                           |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Interest expense, as previously reported |  | $                                  | (27,283 | ) |                                   | $ | (79,411 | )
|Adjustments:                             |  |                                    |         |   |                                   |   |         |  
|Vendor Allowances                        |  |                                    | (748    | ) |                                   |   | (2,244  | )
|Other Items:                             |  |                                    |         |   |                                   |   |         |  
|Reclassifications                        |  |                                    | (369    | ) |                                   |   | (2,706  | )
|                                         |  |                                    |         |   |                                   |   |         |  
|Total adjustments                        |  |                                    | (1,117  | ) |                                   |   | (4,950  | )
|                                         |  |                                    |         |   |                                   |   |         |  
|Interest expense, as restated            |  | $                                  | (28,400 | ) |                                   | $ | (84,361 | )
|                                         |  |                                    |         |   |                                   |   |         |  



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Other Income (Expense)



|                                                    |  |                                    |     |                                   |   |      
|--------------------------------------------------- |  | ---------------------------------- | --- | --------------------------------- | - | -----
|(in thousands)                                      |  | Three Months EndedOctober 30, 2004 |     | Nine Months EndedOctober 30, 2004
|Other income (expense), net, as previously reported |  | $                                  | 103 |                                   | $ | 241  
|Adjustments:                                        |  |                                    |     |                                   |   |      
|Other Items:                                        |  |                                    |     |                                   |   |      
|Reclassifications                                   |  |                                    | 369 |                                   |   | 2,706
|                                                    |  |                                    |     |                                   |   |      
|Total adjustments                                   |  |                                    | 369 |                                   |   | 2,706
|                                                    |  |                                    |     |                                   |   |      
|Other income (expense), net, as restated            |  | $                                  | 472 |                                   | $ | 2,947
|                                                    |  |                                    |     |                                   |   |      



Provision for Income Taxes



|                                                   |  |                                    |         |   |                                   |   |         |  
|-------------------------------------------------- |  | ---------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|(in thousands)                                     |  | Three Months EndedOctober 30, 2004 |         |   | Nine Months EndedOctober 30, 2004 |  
|Provision for income taxes, as previously reported |  | $                                  | (16,153 | ) |                                   | $ | (20,129 | )
|Adjustments:                                       |  |                                    |         |   |                                   |   |         |  
|Vendor Allowances                                  |  |                                    | (273    | ) |                                   |   | (819    | )
|Operating Leases:                                  |  |                                    |         |   |                                   |   |         |  
|Tenant Allowances - Improvement Incentives         |  |                                    | (130    | ) |                                   |   | (420    | )
|Tenant Allowances - Impairments                    |  |                                    | 717     |   |                                   |   | 789     |  
|Rent Holiday                                       |  |                                    | 42      |   |                                   |   | 149     |  
|Depreciation Lives of Leasehold Improvements       |  |                                    | (6      | ) |                                   |   | (18     | )
|Other Items:                                       |  |                                    |         |   |                                   |   |         |  
|Tax Items                                          |  |                                    | 3,755   |   |                                   |   | 3,755   |  
|Store Stock Supplies                               |  |                                    | 19      |   |                                   |   | 28      |  
|Other                                              |  |                                    | (1,368  | ) |                                   |   | 252     |  
|                                                   |  |                                    |         |   |                                   |   |         |  
|Total adjustments                                  |  |                                    | 2,756   |   |                                   |   | 3,716   |  
|                                                   |  |                                    |         |   |                                   |   |         |  
|Provision for income taxes, as restated            |  | $                                  | (13,397 | ) |                                   | $ | (16,413 | )
|                                                   |  |                                    |         |   |                                   |   |         |  



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CONDENSED CONSOLIDATED BALANCE SHEET ACCOUNTS



Total Assets



|                                             |  |                 |           |  
|-------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                               |  | October 30,2004 |          
|Total assets, as previously reported         |  | $               | 4,775,997 |  
|Adjustments:                                 |  |                 |           |  
|Operating Leases:                            |  |                 |           |  
|Tenant Allowances - Improvement Incentives   |  |                 | 31,283    |  
|Tenant Allowances - Impairments              |  |                 | 2,032     |  
|Depreciation Lives of Leasehold Improvements |  |                 | (165      | )
|Other Items:                                 |  |                 |           |  
|Reclassifications                            |  |                 | (13,920   | )
|Tax Items                                    |  |                 | 11,924    |  
|Purchase Discounts                           |  |                 | (8,198    | )
|Store Stock Supplies                         |  |                 | (2,371    | )
|Other                                        |  |                 | (2,129    | )
|                                             |  |                 |           |  
|Total adjustments                            |  |                 | 18,456    |  
|                                             |  |                 |           |  
|Total assets, as restated                    |  | $               | 4,794,453 |  
|                                             |  |                 |           |  



Cash and Cash Equivalents



|                                                  |  |                 |        |  
|------------------------------------------------- |  | --------------- | ------ | -
|(in thousands)                                    |  | October 30,2004 |       
|Cash and cash equivalents, as previously reported |  | $               | 74,521 |  
|Adjustments:                                      |  |                 |        |  
|Other Items:                                      |  |                 |        |  
|Reclassifications                                 |  |                 | 6,585  |  
|Other                                             |  |                 | (11    | )
|                                                  |  |                 |        |  
|Total adjustments                                 |  |                 | 6,574  |  
|                                                  |  |                 |        |  
|Cash and cash equivalents, as restated            |  | $               | 81,095 |  
|                                                  |  |                 |        |  



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Merchandise Inventories



|                                                |  |                 |           |  
|----------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                                  |  | October 30,2004 |          
|Merchandise inventories, as previously reported |  | $               | 1,856,358 |  
|Adjustments:                                    |  |                 |           |  
|Other Items:                                    |  |                 |           |  
|Purchase Discounts                              |  |                 | (8,198    | )
|Other                                           |  |                 | (6,244    | )
|                                                |  |                 |           |  
|Total adjustments                               |  |                 | (14,442   | )
|                                                |  |                 |           |  
|Merchandise inventories, as restated            |  | $               | 1,841,916 |  
|                                                |  |                 |           |  



Other Current Assets



|                                             |  |                 |         |  
|-------------------------------------------- |  | --------------- | ------- | -
|(in thousands)                               |  | October 30,2004 |        
|Other current assets, as previously reported |  | $               | 169,591 |  
|Adjustments:                                 |  |                 |         |  
|Operating Leases:                            |  |                 |         |  
|Tenant Allowances - Improvement Incentives   |  |                 | 2,205   |  
|Other Items:                                 |  |                 |         |  
|Reclassifications                            |  |                 | (20,505 | )
|Store Stock Supplies                         |  |                 | (2,371  | )
|Other                                        |  |                 | (989    | )
|                                             |  |                 |         |  
|Total adjustments                            |  |                 | (21,660 | )
|                                             |  |                 |         |  
|Other current assets, as restated            |  | $               | 147,931 |  
|                                             |  |                 |         |  



Current Deferred Income Taxes,
Net



|                                                           |  |                 |       
|---------------------------------------------------------- |  | --------------- | ------
|(in thousands)                                             |  | October 30,2004
|Current deferred income taxes, net, as previously reported |  | $               | 73,774
|Adjustments:                                               |  |                 |       
|Other Items:                                               |  |                 |       
|Tax Items                                                  |  |                 | 13,441
|                                                           |  |                 |       
|Total adjustments                                          |  |                 | 13,441
|                                                           |  |                 |       
|Current deferred income taxes, net, as restated            |  | $               | 87,215
|                                                           |  |                 |       



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Property and Equipment, Net of Depreciation



|                                                    |  |                 |           |  
|--------------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                                      |  | October 30,2004 |          
|Property and equipment, net, as previously reported |  | $               | 2,034,696 |  
|Adjustments:                                        |  |                 |           |  
|Operating Leases:                                   |  |                 |           |  
|Tenant Allowances - Improvement Incentives          |  |                 | 29,078    |  
|Tenant Allowances - Impairments                     |  |                 | 2,032     |  
|Depreciation Lives of Leasehold Improvements        |  |                 | (165      | )
|Other Items:                                        |  |                 |           |  
|Other                                               |  |                 | 3,917     |  
|                                                    |  |                 |           |  
|Total adjustments                                   |  |                 | 34,862    |  
|                                                    |  |                 |           |  
|Property and equipment, net, as restated            |  | $               | 2,069,558 |  
|                                                    |  |                 |           |  



Goodwill and Intangibles, Net of
Amortization



|                                                      |  |                 |        
|----------------------------------------------------- |  | --------------- | -------
|(in thousands)                                        |  | October 30,2004
|Goodwill and intangibles, net, as previously reported |  | $               | 324,363
|Adjustments:                                          |  |                 |        
|Other Items:                                          |  |                 |        
|Other                                                 |  |                 | 1,198  
|                                                      |  |                 |        
|Total adjustments                                     |  |                 | 1,198  
|                                                      |  |                 |        
|Goodwill and intangibles, net, as restated            |  | $               | 325,561
|                                                      |  |                 |        



