<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A
                                 AMENDMENT NO. 2

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

                   For the fiscal year ended December 31, 2005

                         Commission File Number 1-11681

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

<TABLE>
<S>                                            <C>
        DELAWARE                                           22-3439443
(State of incorporation)                       (IRS Employer Identification No.)
</TABLE>

                  933 MACARTHUR BLVD., MAHWAH, NEW JERSEY 07430
                    (Address of principal executive offices)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                     Common Stock (par value $.01 per share)
                                (Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

                                                                  [ ] Yes [X] No

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act

                                                                  [ ] Yes [X] No

<PAGE>

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

                                 Yes  X  No
                                     ---    ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.
[ ]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).

   Large accelerated filer     Accelerated filer  X  Non-accelerated filer
                           ---                   ---                       ---

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                                 Yes     No  X
                                     ---    ---

The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 1, 2006, was approximately $86.9 million.

Number of shares outstanding of common stock, par value $.01 per share, as of
March 1, 2006: 20,806,641.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


                                        2

<PAGE>

EXPLANATORY NOTE

We are filing this Amendment No. 2 (this "Amendment") to our Annual Report on
Form 10-K as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed on
March 16, 2006 (the "Original Filing"), in order to amend Item 9A. Item 9A in
the Original Filing inadvertently omitted, and Item 9A in this Amendment
includes, the conclusions of our principal executive and financial officers
regarding the effectiveness of our disclosure controls and procedures.

Because the Item 9A changes relate to the entire Form 10-K, this Amendment sets
forth the Original Filing in its entirety. This Amendment does not amend any
portion of the Original Filing except for the Amendment to Item 9A, and the
inclusion of updated certifications of our principal executive and financial
officers and an updated consent from our independent accountants. This Amendment
thus does not reflect events that have occurred after March 16, 2006, the filing
date of the Original Filing, or modify or update the forward looking statements
presented in the Original Filing. Accordingly, this Amendment should be read in
conjunction with our periodic filings made with the SEC subsequent to the filing
date of the Original Filing, including any amendments to those filings, as well
as any Current Reports filed on Form 8-K subsequent to the filing date of the
Original Filing. Any reference to facts and circumstances at a "current" date
refer to such facts and circumstances as of the filing date of the Original
Filing.


                                        3

<PAGE>

                                 FOOTSTAR, INC.
                           ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                           <C>
PART I ....................................................................    5
Introductory Note .........................................................    5
Item 1. Business ..........................................................   12
General ...................................................................   12
Meldisco ..................................................................   12
Competitive Environment ...................................................   13
Merchandising .............................................................   13
Marketing .................................................................   13
Trademarks and Service Marks ..............................................   14
Employees .................................................................   14
Available Information .....................................................   14
Item 1A. Risk Factors .....................................................   14
Item 1B. Unresolved Staff Comments ........................................   18
Item 2. Properties ........................................................   18
Item 3. Legal Proceedings .................................................   19
Item 4. Submission of Matters to a Vote of Security Holders ...............   20

PART II ...................................................................   21
Item 5. Market Prices for the Registrant's Common Equity and Related
Stockholder Matters .......................................................   21
Item 6. Selected Financial Data ...........................................   22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .....................................................   24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......   40
Item 8. Financial Statements and Supplementary Data .......................   41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ......................................................   41
Item 9A. Controls and Procedures ..........................................   41
Item 9B. Other Information ................................................   44

PART III ..................................................................   45
Item 10. Directors and Executive Officers of the Registrant ...............   45
Item 11. Executive Compensation ...........................................   49
Item 12. Security Ownership of Certain Beneficial Owners and Management ...   56
Item 13. Certain Relationships and Related Transactions ...................   59
Item 14. Principal Accountant Fees and Services ...........................   59

PART IV ...................................................................   60
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ..................................................................   60
</TABLE>

Footstar, the Footstar logo, Just For Feet, Thom McAn, Cobbie Cuddlers, Texas
Steer and Cara Mia are, or were as of December 31, 2005, trademarks and/or
service marks of Footstar, Inc.'s subsidiaries or affiliates. All other
trademarks mentioned are the property of their respective owners.


                                        4
<PAGE>

                                     PART I

INTRODUCTORY NOTE

Footstar, Inc., which may be referred to as "Footstar", the "Company", "we",
"us" or "our", is today filing this Annual Report on Form 10-K for its fiscal
year ended December 31, 2005.

On February 7, 2006, Footstar emerged from bankruptcy and made payments to
creditors totaling $105.1 million, plus applicable interest, pursuant to our
Plan of Reorganization (the "Plan"). These payments exclude approximately $14.2
million in claims which will be paid upon final resolution. Creditors were or
will be paid in full, plus interest where applicable, from existing cash
balances. This Introductory Note first describes the key events that led to our
eventual emergence and then provides a chronology of events since November,
2002:

          -    The disposition of our Athletic segment which included the sale
               of 349 Footaction stores to FootLocker, Inc., and the subsequent
               liquidation of all Just for Feet and Uprise stores and the
               remaining 75 Footaction stores.

          -    The sale and monetization of our two distribution centers and
               subsequent agreement to utilize a third party provider, FMI, for
               all product distribution and warehousing services.

          -    The disposition of certain businesses in the Meldisco segment.

          -    The Kmart settlement agreement that allowed the Company to assume
               its agreement to operate the Kmart footwear departments until no
               later than December 31, 2008.

On November 13, 2002, we announced that management had discovered discrepancies
in the reporting of our accounts payable balances. An investigation of the
discrepancies was conducted under the oversight of the Audit Committee of the
Board of Directors and the assistance of outside legal advisors and forensic
accountants.

The investigation determined that a restatement of previously issued financial
statements over a five-and-one-half year period from the beginning of fiscal
year 1997 through June, 2002 was required. This restatement was included in our
fiscal year 2002 Annual Report on Form 10-K that was filed on September 3, 2004.
In addition, and as a result of the restatement, we were delayed in filing other
periodic reports with the Securities and Exchange Commission (the "SEC"). Our
2003 Annual Report on Form 10-K was filed on April 8, 2005 and Amendment No. 1
on Form 10-K/A to our 2003 Annual Report on Form 10-K was filed on September 29,
2005. Our 2004 Annual Report on Form 10-K was filed on September 30, 2005. Our
Quarterly Reports on Form 10-Q for our first two fiscal quarters ended April 2,
2005 and July 2, 2005 were filed on September 30, 2005, at which time we became
current under the Securities Exchange Act of 1934, in filing our periodic
reports with the SEC and we continue to be current in filing our periodic
reports with the SEC.

Prior to the Company's November 13, 2002 announcement, we notified the Staff of
the SEC of the discovery of the accounting discrepancies. Following that
notification, the Staff of the SEC began an enforcement proceeding including an
investigation into the facts and circumstances giving rise to the restatement
and in February 2006, sent the Company a Wells Notice. The Company has been and
intends to continue cooperating fully with the SEC. We cannot predict the
outcome of this proceeding. For a further description of this and other
restatement-related litigation, see "Restatement Related Proceedings" under Item
3 - Legal Proceedings.


                                        5

<PAGE>

On December 29, 2003, the New York Stock Exchange ("NYSE") suspended trading in
our common stock and, at a later date, our common stock was delisted. The NYSE
stated that it decided to take these actions in view of the overall uncertainty
surrounding our previous announcement that a restatement of our results for 1997
through 2002 would be required and the continued delay in fulfilling our
financial statement filing requirements.

Commencing March 2, 2004 ("Petition Date"), Footstar and substantially all of
its subsidiaries (collectively, the "Debtors") filed voluntary petitions for
relief under chapter 11 of title 11 of the United States Code ("Bankruptcy Code"
or "Chapter 11") in the United States Bankruptcy Court for the Southern District
of New York in White Plains ("Court"). The Chapter 11 cases were jointly
administered under the caption "In re: Footstar, Inc., et al. Case No. 04-22350
(ASH)" (the "Chapter 11 Cases"). The Debtors operated their businesses and
managed their properties as debtors-in-possession pursuant to Sections 1107(a)
and 1108 of the Bankruptcy Code. As debtors-in-possession, we were authorized to
continue to operate as an ongoing business but could not engage in transactions
outside the ordinary course of business without the approval of the Court.

As of the Petition Date, our operations were comprised of two distinct business
segments: the discount and family footwear segment ("Meldisco" or "Meldisco
Segment") and the athletic footwear and apparel segment ("Athletic" or "Athletic
Segment"). Meldisco sells family footwear through licensed footwear departments
and wholesale arrangements. Athletic sold athletic footwear and apparel through
various retail chains (for example, Footaction and Just For Feet), and via
catalogues and the Internet.

Meldisco has operated licensed footwear departments in discount chains since
1961, and is the only major operator of licensed footwear departments in the
United States today. As of December 31, 2005, Meldisco operated licensed
footwear departments in all 1421 Kmart Corporation ("Kmart") stores and in 859
Rite Aid Corporation ("Rite Aid") stores located on the West Coast. Meldisco
also supplies certain retail stores, including stores operated by Wal-Mart
Stores, Inc. ("Wal-Mart") and Rite Aid, with family footwear on a wholesale
basis.

Athletic specialized in the sale of branded athletic footwear, apparel and
accessories through its three retail chains, Footaction, Just For Feet and
Uprise. Each of the retail chains in Athletic sold footwear and apparel from all
of the major brand-name vendors. Athletic's Consumer Direct operations conducted
sales through catalogues and the Internet to support the Footaction and Just For
Feet retail chains.

We sought bankruptcy protection after we determined we could not obtain
necessary liquidity from our lending syndicate or additional debt or equity
financing. This decline in liquidity primarily resulted from unprofitable
results in the Athletic Segment, a reduction in trade credit by certain Athletic
vendors, unprofitable results of operations from recent acquisitions and the
effect of Kmart's own bankruptcy. Other factors included intense competition in
the discount retailing industry, unsuccessful sales and marketing initiatives
and capital market volatility.

Since the Petition Date, we exited the Athletic Segment entirely by closing
certain underperforming stores and selling the remainder of the stores and the
other assets. Our financial statements present the Athletic Segment as a
discontinued operation for all periods presented.


                                        6

<PAGE>

In the initial stages of the Chapter 11 cases, we sought to streamline our
Meldisco business by selling or exiting selected stores. As a result, we sold or
liquidated all of our Shoe Zone stores ("Shoe Zone").We also exited the footwear
departments in 44 Gordmans, Inc. ("Gordmans") stores and the footwear
departments in 87 stores operated by subsidiaries of Federated Department
Stores, Inc. ("Federated"). Our financial statements reflect these businesses as
a discontinued operation for all periods presented.

We have sold other assets, including our distribution centers in Mira Loma,
California ("Mira Loma") in July 2004 and Gaffney, South Carolina ("Gaffney") in
September 2004. The purchaser of Mira Loma, Thrifty Oil Co. ("Thrifty") has
leased Mira Loma to FMI International LLC ("FMI"), a logistics provider, which
is obligated to provide us with warehousing and distribution services through
June 30, 2012 under a receiving, warehousing and distribution services agreement
(the "FMI Agreement"). Pursuant to the FMI Agreement, FMI is the Company's
exclusive provider of receiving, warehousing and physical distribution services
for (a) imported product where the Company or its subsidiaries are the importer
of record or (b) landed or domestic shipments controlled within the Company's
supply chain. In 2006, we are obligated to pay FMI a minimum of $15.1 million.
Commencing with calendar year 2007, there are no specified minimum payments due
under the FMI Agreement. The Company's obligation with respect to each calendar
year commencing with 2007 through the end of the term of the FMI Agreement is to
provide FMI with an estimated total unit volume, if any, prior to the start of
such year. Such estimated unit volume, if any, will be the basis for any minimum
quantity commitment for such year. If actual unit volume in any year is less
than the estimated unit volume provided by the Company for such year, a payment
will be due by the Company to FMI to make up for any such shortfall within 30
days after the end of each calendar quarter.

The business relationship between Meldisco and Kmart is extremely important to
us. The licensed footwear departments in Kmart have historically provided a
significant portion of our total sales and profits, and comprise substantially
all of our sales and profits now that we have exited all of our Athletic Segment
businesses and most of our other Meldisco businesses.

Our arrangement with Kmart was governed by the Master Agreement with Kmart
effective July 1, 1995, as amended ("Master Agreement"). The Master Agreement
provided us with the non-transferable, exclusive right and license to operate
the footwear department in every Kmart store. The initial term of the Master
Agreement would have expired on July 1, 2012, and was renewable for a 15 year
term upon mutual agreement, unless either party gave notice of termination at
least four years prior to the end of the applicable term.

On August 12, 2004, we filed a motion to assume the Master Agreement. On
September 30, 2004, Kmart filed an objection to this motion (the "Assumption
Objection") and cross-moved to lift the automatic stay to enable Kmart to
terminate the Master Agreement (the "Cross Motion").

In the Assumption Objection, Kmart argued that the Master Agreement was
non-assumable under section 365(c)(1) of the Bankruptcy Code because applicable
law rendered the Master Agreement non-assignable. In addition, Kmart argued that
the Master Agreement was non-assumable pursuant to section 365(b)(2)(D) of the
Bankruptcy Code because we had defaulted under the Master Agreement and such
defaults were incurable. Finally, Kmart disputed the amount of cure we would owe
Kmart should we be authorized to assume the Master Agreement. In the Cross
Motion, Kmart


                                        7

<PAGE>

argued that, because the Master Agreement was non-assumable, Kmart should be
entitled to exercise a termination provision pursuant to section 365(e)(2) of
the Bankruptcy Code.

We contested the factual assertions and legal arguments contained in the
Assumption Objection and Cross Motion. On December 17, 2004, a hearing was held
to determine whether, as a matter of law, we could assume the Master Agreement.
On February 16, 2005, the Court issued its decision on the Motion to Assume
Executory Contracts (the "Assumption Decision"). In the Assumption Decision, the
Court overruled the Assumption Objection and held that section 365(c)(1) did not
prevent assumption of the Master Agreement because we did not intend to assign
the Master Agreement.

Kmart moved for re-argument of the Assumption Decision and the Court held a
hearing on the argument on March 31, 2005. At this hearing the Court affirmed
the Assumption Decision. An additional hearing with respect to Kmart's Cross
Motion was held and, on May 10, 2005, the Court denied the Cross Motion. The
Court did not resolve the issue of whether the Master Agreement was assignable
under applicable nonbankruptcy law and reserved its decision on the issue of
section 365(b)(2)(D) until the completion of discovery. There continued to be no
guarantee that the Court would authorize us to assume the Master Agreement or
Kmart to terminate the Master Agreement under section 365(b)(2)(D) of the
Bankruptcy Code. Additionally, we could not be sure what cure amounts the Court
would find would be owing to Kmart if the Court authorized us to assume the
Master Agreement.

In June 2004, Kmart announced the sale of 54 of its retail store locations to
Sears, Roebuck and Co. ("Sears") but agreed that Kmart would continue to operate
such stores until Sears could complete its conversion plans. Thereafter, in
November 2004, Kmart announced plans to acquire Sears (the "Sears Acquisition"),
which acquisition closed on March 24, 2005. Following the announcement of the
Sears Acquisition, we received inconsistent information from Kmart regarding its
plan to convert certain of its stores to a different retail format. Initially,
Kmart advised us of its intent to convert approximately 25 of the 54 stores to
Sears Essential stores, and that Kmart expected us to discontinue operating the
footwear departments in those stores. Kmart then informed us that only 11 of
these 25 stores were slated for a format conversion. After receiving this
inconsistent information, we filed a motion with the Court on January 28, 2005
seeking to compel Kmart to produce certain documents relating to the proposed
Sears Acquisition and Kmart's business plans relating to the operation of
footwear departments in its stores.

When Kmart announced its plan to begin the reconfiguration of some of the stores
slated for conversion to a new Sears format (the "Converting Stores"), we
believed that the Master Agreement continued to grant us the exclusive right to
operate footwear departments in the Converting Stores, whether or not Kmart
converted or operated certain of those stores under a different name, such as
the Sears Essentials name. Accordingly, after receiving notice of the
reconfigurations from Kmart, we filed a motion (the "Enforcement Motion")
requesting that the Court determine Kmart to be in contempt for violation of the
automatic stay and assess damages. Kmart replied to the Enforcement Motion by
arguing that the automatic stay did not prevent Kmart from converting stores to
a different format because our rights under the Master Agreement to sell
footwear in the Converting Stores expire upon conversion.

On February 24, 2005, the Court held a hearing with respect to the Enforcement
Motion and ruled that the automatic stay barred Kmart from taking any actions to
remove us from the Converting Stores absent relief from the automatic stay.
Accordingly, on March 4, 2005, Kmart filed a motion seeking relief from the
automatic stay. On April 6, 2005, the Court heard legal arguments


                                        8

<PAGE>

concerning our claim that we had the right to continue to operate in the
Converting Stores. On May 10, 2005, the Court granted Kmart relief from the
automatic stay to effect conversions of the Converting Stores. We filed a motion
asking that the Court reconsider its ruling on this issue (the "Reconsideration
Motion"). On June 6, 2005, the Court heard legal arguments on the
Reconsideration Motion and, on June 24, 2005, the Court denied the
Reconsideration Motion.

On July 2, 2005, the Company and Kmart entered into an agreement (the "Kmart
Settlement") with respect to the assumption, interpretation and amendment of the
Master Agreement. On August 25, 2005, the Court approved the Kmart Settlement.
The Kmart Settlement, which took effect beginning January 2, 2005, allows us to
continue operating the footwear departments in Kmart stores pursuant to the
Master Agreement as amended by the Kmart Settlement (the "Amended Master
Agreement"). The significant provisions of the Kmart Settlement are as follows:

     -    Elimination of all outstanding litigation between Kmart and us.

     -    Expiration of the Amended Master Agreement at the end of 2008 and the
          requirement that Kmart will purchase our Shoemart inventory (but not
          our brands) at book value, which will avoid the need to manage a
          complex liquidation of such inventory and the attendant costs.

          Kmart has agreed to purchase all of the inventory (excluding inventory
          that is damaged, unsaleable and seasonal inventory, as defined) that
          is in our remaining stores on December 31, 2008, or that is on order
          on that date pursuant to Kmart's written request, for an amount equal
          to the book value of the inventory, as defined. We will vacate those
          stores and the Amended Master Agreement will expire on December 31,
          2008.

     -    Our cure obligation to Kmart was fixed at $45.0 million.

          The cure amount was inclusive of all claims of Kmart, including,
          without limitation, retained earnings and retained deficit of all
          stores that were no longer in operation as of January 1, 2005 and any
          dividend/excess fees. This entire amount was paid to Kmart on August
          26, 2005.

     -    Elimination of all annual fees/payments, other than a weekly license
          fee, equal to 14.625% of gross sales and a miscellaneous expense fee
          of $23,500 per store per year; elimination of Kmart's equity interests
          in the Shoemart Corporations.

          Kmart's equity interests in the Shoemart Corporations were
          extinguished effective as of January 2, 2005 and accordingly Kmart no
          longer shares in the profits or losses of these entities for fiscal
          2005 or subsequent years. Beginning on January 2, 2005, we were
          required to begin paying Kmart 14.625% of the gross sales of the
          footwear departments. Effective August 25, 2005, we are also required
          to pay Kmart a revised miscellaneous expense fee of $23,500 per store
          per year. These are the only material fees which we will be required
          to pay Kmart pursuant to the Kmart Settlement.

          Kmart will have a capital claim against us in the amount of $11,000
          for each store that is an existing store, as defined, on August 25,
          2005, which is generally payable by us to Kmart at the time a store
          closes or converts to another retail format in accordance with the 550
          store


                                        9

<PAGE>

          limitation described below. However, upon the expiration of the
          Amended Master Agreement or upon early termination of that agreement
          other than as a result of our breach, all capital claims not yet due
          and payable will be waived for any remaining stores. If the Amended
          Master Agreement is terminated as a result of our breach, capital
          claims for remaining stores will not be waived and will become
          immediately due and payable.

     -    Kmart must pay us the stipulated loss value if it reduces the number
          of stores in which we operate below specified levels.

          Kmart will be permitted to terminate our rights to operate footwear
          departments in up to 550 existing Kmart stores during the remaining
          term of the Amended Master Agreement by disposing of, closing or
          converting these stores without paying us the agreed upon stipulated
          loss value. The number of such terminations per year is capped at 85
          in 2005, 150 in 2006 and 160 in each of 2007 and 2008, with any unused
          cap carried over to the following year. For each store that is closed
          or converted, Kmart must purchase all of our in-store inventory
          (excluding inventory that is damaged, unsaleable and seasonal
          inventory, as defined) at book value, as defined. In addition, for all
          closings and conversions above the annual cap or the 550 aggregate
          limit, Kmart must pay us a nonrefundable stipulated loss value per
          store equal to $100,000 for closings and conversions occurring in
          2005, $60,000 for closings and conversions occurring in 2006, $40,000
          for closings and conversions occurring in 2007 and $20,000 for
          closings and conversions occurring in 2008. A termination of the
          entire Amended Master Agreement in accordance with its terms does not
          trigger the obligation to make a stipulated loss value payment. Actual
          store closures during fiscal year 2005 were 61. In 2006, through
          February 25, 2006, 18 stores have been closed or converted with one
          store identified to be disposed of, closed or converted subsequent to
          February 25, 2006.

     -    Minimum staffing obligations.

          We must spend at least 10% of gross sales in the footwear departments
          on staffing costs for the stores; and we must schedule staffing in
          each store at a minimum of 40 hours per week. If we do not meet these
          staffing obligations termination of the Amended Master Agreement may
          occur prior to December 31, 2008.

     -    Elimination of performance standards in favor of a minimum sales test.

          The Company and Kmart will each have the right to terminate the
          Amended Master Agreement if the gross sales of the footwear
          departments are less than $550.0 million in any year, less $0.4
          million for each store that is closed or converted after August 25,
          2005. Twenty-two stores have been closed or converted from August 25,
          2005 through February 25, 2006. We will also have a separate,
          unilateral right to terminate the Amended Master Agreement if either
          (i) the number of Kmart stores is less than 900 or (ii) the gross
          sales of the footwear departments in any four consecutive fiscal
          quarters is less than $450.0 million. Upon termination under either
          circumstance, Kmart must purchase all of the inventory at the stores,
          (including inventory that is on order but excluding inventory that is
          damaged, unsaleable and seasonal inventory, as defined) for an amount
          equal to the book value of the inventory, as defined. If we do not
          meet these sales tests or the number of Kmart stores is less than 900,
          termination of the Amended Master Agreement may occur prior to
          December


                                       10

<PAGE>

          31, 2008.

     -    Kmart is required to allocate 52 weekend newspaper advertising insert
          pages per year to our products.

Effective March 4, 2004, we entered into a two year, $300.0 million senior
secured Debtor-in-Possession Credit Agreement ("DIP Credit Agreement") with a
syndicate of lenders co-led by Bank of America, N.A. (formerly Fleet National
Bank ) and GECC Capital Markets Group, Inc. The DIP Credit Agreement was
subsequently amended effective August 2, 2004 to reduce the amount of lending
commitments available while operating as debtor-in-possession and provide for
post-emergence financing ("DIP and Exit Facility").

Effective July 1, 2005, we entered into an amendment to the DIP and Exit
Facility (the "Amended DIP and Exit Facility") which allowed for the
consummation of our Amended Plan. The Amended DIP and Exit Facility was further
amended effective January 6, 2006 and, as is currently constituted (the "Exit
Facility"), provides for $100.0 million of revolving commitments (including a
$40.0 million sub-limit for letters of credit), availability of which is subject
to a borrowing base based upon eligible inventory and accounts receivable. The
Exit Facility became effective upon consummation of the Amended Plan on February
7, 2006 as all conditions to be satisfied were met. The Exit Facility has a
maturity date of the earlier of (a) November 30, 2008 and (b) thirty days prior
to termination of the Amended and Restated Kmart Agreement. For further
information on the Company's credit facilities, see "Liquidity and Capital
Resources" under Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Pursuant to Court orders, we were authorized to pay certain pre-petition
operating liabilities incurred in the ordinary course of business and reject
certain of our pre-petition obligations. We notified all known pre-petition
creditors of the establishment of a bar date by which creditors must file a
proof of claim, which date has now passed for all creditors. We reconciled our
pre-petition liabilities to our actual claim payments along with estimated
future claim payments and recorded a reduction of our pre-petition liabilities
of $18.7 million, of which $1.5 million was recorded in reorganization expense
in continuing operations, $9.2 million was recorded in discontinued operations
and $8.0 million as a gain on disposal of discontinued operations.

On November 12, 2004, we filed a proposed joint plan of reorganization with the
Court. On October 28, 2005, we filed an amended plan with the Court (the
"October 2005 Plan"). The October 2005 Plan provided for a reorganization of the
Company and cash distributions to creditors and was subject to a vote by
eligible ballot holders. The October 2005 Plan provided that creditors in the
bankruptcy would be paid in full, with interest at the federal judgment interest
rate of 1.23%. The Creditors' Committee believed, however, that this interest
rate was insufficient, and accordingly, sought to terminate the Debtors'
exclusivity periods and have the Bankruptcy Court fix a higher rate of
postpetition interest. On November 23, 2005, the Bankruptcy Court terminated the
Debtors' exclusivity periods, but reserved judgment on appropriate rate of
postpetition interest. The Creditors' Committee and the Equity Committee
subsequently agreed to the terms of a consensual plan of reorganization,
including a postpetition interest rate for unsecured claims at 4.25% per annum
and to the filing on December 5, 2005, of further amendments to the October 2005
Plan to reflect such agreement (the "Amended Plan"). On January 25, 2006, the
Bankruptcy Court confirmed our Amended Plan. On February 7, 2006, we
successfully emerged from bankruptcy.


                                       11

<PAGE>

Pursuant to the guidance provided by the American Institute of Certified Public
Accountants in Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code ("SOP 90-7"), the Company has not
adopted fresh-start reporting because there was no change to the holders of
existing voting shares and the reorganization value of the Company's assets is
greater than its post petition liabilities and allowed claims.

ITEM 1. BUSINESS

GENERAL

We are a holding company and operate a retail business through Meldisco, which
sells family footwear through licensed footwear departments and wholesale
arrangements.

See "Introductory Note" for a description of certain important events which have
occurred, including our restatement, our Chapter 11 filing and subsequent exit
from bankruptcy, the exit from the footwear departments of Federated and
Gordmans stores and the closing and sale of the Shoe Zone stores within the
Meldisco Segment and the closing of certain stores, the sale of all remaining
stores within the Athletic Segment and the Kmart Settlement.

MELDISCO

Meldisco sells family footwear through licensed footwear departments and
wholesale arrangements. Meldisco has operated licensed footwear departments
since 1961 and is the only major operator of licensed footwear departments in
the United States today.

As of December 31, 2005, Meldisco operated licensed footwear departments in
1,421 Kmart stores and in 859 Rite Aid drugstores. Meldisco's licensed footwear
operation sells family footwear and lower-priced basic and seasonal footwear in
Kmart and Rite Aid stores. In its licensed footwear departments, Meldisco
generally sells a wide variety of family footwear, including men's, women's and
children's dress, casual and athletic footwear, work shoes and slippers.

In October 2002, we began supplying Thom McAn family footwear on a wholesale
basis to 300 Wal-Mart stores. In February 2003, we expanded our arrangement with
Wal-Mart to supply Thom McAn family footwear on a wholesale basis to up to 1,500
Wal-Mart stores in the United States. As of December 31, 2005, we were supplying
Thom McAn family footwear to 1,500 Wal-Mart stores in the United States and 13
stores in Puerto Rico. In 2005, we sold approximately $27 million of Thom McAn
products to Wal-Mart stores. However, beginning in January 2006, Wal-Mart is no
longer purchasing Thom McAn product for any of its stores in the United States,
but, it will continue to buy Thom McAn footwear for Wal-Mart stores in Puerto
Rico and will continue to source footwear from us for Wal-Mart stores under
Wal-Mart's proprietary brands.

In April 2003, the licensed footwear agreement between the Company and Rite Aid
covering approximately 2,500 Rite Aid drugstores located in the eastern half of
the United States changed to a wholesale arrangement. The remaining 859 Rite Aid
drugstores are operated as licensed footwear departments.


                                       12

<PAGE>

COMPETITIVE ENVIRONMENT

The family footwear business, where the majority of Meldisco's business is
generated, is highly competitive.

Competition is concentrated among a limited number of retailers and discount
department stores, including Kmart, Wal-Mart, Payless ShoeSource, Kohl's, Target
and Sears, with a number of traditional off-price and value retailers such as
Shoe Carnival, Famous Footwear and Rack Room also selling lower-priced footwear.
The events that caused us to seek bankruptcy and the terms of the Kmart
Settlement put us at a disadvantage with respect to our competitors, many of
which are growing rapidly and have substantial financial and marketing resources
which are unavailable to us.

MERCHANDISING

Meldisco's merchandising strategy is to continue to build upon its position in
family footwear. The essence of this strategy is to satisfy Meldisco's customers
with high in-stock availability of its footwear products and a wide selection of
well-known national brands such as Thom McAn and Cobbie Cuddlers (which are
Company-owned). We offer a wide range of quality, value-priced footwear. Key
strengths include style development, quality control, competitive pricing,
planning and inventory management.

