EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS

FORWARD-LOOKING STATEMENTS

This Annual Report to Shareholders contains statements which constitute
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this Annual Report as well as the documents incorporated by reference and can be
identified by the use of forward-looking terminology such as "believe,"
"expect," "estimate," "plans," "may," "will," "should," "anticipates," or
similar statements, or the negative thereof or other variations. Such
forward-looking statements include, without limitation, statements relating to
revenue projections, cost savings, capital expenditures, future cash needs,
improvements in infrastructure and operating efficiencies. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks and uncertainties
include, but are not limited to; uncertainties related to consumer demand for
footwear, warmer than expected weather, consumer acceptance of the Company's
merchandise mix, retail locations, product availability and the effect of
competitive products and pricing. Consequently, all of the forward-looking
statements, internal and external, are qualified by these cautionary statements,
and there can be no assurance that the actual results, performance or
achievements will be realized. The information contained in this Annual Report
including information included under this section captioned "Management's
Discussion and Analysis," as well as information contained under the caption
"Risk Factors" in other Company filings with the Securities and Exchange
Commission, identifies important factors that could cause such results,
performance or achievements not to be realized. The Company undertakes no
obligation to update forward-looking statements to reflect events or
circumstances after the date such statements were made.

THE COMPANY

Footstar, Inc. (the "Company") became an independent company in 1996 after the
Board of Directors of Melville Corporation ("Melville") approved the spin-off of
its footwear segments. These businesses were comprised of Meldisco, a leading
operator of leased footwear departments nationwide and abroad; Footaction, a
mall-based branded athletic footwear and apparel chain; and Thom McAn, which has
been reported as discontinued operations. The spin-off was completed with the
distribution (the "Distribution") on October 12, 1996, to Melville shareholders
of record on October 2, 1996, of all the shares of the Company. The Distribution
was made on the basis of .2879 shares of the Company's common stock for every
one share of Melville common stock. A total of 30,533,883 shares of the common
stock were issued.

GENERAL

The following  discussion and analysis  should be read in  conjunction  with the
consolidated financial statements and the notes thereto that appear elsewhere in
this Annual Report.

Fiscal Year 1999

In 1999, the Company recorded a net reversal of charges of $4.7 million
consisting of reversals of restructuring charges totaling $12.8 million
partially offset by an asset impairment charge of $8.1 million. During the year,
the Company successfully negotiated with landlords for the early termination of
certain store leases attributable to the 1998 closed store restructuring charge
which allowed the Company to reverse $9.9 million of the original reserve. Also
in 1999, the Company completed the 1997 warehouse and service center
consolidation plan, reversing $2.9 million of restructuring costs previously
reserved.

   During 1999, the Company recorded an $8.1 million asset impairment  charge in
accordance   with  SFAS  121.  This  impairment   charge  relates   entirely  to
underperforming  Footaction stores in a difficult  athletic retail  environment.
The charge includes the impairment of fixed assets and goodwill.


                                    Footstar, Inc. and Subsidiary Companies   13

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

      The Company also recorded, in December of 1999, a reversal of $3.8 million
of a reserve balance recorded as a result of the discontinuance of the Thom McAn
chain in 1996.

      The Company continued its share repurchase program in 1999 by buying back
3,441,475 shares at an average price per share of $30.38, for an aggregate
purchase amount of $104.6 million. Since becoming a public company in October
1996, through the end of fiscal 1999 the Company has repurchased a total of 10.5
million shares, representing approximately 34 percent of the total shares
outstanding at the time of the spin-off from Melville, now known as CVS
Corporation.

Fiscal Year 1998

The Company announced a non-recurring plan to close approximately 30
underperforming Footaction stores, reconfigure Footaction merchandise
assortments and refine store layouts to place greater emphasis on
better-performing, higher-potential categories and exit Meldisco's Central
European business. In conjunction with these actions, Footstar recorded pre-tax,
non-recurring charges of $34.4 million ($22.7 million after taxes) in the fourth
quarter of fiscal 1998. These non-recurring charges included lease buyouts,
inventory markdowns and asset impairment charges.

      In 1998, the Company also successfully consolidated its logistics network
and centralized several accounting operations. Footaction's distribution
operations were relocated from its Dallas facility and combined with those of
Meldisco in the Company's state-of-the-art distribution center located in
Gaffney, South Carolina. Prior to the consolidation, this center only served
Meldisco's distribution needs.

      The Company also established a shared accounting operations service center
("Shared Service Center") in the Dallas area, to support both its Meldisco and
Footaction businesses. This Shared Service Center currently supports the
accounts payable, store accounting, inventory management, asset protection and
payroll functions of both businesses.

      During 1999, these initiatives have begun to generate considerable annual
cost savings and to reduce the current need for substantial capital expenditures
to expand Footaction's distribution network.

Fiscal Year 1997

In preparation for the distribution center and accounting operations
consolidations in 1998, the Company recorded a one-time, pre-tax charge of $15.7
million ($9.9 million after taxes) in the fourth quarter of 1997.

      The Company also reversed $34.0 million ($21.4 million after taxes) of a
reserve balance created as a result of the discontinuance of the Thom McAn chain
in 1996. This reversal was recorded in the fourth quarter of 1997 as
discontinued operations.

RESULTS OF OPERATIONS

Net Sales

                                                      Fiscal Year Ended
                                             -----------------------------------
($ in millions)                                 1999        1998        1997
--------------------------------------------------------------------------------
Company:
Net sales                                    $1,880.0     $1,829.1    $1,794.9
Net sales % change from prior year                2.8%         1.9%        7.3%
Same store sales % change                         1.4%        (0.4)%       0.3%

Meldisco:
Net sales                                    $1,236.7     $1,174.8    $1,187.2
Net sales % change from prior year                5.3%        (1.0)%       2.7%
Same store sales % change                         4.0%        (0.5)%       1.4%
% of combined net sales                          65.8%        64.2%       66.1%

Footaction:
Net sales                                    $  643.3     $  654.3    $  607.7
Net sales % change from prior year               (1.7)%        7.7%       17.8%
Same store sales % change                        (3.4)%       (0.1)%      (2.5)%
% of combined net sales                          34.2%        35.8%       33.9%
--------------------------------------------------------------------------------


14     Footstar, Inc. and Subsidiary Companies

<PAGE>

Fiscal Year 1999

Consolidated net sales for 1999 increased $50.9 million, or 2.8 percent over
1998. Meldisco reported a net sales increase of 5.3 percent over 1998 and a
comparable stores sales increase of 4.0 percent. Meldisco continued to
experience solid results from the Thom McAn(R) brand with the expansion of the
line this year to include kid's and women's product. Meldisco's sales benefited
as Kmart continued its growth with the acquisition of certain former Caldor
stores, which resulted in the opening of 16 new shoe departments. Kmart also
continued its store remodeling program, converting 578 stores to its Big Kmart
format, ending the year with 84 percent of its 2,177 stores operating in the new
redesigned format. Meldisco's Kmart operations accounted for 64.5 percent and 98
percent of the net sales of the Company and Meldisco, respectively.

      Footaction's performance continued to reflect difficult conditions in the
athletic footwear and apparel sector. Total sales in 1999 decreased 1.7 percent
from 1998, with same store sales decreasing 3.4 percent. Footaction opened seven
new stores, expanded 13 stores and closed 35 stores. A highly promotional
environment, weak apparel sales and reduced demand for basketball product all
had a negative impact on sales.

Fiscal Year 1998

Consolidated net sales for 1998 increased 1.9 percent over 1997. Meldisco's
total sales for 1998 decreased 1.0 percent while comparable store sales declined
0.5 percent. Meldisco experienced positive results from the Thom McAn(R) brand
and growth at Kmart while seasonal footwear sales were relatively weak due to
adverse weather conditions. The Kmart growth was supported by an acquisition of
certain former Venture store leases that added a net of 37 high-volume shoe
departments in the fourth quarter. Kmart also continued to convert stores to the
Big K format in 1998. By year-end, the chain had converted 1,231 stores, or 57
percent of its 2,161 stores nationwide. Meldisco's Kmart operations accounted
for 62.3 percent and 96.9 percent of the net sales of the Company and Meldisco,
respectively.

      Footaction continued to face a difficult athletic footwear environment.
Total sales in 1998 increased 7.7 percent over 1997 due to a 14 percent
expansion of square footage while comparable store sales declined 0.1 percent.
Footaction opened 42 new stores and expanded 66 stores in 1998.

      Weak consumer demand for athletic footwear and apparel, the NBA lockout, a
highly promotional marketplace and non-seasonal weather all had a negative
impact on sales. In December 1998, the Company announced a reorganization plan
to strengthen Footaction and position the chain to better compete in the current
environment. As part of this plan, approximately 30 underperforming stores were
planned to be closed. Expansion plans for 1999 were also scaled back in response
to the over-stored environment.

COSTS AND EXPENSES

                                                     Fiscal Year Ended
                                           -------------------------------------
(As a % of net sales)                      1999            1998           1997
--------------------------------------------------------------------------------

Cost of sales(1)                           68.9%          69.9%           69.1%
Store operating, selling, general
 and administrative expenses               21.1%          21.1%           20.7%
Depreciation and amortization               1.8%           1.8%            1.9%
--------------------------------------------------------------------------------
1 After non-recurring charges
--------------------------------------------------------------------------------

COST OF SALES

In fiscal year 1999, consolidated cost of sales decreased 100 basis points. This
cost decrease is primarily attributable to lower markdowns in both divisions. At
Footaction, lower markdowns and lower delivery costs were offset by increased
occupancy costs as a percentage of sales due to lower store productivity.
Meldisco's cost of sales decreased from last year as a result of lower
distribution costs, lower markdowns and improved purchasing.


