FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended     September 28, 1996


Commission File Number   1-11681

                                 FOOTSTAR, INC.
             (Exact Name of registrant as specified in its charter)

            Delaware                                  22-3439443
(State or other Jurisdiction of          (I.R.S. Employer Identification Number)
 Incorporation or Organization)      


                933 MacArthur Boulevard, Mahwah, New Jersey 07430
               (Address of principal executive offices) (Zip Code)

                                 (201) 934-2000
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                             Yes X       No _____

Number of shares outstanding of the issuer's Common Stock:

               Class                       Outstanding as of October 14, 1996
               -----                       ----------------------------------

   Common Stock, $.01 par value                        30,533,883


<PAGE>

                                      INDEX
                                      -----

                                                                     Page No.
                                                                     --------

Part I. - Financial Information

     Consolidated Condensed Statements of Operations -
           Third Quarter and Nine Months Ended 
           September 28, 1996 and September 30, 1995                    3

     Consolidated Condensed Balance Sheets -
           September 28, 1996, December 31, 1995, 
           and September 30, 1995                                       4

     Consolidated Condensed Statements of Cash Flows -
           Nine Months Ended September 28, 1996 
           and September 30, 1995                                       5

     Notes to Consolidated Condensed Financial Statements               6 - 9

     Management's Discussion and Analysis of
           Financial Condition and Results of Operations                10 - 13

     Review by Independent Auditors                                     14
 
     Exhibit 1 - Independent Auditors' Review Report                    15

Part II. - Other Information

     Item 6 - Exhibits and Reports on Form 8-K                          16

 
                                      2

<PAGE>

                    FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                                 ($ in millions)

<TABLE>
<CAPTION>
                                                                Third Quarter Ended                    Nine Months Ended     
                                                             ----------------------------        ---------------------------     
                                                             Sept. 28,          Sept. 30,        Sept. 28,         Sept. 30,  
                                                               1996               1995             1996               1995
                                                             ---------          ---------        ---------         ---------  
                                                                                                               
<S>                                                          <C>               <C>               <C>                <C>      
Net sales                                                    $  432.7          $  412.4          $ 1,188.6          $ 1,160.0
                                                                                                               
Cost of sales                                                   297.6             287.1              821.8              814.5
                                                             --------          --------          ---------          ---------
    Gross profit                                                135.1             125.3              366.8              345.5
                                                                                                               
Store operating, selling, general                                                                              
   and administrative expenses                                   92.8              86.4              263.4              246.1
                                                                                                               
Depreciation and amortization                                     6.7               6.2               18.3               16.9
                                                             --------          --------          ---------          ---------
    Operating profit                                             35.6              32.7               85.1               82.5
                                                                                                               
Interest income, net                                              4.7               5.0               14.0               15.7
                                                             --------          --------          ---------          ---------
    Income  from  continuing   operations                                                                      
      before  income  taxes,   minority                                                                        
      interests and cumulative effect of                                                                       
      change in accounting principle                             40.3              37.7               99.1               98.2

Provision for income taxes                                       13.7              12.9               32.5               31.1
                                                             --------          --------          ---------          ---------
    Income  from  continuing   operations                                                                      
      before  minority   interests  and                                                                        
      cumulative effect of change in                                                                           
      accounting principle                                       26.6              24.8               66.6               67.1
                                                                                                               
Minority interests in net income                                  7.6               6.9               19.3               23.0
                                                             --------          --------          ---------          ---------
    Income from continuing operations before                                                                   
      cumulative effect of change in                                                                           
      accounting principle                                       19.0              17.9               47.3               44.1
                                                                                                               
Income (loss) from discontinued operations,                                                                    
  net of income taxes of                                                                                       
  $0.5, ($30.3) and ($1.2)                                        --                0.4              (52.8)              (2.9)   
                                                             --------          --------          ---------          ---------
    Income (loss) before cumulative effect                                                                     
      of change in accounting principle                          19.0              18.3                5.5               41.2
                                                                                                               
Cumulative effect of change in                                                                                 
  accounting principle, net                                       --                --                 --                (3.9) 
                                                             --------          --------          ---------          ---------
    Net income (loss)                                        $   19.0          $   18.3          $    (5.5)         $    37.3
                                                             ========          ========          =========          =========
</TABLE>
     
                           
     See accompanying notes to consolidated condensed financial statements.