In its licensed footwear operations, Meldisco seeks to attract non-footwear
shoppers into the footwear departments from other areas of the stores. Its
branded products are also intended to differentiate Meldisco merchandise from
that of its competitors. Brands currently available at Meldisco's operations
include Thom McAn, Cobbie Cuddlers and Texas Steer (which are Company-owned) and
Route 66, Basic Editions, Thalia and Joe Boxer. Meldisco conducts consumer
research to gauge new opportunities for brand extensions and to determine price
and positioning of new brands.

Meldisco's traditional strength has been in quality leather footwear which it
currently offers under the Thom McAn brand, as well as seasonal, work,
value-priced athletic, women's casual and children's shoes. Meldisco builds on
its strength in these segments by focusing on customer satisfaction. Meldisco's
"narrow and deep" merchandising strategy and its merchandise planning systems
are designed to ensure that each store is well stocked in product lines that are
particularly popular with Meldisco's core customers. Meldisco's demand-driven
merchandise replenishment system has been designed to permit inventory
management at the store, style and size levels.

MARKETING

Meldisco believes that the typical footwear customer in its licensed footwear
departments in Kmart generally resembles the average Kmart softlines shopper: a
25 to 49 year-old woman who is employed at least part-time, has at least one
child under the age of 18 and reports a total annual household income between
$25,000 and $65,000. Meldisco's marketing initiatives are designed to support
its overall business strategy of increasing purchases among traditional footwear
shoppers, as well as appealing to the growing customer segments that include
African Americans and Hispanics.

Meldisco's marketing strategy in its Kmart footwear departments is designed to
convey to prospective customers that Kmart carries the right value combination
of brands, product selection, quality, comfort and price to make Kmart footwear
departments their footwear destination of


                                       13

<PAGE>

choice. This message is communicated primarily through weekly advertising in
newspaper inserts and in-store presentations. Kmart's weekly newspaper inserts
had a weekly circulation of approximately 43.9 million as of December 31, 2005.

TRADEMARKS AND SERVICE MARKS

Footstar or its subsidiaries own all rights in the United States to the marks
Thom McAn, Cobbie Cuddlers and Cara Mia for use in connection with footwear
and/or related products and services. The Company or its subsidiaries have
registered or have common law rights in the United States to over 100 trademarks
and/or service marks under which we market merchandise or services. The Company
either has registered or is in the process of registering its trademarks and
service marks in foreign countries in which it operates or may operate in the
future. We vigorously protect our trademarks and service marks both domestically
and internationally.

EMPLOYEES

As of December 31, 2005, we had 5,088 employees, of which 1,331 were full-time
and 3,757 were part-time employees.

AVAILABLE INFORMATION

We make available free of charge through our web site, www.footstar.com, all
materials that we file electronically with the SEC, including our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934. During the period covered by this
Form 10-K, we made all such materials available through our web site as soon as
reasonably practicable after filing such materials with the SEC.

You may also read and copy any materials filed by us with the SEC at the SEC's
Public Reference Room at 100 F Street, NE, Washington, DC 20549, and you may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet web site,
www.sec.gov, which contains reports, proxy and information statements and other
information which we file electronically with the SEC.

ITEM 1A. RISK FACTORS

Set forth below are certain important risks and uncertainties that could
adversely affect our results of operations or financial condition and cause our
actual results to differ materially from those expressed in forward-looking
statements made by the Company or its management. See "Forward-Looking
Statements" in Item 7 for additional risk factors.

MELDISCO IS OUR ONLY CONTINUING BUSINESS AND SUBSTANTIALLY ALL OF OUR CONTINUING
NET SALES AND PROFITS RESULT FROM MELDISCO'S BUSINESS IN KMART STORES. THE KMART
SETTLEMENT WILL RESULT IN THE LIQUIDATION OF OUR KMART BUSINESS NO LATER THAN
THE END OF DECEMBER 2008 OR EARLIER IF WE FAIL TO MEET THE MINIMUM SALES TESTS,
STAFFING OBLIGATIONS OR OTHER PROVISIONS OF THE AMENDED MASTER AGREEMENT. IF WE
FAIL TO DEVELOP VIABLE BUSINESS ALTERNATIVES TO OFFSET THIS BUSINESS WE WILL
ALMOST CERTAINLY BE FORCED TO LIQUIDATE OUR BUSINESS WHEN THE KMART RELATIONSHIP
ENDS.


                                       14

<PAGE>

WE MAY BE UNABLE TO ATTRACT AND RETAIN TALENTED PERSONNEL.

Our success is dependent upon our ability to attract and retain qualified and
talented individuals. We have instituted several retention programs designed to
retain key executives and employees and will seek to implement additional
programs to retain key executives and employees as necessary. However, if we are
unable to attract or retain key executives and employees, including senior
management, and qualified accounting and finance, marketing, and merchandising
personnel, or put in place additional retention programs, it could adversely
affect our businesses. This risk is acute given the anticipated liquidation of
our Kmart business no later than the end of 2008 as a result of the Kmart
Settlement.

WE RELY ON KEY VENDORS AND THIRD PARTIES TO MANUFACTURE AND DISTRIBUTE OUR
PRODUCTS.

Product sourcing in the family footwear business is driven by relationships with
foreign manufacturers. If the terms under which these vendors deal with us,
including payment terms, change adversely, there could be a material adverse
impact on our operations and financial condition. Also, if these foreign
manufacturers are unable to secure sufficient supplies of raw materials or
maintain adequate manufacturing capacity, they may be unable to provide us with
timely delivery of products of acceptable quality. In addition, if the prices
charged by these manufacturers increase, our cost of acquiring merchandise would
increase. A portion of our footwear product is comprised of petrochemical
products which have risen in price dramatically over the past year. It is very
possible that these raw material price increases will be passed on to us.
Furthermore, higher product prices could result from the recent decision by the
Chinese government to revalue their currency. Although we pay for finished goods
in U.S. dollars, it is possible that higher labor costs due primarily to the
currency revaluation could be passed on to us through higher product costs. If
we cannot recover these cost increases with increased pricing to our customers,
it could have a material adverse effect on our operations and financial
condition. The Company is managing against possible product cost increases by
shifting manufacturing production to lower cost regions of China. While the
Company is exercising considerable diligence in selecting new factories, it is
possible that the Company could experience lower product quality and/or late
shipments from these new factories which could unfavorably impact the Company's
financial results.

We also depend on third parties to receive, transport and deliver our products.
If these third parties are unable to perform for any reason, or if they increase
the price of their services as a result of increases in the cost of fuel, there
could be a material adverse effect on our operations and financial performance.

WE ARE THE SUBJECT OF AN SEC ENFORCEMENT INVESTIGATION AND CANNOT YET DETERMINE
WHETHER ANY FINES WILL BE IMPOSED ON US BY THE SEC AND IF SO, WHAT THE IMPACT OF
ANY FINE OR SANCTION WILL BE ON OUR BUSINESS.

Prior to our November 13, 2002 announcement that management had discovered
discrepancies in the reporting of our accounts payable balances, we notified the
staff of the SEC concerning the discovery of the accounting discrepancies.
Following that notification, the SEC began an enforcement proceeding, including
an investigation into the facts and circumstances giving rise to the
restatement. As we announced on February 10, 2006, the Company received a Wells
notice


                                       15

<PAGE>

from the SEC Staff in connection with the enforcement investigation. Under SEC
procedures, a Wells notice indicates that the Staff has made a preliminary
decision to recommend that the SEC authorize the Staff to bring a civil or
administrative action against the recipient of the notice. The Wells notice that
Footstar received states that the SEC Staff, as a result of its investigation,
is considering recommending that the SEC bring a civil injunctive action against
the Company for alleged violations of provisions of the Securities Exchange Act
of 1934 relating to the maintenance of books, records and internal accounting
controls, the establishment of disclosure controls and procedures and the
periodic filing requirements of Sections 10(b), 13(a) and 13(b)(2) of the
Exchange Act and in SEC Rules 10b-5, 12b-20, 13a-1 and 13a-13. A recipient of a
Wells notice can respond to the SEC Staff before the Staff makes a formal
recommendation regarding whether the SEC should bring any action.

Footstar has been, and intends to continue, cooperating fully with the SEC Staff
in connection with this matter and is in discussions with the Staff regarding
the possible resolution of this matter. We cannot predict the outcome of this
proceeding.

For a further description of our restatement related litigation, see
"Restatement Related Proceedings" under Item 3 - Legal Proceedings.

WE HAVE HAD MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING AND
CANNOT ASSURE YOU THAT MATERIAL WEAKNESSES WILL NOT BE IDENTIFIED IN THE FUTURE.
OUR FAILURE TO EFFECTIVELY MAINTAIN INTERNAL CONTROL OVER FINANCIAL REPORTING
CAN RESULT IN MATERIAL MISSTATEMENTS IN OUR FINANCIAL STATEMENTS WHICH COULD
REQUIRE US TO RESTATE FINANCIAL STATEMENTS, CAUSE INVESTORS TO LOSE CONFIDENCE
IN OUR REPORTED FINANCIAL INFORMATION AND HAVE A NEGATIVE EFFECT ON OUR STOCK
PRICE.

We and our independent registered public accounting firm determined that we had
deficiencies in our internal control over financial reporting during fiscal 2004
that constitute "material weaknesses" as defined by the Public Company
Accounting Oversight Board's Audit Standard No. 2.

Although these material weaknesses have been remediated, we cannot assure you
that additional other weaknesses in our internal control over financial
reporting will not be identified in the future. Any failure to maintain or
implement required new or improved controls, or any difficulties we encounter in
their implementation, could result in other material weaknesses, cause us to
fail to meet our periodic reporting obligations or result in material
misstatements in our financial statements. Any such failure could also adversely
affect the results of periodic management evaluations and annual auditor
attestation reports regarding the effectiveness of our internal control over
financial reporting required under Section 404 of Sarbanes-Oxley and the rules
promulgated under Section 404. The existence of a material weakness could also
cause investors to lose confidence in our reported financial information,
leading to a decline in our stock price.

DECLINES IN OUR SALES WILL HAVE A MAGNIFIED IMPACT ON PROFITABILITY BECAUSE OF
OUR FIXED COSTS.

A significant portion of our operating expenses are fixed costs that are not
dependent on our sales performance, as opposed to variable costs, which vary
proportionately with sales performance. These fixed costs include, among other
things, the costs associated with operating as a public company and a
substantial portion of our labor expenses. As our sales continue to decline with
the


                                       16

<PAGE>

disposition, closing or conversion of Kmart stores, we will be unable to reduce
our operating expenses proportionately. In accordance with the Kmart Settlement,
if Kmart store sales fall below a certain threshold, as defined, the Amended
Master Agreement may be terminated early.

WE OPERATE IN THE HIGHLY COMPETITIVE FOOTWEAR RETAILING INDUSTRY.

The family footwear industry, where our business is now concentrated, is highly
competitive. Competition is concentrated among a limited number of retailers and
discount department stores, including Payless ShoeSource, Kmart, Wal-Mart,
Kohl's, Sears and Target, with a number of traditional mid-tier retailers such
as Shoe Carnival, Famous Footwear and Rack Room also selling lower-priced
footwear. The events that caused us to seek bankruptcy protection in 2004 and
the terms of the Kmart Settlement put us at a disadvantage with respect to our
competitors, many of which are growing rapidly and have substantial financial
and marketing resources which are unavailable to us. If we are unable to
overcome this disadvantage and respond effectively to our competitors, we may be
forced to liquidate our operations.

THERE ARE RISKS ASSOCIATED WITH OUR IMPORTATION OF PRODUCTS.

Approximately 99% of Meldisco's products are manufactured in China.
Substantially all of this imported merchandise is subject to customs duties and
tariffs imposed by the United States. Penalties may be imposed for violations of
labor and wage standards by foreign contractors.

In addition, China and other countries in which our merchandise is manufactured
may, from time to time, impose additional new quotas, tariffs, duties, taxes or
other restrictions on its merchandise or adversely change existing quotas,
tariffs, duties, taxes or other restrictions. Any such changes could adversely
affect our ability to import our products and, therefore, our results of
operations.

Any deterioration in the trade relationship between the United States and China,
issues regarding China's compliance with its agreements related to its entry
into the World Trade Organization, or any other disruption in our ability to
import products from China could adversely affect our business, financial
condition or results of operations.

Other risks inherent in sourcing products from foreign countries include
economic and political instability, social unrest and the threat of terrorism,
each of which risks could adversely affect our business, financial condition or
results of operations. In addition, we incur costs as a result of security
programs designed to prevent acts of terrorism such as those imposed by
government regulations and our participation in the Customs-Trade Partnership
Against Terrorism implemented by the United States Bureau of Customs and Border
Protection. Significant increases in such costs could adversely affect our
business, financial condition or results of operations.

Our ability to successfully import merchandise into the United States from
foreign sources is also dependent on stable labor conditions in the major ports
of the United States. Any instability or deterioration of the domestic labor
environment in these ports could result in increased costs, delays or disruption
in merchandise deliveries that could cause loss of revenue, damage to customer
relationships and have a material adverse effect on our business operations and
financial condition.

THE FOOTWEAR RETAILING INDUSTRY IS HEAVILY INFLUENCED BY GENERAL ECONOMIC
CYCLES.


                                       17

<PAGE>

Footwear retailing is a cyclical industry that is heavily dependent upon the
overall level of consumer spending. Purchases of footwear, apparel and related
goods tend to be highly correlated with the cycles of the levels of disposable
income of our customers. As a result, any substantial deterioration in general
economic conditions, including sustained increases in gasoline prices, could
have a material adverse effect on our operations and financial condition.

WE MAY BE UNABLE TO ADJUST TO CONSTANTLY CHANGING FASHION TRENDS.

Our success depends, in large part, upon our ability to gauge the evolving
fashion tastes of our customers and to provide merchandise that satisfies those
fashion tastes in a timely manner. The retailing industry fluctuates according
to changing fashion tastes and seasons, and merchandise usually must be ordered
well in advance of the season, frequently before consumer fashion tastes are
evidenced by consumer purchases. In addition, in order to ensure sufficient
quantities of footwear in the desired size, style and color for each season, we
are required to maintain substantial levels of inventory, especially prior to
peak selling seasons when we build up our inventory levels.

As a result, if we fail to properly gauge the fashion tastes of consumers or to
respond to changes in fashion tastes in a timely manner, this failure could
adversely affect retail and consumer acceptance of our merchandise and leave us
with substantial unsold inventory. If that occurs, we may be forced to rely on
markdowns or promotional sales to dispose of excess, slow-moving inventory,
which may harm our business and financial results.

WE MUST PROVIDE CONSUMERS WITH SEASONALLY APPROPRIATE MERCHANDISE, MAKING OUR
SALES HIGHLY DEPENDENT ON SEASONAL WEATHER CONDITIONS.

If the weather conditions for a particular period vary significantly from those
typical for that period, such as an unusually cold spring or an unusually warm
winter, consumer demand for seasonally appropriate merchandise that we have
available in our footwear departments will be lower, and our net sales and
margins will be adversely affected. Lower sales may leave us with excess
inventory of our basic products and seasonally appropriate products, forcing us
to sell both types of our products at significantly discounted prices and,
thereby, adversely affecting our net sales and margins.

ITEM 1 B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

As of December 31, 2005, we operated licensed footwear departments in 2,280
stores. The licensed footwear departments are located in 49 states, Guam, Puerto
Rico and the U.S. Virgin Islands. Of the licensed departments operated as of
December 31, 2005, 1,421 were located in Kmart discount stores and 859 were in
Rite Aid drugstores on the West Coast.

Kmart and other retail host stores provide us with store space to sell footwear
in exchange for certain payments. The footwear departments we operate in Kmart
stores range from 1,200 to 4,400 square feet.


                                       18

<PAGE>

Our corporate headquarters is located in 129,000 square feet of owned office
space in Mahwah, New Jersey. We also lease approximately 20,000 square feet of
space in Mahwah, New Jersey for use by our footwear testing lab and for storage.
Our corporate tax department is located in 3,500 square feet of leased office
space in Worcester, Massachusetts.

ITEM 3. LEGAL PROCEEDINGS

In addition to the matters described below, we are involved in other legal
proceedings, lawsuits and claims incidental to the conduct of our business.
Estimates of the probable costs for resolution of these claims are accrued to
the extent that they can be reasonably estimated. These estimates are based on
an analysis of potential outcomes, assuming a combination of litigation and
settlement strategies. These estimates also take into account any claim relating
to events that occurred prior to our bankruptcy filing, which were required to
be reported in a proof of claim filed with the Bankruptcy Court. However, legal
proceedings are subject to significant uncertainties, the outcomes are difficult
to predict, and assumptions and strategies may change. Consequently, except as
specified below, we are unable to ascertain the ultimate financial impact of any
legal proceedings.

RESTATEMENT RELATED PROCEEDINGS

Prior to our November 13, 2002 announcement that management had discovered
discrepancies in the reporting of our accounts payable balances, we notified the
Staff of the SEC concerning the discovery of the accounting discrepancies.
Following that notification, the Staff of the SEC began an enforcement
proceeding captioned, In the Matter of Footstar, Inc., MNY-7122, including an
investigation into the facts and circumstances giving rise to the discrepancies.
On November 25, 2003 the SEC issued a formal order in that enforcement
proceeding, authorizing an investigation and empowering certain members of the
SEC Staff to take certain actions in the course of the investigation, including
requiring testimony and the production of documents.

The enforcement investigation includes determining whether the Company and
certain of its present or former directors, officers and employees may have
engaged in violations of the federal securities laws in connection with: the
purchase or sale of the securities of the Company; required filings with the
SEC; maintenance of our books, records and accounts; implementation and
maintenance of internal accounting controls; making of false or misleading
statements or omissions in connection with required audits or examinations of
our consolidated financial statements or the preparation and filing of documents
or reports we are required to file with the SEC.

As we announced on February 10, 2006, the Company received a Wells notice from
the SEC Staff in connection with the enforcement investigation. Under SEC
procedures, a Wells notice indicates that the Staff has made a preliminary
decision to recommend that the SEC authorize the Staff to bring a civil or
administrative action against the recipient of the notice. The Wells notice that
Footstar received states that the SEC Staff, as a result of its investigation,
is considering recommending that the SEC bring a civil injunctive action against
the Company for alleged violations of provisions of the Securities Exchange Act
of 1934 relating to the maintenance of books, records and internal accounting
controls, the establishment of disclosure controls and procedures and the
periodic filing requirements of Sections 10(b), 13(a) and 13(b)(2) of the
Exchange Act and in SEC Rules 10b-5, 12b-20, 13a-1 and 13a-13. A recipient of a
Wells notice can respond to the SEC Staff before the Staff makes a formal
recommendation regarding whether


                                       19

<PAGE>

the SEC should bring any action. Footstar has been, and intends to continue,
cooperating fully with the SEC Staff in connection with this matter and is in
discussions with the Staff regarding the possible resolution of this matter. We
cannot predict the outcome of this proceeding.

OTHER LITIGATION MATTERS

On or about March 3, 2005, a first amended complaint was filed against us in the
U.S. District Court for the District of Oregon, captioned Adidas America, Inc.
and Adidas-Solomon AG v. Kmart Corporation and Footstar, Inc. The complaint
seeks injunctive relief and unspecified monetary damages for trademark
infringement, trademark dilution, unfair competition, deceptive trade practices
and breach of contract arising out of our use of four stripes as a design
element on footwear which Adidas alleges infringes on its registered three
stripe trademark. While it is too early in litigation to predict the outcome of
this litigation, we believe that we have meritorious defenses to the claims
asserted by Adidas and have filed an answer denying the allegations.

NAFTA Traders, Inc. ("NAFTA"), a salvage company which previously did business
with our former Footaction division, filed a proof of claim in our bankruptcy
proceeding alleging that NAFTA is owed $3.8 million. We have objected to this
proof of claim on the basis that we do not owe any amounts to NAFTA and we are
currently involved in an adversary proceeding in the bankruptcy court regarding
resolution of this proof of claim. While it is too early to predict the outcome
of this proceeding, we intend to continue to object and vigorously defend the
proof of claim submitted by NAFTA.

Mr. Robinson's employment as our Chairman, President and Chief Executive Officer
was terminated on September 12, 2003. Mr. Robinson had an employment agreement
with us and initiated arbitration proceedings against us for benefits under that
agreement. In July 2004, the parties agreed to settle that matter for $5.1
million. In January 2006, the final installment which was due to Mr. Robinson
under the settlement was paid.

A former employee of the company filed a proof of claim in our bankruptcy
proceeding alleging he is owed $2,000,000 based on services rendered and
agreements entered into during his employment. We have objected to and intend to
vigorously defend this proof of claim.

We are involved in other various claims and legal actions arising in the
ordinary course of business. We do not believe that any of them will have a
material adverse effect on our financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during fiscal year
2005 as no annual meeting was held.

Pursuant to Section 2 of Footstar's Amended and Restated By-Laws, our next
annual meeting of shareholders is scheduled to be held in May, 2007.


                                       20
<PAGE>

                                     PART II

ITEM 5. MARKET PRICES FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Since the delisting of our common stock from the NYSE on December 30, 2003, our
common stock has been traded on the over-the-counter bulletin board ("OTCBB")
under the symbol "FTSTQ:PK" (see "Introductory Note"). Effective March 13, 2006
our symbol changed to FTAR:PK. Prices shown below reflect the intraday high and
low price ranges for the common stock as reported on the OTCBB System. The
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily reflect actual
transactions. As of December 31, 2005, the closing price of our common stock was
$3.45 and there were 2,332 shareholders of record. Information concerning the
market prices of our common stock is set forth below:

<TABLE>
<CAPTION>
                  MARKET PRICE
                 -------------
                  HIGH    LOW
                 -----   -----
<S>              <C>     <C>
2004
First Quarter    $6.02   $0.95
Second Quarter   $6.95   $2.15
Third Quarter    $5.75   $2.00
Fourth Quarter   $5.05   $2.05

2005
First Quarter    $6.35   $3.50
Second Quarter   $5.20   $3.75
Third Quarter    $6.90   $4.85
Fourth Quarter   $6.00   $3.00
</TABLE>

We have not paid dividends on our common stock at any time since we became a
public company and we currently have no plans to pay dividends during 2006.


                                       21

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR HISTORICAL FINANCIAL SUMMARY

<TABLE>
<CAPTION>
(dollars in millions)                             2005     2004     2003      2002       2001
                                                 ------   ------   ------   --------   --------
<S>                                              <C>      <C>      <C>      <C>        <C>
STATEMENT OF OPERATIONS DATA
Net sales                                        $715.4   $800.2   $962.4   $1,321.3   $1,443.2
Cost of sales                                     490.4    535.8    650.3      899.8      986.2
                                                 ------   ------   ------   --------   --------
GROSS PROFIT                                      225.0    264.4    312.1      421.5      457.0
Store operating, selling, general and
   administrative expenses                        183.1    236.1    250.7      308.8      322.2
Depreciation and amortization                       7.7     21.7     19.0       19.9       18.9
Restructuring, asset impairment and other
   charges, net                                      --       --      2.5       14.0        3.3
Loss on Kmart Settlement (1)                         --      6.3       --         --         --
Bad debt expense - Ames Department Stores            --       --       --        9.2         --
Other income                                         --     (9.2)    (5.4)        --         --
Interest expense                                    4.6     11.0     23.4        9.5        3.8
Interest income                                      --       --     (1.1)      (1.1)      (1.6)
                                                 ------   ------   ------   --------   --------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS,
   INCOME TAXES, MINORITY INTERESTS,
   DISCONTINUED OPERATIONS AND CUMULATIVE
   EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE      29.6     (1.5)    23.0       61.2      110.4
Reorganization items(2)                           (14.6)   (37.1)      --         --         --
                                                 ------   ------   ------   --------   --------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
   INTERESTS, DISCONTINUED OPERATIONS AND
   CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
   PRINCIPLE                                       15.0    (38.6)    23.0       61.2      110.4
(Provision) benefit for income taxes (3)           (4.2)     2.9    (10.0)     (70.9)     (28.8)
                                                 ------   ------   ------   --------   --------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND
   DISCONTINUED OPERATIONS                         10.8    (35.7)    13.0       (9.7)      81.6
Minority interests in net loss (income)              --     11.0    (17.3)     (37.1)     (44.8)
                                                 ------   ------   ------   --------   --------
INCOME (LOSS) FROM CONTINUING OPERATIONS           10.8    (24.7)    (4.3)     (46.8)      36.8
Income (loss) from discontinued operations,
   net of tax (4)                                   4.7    (66.7)   (50.1)     (32.4)     (67.4)
Gain from disposal of Athletic Segment, net of
   tax                                              8.9     21.4       --         --         --
                                                 ------   ------   ------   --------   --------
INCOME (LOSS) FROM OPERATIONS BEFORE
   CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
   PRINCIPLE                                       24.4    (70.0)   (54.4)     (79.2)     (30.6)
Cumulative effect of a change in accounting
   principle (5)                                     --       --       --      (24.3)        --
                                                 ------   ------   ------   --------   --------
NET INCOME (LOSS)                                $ 24.4   $(70.0)  $(54.4)  $ (103.5)  $  (30.6)
                                                 ======   ======   ======   ========   ========
BASIC INCOME (LOSS) PER SHARE FROM CONTINUING
   OPERATIONS                                    $ 0.53   $(1.20)  $(0.21)  $  (2.29)  $   1.82
                                                 ======   ======   ======   ========   ========
DILUTED INCOME (LOSS) PER SHARE FROM
   CONTINUING OPERATIONS                         $ 0.53   $(1.20)  $(0.21)  $  (2.29)  $   1.78
                                                 ======   ======   ======   ========   ========
</TABLE>


                                       22

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA, CONT.

FIVE-YEAR HISTORICAL FINANCIAL SUMMARY

<TABLE>
<CAPTION>
(dollars in millions)                             2005     2004     2003     2002     2001
                                                 ------   ------   ------   ------   ------
<S>                                              <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA
Current assets:
   Cash and cash equivalents                     $196.1   $189.6   $  1.1   $ 13.4   $ 12.5
   Inventories                                     89.2     98.9    179.7    360.9    389.5
   Other                                           30.3     50.5     39.7     87.5    123.7
   Assets related to discontinued operations        0.1      6.2    284.5       --       --
                                                 ------   ------   ------   ------   ------
   Total current assets                           315.7    345.2    505.0    461.8    525.7
Property and equipment, net                        28.9     35.4    147.2    266.7    256.2
Other assets                                       12.1     13.5     12.5     46.8    116.9
                                                 ------   ------   ------   ------   ------
Total assets                                      356.7    394.1    664.7    775.3    898.8
                                                 ======   ======   ======   ======   ======
Notes payable                                        --       --    198.0    146.8    146.9
Amount due under Kmart Settlement (1)                --     45.0       --       --       --
Other current liabilities                         107.8     98.0    133.2    319.0    322.4
Liabilities related to discontinued operations      7.4      3.5    110.5       --       --
Liabilities subject to compromise                 125.5    152.3       --       --       --
                                                 ------   ------   ------   ------   ------
Total current liabilities                         240.7    298.8    441.7    465.8    469.3
Other long term liabilities                        35.0     38.5     58.9     72.8     81.5
Amount due under Kmart Settlement (1)               5.5      5.5       --       --       --
Minority interests in subsidiaries (1)               --       --     42.2     61.9     70.1
                                                 ------   ------   ------   ------   ------
Total liabilities                                 281.2    342.8    542.8    600.5    620.9
                                                 ------   ------   ------   ------   ------
Shareholders' equity                               75.5     51.3    121.9    174.8    277.9
                                                 ------   ------   ------   ------   ------
Total liabilities and shareholders equity        $356.7   $394.1   $664.7   $775.3   $898.8
                                                 ======   ======   ======   ======   ======
</TABLE>

(1)  Represents additional charge incurred on Kmart Settlement and the
     elimination of the minority interests as part of the cure payment.

(2)  Represents income and expenses associated with our bankruptcy. See Note 19
     "Reorganization Items" of Notes to Consolidated Financial Statements.

(3)  As a result of our historical losses and possible liquidation of our
     business in December, 2008, for accounting purposes we cannot rely on
     anticipated future profits to utilize certain of our deferred tax assets.
     As a result, we could not conclude that it is more likely than not that the
     deferred tax assets will be realized and have recorded in fiscal 2005 an
     additional non-cash valuation allowance of $1.9 million, $21.4 million in
     fiscal 2004, $24.7 million in fiscal 2003, $70.2 million in fiscal 2002.