                                   Footstar, Inc. and Subsidiary Companies    15

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

      In fiscal 1998, cost of sales rose 80 basis points from 1997. This cost
increase was primarily attributable to higher markdowns recorded by Footaction
as a result of the highly promotional business environment and to the under
absorption of occupancy expenses due to lower sales productivity. Excluding the
effect of non-recurring charges representing inventory writedowns of $5.2
million in Footaction and $2.5 million in Meldisco's Central European business,
cost of sales would have been 69.4 percent. Meldisco's cost of sales decreased
from 1997 as a result of better buying, lower distribution costs and improved
inventory management which contributed to lower markdowns.

STORE OPENING, SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES

For 1999, store operating, general and administrative expenses were flat, as a
percentage of sales, to last year. Total expenses increased from $386.3 million
in 1998 to $396.9 million in 1999, primarily to support the increased sales
volume. Store expenses increased from last year as a result of increased selling
and occupancy costs at both Meldisco and Footaction.

      Store operating, selling, general and administrative expenses for fiscal
1998 versus 1997 increased 40 basis points. This increase was due primarily to
the under absorption of fixed expenses resulting from lower sales productivity.

OPERATING PROFIT

                                                        Fiscal Year Ended
                                                 -------------------------------
($ in millions)                                   1999      1998        1997
--------------------------------------------------------------------------------
Operating Profit
Meldisco(1)                                      $133.4    $108.5      $105.0
Footaction(1)                                      29.0      39.4        53.0
General corporate expenses(1)                      (8.5)     (8.9)       (8.5)
Restructuring and asset
  impairment (reversals) charges, net              (4.7)     34.4        15.7
--------------------------------------------------------------------------------
Operating profit                                 $158.6    $104.6      $133.8
================================================================================
Operating profit as a % of net sales                8.4%      5.7%        7.5%
--------------------------------------------------------------------------------
1 Calculated before non-recurring charges
--------------------------------------------------------------------------------

      Operating profit for 1999 increased from 1998 due to improved gross
margins and tight expense control. Meldisco improved operating profit in 1999
through increased gross margin as a result of lower markdowns.

      Fiscal 1998 operating profit decreased from 1997 due primarily to the
$34.4 million non-recurring charges relating to the planned closing of
approximately 30 Footaction stores, reconfiguring merchandise assortments at
Footaction and exiting Meldisco's Central European business. Excluding this
charge, operating profit would have been $139.0 million. Also contributing to
the decrease was the decline in Footaction's operating profit resulting from
gross margin pressure due to the highly promotional environment and higher fixed
expenses, primarily rent, that Footaction could not absorb efficiently due to
the lower sales productivity of the existing space. In 1998, Meldisco improved
operating profit through improved gross margins and effective expense control in
spite of lower same store sales due to unseasonable weather.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $151.1 million, $126.5 million
and $145.4 million for 1999, 1998 and 1997, respectively, and continued to serve
as the Company's primary source of liquidity. During the three years ended
January 1, 2000, cash generated from operations exceeded cash requirements for
capital additions and dividends to Kmart. Additionally, the Company has a credit
agreement that provides for a $300 million unsecured revolving credit facility
(the "Credit Facility") to meet its operating and discretionary spending
requirements.

      The Company's Credit Facility contains various operating covenants which,
among other things, impose certain limitations on the Company's ability to incur
liens, incur indebtedness, merge, consolidate or declare and make dividend
payments. Under the Credit Facility, the Company is required to comply with
financial covenants relating to ratios of debt and fixed charge coverage. The
Credit Facility may be prepaid or retired by the Company without penalty prior
to the maturity date of September 18, 2000. The Credit Facility can be utilized
for direct borrowings and the issuance of letters of credit.

                                                     Fiscal Year Ended
                                        ----------------------------------------
($ in millions)                          1999           1998            1997
--------------------------------------------------------------------------------

Cash flows provided by
  operating activities(1)               $151.1         $126.5          $145.4
Working capital                          151.3          161.9           285.1
Current ratio                            1.66x          1.60x           2.17x
Capital expenditures                      23.1           58.6            59.1
--------------------------------------------------------------------------------
1 Cash flows from operating activities are stated before cash outlays for
  minority interest of $38.1 million, $36.3 million and $35.9 million for the
  fiscal years 1999, 1998 and 1997, respectively.
--------------------------------------------------------------------------------

16   Footstar, Inc. and Subsidiary Companies

<PAGE>

      As of January 1, 2000, there were no loans outstanding under the Credit
Facility.

      During February 2000, the Company received and accepted a commitment from
Fleet National Bank for a 3-year, $350 million revolving credit facility. The
Company expects that the credit facility will become effective in the second
quarter of 2000 (see "Subsequent Events" in the "Notes to the Consolidated
Financial Statements").

      At the end of the year, the Company had $31.8 million in cash and cash
equivalents and it was debt free, in spite of spending $104.6 million for its
share buyback programs during the 1999 fiscal year. At the end of 1999, working
capital declined from 1998 reflecting lower levels of inventory, accounts
receivable and other current assets, as well as lower levels of cash and cash
equivalents as a result of the share repurchases. The Company's 1999 year-end
current ratio increased over 1998 reflecting a decrease in current liabilities
primarily attributable to the decrease in accrued expenses.

      The Company's businesses are seasonal in nature. Peak selling periods
coincide with Christmas, the Easter holiday and the back-to-school season.
Working capital requirements vary with seasonal business volume and inventory
buildups occur prior to peak selling periods. The Company expects that its
current cash, together with cash generated from operations and credit
facilities, will be sufficient to fund its operating expenses, working capital
needs, capital expenditures and projected growth for the foreseeable future. The
Company currently maintains significant borrowing capacity to take advantage of
growth and investment opportunities.

      At the end of 1999, accounts receivable balances decreased over 1998
levels due to a decrease in construction allowances at Footaction as a result of
decreased store openings. The decrease in current liabilities in 1999 versus
1998 was due primarily to the utilization, and where appropriate, reversal of
restructuring reserves.

      The Company spent $23.1 million in capital expenditures in 1999 primarily
relating to its continuing investment in information systems and the opening,
relocating, or remodeling of Footaction stores. The decline of capital
expenditures in 1999 was attributable to the decrease in the number of
Footaction store openings and expansions during 1999 versus 1998.

      For fiscal year 2000, the Company expects capital expenditures to be
approximately $48 million to support the recently completed acquisition of
certain assets of Just For Feet, Inc., information systems infrastructure
projects, e-commerce initiatives and a store kiosk program at Footaction.
Footaction plans to open or convert approximately 30 new stores in 2000.

Year 2000 Update

As described in the Company's public filings with the Securities and Exchange
Commission during 1999, the Company had developed plans to address the possible
exposures related to the impact on its computer systems of the Year 2000. Since
entering the year 2000, the Company has not experienced any significant
disruptions to its business nor is it aware of any significant Year 2000-related
disruptions impacting its third-party suppliers, trading partners and vendors.
The Company will continue to monitor its critical systems over the next several
months but does not anticipate any significant impacts due to Year 2000
exposures from its internal systems as well as from the activities of its
third-party suppliers, trading partners and vendors.

      Costs incurred to achieve Year 2000 readiness were charged to expense as
incurred. Such costs totaled approximately $0.6 million in 1999, excluding
payroll costs of the Company's internal personnel. The total amount expended on
the Project from inception was $1.3 million.


                                   Footstar, Inc. and Subsidiary Companies    17

<PAGE>

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The integrity and objectivity of the financial  statements and related financial
information  in this  report are the  responsibility  of the  management  of the
Company.  The  financial  statements  have  been  prepared  in  conformity  with
generally accepted accounting principles and include,  when necessary,  the best
estimates and judgments of management.

      The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization, and the
accounting records provide a reliable basis for the preparation of the financial
statements. The system of internal accounting controls is continually reviewed
by management and improved and modified as necessary in response to changing
business conditions and recommendations of the Company's internal auditors and
independent auditors.

      The Audit Committee of the Board of Directors, consisting solely of
independent directors, meets periodically with management, internal auditors and
the independent auditors to review matters relating to the Company's financial
reporting, the adequacy of internal accounting controls and the scope and
results of audit work. The internal auditors and independent auditors have free
access to the Audit Committee.

      KPMG LLP, certified public accountants, were engaged to audit the
consolidated financial statements of the Company. Their Independent Auditors'
Report, which is based on an audit made in accordance with generally accepted
auditing standards, expresses an opinion as to the fair presentation of these
financial statements.


/s/ J. M. Robinson
----------------------------------
J. M. ROBINSON
Chairman of the Board, Chief Executive Officer and President


/s/ Carlos E. Alberini
----------------------------------
CARLOS E. ALBERINI
Senior Vice President and Chief Financial Officer
February 8, 2000

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of Footstar, Inc.: We have audited
the accompanying consolidated balance sheets of Footstar, Inc. and Subsidiary
Companies as of January 1, 2000 and January 2, 1999, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
January 1, 2000. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

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

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Footstar,
Inc. and Subsidiary Companies as of January 1, 2000 and January 2, 1999, and the
results of its operations and its cash flows for each of the years in the
three-year period ended January 1, 2000 in conformity with generally accepted
accounting principles.