Non-current Deferred Income
Taxes, Net



|                                                               |  |                 |         |  
|-------------------------------------------------------------- |  | --------------- | ------- | -
|(in thousands)                                                 |  | October 30,2004 |        
|Non-current deferred income taxes, net, as previously reported |  | $               | 153,426 |  
|Adjustments:                                                   |  |                 |         |  
|Other Items:                                                   |  |                 |         |  
|Tax Items                                                      |  |                 | (1,517  | )
|                                                               |  |                 |         |  
|Total adjustments                                              |  |                 | (1,517  | )
|                                                               |  |                 |         |  
|Non-current deferred income taxes, net, as restated            |  | $               | 151,909 |  
|                                                               |  |                 |         |  



70



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Total Current Liabilities



|                                                  |  |                 |           |  
|------------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                                    |  | October 30,2004 |          
|Total current liabilities, as previously reported |  | $               | 1,154,243 |  
|Adjustments:                                      |  |                 |           |  
|Vendor Allowances                                 |  |                 | 27,222    |  
|Operating Leases:                                 |  |                 |           |  
|Tenant Allowances - Improvement Incentives        |  |                 | (6,578    | )
|Tenant Allowances - Impairments                   |  |                 | (4,624    | )
|Rent Holiday                                      |  |                 | (2,510    | )
|Depreciation Lives of Leasehold Improvements      |  |                 | (246      | )
|Other Items:                                      |  |                 |           |  
|Reclassifications                                 |  |                 | (12,335   | )
|Tax Items                                         |  |                 | (15,627   | )
|Purchase Discounts                                |  |                 | (3,108    | )
|Store Stock Supplies                              |  |                 | (761      | )
|Other                                             |  |                 | 1,191     |  
|                                                  |  |                 |           |  
|Total adjustments                                 |  |                 | (17,376   | )
|                                                  |  |                 |           |  
|Total current liabilities, as restated            |  | $               | 1,136,867 |  
|                                                  |  |                 |           |  



Accounts Payable



|                                         |  |                 |         |  
|---------------------------------------- |  | --------------- | ------- | -
|(in thousands)                           |  | October 30,2004 |        
|Accounts payable, as previously reported |  | $               | 562,490 |  
|Adjustments:                             |  |                 |         |  
|Vendor Allowances                        |  |                 | 31,871  |  
|Other Items:                             |  |                 |         |  
|Other                                    |  |                 | (1,153  | )
|                                         |  |                 |         |  
|Total adjustments                        |  |                 | 30,718  |  
|                                         |  |                 |         |  
|Accounts payable, as restated            |  | $               | 593,208 |  
|                                         |  |                 |         |  



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Accrued Expenses and Other Current Liabilities



|                                                                       |  |                 |         |  
|---------------------------------------------------------------------- |  | --------------- | ------- | -
|(in thousands)                                                         |  | October 30,2004 |        
|Accrued expenses and other current liabilities, as previously reported |  | $               | 515,630 |  
|Adjustments:                                                           |  |                 |         |  
|Vendor Allowances                                                      |  |                 | (4,649  | )
|Operating Leases:                                                      |  |                 |         |  
|Tenant Allowances - Improvement Incentives                             |  |                 | (6,578  | )
|Tenant Allowances - Impairments                                        |  |                 | (4,624  | )
|Rent Holiday                                                           |  |                 | (2,510  | )
|Depreciation Lives of Leasehold Improvements                           |  |                 | (246    | )
|Other Items:                                                           |  |                 |         |  
|Reclassifications                                                      |  |                 | (13,920 | )
|Tax Items                                                              |  |                 | (15,627 | )
|Purchase Discounts                                                     |  |                 | (3,108  | )
|Store Stock Supplies                                                   |  |                 | (761    | )
|Other                                                                  |  |                 | 2,344   |  
|                                                                       |  |                 |         |  
|Total adjustments                                                      |  |                 | (49,679 | )
|                                                                       |  |                 |         |  
|Accrued expenses and other current liabilities, as restated            |  | $               | 465,951 |  
|                                                                       |  |                 |         |  



Current Portion of Long-Term
Debt



|                                                          |  |                 |       
|--------------------------------------------------------- |  | --------------- | ------
|(in thousands)                                            |  | October 30,2004
|Current portion of long-term debt, as previously reported |  | $               | 76,123
|Adjustments:                                              |  |                 |       
|Other Items:                                              |  |                 |       
|Reclassifications                                         |  |                 | 1,585 
|                                                          |  |                 |       
|Total adjustments                                         |  |                 | 1,585 
|                                                          |  |                 |       
|Current portion of long-term debt, as restated            |  | $               | 77,708
|                                                          |  |                 |       



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Long-Term Debt



|                                       |  |                 |           |  
|-------------------------------------- |  | --------------- | --------- | -
|(in thousands)                         |  | October 30,2004 |          
|Long-term debt, as previously reported |  | $               | 1,428,095 |  
|Adjustments:                           |  |                 |           |  
|Other Items:                           |  |                 |           |  
|Reclassifications                      |  |                 | (1,585    | )
|                                       |  |                 |           |  
|Total adjustments                      |  |                 | (1,585    | )
|                                       |  |                 |           |  
|Long-term debt, as restated            |  | $               | 1,426,510 |  
|                                       |  |                 |           |  



Other Long-Term Liabilities



|                                                    |  |                 |        
|--------------------------------------------------- |  | --------------- | -------
|(in thousands)                                      |  | October 30,2004
|Other long-term liabilities, as previously reported |  | $               | 241,272
|Adjustments:                                        |  |                 |        
|Operating Leases:                                   |  |                 |        
|Tenant Allowances - Improvement Incentives          |  |                 | 48,838 
|Tenant Allowances - Impairments                     |  |                 | 14,054 
|Rent Holiday                                        |  |                 | 6,679  
|Depreciation Lives of Leasehold Improvements        |  |                 | 504    
|                                                    |  |                 |        
|Total adjustments                                   |  |                 | 70,075 
|                                                    |  |                 |        
|Other long-term liabilities, as restated            |  | $               | 311,347
|                                                    |  |                 |        



73



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Total Shareholders Equity



|                                                   |  |                 |           |  
|-------------------------------------------------- |  | --------------- | --------- | -
|(in thousands)                                     |  | October 30,2004 |          
|Total shareholders equity, as previously reported |  | $               | 1,952,387 |  
|Adjustments:                                       |  |                 |           |  
|Vendor Allowances                                  |  |                 | (27,222   | )
|Operating Leases:                                  |  |                 |           |  
|Tenant Allowances - Improvement Incentives         |  |                 | (10,977   | )
|Tenant Allowances - Impairments                    |  |                 | (7,398    | )
|Rent Holiday                                       |  |                 | (4,169    | )
|Depreciation Lives of Leasehold Improvements       |  |                 | (423      | )
|Other Items:                                       |  |                 |           |  
|Tax Items                                          |  |                 | 27,551    |  
|Purchase Discounts                                 |  |                 | (5,090    | )
|Store Stock Supplies                               |  |                 | (1,610    | )
|Other                                              |  |                 | (3,320    | )
|                                                   |  |                 |           |  
|Total adjustments                                  |  |                 | (32,658   | )
|                                                   |  |                 |           |  
|Total shareholders equity, as restated            |  | $               | 1,919,729 |  
|                                                   |  |                 |           |  



74



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The following tables present the effect of the aforementioned adjustments on the Condensed Consolidated Financial
Statements, including the percentage of increase (decrease) as a result of the adjustments by line item.



CONDENSED CONSOLIDATED STATEMENT OF INCOME

Three Months Ended October 30, 2004



|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|------------------------------------------------------- |  | ------------------ | --------- | - | ----------- | - | ------ | ----------- |  | - | ------------- | - |  | ----- | -
|(In Thousands, except per share amounts)                |  | PreviouslyReported |           |   | Adjustments |   |        | As Restated |  |   | PercentChange |  
|NET SALES                                               |  | $                  | 1,481,645 |   |             | $ |       |             |  | $ | 1,481,645     |   |  | 0.0   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Cost of sales (excluding depreciation and amortization) |  |                    | 901,282   |   |             |   | 3,203  |             |  |   | 904,485       |   |  | 0.4   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Gross margin                                            |  |                    | 580,363   |   |             |   | (3,203 | )           |  |   | 577,160       |   |  | -0.6  | %
|                                                        |  |                    |           |  
|Selling, general and administrative expenses            |  |                    | 408,715   |   |             |   | 4,162  |             |  |   | 412,877       |   |  | 1.0   | %
|Other operating expenses                                |  |                    | 153,586   |   |             |   | (3,312 | )           |  |   | 150,274       |   |  | -2.2  | %
|Store pre-opening costs                                 |  |                    | 3,568     |   |             |   | (115   | )           |  |   | 3,453         |   |  | -3.2  | %
|Impairments and dispositions                            |  |                    | 28,282    |   |             |   | (1,867 | )           |  |   | 26,415        |   |  | -6.6  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|OPERATING INCOME (LOSS)                                 |  |                    | (13,788   | ) |             |   | (2,071 | )           |  |   | (15,859       | ) |  | 15.0  | %
|                                                        |  |                    |           |  
|Interest expense                                        |  |                    | (27,283   | ) |             |   | (1,117 | )           |  |   | (28,400       | ) |  | 4.1   | %
|Other income (expense), net                             |  |                    | 103       |   |             |   | 369    |             |  |   | 472           |   |  | NM    |  
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|INCOME (LOSS) BEFORE INCOME TAXES                       |  |                    | (40,968   | ) |             |   | (2,819 | )           |  |   | (43,787       | ) |  | 6.9   | %
|Provision (benefit) for income taxes                    |  |                    | (16,153   | ) |             |   | 2,756  |             |  |   | (13,397       | ) |  | -17.1 | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|NET INCOME (LOSS)                                       |  | $                  | (24,815   | ) |             | $ | (5,575 | )           |  | $ | (30,390       | ) |  | 22.5  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Earnings (loss) per common share:                       |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Basic earnings (loss) per common share                  |  | $                  | (0.18     | ) |             | $ | (0.04  | )           |  | $ | (0.22         | ) |  | 22.2  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Diluted earnings (loss) per common share                |  | $                  | (0.18     | ) |             | $ | (0.04  | )           |  | $ | (0.22         | ) |  | 22.2  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Weighted average common shares:                         |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Basic                                                   |  |                    | 138,249   |   |             |   |        |             |  |   | 138,249       |   |  |       |  
|Diluted                                                 |  |                    | 138,249   |   |             |   |        |             |  |   | 138,249       |   |  |       |  
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  