(4)  Loss from discontinued operations includes the losses from the disposition
     of our Athletic Segment in fiscal 2003 and the losses from the disposition
     of our Shoe Zone stores and the footwear departments of Gordmans and
     Federated, all part of our Meldisco business, in fiscal 2004. Shoe Zone
     commenced operations in fiscal 2001 and Gordmans and Federated commenced
     operations in fiscal 2002. The income (loss) from discontinued operations
     includes the following (in millions):

<TABLE>
<CAPTION>
                       2005    2004     2003     2002     2001
                      -----   ------   ------   ------   ------
<S>                   <C>     <C>      <C>      <C>      <C>
Athletic Segment      $ 5.1   $(38.9)  $(39.9)  $(30.8)  $(66.7)
Meldisco Businesses    (0.4)   (27.8)   (10.2)    (1.6)    (0.7)
                      -----   ------   ------   ------   ------
   Total              $ 4.7   $(66.7)  $(50.1)  $(32.4)  $(67.4)
                      =====   ======   ======   ======   ======
</TABLE>

See Note 3 "Discontinued Operations" of Notes to Consolidated Financial
Statements.

(5)  Represents write-off of goodwill recorded in connection with the
     acquisition of J. Baker assets upon the adoption of Statement of Financial
     Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
     Amortization of goodwill in fiscal year 2001 was $2.3 million.


                                       23

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements made in reliance upon the safe
harbor provisions of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
may be identified by the use of words such as "anticipate," "estimates,"
"should," "expect," "guidance," "project," "intend," "plan," "believe" and other
words and terms of similar meaning, in connection with any discussion of our
financial statements, business, results of operations, liquidity and future
operating or financial performance. Factors that could affect our
forward-looking statements include, among other things:

     -    The Company's ability to operate within the provisions of the Amended
          Master Agreement with Kmart through December 2008;

     -    the Company's ability to obtain and maintain normal terms with vendors
          and service providers;

     -    negative reactions from the Company's stockholders, creditors,
          licensors or vendors to the results of the investigation and
          restatement or the delay in providing financial information caused by
          the investigation;

     -    the Company's ability to successfully implement internal controls and
          procedures that ensure timely, effective and accurate financial
          reporting;

     -    the Company's ability to reduce overhead costs commensurate with any
          decline in sales;

     -    adverse results on the Company's business relating to increased review
          and scrutiny by regulatory authorities, media and others of financial
          reporting issues and practices or otherwise;

     -    the Company's compliance with the requirements of Sarbanes-Oxley;

     -    the ability to maintain contracts that are critical to the Company's
          operations;

     -    any adverse developments in existing commercial disputes or legal
          proceedings; and

     -    intense competition in the markets in which the Company competes.

Additionally, due to material uncertainties, it is not possible to predict the
outcome of the ongoing SEC investigation, the Company's discussions with the SEC
in response to the Wells notice it has received or the effect of the proceeding
on the Company's businesses and the interests of various creditors and security
holders. Also, the Company's Meldisco business is the Company's only continuing
business and substantially all of the Company's continuing net sales and profits
result from Meldisco's business in Kmart stores. The Kmart Settlement will
result in the liquidation of the Company's Kmart business no later than the end
of December 2008. If the Company fails to develop viable business alternatives
to offset this business the Company will almost certainly be forced to liquidate
our business when the Kmart relationship ends.

Because the information in this Annual Report on Form 10-K is based solely on
data currently available, it is subject to change and should not be viewed as
providing any assurance regarding our future performance. Actual results and
performance may differ from our current projections, estimates and expectations
and the differences may be material, individually or in the aggregate, to our
business, financial condition, results of operations, liquidity or prospects.
Additionally, we assume no obligation to update any of our forward looking
statements based on changes in


                                       24

<PAGE>

assumptions, changes in results or other events subsequent to the date of this
Annual Report on Form 10-K.

OVERVIEW

Management confronts major challenges in the emergence of the Company from the
bankruptcy process and managing the business after the Kmart Settlement.
Meldisco is our only continuing business and substantially all of our continuing
net sales and profits result from Meldisco's business in Kmart stores. If we
fail to develop viable business alternatives to offset the termination of the
Kmart relationship, we will be forced to liquidate our business when the Kmart
relationship ends which pursuant to the Kmart Settlement will be no later than
December 31, 2008.

We decided to seek bankruptcy protection after management determined it was
unable to obtain necessary liquidity from our lending syndicate or additional
debt or equity financing. We suffered a decline in our liquidity primarily
resulting from unprofitable results in our Athletic Segment, a reduction in
trade credit by certain Athletic vendors, unprofitable results of operations
from recent acquisitions and the effect of the Kmart bankruptcy. Other factors
included intense competition in the discount retailing industry, unsuccessful
sales and marketing initiatives and capital market volatility. As a
debtor-in-possession, we were authorized to continue to operate as an ongoing
business but could not engage in transactions outside the ordinary course of
business without the approval of the Court.

On February 7, 2006, we successfully emerged from bankruptcy. Our creditors have
been or will be paid in full, plus interest where applicable.

Although the process for the disposition of our Athletic Segment commenced in
2003, as part of our initial reorganization plans after filing for Chapter 11 we
closed 166 underperforming stores within the Athletic Segment, comprised of all
88 Just For Feet stores, 75 Footaction stores and 3 Uprise stores.

After filing for bankruptcy protection, we received indications of significant
interest from potential acquirers of the remaining Footaction retail stores
comprising the Athletic Segment. We determined that a sale of these stores was
the best way to maximize the value of that business. This decision was driven in
part by the absence of a commitment from Nike USA, Inc., the largest supplier of
the Athletic Segment, to supply the Athletic Segment for more than a limited
period of time in accordance with past business practices. Accordingly, we
decided to establish an orderly sale process for the remaining Footaction retail
stores.

On April 21, 2004, we received Court approval to sell to Foot Locker 349 of the
remaining Footaction stores (including all lease rights and inventory at these
stores), along with the remaining inventory from the four remaining Footaction
stores. Effective May 2, 2004, these assets were sold to Foot Locker for $225.0
million in cash, subject to adjustment. Approximately $13.0 million of the sales
proceeds were placed in escrow with respect to 14 store locations that were
leased on a month-to-month basis. If Foot Locker entered into a new lease for
any of these store locations, the escrow amount related to that location was
paid to us. The escrow amount related to any location for which Foot Locker did
not enter into a new lease was paid to Foot Locker, thereby reducing the
purchase price by such amount. As of December 31, 2005, no amounts were left in
escrow as we


                                       25

<PAGE>

have been paid approximately $10 million from the escrow account and Foot Locker
has been paid approximately $3 million. The Athletic Segment has been accounted
for as discontinued operations in accordance with FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets".

In the initial stages of our bankruptcy, we sought to streamline our Meldisco
business by selling or exiting selected stores. As a result of our continued
analysis of our businesses, we sold or liquidated all of our Shoe Zone stores.
We also exited the footwear departments in 44 Gordmans stores and 87 Federated
stores. Our financial statements reflect these Meldisco businesses as
discontinued operations for all periods presented.

We have sold other assets, including our distribution centers in Mira Loma in
July 2004 and Gaffney in September 2004. The purchaser of Mira Loma, Thrifty,
has leased Mira Loma to FMI which has agreed to provide us with warehousing and
distribution services through June 30, 2012 under the FMI Agreement. (See
Introductory Note)

We previously operated a Shared Services Center in Dallas, Texas. The Shared
Services Center administered accounts payable, loss prevention, payroll,
benefits, store accounting and inventory control for the entire Company and also
contained our information system's data center. In connection with our decision
to sell the Athletic Segment and streamline our Meldisco business, we determined
that, from both an internal control and cost perspective, the Shared Services
Center was no longer a viable concept given our significantly reduced operating
structure. Accordingly, during 2004 we transitioned all Shared Services Center
functions to our headquarters in Mahwah, New Jersey.

KMART SETTLEMENT

Our business relationship between Meldisco and Kmart is extremely important to
us. The licensed footwear departments in Kmart now provide substantially all of
our sales and profits.

On July 2, 2005, the Company and Kmart entered into the Kmart Settlement and
thereafter the Amended Master Agreement which dictates the structure of our
relationship with Kmart. Under the Master Agreement before amendment, the
Company and Kmart had formed in excess of 1,500 Shoemart Corporations in which
we had a 51% ownership interest and Kmart had a 49% ownership interest, except
for 23 Shoemart Corporations which were wholly-owned by us.

The Kmart Settlement provides that Kmart's equity interests in the Shoemart
Corporations were extinguished effective January 2, 2005, and accordingly, Kmart
does not share in the profits or losses of those entities for fiscal 2005 or
subsequent years. The Kmart Settlement fixed the cure amount with respect to our
assumption of the Amended Master Agreement at $45.0 million, which was paid on
August 26, 2005. Effective January 2, 2005, we are required to pay Kmart 14.625%
of the gross sales of the footwear departments, in lieu of the fees and
dividends required under the Master Agreement. We made payments to Kmart of
$15.5 million based on the revised percent of gross sales due under the Amended
Master Agreement for the period beginning January 2, 2005 through August 27,
2005. Effective August 25, 2005, we are required to pay Kmart a miscellaneous
expense fee of $23,500 per open store per year. The Amended Master Agreement
expires at the end of 2008 at which time Kmart is obligated to purchase our
Shoemart inventory (but not our brands)


                                       26

<PAGE>

at book value, as defined.

We and Kmart each have the right to terminate the Amended Master Agreement early
if the gross sales of the footwear departments are less than $550.0 million in
any year, provided that this gross sales minimum will be reduced by $0.4 million
for each store that is closed or converted after August 25, 2005. Twenty-two
stores have been closed or converted from August 25, 2005 through February 25,
2006. The Company also has the unilateral right to terminate the Amended Master
Agreement if either (i) the number of Kmart stores is less than 900 or (ii) the
gross sales of the footwear departments in any four consecutive quarters are
less than $450.0 million. In the event of any such termination, Kmart is
obligated to purchase all of the inventory (including inventory that is on order
but excluding inventory that is damaged, unsaleable, and seasonal inventory, as
defined) for an amount equal to the book value of the inventory, as defined.

Pursuant the Amended Master Agreement Kmart must pay us the stipulated loss
value (as set forth below), if it terminates our licenses to operate shoe
departments in up to 550 Kmart stores during the remaining term of the Amended
Master Agreement by disposing of, closing or converting those stores. The number
of stores it can dispose of, close or convert per year is capped at 85 in 2005,
150 in 2006 and 160 in each of 2007 and 2008, with any unused cap carried over
to the following year. In 2005, 61 stores have been disposed of, closed or
converted. In 2006, through February 25, 2006, 18 stores were disposed of,
closed or converted and one additional store has been identified to be disposed
of, closed or converted. For each store that is disposed of, closed or
converted, Kmart must purchase all of our in-store inventory (excluding
inventory that is damaged, unsaleable and seasonal inventory, as defined) at
book value, as defined. In addition, to the extent Kmart exceeds the annual cap
or the 550 aggregate limit, Kmart must pay us a non-refundable stipulated loss
value per store equal to $100,000 for terminations occurring in 2005, $60,000
for terminations occurring in 2006, $40,000 for terminations occurring in 2007
and $20,000 for terminations occurring in 2008. If the entire Amended Master
Agreement is terminated in accordance with its terms, Kmart is not obligated to
make any stipulated loss value payments for such stores.

The Amended Master Agreement sets forth the parties' obligations with respect to
staffing and advertising. Specifically, we must spend at least 10% of gross
sales in the footwear departments on staffing costs, as defined, for the stores
and we must schedule the staffing in each store at a minimum of 40 hours per
week. In addition, Kmart is required to allocate at least 52 weekend newspaper
advertising insert pages per year to our products.

Kmart has a capital claim against us in the amount of $11,000 for each store
that is an existing store, as defined, on August 25, 2005, which is generally
payable by us to Kmart at the time a store is disposed of, closed or converted
to another retail format in accordance with the 550 store limitation described
above. However, upon the expiration of the Amended Master Agreement or upon
early termination of that agreement other than as a result of our breach, all
capital claims not yet due and payable will be waived for any remaining stores.
If the Amended Master Agreement is terminated as a result of our breach, capital
claims for remaining stores will not be waived and will become immediately due
and payable.


                                       27

<PAGE>

BUSINESS RELATIONSHIP WITH WAL-MART STORES

Although, as of December 31, 2005, we were supplying Thom McAn family footwear
to 1,500 Wal-Mart stores in the United States and 13 stores in Puerto Rico,
beginning in January 2006, Wal-Mart is no longer purchasing Thom McAn product
for any of its stores in the United States; however, it will continue to buy
Thom McAn footwear for Wal-Mart stores in Puerto Rico and will continue to
source footwear from us for Wal-Mart stores under Wal-Mart's proprietary brands.
In 2005, we sold approximately $27 million of Thom McAn products to Wal-Mart
stores.

PRODUCT SOURCING

Product sourcing in the family footwear business is driven by relationships with
foreign manufacturers. Approximately 99% of our products are manufactured in
China. A portion of our footwear product is comprised of petrochemical products
which have risen in price dramatically over the past year. It is possible that
these raw material price increases will be passed on to us. Furthermore, higher
product prices could result from the recent decision by the Chinese government
to revalue their currency. Although we pay for finished goods in U.S. dollars,
it is possible that higher labor costs due primarily to the currency revaluation
could be passed on to us through higher product costs. As a result of these
issues, the Company is beginning to shift manufacturing production to lower cost
regions of China. While management is exercising considerable diligence in
selecting new factories, it is possible that the Company could experience lower
product quality and/or late shipments in these new factories which could
unfavorably impact the Company's financial results.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with and is
qualified in its entirety by our Consolidated Financial Statements and the Notes
thereto that appear elsewhere in this report.

FISCAL 2005 VERSUS FISCAL 2004

Meldisco represents substantially all of our operations. Corporate (income)
expenses (excluding other income, interest income and interest expense), net of
royalties and commissions, were approximately $(10.0) million in fiscal 2005 and
$22.1 million in fiscal 2004.

2005 VERSUS 2004 - CORPORATE

Royalties and commissions, which were approximately $12.9 million in fiscal 2005
and $14.4 million in fiscal 2004, consisted of the following:

     -    The royalties Footstar charges Meldisco on the corporate trademarks
          which we own and Meldisco utilizes on its products.

     -    Commissions on goods sourced to third parties.

     -    Fees associated with third party services, such as the testing lab.

Corporate expenses (excluding other income, interest income and interest
expense) were


                                       28

<PAGE>

approximately $2.8 million in fiscal 2005 and $36.5 million in fiscal 2004 and
consisted of the following:

     -    General expenses not allocated.

     -    Depreciation on assets located at our former headquarters in West
          Nyack, New York.

     -    Amortization of Company-owned trademarks.

MELDISCO

<TABLE>
<CAPTION>
(dollars in millions)        2005     2004
                            ------   ------
<S>                         <C>      <C>
Net Sales                   $715.4   $800.2
                            ------   ------
Gross Profit                 212.1    250.1
SG&A Expenses                180.6    204.8
Depreciation/Amortization      7.4     16.6
Loss on Kmart Settlement        --      6.3
                            ------   ------
Operating Profit            $ 24.1   $ 22.4
                            ======   ======
</TABLE>

Meldisco operates through our Shoemart subsidiaries primarily in the discount
footwear market through its operation of 1,421 Kmart licensed footwear
departments as of December 31, 2005, as well as other licensed footwear and
wholesale businesses. Meldisco competes primarily with other discount department
stores, discount footwear retailers, as well as off-price and value retailers.
As a result, Meldisco is heavily dependent on the ability of its host retailers
to attract traffic into their stores through their promotional and advertising
programs. Our Shoemart Subsidiaries accounted for 93%, 94% and 94% of Meldisco's
sales in 2005, 2004 and 2003, respectively.

As part of the Kmart Settlement, effective January 2, 2005 the fees paid to
Kmart were revised and Kmart's equity interest in the Shoemart Corporations were
eliminated. The effect of this change in payments made to Kmart in 2005 compared
with 2004 is as follows:

<TABLE>
<S>                         <C>
Increase in cost of sales   $32.8 million
Decrease in SG&A expenses   $17.3 million
</TABLE>

The increase in cost of sales was due to the 6.025% increase in the percentage
of sales remitted to Kmart for license fees as a result of the Kmart Settlement
($45.3 million) offset by the reduction in sales ($12.5 million). The decrease
in SG&A expenses was due to the elimination of the 2.3% of sales remitted to
Kmart for advertising as a result of the Kmart Settlement ($15.3 million) in
addition to the decrease in sales ($2.0 million).

Effective January 2, 2005, Kmart's equity interests in the Shoemart Corporations
were eliminated. The minority interests share in 2004 losses was $11.0 million.


                                       29

<PAGE>

NET SALES

Net sales decreased $84.8 million, or 10.6%, in 2005, to $715.4 million compared
with $800.2 million in 2004. A 7.5% comparable store sales decline in our Kmart
stores during 2005 accounted for $53 million of this decrease and the reduction
in open Kmart stores accounted for the remaining $32 million. There were 1,421
Kmart stores opened at the end of fiscal 2005 versus 1,482 at the end of fiscal
2004. Sales in our Rite Aid licensed footwear operation and wholesale operations
were approximately the same in fiscal 2005 as they were in fiscal 2004.

As of the date of the filing of this 2005 Form 10-K, Kmart has not published
comparable store data for fiscal 2005.

GROSS PROFIT

Gross profit decreased $38.0 million, or 15.2%, to $212.1 million in 2005
compared with $250.1 million in 2004. This decrease is primarily due to the
aforementioned $32.8 million increase in the cost of sales as a result of the
Kmart agreement. The overall gross margin rate declined to 29.7% in 2005 from
31.3% in 2004 primarily due to the Kmart settlement. Excluding the Kmart
Settlement, the gross margin rate for 2005 would have been 34.2%. The higher
gross margin rates in 2005 were due to a reduction in clearance sales in 2005
versus 2004 when the Company moved to aggressively sell aged inventory product
at discounted prices in 2004. Such clearance sales were not necessary in 2005 as
inventory levels contained a significantly lower level of aged merchandise.

SG&A EXPENSES

SG&A expenses decreased $24.2 million, or 11.8%, to $180.6 million in 2005
compared with $204.8 million in 2004. Approximately $17.3 million of this
decrease was due to the elimination of the 2.3% advertising fee as a result of
the Kmart settlement and reduction in sales and the remainder was due to
reduction in store staffing and supervisory costs.

DEPRECIATION/AMORTIZATION

Depreciation/amortization decreased $9.2 million, or 55.4%, to $7.4 million in
2005 compared with $16.6 million in 2004 due to the significant disposal of
assets during 2004.

KMART SETTLEMENT CHARGE

In connection with the Kmart Settlement, we recorded a charge of $6.3 million in
fiscal 2004. This charge represents the amount of the $45.0 million cure payment
to Kmart in excess of previously recorded amounts due Kmart, including minority
interests.

OPERATING PROFIT

Operating profit increased $1.7 million, or 7.6%, to $24.1 million in 2005
compared with $22.4 million in 2004 due to the reasons noted above.


                                       30

<PAGE>

REORGANIZATION ITEMS

Reorganization items, which consist of income and expenses that are related to
our bankruptcy were comprised of the following for 2005 and 2004 (in millions):

<TABLE>
<CAPTION>
                                             2005    2004
                                            -----   -----
<S>                                         <C>     <C>
Store and distribution center closing and
   related asset impairment costs           $ 0.1   $24.5
Professional fees                            18.5     7.9
Trustee fees                                  3.1     5.8
Gain on disposition of bankruptcy claims     (1.5)     --
Interest income                              (5.6)   (1.1)
                                            -----   -----
   Total                                    $14.6   $37.1
                                            =====   =====
</TABLE>

The disposition of bankruptcy claims resulted in an increase of $1.5 million in
income from continuing operations.

SOP 90-7 requires that interest income earned on cash accumulated during
bankruptcy proceedings be included as a reorganization item. During fiscal 2005
and 2004, interest income of $5.6 million and $1.1 million, respectively, was
earned on cash that would otherwise have been used to pay such pre-petition
liabilities.

FISCAL 2004 VERSUS FISCAL 2003

Meldisco represents substantially all of our operations. Corporate expenses
(excluding other income, interest income and interest expense), net of royalties
and commissions, were approximately $22.1 million in fiscal 2004 and $19.1
million in fiscal 2003.

2004 VERSUS 2003 - CORPORATE

Royalties and commissions, which were approximately $14.4 million in fiscal 2004
and $19.5 million in fiscal 2003, consisted of the following:

     -    The royalties Footstar charges Meldisco on the corporate trademarks
          which we own and Meldisco utilizes on its products.

     -    Commissions on goods sourced to third parties.

     -    Fees associated with third party services, such as the testing lab.

Corporate expenses (excluding other income, interest income and interest
expense), which were approximately $36.5 million in fiscal 2004 and $38.6
million in fiscal 2003, consisted of the following:

     -    General expenses not allocated.

     -    Depreciation on assets located at our former headquarters in West
          Nyack, New York.

     -    Amortization of Company-owned trademarks.


                                       31

<PAGE>

MELDISCO

<TABLE>
<CAPTION>
(dollars in millions)             2004     2003
                                 ------   ------
<S>                              <C>      <C>
Net Sales                        $800.2   $962.4
                                 ------   ------
Gross Profit                      250.1    292.7
SG&A Expenses                     204.8    217.4
Depreciation/Amortization          16.6     14.0
Loss on Kmart Settlement            6.3       --
Restructuring, Asset
   Impairment and Other Charge       --      2.3
                                 ------   ------
Operating (Loss) Profit          $ 22.4   $ 59.0
                                 ======   ======
</TABLE>

Meldisco operates through our Shoemart subsidiaries primarily in the discount
footwear market through its operation of 1,482 Kmart licensed footwear
departments as of January 1, 2005, as well as other licensed footwear and retail
businesses. Meldisco competes primarily with other discount department stores,
discount footwear retailers, as well as off-price and value retailers. As a
result, Meldisco is heavily dependent on the ability of its host retailers to
attract traffic into their stores through their promotional and advertising
programs. Our Shoemart Subsidiaries accounted for 94%, 94% and 87% of Meldisco's
sales in 2004, 2003 and 2002, respectively.

NET SALES

Net sales decreased $162.2 million, or 16.9%, in 2004, to $800.2 million
compared with $962.4 million in 2003. This sales decrease was primarily due to
Shoemart comparable store sales declines ($80 million), a reduction in open
Kmart stores ($58 million), one fewer week of sales results in the fiscal
calendar year ($12 million) and lower sales to Wal-Mart ($9 million) as 2003
sales to Wal-Mart were higher due to initial shipment quantities.

Shoemart sales are largely dependent on the number of open Kmart stores and
Kmart comparable store sales.

<TABLE>
<CAPTION>
                 Open Kmart   Kmart Store     Shoemart
                   Stores      Comps (A)    Store Comps
                 ----------   -----------   -----------
<S>              <C>          <C>           <C>
Full Year 2004      1,482       (11.0)%        (9.8)%
Full Year 2003      1,511        (8.1)%        (7.8)%
</TABLE>

(A)  for periods ended January 26, 2005 and January 28, 2004, respectively.

GROSS PROFIT

Gross profit decreased $42.6 million, or 14.6%, to $250.1 million in 2004
compared with $292.7 million in 2003. This decrease was primarily due to the
16.9% decrease in sales. The increase in the overall gross margin rates to 31.3%
in 2004 from 30.4% in 2003 was due to increasing the percentage of internally
sourced purchases rather than using outside vendors and some price increases.


                                       32

<PAGE>

SG&A EXPENSES

SG&A expenses decreased $12.6 million, or 5.8%, to $204.8 million in 2004
compared with $217.4 million in 2003. This decrease was primarily attributable
to a reduction in expenses to offset a portion of the sales declines in the
Shoemart operation and the reduction of open Kmart stores. The overall SG&A rate
as a percentage of sales increased to 25.6% in 2004 compared with 22.6% in 2003
as Shoemart was unable to reduce store selling, fixture and administrative costs
commensurate with the overall sales decline due to a certain portion of these
costs being fixed in nature.

DEPRECIATION/AMORTIZATION

Depreciation/amortization increased $2.6 million, or 18.6%, to $16.6 million in
2004 compared with $14.0 million in 2003. This increase is attributable to the
acceleration of depreciation of our shared services center assets to coincide
with the closing of the center in December 2004. This acceleration exceeded the
reduction in depreciation associated with the disposition of Mira Loma and
Gaffney distribution centers during 2004.

KMART SETTLEMENT CHARGE

In connection with the Kmart Settlement, we recorded a charge of $6.3 million in
the fourth quarter of fiscal 2004. This charge represents the amount in excess
of previously recorded amounts due Kmart, including minority interests.

RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

In 2003, we incurred approximately $18.2 million of restructuring and asset
impairments relating to the closing of 321 Kmart stores. These charges included
approximately $15.7 million for inventory write-downs which are included as a
component of cost of sales. The other charges, which amounted to $2.5 million,
included $1.9 million for severance costs and $0.6 million for asset
impairments. These other charges were offset by $0.2 million of reserve
reversals in the 2003 fourth quarter.

OPERATING PROFIT

Operating profit decreased $36.6 million, or 62.0%, to $22.4 million in 2004
compared with $59.0 million in 2003 due to the effect of the 16.9% decline in
sales and the Kmart Settlement in 2004, which was offset by restructuring
charges incurred in 2003.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity used in funding short-term operations are our
operating cash flows and our Exit Facility (previously our Amended DIP and Exit
Facility). The Exit Facility is structured to support general corporate
borrowing requirements. We also continue to benefit from improved payment terms
obtained from our vendors and factories overseas beginning in December, 2004.


                                       33

<PAGE>

In accordance with the Amended Master Agreement, on August 26, 2005, we made the
$45.0 million cure payment to Kmart. On August 29, 2005, we made an estimated
payment to Kmart of $14.0 million based on the revised percent of gross sales
due under the Amended Master Agreement for the period beginning January 2, 2005
through August 27, 2005. On September 6, 2005, we paid an additional $1.5
million to Kmart for the final payment of the amount due.

Upon emergence from Chapter 11 on February 7, 2006, we made payments to
creditors totaling $105.1 million, plus interest where applicable. These
payments exclude claims for approximately $14.2 million which will be paid upon
final resolution. Creditors were and will be paid in full, plus interest. Such
distributions were paid from existing cash balances and did not require us to
incur borrowings under our Exit Facility.

Factors that could affect our liquidity include, among other things, maintaining
the support of our key vendors and lenders, retaining key personnel, the impact
of subsequent financial results, many of which are beyond our control. Also, the
timing of the wind-down and ultimate liquidation of our Kmart business is
outside our control (within certain parameters described under the "Kmart
Settlement" above). If the Company does not develop viable business alternatives
to offset the termination of its Kmart business by no later than the end of
2008, it is expected that the Company will liquidate its business when the Kmart
relationship ends. Although we cannot reasonably assess the impact of these
uncertainties on our long-term liquidity needs, we believe that our current
cash, together with cash generated from operations and cash available under our
Exit Facility, will be sufficient to fund our expected operating expenses,
capital expenditures and working capital needs during the next 12 months.

THE CREDIT FACILITIES

Effective March 4, 2004, we entered into a two-year, $300.0 million
senior-secured Debtor-in-Possession Credit Agreement (the "DIP Credit
Agreement") with a syndicate of lenders co-led by Bank of America, N.A.
(formerly Fleet National Bank) and GECC Capital Markets Group, Inc. Effective
August 2, 2004, the DIP Credit Agreement was amended and restated (the "DIP and
Exit Facility"), which, among other things, provided for up to $160.0 million of
post-emergence financing (containing a $75.0 million sub-limit for letters of
credit) and reduced the amount of lending commitments available while operating
as debtor-in-possession to $100.0 million (including a sub-limit for letters of
credit).

Effective July 1, 2005, we amended certain terms and conditions of the DIP and
Exit Facility (the "Amended DIP and Exit Facility") to, among other things,
allow for the consummation of our Amended Plan and reduce the amount of
revolving commitments available upon emergence from $160.0 million to $100.0
million. Accordingly, the letter of credit sub-limit was reduced from $75.0
million to $40.0 million. This amendment also included a change in the maturity
date for the debtor-in-possession portion of the facility from the earlier of
(a)(i) March 4, 2006 or (ii) 15 days following confirmation of the Amended Plan
to the earlier of (b)(i) October 31, 2006 or (ii) emergence from Chapter 11. The
maturity date of the exit portion of the Amended DIP and Exit Facility was
modified to be, the earlier of 36 months after our emergence from Chapter 11 or
March 4, 2009.

Effective January 6, 2006, we further amended our Amended DIP and Exit Facility.
This amendment modified only certain terms and conditions related to the exit
portion of the facility (the


                                       34

<PAGE>

"Exit Facility"). Debtor-in-possession financing continued to be provided under
the Amended DIP and Exit Facility prior to the emergence date. The Exit Facility
became effective upon consummation of the Plan on February 7, 2006 as all
conditions to be satisfied were met. The Exit Facility has a maturity date of
the earlier of (a) November 30, 2008 and (b) thirty days prior to the
termination of the Amended and Restated Kmart Agreement. Prior to the amendment,
the maturity date of the exit portion of the facility was the earlier of (a)
thirty-six months after the Company's emergence from chapter 11 and (b) March 4,
2009. In addition, the Exit Facility reflects, among other things, temporary
changes in certain advance rates and availability requirements which provide for
incremental liquidity during the first twelve months following our emergence
from chapter 11.