/s/ KPMG LLP
-----------------------------
KPMG LLP
Short Hills, New Jersey
February 8, 2000

18    Footstar, Inc. and Subsidiary Companies

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                              For the Fiscal Years Ended
                                                                      --------------------------------------------
(dollars in millions, except per share amounts)                       Jan. 1, 2000    Jan. 2, 1999    Jan. 3, 1998
------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>             <C>             <C>
Net sales                                                                 $1,880.0        $1,829.1        $1,794.9
Cost of sales                                                              1,294.5         1,278.0         1,240.8
------------------------------------------------------------------------------------------------------------------
GROSS PROFIT                                                                 585.5           551.1           554.1
Store operating, selling, general and administrative expenses                396.9           386.3           371.1
Depreciation and amortization                                                 34.7            33.5            33.5
Restructuring and asset impairment (reversals) charges, net                   (4.7)           26.7            15.7
------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT                                                             158.6           104.6           133.8
Interest expense (income), net                                                 2.3             0.6            (2.1)
------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
   INCOME TAXES AND MINORITY INTERESTS                                       156.3           104.0           135.9
Provision for income taxes                                                    48.3            32.4            41.3
------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
   MINORITY INTERESTS                                                        108.0            71.6            94.6
Minority interests in net income                                              44.6            38.1            36.0
------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
   DISCONTINUED OPERATIONS                                                    63.4            33.5            58.6
Income on disposal of discontinued operations,
   net of income taxes of  $1.4 and $12.6                                      2.4              --            21.4
------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                $   65.8        $   33.5        $   80.0
------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
   Basic                                                                      21.6            25.2            29.3
==================================================================================================================
   Diluted                                                                    21.9            25.4            29.4
==================================================================================================================
EARNINGS PER SHARE
   Basic:
   Income from continuing operations                                      $   2.94        $   1.33        $   2.00
   Income from discontinued operations                                        0.11              --            0.73
==================================================================================================================
   Net income                                                             $   3.05        $   1.33        $   2.73
------------------------------------------------------------------------------------------------------------------
   Diluted:
   Income from continuing operations                                      $   2.89        $   1.32        $   1.99
   Income from discontinued operations                                        0.11              --            0.73
==================================================================================================================
   Net income                                                             $   3.00        $   1.32        $   2.72
==================================================================================================================
See accompanying notes to consolidated financial statements.
------------------------------------------------------------------------------------------------------------------
</TABLE>


                                    Footstar, Inc. and Subsidiary Companies   19

<PAGE>

CONSOLIDATED BALANCE SHEETS

(in millions, except share amounts)                 Jan. 1, 2000   Jan. 2, 1999
--------------------------------------------------------------------------------
ASSETS
Current assets:
   Cash and cash equivalents                          $  31.8       $  49.1
   Accounts receivable, net                              42.8          52.0
   Inventories                                          271.3         280.2
   Prepaid expenses and other current
     assets                                              34.9          49.4
--------------------------------------------------------------------------------
      Total current assets                              380.8         430.7
Property and equipment, net                             198.7         217.3
Goodwill, deferred charges and other
  noncurrent assets                                      32.7          37.4
--------------------------------------------------------------------------------
      Total assets                                    $ 612.2       $ 685.4
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                   $ 100.5       $ 112.3
   Accrued expenses                                     117.8         143.8
   Income taxes payable                                  11.2          12.7
--------------------------------------------------------------------------------
      Total current liabilities                         229.5         268.8
Other long-term liabilities                              40.5          45.5
Minority interests in subsidiaries                       74.3          67.8
--------------------------------------------------------------------------------
      Total liabilities                               $ 344.3       $ 382.1
================================================================================
Shareholders' equity:
   Common stock $.01 par value: 100,000,000
      shares authorized, 30,634,283 and
      30,591,575 shares issued                        $   0.3       $   0.3
   Additional paid-in capital                           338.6         335.5
   Accumulated other comprehensive income                (0.1)         (0.2)
   Treasury stock: 10,510,300 and 7,068,825
      shares, at cost, respectively                    (305.4)       (200.8)
   Unearned compensation                                 (5.2)         (5.4)
   Retained earnings                                    239.7         173.9
--------------------------------------------------------------------------------
      Total shareholders' equity                        267.9         303.3
--------------------------------------------------------------------------------
      Total liabilities and shareholders' equity      $ 612.2       $ 685.4
================================================================================
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------


20   Footstar, Inc. and Subsidiary Companies

<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                                                              Accumulated
                                                                                                                    Other
                                         Common Stock         Treasury Shares    Additional Unearned              Compre-
                                      ------------------      ---------------       Paid-in  Compen-   Retained   hensive
(in millions, except share amounts)   Shares      Amount      Stock    Amount       Capital   sation   Earnings    Income     Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>      <C>           <C>       <C>        <C>        <C>       <C>      <C>
BALANCE AS OF
   DECEMBER 28, 1996                30,533,883     $0.3            --    $    --    $330.0     $(6.1)     $ 60.4    $(0.4)   $ 384.2
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
   Net income                               --       --            --         --        --        --        80.0       --      80.0
Common stock
   incentive plans                      24,224       --            --         --       3.6       1.0          --       --       4.6
Purchase of treasury shares                 --       --    (2,685,900)     (66.3)       --        --          --       --     (66.3)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF
   JANUARY 3, 1998                  30,558,107     $0.3    (2,685,900)   $ (66.3)   $333.6     $(5.1)     $140.4    $(0.4)  $ 402.5
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
   Net income                               --       --            --         --        --        --        33.5       --      33.5
   Foreign currency
      translation adjustment,
      net of tax                            --       --            --         --        --        --          --      0.2       0.2
                                                                                                                            --------
      Total comprehensive
         income                                                                                                                33.7
Common stock
   incentive plans                      33,468       --            --         --       1.9      (0.3)         --       --       1.6
Purchase of treasury shares                 --       --    (4,382,925)    (134.5)       --        --          --       --    (134.5)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF
   JANUARY 2, 1999                  30,591,575     $0.3    (7,068,825)   $(200.8)   $335.5     $(5.4)     $173.9    $(0.2)  $ 303.3
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
   Net income                               --       --            --         --        --        --        65.8       --      65.8
   Foreign currency
      translation adjustment,
      net of tax                            --       --            --         --        --        --          --      0.1       0.1
                                                                                                                            --------
      Total comprehensive
         income                                                                                                                65.9
Common stock
   incentive plans                      42,708       --            --         --       3.1       0.2          --       --       3.3
Purchase of treasury shares                 --       --    (3,441,475)    (104.6)       --        --          --       --    (104.6)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF
   JANUARY 1, 2000                  30,634,283     $0.3   (10,510,300)   $(305.4)   $338.6     $(5.2)     $239.7    $(0.1)  $ 267.9
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                    Footstar, Inc. and Subsidiary Companies   21

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

(dollars in millions)                                                   Jan. 1, 2000    Jan. 2, 1999    Jan. 3, 1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>             <C>              <C>
Cash flows from operating activities:
   Net income                                                                $  65.8         $  33.5          $ 80.0
Adjustments to reconcile net income to net cash provided by
  operating activities:
   Gain on disposal of discontinued operations                                 (3.8)              --          (34.0)
   Restructuring and asset impairment (reversals) charges, net                 (4.7)            34.4            15.7
   Minority interests in net income                                            44.6             38.1            36.0
   Depreciation and amortization                                               34.7             33.5            33.5
   Loss on disposal of fixed assets                                             2.3              4.6             3.9
   Deferred income taxes                                                       14.5             (2.3)           18.9
   Stock incentive plans                                                        3.1              2.2             1.9
   Changes in operating assets and liabilities:
      Decrease (increase) in accounts receivable, net                           9.2             (8.1)           33.7
      Decrease (increase) in inventories                                        8.8             (3.4)           (2.6)
      Decrease (increase) in prepaid expenses, deferred charges
        and other assets                                                        2.5              1.1            (3.5)
      (Decrease) increase in accounts payable and accrued expenses            (19.8)            13.9           (30.6)
      (Decrease) in federal income taxes payable and other liabilities         (6.1)           (21.0)           (7.5)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                     151.1            126.5           145.4
--------------------------------------------------------------------------------------------------------------------
Cash flows (used in) investing activities:
   Additions to property and equipment                                        (23.1)           (58.6)          (59.1)
   Investment in HoopsTV.com                                                   (3.0)              --              --
--------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities                                       (26.1)           (58.6)          (59.1)
--------------------------------------------------------------------------------------------------------------------
Cash flows (used in) from financing activities:
   Payments on stock incentive plans                                           (0.3)            (0.8)             --
   Dividends paid to minority interests                                       (38.1)           (36.3)          (35.9)
   Proceeds of common stock from minority interest                              0.5              0.8              --
   Treasury stock acquired                                                   (104.6)          (134.5)          (66.3)
   Other                                                                        0.2             (0.2)            3.5
--------------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities                                      (142.3)          (171.0)          (98.7)
--------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                                     (17.3)          (103.1)          (12.4)
Cash and cash equivalents, beginning of year                                   49.1            152.2           164.6
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                      $  31.8          $  49.1          $152.2
====================================================================================================================
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------------------------------------------
</TABLE>

22     Footstar, Inc. and Subsidiary Companies

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in millions, except share and per share amounts)

THE COMPANY

Footstar, Inc. (the "Company") became an independent company in 1996 after the
Board of Directors of Melville Corporation ("Melville") approved the spin-off of
its footwear operations. These businesses are comprised of Meldisco, a leading
operator of leased footwear departments nationwide; Footaction, a mall-based
branded athletic footwear and apparel chain; and Thom McAn, which has been
reported as discontinued operations. The spin-off was completed with the
distribution (the "Distribution") on October 12, 1996, to Melville shareholders
of record on October 2, 1996, of all the shares of the Company. The Distribution
was made on the basis of .2879 shares of the Company's common stock for every
one share of Melville Corporation common stock. A total of 30,533,883 shares of
the Company's common stock was issued and began trading on the New York Stock
Exchange on a when-issued basis on September 25, 1996.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of all
subsidiary companies. The minority interests represent the 49 percent
participation of Kmart Corporation ("Kmart") in the ownership of substantially
all retail subsidiaries of Meldisco formed or to be formed from July 1967 until
July 1, 2012 for the purpose of operating leased shoe departments in Kmart
stores. Interdivisional balances and transactions between the entities have been
eliminated. The accompanying financial statements include the consolidated
results of operations, assets and liabilities of the Company for the 52-week
year ended January 1, 2000, the 52-week year ended January 2, 1999 and the
53-week year ended January 3, 1998. For simplicity of presentation, these
financial statements are referred to as consolidated financial statements
herein.