---

NM is defined as Not Meaningful



75



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##### Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF INCOME

Nine Months Ended October 30, 2004



|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|------------------------------------------------------- |  | ------------------ | --------- | - | ----------- | - | ------ | ----------- |  | - | ------------- | - |  | ----- | -
|(In Thousands, except per share amounts)                |  | PreviouslyReported |           |   | Adjustments |   |        | As Restated |  |   | PercentChange |  
|NET SALES                                               |  | $                  | 4,372,195 |   |             | $ |       |             |  | $ | 4,372,195     |   |  | 0.0   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Cost of sales (excluding depreciation and amortization) |  |                    | 2,693,318 |   |             |   | (2,602 | )           |  |   | 2,690,716     |   |  | -0.1  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Gross margin                                            |  |                    | 1,678,877 |   |             |   | 2,602  |             |  |   | 1,681,479     |   |  | 0.2   | %
|                                                        |  |                    |           |  
|Selling, general and administrative expenses            |  |                    | 1,165,253 |   |             |   | 5,017  |             |  |   | 1,170,270     |   |  | 0.4   | %
|Other operating expenses                                |  |                    | 445,852   |   |             |   | (2,274 | )           |  |   | 443,578       |   |  | -0.5  | %
|Store pre-opening costs                                 |  |                    | 4,807     |   |             |   | (408   | )           |  |   | 4,399         |   |  | -8.5  | %
|Impairments and dispositions                            |  |                    | 35,653    |   |             |   | (1,867 | )           |  |   | 33,786        |   |  | -5.2  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|OPERATING INCOME (LOSS)                                 |  |                    | 27,312    |   |             |   | 2,134  |             |  |   | 29,446        |   |  | 7.8   | %
|                                                        |  |                    |           |  
|Interest expense                                        |  |                    | (79,411   | ) |             |   | (4,950 | )           |  |   | (84,361       | ) |  | 6.2   | %
|Other income (expense), net                             |  |                    | 241       |   |             |   | 2,706  |             |  |   | 2,947         |   |  | NM    |  
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|INCOME (LOSS) BEFORE INCOME TAXES                       |  |                    | (51,858   | ) |             |   | (110   | )           |  |   | (51,968       | ) |  | 0.2   | %
|Provision (benefit) for income taxes                    |  |                    | (20,129   | ) |             |   | 3,716  |             |  |   | (16,413       | ) |  | -18.5 | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|NET INCOME (LOSS)                                       |  | $                  | (31,729   | ) |             | $ | (3,826 | )           |  | $ | (35,555       | ) |  | 12.1  | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Earnings (loss) per common share:                       |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Basic earnings (loss) per common share                  |  | $                  | (0.23     | ) |             | $ | (0.02  | )           |  | $ | (0.25         | ) |  | 8.7   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Diluted earnings (loss) per common share                |  | $                  | (0.23     | ) |             | $ | (0.02  | )           |  | $ | (0.25         | ) |  | 8.7   | %
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Weighted average common shares:                         |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  
|Basic                                                   |  |                    | 140,289   |   |             |   |        |             |  |   | 140,289       |   |  |       |  
|Diluted                                                 |  |                    | 140,289   |   |             |   |        |             |  |   | 140,289       |   |  |       |  
|                                                        |  |                    |           |   |             |   |        |             |  |   |               |   |  |       |  

---

NM is defined as Not Meaningful



76



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CONDENSED CONSOLIDATED BALANCE SHEET

October 30, 2004



|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|---------------------------------------------- |  | ------------------ | --------- | ----------- | - | ------- | ----------- |  | ------------- | --------- |  | ----- | -
|(In Thousands)                                 |  | PreviouslyReported |           | Adjustments |   |         | As Restated |  | PercentChange |          
|ASSETS                                         |  |                    |           |             |   |         |             |  |               |           |  |       |  
|                                               |  |                    |           |            
|CURRENT ASSETS                                 |  |                    |           |             |   |         |             |  |               |           |  |       |  
|Cash and cash equivalents                      |  | $                  | 74,521    |             | $ | 6,574   |             |  | $             | 81,095    |  | 8.8   | %
|Merchandise inventories                        |  |                    | 1,856,358 |             |   | (14,442 | )           |  |               | 1,841,916 |  | -0.8  | %
|Other current assets                           |  |                    | 169,591   |             |   | (21,660 | )           |  |               | 147,931   |  | -12.8 | %
|Deferred income taxes, net                     |  |                    | 73,774    |             |   | 13,441  |             |  |               | 87,215    |  | 18.2  | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL CURRENT ASSETS                           |  |                    | 2,174,244 |             |   | (16,087 | )           |  |               | 2,158,157 |  | -0.7  | %
|                                               |  |                    |           |            
|PROPERTY AND EQUIPMENT, NET OF DEPRECIATION    |  |                    | 2,034,696 |             |   | 34,862  |             |  |               | 2,069,558 |  | 1.7   | %
|GOODWILL AND INTANGIBLES, NET OF AMORTIZATION  |  |                    | 324,363   |             |   | 1,198   |             |  |               | 325,561   |  | 0.4   | %
|DEFERRED INCOME TAXES, NET                     |  |                    | 153,426   |             |   | (1,517  | )           |  |               | 151,909   |  | -1.0  | %
|OTHER ASSETS                                   |  |                    | 89,268    |             |   |        |             |  |               | 89,268    |  | 0.0   | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL ASSETS                                   |  | $                  | 4,775,997 |             | $ | 18,456  |             |  | $             | 4,794,453 |  | 0.4   | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|LIABILITIES AND SHAREHOLDERS EQUITY           |  |                    |           |             |   |         |             |  |               |           |  |       |  
|                                               |  |                    |           |            
|CURRENT LIABILITIES                            |  |                    |           |             |   |         |             |  |               |           |  |       |  
|Accounts payable                               |  | $                  | 562,490   |             | $ | 30,718  |             |  | $             | 593,208   |  | 5.5   | %
|Accrued expenses and other current liabilities |  |                    | 515,630   |             |   | (49,679 | )           |  |               | 465,951   |  | -9.6  | %
|Current portion of long-term debt              |  |                    | 76,123    |             |   | 1,585   |             |  |               | 77,708    |  | 2.1   | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL CURRENT LIABILITIES                      |  |                    | 1,154,243 |             |   | (17,376 | )           |  |               | 1,136,867 |  | -1.5  | %
|                                               |  |                    |           |            
|LONG-TERM DEBT                                 |  |                    | 1,428,095 |             |   | (1,585  | )           |  |               | 1,426,510 |  | -0.1  | %
|OTHER LONG-TERM LIABILITIES                    |  |                    | 241,272   |             |   | 70,075  |             |  |               | 311,347   |  | 29.0  | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL LIABILITIES                              |  |                    | 2,823,610 |             |   | 51,114  |             |  |               | 2,874,724 |  | 1.8   | %
|                                               |  |                    |           |            
|COMMITMENTS AND CONTINGENCIES                  |  |                    |          |             |   |        |             |  |               |          |  | 0.0   | %
|                                               |  |                    |           |            
|SHAREHOLDERS EQUITY                           |  |                    | 1,952,387 |             |   | (32,658 | )           |  |               | 1,919,729 |  | -1.7  | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY     |  | $                  | 4,775,997 |             | $ | 18,456  |             |  | $             | 4,794,453 |  | 0.4   | %
|                                               |  |                    |           |             |   |         |             |  |               |           |  |       |  