 
                                      3

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                 ($ in millions)
<TABLE>
<CAPTION>

                                                                                September 28,      December 31,      September 30, 
                                                                                     1996              1995              1995
                                                                                 (Unaudited)        (Audited)         (Unaudited)
                                                                                -------------      ------------     --------------
ASSETS
Current Assets:

<S>                                                                              <C>              <C>                 <C>       
     Cash and cash equivalents                                                   $     24.2        $     26.3         $     14.6
                                                                                                                   
     Accounts receivable (net of allowance for                                                                     
       doubtful accounts of $1.1 at September 28, 1996,                                                            
       $1.0 at December 31, 1995 and $0.6 at                                                                       
       September 30, 1995)                                                             58.6              56.1               56.5
                                                                                                                   
     Due from parent and other divisions                                              677.6             710.8              618.6
                                                                                                                   
     Inventories                                                                      332.8             282.6              368.4
                                                                                                                   
     Prepaid expenses and other current assets                                         51.0              38.5               27.9
                                                                                 ----------        ----------         ----------
        Total current assets                                                        1,144.2           1,114.3            1,086.0
                                                                                 ----------        ----------         ----------
                                                                                                                   
Property and equipment, at cost                                                       254.9             320.3              310.9
Less:   accumulated depreciation and amortization                                      70.5             125.2              125.2
                                                                                 ----------        ----------         ----------
Net property and equipment                                                            184.4             195.1              185.7
                                                                                                                   
Goodwill (net of accumulated amortization                                                                          
  of $4.0 at September 28, 1996,                                                                                   
  $3.4 at December 31, 1995 and                                                                                    
  $3.3 at September 30, 1995)                                                          29.0              29.6               32.2
                                                                                                                   
Deferred charges and other non-current assets                                          22.5              33.7               15.7
                                                                                 ----------        ----------         ----------
        Total assets                                                             $  1,380.1        $  1,372.7         $  1,319.6
                                                                                 ----------        ----------         ----------
                                                                                                                   
LIABILITIES & DIVISIONAL EQUITY                                                                                    
                                                                                                                   
Current Liabilities:                                                                                               
                                                                                                                   
     Accounts payable                                                            $     76.8        $     59.6         $     50.4

     Accrued expenses                                                                 184.2             143.9               91.3
                                                                                 ----------        ----------         ----------
        Total current liabilities                                                     261.0             203.5              141.7
                                                                                 ----------        ----------         ----------
Long-term debt                                                                          0.2               0.2                0.2

Other long-term liabilities                                                            61.0              61.4               58.9

Minority interests in subsidiaries                                                     49.5              93.8               79.5

Divisional equity                                                                   1,008.4           1,013.8            1,039.3
                                                                                 ----------        ----------         ----------
        Total liabilities and divisional equity                                  $  1,380.1        $  1,372.7         $  1,319.6
                                                                                 ==========        ==========         ==========
</TABLE>

                                                                       
     See accompanying notes to consolidated condensed financial statements.

                                        4

<PAGE>

                    FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 ($ in millions)

                                                         Nine Months Ended
                                                    ---------------------------
                                                    September 28,  September 30,
                                                        1996           1995
                                                     ----------     ----------
Net cash provided by operating activities            $     79.1     $     32.1
                                                     ----------     ----------
Cash flows from investing activities:                               
  Additions to property and equipment                     (36.6)         (54.4)
  Acquisitions, net of cash acquired                       --             (1.5)
  Proceeds from sale or disposal of assets                  3.4           --
                                                     ----------     ----------
  Net cash used in investing activities                   (33.2)         (55.9)
                                                     ----------     ----------
Cash flows from financing activities:                               
  Dividends paid to parent                                 --            (25.9)
  Dividends paid to minority interests                    (63.8)         (52.2)
  Decrease in book overdrafts                             (17.4)          (1.2)
  Decrease in due from parent and other divisions          33.2          109.1
  Recapitalization of subsidiaries by parent               --             (4.4)
  Other                                                    --             (0.9)
                                                     ----------     ----------
  Net cash (used in) provided by financing 
     activities                                           (48.0)          24.5
                                                     ----------     ----------
Net (decrease) increase in cash and cash equivalents       (2.1)           0.7
Cash and cash equivalents at beginning of period           26.3           13.9
                                                     ----------     ----------
Cash and cash equivalents at end of period           $     24.2     $     14.6
                                                     ==========     ==========
                                                                    
     See accompanying notes to consolidated condensed financial statements.