Basis of Presentation

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of expenses during the reporting period.
Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid instruments with maturities of three
months or less and are stated at cost that approximates their fair market value.
The Company's cash management program utilizes zero balance accounts. Accord-
ingly, all book overdraft balances have been reclassified to current
liabilities.

Inventories

Inventories are finished goods, consisting of merchandise purchased from
domestic and foreign vendors and are carried at the lower of cost or market
value, determined by the retail inventory method on a first-in, first-out (FIFO)
basis.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are computed on a straight-line basis, generally over the
estimated useful lives of the assets or, when applicable, the life of the lease,
whichever is shorter. Capitalized software costs are amortized on a
straight-line basis over their estimated useful lives. Maintenance and repairs
are charged directly to expense as incurred. Major renewals or replacements are
capitalized after making the necessary adjustment on the asset and accumulated
depreciation accounts of the items renewed or replaced.

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to discounted future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by comparing projected
individual store discounted cash flows over the lease term to the asset carrying
values.

Deferred Charges

Deferred charges are amortized on a straight-line basis, generally over the
remaining life of the charge.


                                   Footstar, Inc. and Subsidiary Companies    23

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill

The excess of acquisition costs over the fair value of net assets acquired is
amortized on a straight-line basis over 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
discounted future operating cash flows of the acquired operation. The assessment
of the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.

Revenue Recognition

Revenues from retail sales are recognized at the time of sale.

Store Opening and Closing Costs

New store opening costs are charged to expense as incurred. In the event a store
is closed before its lease has expired, the estimated lease obligation or the
expected amount necessary to eliminate such obligation, less estimated sublease
rental income, is provided for in the year of closing.

Advertising Costs

The Company  charges  production  costs of advertising to expense the first time
the  advertising  takes  place.  Advertising  costs,  as a  component  of  store
operating,  selling,  general and administrative expenses, were $40.9 million in
1999, $40.6 million in 1998 and $39.6 million in 1997.

Income Taxes

In 1996, the Company and Melville entered into a Tax Disaffiliation Agreement.
Under the Agreement, the Company is generally responsible for any of its tax
obligations with respect to periods prior to the spin-off, determined as if on a
separate company basis. For periods subsequent to October 12, 1996, the Company
files its own federal and state tax returns.

      The Company determines its deferred tax provision under the liability
method, whereby deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.

Foreign Currency Translation

The Company translates foreign currency financial statements by translating
balance sheet accounts at the exchange rate as of the balance sheet date and
income statement accounts at the average rate for the year. Adjustments
resulting from the translation of financial statements are reflected as a
component of comprehensive income. Translation gains and losses were
insignificant in all periods.

Postretirement Benefits

The Company provides a defined benefit health care plan for substantially all
retirees who meet certain eligibility requirements, including providing 10 years
of service prior to January 1, 1993. The annual cost of postretirement benefits
is funded as it arises and the cost is recognized over an employee's term of
service to the Company.

Stock-Based Compensation Plans

As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected not to adopt the fair value-based method of accounting for
its stock-based compensation plans, but continues to apply the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25").

Earnings Per Share

In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share," which the Company adopted in fiscal 1997. SFAS
No. 128 replaced the presentation of primary earnings per share (EPS) with basic
EPS. Basic EPS is computed by dividing net income available for common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by net income available to common shareholders
divided by the weighted average shares outstanding after giving effect to the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted.

      The following reconciles shares outstanding at the beginning of the year
to average shares outstanding used to compute basic and diluted earnings per
share.

                                                   1999      1998      1997
--------------------------------------------------------------------------------
Shares outstanding at beginning of year            23.5      27.9      30.5
Weighted average shares repurchased                (2.1)     (2.8)     (1.2)
Contingently issuable shares                        0.2       0.1        --
--------------------------------------------------------------------------------
Average shares outstanding - basic                 21.6      25.2      29.3
Dilutive effect of stock options                    0.3       0.2       0.1
--------------------------------------------------------------------------------
Average shares outstanding - diluted               21.9      25.4      29.4
================================================================================


24   Footstar, Inc. and Subsidiary Companies

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of the fair value of certain financial instruments. Cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses are
reflected in the consolidated financial statements at carrying value, which
approximates fair value due to the short-term nature of these instruments.

Comprehensive Income

On January 4, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the consolidated statements of shareholders'
equity and comprehensive income. The statement requires only additional
disclosures in the notes to the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.

Reclassifications

Certain reclassifications have been made to the consolidated financial
statements of prior years to conform to the 1999 presentation.

RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

The net reversal of charges of $4.7 million  ($2.9 million after taxes) for 1999
includes a $9.9 million ($6.6 million after taxes) reversal of lease obligations
in connection with the 1998 closed store  restructuring  charge,  a $2.9 million
($1.7  million  after taxes)  reversal of  transition  costs related to the 1997
warehouse  and  service  center  consolidation  plan,  partially  offset by $8.1
million ($5.4 million after taxes) for asset  impairment  charges as a result of
the 1999 asset impairment review of Footaction stores.

      The fixed asset and goodwill impairment charge associated with
underperforming Footaction stores of $8.1 million represented the amount
necessary to write-down the carrying values of the fixed assets and goodwill for
the respective stores based on the Company's best estimate as of January 1, 2000
of those stores' future discounted cash flows.

      The asset impairment test was applied to all stores with negative
contribution and cash flows. The amount of the impairment charge was calculated
as the difference between the carrying amount of the assets and each store's
estimated future discounted cash flows. The asset impairment charge was recorded
as a reduction of goodwill and fixed assets, principally representing fixtures
and leasehold improvements.

      During 1998, the Company had approved a restructuring plan that included
the closing of approximately 30 underperforming Footaction stores, the
reconfiguring of Footaction merchandise assortments, the refinement of store
layouts and the exiting of Meldisco's Central European business. These charges
included lease buyouts, inventory markdowns and asset impairment charges
relating to planned store closings and asset impairment charges relating to
other stores.

      In connection with these actions, the Company recorded a one-time, pre-tax
charge of $34.4 million in 1998.

      The following table displays a rollforward of the activity and the
significant components of the restructuring, asset impairment and other charges,
and the reserves remaining as of January 1, 2000 and January 2, 1999:

                                              Remaining               Remaining
                                   Deductions   Jan. 2,   Deductions    Jan. 1,
                        Recorded         1998      1999         1999       2000
--------------------------------------------------------------------------------

Lease obligations
  and fixed asset
  write-offs for
  Footaction store
  closings                 $20.0      $   --     $20.0       $(14.2)      $5.8
Impaired assets,
  principally
  fixtures and
  leasehold
  improvements               6.4        (6.4)       --           --         --
Store footwear and
  apparel inventory
  markdowns                  5.2          --       5.2         (5.2)        --
Europe inventory
  markdown                   2.5          --       2.5         (2.5)        --
Lease obligations and
  fixed asset write-offs
  for Europe closings        0.3          --       0.3         (0.3)        --
--------------------------------------------------------------------------------
                           $34.4       $(6.4)    $28.0       $(22.2)      $5.8
================================================================================

      During 1998, the inventory reduction charge totaling $7.7 million was
recorded in cost of sales while the remaining $26.7 million was recorded in
operating expenses under restructuring and asset impairment charges. Of the
$28.0 million reserve remaining at January 2, 1999, $7.7 million was recorded as
a reserve reducing inventory and $20 million of Footaction lease obligations and
fixed asset write-offs were a component of


                                     Footstar, Inc. and Subsidiary Companies  25
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

accrued expenses. The $0.3 million of Europe lease obligations and fixed asset
write-offs were reserved for in long-term liabilities. The asset impairment
charge of $6.4 million was recorded as a reduction of property and equipment.
The fixed asset write-offs and asset impairments represent principally fixtures
and leasehold improvements.

      In connection with the Footaction store closings, the Company established
a reserve for future lease payments anticipating sublease activity and lease
buyouts based on historical experience. Costs are being charged against the
reserve as incurred. On average, the remaining lease term for the stores to be
closed at the time the charge was taken was approximately five years. Given the
estimated payout term of these reserves, they will be assessed periodically to
determine their adequacy.

      The fixed assets written off could not readily be used at other store
locations nor was there a ready market outside the Company to determine fair
value; the assets are expected to be discarded at the time of closing.
Accordingly, the asset write-off charge recorded represented the carrying value
of the assets at the time of approval for the restructuring plan. Depreciation
for those assets was discontinued. Operating results for the individual stores
were included in operations through the closing dates of the respective stores.

      The deductions to the reserve balance during 1999 included a reversal of
lease obligations previously reserved for totaling $9.9 million, payments of
lease obligations and fixed asset write-offs for closed stores totaling $4.6
million and store inventory markdowns taken totaling $7.7 million.

      During 1999, the Company completed the exit of Meldisco's Central European
business by winding down the business and selling the remaining inventory to an
outside party. Net sales for this business amounted to $4.7 million, $11.5
million and $11.8 million in 1999, 1998 and 1997, respectively. Consolidated net
losses after intercompany eliminations amounted to $0.3 million in 1999, $1.9
million in 1998 and $0.1 million in 1997. The 1998 net loss is before the
non-recurring charge of $2.8 million.