We may borrow up to $100.0 million through the Exit Facility, subject to a
sufficient borrowing base (based upon eligible inventory and accounts
receivable), and other terms of the facility. Revolving loans under the Exit
Facility bear interest, at our option, either at the prime rate plus a variable
margin of 0.0% to 0.5% or the London-Inter-Bank Offered Rate ("LIBOR") plus a
variable margin of 1.75% to 2.50%. The variable margin is based upon quarterly
excess availability levels specified in the Exit Facility. A quarterly fee of
0.3% per annum is payable to the lenders on the unutilized balance.

The Exit Facility is secured by substantially all of the assets of the Company
and contains various affirmative and negative covenants, representations,
warranties and events of default to which we are subject, including certain
financial covenants and restrictions such as limitations on additional
indebtedness, other liens, dividends, stock repurchases and capital
expenditures. The Company is required to maintain minimum excess availability
equal to at least 5% of the borrowing base for the first twelve months following
the emergence date and 10% thereafter. In addition, if minimum excess
availability falls below 20% of the borrowing base, we will be subject to a
fixed charge coverage covenant. The Company is currently in compliance with all
financial covenants.

The Exit Facility also includes representations and warranties, that, on an
ongoing basis, there are no material adverse events affecting our business,
operations, property, assets, or condition and that the Amended Master Agreement
is in full force and effect and not in default. A failure by us to satisfy any
of the covenants, representations or warranties would result in default or other
adverse impact under the Exit Facility.

As of December 31, 2005, the Company had no loans outstanding and approximately
$49.1 million of excess availability, as defined, under the Amended DIP and Exit
Facility, net of outstanding letters of credit totaling $14.7 million (the
majority of which were standby letters of credit) and minimum excess
availability requirements.

CONTRACTUAL OBLIGATIONS

The following is a summary of our significant contractual obligations as of
December 31, 2005 (in millions):


                                       35
<PAGE>

<TABLE>
<CAPTION>
                                  Payments Due By Period
                   ---------------------------------------------------
                           Less than                            After
                   Total     1 Year    1-3 Years   4-5 Years   5 Years
                   -----   ---------   ---------   ---------   -------
<S>                <C>     <C>         <C>         <C>         <C>
Mortgage payable    $5.3      $1.0        $2.3        $2.0        --
Operating leases     3.4       1.5         1.6         0.3        --
                    ----      ----        ----        ----       ---
   Total            $8.7      $2.5        $3.9        $2.3        --
                    ====      ====        ====        ====       ===
</TABLE>

The above table does not include the Kmart license fees, as defined in the
Amended Master Agreement, as such fees are based on sales. The Amended Master
Agreement, however, requires the payment of a miscellaneous expense fee equal to
$23,500 per open store per year.

In addition, pursuant to the FMI Agreement, we are obligated to pay to FMI a
minimum of $15.1 million in 2006. (See Introductory Note)

CRITICAL ACCOUNTING ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations is based in part upon the Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America.

The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
expenses and related disclosure of contingent liabilities. On an ongoing basis,
we evaluate these estimates, including those related to the valuation of
inventory, deferred tax assets and the impairment of long-lived assets. We base
these estimates on historical experience and on various other assumptions that
are believed to be reasonable, the results of which form the bases for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may ultimately differ from
these estimates. Our management has discussed with the Audit Committee of its
Board of Directors the development, selection and disclosure of our critical
accounting estimates and the application of these estimates. We considered the
following to be our critical accounting estimates in the preparation of the
Consolidated Financial Statements included in this report.

Valuation and Aging of Inventory and Shrink Reserve

Merchandise inventory is a significant portion of our consolidated balance
sheets, representing approximately 25% of total assets from continuing
operations.

Inventories are valued using the lower of cost or market value, determined by
the reverse mark-up or retail inventory method ("RIM"). Under the RIM, the
valuation of inventories at cost and the resulting gross margins are calculated
by applying a calculated cost-to-retail ratio to the retail value of
inventories. RIM is an averaging method that is widely used in the retail
industry due to its practicality. Also, it is recognized that the use of RIM
will result in valuing inventories at the lower of cost or market if markdowns
are currently taken as a reduction of the retail value of inventories.

The methodologies we utilize in our application of RIM are consistent for all
periods presented. Such methodologies include the development of cost-to-retail
ratios, the development of shrinkage reserves and the accounting for price
changes. RIM calculations require management to make


                                       36

<PAGE>

estimates, such as merchandise mark-on, mark-ups, markdowns and shrinkage, which
can significantly impact the ending inventory valuation at cost as well as
resulting gross margins. These significant estimates, coupled with the fact that
the RIM is an averaging process, may not, in all circumstances, reflect actual
historical experience, and could result in significant differences to amounts
recorded. Future events, such as store closings and liquidations, could result
in an increase in the level of estimated markdowns which could result in lower
inventory values and increases to cost of sales in future periods. In addition,
failure to take markdowns currently can result in an overstatement of inventory
value under the lower of cost or market principle.

As a supplement to the inventory values established under the RIM, we establish
reserves for additional markdowns associated with shrink and aged product. The
shrink expense reserve represents a reserve for the unidentified loss of
inventory. Management uses historical percentages to accrue shrink expense.
Physical inventory counts are performed at each store and distribution location
throughout the year. At the completion of the inventory count, actual shrink
expense is quantified and compared to the shrink reserve. Any difference between
actual shrink expense and the reserve is recorded as a reduction or addition to
inventory on the consolidated balance sheet and as a reduction or addition to
cost of sales in the consolidated statements of operations.

The aged inventory reserve represents an estimate of the markdown required to
liquidate aged inventory, which is generally defined as inventory that is aged
12 months or more. Management calculates a reserve for aged inventory by
comparing the cost of the inventory to the estimated realizable value of the
inventory. In order to accomplish this, we analyze the quantity and quality of
all inventory in seasonal aging brackets (i.e., aged one season, two seasons,
etc.). The expected markdowns necessary to liquidate each aging bracket are thus
analyzed to determine if the related cost exceeds the net realizable value and a
reserve, if necessary, is established.

Impairment of Long-Lived Assets

We evaluate the recoverability of our long-lived assets in accordance with
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets to be Disposed Of, which generally requires us to assess these assets for
recoverability whenever events or changes in circumstances indicate that the
carrying amounts of long-lived tangible assets and intangible assets that are
amortized may not be recoverable.

We consider historical performance and future estimated results in our
evaluation of potential impairment and then compare the carrying amount of the
asset to the estimated future undiscounted cash flows expected to result from
the use of the asset. The ability to accurately predict future cash flows may
impact the determination of fair value. Management's assessments of cash flows
represent its best estimate as of the time of the impairment review and are
based upon expected future results of operations. Management believes that its
estimates of applicable cash flows in the current period are reasonable;
however, if different cash flows had been estimated in the current period, the
long-lived asset balances could have been materially impacted. Furthermore,
estimates may change from period to period as new information is generated and
as trends are identified, and this could materially impact results in future
periods.

Factors that management must estimate when performing impairment tests include,
among other items, possible liquidation of our business, sales volume, the
related cost of product, markdowns,


                                       37

<PAGE>

shrink and estimated flow through or operating profit percentages. Actual
results may ultimately differ from these estimates and, as a result, the fair
values may be adjusted in the future.

As a result of the settlement with Kmart, effective during 2005 the useful lives
of all long-lived assets except for land and building and improvement have been
reduced so that long-lived assets will be fully depreciated or amortized as of
December, 2008 to coincide with the expiration of our contract with Kmart.

Insurance and Self-Insurance Liabilities

We are primarily self-insured for medical costs and for fiscal year 2004 and
prior we were primarily self-insured for worker's compensation, as our
deductible under third party coverage was $250,000 per claim. We establish
accruals for our insurance programs based on available claims data and
historical trends and experience, as well as loss development factors prepared
by third party actuaries. Loss development factors are estimates based on our
actual historical data and other retail industry data. Commencing in 2005, the
Company is no longer self-insured for workers' compensation insurance.

We evaluate the accrual and the underlying assumptions for workers compensation
claims and for medical costs quarterly and make adjustments as needed based on
third party actuarial assessments. The ultimate cost of these claims may be
greater than or less than the established accrual. While we believe that the
recorded amounts are adequate, there can be no assurance that changes to
management's estimates will not occur due to limitations inherent in the
estimating process. In the event we determine the accruals should be increased
or reduced, we record such adjustments in the period in which such determination
is made.

The accrued obligation for these self-insurance programs was approximately $5.7
million at the end of fiscal year 2005 and $10.1 million at the end of fiscal
year 2004. Because loss development factors are estimates at a point in time,
should unknown claim issues, such as adverse medical costs, occur, develop or
become realized over the course of the claim, actual claim payments could
materially differ from our accrued obligation.

Deferred Tax Assets

We currently have significant deferred tax assets resulting from net operating
loss carryforwards and temporary differences, which should reduce taxable income
in future periods.

As of December 31, 2005 we have recorded a deferred tax asset of $109.8 million
and a related valuation allowance of $109.8 million. In connection with the
audits of our fiscal years 2005, 2004, and 2003 consolidated financial
statements, we reviewed the valuation of our deferred tax assets based on
projections of our future taxable earnings. Primarily due to our historical
losses and projected results, for accounting purposes we cannot rely on
anticipated long-term future profits to utilize our deferred tax assets. As a
result, we could not conclude that it is more likely than not that certain
deferred tax assets will be realized and have recorded a non-cash valuation
allowance on our net deferred tax asset.


                                       38

<PAGE>

Retiree Medical Benefits

The costs and obligations of our retiree medical plans (for current retirees and
a "closed" group of active associates who meet certain eligibility requirements)
are calculated by third party actuarial assessments using many assumptions to
estimate the benefit that the employee earns while working, the amount of which
cannot be completely determined until the benefit payments cease.

The most significant assumptions, as presented in Note 23 "Post Retirement
Benefits" of Notes to the Consolidated Financial Statements, include discount
rate and future trends in health care costs. The selection of assumptions is
based on historical trends and known economic and market conditions at the time
of valuation. Future health care costs may differ substantially from these
assumptions. These differences may significantly impact future retiree medical
expenses.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, FASB Statement No. 151, Inventory Costs, an Amendment of APB
No. 43, Chapter 4 ("Statement No. 151"), was issued. Statement No. 151 requires
certain abnormal expenditures to be recognized as expenses in the current
period. It also requires that the amount of fixed production overhead allocated
to inventory be based on the normal capacity of the production facilities.
Statement No. 151 is effective for the fiscal year beginning January 1, 2006.
The adoption of Statement No. 151 is not expected to have a material impact on
our financial statements.

In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29 ("Statement No. 153"). Statement No.
153 is effective for nonmonetary asset exchanges occurring in our fiscal year
beginning January 1, 2006. Statement No. 153 requires that exchanges of
productive assets be accounted for at fair value unless fair value cannot be
reasonably determined or the transaction lacks commercial substance. Statement
No. 153 is not expected to have a material impact on our financial statements.

In December 2004, the FASB issued Statement No. 123 (Revised 2004), Share-Based
Payment, which is a revision of Statement No. 123. With limited exceptions,
Statement No. 123 (Revised 2004) requires that the fair value of share-based
payments to employees be expensed over the period service is received. This
Statement is effective for us beginning with our first interim period subsequent
to December 15, 2005. We intend to adopt this Statement using the modified
prospective method. We expect to record approximately $0.6 million as a
component of store operating, selling, general and administrative expenses in
the 2006 Consolidated Statement of Operations.

In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial statements or a change in accounting
estimate. The provisions of this Statement shall be effective for accounting
changes and correction of errors made in fiscal years beginning after December
15, 2005. The adoption of Statement No. 154 is not expected to have a


                                       39

<PAGE>

material impact on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVES

As of December 31, 2005, we were not materially exposed to changes in the
underlying values of our assets or liabilities nor were we materially exposed to
changes in the value of expected foreign currency cash flows. We historically
have not entered into derivative instruments for any purpose other than to
manage our interest rate exposure. That is, we do not hold derivative financial
investments for trading or speculative purposes.

INTEREST RATES

Revolving loans under our Exit Facility bear interest at rates that are based
upon the London-Inter-Bank Offered Rate ("LIBOR") and the Prime Rate and
therefore, our consolidated financial statements will be exposed to changes in
interest rates. As of December 31, 2005, we had no loans outstanding under the
Amended DIP and Exit Facility and letters of credit issued thereunder totaled
$14.7 million (the majority of which were standby letters of credit). We assess
interest rate cash flow risk by identifying and monitoring changes in interest
rate exposures that may adversely impact expected future cash flows and by
evaluating hedging opportunities. The Company has engaged in interest rate
hedging agreements in the past for purposes of limiting portions of interest
rate expense in connection with outstanding variable rate debt.

FOREIGN EXCHANGE

A significant percentage of Meldisco's products are sourced or manufactured
offshore, with China accounting for approximately 99% of all sources. Our
offshore product sourcing and purchasing activities are currently, and have been
historically, denominated in U.S. dollars, and, therefore, we do not currently
have material exposure to cash flows denominated in foreign currencies nor have
net foreign exchange gains or losses been material to operating results in the
reporting periods presented in this report.


                                       40

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The reports of independent registered public accounting firms, the consolidated
financial statements of the Company, the notes to consolidated financial
statements, and the supplementary financial information called for by this Item
8 are listed below. Specific financial statements and supplementary data can be
found beginning on the page listed in the following index:

<TABLE>
<CAPTION>
                                  INDEX                                     PAGE
                                  -----                                     ----
<S>                                                                         <C>
Report of Independent Registered Public Accounting Firm                      F-2

Consolidated Statements of Operations for the Fiscal Years Ended             F-3
   December 31, 2005, January 1, 2005 and January 3, 2004

Consolidated Balance Sheets as of December 31, 2005 and January 1, 2005      F-4

Consolidated Statements of Shareholders' Equity and Comprehensive
   Income for the Fiscal Years Ended December 31, 2005, January 1, 2005,
   and January 3, 2004                                                       F-5

Consolidated Statements of Cash Flows for the Fiscal Years Ended
   December 31, 2005, January 1, 2005, and January 3, 2004                   F-6

Notes to Consolidated Financial Statements                                   F-7

Schedule II - Valuation and Qualifying Accounts for the Fiscal Years
   ended December 31, 2005, January 1, 2005, and January 3, 2004              63
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
     FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

(A)  DISCLOSURE CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and our Senior Vice President of
Financial Reporting and Control (Principal Financial Officers), conducted an
evaluation of the effectiveness of the design and operation of the


                                       41

<PAGE>

Company's disclosure controls and procedures, as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the
end of the period covered by this report (the "Evaluation Date"). Since the
original date of the filing of our Form 10-K for the year ending December 31,
2005 on March 15, 2006, our Senior Vice President of Financial Reporting and
Control (who was then our Principal Financial Officer) retired. The principal
executive officer and principal financial officers concluded that, as of the
Evaluation Date and as of the date of this filing, the Company's disclosure
controls and procedures were effective at a reasonable assurance level in
ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act (i) is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and (ii) is accumulated and communicated to the Company's management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.

In addition, based on that evaluation, no changes in the Company's internal
control over financial reporting have occurred during the Company's last fiscal
quarter of 2005 that has materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.

(B)  MANAGEMENT'S REPORT ON ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL
     REPORTING

Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company's internal control over financial reporting consists of policies and
procedures that are designed and operated to provide reasonable assurance about
the reliability of the Company's financial reporting and its process for
preparing financial statements in accordance with generally accepted accounting
principles ("GAAP"). Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005. In making this assessment,
management used the criteria described in Internal Control -- Integrated
Framework issued by The Committee of Sponsoring Organizations of the Treadway
Commission. Based on the results of this assessment, management (including our
Chief Executive Officer and our Senior Vice President of Financial Reporting and
Control (Principal Financial Officer)) has concluded that, as of December 31,
2005, our internal control over financial reporting was effective at a
reasonable assurance level.

Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by Amper
Politziner & Mattia, PC, an independent registered public accounting firm, as
stated in their report which appears herein.

(C)  REMEDIATION OF MATERIAL WEAKNESSES

As of January 1, 2005, we identified material weaknesses in internal control
over financial reporting concerning: (1) timeliness of filing of periodic
reports with the SEC and timeliness of the


                                       42

<PAGE>

accounting close process, (2) operational deficiency in controls over landed
cost accounts, and (3) design deficiency in controls over in-transit inventory.

For additional information relating to the control deficiencies that resulted in
the material weakness described above, please see the discussion under "Item 9A.
Controls and Procedures -- Management Report on Internal Control Over Financial
Reporting" included in our Fiscal 2004 Annual Report on Form 10-K.

During 2005, we implemented measures designed to remediate the material
weaknesses referred to above. As described in our Form 10-Q for quarterly period
ended October 1, 2005, the Company's remediation included:

     -    We filed our outstanding reports on Form 10-K for the fiscal year 2004
          and Form 10-Q for the first and second quarter of fiscal 2005 in
          September 2005. We also filed our Form 10-Q for the third quarter
          within the required 45 days of our fiscal quarter end date of October
          1, 2005.

     -    Since January 2, 2005, an analysis of the components of our landed
          cost accrual has been performed monthly.

     -    We have corrected a design deficiency in our controls over in-transit
          inventory to ensure that inventory and accounts payable can be
          properly stated for all periods presented.

(D)  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

While the planned remediation steps were designed and in place by the end of our
2004 fiscal year, management continued to evaluate the operating effectiveness
through the end of the third quarter of fiscal year 2005 when it concluded that
the Company's internal control over financial reporting was sufficiently mature
to support an assessment that the controls were effective. There were no changes
in our internal control over financial reporting during the quarter ended
December 31, 2005 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

(E)  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Footstar, Inc.

We have audited management's assessment, included in the accompanying
Management's 2005 Annual Report on Internal Controls, that Footstar, Inc. and
Subsidiaries (the Company) maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment, and an opinion on the effectiveness of the company's internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting


                                       43

<PAGE>

Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on control criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on the criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of Footstar, Inc. and Subsidiaries and our report dated March 1,
2006, expressed an unqualified opinion.


/s/ Amper, Politziner & Mattia P.C.

March 1, 2006
Edison, New Jersey

ITEM 9B. OTHER INFORMATION

Not applicable.


                                       44
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS OF THE REGISTRANT

The following information sets forth the name, age and business experience
during the past five years of the executive officers of the Company as of March
1, 2006:

Jeffrey A. Shepard, age 55, was appointed Chief Executive Officer and President
of Footstar on February 6, 2006. He has been a member of the Board of Directors
since January 2005. He formerly served as the Executive Vice President of
Footstar and President and Chief Executive Officer of Meldisco.

William Lenich, age 57, became an Executive Vice President of Footstar on
February 7, 2006. Prior to that he was the Executive Vice President of Meldisco
since joining Meldisco in 2002. From February 2001 to August 2002, he was
President and COO at R.G. Barry Corporation. From 1990 to 2000, he was President
and COO Retail and International at Nine West Group.

Dennis M. Lee, age 56, became Senior Vice President, Human Resources of Footstar
on February 7, 2006. Prior to that he was Senior Vice President, Human Resources
of Meldisco since joining Meldisco in July 2004. Prior to joining Footstar, he
served as an Assistant Professor in Residence for Human Resource Management,
College of Continuing Studies and School of Business at the University of
Connecticut and was Senior Vice President Human Resources and Logistics for the
Venator Group.

Michael J. Lynch, age 39, became the Senior Vice President of Finance of
Footstar on February 7, 2006. Prior to that he was Senior Vice President of
Finance of Meldisco. Since joining the Company in August 1995, he also served as
the Division Vice President-Finance at both Footstar Athletic and Meldisco.

Randall Proffitt, age 60, became Senior Vice President, Store Operations of
Footstar on February 7, 2006. Prior to that he held such position at Meldisco
since 1995. From 1984 to 1994, Mr. Proffitt was Vice President, Store
Operations.

Maureen Richards, age 49, has been the Senior Vice President, General Counsel
and Corporate Secretary of Footstar since March 2001. From October 1996 to March
2001, Ms. Richards was Vice President, General Counsel and Corporate Secretary
of Footstar.

Richard L. Robbins, age 65, was appointed as Senior Vice President, Financial
Reporting and Control of Footstar on January 5, 2004 and, as our Principal
Financial Officer, is the functional equivalent of our Chief Financial Officer.
From October 2003 to January 2004, he was Senior Vice President Financial
Reporting of Footstar. From August 2002 to October 2003, Mr. Robbins was a
Partner in Robbins Consulting LLP (financial, strategic and management
consulting firm). From 1978 to July 2002, Mr. Robbins was a Partner in Arthur
Andersen LLP.

Stuart E. Werner, age 45, became Senior Vice President and Chief Information
Officer of Footstar on February 7, 2006. Prior to that he held the same position
at Meldisco which he joined in July


                                       45

<PAGE>

2004. From August 2003 to June 2004 he was an independent consultant. From 1997
to July 2002 he was a Partner with Andersen Business Consulting, and a Managing
Director with BearingPoint which acquired the majority of Andersen Business
Consulting from July 2002 to July 2003.

BOARD OF DIRECTORS

General

The Board currently consists of nine members divided into three classes all of
whom became Directors of the Company on February 7, 2006, except for Mr.
Shepard, who became a Director in January, 2005. Directors have been appointed
on a staggered term basis, so that each year the term of office of one class
will expire and the terms of office of the other classes will extend for
additional periods of one and two years, respectively. The term of Class I
directors will expire at the 2007 Annual Meeting of Shareholders. The term of
Class II directors will expire at the 2008 Annual Meeting of Shareholders. The
term of Class III directors will expire at the 2009 Annual Meeting of
Shareholders. The names of the directors and certain information about each of
them are set forth below. Pursuant to the Company's Second Amended and Restated
Certification of Incorporation, the Board of Directors shall be reduced as
follows: the size of Class I shall be reduced to one director when the term of
current Class I directors expire; the size of Class II shall be reduced to two
directors when the term of current Class II directors expires; and the size of
Class III shall be reduced to two directors when the term of the current Class
III directors expires.

<TABLE>
<CAPTION>
Name, Age and
Director Class                   Principal Occupation and Background              Director Since
-------------------   ---------------------------------------------------------   --------------
<S>                   <C>                                                         <C>
Jonathan M.           Elected Chairman of the Board of Footstar, Inc. on               2006
Couchman, 36,         February 7, 2006. Mr. Couchman is the Managing Member of
Class III             Couchman GP LLC, the general partner of Couchman
                      Investments LP, a private investment partnership
                      established November 1, 2001 and the Managing Member of
                      Couchman Capital LLC, the co-investment manager of
                      Couchman International LTD, a private partnership
                      established November 1, 2001. Mr. Couchman is also the
                      Managing Member of Couchman Capital Services LLC, the
                      general partner of Couchman Partners LP, a private
                      investment partnership established November 1, 2001 and
                      the investment manager of Couchman Investments LP and
                      co-investment manager of Couchman International LTD. In
                      addition, Mr. Couchman is the President of Couchman
                      Advisors, Inc., a management and advisory company. From
                      January to September 2001, Mr. Couchman was a
                      Co-Portfolio Manager and Principal at Weiss, Peck &
                      Greer. He is a member of the CFA Institute and the New
                      York Society of Security Analysts.
</TABLE>


                                       46

<PAGE>

<TABLE>
<CAPTION>
Name, Age and
Director Class                   Principal Occupation and Background              Director Since
-------------------   ---------------------------------------------------------   --------------
<S>                   <C>                                                         <C>
Eugene I. Davis,      Presently Chairman and Chief Executive Officer of                2006
51, Class III         PIRINATE Consulting Group, LLC, a privately-held
                      strategic advisory consulting firm, a company he formed
                      in 1997. Prior to forming PIRINATE, Mr. Davis served as
                      Chief Operating Officer of Total-Tel USA Communications,
                      Inc. He also served as President, Vice Chairman and
                      Director of Emerson Radio Corporation and Vice Chairman
                      of Sport Supply Group, Inc. Mr. Davis presently serves
                      as Chairman of the Boards of Atlas Air Worldwide
                      Holdings, Inc., Cadence Innovation, LLC, and General
                      Chemical Industrial Products, Inc. Also he serves as a
                      Board member of American Commercial Lines, Inc., and
                      TeleCove, Inc.

Adam W. Finerman,     Partner with the law firm of Olshan Grundman Frome               2006
40, Class II          Rosenzweig & Wolosky LLP, based in New York City, since
                      1998. Mr. Finerman practices in the areas of mergers
                      and acquisitions and corporate finance, as well as proxy
                      contests. He also counsels corporate clients on corporate
                      governance practices and related matters, SEC reporting
                      requirements and other public company obligations.

Alan Kelly, 57,       President of Alan Kelly & Associates since January               2006
Class II              2002. From 1988-2001, he served as an officer of Bata
                      Ltd, first as the Chief Financial Officer, then as
                      President of the largest Bata operating group. Mr.
                      Kelly is a Fellow of the Institute of Chartered
                      Accountants of England and Wales.

Gerald F. Kelly,      Interim Chief Information Officer for United Airlines            2006
58, Class I           since November, 2005. From 2002 to 2005 he was a senior
                      executive for Sears, Roebuck & Company and was the Chief
                      Information Officer and Senior Vice President, and
                      Executive Officer and member of the Operating, Capital
                      and Contracts, and Political Action Committees. From
                      December 2001 to October 2002 he was a business advisor.
                      From 1986-2001, Mr. Kelly was an Executive Officer of
                      Payless Shoesource, Inc. of Topeka, K.S., and was a
                      member of Payless's Senior Management, Operating, Capital
                      Expenditure, and Political Action Committees. He is a
                      Member of The Alexis de Tocqueville Society of The United
                      Way of America.
</TABLE>


                                       47

<PAGE>

<TABLE>
<CAPTION>
Name, Age and
Director Class                   Principal Occupation and Background              Director Since
-------------------   ---------------------------------------------------------   --------------
<S>                   <C>                                                         <C>
Michael O'Hara, 38,   President of Consensus Advisors LLC a position he has            2006
Class I               held since February 2006. From September 2003 to
                      February 2006, he was a Managing Director of Financo,
                      Inc. In May 2002, Mr. O'Hara was appointed the President
                      of the liquidating bankruptcy estates of Casual Male
                      Corp. et al. From January 2000 to May 2002, he served as
                      First Senior Vice President of Corporate Affairs and
                      General Counsel for Casual Male Corp, and its
                      predecessor, J. Baker, Inc. From April 1996 to January
                      2000, he served as the head of Brookstone, Inc.'s real
                      estate and legal departments.

Jeffrey A. Shepard,   Appointed Chief Executive Officer and President of               2005
55, Class III         Footstar on February 7, 2006. He was appointed to the
                      Board of Directors in January 2005. He formerly served
                      as President and Chief Executive Officer of Meldisco
                      since 1996.

George A.             Chairman and CEO of Standard Holding Corporation of              2006
Sywassink, 67,        Charlotte, N.C. since 1987. Mr. Sywassink has 44 years
Class II              work experience in the transportation industry. He
                      serves as Chairman of the Board of Directors for Homes
                      for Children, Inc. of Banner Elk, NC and serves on the
                      Board of Directors of the Appalachian State University
                      Foundation as Chairman of the Investments Advisory
                      Committee. He also is a Board member of the John A.
                      Walker College Business Advisory Council and a trustee
                      of Hiram College, Hiram, Ohio.

Alan I. Weinstein,    Formerly Chairman and Chief Executive Officer of Casual          2006
63, Class I           Male, Inc., a specialty retailer, has over 34 years of
                      experience in the retail industry. Mr. Weinstein is
                      affiliated with AICPA and NYSCPA and is a member of the
                      Board of Massachusetts Eating Disorders and a member of
                      the Board and First Vice President of a camp
                      specializing in physically and mentally challenged
                      children.
</TABLE>

Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the
Securities Exchange Act of 1934 requires our officers and directors to file with
the SEC reports regarding ownership of our common stock, and to furnish us with
copies of all such filings. Based on a review of their filings, the Company
believes that all of the filings were timely made during 2005.

We have adopted a Code of Business Conduct and Ethics (the "Code of Ethics")
that applies to our chief executive officer, principal financial officer,
principal accounting officer, and to all other directors, officers and
employees. The Code of Ethics is available on our website www.footstar.com. A
waiver from any provision of the Code of Ethics in favor of a director or
executive officer may only be granted by the Board of Directors and any such
waiver will be


                                       48
<PAGE>

publicly disclosed. We will disclose substantive amendments to, and any waivers
from, the Code of Ethics provided to our chief executive officer, principal
financial officer or principal accounting officer, as well as any other
executive officer or director, on our website www.footstar.com.