                                       5
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)
                     ($ in millions, except per share data)

1.   Basis of Presentation

     In the opinion of Footstar, Inc. (the "Company"), the accompanying
     unaudited consolidated condensed financial statements contain all
     adjustments (consisting of only normal recurring accruals) necessary to
     present fairly the financial position of the Company as of September 28,
     1996 and September 30, 1995 and the results of operations for the three and
     nine-month periods then ended and cash flows for the same nine-month
     periods then ended. The preparation of 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 at the date of the financial statements and the reported
     amounts of revenues and expenses during the reporting period. Actual
     results could differ from those estimates. Because of the seasonality of
     the specialty retailing business, operating results of the Company on a
     quarterly basis may not be indicative of operating results for the full
     year. The consolidated condensed financial statements of the Company should
     be read in conjunction with the financial statements of the Company
     included in its Form 10 Registration Statement that became effective on
     September 26, 1996.

2.   Spin-off

     On October 24, 1995 Melville Corporation announced its intention to
     spin-off its footwear businesses. 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.
     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.

3.   Earnings per Share

     As of September 28, 1996, Footstar, Inc. was part of Melville Corporation
     which reported results on a consolidated basis. Therefore, earnings per
     share for the historical results have not been calculated for the Company.
     (See Note 5 with respect to pro forma earnings per share data.)

4.   Supplemental Cash Flow Information

                                                      Nine Months Ended
                                               -------------------------------
                                               September 28,     September 30,
                                                    1996              1995
                                               -------------     -------------
          
          Cash paid for income taxes               $15.1              $52.5
          Cash paid for interest                    $0.4               $0.1
          
          
                                       6
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)
                     ($ in millions, except per share data)

5.   Pro Forma Statements of Operation

     The following table represents a comparison of the Company's pro forma
     consolidated condensed statements of operations to the actual results for
     the three and nine months ended September 28, 1996. Pro forma results
     assume that the Distribution and related transactions and events occurred
     as of the beginning of 1996. Pro forma financial information is presented
     for informational purposes only and may not reflect the future results of
     the Company or what the results would have been had the Company been
     operated as a separate company.

<TABLE>
<CAPTION>
                                                                             Third Quarter Ended        Nine Months Ended
                                                                              September 28, 1996        September 28, 1996
                                                                            -----------------------   -----------------------
                                                                            Historical   Pro Forma    Historical   Pro Forma
                                                                            ----------   ----------   ----------   ----------
<S>                                                                         <C>          <C>          <C>          <C>      
Net sales                                                                   $    432.7   $   432.7    $  1,188.6   $ 1,188.6
Cost of sales                                                                    297.6       297.6         821.8       821.8
                                                                            ----------   ----------   ----------   ----------
     Gross profit                                                                135.1       135.1         366.8       366.8
Store operating, selling, general and administrative expenses                     92.8        94.4         263.4       271.3
Depreciation and amortization                                                      6.7         6.7          18.3        18.3
                                                                            ----------   ----------   ----------   ----------
     Operating profit                                                             35.6        34.0          85.1        77.2
Interest income, net                                                               4.7         0.0          14.0         0.0
                                                                            ----------   ----------   ----------   ----------
     Income from continuing operations before income taxes and minority                             
        interests                                                                 40.3        34.0          99.1        77.2
Provision for income taxes                                                        13.7        11.2          32.5        24.0
                                                                            ----------   ----------   ----------   ----------
     Income from continuing operations before minority interests                  26.6        22.8          66.6        53.2
Minority interests in net income                                                   7.6         7.6          19.3        19.3
                                                                            ----------   ----------   ----------   ----------
     Income from continuing operations                                      $     19.0   $    15.2    $     47.3   $    33.9
                                                                            ==========   ==========   ==========   ==========
Weighted average shares outstanding                                                           30.7                      30.7   
                                                                                         ==========                ==========   
Earnings per share                                                                       $     0.49                $     1.10
                                                                                         ==========                ==========   
</TABLE>

                                       7
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)
                     ($ in millions, except per share data)

5.   Pro Forma Statements of Operation (Continued)

     The pro forma results have been derived from the historical financial
     results and principally reflect the following:

     a)   The elimination of Melville expense allocation and the anticipated net
          increase in overhead to add functional areas required to be a
          stand-alone public company.

     b)   The elimination of net interest income relating to intercompany
          balances due to the recapitalization of the Company.

     c)   The net change in provision for income taxes. The pro forma
          adjustments were tax effected at 39%, which approximates the Company's
          blended statutory rate.

     d)   Pro forma earnings per common share assumes that the common stock
          issued on the Distribution date had been issued at the beginning of
          1996, after giving effect to common stock equivalents arising from
          deferred stock awards.