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SUMMARY OF CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS



|                                                    |  |                    |          |   |             |   |        |             |  |   |               |   |  |        |  
|--------------------------------------------------- |  | ------------------ | -------- | - | ----------- | - | ------ | ----------- |  | - | ------------- | - |  | ------ | -
|Nine Months Ended July 31, 2004 (In
Thousands)      |  | PreviouslyReported |          |   | Adjustments |   |        | As Restated |  |   | PercentChange |  
|Net cash provided by (used in) operating activities |  | $                  | (4,602   | ) |             | $ | 9,411  |             |  | $ | 4,809         |   |  | -204.5 | %
|Net cash used in investing activities               |  |                    | (135,407 | ) |             |   | (2,876 | )           |  |   | (138,283      | ) |  | 2.1    | %
|Net cash used in financing activities               |  |                    | (151,304 | ) |             |   |       |             |  |   | (151,304      | ) |  | 0.0    | %
|                                                    |  |                    |          |   |             |   |        |             |  |   |               |   |  |        |  
|Change in cash and cash equivalents                 |  |                    | (291,313 | ) |             |   | 6,535  |             |  |   | (284,778      | ) |  | -2.2   | %
|Cash and cash equivalents at beginning of year      |  |                    | 365,834  |   |             |   | 39     |             |  |   | 365,873       |   |  | 0.0    | %
|                                                    |  |                    |          |   |             |   |        |             |  |   |               |   |  |        |  
|Cash and cash equivalents at end of year            |  | $                  | 74,521   |   |             | $ | 6,574  |             |  | $ | 81,095        |   |  | 8.8    | %
|                                                    |  |                    |          |   |             |   |        |             |  |   |               |   |  |        |  



SALE OF BUSINESSES



On July 5, 2005, the Company consummated a transaction with
Belk, Inc. (Belk), whereby Belk acquired from the Company for $622.4 million in cash substantially all of the assets directly involved in the Companys Proffitts and McRaes business operations (hereafter described as
Proffitts), 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 which generated fiscal 2004 revenues of approximately $700 million. After considering the assets and liabilities sold, liabilities settled,
transaction fees and severance, the Company realized a net gain of $155.5 million on the sale.



On October 31, 2005, the Company announced the planned sale of its Northern Department Store Group (NDSG) to The Bon-Ton Stores, Inc. (Bon-Ton) for $1.1 billion in cash plus the assumption
of approximately $85 million of liabilities. Closing of the transaction is subject to certain conditions, including Bon-Tons financing for the transaction, the expiration or termination of all waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act, and various other customary conditions. Bank of America, N.A. has executed a commitment letter with Bon-Ton to provide for the financing of the transaction, subject to the conditions that are contained in the commitment
letter. The transaction is expected to be completed early in the first fiscal quarter of 2006. As part of the transaction, the Company will enter into a fee for services agreement to provide Bon-Ton with specified support services, including
information technology, credit services, and other back office support functions, for a limited period of time. The assets and liabilities associated with NDSG have been appropriately classified as held for sale at October 29, 2005 in the
accompanying condensed consolidated balance sheet.



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SAKS FIFTH AVENUE NEW ORLEANS STORE



The SFAE store in New Orleans suffered substantial water, fire, and other damage related to Hurricane Katrina, which struck in late August
2005. The Company anticipates reopening the store in the third fiscal quarter of 2006 after necessary repairs and renovations are made to the property.



The SFAE New Orleans store is covered by both property damage and business interruption insurance. The property damage coverage will pay to repair and/or replace the
physical property damage and inventory loss, and the business interruption coverage will reimburse the Company for lost profits as well as continuing expenses related to loss mitigation, recovery, and reconstruction for the full duration of the
reconstruction period plus three months. The Company recorded both (i) a $16.5 million gain on the excess of the replacement value over the net book value of the lost and damaged assets and (ii) $2.6 million of expenses related to the
insurance deductible during the quarter.



Total company revenues and operating
income were negatively affected by approximately $9.3 million and $5.0 million, respectively, for the third quarter of 2005, due to the New Orleans store closing.



FINANCIAL PERFORMANCE SUMMARY



Diluted earnings (loss) per share for the three-month period ended October 29, 2005 improved to $0.2 million or $0.00 per share from a loss of ($30.4) million or
($0.22) per share in the three-month period ended October 30, 2004. The current year period included a net gain of $5.5 million, net of taxes, primarily related to a $10.0 million, net of taxes, net gain related to the estimated insurance
settlement on SFAE New Orleans store that was damaged by Hurricane Katrina, offset in-part by expenses of $4.5 million, net of taxes, of asset impairments and additional transaction costs associated with the sale of Proffitts. The comparable
prior year period included net charges of $20.0 million, net of taxes, primarily related to asset impairments and the disposition of assets associated with SFAE store closings.



Additionally, several other items, including expenses related to the Companys investigations, retention and severance, and the
insurance deductible for the SFAE New Orleans store, as well as income related to the Companys estimated share of proceeds from Visa/MasterCard antitrust litigation settlement, were included in the current periods quarterly results.
These items netted approximately $10.2 million in after-tax expenses.



SFAE
realized a 5.4% comparable store sales increase during the three-month period ended October 29, 2005; however, its operating income declined to $16.7 million from $21.4 million. Excluding expenses related to the investigations and insurance
deductible expenses and considering the reduction in operating income contribution associated with the closed New Orleans store (estimated at approximately $5 million on a pre-tax basis), SFAEs operating performance was improved from the prior
period.



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SDSG experienced a 0.1% comparable store sales increase during the three-month period ended October 29, 2005, and
operating income improved by $9.5 million to $13.3 million. The majority of the improvement reflected an improved gross margin rate and expense control during the quarter.



Items not allocated to the business segments changed significantly during the year-over-year three-month period. During the three months
ended October 29, 2005, the Company incurred a $16.5 million gain primarily related to the estimated SFAE New Orleans store insurance settlement, partially offset by $7.2 million of other impairments and dispositions, primarily in the normal
course of business. During the three-month period ending October 30, 2004, impairments and dispositions primarily consisted of lease termination costs and asset impairments associated with the SFAE store closings and other store closings.



Consistent with the improvement in earnings during the third quarter, earnings
(loss) per share for the nine-month period ended October 29, 2005 improved to $24.6 million or $0.17 per diluted share from a loss of ($35.6) million or ($0.25) per diluted share in the nine-month period ended October 30, 2004. The current
nine-month period included a net gain of $64.0 million, net of taxes, primarily related to the aforementioned sale of Proffitts and the New Orleans store insurance settlement, offset by the loss on debt extinguishment. The prior year
nine-month period included charges of $24.7 million, net of taxes, primarily related to asset impairments and the disposition of assets associated with SFAE store closings.



SFAE realized a 5.1% comparable store sales increase during the nine-month period ended October 29, 2005 but experienced a decline in
operating income of $46.0 million. SDSG experienced a 0.1% comparable store sales decrease during the nine-month period ended October 29, 2005 and a decline in operating income of $0.6 million.



Items not allocated to the business segments changed significantly during the year-over-year
nine-month period. During the nine months ended October 29, 2005, the Company incurred net gains of $162.3 million, primarily related to the gain associated with the sale of Proffitts, partially offset by a loss on the extinguishment of
debt. During the nine-month period ending October 30, 2004, impairments and dispositions primarily consisted of lease termination costs and asset impairments associated with the SFAE store closings and other store closings.



During the three months ended October 29, 2005, the Company recorded a pre-tax benefit
of $0.9 million related to the correction of errors that occurred in the second quarter of 2005. The Company considered the financial effect of these errors to be immaterial and thus included this effect in the third quarter results.



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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.



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       |  
|                                                        |  | October 29,2005    |   |  | RestatedOctober 30,2004 |   |  | October 29,2005 |   |  | RestatedOctober 30,2004 |  
|Net sales                                               |  | 100.0              | % |  | 100.0                   | % |  | 100.0           | % |  | 100.0                   | %
|Costs and expenses:                                     |  |                    |   |  |                         |   |  |                 |   |  |                         |  
|Cost of sales (excluding depreciation and amortization) |  | 61.0               | % |  | 61.0                    | % |  | 62.3            | % |  | 61.5                    | %
|Selling, general & administrative expenses              |  | 27.9               | % |  | 27.9                    | % |  | 27.6            | % |  | 26.8                    | %
|Other operating expenses                                |  | 10.4               | % |  | 10.1                    | % |  | 10.3            | % |  | 10.1                    | %
|Store pre-opening costs                                 |  | 0.2                | % |  | 0.2                     | % |  | 0.1             | % |  | 0.1                     | %
|Impairments and dispositions                            |  | -0.7               | % |  | 1.8                     | % |  | -4.0            | % |  | 0.8                     | %
|                                                        |  |                    |   |  |                         |   |  |                 |   |  |                         |  
|Operating income (loss)                                 |  | 1.2                | % |  | -1.1                    | % |  | 3.8             | % |  | 0.7                     | %
|Other income (expense):                                 |  |                    |   |  |                         |   |  |                 |   |  |                         |  
|Interest expense                                        |  | -1.2               | % |  | -1.9                    | % |  | -1.7            | % |  | -1.9                    | %
|Loss on extinguishment of debt                          |  | 0.0                | % |  | 0.0                     | % |  | -0.7            | % |  | 0.0                     | %
|Other income (expense), net                             |  | 0.1                | % |  | 0.0                     | % |  | 0.2             | % |  | 0.1                     | %
|                                                        |  |                    |   |  |                         |   |  |                 |   |  |                         |  
|Income (loss) before income taxes                       |  | 0.0                | % |  | -3.0                    | % |  | 1.6             | % |  | -1.2                    | %
|                                                        |  |                    |   | 
|Provision (benefit) for income taxes                    |  | 0.0                | % |  | -0.9                    | % |  | 1.0             | % |  | -0.4                    | %
|                                                        |  |                    |   |  |                         |   |  |                 |   |  |                         |  
|Net income (loss)                                       |  | 0.0                | % |  | -2.1                    | % |  | 0.6             | % |  | -0.8                    | %
|                                                        |  |                    |   |  |                         |   |  |                 |   |  |                         |  