      During November 1997, in support of its long-term strategy, the Company
announced plans to consolidate its logistics networks and centralize certain
accounting functions. In connection with these actions, the Company recorded a
one-time, pre-tax charge of $15.7 million comprised of fixed asset write-offs of
$9.0 million, lease obligations and transition costs of $4.3 million, and
severance and other employee benefits of $2.4 million in 1997. The Company
ceased operating its Dallas distribution center's warehouse in 1998 and
completely exited the distribution center during the first quarter of 1999 as
part of this plan.

      The significant components of the restructuring and asset impairment
charges recorded in the fourth quarter of 1997, and the reserves remaining as of
January 1, 2000, January 2, 1999 and January 3, 1998, were as follows:

                       Remaining               Remaining               Remaining
                         Jan. 3,   Deductions    Jan. 2,   Deductions    Jan. 1,
                            1998         1998       1999         1999       2000
--------------------------------------------------------------------------------
Lease obligations
  and transition costs
  related to warehouse
  and service center        $4.3       $(0.3)       $4.0       $(4.0)       $ --
Severance and other
  employee benefit
  vesting                    2.4        (2.4)         --          --          --
--------------------------------------------------------------------------------
                            $6.7       $(2.7)       $4.0       $(4.0)       $ --
================================================================================

      The deductions to the reserve balance during 1998 included payments of
lease obligations and transition costs totaling $0.3 million and payments of
severance and other employee benefits totaling $2.4 million. The deductions to
the reserve balance during 1999 included both a reversal of lease obligations
and transition costs previously reserved for totaling $2.9 million and payments
of lease obligations and transition costs totaling $1.1 million.

DISCONTINUED OPERATIONS

On June 3, 1996, Melville announced a plan to convert approximately 100 Thom
McAn stores to Footaction stores and to exit the Thom McAn business. This plan
was primarily completed by the end of fiscal 1997. In connection with this plan,
the Company recorded a pre-tax charge of $85.0 million in the first quarter of
1996. Accordingly, the results of operations for the Thom McAn segment have been
classified as discontinued operations for all periods presented in the
consolidated statements of operations.


26   Footstar, Inc. and Subsidiary Companies

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      During 1997 and 1999, the Company reversed $34.0 million ($21.4 million
after taxes) and $3.8 million ($2.4 million after taxes), respectively, of the
$85.0 million ($53.6 million after taxes) reserve created as a result of the
discontinuation of the Thom McAn chain in 1996. The reversal of the discontinued
operations reserve reflected revisions of lease obligations and contingencies
based on the favorable settlement of leases and litigation.

      The remaining discontinued operations reserve of $3.0 million is a
component of accrued expenses and is principally for lease obligations and
environmental contingencies.

ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

                                                             1999       1998
----------------------------------------------------------------------------
Due from licensors, principally Kmart                       $28.5      $28.4
Other                                                        16.7       24.8
----------------------------------------------------------------------------
                                                             45.2       53.2
Less: Allowance for doubtful accounts                         2.4        1.2
----------------------------------------------------------------------------
Total                                                       $42.8      $52.0
============================================================================

PREPAID  EXPENSES AND OTHER CURRENT  ASSETS

Prepaid expenses and other current assets consisted of the following:

                                                             1999       1998
----------------------------------------------------------------------------
Deferred income taxes                                       $21.6      $35.9
Other                                                        13.3       13.5
----------------------------------------------------------------------------
Total                                                       $34.9      $49.4
============================================================================

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

                                 Useful Lives (in years)     1999       1998
----------------------------------------------------------------------------

Land                                                       $  9.9     $  8.9
Buildings and improvements                         10-40      3.6       12.1
Equipment and furniture                             5-10    213.1      211.0
Leasehold improvements                                10     83.3       75.3
----------------------------------------------------------------------------
                                                            309.9      307.3
Less: Accumulated depreciation
  and amortization                                          111.2       90.0
----------------------------------------------------------------------------
Total                                                      $198.7     $217.3
============================================================================

ACCRUED EXPENSES

Accrued expenses consisted of the following:

                                                             1999       1998
----------------------------------------------------------------------------
Rent                                                       $ 36.2     $ 28.1
Taxes other than federal income taxes                        13.0       14.4
Salaries and compensated absences                            16.0       12.0
Reserve for loss on disposal of discontinued operations       3.0        6.0
Capital expenditures                                          1.1        4.7
Restructuring reserve                                         5.8       24.0
Other                                                        42.7       54.6
----------------------------------------------------------------------------
Total                                                      $117.8     $143.8
============================================================================

OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following:

                                                             1999       1998
----------------------------------------------------------------------------
Employee benefit costs                                      $40.5      $40.4
Restructuring reserves                                         --        0.3
Other                                                          --        4.8
----------------------------------------------------------------------------
Total                                                       $40.5      $45.5
============================================================================

LONG-TERM DEBT

The Company maintains a $300 million unsecured revolving Credit Facility to
support general corporate borrowing requirements. As of January 1, 2000 and
January 2, 1999, respectively, there were no loans outstanding under the Credit
Facility. Interest on all borrowings is determined based upon several
alternative rates available under the Credit Facility.

      The Company's Credit Facility contains various operating covenants which,
among other things, impose certain limitations on the Company's ability to incur
liens, incur indebtedness, merge, consolidate or declare and make dividend
payments. Under the Credit Facility, the Company is required to comply with
financial covenants relating to ratios of debt and fixed charge coverage. The
Credit Facility may be prepaid or retired by the Company without penalty prior
to the maturity date of September 18, 2000. On August 3, 1999, the Company
announced an amendment to its Credit Facility that eased a certain restrictive
covenant that had limited its ability to repurchase stock. This amendment gave
the Company the flexibility to complete its fourth share repurchase program of
2,210,000 shares and participate in future share repurchase programs.


                                   Footstar, Inc. and Subsidiary Companies    27

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEASES

The Company and its subsidiaries lease retail stores and warehouse and office
facilities over periods generally ranging from 5 to 10 years. The Company also
leases autos, computer hardware and various equipment for shorter periods.

      Net rental expense for all operating leases for each of the years in the
three-year period ended January 1, 2000 was as follows:

                                                  1999       1998       1997
----------------------------------------------------------------------------
Minimum rentals                                 $ 67.3     $ 61.9     $ 47.9
Contingent rentals                               135.1      124.0      125.3
----------------------------------------------------------------------------
Total                                           $202.4     $185.9     $173.2
============================================================================

      Contingent rent expense represents rentals assessed under the Master
Agreement with Kmart which are principally based on sales. Accordingly, the
future minimum rental payments disclosed below exclude future rents to Kmart.

      At January 1, 2000, the future minimum rental payments under operating
leases, excluding lease obligations for closed stores, were as follows:

                                                             Operating Leases
-----------------------------------------------------------------------------
2000                                                                  $  64.3
2001                                                                     62.1
2002                                                                     59.7
2003                                                                     57.5
2004                                                                     53.5
Thereafter                                                              136.3
-----------------------------------------------------------------------------
Total                                                                  $433.4
=============================================================================

INCOME TAXES

The provision for income taxes was comprised of the following:

                                                  1999       1998       1997
----------------------------------------------------------------------------
Federal                                          $38.2      $25.2      $32.2
State                                             10.1        7.2        9.1
----------------------------------------------------------------------------
Total                                            $48.3      $32.4      $41.3
============================================================================

      The provision for income taxes for continuing operations includes a net
deferred tax charge of $10.2 million for January 1, 2000 and net deferred tax
benefits of $9.4 million and $9.3 million for January 2, 1999 and January 3,
1998, respectively.

      Reconciliations of the effective tax rates to the U.S. statutory income
tax rate are as follows:

                                                  1999       1998       1997
----------------------------------------------------------------------------
Effective tax rate                                30.9%      31.1%      30.4%
State income taxes, net of
  federal tax benefit                             (4.2)      (4.5)      (4.3)
51% owned subsidiaries excluded
  from the parent's consolidated
  federal income tax return                        8.0       11.7        8.6
Other                                              0.3       (3.3)       0.3
----------------------------------------------------------------------------
Statutory federal income tax rate                 35.0%      35.0%      35.0%
============================================================================

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities for the fiscal years were as
follows:

                                                             1999       1998
----------------------------------------------------------------------------

Deferred tax assets:
  Restructuring reserves                                   $  3.5      $12.0
  Inventories                                                 9.9       14.9
  Postretirement benefits                                    12.7       13.4
  Employee benefits                                           9.4        9.9
  Other                                                       5.0        3.6
----------------------------------------------------------------------------
Total deferred tax assets                                    40.5       53.8
----------------------------------------------------------------------------
Deferred tax liabilities:
  Property and equipment                                     14.4       13.6
  Other                                                       3.2        2.8
----------------------------------------------------------------------------
Total deferred tax liabilities                               17.6       16.4
----------------------------------------------------------------------------
Net deferred tax assets                                     $22.9      $37.4
============================================================================

      The Company has recorded $1.3 million and $1.5 million of the net deferred
tax asset as a noncurrent asset at January 1, 2000 and January 2, 1999,
respectively.

      Based on the Company's historical taxable income and projected future
taxable income over the periods in which deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
net deferred tax assets.