The Board of Directors has determined that Alan Kelly, Eugene I. Davis and Alan
I. Weinstein are independent directors and are audit committee financial
experts, within the meaning of the SEC regulations. This designation is an SEC
disclosure requirement related to their experience and understanding of
accounting and auditing matters and is not intended to impose any additional
duty, obligation or liability on Mr. Kelly, Mr. Davis or Mr. Weinstein.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table. The following table summarizes compensation awarded
to, earned by or paid to the following executive officers of the Company (the
"Named Officers") for services rendered to us.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                         LONG TERM COMPENSATION
                                                                                ---------------------------------------
                                                                                         AWARDS
                                               ANNUAL COMPENSATION              ------------------------      PAYOUTS
                                    -----------------------------------------   Restricted/                ------------
                                                                   Other          Deferred    Securities     All Other
Name and Principal         Fiscal                                  Annual         Stock(1)    Underlying   Compensation
Position                    Year    Salary($)      Bonus($)   Compensation($)   Award(s)($)   Options(#)      ($)(2)
------------------         ------   ---------     ---------   ---------------   -----------   ----------   ------------
<S>                        <C>      <C>           <C>         <C>               <C>           <C>          <C>
Dale W. Hilpert             2005      850,000     2,550,000      366,179(3)          0             0           3,075
Chairman of the Board,      2004    2,108,654(4)          0      261,734(3)          0             0           3,075
Chief Executive Officer
and President

Jeffrey A. Shepard,         2005      651,596     1,801,149       39,447(5)          0             0           9,025
Executive Vice President    2004      588,808             0       26,288(5)          0             0           9,025
                            2003      561,500       368,550            0             0             0           8,000

Stephen R. Wilson,          2005      446,000       111,500            0             0             0           7,175
Executive Vice              2004      463,154             0            0             0             0           7,175
President, Chief            2003      439,538       223,000            0             0             0           2,500
Administrative Officer

Maureen Richards, Senior    2005      337,692       536,250            0             0             0           7,525
Vice President, General     2004      333,077             0            0             0             0           7,525
Counsel and Corporate       2003      300,076       137,250            0             0             0           7,000
Secretary

Richard Robbins             2005      275,000       402,188            0             0             0           1,025
Senior Vice President
Financial Reporting and
Control
</TABLE>

(1)  No deferred or restricted shares were awarded in 2003, 2004, or 2005. Prior
     filings inadvertently included shares that were awarded in 1998 and1999 but
     vested in 2003 and 2004. The number and value of all restricted stock units
     and of all Company grants of deferred shares including the restricted and
     deferred shares granted in prior years, which were held by each of the
     Named Officers as of December 31, 2005 were: Mr. Hilpert, 0; Mr. Shepard,
     24,028 shares


                                       49

<PAGE>

     valued at $81,695; Mr. Wilson, 8,637 shares valued at $29,366; and Ms.
     Richards, 4,647 shares valued at $15,800. Dividends were not paid on
     restricted stock units or deferred shares.

(2)  The amounts represent our contributions under our 401(k) and profit sharing
     plan.

(3)  These amounts represent perquisites for Mr. Hilpert plus tax gross ups on
     such perquisites, paid in accordance with Mr. Hilpert's employment
     agreement. For 2005, this amount represents perquisites for Mr. Hilpert
     including $124, 528 (inclusive of a $55,166 tax gross up) for payment of
     housing expenses, $46,494 (inclusive of a $18,994 tax gross up) paid in
     consideration for opting out of certain benefit plans and $47,370
     (inclusive of a $20,895 tax gross up) for reimbursement of travel expenses.
     In addition, Mr. Hilpert received a tax gross-up on the housing and travel
     expense reimbursement in the amount of $130,962 and $16,825, respectively,
     for 2004 however, these amounts were not paid until 2005. For 2004, this
     amount represents perquisites for Mr. Hilpert including $157,500 for
     payment of housing expenses, a one-time payment of $38,255 (inclusive of a
     $13,255 tax gross-up) paid pursuant to his original employment agreement,
     $45,745 (inclusive of a $18,245 tax gross-up) paid in consideration for
     opting out of certain benefit plans and $20,234 for reimbursement of travel
     expenses.

(4)  For the fiscal year ended January 1, 2005, Mr. Hilpert received a base
     salary of $833,654 and in lieu of an annual bonus, a supplemental salary of
     $1,275,000.

(5)  This amount represents perquisites for payment of premiums for long term
     disability insurance.

Option Grants in Last Fiscal Year. There were no grants of stock options made to
the Named Officers during fiscal year 2005.

Option Exercises and Fiscal Year-End Option Holdings. None of the Named Officers
exercised any options during fiscal year 2005. The following table shows
information regarding option exercises during fiscal year 2005 as well as fiscal
year 2005 year-end option holdings for each of the Named Officers. None of these
options were in the money at fiscal year end.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                      NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                        SHARES                       UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS
                      ACQUIRED ON       VALUE        OPTIONS AT FY-END (#)           AT FY-END ($)
NAME                 EXERCISE (#)   REALIZED ($)   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----                 ------------   ------------   -------------------------   -------------------------
<S>                  <C>            <C>            <C>                         <C>
Dale W. Hilpert            0              0                          0                    0/0
Jeffrey A. Shepard         0              0             133,234/24,001                    0/0
Stephen R. Wilson          0              0              23,198/15,004                    0/0
</TABLE>


                                       50

<PAGE>

<TABLE>
<S>                  <C>            <C>            <C>                         <C>
Maureen Richards           0              0               70,474/8,401                    0/0
Richard Robbins            0              0                          0                    0/0
</TABLE>

Supplemental Executive Retirement Plan. The following table indicates the
approximate amount of annual retirement income that would be payable under the
Supplemental Executive Retirement Plan for Select Senior Management of Footstar
(the "SERP"), including Jeffrey A. Shepard, Maureen Richards, William Lenich,
and Randall Proffitt, based on various assumptions as to compensation and years
of service, assuming benefits are computed under a straight life annuity formula
and retirement at age 60.

The annual benefit will be reduced by the annualized value of any retirement or
deferred profit sharing benefit paid or payable under our 401(k) profit sharing
plan or any other plan maintained by us (excluding benefits attributable to
contributions made by participants), and without offset for Social Security or
other benefits.

                               PENSION PLAN TABLE

 ESTIMATED ANNUAL RETIREMENT BENEFITS BASED ON YEARS OF SERVICE AND COMPENSATION

<TABLE>
<CAPTION>
                                            YEARS OF SERVICE
               --------------------------------------------------------------------------
COMPENSATION      10         11         12         13         14         15         20
------------   --------   --------   --------   --------   --------   --------   --------
<S>            <C>        <C>        <C>        <C>        <C>        <C>        <C>
 $  400,000    $ 80,000   $ 88,000   $ 96,000   $104,000   $112,000   $120,000   $160,000
    500,000     100,000    110,000    120,000    130,000    140,000    150,000    200,000
    600,000     120,000    132,000    144,000    156,000    168,000    180,000    240,000
    700,000     140,000    154,000    168,000    182,000    196,000    210,000    280,000
    800,000     160,000    176,000    192,000    208,000    224,000    240,000    320,000
    900,000     180,000    198,000    216,000    234,000    252,000    270,000    360,000
  1,000,000     200,000    220,000    240,000    260,000    280,000    300,000    400,000
  1,100,000     220,000    242,000    264,000    286,000    308,000    330,000    440,000
  1,200,000     240,000    264,000    288,000    312,000    336,000    360,000    480,000
  1,300,000     260,000    286,000    312,000    338,000    364,000    390,000    520,000
  1,400,000     280,000    308,000    336,000    364,000    392,000    420,000    560,000
</TABLE>

The SERP is designed to provide competitive retirement benefits to select
executives with at least ten years of credited service. The normal retirement
benefit commencing at age 60 is equal to the lesser of (x) or (y) where (x) is
2% of the average of the executive's base salary for the highest three years out
of the ten years preceding the date of termination or change in control plus the
participant's full target annual incentive compensation in effect for the year
termination or change in control occurs, multiplied by the number of years of
credited service with the Company and reduced by an actuarial calculation of any
other vested retirement benefits or retirement benefits


                                       51

<PAGE>

already paid to the executive by us, and (y) is 50% of the average of the
executive's base salary for the highest three years out of the ten years
preceding the date of termination plus annual target incentive compensation in
effect during 2004.

As part of the Company's reorganization we were authorized to continue to honor
our obligations under the SERP with the following modifications; future benefit
calculations were modified to reflect current salary levels but 2004 bonus
levels. No additional participants were to be added to the plan and upon their
retirement or termination of employment without cause, "lump sum values" would
be payable to participants as if a change in control occurred the day before
such event.

Covered compensation (base pay plus annual incentive target bonus) under the
SERP as of December 31, 2005 for Mr. Shepard, Mr. Wilson and Ms. Richards was
$1,300,000, $669,000, and $510,000, respectively. (Mr. Hilpert and Mr. Robbins
were not eligible for, and Mr. Wilson waived his right to receive any benefits
under the SERP). As of December 31, 2005, the credited years of service under
the SERP for Mr. Shepard, Mr. Wilson (no longer an employee nor entitled to any
benefits under SERP) and Ms. Richards, were 9, 4 and 9 years, respectively. If a
covered executive is terminated without "cause" or voluntarily terminates
employment for "good reason" (as each such term is defined in the SERP), the
executive would receive a lump sum payment equal to the actuarial equivalent of
the executive's normal retirement benefit calculated as if a change in control
had occurred the day before the termination date. Where such termination occurs
prior to 10 years of service, the executive would receive a lump sum payment
equal to the actuarial equivalent of the benefit determined by a fraction where
the numerator is the executive's actual years of credited service (but not more
than 10) multiplied by the executive's normal retirement benefit and the
denominator is 10 (thus reducing the benefit proportionately to the extent the
executive's actual years of credited service are less than 10).

EMPLOYMENT AGREEMENTS

As of March 1, 2006, we had employment agreements with the following Named
Officers: Mr. Shepard and Ms. Richards. Prior to such date, we had employment
agreements with Messrs. Hilpert and Wilson, which agreements expired when the
Company emerged from bankruptcy on February 7, 2006 (the "Plan Effective Date").
Mr. Shepard and Ms. Richards entered into employment agreements in October and
December 2005, respectively, which became effective on February 7, 2006. The
following briefly summarizes the principal terms of the employment agreements,
the Meldisco Plan (as defined below) and the settlement agreements, subject in
each case to the actual terms of the applicable agreement.

MR. HILPERT

Mr. Hilpert entered into an agreement with us on January 15, 2004 which was
amended and restated on March 1, 2004, May 27, 2004 and January 25, 2005. The
agreement was for a term commencing March 1, 2004 and expiring on February 7,
2006, the Plan Effective Eate.

The agreement provided for an annual base salary of $850,000, to be reviewed
annually, a one-time payment of $25,000, and an annual incentive award
opportunity of no less than 150% of base salary effective January 2, 2005 (for
the fiscal year ended January 1, 2005 the agreement provided for payment of a
supplemental salary, as defined in lieu of an annual incentive award). The
agreement


                                       52
<PAGE>

also provided for an additional incentive award of $1.7 million to be paid upon
the Plan Effective Date.

The agreement generally provided for (i) participation in benefit plans and
programs including retirement benefits, life insurance and medical benefits;
(ii) restrictive covenants including non-disclosure, non-solicitation of
employees and availability for litigation support; and (iii) a housing
allowance. Under the terms of the agreement, Mr. Hilpert, at his option, opted
out of our SERP, financial and tax planning and excess disability plans and in
consideration for opting out of such plans we paid him the sum of $25,000
annually. In addition we paid him $2,500 annually as an additional allowance
under our medical plan. In the event of any of the above resulted in liability
to Mr. Hilpert for any federal, state or local tax, the Company agreed to pay an
amount equal to such tax and a tax gross up thereon.

We acknowledged that Mr. Hilpert's principal residence was located in the
western United States and, as a result, as of January 2005 was entitled to a new
arrangement with respect to housing and related expenses. Under the new
arrangement the lease for Mr. Hilpert's housing was terminated and he was
reimbursed for travel and housing expenses, on a grossed-up basis, incurred in
connection with travel to our headquarters, Mr. Hilpert was reimbursed for
reasonable expenses incurred in return shipping charges for his personal items.
Mr. Hilpert was not entitled to receive any relocation benefits under this new
arrangement.

MR. WILSON

Mr. Wilson's employment ended on February 6, 2006. Mr. Wilson was a participant
in the Key Employee Retention Plan ("KERP") approved by order of the Court in
May 2004. This KERP was designed to encourage key employees to remain employed
by us throughout the reorganization process. In consideration for a release from
any and all claims, inclusive of any claims related to his employment agreement,
upon termination of employment Mr. Wilson received the following under the KERP:
(i) $669,000 ($111,500 of which was paid to Mr. Wilson in July 2005 pursuant to
Court order); (ii) $1,003,500 of severance; (iii) the right to continue to
participate in our medical and dental plans for a period of up to eighteen (18)
months unless such coverage becomes available to Mr. Wilson through other
employment; (iv) outplacement services for a period of eighteen (18) months; (v)
the right to exercise outstanding stock options for a period of ninety (90)
days; and (vi) receipt of 100% of his deferred vested shares of common stock.

EMPLOYMENT AGREEMENTS MR. SHEPARD AND MS. RICHARDS

Mr. Shepard entered into an employment agreement on October 28, 2005. Pursuant
to the agreement Mr. Shepard became the Company's Chief Executive Officer and
President as of the Plan Effective Date. The agreement is for a term ending on
December 31, 2008, and is subject to automatic renewal for successive one year
terms unless either the Company or Mr. Shepard notifies the other party in
writing at least 90 days prior to expiration that he or it is electing to
terminate the agreement at the expiration of the then current term of
employment.

Mr. Shepard will continue to receive a base salary of $650,000 subject to annual
review for increase at the discretion of the compensation committee of the
Company's board of directors. Mr. Shepard shall participate in the Company's
1996 Incentive Compensation Plan under which he is afforded


                                       53

<PAGE>

the opportunity to earn no less than 100% of his base salary per year if certain
targets are achieved. Mr. Shepard shall receive retention bonuses in the amount
of $158,437.50 on each July 1 and December 31 of 2006, 2007 and 2008 if he
continues to be employed by the Company through the date such payments are due.
Mr. Shepard also received a restricted stock grant of 130,000 shares of the
Company's common stock, which restrictions shall lapse only upon certain
terminations of employment and on the Plan Effective Date, a KERP payment of
$751,725.

Ms. Richards entered into an employment agreement on December 16, 2005. Pursuant
to the agreement Ms. Richards will continue to serve as Senior Vice President,
General Counsel and Corporate Secretary to the Company. The term of employment
ends on December 31, 2008, and is subject to automatic renewal for successive
one year terms unless either the Company or Ms. Richards notifies the other
party in writing at least 60 days prior to expiration that she or it is electing
to terminate the agreement at the expiration of the then current term of
employment.

Ms. Richards will continue to receive a base salary of $340,000 subject to
annual review for increase at the discretion of the compensation committee of
the Company's board of directors. Ms. Richards shall participate in the
Company's 1996 Incentive Compensation Plan under which she is afforded the
opportunity to earn no less than 50% of her base salary per year if certain
targets are achieved. Ms. Richards shall receive retention bonuses in the amount
of $61,875 on each July 1and December 31 of 2006, 2007 and 2008 if she continues
to be employed by the Company through the date such payments are due. Ms.
Richards also received a restricted stock grant of 4,500 shares of the Company's
common stock, which restrictions shall lapse only upon certain terminations of
employment and on the Plan Effective Date, a KERP payment of $412,500.

The employment agreements generally provide for (i) participation in benefit
plans and programs including life insurance benefits; (ii) participation in the
SERP; and (iii) restrictive covenants including, non-competition,
non-disclosure, non-solicitation of employees and availability for litigation
support. Upon a termination without cause, Mr. Shepard agreed not to compete for
a period of 24 months and Ms. Richards agreed not to compete for a period of 18
months.

If the executive's employment is terminated without cause the employment
agreements generally provide for (i) payment of base salary earned through
cessation of employment; (ii) a lump sum amount equal to $1,950,000 for Mr.
Shepard and $742,500 for Ms. Richards less any retention payments paid; (iii) an
amount equal to the executive's pro-rata incentive award for the year in which
the termination occurs; (iv) lapse of all restrictions on any restricted stock
award and restricted stock award units outstanding at the time of termination;
(v) immediate vesting of any matching grants under the Company's Switch to
Equity Program ("STEP"), (which was a component of the Company's annual
incentive plan that permitted employees to defer up to 75% of their annual
incentive award for 5 years for which they were entitled to receive a 50% match
of Company stock if they remained employed by the Company during such 5 year
period); (vi) immediate vesting of outstanding stock options and a right to
exercise such stock options for the applicable severance period (24 months for
Mr. Shepard; 18 months for Ms. Richards) or the remainder of the exercise
period, whichever is shorter; (vii) immediate vesting of any deferred shares of
Company stock under our Career Equity Program (which was the Company's long term
incentive plan with awards payable 50% in cash, and 50% in deferred shares based
on achievement of financial targets measured over three year cycles) payable in
a lump sum; (viii) payment of the balance of any incentive awards earned and not
yet paid; (ix) continuation of medical, dental and


                                       54

<PAGE>

life insurance coverage for the applicable severance period (24 months for Mr.
Shepard; 18 months for Ms. Richards) or receipt from a subsequent employer of
equivalent coverage; (x) payment of the "lump sum value" under the SERP
calculated as if a change in control occurred the day before termination; and
(xi) other or additional benefits then due or earned in accordance with
applicable plans or programs.

If the executive's employment is terminated with cause the employment agreements
generally provide for (i) payment of base salary earned through cessation of
employment; (ii) payment of the balance of any incentive award earned but not
yet paid; and (iii) other or additional benefits then due or earned in
accordance with applicable plans or programs.

The employment agreements obligate the Company to indemnify the executives to
the fullest extent permitted by law including the advancement of expenses in
connection therewith.

If payments made to the executive under the employment agreement become subject
to excise tax, the Company will make an additional "gross up" payment sufficient
to ensure that the net after-tax amount retained by the executive (taking into
account all taxes including those on the gross up payment) is the same as would
have been the case had such excise tax not applied.

Mr. Shepard and Ms. Richards were participants under the Meldisco Compensation
Plan in 2005 that was approved by the Court on December 15, 2004 (the "Meldisco
Plan"). When Mr. Shepard and Ms. Richards entered into employment agreements any
benefits provided to them under the Meldisco Plan have been incorporated in
their employment agreements.

MR. ROBBINS

Mr. Robbins continued to be a participant in the KERP and Meldisco Plan which
provided for the following: (i) participation in the 2005 annual bonus plan
under which he was afforded the opportunity to earn 45% of his base salary upon
achievement of certain free cash flow goals (such bonus was paid out at 200% of
the targeted amount to all participants based on exceeding performance
measures); (ii) participation in the 2005 retention plan in which he was
afforded the opportunity to earn $92,813 based on continued employment in 2005;
(iii) the right, upon involuntary termination of employment other than in
connection with a sale of the Company in which Mr. Robbins is offered comparable
employment, severance equal to $598,125; (iv) a KERP payment of $399,000; (v)
that Mr. Robbins would not compete with the Company during his employment and
for a period ending at the earlier of (a) 12 months after his employment
terminated or (b) 12 months after the Amended Master Agreement is terminated;

DIRECTOR COMPENSATION

In 2005, Directors who were not receiving compensation as officers or employees
of the Company or any affiliate ("non-employee directors") were paid an annual
retainer of $25,500 and a $1,000 fee for attendance at each meeting of the Board
of Directors of the Company (the "Board") or any committee of the Board.
Non-employee directors were entitled to a $2,500 annual fee for serving as a
committee chair, other than for the Audit Committee Chair, who was paid an
annual retainer of $7,500.


                                       55

<PAGE>

On the Company's emergence from bankruptcy on February 7, 2006, the 2006
Non-Employee Director Stock Plan (the "2006 Director Stock Plan") became
effective and the 1996 Directors Stock Plan was frozen so that no further grants
may be made under that plan. The 2006 Director Stock Plan provides for an
automatic initial grant of 10,000 shares of restricted common stock to each
eligible director. Beginning with the 2007 annual meeting of the Company, the
Company shall make additional grants to each eligible director of 10,000 shares
of restricted common stock, or such other amount determined by the Board,
subject to the provisions of the 2006 Director Stock Plan.

Unless the Board shall determine otherwise at the time of grant, each award of
restricted common stock shall vest with respect to 50% of the shares on the
first anniversary of the date of grant, an additional 25% of the shares on the
second anniversary and the remaining 25% of the shares on the third anniversary
of the date of grant. Upon a director's retirement or upon a change in control
(as defined in the 2006 Director Stock Plan), all unvested shares of restricted
common stock automatically vest.

Each eligible director may elect, prior to the end of the Company's first fiscal
quarter of the year, to receive in lieu of his or her cash director fees for
that year, shares of fully vested common stock with a fair market value equal to
the amount of those fees.

In addition to the grants under the 2006 Director Stock Plan, each non-employee
director receives an annual cash retainer of $50,000 paid in quarterly
installments, unless the director elects to receive common stock in lieu of cash
as described above. The Chairman of the Board receives an additional annual cash
retainer of $40,000 paid in equal semi-annual installments, and the Chairman of
the Company's Audit Committee receives an additional annual cash retainer of
$10,000 paid in equal semi-annual installments. Such directors may elect to
receive common stock in lieu of these additional cash as retainers described
above.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board in 2005 was comprised of three outside
independent Directors, George S. Day, Stanley P. Goldstein and Bettye Martin
Musham. The Compensation Committee of the Board is currently comprised of
Michael A. O'Hara, G. A. Sywassink and Jonathan Couchman.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as to beneficial ownership of
the outstanding common stock of the Company as of March 1, 2006, by each person
known to us to own beneficially more than 5% of the outstanding common stock, by
each director of the Company, by each of the Named Officers and by all directors
and executive officers of the Company as a group. To our knowledge, except as
otherwise indicated, all persons listed below have sole voting and investment
power with respect to such shares.


                                       56

<PAGE>

<TABLE>
<CAPTION>
                                                  NUMBER OF COMMON SHARES
            NAME OF BENEFICIAL OWNER               BENEFICIALLY OWNED (1)   PERCENT OF CLASS
            ------------------------              -----------------------   ----------------
<S>                                               <C>                       <C>
Directors and Named Officers:                                                         %

Jonathan M. Couchman                                   987,272(2)                 4.74%
Eugene I Davis                                          10,000                        *
Adam W. Finerman                                        20,929                        *
Alan Kelly                                              10,000                        *
Gerald F. Kelly, Jr.                                    10,000                        *
Michael A. O'Hara                                       10,000                        *
Jeffrey A. Shepard                                     373,726(3)                     *
George A. Sywassink                                     20,929                        *
Alan I. Weinstein                                       10,000                        *
Dennis M. Lee                                              -0-                        *
William Lenich                                         121,250                        *
Michael J. Lynch                                         2,700(3)                     *
Randall Proffitt                                       121,435(3)                     *
Maureen Richards                                       110,826(3)                     *
Richard L. Robbins                                         -0-                        *
Stuart E. Werner                                           -0-                        *

All current executive officers and directors as
   a group                                           1,809,067(2)(3)(4)           8.56%

   5% Stockholders:
   FMR Corp.
   Edward C. Johnson, 3d
   Fidelity Management & Research
   Company
   Fidelity Low Priced Stock Fund
   82 Devonshire Street
   Boston, MA 02109                                  2,016,000(4)                 9.68%

   Dimensional Fund Advisors Inc.
   1299 Ocean Avenue, 11th Floor
   Santa Monica, CA 90401                            1,182,600(5)                 5.28%

   Schultze Asset Management, LLC
   George J. Schultze
   3000 Westchester Avenue
   Purchase, NY 10577                                1,117,713(6)                 5.37%
</TABLE>

*    Less than one percent

1.   Beneficially owned shares include shares over which the named person
     exercises either sole or shared voting power or sole or shared investment
     power and includes restricted


                                       57

<PAGE>

     or deferred shares.

2.   Of the shares shown, 557,600 shares are owned by Couchman Partners L.P.

3.   The amounts shown also include the following shares issuable pursuant to
     stock option which, as of March 1, 2006, were currently exercisable or
     would become exercisable within 60 days: Mr. Shepard, 149,234; Ms.
     Richards, 76,074; Mr. Proffitt, 31,700; and Mr. Lynch, 2,700.

4.   Pursuant to a Schedule 13G filed on February 14, 2006, FMR Corp., Edward C.
     Johnson, 3d, Fidelity Management & Research Company and Fidelity Low Priced
     Stock Fund (collectively "FMR"); FMR has sole voting power with respect to
     no shares and sole dispositive power with respect to 2,016,200 shares.

5.   Pursuant to a Schedule 13G filed on February 6, 2006, Dimensional Fund
     Advisors Inc. has sole voting and sole dispositive power with respect to
     1,182,600 shares.

6.   Pursuant to a Schedule 13D/A filed on June 28, 2005, Schultze Asset
     Management, LLC and George J. Schultze have shared voting and shared
     dispositive power with respect to 1,117,713 shares.

                      EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                                                                                                            (c)
                                                                                                    Number of securities
                                                 (a)                                              remaining available for
                                     Number of securities to be                (b)                 future issuance under
                                       issued upon exercise of      Weighted-average exercise    equity compensation plans
                                        outstanding options,          price of outstanding         (excluding securities
           Plan category                 warrants and rights      options, warrants and rights    reflected in column (a))
           -------------             --------------------------   ----------------------------   -------------------------
<S>                                  <C>                          <C>                            <C>
Equity compensation plans
   approved by security holders(1)             566,034                         $28                       1767,866

Equity compensation plans not
   approved by security holders(2)             320,556                         $30                       1,577,653
                                               -------                         ---                       ---------
   Total                                       886,590                         $29                       3,345,519
                                               =======                         ===                       =========
</TABLE>

(1)  1996 Non-Employee Director Stock Plan and 1996 Incentive Compensation Plan


                                       58

<PAGE>

(2)  2000 Equity Incentive Plan

Our 2000 Equity Incentive Plan was adopted by the Board and became effective on
March 10, 2000. The plan is administered as a "broadly-based plan" within the
meaning of Section 312 of the New York Stock Exchange Listing Rules. The plan
provides for grants of stock options and other stock based awards to our
full-time employees other than to any individual who would be a named executive
officer in the proxy statement to be filed with the SEC in connection with the
annual meeting for the applicable year. Participants in the plan may be granted
stock options, stock appreciation rights, restricted stock, deferred stock,
bonus stock, dividend equivalents, or other stock based awards, performance
awards or annual incentive awards. All stock option grants have an exercise
price per share no less than the fair market value per share of common stock on
the grant date and may have a term of no longer than ten years from grant date.
For further information concerning the plan, see Note 23 to the Consolidated
Financial Statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

[NONE]

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees for (1) professional audit services rendered
by APM for fiscal 2003, 2004, and 2005, and (2) fees billed for other services
rendered by KPMG LLP for fiscal 2003 and 2004.

<TABLE>
<CAPTION>
                                    2005       2004       2003
                                  --------   --------   --------
<S>                               <C>        <C>        <C>
Audit fees (1)                    $945,000   $900,000   $900,000
Audit-related fees (2)              20,000     19,000     16,800
                                  --------   --------   --------
   Audit and audit related fees    965,000    919,000    916,800
Tax fees                                --         --         --
                                  --------   --------   --------
   Total fees                     $965,000   $919,000   $916,800
                                  ========   ========   ========
</TABLE>

(1)  Audit fees for fiscal 2004 and 2005 include fees relating to management's
     assessment of internal controls over financial reporting.

(2)  Audit related fees consist of fees for audits of the financial statements
     of our employee benefit plans.

POLICY FOR APPROVAL OF AUDIT SERVICES

The services performed by our independent registered public accounting firm in
2005 were pre-approved in accordance with the pre-approval policy and procedures
adopted by the Audit Committee in 2003. This policy describes the permitted
audit, audit-related, tax and other services that the independent registered
public accounting firm may perform. The policy also requires that requests or
applications to provide services that require specific approval, in each of the
specified categories, be presented to the Audit Committee for pre-approval
together with a statement as to whether such request or application is
consistent with application rules on auditor independence. Any pre-approval is
detailed as to the particular service or category of services and generally is
subject to a budget.