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THREE MONTHS ENDED OCTOBER 29, 2005 COMPARED TO THREE MONTHS ENDED OCTOBER 30, 2004 DISCUSSION OF OPERATING
INCOME



The following table shows the changes in operating income
from the three-month period ended October 30, 2004 to the three-month period ended October 29, 2005:



|                                                         |  |      |       |   |      |   |      |                    |  |   |              |   |  |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ---- | ------------------ |  | - | ------------ | - |  | - | ----- | -
|(In Millions)                                            |  | SDSG |       |   | SFAE |   |      | Items notallocated |  |   | TotalCompany |  
|For the three months ended October 30, 2004, as restated |  | $    | 3.8   |   |      | $ | 21.4 |                    |  | $ | (41.1        | ) |  | $ | (15.9 | )
|                                                         |  |      |       |  
|Store sales and margin                                   |  |      | (58.1 | ) |      |   | (6.6 | )                  |  |   |             |   |  |   | (64.7 | )
|Operating expenses                                       |  |      | 67.6  |   |      |   | 2.0  |                    |  |   | (10.2        | ) |  |   | 59.4  |  
|Impairments and dispositions                             |  |      |      |   |      |   |     |                    |  |   | 35.8         |   |  |   | 35.8  |  
|Severence and other costs                                |  |      |      |   |      |   |     |                    |  |   | 1.0          |   |  |   | 1.0   |  
|                                                         |  |      |       |   |      |   |      |                    |  |   |              |   |  |   |       |  
|Increase (Decrease)                                      |  |      | 9.5   |   |      |   | (4.6 | )                  |  |   | 26.6         |   |  |   | 31.5  |  
|                                                         |  |      |       |   |      |   |      |                    |  |   |              |   |  |   |       |  
|For the three months ended October 29, 2005              |  | $    | 13.3  |   |      | $ | 16.8 |                    |  | $ | (14.5        | ) |  | $ | 15.6  |  
|                                                         |  |      |       |   |      |   |      |                    |  |   |              |   |  |   |       |  



Consolidated



On a consolidated basis, net sales decreased 11.2%, while comparable store sales
increased 2.7%. The comparable store sales increase was comprised of a 0.1% increase at SDSG and a 5.4% increase at SFAE. Improved operating income at SDSG and a reduction in impairment and disposition charges resulted in an increase in operating
income of $31.5 million to $15.6 million.



SFAE



At SFAE, comparable store sales increased 5.4%; however, operating income declined by $4.6
million. Excluding the expenses related to the previously mentioned investigation ($7.4 million) and insurance deductible expenses ($2.6 million) and considering the reduction in operating income contribution associated with the closed New Orleans
store (estimated at approximately $5.0 million on a pre-tax basis), SFAEs third quarter operating income would have totaled approximately $31.8 million, a $10.4 million improvement over the prior year. Excluding New Orleans, the net effect of
new and closed stores resulted in a decrease of operating income of $3.3 million.



SDSG



At SDSG, comparable store sales increased 0.1%
and total sales declined 19.6%, primarily related to the sale of Proffitts. However, SDSG generated both an improved gross margin rate and SG&A leverage for the quarter based on diligent inventory management and expense control. The net
effect of new and closed stores resulted in an increase in operating income of $1.6 million.



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Expenses and charges not allocated to the segments decreased by $26.6 million primarily due to the current period $16.5
million gain from the estimated insurance settlement on the SFAE New Orleans store and a year-over-year decrease in impairments and dispositions resulting from the prior period SFAE store closings, slightly offset by increased equity compensation
and retention and severance costs associated with the sale of businesses at SDSG. The current period retention costs represent the expenses that the Company must incur to maintain adequate staffing necessary to support its operations and fulfill its
support services agreement with Belk and the proposed support services agreement with Bon-Ton.



NET SALES



The following table
shows relevant net sales information by segment for the three-month periods ended October 29, 2005 and October 30, 2004:



|              |  |                    |         |                          |   |         |                            |   |        |                           |  |       |   |  |     |  
|------------- |  | ------------------ | ------- | ------------------------ | - | ------- | -------------------------- | - | ------ | ------------------------- |  | ----- | - |  | --- | -
|              |  | Three Months Ended |         | Total (Decrease)Increase |   |         | Total % (Decrease)Increase |   |        | Comp % (Decrease)Increase | 
|(In Millions) |  | October 29,2005    |         | October 30,2004          |   |         |                           
|SDSG          |  | $                  | 680.6   |                          | $ | 846.6   |                            | $ | (166.0 | )                         |  | -19.6 | % |  | 0.1 | %
|SFAE          |  |                    | 634.6   |                          |   | 635.1   |                            |   | (0.5   | )                         |  | -0.1  | % |  | 5.4 | %
|              |  |                    |         |                          |   |         |                            |   |        |                           |  |       |   |  |     |  
|Consolidated  |  | $                  | 1,315.2 |                          | $ | 1,481.7 |                            | $ | (166.5 | )                         |  | -11.2 | % |  | 2.7 | %
|              |  |                    |         |                          |   |         |                            |   |        |                           |  |       |   |  |     |  



For the three months ended
October 29, 2005, total sales decreased 11.2% year over year, and consolidated comparable store sales increased 2.7%. The 5.4% comparable sales increase at SFAE evidenced continued strength in the luxury sector. The total sales decrease at SFAE
resulted mainly from the lost contribution as a result of the closed New Orleans store. SDSG experienced a 0.1% increase in comparable store sales. The net effect of sales from new and closed stores resulted in a reduction of $198.8 million, due
principally to the sale of Proffitts.



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, converted and re-branded stores are included in the comparable store sales comparison, except for the periods in which they are closed for
remodeling and renovation.



GROSS MARGIN



For the three months ended October 29, 2005, gross margin was $512.4 million, or 39.0%
of net sales, compared to $577.2 million, or 39.0% of net sales, for the three months ended October 30, 2004. The decline in gross margin dollars was principally attributable to the lost contribution from the sale of Proffitts. Although
the consolidated gross margin rate was flat with last year, SDSG generated an improved gross margin rate reflecting diligent inventory management, while SFAE experienced a modest decline in its rate, resulting largely from a continued decline in
vendor support.



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



For the three months ended October 29, 2005, SG&A was $366.8 million, or 27.9% of
net sales, compared to $412.9 million, or 27.9% of net sales, for the three months ended October 30, 2004. The net decrease of $46.1 million in expenses was largely due to the elimination of prior year expenses associated with the sold
Proffitts stores. This net decline in SG&A also included expenses related to the previously mentioned investigation, retention and severance, the insurance deductible for the closed New Orleans store, and the income from the
Visa/MasterCard settlement. Excluding these items, year-over-year SG&A leverage would have improved.



OTHER OPERATING EXPENSES



For
the three months ended October 29, 2005, other operating expenses, including store pre-opening costs, were $139.4 million, or 10.6% of net sales, compared to $153.7 million, or 10.4% of net sales, for the three months ended October 30,
2004. The decrease of $14.3 million was largely driven by a reduction in depreciation, rent and property and payroll taxes recognized on the Proffitts stores sold.



IMPAIRMENTS AND DISPOSITIONS



For the three months ended October 29, 2005 and October 30, 2004, the Company realized (gains)/losses from impairments and dispositions of ($9.4) million and
$26.4 million, respectively. The current quarter net gain primarily related to the estimated insurance settlement on the New Orleans store. Prior quarter charges were principally due to the impairment of store assets related to SFAE store closings
and impairments and disposition charges in the normal course of business.



INTEREST EXPENSE



For the three months ended
October 29, 2005, interest expense was $16.4 million, or 1.2% of net sales, compared to $28.4 million, or 1.9% of net sales, for the three months ended October 30, 2004. The improvement of $12.0 million was primarily due to the reduction
in debt resulting from the repurchase of approximately $585.7 million and $21.4 million of senior notes in July 2005 and August 2005, respectively.



INCOME TAXES



The effective income tax rates for the three-month periods ending October 29, 2005 and October 30, 2004 were 39.0% and 30.6%, respectively. The increase in the effective rate over the effective rate for
the three-month period ending October 30, 2004 is primarily the result of the prior year effective rate including the benefit for a reduction in the valuation allowance for state net operating loss carryforwards. In addition, the prior
three-month period included an adjustment to tax reserves resulting from the conclusion of tax examinations.