STOCK INCENTIVE PLANS

As of October 12, 1996, the Company adopted the 1996 Incentive Compensation Plan
(the  "Plan").  The Plan is  designed to motivate  and reward  officers  and key
employees for outstanding  service,  by providing  awards that are linked to the


28  Footstar, Inc. and Subsidiary Companies

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company's  performance and the creation of shareholder  value. Under the Plan, a
maximum of 3,100,000  shares,  plus 10 percent of the number of any shares newly
issued  by the  Company  (excluding  issuances  under  the  Plan  or  any  other
compensation  or benefit plan of the Company) may be issued in  connection  with
stock options, restricted stock, deferred stock and other stock-based awards.

   Under the Plan, employee stock options may not be awarded with an exercise
price less than fair market value on the date of grant. Generally, options are
exercisable in installments of 20 percent beginning one year from date of grant
and expire ten years after the grant date, provided the optionee continues to be
employed by the Company.

   The  following  table  provides  information  relating  to the status of, and
changes in, employee stock options granted:

                                        1999                        1998
                                -------------------       ----------------------
                                Employee    Average        Employee      Average
                                   Stock     Option           Stock       Option
                                 Options      Price         Options        Price
---------------------------------------------------       ----------------------
Outstanding at
  beginning of year            1,195,580        $26         971,370          $24
Granted                          512,471         26         305,600           31
Cancelled                        (48,150)        28         (52,550)          25
Exercised                        (29,660)        24         (28,840)          22
---------------------------------------------------       ----------------------
Outstanding at end of year     1,630,241        $26       1,195,580          $26
---------------------------------------------------       ----------------------
Exercisable at end of year       486,966                    344,451
================================================================================

      Deferred restricted stock units were granted to certain officers and key
employees. The units vest five years from date of grant, provided the executive
continues to be employed by the Company.

      The following table provides information relating to the status of, and
changes in, deferred restricted stock units:

                                        1999                      1998
                             ----------------------     ------------------------
                                Deferred    Average        Deferred      Average
                              Restricted       Unit      Restricted         Unit
                             Stock Units      Price     Stock Units        Price
---------------------------------------------------     ------------------------

Outstanding at
  beginning of year              171,348        $22         156,297          $21
Granted                           33,776         30          15,051           27
---------------------------------------------------     ------------------------
Outstanding at end of year       205,124        $23         171,348          $22
--------------------------------------------------------------------------------

      The Company recorded $1.0 million and $0.4 million as unearned
compensation in 1999 and 1998, respectively, and has amortized $0.9 million,
$0.7 million and $0.7 million in 1999, 1998 and 1997, respectively.

      The Plan also permits the granting of deferred stock units, representing
rights to receive cash and/or common stock of the Company based upon certain
performance criteria generally over a three-year performance period.
Compensation expense related to grants under these provisions is based on the
current market price of the Company's common stock at the date of grant and the
extent to which performance criteria are being met.

      The following table provides information relating to the status of, and
changes in, these deferred stock units:

                                         1999                        1998
                                -------------------        ---------------------
                                Deferred    Average        Deferred      Average
                                   Stock       Unit           Stock         Unit
                                   Units      Price           Units        Price
---------------------------------------------------        ---------------------

Outstanding at
  beginning of year               27,902        $29              --          $--
Granted                           12,218         25          27,902           29
---------------------------------------------------        ---------------------
Outstanding at end of year        40,120        $28          27,902          $29
--------------------------------------------------------------------------------

      The Company recorded $0.8 million, $2.1 million and $1.1 million as
unearned compensation in 1999, 1998 and 1997, respectively, and amortized $0.7
million, $1.1 million and $1.2 million in 1999, 1998 and 1997, respectively. The
Company paid $0.3 million and $0.8 million in cash relating to the plan in 1999
and 1998, respectively.

      The Plan also offers incentive opportunities based upon performance
results against pre-established earnings targets and other selected measures for
each fiscal year. Plan awards may be paid exclusively in cash or partially in
deferred stock with a matching Footstar grant. The elective deferrals and
matched amounts are deferred for a five-year period. The amount deferred will be
paid in shares.

      The following table provides information relating to the status of, and
changes in, deferred shares:

                                       1999                         1998
                                -------------------        ---------------------
                                            Average                      Average
                                Deferred      Share        Deferred        Share
                                  Shares      Price          Shares        Price
---------------------------------------------------       ----------------------
Outstanding at
  beginning of year              153,014        $28         122,520          $26
Granted                           65,996         25          40,507           29
Cancelled                         (4,777)        27          (3,337)          28
Shares issued                     (9,553)        27          (6,676)          28
---------------------------------------------------       ----------------------
Outstanding at end of year       204,680        $27         153,014          $28
--------------------------------------------------------------------------------


                                   Footstar, Inc. and Subsidiary Companies    29

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Company recorded $0.6 million and $0.4 million as unearned
compensation in 1999 and 1998, respectively, and has amortized $0.2 million,
$0.4 million and $0.2 million in 1999, 1998 and 1997, respectively.

      Shares available for grant under the Plan totaled 940,262 and 1,508,780 as
of January 1, 2000 and January 2, 1999, respectively.

      Effective on the Distribution, the Company adopted the 1996 Non-Employee
Director Stock Plan (the "Director Plan"). A total of 200,000 shares of Company
common stock are reserved and available for issuance under the Director Plan.
Any person who becomes an eligible director receives an initial option to
purchase 2,000 shares of common stock. All options are awarded with an exercise
price equal to the fair market value of the common stock on the date of grant.
Generally, options are exercisable in installments of 20 percent beginning one
year from date of grant and expire ten years after grant date, provided the
non-employee director is still a member of the board.

      The following table provides information relating to the status of, and
changes in, options granted:

                                   1999                 1998
                             ------------------    ----------------
                                        Average             Average
                               Stock     Option      Stock   Option
                             Options      Price    Options    Price
-----------------------------------------------    ----------------
Outstanding at
  beginning of year           14,000        $24     12,000      $21
Granted                           --         --      2,000       44
-----------------------------------------------    ----------------
Outstanding at end of year    14,000        $24     14,000      $24
-----------------------------------------------    ----------------
Options exercisable
  at end of year               7,200                 4,400
-------------------------------------------------------------------

      The Director Plan also provides for automatic grants of 2,000 stock units
("Stock Units") to each non-employee director on the date of each annual meeting
of the Company's shareholders. Each Stock Unit represents the right to receive
one share of Company common stock at the end of a specified period. Fifty
percent of such Stock Units vest six months and a day after the grant date,
provided the non-employee director has not ceased to serve as a director for any
reason other than death, disability or retirement. The remaining fifty percent
of such Stock Units will be paid upon the later of ceasing to be a director or
attaining age 65, provided that settlement of such Stock Units shall be
accelerated in the event of death, disability or a change in control.

      The following table provides information relating to the status of, and
changes in, stock units:

                                    1999                1998
                               ---------------    -----------------
                                       Average              Average
                               Stock      Unit      Stock      Unit
                               Units     Price      Units     Price
----------------------------------------------     ----------------
Outstanding at
  beginning of year           28,000       $30     18,000       $22
Granted                       12,000        35     12,000        44
Shares issued                 (6,000)       34     (2,000)       44
----------------------------------------------     ----------------
Outstanding at end of year    34,000       $31     28,000       $30
-------------------------------------------------------------------

      Shares available for grant under the Director's Plan totaled 131,426 and
146,525 as of January 1, 2000 and January 2, 1999, respectively.

      The Company applies APB No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock and
performance-based awards. Had compensation cost for the Company's other stock
option plans been determined based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under SFAS
No. 123, the Company's net income and earnings per share would have been as
follows:

                                                    1999     1998
-----------------------------------------------------------------
Net income:
  Reported                                         $65.8    $33.5
  As adjusted for SFAS 123                          61.3     30.2
-----------------------------------------------------------------
Earnings per share:
  Basic:
   Reported                                        $3.05    $1.33
   As adjusted for SFAS 123                         2.84     1.20
  Diluted:
   Reported                                         3.00     1.32
   As adjusted for SFAS 123                         2.80     1.19
-----------------------------------------------------------------


30  Footstar, Inc. and Subsidiary Companies

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The fair value of options granted during 1999, 1998 and 1997 was $12.55,
$13.87 and $12.96 respectively. The fair value of each option granted was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:

                                          1999     1998      1997
-----------------------------------------------------------------
Expected volatility                      40.0%    35.0%     35.0%
Expected life in years                    6.0      6.0       6.1
Risk-free interest rate                   5.4%     5.5%      5.6%
Assumed forfeiture rate                   0.0%     0.0%      0.0%
-----------------------------------------------------------------

      During 1997, the Company adopted an Associate Stock Purchase Plan to
provide substantially all employees who have completed one year of service an
opportunity to purchase shares of its common stock through payroll deductions,
up to 10 percent of eligible compensation. Quarterly, participant account
balances are used to purchase shares of stock at 85 percent of the lower of the
fair market value of the shares at the beginning of the offering period or the
purchase date. A total of 1,600,000 shares are available for purchase under the
plan. There were 82,185, 56,199 and 19,486 shares purchased under this plan in
fiscal 1999, 1998 and 1997, respectively.