6.   Pro Forma Capitalization

     The following table represents the combined capitalization of the Company
     as of September 28, 1996, and as adjusted to give effect to the
     Distribution and the related transactions. The pro forma capitalization
     table below is provided for informational purposes only and may not reflect
     the future capitalization or financial condition of the Company or what the
     capitalization would have been had the Company been operated as a separate
     company.

                                                           September  28, 1996
                                                         ----------------------
                                                         Historical   Pro Forma
                                                         ----------   ---------
Due from parent and other divisions                      $    677.6   $    --
                                                         ----------   ---------
Total indebtedness                                       $      0.2   $     0.2
                                                         ----------   ---------
Minority interests in subsidiaries                             49.5        49.5

Equity:                                                    
  Divisional  equity                                        1,008.4

  Shareholders' equity:                                    
    Common stock, par value $.01 per share; 100 million    
    shares authorized; 30.5 million shares issued and      
    outstanding                                                             0.3
       Contributed capital                                                305.8
       Retained earnings                                                   59.3
       Cumulative translation adjustment                                    0.1
                                                         ----------   ---------
          Total equity                                      1,008.4       365.5
                                                         ----------   ---------
          Total capitalization                           $  1,058.1   $   415.2
                                                         ==========   =========
Total debt to total capitalization                             .02%        .05%
                                                          

                                       8
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)
                     ($ in millions, except per share data)

6.   Pro Forma Capitalization (Continued)

     The pro forma recapitalization of the Company reflects (as if the
     Distribution occurred on Sepember 28, 1996):

     a)   A transfer of divisional equity to Melville.

     b)   The elimination of resulting intercompany indebtedness.

     c)   A capital contribution by Melville to the Company.

     d)   Total debt to total capitalization has been computed by dividing total
          indebtedness by total capitalization.



                                       9
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Prior to the Distribution, Meldisco, Footaction and Thom McAn were operated as
part of Melville Corporation. The historical financial information presented
herein reflects periods during which the Company did not operate as a separate
company, and accordingly, certain assumptions were made in preparing such
financial information. Such information, therefore, may not necessarily reflect
the results of operations or the financial condition of the Company which would
have resulted had the Company been a stand-alone public company during the
reporting periods, and are not necessarily indicative of the Company's future
operating results or financial condition. On June 3, 1996, Melville announced
the discontinuance of the Thom McAn segment. Accordingly, the results of
operations for the Thom McAn segment have been classified as discontinued
operations for all periods presented. In connection with the discontinuation of
Thom McAn, the Company recorded a pre-tax charge of approximately $85.0 million
in the first quarter of 1996. The charge primarily relates to future operating
losses during the wind-down period, lease settlement costs, asset write-offs and
severance costs.

Results of Operations
Net Sales
Third Quarter and Nine Months
<TABLE>
<CAPTION>

                                                  Third Quarter Ended            Nine Months Ended
                                            -----------------------------   -----------------------------
                                            Sepember 28,    September 30,   September 28,   September 30, 
($ in millions)                                 1996            1995            1996            1995
                                            ------------    -------------   -------------   ------------- 
Company:

<S>                                            <C>             <C>            <C>             <C>     
    Net sales                                  $432.7          $412.4         $1,188.6        $1,160.0
    Net sales % change from prior
      year                                        4.9%           (4.3%)            2.5%            0.8%

    Same store sales % change                     3.4%           (3.5%)            2.2%           (2.2)

Meldisco:

    Net sales                                  $285.4          $289.6         $  820.9        $  858.8
    Net sales % change from prior                (1.5%)         (12.1%)           (4.4%)          (6.6%)
      year

    Same store sales % change                    (1.7%)          (7.8%)           (3.5%)          (5.8%)

% of combined net sales                          66.0%           70.2%            69.1%           74.0%

Footaction:

     Net sales                                 $147.3          $122.8         $  367.7        $  301.2
     Net sales % change from                     20.0%           21.0%            22.1%           30.4%
       prior year

     Same store sales % change                   15.9%           11.4%            18.7%           13.0%

% of combined net sales                          34.0%           29.8%            30.9%           26.0%

</TABLE>

                                       10
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Net sales for the third quarter and first nine months ended September 28, 1996
increased 4.9% and 2.5%, respectively, over the comparable prior-year periods.
Footaction's net sales increased 20.0% and 22.1% in 1996 over the comparable
1995 third quarter and nine-month periods, respectively, driven by the continued
success of its new merchandising strategy, expansions and new stores in the
larger format, increased consumer demand for athletic footwear, and increased
sales of branded apparel and accessories. These increases were offset in part by
decreased sales at Meldisco due to increased competition among discount and
department stores and the closing of stores in 1995 in which Meldisco operated
leased footwear departments.

Cost of Sales and Expenses
Third Quarter and Nine Months
<TABLE>
<CAPTION>

                                                Third Quarter Ended                  Nine Months Ended
                                            ------------------------------     -------------------------------
                                            September 28,    September 30,     September 28,     September 30,
                                                1996             1995              1996              1995
                                            -------------    -------------     -------------     -------------
(As a % of net sales)

<S>                                             <C>              <C>               <C>               <C>  
Cost of Sales                                   68.8%            69.6%             69.1%             70.2%

Store operating, selling, general and
  administrative expenses*                      21.4%            21.0%             22.2%             21.2%

Depreciation and amortization                    1.5%             1.5%              1.5%              1.5%

</TABLE>

------------------
*Includes allocations from parent

Cost of Sales

Cost of sales for the third quarter and first nine months of 1996, as a
percentage of sales, decreased from the corresponding prior-year periods,
primarily due to Footaction's higher proportion of business to total Company
operations and improvements at Footaction in leveraging fixed costs, shrinkage
and promotional markdowns. The Company's cost of sales in both 1996 periods was
also favorably impacted by Meldisco's variable occupancy cost structure, offset
in part by higher distribution costs related to the startup of new distribution
facilities.

Store Operating, Selling, General and Administrative Expenses

Store operations, selling, general and administrative expenses as a percentage
of sales for the third quarter and first nine months of 1996 increased from the
comparable 1995 periods due to lower sales volume at Meldisco, increased
advertising costs and incentive compensation at Footaction and the costs
incurred in the third quarter relating to the addition of functional areas
required to support a stand-alone public company.


                                       11
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating Profit

                      Third Quarter Ended               Nine Months Ended
                  -----------------------------   ------------------------------
                  September 28,   September 30,   September 28,    September 30,
                      1996            1995            1996             1995
                  -------------   -------------   -------------    -------------
($ in millions)
Meldisco             $20.3           $19.9           $56.7            $67.2

Footaction           $16.8           $12.8           $29.9            $15.3


Operating profit for the third quarter and nine months ended September 28, 1996,
after corporate overhead of $1.5 million for both periods, increased 8.9% and
3.2%, respectively, over the comparable periods of 1995. Footaction's operating
profit increase was due to increased sales and the ability to leverage fixed
costs. Meldisco's operating profit growth in the third quarter was due to gross
margin improvement partially offset by increased operating expenses. Meldisco's
decrease for the nine months was due to lower sales and the impact of the store
closings.

Liquidity and Capital Resources

The historical financial statements reflect the Company's results as a part of
Melville, with an intercompany receivable balance that generated interest income
to the Company. As of the Distribution date, this intercompany balance was
eliminated (see Note 6). As a result of the recapitalization and elimination of
the intercompany balance, the Company will no longer generate interest income
from Melville. In addition, as further discussed below, the Meldisco
subsidiaries made a distribution to Kmart in respect of Kmart's minority
interest in all of the undistributed retained earnings of such subsidiaries with
respect to prior periods.

The Company's primary source of liquidity is cash provided by operations. The
Company's earnings are seasonal in nature. Peak selling periods coincide with
the Easter holiday, back-to-school and Christmas selling season. Working capital
requirements vary with seasonal business volume and inventory buildups occurring
prior to the peak periods. The Company believes that cash from operations,
together with borrowings under its credit facility will be adequate to fund
operating expenses, working capital and capital expenditure needs, the cash
needs associated with the discontinuation of Thom McAn, and the growth of the
Company's business in accordance with the Company's business plan. The Company
may, from time to time, pursue strategic acquisitions or other new business
opportunities, and may need to secure additional financing in connection with
any such acquisitions or other business opportunities. The Company anticipates
that the net after-tax cash impact of discontinuing the Thom McAn segment will
be approximately $15.0 million. Such cash outlays relate principally to
operating losses, lease settlement and severance costs partially offset by
inventory liquidation and taxes.