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NINE MONTHS ENDED OCTOBER 29, 2005 COMPARED TO NINE MONTHS ENDED OCTOBER 30, 2004



DISCUSSION OF OPERATING INCOME



The following table shows the changes in operating income from the nine-month period ended
October 30, 2004 to the nine-month period ended October 29, 2005:



|                                                        |  |      |       |   |      |   |       |                    |  |   |              |   |  |   |        |  
|------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ------------------ |  | - | ------------ | - |  | - | ------ | -
|(In Millions)                                           |  | SDSG |       |   | SFAE |   |       | Items notallocated |  |   | TotalCompany |  
|For the nine months ended October 30, 2004, as restated |  | $    | 36.4  |   |      | $ | 60.8  |                    |  | $ | (67.8        | ) |  | $ | 29.4   |  
|                                                        |  |      |       |  
|Store sales and margin                                  |  |      | (80.9 | ) |      |   | (24.2 | )                  |  |   |             |   |  |   | (105.1 | )
|Operating expenses                                      |  |      | 80.3  |   |      |   | (21.9 | )                  |  |   | (16.6        | ) |  |   | 41.8   |  
|Impairments and dispositions                            |  |      |      |   |      |   |      |                    |  |   | 196.1        |   |  |   | 196.1  |  
|Severance and other costs                               |  |      |      |   |      |   |      |                    |  |   | (1.5         | ) |  |   | (1.5   | )
|                                                        |  |      |       |   |      |   |       |                    |  |   |              |   |  |   |        |  
|Increase (Decrease)                                     |  |      | (.6   | ) |      |   | (46.1 | )                  |  |   | 178.0        |   |  |   | 131.3  |  
|                                                        |  |      |       |   |      |   |       |                    |  |   |              |   |  |   |        |  
|For the nine months ended October 29, 2005              |  | $    | 35.8  |   |      | $ | 14.7  |                    |  | $ | 110.2        |   |  | $ | 160.7  |  
|                                                        |  |      |       |   |      |   |       |                    |  |   |              |   |  |   |        |  



Consolidated



On a consolidated basis, net sales decreased 4.4%, while comparable store sales increased
2.2%. The comparable store sales increase was comprised of a 0.1% decrease at SDSG and a 5.1% increase at SFAE. The consolidated net sales decrease led to a decline in consolidated gross margin. The gain from the sale of Proffitts and
decreased operating expenses, offset by a loss from debt extinguishment and the deterioration in the gross margin rate at SFAE, resulted in an increase in operating income of $131.3 million to $160.7 million.



SFAE



At SFAE, comparable store sales increased 5.1%; however, the gross margin rate declined substantially, related to (i) unsatisfactory
inventory management, which led to substantially higher markdowns and (ii) a considerable year-over-year decline in vendor markdown support. Additionally, an increase in operating expenses primarily reflected costs associated with the
previously mentioned investigations, the SFAE New Orleans store insurance deductible, and costs necessary to support the increase in sales. As a result, operating income declined by $46.1 million. Excluding the closure of the New Orleans store,
which reduced operating income by approximately $7.4 million, the net effect of new and closed stores reduced operating income by $6.8 million at SFAE.



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SDSG



At SDSG, comparable store sales decreased 0.1%. Operating income declined by $0.6 million, primarily representing the forfeited contribution from the Proffitts
business, offset by improved performance reflecting diligent inventory management and expense control. The net effect of new and closed stores resulted in a decrease in operating income of $4.4 million.



Expenses and charges not allocated to the segments decreased by $178.0 million primarily due
to the gain associated with the sale of Proffitts and the gain from the estimated insurance settlement on the SFAE New Orleans store, slightly offset by increased equity compensation and retention and severance compensation associated with the
sale of businesses at SDSG.



NET SALES



The following table shows relevant net sales information by segment for the nine-month
periods ended October 29, 2005 and October 30, 2004:



|              |  |                  |         |                 |   |         |                 |   |        |                |  |      |   |  |      |  
|------------- |  | ---------------- | ------- | --------------- | - | ------- | --------------- | - | ------ | -------------- |  | ---- | - |  | ---- | -
|              |  | NineMonths Ended |         | TotalIncrease   |   |         | Total %Increase |   |        | Comp %Increase | 
|(In Millions) |  | October 29,2005  |         | October 30,2004 |   |         |                
|SDSG          |  | $                | 2,250.1 |                 | $ | 2,474.8 |                 | $ | (224.7 | )              |  | -9.1 | % |  | -0.1 | %
|SFAE          |  |                  | 1,930.4 |                 |   | 1,897.4 |                 |   | 33.0   |                |  | 1.7  | % |  | 5.1  | %
|              |  |                  |         |                 |   |         |                 |   |        |                |  |      |   |  |      |  
|Consolidated  |  | $                | 4,180.5 |                 | $ | 4,372.2 |                 | $ | (191.7 | )              |  | -4.4 | % |  | 2.2  | %
|              |  |                  |         |                 |   |         |                 |   |        |                |  |      |   |  |      |  



For the nine months ended
October 29, 2005, total sales decreased 4.4% year over year, and consolidated comparable store sales increased 2.2%. The 5.1% comparable sales increase at SFAE was evidenced by continued strength in the luxury sector. SDSG experienced a 0.1%
decline in comparable store sales. The net effect of sales lost from new and closed stores resulted in a $279.1 million reduction, due principally to the sale of Proffitts.



GROSS MARGIN



For the nine months ended October 29, 2005, gross margin was $1,575.5 million, or 37.7% of net sales, compared to $1,681.5 million, or 38.5% of net sales, for the
nine months ended October 30, 2004. Aside from the lost contribution from the sale of Proffitts, the reduction in gross margin dollars and rate was primarily attributable to the aforementioned merchandising issues at SFAE, whereby key
members of management, the merchandising team, and the finance group were largely focused on activities surrounding the investigation and as a consequential amount of merchant turnover took place during the period. In addition, due to the ongoing
investigation, SFAEs ability to collect certain vendor markdown allowances was impacted, which negatively affected gross margin. Management anticipates that vendor support levels will normalize by the end of the current fiscal year.



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



For the nine months ended October 29, 2005, SG&A was $1,151.8 million, or 27.6% of
net sales, compared to $1,170.3 million, or 26.8% of net sales, for the nine months ended October 30, 2004. The net decrease of $18.5 million in expenses was largely due to the elimination of prior year expenses resulting from the sold
Proffitts stores, offset by costs associated with the previously mentioned investigations, equity compensation and severance and retention compensation.



OTHER OPERATING EXPENSES



For the nine months ended October 29, 2005, other operating expenses, including store pre-opening costs, were $432.3 million, or 10.3% of net sales, compared to
$448.0 million, or 10.2% of net sales, for the nine months ended October 30, 2004. The decrease of $15.7 million was largely driven by a reduction in depreciation, rent and property and payroll taxes recognized on the Proffitts stores
sold.



IMPAIRMENTS AND DISPOSITIONS



For the nine months ended October 29, 2005 and October 30, 2004, the Company
realized (gains)/losses from impairments and dispositions of ($169.3) million and $33.8 million, respectively. The current period net gain primarily related to the gain on the sale of Proffitts. Prior period charges were principally due to the
impairment of store assets resulting from the announced SFAE store closings and the impairment and disposition charges from other store closings in the normal course of business.



INTEREST EXPENSE



For the nine months ended October 29, 2005, interest expense was $70.9 million, or 1.7% of net sales, compared to $84.4 million, or 1.9% of net sales, for the nine
months ended October 30, 2004. The improvement of $13.5 million was primarily due to the reduction in debt resulting from the repurchase of approximately $585.7 million and $21.4 million of senior notes in July 2005 and August 2005,
respectively.



LOSS ON EXTINGUISHMENT OF DEBT



During July 2005, the Company repurchased a total of approximately $585.7 million in
principal amount of senior notes and received consents from holders of a majority of every issue of its senior notes and of its convertible senior notes. The notes were repurchased at par, which included a consent fee. Additionally, during August
2005, the Company repurchased $21.4 million of additional senior notes at par through open market repurchases. The repurchases of these notes resulted in a loss on extinguishment of debt of approximately $29.0 million related principally to the
write-off of deferred financing costs and a premium on previously exchanged notes.



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INCOME TAXES



The effective income tax rates for the nine-month periods ending October 29, 2005 and October 30, 2004 were 63.4% and 31.6%. The increase in the effective
rate was primarily the result of the write-off of goodwill related to the sale of Proffitts which is non-deductible for tax purposes. The increase was partially offset by a benefit recognized to increase the state deferred tax rate to reflect
the location of the Companys remaining business assets in various states after the sale of Proffitts. Excluding these items, the Companys effective income tax rate was 39.0% for the nine-month period ending October 29, 2005.
The increase in this rate over the rate for the nine-month period ending October 30, 2004 is primarily the result of the prior year effective rate including the benefit for a reduction in the valuation allowance for state net operating loss
carryforwards. In addition, the prior nine-month period included an adjustment to tax reserves resulting from the conclusion of tax examinations.