Any services for audit, audit-related, tax and other services not contemplated
by those pre-approved


                                       59

<PAGE>

services must be submitted to the Audit Committee for specific pre-approval.
Normally, pre-approval is considered at regularly scheduled meetings. However,
the authority to grant specific pre-approval between meetings, as necessary, has
been delegated to the Chairman of the Audit Committee where fees do not exceed
$50,000. The Chairman must update the Audit Committee at the next regularly
scheduled meeting of any services that were granted specific pre-approval. Any
proposed services exceeding the pre-approval fee levels will require specific
pre-approval by the Audit Committee.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)(1) FINANCIAL STATEMENTS

The following financial statements are included within this report:

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Registered Public Accounting Firm                      F-2

Consolidated Statements of Operations for the Fiscal Years ended
   December 31, 2005, January 1, 2005, and January 3, 2004                   F-3

Consolidated Balance Sheets as of December 31, 2005 and January 1, 2005      F-4

Consolidated Statements of Shareholders' Equity and Comprehensive Income
   for the Fiscal Years ended December 31, 2005, January 1, 2005, and
   January 3, 2004                                                           F-5

Consolidated Statements of Cash Flows for the Fiscal Years ended
   December 31, 2005, January 1, 2005 and January 3, 2004                    F-6

Notes to Consolidated Financial Statements                                   F-7
</TABLE>

(A)(2) SCHEDULE

The following schedule is included in Part IV of this report:

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
   Schedule II - Valuation and Qualifying Accounts for the Fiscal Years
      ended December 31, 2005, January 1, 2005 and January 3, 2004           62
</TABLE>


                                       60
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                         INDEX                                     PAGE
                         -----                            ----------------------
<S>                                                       <C>
Report of Independent Registered Public Accounting Firm             F-2

Consolidated Statements of Operations for the Fiscal
Years Ended December 31, 2005, January 1, 2005, and
January 3, 2004                                                     F-3

Consolidated Balance Sheets as of December 31, 2005 and
January 1, 2005                                                     F-4

Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the Fiscal Years Ended
December 31, 2005, January 1, 2005, and January 3, 2004             F-5

Consolidated Statements of Cash Flows for the Fiscal
Years Ended December 31, 2005, January 1, 2005, and
January 3, 2004                                                     F-6

Notes to Consolidated Financial Statements                          F-7

Schedule II - Valuation and Qualifying Accounts for the
Fiscal Years ended December 31, 2005, January 1, 2005,
and January 3, 2004                                       (Part IV, Item 15(a)2)
</TABLE>


                                       F-1

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Footstar, Inc.:

We have audited the consolidated balance sheets of Footstar, Inc. and
subsidiaries (the "Company") as of December 31, 2005 and January 1, 2005, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Footstar, Inc. and
subsidiaries as of December 31, 2005 and January 1, 2005 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note 5 to the accompanying consolidated financial statements,
the Company's Amended Master Agreement with Kmart expires on December 31, 2008.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board of the United States of America, the effectiveness of
the internal control over financial reporting of Footstar, Inc. and Subsidiaries
as of December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 1, 2006 expressed an
unqualified opinion.

We have also audited the consolidated financial statement schedule listed in the
index at item 15(a), Schedule II for each of the three years in the period ended
December 31, 2005. In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects
information set forth therein.


/s/ Amper, Politziner & Mattia, P.C.
Edison, New Jersey
March 1, 2006


                                       F-2

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                             -----------------------------------------------------
                                                             DECEMBER 31, 2005   January 1, 2005   January 3, 2004
                                                             -----------------   ---------------   ---------------
<S>                                                          <C>                 <C>               <C>
Net sales                                                         $715.4             $800.2            $962.4
Cost of sales                                                      490.4              535.8             650.3
                                                                  ------             ------            ------
GROSS PROFIT                                                       225.0              264.4             312.1
Store operating, selling, general and administrative
   expenses                                                        183.1              236.1             250.7
Depreciation and amortization                                        7.7               21.7              19.0
Loss on Kmart Settlement                                              --                6.3                --
Restructuring, asset impairment and other charges, net                --                 --               2.5
Other income                                                          --               (9.2)             (5.4)
Interest expense                                                     4.6               11.0              23.4
Interest income                                                       --                 --              (1.1)
                                                                  ------             ------            ------
INCOME (LOSS)  BEFORE REORGANIZATION ITEMS, INCOME TAXES,
   MINORITY INTERESTS AND DISCONTINUED OPERATIONS                   29.6               (1.5)             23.0
Reorganization items                                               (14.6)             (37.1)               --
                                                                  ------             ------            ------
INCOME (LOSS)  BEFORE INCOME TAXES, MINORITY INTERESTS AND
   DISCONTINUED OPERATIONS                                          15.0              (38.6)             23.0
(Provision) benefit for income taxes                                (4.2)               2.9             (10.0)
                                                                  ------             ------            ------
INCOME (LOSS)  BEFORE MINORITY INTERESTS AND DISCONTINUED
   OPERATIONS                                                       10.8              (35.7)             13.0
Minority interests in net loss (income)                               --               11.0             (17.3)
                                                                  ------             ------            ------
INCOME (LOSS) FROM CONTINUING OPERATIONS                            10.8              (24.7)             (4.3)
Income (loss) from discontinued operations, net of tax               4.7              (66.7)            (50.1)
Gain from disposal of Athletic Segment, net of tax                   8.9               21.4                --
                                                                  ------             ------            ------
NET INCOME (LOSS)                                                   24.4             $(70.0)           $(54.4)
                                                                  ======             ======            ======
AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted                                                   20.5               20.5              20.5
                                                                  ======             ======            ======
INCOME (LOSS) PER SHARE:
Basic and diluted:
   Income (loss) from continuing operations                       $ 0.53             $(1.20)           $(0.21)
   Income (loss) from discontinued operations                       0.66              (2.21)            (2.44)
                                                                  ------             ------            ------
   Net income (loss)                                              $ 1.19             $(3.41)           $(2.65)
                                                                  ======             ======            ======
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       F-3
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES

                           CONSOLIDATED BALANCE SHEETS
                       (IN MILLIONS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                      DECEMBER 31, 2005   January 1, 2005
                                                      -----------------   ---------------
<S>                                                   <C>                 <C>
ASSETS
Current assets:
   Cash and cash equivalents                                $196.1             $189.6
   Accounts receivable, net                                    8.8               22.1
   Inventories                                                89.2               98.9
   Prepaid expenses and other current assets                  21.5               28.4
   Assets related to discontinued operations                   0.1                6.2
                                                            ------             ------
      Total current assets                                   315.7              345.2
Property and equipment, net                                   28.9               35.4
Intangible assets, net                                        10.0               10.3
Deferred charges and other noncurrent assets                   2.1                3.2
                                                            ------             ------
      Total assets                                          $356.7             $394.1
                                                            ======             ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Liabilities not subject to compromise
   Accounts payable                                           60.0               48.0
   Accrued expenses                                           45.9               48.0
   Amount due under Kmart Settlement                            --               45.0
   Income taxes payable                                        1.9                2.0
   Liabilities related to discontinued operations              7.4                3.5
Liabilities subject to compromise                            125.5              152.3
                                                            ------             ------
      Total current liabilities                              240.7              298.8
Other long-term liabilities                                   35.0               38.5
Amount due under Kmart Settlement                              5.5                5.5
                                                            ------             ------
      Total liabilities                                      281.2              342.8
                                                            ------             ------
Shareholders' equity:
   Common stock $.01 par value: 100,000,000 shares
      authorized; 31,084,647 and 31,018,065 shares
      issued                                                   0.3                0.3
   Additional paid-in capital                                342.6              343.1
   Treasury stock: 10,711,569 shares, at cost               (310.6)            (310.6)
   Unearned compensation                                      (0.1)              (0.4)
   Retained earnings                                          43.3               18.9
                                                            ------             ------
      Total shareholders' equity                              75.5               51.3
                                                            ------             ------
      Total liabilities and shareholders' equity            $356.7             $394.1
                                                            ======             ======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-4

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES

    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                       (IN MILLIONS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                             Accum.
                                                                                                             Other
                                                                                                            Compre-
                                   Common Stock         Treasury Stock       Add'l    Unearned              hensive
                               -------------------   --------------------   Paid-in    Compen-   Retained   Income
                                 Shares     Amount     Shares      Amount   Capital    sation    Earnings    (Loss)    Total
                               ----------   ------   ----------   -------   -------   --------   --------   -------   ------
<S>                            <C>          <C>      <C>          <C>       <C>       <C>        <C>        <C>       <C>
BALANCE AS OF DECEMBER 28,
   2002                        30,896,192    $0.3    10,711,569   $(310.6)   $346.3     $(2.9)    $143.3     $(1.6)   $174.8
Comprehensive loss:
   Net loss                            --      --            --        --        --        --      (54.4)       --     (54.4)
   Unrealized gain on
      interest rate swap
      agreement                        --      --            --        --        --        --         --       1.2       1.2
                                                                                                                      ------
Total comprehensive loss                                                                                               (53.2)
Common stock incentive plans       53,766      --            --        --      (1.1)      1.4         --        --       0.3
                               ----------    ----    ----------   -------    ------     -----      -----     -----    ------
BALANCE AS OF JANUARY 3,
   2004                        30,949,958    $0.3    10,711,569   $(310.6)   $345.2     $(1.5)     $88.9     $(0.4)   $121.9
Comprehensive loss:
   Net loss                            --      --            --        --        --        --      (70.0)       --     (70.0)
   Unrealized gain on
      interest rate swap
      agreement                        --      --            --        --        --        --         --       0.4       0.4
                                                                                                                      ------
Total comprehensive loss                                                                                               (69.6)
Common stock incentive plans       68,107      --            --        --      (2.1)      1.1         --        --      (1.0)
                               ----------    ----    ----------   -------    ------     -----      -----     -----    ------
BALANCE AS OF JANUARY 1,
   2005                        31,018,065    $0.3    10,711,569   $(310.6)   $343.1     $(0.4)     $18.9     $  --    $ 51.3
Comprehensive income:                  --      --            --        --        --        --         --        --        --
   Net income                          --      --            --        --        --        --       24.4        --      24.4
                                                                                                                      ------
Total comprehensive income                                                                                              24.4
Common stock incentive plans       66,582      --            --        --      (0.5)      0.3         --        --      (0.2)
                               ----------    ----    ----------   -------    ------     -----      -----     -----    ------
BALANCE AS OF DECEMBER 31,
   2005                        31,084,647    $0.3    10,711,569   $(310.6)   $342.6     $(0.1)     $43.3     $  --    $ 75.5
                               ==========    ====    ==========   =======    ======     =====      =====     =====    ======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-5
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (in millions)

<TABLE>
<CAPTION>
                                                                                  For the Fiscal Years Ended
                                                                            --------------------------------------
                                                                            DECEMBER 31,   January 1,   January 3,
                                                                                2005          2005         2004
                                                                            ------------   ----------   ----------
<S>                                                                         <C>            <C>          <C>
Cash flows from operating activities:
   Net income (loss)                                                           $ 24.4       $ (70.0)      $(54.4)
Adjustments to reconcile net income (loss) to net cash provided
   by operating activities:
         (Income) loss from discontinued operations, net of tax                 (13.6)         45.3         50.1
         Restructuring, asset impairment and other charges/reversals, net          --            --         18.2
         Loss on sale of assets included in reorganization items                   --          24.1           --
         Minority interests in net (loss) income                                   --         (11.0)        17.3
         Depreciation and amortization                                            7.7          21.7         19.0
         Loss on disposal of fixed assets                                          --           2.1         17.5
         Deferred income taxes                                                    2.9          (1.6)        (0.9)
         Stock incentive plans                                                   (0.2)         (1.0)         0.7
         Changes in operating assets and liabilities:
            Decrease (increase) in accounts receivable, net                      13.3          (6.6)        19.9
            Decrease (increase) in inventories                                    9.8          72.0         (6.6)
            Decrease (increase) in prepaid expenses and other assets              9.8          (5.7)        (0.6)
            (Decrease) increase in accounts payable, accrued expenses and
               amount due under Kmart Settlement                                (38.4)          7.4        (23.9)
            (Decrease) increase in income taxes payable and other
               long-term liabilities                                             (5.5)         (2.1)       (27.9)
                                                                               ------       -------       ------
               Net cash provided by operating activities                         10.2          74.6         28.4
                                                                               ------       -------       ------
Cash flows provided by (used in) investing activities:
      Additions to property and equipment                                        (1.4)         (3.8)       (17.5)
      Proceeds from the sale of assets included in reorganization items           0.6          47.4           --
      Proceeds from sale of the Athletic Segment                                  6.3         222.1           --
                                                                               ------       -------       ------
               Net cash provided by (used in) investing activities                5.5         265.7        (17.5)
                                                                               ------       -------       ------
Cash flows (used in) provided by financing activities:
      Net (payments) proceeds from note payable                                    --        (198.0)        51.2
      Dividends paid to minority interests                                         --            --        (36.2)
      Payments on capital leases                                                   --            --         (0.8)
      Payments on mortgage note                                                  (1.8)           --         (0.8)
      Other                                                                        --           0.3         (1.4)
                                                                               ------       -------       ------
               Net cash (used in) provided by financing activities               (1.8)       (197.7)        12.0
                                                                               ------       -------       ------
Cash flows from discontinued operations (REVISED):
      Net cash (used in) provided by operating activities of
         discontinued activities                                                 (7.4)         46.7        (15.9)
      Net cash used in investing activities of discontinued activities             --          (0.4)       (18.9)
      Net cash used in financing activities of discontinued activities             --          (0.4)        (0.4)
                                                                               ------       -------       ------
               Net (decrease) increase in cash - discontinued operations         (7.4)         45.9        (35.2)
                                                                               ------       -------       ------
               Net increase (decrease) in cash and cash equivalents               6.5         188.5        (12.3)
                                                                               ------       -------       ------
Cash and cash equivalents, beginning of year                                    189.6           1.1         13.4
Cash and cash equivalents, end of year                                         $196.1       $ 189.6       $  1.1
                                                                               ------       -------       ------
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-6

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE COMPANY

Footstar, Inc. ("Footstar", the "Company", "we", "us" or "our") is a holding
company in which its businesses are operated through its subsidiaries. We are
principally a retailer conducting business through our Meldisco and, formerly,
Athletic segments. (see Note 1 "Business Risks - Bankruptcy Filing"). The
Meldisco segment (the "Meldisco Segment" or "Meldisco") sells family footwear
through licensed footwear departments and wholesale arrangements. Prior to its
disposition the Athletic Segment sold athletic footwear and apparel through
various retail chains (for example, Footaction and Just For Feet) and via
catalogs and the Internet.

1.   BUSINESS RISKS - BANKRUPTCY FILING

Commencing March 2, 2004 ("Petition Date"), Footstar and most of its
subsidiaries (collectively, the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 of Title 11 of the United States Code
("Bankruptcy Code" or "Chapter 11") in the United States Bankruptcy Court for
the Southern District of New York in White Plains ("Court"). The Chapter 11
cases were jointly administered under the caption "In re: Footstar, Inc., et al.
Case No. 04-22350 (ASH)" (the "Chapter 11 Cases"). The Debtors operated their
business and managed their properties as debtors-in-possession pursuant to
Sections 1107(a) and 1108 of the Bankruptcy Code. As debtors-in-possession, we
were authorized to continue to operate as an ongoing business but could not
engage in transactions outside the ordinary course of business without the
approval of the Court.

Although the process for the disposition of our Athletic Segment commenced in
2003, as part of our initial reorganization plans after filing Chapter 11, we
closed in 2004 166 underperforming stores within the Athletic Segment: all 88
Just For Feet stores; 75 Footaction stores and 3 Uprise stores. In May, 2004 we
sold to certain affiliates of Foot Locker, Inc. (collectively "Foot Locker") 349
of the remaining Footaction stores (including all lease rights and inventory at
these stores), along with the remaining inventory from the other four remaining
Footaction stores (see Note 3 "Discontinued Operations" and Note 9 "Assets and
Liabilities Related to Discontinued Operations").

Within the Meldisco Segment, in 2004 we exited the footwear departments in 87
stores operated by subsidiaries of Federated Department Stores, Inc.
("Federated"), and 44 Gordmans, Inc. ("Gordmans") stores; closed 13 Shoe Zone
stores and sold 26 Shoe Zone stores located in Puerto Rico. These stores are
reflected as discontinued operations (see Note 3 "Discontinued Operations" and
Note 9 "Assets and Liabilities Related to Discontinued Operations").

In March 2004, we entered into a debtor-in-possession credit agreement, which
was subsequently substantially amended (see Note 14 "The Amended DIP and Exit
Credit Facility").

During 2004, we sold certain other assets, including our distribution centers in
Mira Loma, California ("Mira Loma") and Gaffney, South Carolina ("Gaffney"). We
sold Mira Loma to Thrifty Oil Co. ("Thrifty"). Thrifty has leased Mira Loma to
FMI International LLC ("FMI"), a logistics provider, which has agreed to provide
us with warehousing and distribution services through June 30, 2012 under a
receiving, warehousing and physical distribution services agreement (the "FMI
Agreement") (See Note 25 "Commitments and Contingencies").


                                       F-7

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On July 2, 2005, the Company and Kmart entered into an agreement (the "Kmart
Settlement") with respect to the assumption of the Master Agreement with Kmart,
effective July 1, 1995, as amended (the "Master Agreement"). On August 25, 2005,
the Court approved the Kmart Settlement. The Kmart Settlement, which was
effective as of January 2, 2005, allows us to continue operating the footwear
departments in Kmart stores pursuant to the Master Agreement as amended by the
Kmart Settlement (the "Amended Master Agreement"). See Note 5 "Meldisco's
Relationship with Kmart".

On November 12, 2004, we filed a proposed joint plan of reorganization with the
Court. On October 28, 2005, we filed an amended plan with the Court (the
"October 2005 Plan"). The October 2005 Plan provided for a reorganization of the
Company and cash distributions to creditors and was subject to a vote by
eligible ballot holders. The October 2005 Plan provided that creditors in the
bankruptcy would be paid in full, with interest at the federal judgment interest
rate of 1.23%. The Creditors' Committee believed, however, that this interest
rate was insufficient, and accordingly, sought to terminate the Debtors'
exclusivity periods and have the Bankruptcy Court fix a higher rate of
postpetition interest. On November 23, 2005, the Bankruptcy Court terminated the
Debtors' exclusivity periods, but reserved judgment on appropriate rate of
postpetition interest. The Creditors' Committee and the Equity Committee
subsequently agreed to the terms of a consensual plan of reorganization,
including a postpetition interest rate for unsecured claims at 4.25% per annum
and to the filing on December 5, 2005, of further amendments to the October 2005
Plan to reflect such agreement (the "Amended Plan"). On January 25, 2006, the
Bankruptcy Court confirmed our Amended Plan. On February 7, 2006, we
successfully emerged from bankruptcy. Pursuant to the guidance provided by the
American Institute of Certified Public Accountants in Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code ("SOP 90-7"), the Company has not adopted fresh-start reporting because
there was no change to the holders of existing voting shares and the
reorganization value of the Company's assets is greater than its post petition
liabilities and allowed claims.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

Our consolidated financial statements include the accounts of all subsidiary
companies. Intercompany balances and transactions between the entities have been
eliminated. Prior to fiscal 2005, the minority interests represented the 49%
participation of Kmart in the ownership of substantially all subsidiaries of
Meldisco formed for the purpose of operating licensed footwear departments in
Kmart stores (see Note 5 "Meldisco's Relationship with Kmart" for the
elimination of Kmart's interests as of January 2, 2005).

For simplicity of presentation, these consolidated financial statements are
referred to as financial statements herein.

BASIS OF PRESENTATION

Our fiscal 2005 and 2004 financial statements have been prepared in accordance
with the provisions of SOP 90-7. Pursuant to SOP 90-7, our pre-petition
liabilities that were subject to compromise are reported separately in the
accompanying balance sheet as an estimate of the amount that will ultimately be
allowed by the Court. SOP 90-7 also requires separate reporting of certain
expenses, realized gains


                                       F-8

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and losses and provisions for losses related to the bankruptcy filing as
reorganization items. See Note 13 "Liabilities Subject to Compromise" and Note
20 "Reorganization Items".

FISCAL YEARS

The accompanying financial statements include our consolidated results of
operations, assets and liabilities for the 52-week fiscal years ended December
31, 2005 and January 1, 2005 and for the 53-week fiscal year ended January 3,
2004.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent 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. Our critical
accounting estimates, which may be impacted by management's estimates and
assumptions, are discussed in these notes and include the valuation and aging of
inventory and shrink reserve, the impairment of long-lived assets, insurance
liabilities, the valuation of deferred taxes and the valuation of retiree
medical benefits.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of highly liquid instruments with maturities
of three months or less from the date acquired and are stated at cost that
approximates their fair market value.

MERCHANDISE INVENTORIES AND COST OF SALES

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. The retail inventory method is commonly used by retail companies
to value inventories at cost by applying a cost-to-retail percentage to the
retail value of inventories. The retail inventory method is a system of averages
that requires management's estimates and assumptions regarding initial mark-ons,
mark-ups, markdowns and shrink, among others and, as such, could result in
distortions of inventory amounts. The cost of inventories includes the cost of
merchandise, freight-in, duties, royalties and related fees and the cost of our
merchandise sourcing operations. Cost of sales is comprised of the cost of
merchandise, warehousing and delivery costs, inventory shrinkage, rent and
buying/merchandising costs.

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. As a result of the Kmart
Settlement, the useful lives of all fixed assets, except for land and building
and improvements, have been revised so that the fixed assets will be fully
depreciated as of December 2008 to coincide with the expiration of our contract
with Kmart.


                                       F-9

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maintenance and repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after making the necessary adjustment
to the asset and accumulated depreciation accounts of the items renewed or
replaced.

IMPAIRMENT OF LONG-LIVED ASSETS

An impairment loss is recognized whenever events or changes in circumstances
indicate that the carrying amounts of long-lived tangible and intangible assets
with finite lives may not be recoverable. Assets are grouped and evaluated at
the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. We consider historical
performance and future estimated results in our evaluation of potential
impairment and then compare the carrying amount of the asset to the estimated
future cash flows expected to result from the use of the asset. If the carrying
amount of the asset exceeds estimated expected future cash flows, we measure the
amount of the impairment by comparing the carrying amount of the asset to its
fair value. The estimation of fair value is generally measured by discounting
expected future cash flows at our weighted average cost of capital. We estimate
fair value based on the best information available using estimates, judgments
and projections as considered necessary.

DEFERRED CHARGES

Deferred charges, which primarily include deferred financing costs, are
amortized on a straight-line basis over the remaining term of the debt.

OTHER INTANGIBLE ASSETS

Statement No. 142, Goodwill and Other Intangible Assets, ("Statement No. 142")
requires that intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment annually in accordance with the
provisions of Statement No. 142. (see Note 11 "Other Intangible Assets.")
Statement No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values. Intangible assets with definite useful lives are
reviewed for impairment in accordance with Statement No. 144. The costs of these
intangibles are amortized on a straight-line basis over the estimated useful
lives of the respective assets and liabilities, which range from 3 to 7 years.

REVENUE RECOGNITION

Revenues from retail stores are recorded at the point of sale when the product
is delivered to customers and revenues from wholesale operations are recorded
when the product is shipped to customers in accordance with the terms of the
applicable contractual agreement. Retail sales exclude all taxes. Provisions for
merchandise returns are provided in the period that the related sales are
recorded and are reflected as a reduction of revenues. We determine the amount
of provisions based on historical information. Sales discounts and other similar
incentives are recorded as a reduction of revenues in the period in which the
related sales are recorded.

ADVERTISING COSTS

Advertising and sales promotion costs are expensed at the time the advertising
or promotion takes


                                      F-10

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

place. Advertising costs are recorded as a component of store operating,
selling, general and administrative expenses in the accompanying consolidated
statements of operations and were $3.0 million, $21.5 million and $24.2 million
in 2005, 2004 and 2003, respectively. As a result of the Kmart Settlement (See
Note 5 "Meldisco's Relationship with Kmart"), effective January 2, 2005, we are
no longer required to remit to Kmart 2.3% of sales for advertising.

INCOME TAXES

We determine our 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 carryforwards. Deferred tax assets and liabilities are
measured using currently enacted tax rates. A valuation allowance is established
for amounts which we cannot conclude that it is more likely than not that such
amounts will be realized (see Note 19 "Income Taxes.")

POSTRETIREMENT BENEFITS

We provide a defined benefit health care plan for substantially all retirees who
meet certain eligibility requirements, including current active full-time
associates who had a minimum of 10 years of service as of December 31, 1992 and
work up to age 60. As of December 31, 2005 and January 1, 2005, we had an
accrual of $25.9 million and $27.9 million, respectively, relating to
postretirement benefits in other long-term liabilities on our consolidated
balance sheets. The annual cost of postretirement benefits is funded as it
arises and the cost is recognized over an employee's term of service to us (see
Note 24 "Postretirement Benefits".)

INSURANCE LIABILITIES

We are primarily self-insured for health care costs. We were self-insured for
workers' compensation insurance for fiscal years 2004 and prior. Our health care
and workers' compensation (fiscal 2004 and prior) have a deductible of $250,000,
property insurance with deductibles ranging between $25,000 to $100,000 and
general liability insurance with no deductible. For self-insured claims,
including medical, postretirement benefits, workers' compensation, general,
automobile and property claims, provisions are made for our actuarially
determined estimates of discounted future claim costs for such risks. Commencing
in 2005, the Company is no longer self-insured for workers' compensation
insurance and we maintained workers' compensation insurance with no deductible.

STOCK-BASED COMPENSATION PLANS

As permitted under Statement No. 123, Accounting for Stock-Based Compensation
("Statement No. 123"), we have elected not to adopt the fair value method of
accounting for our three stock-based compensation plans (see Note 21 "Stock
Incentive Plans"), but continue to apply the provisions of Accounting Principles
Board Opinion ("APB 25"), Accounting for Stock Issued to Employees. In
accordance with APB 25, compensation expense is not recorded for options granted
if the option price is not less than the quoted market price at the date of
grant. Compensation expense was also not recorded for employee purchases of
stock under the 1997 Associate Stock Purchase Plan since the plan was
non-compensatory as defined in APB 25. We have adopted the disclosure standards
of Statement No. 123 and Statement No. 148, Accounting for Stock-Based
Compensation - Transition and


                                      F-11
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disclosure (an amendment of FASB Statement No. 123) which requires us to provide
pro forma net loss and pro forma loss per share disclosures for employee stock
option grants as if the fair value method of accounting for stock options as
defined in Statement No. 123 had been applied. We plan to adopt FASB Statement
No. 123 (Revised 2004) in 2006 (see Note 4 "Impact of Recently Issued Accounting
Standards"), which requires that the fair value of share-based payments to
employees be expensed.

The following table illustrates the effect on net income (loss) and income
(loss) per share amounts if we had applied the fair value recognition provisions
of Statement No. 123 to stock-based employee compensation (in millions, except
per share amounts):

<TABLE>
<CAPTION>
                                        2005    2004     2003
                                       -----   ------   ------
<S>                                    <C>     <C>      <C>
NET INCOME (LOSS):
   Reported                            $24.4   $(70.0)  $(54.4)
   Stock-based employee compensation
      expense determined under fair
      value method for all awards,
      net of tax                        (1.2)    (2.0)    (6.6)
                                       -----   ------   ------
   Pro forma net income (loss)         $23.2   $(72.0)  $(61.0)
                                       -----   ------   ------
EARNINGS (LOSS) PER SHARE:
   Basic and Diluted:
   Reported                            $1.19   $(3.41)  $(2.65)
   Pro forma                           $1.13   $(3.51)  $(2.97)
</TABLE>

There were no options granted during fiscal years 2005, 2004 and 2003. The fair
value of each option outstanding was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                          2005   2004   2003
                          ----   ----   ----
<S>                       <C>    <C>    <C>
Expected volatility       46.4%  45.3%  44.5%
Expected life in years     6.0    6.0    6.0
Risk-free interest rate    5.3%   5.3%   5.3%
Assumed forfeiture rate     --     --     --
</TABLE>


                                      F-12

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER SHARE

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 dividing net income available to common stockholders
by the weighted average shares outstanding, after giving effect to the potential
dilution that could occur if outstanding options or other contracts or
obligations to issue common stock were exercised or converted. The following
table reflects average shares outstanding used to compute basic and diluted loss
per share (in millions):

<TABLE>
<CAPTION>
                                              2005   2004   2003
                                              ----   ----   ----
<S>                                           <C>    <C>    <C>
Average shares outstanding                    20.3   20.3   20.2
Contingently issuable shares (1)               0.2    0.2    0.3
                                              ----   ----   ----
Average shares outstanding - basic            20.5   20.5   20.5
                                              ----   ----   ----
Average shares outstanding - diluted (2)(3)   20.5   20.5   20.5
                                              ----   ----   ----
</TABLE>

(1)  Represents shares earned under our stock incentive plans.

(2)  For fiscal year 2005, the computation of diluted earnings per share exclude
     806,067 shares of outstanding stock incentive plan grants as these options
     have an exercise price in excess of the Company's market per share price.

(3)  The computation of diluted EPS does not assume conversion, exercise, or
     issuance of shares that would have an anti-dilutive effect on EPS. During
     the years ended January 1, 2005 and January 3, 2004, we had a net loss; as
     a result, any assumed conversions would result in reducing the loss per
     share and, therefore, are not included in the calculation. Shares having an
     anti-dilutive effect on EPS and, therefore, excluded from the calculation
     of diluted earnings per share, totaled 0 shares and 841 shares for the
     years ended January 1, 2005 and January 3, 2004, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement 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 balance sheets at carrying value, which
approximates fair value due to the short-term nature of these instruments and
the variability of the respective interest rates where applicable. The carrying
value of the mortgage, which approximated fair value, was $5.3 million and $7.1
million as of December 31, 2005 and January 1, 2005, respectively.