Current assets were higher at September 28, 1996 compared to September 30, 1995
due primarily to increases in deferred tax assets (primarily related to the
discontinued operations charge) and increases in the amount due from parent and
other divisions. These increases were partially offset by lower inventory levels
which were primarily associated with the discontinuation of the Thom McAn
segment.

The increase in current liabilities during the first nine months of 1996
compared to 1995 was due to the recording of the discontinued operation reserves
in 1996 and improved working capital management.


                                       12
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The Company plans to spend approximately $70 million on capital expenditures in
1996. These expenditures relate primarily to the opening, remodeling, relocation
or expansion of Footaction stores and investments in strategic management
information systems and a new logistics network to support the Meldisco
operation. During the first nine months of 1996, the Company's capital
expenditures were approximately $36.6 million.

Following the Distribution and except as described below with respect to Kmart,
the Company expects that it will retain all available funds for operation and
expansion of its business, and does not anticipate paying any cash dividends to
shareholders in the foreseeable future. Meldisco distributed to Kmart in April
1996 approximately $64 million, representing Kmart's minority interest in all of
the undistributed retained earnings of the Meldisco subsidiaries with respect to
pre-1996 periods. Such distribution was funded by an intercompany loan from
Melville in connection with the transfer of retained earnings to Melville and
the elimination of the resulting intercompany indebtedness. (See Note 6). Under
its arrangement with Kmart, Meldisco will distribute to Kmart, in future
periods, a portion of the profits representing Kmart's minority interest in the
Meldisco subsidiaries.

The Company has an unsecured credit facility which permits revolving credit
borrowings for working capital and general corporate purposes up to an aggregate
amount of $200 million, and letters of credit of up to an aggregate amount of
$400 million, with an overall combined limit for outstanding borrowings and
letters of credit at any time of $425 million. The credit facility contains
customary covenants and events of default and expires on the third anniversary
of the Distribution.


                                       13
<PAGE>

                         REVIEW BY INDEPENDENT AUDITORS


The September 28, 1996 and September 30, 1995 consolidated condensed financial
statements included in this filing on Form 10-Q have been reviewed by KPMG Peat
Marwick LLP, independent auditors, in accordance with established professional
standards and procedures for such a limited review.

The report of KPMG Peat Marwick LLP, commenting on their review, is included
herein as Part I - Exhibit 1.


                                       14
<PAGE>

                                                              Part 1 - Exhibit 1

                       Independent Auditors' Review Report

The Board of Directors and Shareholders of
Footstar, Inc.

We have reviewed the consolidated condensed balance sheet of Footstar, Inc. and
subsidiary companies as of September 28, 1996, and the related consolidated
condensed statements of operations for the three and nine month periods ended
September 28, 1996 and September 30, 1995, respectively, and the consolidated
condensed statements of cash flows for the nine months ended September 28, 1996
and September 30, 1995, respectively. These consolidated condensed financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with general accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Footstar, Inc. and subsidiary
companies as of December 31, 1995 and the related consolidated statements of
operations, divisional equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 21, 1996, except as to Note
3, which was as of June 3, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated condensed balance sheet as of December 31, 1995,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.


                                        /S/KPMG Peat Marwick LLP

New York, New York
October 22, 1996


                                       15
<PAGE>

                          Part II. - OTHER INFORMATION


Item 6  -  Exhibits and Reports on Form 8-K

     a)

                                  EXHIBIT INDEX
                                  -------------

   Exhibit
   -------

     27   Financial Data Schedule

     b)   Reports on Form 8-K - There were no reports on Form 8-K filed 
          for the three months ended September 28, 1996.

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


                                 FOOTSTAR, INC.
                                  (REGISTRANT)

                             /S/ CARLOS E. ALBERINI
                             ------------------------------
                                  Carlos E. Alberini
                                  Senior Vice President and
                                  Chief Financial Officer

Date:  November 11, 1996

                                       16