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 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 provided by (used in) operating activities was ($116.6) million for the nine months ended October 29, 2005 and $4.8 million for
the nine months ended October 30, 2004. Cash provided by operating activities principally represents income before depreciation and non-cash charges and after changes in working capital. The $121.4 million decrease in 2005 from 2004 was largely
due to the disposal of assets related to the sale of Proffitts.



Inventory, accounts payable and debt balances fluctuate throughout the year due to the seasonal nature of the Companys business. Merchandise inventory balances at October 29, 2005 decreased from October 30, 2004 largely due
to a reduction in merchandise inventory related to the sale of Proffitts.



Cash provided by (used in) investing activities was $460.5 million for the nine months ended October 29, 2005 and ($138.3) million for the nine months ended October 30, 2004. 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 $598.8 million increase is primarily due to the $622.4 million of proceeds received from
the sale of Proffitts.



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Property and equipment balances at October 29, 2005 decreased from October 30, 2004 balances primarily due to
the disposal of assets related to the sale of Proffitts, depreciation on existing assets during the last twelve months and to store closings and impairments, partially offset by capital expenditures related to new store additions, expansions,
replacements and the remodeling of existing stores. Goodwill and intangibles at October 29, 2005 also decreased from October 30, 2004 due to the sale of Proffitts and amortization expense during the last twelve months.



Cash used in financing activities was $570.1 million for the nine months ended
October 29, 2005 and $151.3 million for the nine months ended October 30, 2004. The year over year change was principally attributable to the repurchase of approximately $607.1 million in principal amount of senior notes related to the
completion of the tender offers and consent solicitations as described in the Capital Structure disclosure.



CASH BALANCES AND LIQUIDITY



The
Companys primary sources of short-term liquidity are cash on hand and availability under its $800 million revolving credit facility. At October 29, 2005 and October 30, 2004, the Company maintained cash and cash equivalent balances
of $31.0 million (including $3.1 million of NDSG store cash held for sale) and $81.1 million, respectively. At October 29, 2005, the Company had borrowings of $27.0 million under its $800 million revolving credit facility, and had $89.4 million
in unfunded letters of credit representing utilization of availability under the facility. Availability under the facility was $683.6 million at October 29, 2005. The amount of cash borrowed under the Companys revolving credit facility is
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 any of the Companys senior notes at maturity.



CAPITAL STRUCTURE



The Company
continuously evaluates its debt-to-capitalization in light of economic trends; business trends; levels of interest rates; and terms, conditions and availability of capital in the capital markets. At October 29, 2005, the Companys capital
and financing structure was comprised of a revolving credit agreement, senior unsecured notes, convertible notes, capital and operating leases and real estate mortgage financing. At October 29, 2005, total debt was $759.4 million, representing
a decrease of $744.8 million from the balance of $1,504.2 million at October 30, 2004. This decrease in debt was primarily the result of the repurchase of approximately $585.7 million in principal amount of senior notes related to the
completion of the tender offers and consent solicitations discussed below. Additionally, the Company repurchased $21.4 million of



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additional senior notes at par through unsolicited open market repurchases during August 2005. This decrease in debt
decreased the debt to total capitalization percentage to 25.9% from 43.9% in the prior year.



At October 29, 2005, the Company maintained an $800 million senior revolving credit facility maturing in 2009, 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 $100 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 October 29, 2005, the Company had $383 million of unsecured senior notes outstanding, excluding the convertible notes, comprised of five separate series having
maturities ranging from 2008 to 2019. The senior notes have substantially identical terms except for the maturity dates and interest coupons 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.



The Company had $230 million of convertible senior notes, at October 29, 2005, 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 53.5087 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 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.



At October 29, 2005 the Company had $120 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 $6 million and $8
million per year.



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The Company is obligated to fund two cash balance pension plans. 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 funding requirements in 2005 and 2006.



On April 13, 2005 the Company received from the lenders in the revolving credit facility a waiver of any events of default that might
arise under the revolving credit agreement from the Companys failure to timely deliver to the lenders the 2004 Form 10-K. On June 6, 2005 the Company also received from the lenders in the revolving credit facility (i) consent to the
sale of certain assets to Belk, Inc. (as previously described), and (ii) a waiver, until September 1, 2005, of any events of default that might arise under the revolving credit agreement from the Companys failure to timely deliver to
the lenders the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2005. On August 31, 2005, the Company received from the lenders in the revolving credit facility a waiver, through October 31, 2005,
of any events of default that may arise from the Companys failure to timely deliver to the lenders the Companys Quarterly Reports on Form 10-Q for the fiscal quarters ended April 30, 2005 and July 30, 2005.



On June 14, 2005, the Company received a notice of default with respect to its
convertible notes. The notice of default was given by a note holder that stated that it owned more than 25% of the convertible notes. In response to this receipt of a notice of default, on June 20, 2005, the Company announced that it would
commence cash tender offers and consent solicitations for three issues of its outstanding senior notes and consent solicitations with respect to two additional issues of its outstanding senior notes and its outstanding convertible notes.



On July 19, 2005 the Company completed these cash tender offers and consent
solicitations. The consent solicitations (including those that were part of the tender offers) offered holders a one-time fee in exchange for their consent to proposed amendments to the indenture for each issue of notes. Upon completion of the
tender offers and consent solicitations, the Company repurchased a total of approximately $585.7 million in principal amount of senior notes and received consents from holders of a majority of every issue of its senior notes and of its convertible
senior notes. The notes were repurchased at par, which included a consent fee. Additionally, during August 2005, the Company repurchased $21.4 million of additional senior notes at par through unsolicited open market repurchases. The repurchases of
these notes resulted in a loss on extinguishment of debt of approximately $29.0 million, related principally to the write-off of deferred financing costs and a premium on previously exchanged notes.



During the nine months ended October 29, 2005 the Company did not purchase any shares of
Saks common stock. At October 29, 2005, there were 15.7 million shares remaining available for repurchase under the Companys existing share repurchase program. Subsequent to the end of the quarter, the Company repurchased 8.0 million
shares of Saks common stock at a cost of approximately $140.8 million, which left 7.7 million shares available for repurchase under authorized programs. In addition, the Company announced on December 8, 2005 that in anticipation of the closing
of the NDSG transaction, its Board of Directors had approved a 35.0 million share increase in its common share repurchase program, bringing the total available for repurchase to 42.7 million shares. Shares may be purchased in open-market,
negotiated, and other transactions as may be available. Implementation of the increased buyback program will depend on market conditions, the Companys other cash requirements, and other factors.



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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; and obligations under material variable interests.



During the nine months ended October 29, 2005, the Company repurchased a total of $607.1 million in principal amount of its outstanding senior notes. Other than these repurchases, there were no material changes outside of the ordinary
course of business in the Companys contractual obligations specified in Item 303(a)(5) of Regulation S-K during such quarter. For additional information regarding the Companys contractual obligations as of January 29, 2005, see
the Managements Discussion and Analysis section of the 2004 Form 10-K.



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 January 29, 2005 filed with the Securities and Exchange Commission.



NEW ACCOUNTING PRONOUNCEMENTS



The Emerging Issues Task Force (EITF) recently reached a consensus, EITF 04-08, The
Effect of Contingently Convertible Instruments on Diluted Earnings Per Share, whereby the contingent conversion provisions should be ignored and therefore an issuer should apply the if-converted method in calculating dilutive earnings per
share. This consensus became effective for periods ending after December 15, 2004, and requires retroactive application to all periods presented. Furthermore, the Financial Accounting Standards Board (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 upon conversion of the notes in cash, and thus exclude the effect of the conversion
of the notes in its calculation of dilutive 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 dilutive earnings per share except when
the effect would be anti-dilutive. A final Statement is expected to be issued in the first quarter of 2006.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs  An Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter



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4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006. The Company does not expect SFAS
No. 151 to have a material effect on the Companys financial position or its results of operations.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. This statement, referred to as SFAS No. 123R, revised SFAS No. 123, Accounting for
Stock-Based compensation, and requires companies to expense the value of employee stock options and similar awards. The effective date of this standard is annual periods beginning after June 15, 2005.



Until 2003, the Company recorded compensation expense for all stock-based compensation plan
issuances prior to 2003 using the intrinsic value method. Compensation expense, if any, was measured as the excess of the market price of the stock over the exercise price of the award on the measurement date. In 2003, in accordance with SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, the Company began expensing the fair value of all stock-based grants over the vesting period on a prospective
basis utilizing the Black-Scholes model.



Upon the adoption of SFAS
No. 123R, the Company will be required to expense all stock options over the vesting period in its statement of operations, including the remaining vesting period associated with unvested options outstanding as of January 28, 2006. For the
quarters ended October 29, 2005 and October 30, 2004, total stock-based employee compensation expense, net of related tax effects, determined under this new standard would have been approximately $4.0 million, and $5.0 million,
respectively, and for the nine-month periods ended October 29, 2005 and October 30, 2004, total stock-based employee compensation expense, net of related tax effects, would have been approximately $14.0 million, and $16.0 million,
respectively. The Company will be required to adopt SFAS No. 123R in the first quarter of 2006. The Company is still evaluating the effect of the adoption of this standard, but does not expect that it will have a material effect on the
Companys financial position or its results of operations.