REVISIONS

In 2005, the Company separately disclosed the operating, investing and financing
portions of the cash flows attributable to its discontinued operations, which in
prior periods were reported on a combined basis as a single amount.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We account for our derivative instruments and hedging activities in accordance
with Statement No. 133, Accounting for Derivative Instruments and Certain
Hedging Activities ("Statement No. 133") and Statement No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of
FASB 133 ("Statement No. 138"). Statements No. 133 and 138 require that all
derivative instruments be recorded on the balance sheet at their respective fair
values.


                                      F-13

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On the date a derivative contract is entered into, we designate the derivative
as a hedge of the variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge) or a hedge of variability of
fair value released to a recognized asset or liability (fair value hedge). For
all hedging relationships, we formally document the hedging relationship, its
risk-management objective, the strategy for undertaking the hedge, the hedging
instrument, the item, the nature of the risk being hedged, how the hedging
instrument's effectiveness in offsetting the hedged risk will be assessed, and a
description of the method of measuring ineffectiveness. This process includes
linking all derivatives that are designated as cash-flow hedges to specific firm
commitments. We also formally assess, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged
items. When it is determined that a derivative is not highly effective as a
hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively.

Changes in the fair value of a derivative instrument that is not considered to
be highly effective, along with the loss or gain on the hedged asset or
liability or unrecognized firm commitment of the hedged item that is
attributable to the hedged risk are recorded in earnings. Changes in the fair
value of a derivative that is highly effective and that is designated and
qualifies as a cash-flow hedge are recorded in other comprehensive income to the
extent that the derivative is effective as a hedge. Cash settlements under the
hedge are recorded in the period in which earnings are affected by the
variability in cash flows of the designated hedged item.

We discontinue hedge accounting prospectively when we determine that the
derivative is no longer effective in offsetting changes in the fair value or
cash flows of the hedged item, the derivative expires or is sold, terminated, or
exercised, a hedged firm commitment no longer meets the definition of a firm
commitment or designation of the derivative as a hedging instrument is no longer
appropriate.

As of December 31, 2005, and January 1, 2005, we had no derivative instruments
or hedging activities outstanding.

3.   DISCONTINUED OPERATIONS

The sale in 2004 of certain Footaction stores to Foot Locker together with the
closure of the underperforming Just For Feet and Footaction stores, which
comprised the Athletic Segment, has been accounted for as discontinued
operations. Our financial statements reflect the Athletic Segment as
discontinued operations for all periods presented.

During 2003 we initiated a plan for the disposition of our Athletic Segment. In
2004, we closed 166 underperforming stores and, effective May 2, 2004, the
assets of 349 Footaction stores were sold to Foot Locker for $225.0 million in
cash, subject to adjustment. Approximately $13.0 million of the sales proceeds
were placed in escrow with respect to 14 store locations that were leased on a
month-to-month basis. In the event that Foot Locker entered into a new lease for
any of these store locations, the escrow amount related to that location was
paid to us.

In 2004, the escrow deposit was released on seven stores and approximately $6.2
million was received by us and included as part of the gain from disposal of the
Athletic Segment. During 2005, an additional $3.8 million was received from
escrow and included as part of the gain from disposal of the Athletic segment as
a result of six leases that were entered into during 2005. As of December 31,
2005 no funds remained in escrow.


                                      F-14

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net sales and loss from discontinued operations of our Athletic Segment before
interest and taxes for 2005, 2004 and 2003 were as follows (in millions):

<TABLE>
<CAPTION>
                                                2005    2004     2003
                                               -----   ------   ------
<S>                                            <C>     <C>      <C>
Net sales                                      $  --   $218.8   $973.2
Income (loss) before interest and taxes from
   discontinued operations                     $10.9   $(30.1)  $(32.6)
Gain from disposal of Athletic Segment         $ 8.9   $ 21.4   $   --
</TABLE>

We reconciled our pre-petition liabilities (See Note 13 "Liabilities Subject to
Compromise") to our actual claims payments along with estimated future claim
payments and recorded a reduction of pre-petition liabilities resulting in a
gain from disposal of Athletic Segment of $8.0 million and income from
operations of discontinued operations of $9.2. Approximately $5.3 million of the
gain from disposal of Athletic Segment relates to Athletic leases which were
assigned to third parties who assumed all rights and obligations relating to
such leases. Approximately $2.4 million relates to Athletic landlords mitigating
the damages incurred by the initial rejection of the lease. The balance relates
to reductions to amounts claimed resulting from negotiations between the Company
and its creditors. The Company recorded interest expense related to pre-petition
liabilities of discontinued operations of $5.8 million and $1.1 million in
fiscal years 2005 and 2004, respectively, which represents interest on
liabilities subject to compromise in which the Company paid interest upon
emergence from bankruptcy on February 7, 2006.

In the initial stages of the Chapter 11 cases in 2004, we decided to streamline
our Meldisco business by selling or exiting selected stores. As a result, we
sold or liquidated all of our Shoe Zone stores. We also exited the footwear
departments in 44 Gordmans stores and the footwear departments in 87 stores
operated by Federated. As we determined that the disposition of these stores met
the requirements of SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"), the results of operations for these stores
have been accounted for as discontinued operations.

Net sales and loss from discontinued operations of Shoe Zone, Gordmans and
Federated before interest and taxes for 2005, 2004 and 2003 were as follows (in
millions):

<TABLE>
<CAPTION>
                                                                    2005    2004     2003
                                                                   -----   ------   -----
<S>                                                                <C>     <C>      <C>
Net sales                                                          $  --   $ 24.1   $53.2
Loss from discontinued operations before interest and taxes
   (including exit costs of approximately $16.1 million in 2004)   $(0.2)  $(26.8)  $(9.2)
</TABLE>

In addition, we applied the provisions of SFAS No. 144 to the stores closed by
Kmart during 2005 and 2004 and determined that these stores either did not meet
the criteria to be accounted for as discontinued operations or were not
considered material to our consolidated results of operations.

4.   IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, FASB Statement No. 151, Inventory Costs, an Amendment of APB
No. 43, Chapter 4 ("Statement No. 151"), was issued. Statement No. 151 requires
certain abnormal expenditures to be recognized as expenses in the current
period. It also requires that the amount of fixed production overhead allocated
to inventory be based on the normal capacity of the production facilities.
Statement


                                      F-15

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

No. 151 is effective for the fiscal year beginning January 1, 2006. The adoption
of Statement No. 151 is not expected to have a material impact on our financial
statements.

In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29 ("Statement No. 153"). Statement No.
153 is effective for nonmonetary asset exchanges occurring in our fiscal year
beginning January 1, 2006. Statement No. 153 requires that exchanges of
productive assets be accounted for at fair value unless fair value cannot be
reasonably determined or the transaction lacks commercial substance. Statement
No. 153 is not expected to have a material impact on our financial statements.

In December 2004, the FASB issued Statement No. 123 (Revised 2004), Share-Based
Payment, which is a revision of Statement No. 123. With limited exceptions,
Statement No. 123 (Revised 2004) requires that the fair value of share-based
payments to employees be expensed over the period service is received. This
Statement is effective for us beginning with our first interim period subsequent
to December 15, 2005. We intend to adopt this Statement using the modified
prospective method. We expect to record approximately $0.6 million as a
component of store operating, selling, general and administrative expenses in
the 2006 Consolidated Statement of Operations.

In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial statements or a change in accounting
estimate. The provisions of this Statement shall be effective for accounting
changes and correction of errors made in fiscal years beginning after December
15, 2005. The Company elected to early adopt this Statement during fiscal year
2005. The adoption of Statement No. 154 did not have a material impact on our
financial statements.

5.   MELDISCO'S RELATIONSHIP WITH KMART

We operated the footwear departments in 1,421 Kmart stores (the "Shoemart
Corporations") as of December 31, 2005. Prior to January 2, 2005, Kmart owned a
49% equity interest in substantially all of our subsidiaries that operated these
footwear departments. The business relationship between Meldisco and Kmart is
extremely important to us. The loss of Meldisco's Kmart operation, a significant
reduction in customer traffic in Kmart stores or the closing of a significant
number of additional Kmart stores would have a material adverse effect on us.

The Kmart licensed footwear departments account for substantially all of our
sales and operating profit from continuing operations, as shown in the following
tables (in millions):

<TABLE>
<CAPTION>
                                                      2005     2004     2003
                                                     ------   ------   ------
<S>                                                  <C>      <C>      <C>
Sales from continuing operations
   Footstar                                          $715.4   $800.2   $962.4
   Kmart footwear departments                         667.8   $753.0   $901.4
Kmart footwear sales from continuing operations as
   percentage of Footstar                                93%      94%      94%
</TABLE>


                                      F-16
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                             2005    2004    2003
                                                            -----   -----   -----
<S>                                                         <C>     <C>     <C>
Operating profit from continuing operations
   Footstar                                                 $34.2   $ 9.5   $45.3
   Meldisco                                                  24.1    22.4    59.0
   Kmart footwear departments                                35.3    14.6    55.6
Kmart's interest in footwear departments'
   operating profit                                         $  --   $ 7.2   $24.8
                                                            -----   -----   -----
Operating profit adjusted to exclude Kmart's 49%
   interest in applicable footwear departments' operating
   income in 2004 and 2003
   Footstar                                                 $34.2   $ 2.3   $20.5
   Meldisco                                                  24.1    15.2    34.2
   Kmart footwear departments                                35.3     7.4    30.8
                                                            -----   -----   -----
</TABLE>

On July 2, 2005, the Company and Kmart entered into the Kmart Settlement and
thereafter the Amended Master Agreement which dictates the structure of our
relationship with Kmart. Under the Master Agreement before amendment, the
Company and Kmart had formed in excess of 1,500 Shoemart Corporations in which
we had a 51% ownership interest and Kmart had a 49% ownership interest, other
than 23 of the Shoemart Corporations which were wholly-owned by us.

The Kmart Settlement provides that Kmart's equity interests in the Shoemart
Corporations were extinguished effective January 2, 2005, and accordingly, Kmart
does not share in the profits or losses of those entities for fiscal 2005 or
subsequent years. The Kmart Settlement fixed the cure amount with respect to our
assumption of the Amended Master Agreement at $45.0 million, which was paid on
August 26, 2005. Effective January 2, 2005, we are required to pay Kmart 14.625%
of the gross sales of the footwear departments, in lieu of the fees and
dividends required under the Master Agreement. We made payments to Kmart of
$15.5 million based on the revised percent of gross sales due under the Amended
Master Agreement for the period beginning January 2, 2005 through August 27,
2005. Effective August 25, 2005, we are required to pay Kmart a miscellaneous
expense fee of $23,500 per open store per year. The Amended Master Agreement
expires at the end of 2008 at which time Kmart is obligated to purchase our
Shoemart inventory (but not our brands) at book value, as defined.

We and Kmart each have the right to terminate the Amended Master Agreement early
if the gross sales of the footwear departments are less than $550.0 million in
any year, provided that this gross sales minimum will be reduced by $0.4 million
for each store that is closed or converted after August 25, 2005. Twenty-two
stores have been closed or converted from August 25, 2005 through February 25,
2006. The Company also has the unilateral right to terminate the Amended Master
Agreement if either (i) the number of Kmart stores is less than 900 or (ii) the
gross sales of the footwear departments in any four consecutive quarters are
less than $450.0 million. In the event of any such termination, Kmart is
obligated to purchase all of the inventory (including inventory that is on order
but excluding inventory that is damaged, unsaleable, and seasonal inventory, as
defined) for an amount equal to the book value of the inventory, as defined.

Pursuant to the Amended Master Agreement Kmart must pay us the stipulated loss
value (as set forth below), if it terminates our licenses to operate shoe
departments in up to 550 Kmart stores during the remaining term of the Amended
Master Agreement by disposing of, closing or converting those stores.


                                      F-17

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The number of stores it can dispose of, close or convert per year is capped at
85 in 2005, 150 in 2006 and 160 in each of 2007 and 2008, with any unused cap
carried over to the following year. In 2005, 61 stores have been disposed of,
closed or converted. In 2006, through February 25, 2006, 18 stores were disposed
of, closed or converted and one additional store has been identified to be
disposed of, closed or converted. For each store that is disposed of, closed or
converted, Kmart must purchase all of our in-store inventory (excluding
inventory that is damaged, unsaleable and seasonal inventory, as defined) at
book value, as defined. In addition, to the extent Kmart exceeds the annual cap
or the 550 aggregate limit, Kmart must pay us a non-refundable stipulated loss
value per store equal to $100,000 for terminations occurring in 2005, $60,000
for terminations occurring in 2006, $40,000 for terminations occurring in 2007
and $20,000 for terminations occurring in 2008. If the entire Amended Master
Agreement is terminated in accordance with its terms Kmart is not obligated to
make any stipulated loss value payments for such stores.

The Amended Master Agreement sets forth the parties' obligations with respect to
staffing and advertising. Specifically, we must spend at least 10% of gross
sales in the footwear departments on staffing costs, as defined, for the stores
and we must schedule the staffing in each store at a minimum of 40 hours per
week. In addition, Kmart is required to allocate at least 52 weekend newspaper
advertising insert pages per year to our products.

Kmart has a capital claim against us in the amount of $11,000 for each store
that is an existing store, as defined, on August 25, 2005, which is generally
payable by us to Kmart at the time a store is disposed of, closed or converted
to another retail format in accordance with the 550 store limitation described
above. However, upon the expiration of the Amended Master Agreement or upon
early termination of that agreement other than as a result of our breach, all
capital claims not yet due and payable will be waived for any remaining stores.
If the Amended Master Agreement is terminated as a result of our breach, capital
claims for remaining stores will not be waived and will become immediately due
and payable.

As set forth in the Amended Master Agreement, Kmart collects proceeds from the
sale of our inventory and remits those sales proceeds to us on a weekly basis
less any applicable fees outlined in the Kmart settlement for fiscal 2005 and
the Master Agreement for prior fiscal years. Such fees were $120.1 million,
$118.7 million and $136.0 million for fiscal 2005, 2004 and 2003, respectively.
As of December 31, 2005 and January 1, 2005, we had outstanding accounts
receivable due from Kmart of $5.2 million and $17.5 million respectively, which
were subsequently collected in January 2006 and January 2005, respectively.

Under the Master Agreement, Meldisco was required to distribute annually a
payment to Kmart for a portion of profits representing Kmart's 49% minority
interest in Meldisco subsidiaries for the preceding fiscal year and an excess
rent payment (excess fee) for the preceding fiscal year which was contingent
upon store-by-store or store level profits above certain levels. As of January
3, 2004 Kmart's undistributed equity percentage share of the retained earnings
(minority interests) amounted to $13.2 million.

The Kmart Settlement included a $45.0 million cure obligation, and resulted in a
charge of approximately $6.3 million which has been reflected in our fiscal 2004
consolidated statement of operations. This charge represents the amount in
excess of previously recorded amounts due Kmart, including minority interests.


                                      F-18

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   2003 RESTRUCTURING PLAN

In fiscal 2003, we incurred approximately $18.2 million of restructuring and
asset impairments relating to the closing of 316 Kmart stores. These charges
included approximately $15.7 million for inventory write-downs which have been
reflected in the consolidated statements of operations as a component of cost of
sales. The non-inventory amounts, which amounted to $2.5 million, included $1.9
million for severance costs and $0.6 million for asset impairments. Such costs
have been reflected in restructuring, asset impairment and other charges in the
accompanying consolidated statements of operations. All charges under the 2003
restructuring plan were paid during fiscal 2003.

7.   ACCOUNTS RECEIVABLE

     Accounts receivable consisted of the following (in millions):

<TABLE>
<CAPTION>
                                        2005    2004
                                        ----    ----
<S>                                     <C>    <C>
Due from Kmart                          $5.2   $17.5
Other - primarily trade                  4.6     5.0
                                        ----   -----
                                         9.8    22.5
Less: Allowance for doubtful accounts    1.0     0.4
                                        ----   -----
   Total                                $8.8   $22.1
                                        ====   =====
</TABLE>

In fiscal 1998, we sold our right, title and interest in the trademark Land
Rover for a minimum payment of $5.0 million payable in 2004. Subsequent to the
sale, the acquirer filed for bankruptcy and the principal ownership of the
company changed. In July 2003, we began negotiating with the new owners of the
Land Rover trademark and revised the initial agreement to include certain
additional future rights to the use of the name in exchange for an additional
$0.4 million and the acceleration of the required $5.0 million payment. The
amended sale price of $5.4 million was paid in two installments of $2.7 million.
The first installment was paid in August 2003, and the second was paid in
January 2004. Based upon these revisions and due to our collection of all
amounts owed to us, we recorded the $5.4 million as other income in the
accompanying consolidated statements of operations during fiscal 2003.

8.   PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following (in
millions):

<TABLE>
<CAPTION>
                                         2005    2004
                                        -----   -----
<S>                                     <C>     <C>
Deferred income taxes(a)                $  --   $ 2.7
Income tax refund receivable and
   other prepaid taxes                   18.8    20.1
Other                                     2.7     5.6
                                        -----   -----
   Total                                $21.5   $28.4
                                        =====   =====
</TABLE>

(a)  See Note 19, "Income Taxes"


                                      F-19

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.   ASSETS AND LIABILITIES RELATED TO DISCONTINUED OPERATIONS

Assets and liabilities related to discontinued operations as of December 31,
2005 and January 1, 2005 consisted of the following (in millions). See Note 1
"Business Risks - Bankruptcy Filing," Note 3 "Discontinued Operations" and Note
13 "Liabilities Subject to Compromise" for a further discussion of Athletic
Segment liabilities.

<TABLE>
<CAPTION>
                                            2005   2004
                                            ----   ----
<S>                                         <C>    <C>
ASSETS
Accounts receivable, net                      --    5.9
Prepaid expenses and other current assets    0.1    0.3
                                            ----   ----
                                            $0.1   $6.2
                                            ====   ====
Liabilities
Accrued expenses                            $7.4   $3.5
                                            ----   ----
                                            $7.4   $3.5
                                            ====   ====
</TABLE>

10.  PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following (in millions):

<TABLE>
<CAPTION>
                                                           Original useful lives (in yrs.)    2005    2004
                                                          --------------------------------   -----   ------
<S>                                                       <C>                                <C>     <C>
Land                                                                                         $ 3.2   $  3.2
Buildings and improvements                                10-40                               20.3     21.1
Computer hardware and software, equipment and furniture   3-10                                60.3     74.0
Capital leases                                            5                                    --       2.4
Leasehold improvements                                    6 or life of lease, whichever is
                                                          shorter                              0.1      0.2
Construction in progress                                                                       0.3       --
                                                                                             -----   ------
                                                                                              84.2    100.9
                                                                                             -----   ------
Less: Accumulated depreciation                                                                55.3     65.5
                                                                                             -----   ------
   Total                                                                                     $28.9   $ 35.4
                                                                                             =====   ======
</TABLE>

As a result of the Kmart Settlement during 2005, the useful lives of all fixed
assets, except for land and building and improvements, have been reduced so that
our fixed assets will be fully depreciated as of December, 2008, to coincide
with the expiration of our contract with Kmart. The effect of this change in
estimate on 2005 resulted in a decrease to net income from continuing operations
of $0.5 million and a decrease to basic and diluted earnings per share of $0.02.

Depreciation expense was $7.3 million, $21.1 million and $17.8 million in 2005,
2004 and 2003, respectively.


                                      F-20

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  OTHER INTANGIBLE ASSETS

FASB Statement No. 142 requires that intangible assets with indefinite useful
lives not be amortized, but instead be tested for impairment annually. Statement
No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values.

During fiscal year 2003, we evaluated the fair value of our intangible assets
and determined that certain trade names of approximately $1.1 million were
impaired and were written off. During fiscal year 2004, we evaluated the fair
value of our intangible assets and determined that there were no changes from
the prior year and we continued to amortize a trade name with a carrying value
of $0.4 million over a ten year period. During fiscal year 2005, we evaluated
the fair value of our intangible assets and determined that as a result of the
expected termination of the Kmart agreement in December 2008, the useful life of
this tradename and a trademark with a net book value of $9.9 million that had
been determined in prior years to have an indefinite useful life to be amortized
through December 31, 2008.

As of December 31, 2005 and January 1, 2005, the Company had trade names with a
gross carrying amount of $11.3 million. The accumulated amortization associated
with these trade names was $1.3 million and $1.0 million at December 31, 2005
and January 1, 2005, respectively. Amortization expense for fiscal 2005 and 2004
was $0.3 million and $0.7 million, respectively. The following table lists
projected amortization expense relating to intangible assets for the next three
fiscal years (in millions):

<TABLE>
<S>                <C>
Fiscal year 2006   $3.3
Fiscal year 2007    3.3
Fiscal year 2008    3.3
</TABLE>

12.  ACCRUED EXPENSES

Accrued expenses consisted of the following (in millions):

<TABLE>
<CAPTION>
                                            2005    2004
                                           -----   -----
<S>                                        <C>     <C>
Taxes other than federal income taxes      $ 9.4     7.7
Salaries and bonus                          15.4    13.8
Other - individually not in excess of 5%    21.1    26.5
                                           -----   -----
Total                                      $45.9   $48.0
                                           =====   =====
</TABLE>

13.  LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise represent our current estimate of the amount
of the pre-petition claims that are subject to restructuring during our
bankruptcy. Pursuant to Court orders, we were authorized to pay certain
pre-petition operating liabilities incurred in the ordinary course of business
and reject certain of our pre-petition obligations. We notified all known
pre-petition creditors of the establishment of a bar date by which creditors
must file a proof of claim, which bar date has now


                                      F-21
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

passed for all creditors. Differences between liability amounts recorded by us
and claims filed by creditors have been substantially reconciled and paid upon
our emergence on February 7, 2006 (See Note 1 - Business Risks - Bankruptcy
Filing). The Court will make a final determination of allowable claims on the
remaining disputed amounts.

Liabilities subject to compromise as of December 31, 2005 and January 1, 2005
consisted of the following (in millions):

<TABLE>
<CAPTION>
                         2005       2004
                        ------     ------
<S>                     <C>        <C>
Accounts payable        $ 56.0     $ 75.9
Accrued  expenses         64.4       69.8
Long-term liabilities      5.1        6.6
                        ------     ------
Total                   $125.5(a)  $152.3(a)
                        ======     ======
</TABLE>

(a)  Includes approximately $92.3 million and $112.5 million of discontinued
     operations liabilities subject to compromise at December 31, 2005 and
     January 1, 2005, respectively.

We reconciled our recorded liabilities subject to compromise to our actual claim
payments along with estimated future claim payments and recorded a reduction of
our liabilities subject to compromise of $18.7 million (See Note 3 "Discontinued
Operations" and Note 20 "Reorganization Items").

In connection with our purchase of the Meldisco headquarters building in Mahwah,
New Jersey, in September 2000, we assumed a 10-year term mortgage, of which $5.3
million and $7.1 million were outstanding as of December 31, 2005 and January 1,
2005, respectively. As of December 31, 2005, $5.3 million of the mortgage is
included in liabilities subject to compromise ($4.3 million is included in long
term liabilities and $1.0 million is included in accrued expenses). Under the
terms of the mortgage agreement, we are required to make quarterly payments of
approximately $350,000, representing both principal and interest, through May 1,
2010, when the mortgage will be repaid.

The mortgage bears a fixed annual rate of interest of 8.08%. As of December 31,
2005, the future principal payments under the mortgage are as follows:

<TABLE>
<S>    <C>
2006   $1.0
2007    1.1
2008    1.2
2009    1.3
2010    0.7
</TABLE>

14.  THE CREDIT FACILITIES

Effective March 4, 2004, we entered into a two-year, $300.0 million
senior-secured Debtor-in-Possession Credit Agreement (the "DIP Credit
Agreement") with a syndicate of lenders co-led by Bank of America, N.A.
(formerly Fleet National Bank) and GECC Capital Markets Group, Inc. Effective
August 2, 2004, the DIP Credit Agreement was amended and restated (the "DIP and
Exit Facility"), which, among other things, provided for up to $160.0 million of
post-emergence financing (containing a $75.0 million sub-limit for letters of
credit) and reduced the amount of lending commitments available while operating
as debtor-in-possession to $100.0 million (including a sub-


                                      F-22

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

limit for letters of credit).

Effective July 1, 2005, we amended certain terms and conditions of the DIP and
Exit Facility (the "Amended DIP and Exit Facility") to, among other things,
allow for the consummation of our Amended Plan and reduce the amount of
revolving commitments available upon emergence from $160.0 million to $100.0
million. Accordingly, the letter of credit sub-limit was reduced from $75.0
million to $40.0 million. This amendment also included a change in the maturity
date for the debtor-in-possession portion of the facility from the earlier of
(i) March 4, 2006 or (ii) 15 days following confirmation of the Amended Plan to
the earlier of (i) October 31, 2006 or (ii) emergence from Chapter 11. The
maturity date of the exit portion of the Amended DIP and Exit Facility was
modified to be, the earlier of 36 months after our emergence from bankruptcy or
March 4, 2009.

Effective January 6, 2006, we further amended our Amended DIP and Exit Facility.
This amendment modified only certain terms and conditions related to the exit
portion of the facility (the "Exit Facility"). Debtor-in-possession financing
continued to be provided under the Amended DIP and Exit Facility prior to the
emergence date. The Exit Facility became effective upon consummation of the Plan
on February 7, 2006 as all conditions to be satisfied were met. The Exit
Facility has a maturity date of the earlier of (a) November 30, 2008 or (b)
thirty days prior to the termination of the Amended Master Agreement. Prior to
the amendment, the maturity date of the exit portion of the facility was the
earlier of (a) thirty-six months after the Company's emergence from chapter 11
or (b) March 4, 2009. In addition, the Exit Facility reflects, among other
things, temporary changes in certain advance rates and availability requirements
which provide for incremental liquidity during the first twelve months following
our emergence from Chapter 11.

We may borrow up to $100.0 million through the Exit Facility, subject to a
sufficient borrowing base (based upon eligible inventory and accounts
receivable), and other terms of the facility. Revolving loans under the Exit
Facility bear interest, at our option, either at the prime rate plus a variable
margin of 0.0% to 0.5% or LIBOR plus a variable margin of 1.75% to 2.50%. The
variable margin is based upon quarterly excess availability levels specified in
the Exit Facility. A quarterly fee of 0.3% per annum is payable to the lenders
on the unutilized balance.

The Exit Facility is secured by substantially all of the assets of the Company
and contains various affirmative and negative covenants, representations,
warranties and events of default to which we are subject, including certain
financial covenants and restrictions such as limitations on additional
indebtedness, other liens, dividends, stock repurchases and capital
expenditures. The Company is required to maintain minimum excess availability
equal to at least 5% of the borrowing base for the first twelve months following
the emergence date and 10% thereafter. In addition, if minimum excess
availability falls below 20% of the borrowing base, we will be subject to a
fixed charge coverage covenant. The Company is currently in compliance with all
financial covenants.

As of December 31, 2005, the Company had no loans outstanding and approximately
$49.1 million of excess availability, as defined, under the Amended DIP and Exit
Facility, net of outstanding letters of credit (the majority of which were
standby letters of credit) totaling $14.7 million and minimum excess
availability requirements.


                                      F-23

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  THE PRE-PETITION CREDIT FACILITY

Prior to the Petition Date, our principal sources of liquidity were our
operating cash flows and our $345.0 million senior secured credit facility (the
"Pre-Petition Credit Facility).

The Pre-Petition Credit Facility was replaced by the DIP Credit Agreement (see
Note 14 "The Credit Facilities") effective March 4, 2004.

16.  INTEREST RATE SWAP AGREEMENTS

We incurred variable rate debt through the revolving portion of our Credit
Facility. This debt exposed us to variability in interest expense due to changes
in interest rates. In order to limit the variability of a portion of our
interest expense, effective January 8, 2002, we entered into four interest rate
swap agreements with a total notional amount of $60.0 million and a weighted
average fixed rate of 3.6%. The four interest rate swap agreements expired on
January 8, 2004. For the year ended January 3, 2004, interest rate cash flow
hedges were highly effective.

For the year ended January 3, 2004, we recorded interest expense of $1.5 million
related to the interest rate swap agreements. There were no net gains or losses
from cash flow hedge ineffectiveness arising from differences between the
critical terms of the interest rate swap and the hedged debt obligation.

Since the interest rate swaps qualified as cash flow hedges and were determined
to be highly effective, the changes in the fair value were recorded in other
comprehensive loss. We do not enter into derivative instruments for any purpose
other than to manage our interest rate exposure. That is, we do not hold
derivative financial investments for trading or speculative purposes. At
December 31, 2005 and January 1, 2005, we had no derivative financial
instruments.

17.  OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in millions):

<TABLE>
<CAPTION>
                          2005    2004
                         -----   -----
<S>                      <C>     <C>
Employee benefit costs   $31.1   $32.8
Other                      3.9     5.7
                         -----   -----
   Total                 $35.0   $38.5
                         =====   =====
</TABLE>

18.  LEASES

We leased a warehouse and office facilities through operating leases over
periods ranging from five to 15 years. We also lease automobiles, computer
hardware and various equipment for shorter periods. Net rental expense for all
operating leases for each of the fiscal years in the three-year period ended
December 31, 2005 was as follows (in millions):

<TABLE>
<CAPTION>
                      2005     2004    2003
                     ------   -----   -----
<S>                  <C>      <C>     <C>
Minimum rentals      $  3.2   $ 6.8   $ 7.9
Percentage rentals    100.1    67.3    84.7
                     ------   -----   -----
   Total             $103.3   $74.1   $92.6
                     ======   =====   =====
</TABLE>


                                      F-24

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Percentage rentals include excess rent fees under the Master Agreement, which,
prior to the Kmart Settlement, were contingently based on store profitability.