TREASURY STOCK

From May 1997 until the end of fiscal year 1999, the Company's Board of
Directors has authorized four stock repurchase programs of approximately
3,050,000, 3,000,000, 2,450,000 and 2,210,000 shares. As of January 1, 2000, an
aggregate of 10,510,300 shares for an aggregate purchase amount of $305.4
million, or 34 percent of the total common stock outstanding prior to the
repurchase programs, have been repurchased in the open market. The treasury
shares may be used for the exercise of employee stock options and for other
corporate purposes. The following table shows a rollforward of the common stock
repurchased during the two years ended January 1, 2000:

                                     Common   Average   Aggregate
                                      Stock  Purchase    Purchase
                                Repurchased     Price      Amount
-----------------------------------------------------------------

Total shares repurchased
  at January 3, 1998              2,685,900    $24.68      $ 66.3
-----------------------------------------------------------------
1998 Activity:
  Program 1                         364,100     27.24         9.9
  Program 2                       3,000,000     34.32       103.0
  Program 3                       1,018,825     21.24        21.6
-----------------------------------------------------------------
Total 1998 Activity               4,382,925     30.69       134.5
-----------------------------------------------------------------
Total shares repurchased
  at January 2, 1999              7,068,825    $28.41      $200.8
-----------------------------------------------------------------
1999 Activity:
  Program 3                       1,431,175     24.42        35.0
  Program 4                       2,010,300     34.63        69.6
-----------------------------------------------------------------
Total 1999 Activity               3,441,475     30.38       104.6
-----------------------------------------------------------------
Total shares repurchased
  at January 1, 2000             10,510,300    $29.05      $305.4
-----------------------------------------------------------------

401(K) PROFIT SHARING PLAN

The Company has a qualified 401(k) Profit Sharing Plan available to full-time
employees who meet the plan's eligibility requirements. This plan, which is also
a defined contribution plan, contains a profit sharing component, with
tax-deferred contributions to each employee based on certain performance
criteria, and also permits employees to make contributions up to the maximum
limits allowed by the Internal Revenue Code Section 401(d). Under the 401(k)
profit sharing component, the Company matches a portion of the employee's
contribution under a pre-determined formula based on the level of contribution
and years of vesting service.

      Contributions to the plan by the Company for both profit sharing and
matching of employee contributions were approximately $2.8 million, $2.6 million
and $3.3 million for the fiscal years 1999, 1998 and 1997, respectively.

POSTRETIREMENT BENEFITS

On January 4, 1998, the Company adopted SFAS No. 132, "Employer's Disclosure
about Pension and Other Postretirement Benefits." SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the method of accounting for such plans.


                                   Footstar, Inc. and Subsidiary Companies    31

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Company provides postretirement health benefits for retirees who meet
certain eligibility requirements.

The following table represents the Company's change in benefit obligations:

                                                                   1999     1998
--------------------------------------------------------------------------------

Change in benefit obligation
Benefit obligation at beginning of year                          $17.8    $24.3
Service cost                                                       0.3      0.2
Interest cost                                                      1.2      1.4
Amendments                                                        (1.0)    (4.1)
Actuarial loss/(gain)                                              0.1     (2.4)
Net benefits paid (net of participant contributions)              (1.0)    (1.6)
-------------------------------------------------------------------------------
Benefit obligation at end of year                                $17.4    $17.8
Unrecognized net actuarial gain                                    6.4      6.8
Unrecognized prior service cost                                    9.4      9.4
--------------------------------------------------------------------------------
Accrued benefit cost                                             $33.2    $34.0
===============================================================================

                                                                 1999      1998
--------------------------------------------------------------------------------

Weighted-average assumptions as of December 31
Discount rate                                                      7.5%    6.75%
--------------------------------------------------------------------------------

      For measurement purposes, a 9.0 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.0 percent for 2007 and remain at that level
thereafter.

                                                                 1999       1998
--------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost                                                     $ 0.3    $ 0.2
Interest cost                                                      1.2      1.4
Amortization of prior service cost                                (1.0)    (0.5)
Recognized net actuarial gain                                     (0.3)    (0.4)
--------------------------------------------------------------------------------
Net periodic benefit cost                                        $ 0.2    $ 0.7
================================================================================

      Assumed  health  care cost trend  rates have a  significant  effect on the
amounts  reported for the health care plans.  A  one-percentage  point change in
assumed health care cost trend rates would have the following effects:

                                                1-Percentage     1-Percentage
                                              Point Increase   Point Decrease
------------------------------------------------------------------------------

Effect on total of service and
  interest cost components                               0.2             (0.2)
Effect on postretirement benefit obligation              2.1             (1.8)
------------------------------------------------------------------------------

MELDISCO'S RELATIONSHIP WITH KMART

For the fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998,
Meldisco's Kmart operations represented 98.0 percent, 96.9 percent and 96.2
percent of Meldisco's net sales, respectively. These operations represented 64.5
percent, 62.3 percent and 63.6 percent, respectively, of the Company's
consolidated net sales during the same periods. The business relationship
between Meldisco and Kmart is very significant to the Company, and the loss of
Meldisco's Kmart operations would have a material adverse effect on the Company.

      The Company's arrangement with Kmart is governed by a Master Agreement
effective as of July 1, 1995 and amended as of March 25, 1996. The Master
Agreement provides the Company with the non-transferable exclusive right and
license to operate a footwear department in each applicable Kmart store. The
initial term of the Master Agreement expires July 1, 2012 and is renewable
thereafter for 15-year terms, unless terminated earlier as provided in the
Master Agreement.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The Company has an unfunded Supplemental Executive Retirement Plan ("SERP").
Expense related to the SERP was $1.1 million, $0.9 million and $0.6 million in
fiscal years 1999, 1998 and 1997, respectively.

COMMITMENTS AND CONTINGENCIES

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.

SHAREHOLDER RIGHTS PLAN

On March 9, 1999, the Company's Board of Directors approved the adoption of a
Shareholder Rights Plan. Under this plan, Preferred Stock Purchase "Rights" will
be distributed as a dividend to shareholders at the rate of one Right for each
share of common stock outstanding. Initially, the Rights are not exercisable.
Upon a "trigger event," each Right entitles its holder (other than the holder
who caused the trigger event) to purchase at an "Exercise Price" of $100 the
equivalent of that number of shares of common stock of the Company worth twice
the Exercise Price.


32  Footstar, Inc. and Subsidiary Companies

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Rights will be exercisable only if a person or group that is not
currently a 15 percent shareholder acquires beneficial ownership of 15 percent
or more of the Company's common stock. The Rights will not be triggered by a
"Qualifying Offer" that provides that all shareholders will receive the same
"fair" consideration and is for all outstanding shares not owned by the offerer,
among other things. In addition, stock repurchases by the Company do not
constitute a trigger event under any circumstances. Shareholders who owned more
than 15 percent of the stock at the time the plan was implemented or increase
their ownership percentage as a result of the Company's share repurchases are
"grandfathered" under this plan as long as they do not purchase additional
shares.

      The Company will be entitled to redeem the Rights at a price of $0.01 per
Right at any time prior to the earlier of the trigger or expiration of the
Rights.

SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for income taxes and interest for the three years ended January 1,
2000, January 2, 1999 and January 3, 1998 were as follows:

                                          1999     1998      1997
-----------------------------------------------------------------

Income taxes                             $37.8    $43.6     $32.4
Interest                                 $ 3.6    $ 3.2     $ 1.8
-----------------------------------------------------------------

MARKET INFORMATION

The Company's  common stock is listed on the New York Stock  Exchange  under the
trading symbol "FTS." Information  concerning the 1999 and 1998 market prices of
the Company's common stock is set forth in the table below:

                                       Stock Trading Price
                               -----------------------------------
                                    1999               1998
                               --------------     ----------------
Quarter                          High     Low       High       Low
----------------------------------------------    ----------------
First                          $32.63   $23.19    $38.00    $25.13
Second                          41.00    29.81     48.63     37.50
Third                           39.19    31.94     48.13     22.69
Fourth                          36.13    26.63     29.75     19.31
------------------------------------------------------------------

      As of January 1, 2000, the closing price of the Company's stock was
$30.50. As of year-end 1999, there were 3,691 shareholders of record.

SUBSEQUENT EVENTS - UNAUDITED

Just For Feet Acquisition

On March 7, 2000, the Company announced the completion of its acquisition of
certain assets of Just For Feet, Inc. The total cash consideration paid was
$66.8 million and is subject to further post closing adjustments. The Company
acquired the Just For Feet(R) name, 79 superstores, 23 specialty retail stores,
the Internet business and the corporate headquarters building in a transaction
to be accounted for as a purchase.

Credit Facility Commitment

During February 2000, the Company received and accepted a commitment from Fleet
National Bank for a 3-year, $350 million revolving credit facility. The Company
is currently negotiating the structure and terms of the facility but expects it
to contain alternative borrowing options for committed loans, including LIBOR
loans and competitive bid loans. The Company expects that the credit facility
will become effective in the second quarter of 2000.

Fifth Stock Repurchase Program

During January 2000, the Company completed its fourth stock repurchase program.
On February 13, 2000, the Board of Directors authorized the Company's fifth
stock repurchase program enabling the Company to purchase from time to time in
the open market up to 10% of the shares of common stock outstanding, or
approximately 2.0 million shares.

2000 Equity Incentive Plan

On March 16, 2000, the Board of Directors adopted the 2000 Equity Incentive Plan
(the "Incentive Plan"). The Incentive Plan is intended to attract, retain, and
reward high-quality employees, providing awards that are linked to the Company's
stock performance. The Incentive Plan is designed to qualify as a "broad based
plan" under Rule 312 of the listing rules of the New York Stock Exchange. Under
the Incentive Plan, a maximum of 2 million shares may be issued in connection
with stock options, restricted stock, deferred stock and other stock-based
awards.