In March 2005,
the staff issued guidance on SFAS No. 123R. Additionally, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) to assist preparers by simplifying some of the implementation challenges of SFAS No. 123R while enhancing the
information that investors receive. SAB 107 creates a framework that reinforces the flexibility allowed, specifically when valuing employee stock options and permits individuals, acting in good faith, to conclude differently on the fair value of
employee stock options.



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In June 2005, the FASBs Emerging Issues Task Force reached a consensus on Issue No. 05-6,
Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination (EITF 05-6). EITF 05-6 provides guidance on the amortization period for leasehold improvements in
operating leases that are either acquired after the beginning of the initial lease term or acquired as the result of a business combination. This guidance requires leasehold improvements purchased after the beginning of the initial lease term
to be amortized over the shorter of the assets useful life or a term that includes the original lease term plus any renewals that are reasonably assured at the date the leasehold improvements are purchased. This guidance is effective for
reporting periods beginning after June 29, 2005. The adoption of this guidance did not have an impact on our net earnings, cash flows or financial position.



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FORWARD-LOOKING INFORMATION



Certain information presented in this report addresses future results or expectations and 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 department and specialty store industries as well as other retail channels; 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; changes in interest rates; the outcome of the formal investigation by the Securities and Exchange Commission and the inquiry the Company understands has been commenced by the Office of the
United States Attorney for the Southern District of New York into the matters that were the subject of the investigations conducted during 2004 and 2005 by the Audit Committee of the Companys Board of Directors and any related matters that may
be under investigation or the subject of inquiry; the ultimate amount of reimbursement to vendors of improperly collected markdown allowances; the ultimate impact of improper timing of recording of inventory markdowns; the ultimate impact of
incorrect timing of recording of vendor markdown allowances; the outcome of the shareholder litigation that has been filed relating to the matters that were the subject of the Audit Committees initial investigation; and the effects of the
delay in the filing with the SEC of the Companys Form 10-K for the fiscal year ended January 29, 2005 and its Quarterly Reports on Form 10-Q for the fiscal quarters ended April 30, 2005 and July 30, 2005. For additional
information regarding these and other risk factors, please refer to Exhibit 99.1 to the Companys Form 10-K for the fiscal year ended January 29, 2005 filed with the SEC, which may be accessed via EDGAR through the Internet at
www.sec.gov.



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.



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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.



At October 29, 2005, the Company had no derivative instruments outstanding, and at
October 30, 2004, the Company had interest rate swap agreements with notional amounts of $150 million and $100 million, which swapped coupon rates of 8.25% and 7.50%, respectively, for floating rates. During 2004 the Company terminated all
remaining interest rate swap agreements resulting in net losses. When combined with net gains from other previously cancelled interest swap agreements, the Company had total unamortized net gains/(losses) of ($0.6) million and $3.8 million at
October 29, 2005 and October 30, 2004, respectively, which are being amortized as a component of interest expense through 2010. There were no swap agreements outstanding at October 29, 2005.



Based on the Companys market risk sensitive instruments (including variable rate debt)
outstanding at October 29, 2005, 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



Under
the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Accounting 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 October 29, 2005. The Companys disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports we file 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 management, including the Chief Executive Officer and Chief Accounting Officer, to allow timely discussions regarding required disclosure. Based upon this evaluation, the Companys Chief Executive Officer and
Chief Accounting Officer concluded that, since the material weaknesses in internal control over financial reporting described in the Companys



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Annual Report on Form 10-K for the fiscal year ended January 29, 2005 (the 2004 Form 10-K) continue to
exist at October 29, 2005, the Companys disclosure controls and procedures were not effective as of October 29, 2005. Notwithstanding the material weaknesses discussed in the 2004 Form 10-K, the Companys management has
concluded that the consolidated financial statements included in this report present fairly, in all material respects, the Companys financial position, and results of operations and cash flows for the periods presented in conformity with
accounting principles generally accepted in the United States of America.



Earlier in 2005, in connection with the preparation of the Companys consolidated financial statements to be included in the 2004 Form 10-K, management conducted an internal review of the Companys books and records. As a
result of the findings of that review, together with the results of the internal investigations disclosed on March 3, 2005 and June 3, 2005, the Company restated its audited consolidated financial statements for the years ended
January 31, 2004; February 1, 2003; February 2, 2002 and February 3, 2001 and its unaudited consolidated financial information for the quarters ended May 1, July 31 and October 30, 2004 and the quarters
ended May 3, August 2, November 1, 2003 and January 31, 2004. As indicated below, the Company is actively engaged in the implementation of remediation efforts to address the material weaknesses in its internal control
over financial reporting as of January 29, 2005, as outlined in the 2004 Form 10-K.



Management, with the oversight of the Audit Committee of the Board of Directors, has devoted considerable effort to making improvements in the Companys internal control over financial reporting. These
improvements have included appointing a new Chief Accounting Officer in May 2005 who reports to the Companys Chief Executive Officer and the Audit Committee of the Board of Directors and appointing a Chief Ethics and Compliance Officer in
August 2005 who reports to the Chief Executive Officer. To enhance the overall internal control over financial reporting, the Chief Ethics and Compliance Officer, in conjunction with senior management, is expanding the ethics and compliance program
across the Company as it existed at October 29, 2005 to include:



| |  |  | Establishment of a Corporate Enterprise Risk Management Committee to provide ongoing oversight related to Company wide ethics and compliance.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Establishment of ethics and compliance councils in each of the Companys operating divisions and corporate support groups to drive the execution of compliance and enterprise
risk management initiatives across each operating unit.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recommunication of the Companys Code of Conduct to include tailored examples to each audience and integration into all new hire orientation programs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expansion of the Companys values training program to include mandatory programs for all associates.
| | - |  | ----------------------------------------------------------------------------------------------------



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| |  |  | Increased promotion of the Companys confidential hotline that is managed by an independent and external firm which associates can utilize to report perceived accounting and/or
financial integrity concerns.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Specifically related to the
material weaknesses as described in the 2004 Form 10-K, the Companys remediation plan includes the following:



| |  |  | The Company is implementing controls over recording transactions and enhanced its monitoring and review controls in the area of accounting for vendor-provided markdown support, is
training associates on the proper accounting and documentation policies related to vendor provided markdown support and is implementing new internal audit programs to test and monitor accounting policy compliance throughout the year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company is taking measures to enhance the controls over the selection, application and monitoring of its accounting policies to ensure consistent application of accounting
policies that are generally accepted in the United States of America. The Company is also integrating reporting lines, increasing communication and supervision across operating and accounting organizations, and increasing the review of existing
accounting policies. Specifically as it relates to the accounting for leasing transactions, the Company is changing its controls and accounting policies surrounding the review, analysis and recording of new and current leases, including the
selection and monitoring of appropriate assumptions and guidelines to be applied during the review and analysis of all leases. Specifically as it relates to the accounting for vendor-provided support for items such as timely payment discounts and
non-compliance chargebacks, the Company is implementing controls over the accounting, monitoring, and analysis of all vendor-provided support to ensure transactions are recorded consistent with generally accepted accounting principles.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The above-described remedial efforts all began following the
completion of the Companys quarter ended July 30, 2005. There were no changes in the Companys internal control over financial reporting during the quarter ended October 29, 2005 that materially affected or are reasonably likely
to materially affect internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS.



In addition
to the proceedings described in the 2004 Form 10-K, the Company is involved in several 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 an ongoing material adverse effect on the Companys consolidated financial position, results of operations, or liquidity.



On November 30, 2005 an outside investigative firm, retained by the Company to investigate allegations of improper conduct by individuals in the Companys New York
store construction office, delivered a report to the Company that concluded that the Companys regional facilities manager for the northeast region had, to the Companys detriment, improperly (1) steered contracts to a small group of
preferred contractors, (2) caused the Company to pay for work that appears not to have been performed, and (3) received personal benefits from one of the preferred contractors. Following receipt of the report the Company terminated the employment of
the regional facilities manager. The Company, with the assistance of the outside investigative firm and outside counsel, is continuing to investigate the extent of the improper conduct by the regional facilities manager and other possible improper
conduct involving the New York store construction office. The Company is referring this matter to the appropriate law enforcement authorities and intends to seek to recover any identifiable losses resulting from the improper conduct. Management
believes that this matter will not have a material adverse effect on the Companys consolidated financial position, results of operations, or liquidity.



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



During the quarter ended October 29, 2005, the Company did not sell any equity securities which were not registered under the Securities Act or repurchase any of its equity securities.



The Board of Directors has authorized 35.0 million shares in share repurchase programs.
At October 29, 2005, 15.7 million shares remained available for repurchase under these programs.



Item 6. EXHIBITS



|     |  |                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  
|     | 
|31.2 |  | Certification of Chief Accounting 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 Accounting 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 INCORPORATEDRegistrantDecember 8, 2005Date/s/ Kevin G. WillsKevin G. WillsExecutive Vice President of Finance andChief Accounting Officer




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