                                   Footstar, Inc. and Subsidiary Companies    33

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENT INFORMATION

The Company is a retailer conducting business through retail stores in two
business segments: Meldisco in discount footwear and Footaction in branded
athletic footwear and apparel. Information about operations for each of these
segments is summarized as follows:

<TABLE>
<CAPTION>
                                                                                       1999              1998              1997
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>               <C>               <C>
MELDISCO:

Net sales                                                                          $1,236.7          $1,174.8          $1,187.2
Operating profit (2),(3)                                                              133.4             105.7             105.0
Identifiable assets at year-end                                                       319.7             330.3             342.5
Depreciation and amortization                                                          14.0              13.8              13.5
Additions to property and equipment                                                     6.3              11.3               7.9

FOOTACTION:

Net sales                                                                             643.3             654.3             607.7
Operating profit (1),(2),(3)                                                           32.3               7.8              41.2
Identifiable assets at year-end                                                       238.5             298.1             275.0
Depreciation and amortization                                                          20.5              19.6              19.5
Additions to property and equipment                                                     8.6              42.0              44.3

CORPORATE:

General corporate expense (1),(2),(3)                                                  (7.1)             (8.9)            (12.4)
Identifiable assets at year-end                                                        46.1              46.6             139.3
Depreciation and amortization                                                           0.2               0.1               0.5
Additions to property and equipment                                                     8.2               5.3               6.9

CONSOLIDATED:

Net sales                                                                           1,880.0           1,829.1           1,794.9
Operating profit (1),(2),(3)                                                          158.6             104.6             133.8
Interest expense (income), net                                                          2.3               0.6              (2.1)
-------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority interests                                $  156.3          $  104.0          $  135.9
===============================================================================================================================
Identifiable assets at year-end                                                       604.3             675.0             756.8
Assets of discontinued operations                                                       7.9              10.4              14.2
-------------------------------------------------------------------------------------------------------------------------------
Total assets at year-end                                                           $  612.2          $  685.4          $  771.0
===============================================================================================================================
Depreciation and amortization                                                          34.7              33.5              33.5
Total additions to property and equipment                                          $   23.1          $   58.6          $   59.1
===============================================================================================================================
</TABLE>

Operating profit is defined as total revenues less operating expenses.
Identifiable assets include those assets directly related to each segment's
operations.

(1)   1999 includes special charges recorded in connection with the Company's
      restructuring and other one-time charges. Excluding these charges,
      operating profit for the fiscal year-ended 1999 would have been $29.0
      million for Footaction, ($8.5) million for Corporate and $153.9 million
      for the consolidated Company.

(2)   1998 includes special charges recorded in connection with the Company's
      restructuring and other one-time charges. Excluding these charges,
      operating profit for the fiscal year-ended 1998 would have been $108.5
      million for Meldisco, $39.4 million for Footaction, ($8.9) million for
      Corporate and $139.0 million for the consolidated Company.

(3)   1997 includes special charges recorded in connection with the Company's
      restructuring. Excluding these charges, operating profit for the fiscal
      year-ended 1997 would have been $105.0 million for Meldisco, $53.0 million
      for Footaction, ($8.5) million for Corporate and $149.5 million for the
      consolidated Company.

--------------------------------------------------------------------------------
34  Footstar, Inc. and Subsidiary Companies

<PAGE>

SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

Summary data for the years ended January 1, 2000 and January 2, 1999 is as
follows:

<TABLE>
<CAPTION>
                                                       1st Quarter    2nd Quarter     3rd Quarter     4th Quarter(1)         Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>              <C>               <C>          <C>
NET SALES
1999                                                        $439.1        $ 479.0          $470.2            $491.7       $1,880.0
1998                                                         400.9          462.6           472.6             493.0        1,829.1
----------------------------------------------------------------------------------------------------------------------------------

GROSS PROFIT
1999                                                        $124.2        $ 157.7          $147.9            $155.7       $  585.5
1998                                                         114.7          149.7           145.9             140.8          551.1
----------------------------------------------------------------------------------------------------------------------------------

INCOME FROM CONTINUING OPERATIONS
1999                                                        $  8.5        $  18.5          $ 18.0            $ 18.4       $   63.4
1998                                                           5.3           17.4            18.4              (7.6)          33.5
----------------------------------------------------------------------------------------------------------------------------------

NET INCOME
1999                                                        $  8.5        $  18.5          $ 18.0            $ 20.8       $   65.8
1998                                                           5.3           17.4            18.4              (7.6)          33.5
----------------------------------------------------------------------------------------------------------------------------------

EARNINGS PER SHARE (2)
1999 Basic
   Continuing operations                                    $  0.38       $  0.84         $  0.85           $  0.89      $    2.94
   Discontinued operations                                       --            --              --              0.12           0.11
   Net income                                                  0.38          0.84            0.85              1.01           3.05
1999 Diluted
   Continuing operations                                    $  0.38        $ 0.83         $  0.83           $  0.88      $    2.89
   Discontinued operations                                       --            --              --              0.11           0.11
   Net income                                                  0.38          0.83            0.83              0.99           3.00
1998 Basic
   Continuing operations                                    $  0.20       $  0.71         $  0.75            $(0.31)     $    1.33
   Discontinued operations                                       --            --              --                --             --
   Net income                                                  0.20          0.71            0.75             (0.31)          1.33
1998 Diluted
   Continuing operations                                    $  0.20        $ 0.69         $  0.74           $ (0.31)     $    1.32
   Discontinued operations                                       --            --              --                --             --
   Net income                                                  0.20          0.69            0.74             (0.31)          1.32
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   In 1999, the Company reversed restructuring and asset impairment charges
      of $4.7 million, net relating to both the reversal of lease obligations in
      connection with the 1998 closed store restructuring charge and the
      reversal of transition costs related to the 1997 warehouse and service
      center consolidation plan, partially offset by asset impairment charges as
      a result of the 1999 asset impairment review of Footaction stores. In the
      fourth quarter of 1998, the Company had announced plans to close
      approximately 30 underperforming Footaction stores, reconfigure Footaction
      merchandise assortments, refine store layouts and exit Meldisco's Central
      European business. In connection with these actions, the Company recorded
      a pre-tax charge of $34.4 million.

(2)   Computations for each quarter or other period are independent. Earnings
      per share data would neither be restated retroactively nor adjusted
      currently to obtain quarterly (or other period) amounts to equal the
      amount computed for the year to date due to fluctuations in stock price
      and the application of the treasury stock method for determining the
      dilutive effect of stock options.

--------------------------------------------------------------------------------
                                   Footstar, Inc. and Subsidiary Companies    35

<PAGE>

FIVE-YEAR HISTORICAL FINANCIAL SUMMARY

<TABLE>
<CAPTION>
($ in millions)                                                           1999         1998        1997         1996         1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>         <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA

Net sales                                                             $1,880.0     $1,829.1    $1,794.9     $1,672.3     $1,615.2
Cost of sales                                                          1,294.5      1,278.0     1,240.8      1,144.7      1,124.5
---------------------------------------------------------------------------------------------------------------------------------
Gross profit                                                             585.5        551.1       554.1        527.6        490.7
Store operating, selling, general and
   administrative expenses                                               396.9        386.3       371.1        355.5        343.0
Depreciation and amortization                                             34.7         33.5        33.5         24.8         20.0
Restructuring and asset impairment charges                                (4.7)        26.7        15.7           --         23.7
---------------------------------------------------------------------------------------------------------------------------------
Operating profit(1)                                                      158.6        104.6       133.8        147.3        104.0
Interest expense (income), net                                             2.3          0.6        (2.1)       (14.4)       (21.1)
Provision for income taxes                                                48.3         32.4        41.3         54.6         37.3
Minority interests in net income                                          44.6         38.1        36.0         36.0         38.4
Earnings (loss) from discontinued operations, net(2)                       2.4           --        21.4        (52.8)       (26.8)
Cumulative effect of changes in accounting principle, net(3)                --           --          --           --         (3.9)
---------------------------------------------------------------------------------------------------------------------------------
Net income                                                            $   65.8     $   33.5    $   80.0     $   18.3     $   18.7
=================================================================================================================================

BALANCE SHEET DATA

Current assets:
Cash and cash equivalents                                             $   31.8     $   49.1    $  152.2     $  164.6     $   26.3
Due from parent and other divisions                                         --           --          --           --        710.8
Inventories                                                              271.3        280.2       284.5        281.9        298.1
Other                                                                     77.7        101.4        92.3        137.6         94.6
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Total current assets                                                     380.8        430.7       529.0        584.1      1,129.8
Property and equipment, net                                              198.7        217.3       201.9        197.0        195.1
Other assets                                                              32.7         37.4        40.1         44.9         63.3
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Total assets                                                             612.2        685.4       771.0        826.0      1,388.2
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Current liabilities                                                      229.5        268.8       243.9        324.7        219.0
Other liabilities                                                         40.5         45.5        59.5         52.1         61.6
Minority interests in subsidiaries                                        74.3         67.8        65.1         65.0         93.8
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Total liabilities                                                        344.3        382.1       368.5        441.8        374.4
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Divisional equity investment                                                --           --          --           --      1,013.8
Shareholders' equity                                                     267.9        303.3       402.5        384.2       --
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Total liabilities and equity                                          $  612.2     $  685.4    $  771.0     $  826.0     $1,388.2
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</TABLE>


(1)   Amounts in 1999, 1998, 1997 and 1995 reflect certain non-recurring special
      charges. Operating profit in 1999, 1998, 1997 and 1995, excluding the
      effect of these charges would have been $153.9 million, $139.0 million,
      $149.5 million and $139.3 million, respectively. See "Management's
      Discussion and Analysis."

(2)   The Company recorded a pre-tax charge of $85.0 million in the first
      quarter of 1996 for the discontinuation of Thom McAn. The Company reversed
      $3.8 million ($2.4 million after taxes) and $34.0 million ($21.4 million
      after taxes) of this pre-tax charge in 1999 and 1997, respectively.

(3)   The charge in 1995 was for the write-off, effective January 1, 1995, of
      internally developed software costs that had previously been capitalized.

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