As of December 31, 2005, the future minimum rental payments under operating
leases were as follows (in millions):

<TABLE>
<S>    <C>
2006   $1.5
2007    1.0
2008    0.6
2009    0.3
2010     --
</TABLE>

19.  INCOME TAXES

The provision (benefit) provision for income taxes was comprised of the
following (in millions):

<TABLE>
<CAPTION>
           2005    2004    2003
           ----   -----   -----
<S>        <C>    <C>     <C>
Federal    $3.3   $(3.3)  $ 7.1
State       0.9     0.4     2.9
           ----   -----   -----
   Total   $4.2   $(2.9)  $10.0
           ====   =====   =====
</TABLE>

Included in the consolidated provision (benefit) for income taxes are net
deferred tax provision (benefit) of $2.7 million, $1.6 million and $(0.9)
million for the fiscal years ended December 31, 2005, January 1, 2005, and
January 3, 2004, respectively. There was no provision for income taxes relating
to discontinued operations in 2005 due to the elimination of the valuation
allowance for the reversal of temporary differences and the utilization of net
operating loss carryforwards. In 2004 and 2003, no benefit was provided due to
recording a valuation allowance.

Income tax expense (benefit) differs from the "expected" income tax expense
(benefit) computed by applying the U.S. federal income tax of 35% to income
before income taxes as follows (in millions):

<TABLE>
<CAPTION>
                                                        2005    2004     2003
                                                        ----   ------   -----
<S>                                                     <C>    <C>      <C>
Computed "expected" income tax  expense (benefit)        5.3   $(13.5)  $ 8.0
Increases (decreases) in income taxes resulting from:
   State income taxes, net of federal tax benefit        0.6      0.4     2.3
   51% owned subsidiaries                                2.6      4.6    (4.0)
   Utilization of net operating loss carryforwards      (2.8)      --      --
   Other                                                 0.3      0.1     0.1
   Valuation allowance                                  (1.8)     5.5     3.6
                                                        ----   ------   -----
Net income tax expense (benefit)                         4.2   $ (2.9)  $10.0
                                                        ----   ------   -----
</TABLE>


                                      F-25

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 our deferred tax asset and liabilities for the 2005
and 2004 fiscal years were as follows (in millions):

<TABLE>
<CAPTION>
                                   2005      2004
                                  ------   -------
<S>                               <C>      <C>
DEFERRED TAX ASSETS:
   Bankruptcy rejection claims    $ 19.6   $  20.1
   Kmart Settlement Agreement        5.2       2.4
   Restructuring reserves            0.4       0.4
   Inventories                       4.4       4.0
   Postretirement benefits          10.1      10.9
   Employee benefits                 6.2      12.8
   NOL carryforward                 60.1      63.2
   Intangible assets                 5.0       6.2
   Other                             0.4       1.8
                                  ------   -------
Total gross deferred tax assets    111.4     121.8
Less valuation allowance          (109.8)   (116.2)
                                  ------   -------
Total deferred tax assets            1.6       5.6
DEFERRED TAX LIABILITIES:
   Property and equipment           (1.6)     (2.9)
                                  ------   -------
NET DEFERRED TAX ASSETS           $   --   $   2.7
                                  ------   -------
</TABLE>

As of December 31, 2005, we have net operating loss carry forwards for federal
income tax purposes of approximately $156.1 million which, if not utilized, will
begin expiring for federal purposes in 2022 and in 2007 for state income tax
purposes. Utilization of the net operating loss carry forwards may be subject to
an annual limitation in the event of a change in ownership in future years as
defined by Section 382 of the Internal Revenue Code and similar state
provisions.

In assessing the realizability of deferred taxes, we consider whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized based on projections of our future taxable earnings. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.

As a result of our historical losses and possible liquidation of our business in
December, 2008, for accounting purposes we cannot rely on anticipated future
profits to utilize certain of our deferred tax assets. As a result, we cannot
conclude that it is more likely than not that certain deferred tax assets will
be realized and have recorded a non-cash valuation allowance on the net deferred
tax asset in fiscal year 2005. In fiscal 2004 and 2003, the Company had a net
deferred tax asset of $2.7 million and $4.3 million, which represented certain
temporary differences relating to the 51% owned Shoemart Corporations. During
fiscal years 2005, 2004 and 2003, the Company recorded a (reduction) increase of
the valuation allowance of $(6.4) million, $21.4 million and $24.7 million,
respectively. Due to the Kmart Settlement, all Shoemart Corporations will be
included in the Footstar Consolidated income tax returns and, therefore, a full
valuation was provided against the related net deferred tax asset.


                                      F-26
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Prior to fiscal 2005, earnings of our 51%-owned subsidiaries were distributed
and, accordingly, we provided for federal and state income taxes on their
undistributed taxable earnings.

20.  REORGANIZATION ITEMS

Reorganization items, which consist of income and expenses that are related to
our bankruptcy were comprised of the following for 2005 and 2004 (in millions):

<TABLE>
<CAPTION>
                                                           2005    2004
                                                          -----   -----
<S>                                                       <C>     <C>
Store and distribution center closing and related asset
   impairment costs                                       $ 0.1   $24.5
Professional fees                                          18.5     7.9
Trustee fees                                                3.1     5.8
Gain on disposition of bankruptcy claims                   (1.5)     --
Interest income                                            (5.6)   (1.1)
                                                          -----   -----
   Total                                                  $14.6   $37.1
                                                          =====   =====
</TABLE>

The disposition of bankruptcy claims (see Note 13 "Liabilities Subject to
Compromise") resulted in an increase of $1.5 million in income from continuing
operations in fiscal 2005.

SOP 90-7 requires that interest income earned on cash accumulated during
bankruptcy proceedings be included as a reorganization item. During fiscal 2005
and 2004, interest income of $5.6 million and $1.1 million, respectively was
earned on cash that would otherwise have been used to pay such pre-petition
liabilities.

21.  STOCK INCENTIVE PLANS

Our stock incentive plans include the shareholder-approved 1996 Incentive
Compensation Plan (the "1996 Plan") and the shareholder-approved 1996
Non-Employee Director Stock Plan (the "Director Plan and the
non-shareholder-approved 2000 Equity Incentive Plan (the "2000 Plan"), which is
to be used exclusively for non-executive officers of the Company. Under the 1996
Plan, a maximum of 3,100,000 shares may be issued in connection with stock
options, restricted stock, deferred stock and other stock-based awards. Under
the 2000 Plan, a maximum of 2,000,000 shares may be issued in connection with
stock options, restricted stock, deferred stock and other stock-based awards. No
executive officers of the Company are eligible for awards under the 2000 Plan. A
total of 200,000 shares of our common stock were reserved for issuance under the
Director Plan.

Under both the 1996 Plan and the 2000 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 us.

We may grant deferred restricted stock units under both the 1996 Plan and the
2000 Plan. Deferred restricted stock units were granted to certain officers and
key employees. Restricted stock units vest generally five years from date of
grant, provided the executive continues to be employed by us. There were no new
grants of deferred restricted stock units in 2005, 2004 and 2003. We amortized
($0.2) million, $0 million and $0 million in 2005, 2004 and 2003, respectively,
which is recorded as a


                                      F-27

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

component of store operating, selling, general and administrative expenses in
the accompanying consolidated statements of operations.

We may also grant performance-based stock awards under both the 1996 Plan and
the 2000 Plan. Performance-based stock awards include the granting of deferred
stock units, representing rights to receive cash and/or common stock of the
Company, at our discretion, based upon certain performance criteria generally
over a three-year performance period.

These performance-based stock awards vest over a period of time ranging from a
minimum of three years to a maximum of the employee's attainment of retirement
age. Compensation expense related to grants under these provisions is based on
the current market price of our common stock at the date of grant and the extent
to which performance criteria are being met. The 1996 Plan and 2000 Plan also
offered incentive opportunities based upon performance results against
pre-established earnings targets and other selected measures for each fiscal
year. We may also make cash award payments which employees may elect to defer up
to 75% of such payment in deferred shares and receive a matching Company grant.
The elective deferrals and matched amounts are deferred for a five year vesting
period. The amount deferred will be paid in shares. There were no new grants of
performance-based stock awards in 2005, 2004 and 2003. We amortized $0.1
million, $0 and $0.7 million into expense in 2005, 2004 and 2003, respectively,
which is recorded as a component of store operating, selling, general and
administrative expenses in the accompanying consolidated statements of
operations. We made no payments in 2005, 2004 and 2003.

The following table provides information relating to the potential dilutive
effect and shares available for grant under each of our stock compensation
plans.

<TABLE>
<CAPTION>
                            Number of
                          Shares to be       Weighted
                           Issued upon       Average        Number of Shares     Number of Shares       Number of Shares
                           Exercise of    Exercise Price        Issued,        Remaining Available     Remaining Available
                           Outstanding    of Outstanding   Inception to Date   for Future Issuance,   for Future Issuance,
     Plan Category       Options/Awards      Options        as of 12/31/2005      as of 12/31/05         as of 1/1/2005
     -------------       --------------   --------------   -----------------   --------------------   --------------------
<S>                      <C>              <C>              <C>                 <C>                    <C>
1996 Incentive
   Compensation Plan         469,514            $28              920,665             1,709,822              1,617,952
2000 Equity
   Incentive Plan            320,556            $30              101,792             1,577,653              1,455,308
1996 Non-Employee
   Director Stock Plan        96,520            $29               45,436                58,044                 58,044
                             -------            ---            ---------             ---------              ---------
Total                        886,590            $29            1,067,893             3,345,519              3,131,304
                             =======            ===            =========             =========              =========
</TABLE>

The tables below provide information relating to employee stock options,
deferred restricted stock units and performance-based stock awards:

<TABLE>
<CAPTION>
                                              Employee Stock Options
                         ---------------------------------------------------------------
                                2005                  2004                   2003
                         ------------------   --------------------   -------------------
                         EMPLOYEE   AVERAGE     Employee   Average    Employee   Average
                           STOCK     OPTION      Stock      Option     Stock      Option
                          OPTIONS    PRICE      Options     Price     Options     Price
                         --------   -------   ----------   -------   ---------   -------
<S>                      <C>        <C>       <C>          <C>       <C>         <C>
Outstanding, beginning
   of year                874,735     $30      2,374,836     $30     2,630,379     $30
Cancelled                (200,310)    $30     (1,500,101)    $29      (255,543)    $30
Outstanding, end of
   year                   674,425     $30        874,735     $30     2,374,836     $30
                         --------     ---     ----------     ---     ---------     ---
Exercisable, end of
   year                   587,636                662,098             1,449,251
                         --------             ----------             ---------
</TABLE>


                                      F-28

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                   Deferred Restricted Stock Units and Shares and
                                           Performance-Based Stock Awards
                         ------------------------------------------------------------------
                                 2005                   2004                   2003
                         --------------------   --------------------   --------------------
                          DEFERRED               Deferred               Deferred
                         SHARES AND   AVERAGE   Shares and   Average   Shares and   Average
                            UNITS      PRICE       Units      Price       Units      Price
                         ----------   -------   ----------   -------   ----------   -------
<S>                      <C>          <C>       <C>          <C>       <C>          <C>
Outstanding, beginning
   of year                196,040       $22       373,663      $23       427,739      $30
Granted                        --        --            --       --       119,273      $ 8
Cancelled                 (36,643)      $26      (109,620)     $24      (119,583)     $30
Shares issued             (43,752)      $23       (68,003)     $24       (53,766)     $29
                          -------       ---      --------      ---      --------      ---
Outstanding, end of
   year                   115,645       $20       196,040      $22       373,663      $23
                          =======       ===      ========      ===      ========      ===
</TABLE>

Summarized information about stock options outstanding as of December 31, 2005
is as follows:

<TABLE>
<CAPTION>
                                  Options Outstanding
                         -------------------------------------     Options Exercisable
                                         Weighted                ----------------------
                                          Average     Weighted                 Weighted
                                         Remaining     Average                  Average
                            Number      Contractual   Exercise      Number     Exercise
Exercise Price Range     Outstanding   Term (Years)     Price    Exercisable     Price
--------------------     -----------   ------------   --------   -----------   --------
<S>                      <C>           <C>            <C>        <C>           <C>
$20 - 29                   434,420          4.1          $24       379,937        $24
$30 - 39                    94,005          3.3          $33        89,179        $33
$40 - 47                   146,000          4.9          $46       118,520        $46
                           -------          ---          ---       -------        ---
Total                      674,425          4.1          $30       587,636        $30
</TABLE>

1996 DIRECTOR STOCK PLAN

The 1996 Director Plan was intended to assist us in attracting and retaining
highly qualified persons to serve as non-employee directors. Any person who
became an eligible director received an initial option to purchase 2,000 shares
of common stock. All options were awarded with an exercise price equal to the
fair market value of the common stock on the date of grant. Generally, options
were exercisable in installments of 20% beginning one year from date of grant
and expire ten years after the grant date, provided the non-employee director
was still a member of the board.

Commencing in 2003, the 1996 Director Plan also provided for automatic grants of
4,000 stock units ("Stock Units") to each non-employee director on the date of
the annual meeting of our shareholders. Prior to fiscal 2003, the 1996 Director
Plan provided for automatic amounts of 2,000 stock units. Each Stock Unit
represented the right to receive one share of our common stock at the end of a
specified period and vests six months and a day after the grant date. Fifty
percent of such Stock Units were payable upon vesting, provided the non-employee
director had not ceased to serve as a director for any reason other than death,
disability or retirement. The remaining fifty percent of such Stock Units were
payable upon the latter of ceasing to be a director or attaining age 65,
provided that settlement of such Stock Units were accelerated in the event of
death, disability or a change in control.

The following tables provide information relating to the status of, and changes
in, options and Stock Units granted under the 1996 Director Plan:


                                      F-29
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                   Director Plan Stock Options
                                    ---------------------------------------------------------
                                           2005                2004                2003
                                    -----------------   -----------------   -----------------
                                              AVERAGE             Average             Average
                                     STOCK     OPTION    Stock     Option    Stock     Option
                                    OPTIONS    PRICE    Options    Price    Options    Price
                                    -------   -------   -------   -------   -------   -------
<S>                                 <C>       <C>       <C>       <C>       <C>       <C>
Outstanding, at beginning of year    16,000     $26      16,000      $26     16,000     $26
Granted                                  --      --          --       --         --      --
Shares Issued                            --      --          --       --         --      --
                                     ------     ---      ------      ---     ------     ---
Outstanding, at end of year          16,000     $26      16,000      $26     16,000     $26
                                     ======     ===      ======      ===     ======     ===
Options exercisable, at end of
   year                              16,000              16,000              15,200
</TABLE>

<TABLE>
<CAPTION>
                                                     Director Plan Stock Units
                                    ----------------------------------------------------------
                                           2005                 2004                2003
                                    ------------------   ------------------   ----------------
                                               AVERAGE              Average            Average
                                      STOCK      UNIT      Stock      Unit     Stock     Unit
                                    UNITS(1)    PRICE    Units(1)    Price     Units    Price
                                    --------   -------   --------   -------   ------   -------
<S>                                 <C>        <C>       <C>        <C>       <C>      <C>
Outstanding, at beginning of year    66,000      $ 32     66,000      $ 32    66,000     $ 32
Granted                                  --       N/A         --       N/A        --      N/A
Shares Issued                       (14,000)     $ 32         --       N/A        --      N/A
                                    -------      ----     ------      ----    ------     ----
Outstanding, at end of year          52,000      $ 33     66,000      $ 32    66,000     $ 32
                                    =======      ====     ======      ====    ======     ====
</TABLE>

(1)  Since there was no annual meeting in fiscal 2005, 2004 or 2003 no Stock
     Units were granted.

2006 NON-EMPLOYEE DIRECTOR STOCK PLAN

On our emergence from bankruptcy on February 7, 2006, the 2006 Non-Employee
Director Stock Plan (the "2006 Director Stock Plan") became effective. On such
date the 1996 Directors Stock Plan was frozen so that no further grants may be
made under such plan. The 2006 Director Stock Plan allows for the grant of
common stock of the Company (the "Common Stock"). The total number of shares of
Common Stock reserved and available for delivery under the 2006 Director Stock
Plan is 458,044 shares; provided, however, that the number of shares of Common
Stock available is subject to adjustment for recapitalization, merger, and other
similar events.

The 2006 Director Stock Plan provides for an automatic initial grant of 10,000
shares of restricted Common Stock to each eligible director. Beginning with the
2007 annual meeting of the Company, the Company shall make additional grants to
each eligible director of 10,000 shares of restricted Common Stock, or such
other amount determined by the Board of Directors of the Company (the "Board"),
subject to the provisions of the 2006 Director Stock Plan.

Unless the Board shall determine otherwise at the time of grant, each award of
restricted Common Stock shall vest with respect to 50% of the shares on the
first anniversary of the date of grant, an additional 25% of the shares on the
second anniversary of the date of grant, and with respect to the remaining 25%
of the shares on the third anniversary of the date of grant. In the event of a
participant's retirement, all unvested shares of restricted Common Stock shall
become vested as of the effective date of such retirement. In the event of a
change in control (as specified in the 2006 Director


                                      F-30

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Plan), all unvested shares of restricted Common Stock shall become vested
as of the effective date of such change in control.

Each eligible director who so elects at least one business day prior to the last
day of the first fiscal quarter of the Company for the applicable year, in the
form established by the Board, to receive his or her cash director fees for such
year in shares of Common Stock, shall receive a number of shares of Common Stock
with a fair market value equal to the amount of such cash director fees. Such
shares will be granted to the eligible director on the date the first cash
payment for such year would have been made. For 2006, such election must be made
on or prior to the first business day after the Effective Date. All Common Stock
granted under this provision shall be fully vested. For this purpose, "fair
market value" for an applicable date shall mean (i) if the Common Stock is
traded on the over-the-counter bulletin board and is not traded on a national
stock exchange or NASDAQ, the average of the high and low price for Common Stock
on the date the Common Stock is granted and (ii) if the Common Stock is traded
on a national stock exchange or NASDAQ, the closing price of the Common Stock on
such national stock exchange or NASDAQ on the date the Common Stock is granted.

A participant's termination of service as a director of the Company for any
reason other than retirement shall result in the immediate forfeiture of all
shares of restricted Common Stock that have not yet vested as of the date of
such termination of service. To effect such forfeiture, the participant shall
transfer such shares of Common Stock to the Company promptly following such
termination of service in accordance with procedures established by the Board
from time to time and the Company shall reimburse such participant for the
shares of Common Stock in an amount equal to the lesser of (i) the fair market
value of the shares of Common Stock transferred on the date service terminated,
and (ii) the cash price, if any, paid by the participant for such shares of
Common Stock. In addition, the participant shall forfeit all dividends paid on
the shares of restricted Common Stock, which forfeiture shall be effected by
termination of any escrow arrangement under which such dividends are held, or,
if paid directly to the participant by the participant's repayment of dividends
received directly, or by such other method established by the Board from time to
time.

In addition to the grants eligible directors receive under the 2006 Director
Stock Plan, each non-employee director of the Company shall receive $50,000
annually, which shall be paid quarterly in cash in equal installments, unless
any such director elects to receive Common Stock in lieu of cash as described
above. The Chairman of the Board shall receive an additional $40,000 annually,
which shall be paid semi-annually in cash in equal installments, and the
Chairman of the Company's Audit Committee shall receive an additional $10,000
annually, which shall be paid semi-annually in cash in equal installments. These
additional cash retainers may also be received in common stock in lieu of cash
as described above.

ASSOCIATE STOCK PURCHASE PLAN

An Associate Stock Purchase Plan ("ASPP") provides substantially all employees
who have completed service requirements an opportunity to purchase shares of our
common stock through payroll deductions of up to 10% of eligible compensation to
a maximum of $25,000 (in fair market value of common stock purchased) annually.
Quarterly, participant account balances are used to purchase shares of stock at
85% 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 were available
for purchase under the plan, with 949,768 available as of December 31, 2005.
There were 0, 0 and 180,276 shares purchased under this plan in fiscal years
2005, 2004 and 2003, respectively.


                                      F-31

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On December 29, 2003, the New York Stock Exchange ("NYSE") suspended trading in
our common stock and, at a later date, our common stock was delisted. As a
result of the NYSE action, we suspended purchases of our common stock through
the ASPP effective December 29, 2003.

22.  401(K) PROFIT SHARING PLAN

We have a tax 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(k).

Under the 401(k) profit sharing component, we match a portion of the employee's
contribution under a pre-determined formula based on the level of contribution
and years of vesting service. Our contributions to the plan are made in cash.
Our stock is not used to fund the plan, nor is it an investment option for
employees under the plan.

Contributions to the plan by us for both profit sharing and matching of employee
contributions were approximately $2.5 million, $1.9 million and $2.8 million for
fiscal years 2005, 2004 and 2003, respectively.

23.  POSTRETIREMENT BENEFITS

We provide postretirement health benefits for current retirees and a "closed"
group of active employees who meet certain eligibility requirements. For an
active employee to be eligible for future retiree medical benefits, they must
meet all of the following criteria:

     -    have a minimum of 10 years of full time active service as of December
          31, 1992, and have been enrolled in the medical plan on that date,

     -    have continuously participated in the medical plan since that date,
          and,

     -    continue employment with us until at least age 60, or have been
          terminated by us involuntarily due to job elimination and had a
          minimum of 30 years of continuous service and be at least 50 years of
          age on the actual termination date.

The following table represents our change in benefit obligations (in millions):

<TABLE>
<CAPTION>
                                           2005    2004
                                          -----   -----
<S>                                       <C>     <C>
Benefit obligation at beginning of year   $18.1   $21.5
Service cost                                0.1     0.2
Interest cost                               0.8     1.0
Amendments                                 (0.4)   (1.9)
Actuarial (gain) loss                      (3.2)   (1.6)
Benefits paid                              (1.5)   (1.4)
Participant contributions                   0.3     0.3
                                          -----   -----
Benefit obligation at end of year          14.2    18.1
Unrecognized net actuarial gain             4.8     2.0
Unrecognized prior service cost             6.9     7.8
                                          -----   -----
Accrued benefit cost (unfunded)           $25.9   $27.9
                                          -----   -----
</TABLE>


                                      F-32

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                     2005   2004
                                     ----   ----
<S>                                  <C>    <C>
Weighted-average assumptions as of
   December 31
Discount rate                        5.5%   5.5%
</TABLE>

Effective January 1, 2004, deductibles, office visits, co-payments and
out-of-pocket maximums were revised. In addition, prescription drugs were
replaced with co-insurance levels subject to a minimum co-payment amount.

For measurement purposes, a 10% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal year 2005. The rate was
assumed to decrease gradually to 5% for fiscal year 2013 and remain at that
level thereafter. The components of our net periodic benefit cost were as
follows (in millions):

<TABLE>
<CAPTION>
                                     2005    2004   2003
                                     ----   -----   ----
<S>                                  <C>    <C>     <C>
Service cost                          0.1   $ 0.2   $ 0.3
Interest cost                         0.8     1.0     1.3
Amortization of prior service cost   (1.3)   (1.4)   (1.3)
Recognized net actuarial gain        (0.4)   (0.2)     --
                                     ----   -----   -----
Net periodic benefit cost            (0.8)  $(0.4)  $ 0.3
                                     ----   -----   -----
</TABLE>

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:

<TABLE>
<CAPTION>
                                                1-PERCENTAGE     1- PERCENTAGE
                                               POINT INCREASE   POINT DECREASE
                                               --------------   --------------
<S>                                            <C>              <C>
Effect on total of service and interest cost
   components                                        0.1             (0.1)
Effect on postretirement benefit obligation          1.8             (1.5)
</TABLE>

Our estimate of our future postretirement health benefit payments, net of
participant contributions and estimated medical drug subsidies of approximately
$2.8 million for 2006 through 2015, is as follows (in millions):

<TABLE>
<S>         <C>
2006          0.9
2007          0.9
2008          1.0
2009          1.0
2010          1.0
2011-2015     5.2
            -----
            $10.0
            =====
</TABLE>


                                      F-33
<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

24.  SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

We have an unfunded Supplemental Executive Retirement Plan ("SERP"). The SERP is
designed to provide competitive retirement benefits to selected executives with
at least ten years of credited service.

The major provisions and assumptions of the SERP are:

     -    The normal retirement benefit commencing at age 60 is equal to 2% of
          the average of the three highest salary amounts received by the
          executive in the preceding ten years, plus the target annual
          incentive, as defined, for each full year of service with the Company.
          In the case of retirement before age 60, a reduced benefit is
          provided.

     -    All participants will be terminated on December 31, 2008 and a lump
          sum benefit will be paid as if a change in control had occurred the
          day prior to the date of termination. Such amount is estimated to be
          $9.0 million.

     -    The maximum annual benefit available under the plan is 50% of
          compensation, as defined.

     -    The benefits will be paid based on the actuarial equivalent lump sum
          of annual installments for the life of the executive.

     -    The assumed discount rate was 5.5% and 6.25% in fiscal 2005 and 2004,
          respectively.

     -    The assumed salary rate of increase was 3.0% and 5.0% in fiscal 2005
          and 2004, respectively.

     -    For purposes of determining eligible compensation, bonus targets will
          be frozen at the 2004 level.

Expense (income) related to the SERP was $0.7 million, $1.0 million and $(5.3)
million in fiscal years 2005, 2004 and 2003, respectively. The SERP liability
was approximately $5.2 million and $4.5 million as of December 31, 2005 and
January 1, 2005, respectively, and is included in other long-term liabilities.

Effective September 12, 2003, J.M. Robinson was terminated as Chairman,
President and Chief Executive Officer of the Company as a result of the
investigation of the restatement. Mr. Robinson is no longer eligible for
benefits under the SERP. Accordingly, during fiscal 2003 we reduced our SERP
liability by $7.2 million in connection with his termination (see Note 26
"Commitments and Contingencies").

25.  COMMITMENTS AND CONTINGENCIES

Proceedings Involving Kmart

On August 25, 2005, the Bankruptcy Court approved a settlement (the "Kmart
Settlement") between the Company and Kmart, which provided for, among other
things, the consensual assumption of the Master Agreement, as amended. In
connection with the Kmart Settlement, all outstanding litigation between Kmart
and us has been settled. See Note 5 "Meldisco's Relationship with Kmart."

If we fail to develop viable business alternatives to offset the termination of
our Amended Kmart Agreement, we will almost certainly be forced to liquidate our
business in December, 2008. In addition, should we fail to meet the minimum
sales tests, staffing requirements or as otherwise provided in the Amended
Master Agreement, termination of our business could occur prior to December 31,
2008.


                                      F-34

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restatement Related Litigation

Prior to our November 13, 2002 announcement that management had discovered
discrepancies in the reporting of our accounts payable balances, we notified the
Staff of the SEC concerning the discovery of the accounting discrepancies.
Following that notification, the Staff of the SEC began an enforcement
proceeding captioned, In the Matter of Footstar, Inc., MNY-7122, including an
investigation into the facts and circumstances giving rise to the discrepancies.
On November 25, 2003 the SEC issued a formal order in that enforcement
proceeding, authorizing an investigation and empowering certain members of the
SEC Staff to take certain actions in the course of the investigation, including
requiring testimony and the production of documents. We cannot predict the
outcome of this proceeding.

The enforcement investigation includes determining whether the Company and
certain of its present or former directors, officers and employees may have
engaged in violations of the federal securities laws in connection with: the
purchase or sale of the securities of the Company; required filings with the
SEC; maintenance of our books, records and accounts; implementation and
maintenance of internal accounting controls; making of false or misleading
statements or omissions in connection with required audits or examinations of
our consolidated financial statements or the preparation and filing of documents
or reports we are required to file with the SEC.

As we announced on February 10, 2006, the Company received a Wells notice from
the SEC Staff in connection with the enforcement investigation. Under SEC
procedures, a Wells notice indicates that the Staff has made a preliminary
decision to recommend that the SEC authorize the Staff to bring a civil or
administrative action against the recipient of the notice. The Wells notice that
Footstar received states that the SEC Staff, as a result of its investigation,
is considering recommending that the SEC bring a civil injunctive action against
the Company for alleged violations of provisions of the Securities Exchange Act
of 1934 relating to the maintenance of books, records and internal accounting
controls, the establishment of disclosure controls and procedures and the
periodic filing requirements of Sections 10(b), 13(a) and 13(b)(2) of the
Exchange Act and in SEC Rules 10b-5, 12b-20, 13a-1 and 13a-13. A recipient of a
Wells notice can respond to the SEC Staff before the Staff makes a formal
recommendation regarding whether the SEC should bring any action. Footstar has
been, and intends to continue, cooperating fully with the SEC Staff in
connection with this matter and is in discussions with the Staff regarding the
possible resolution of this matter.

Other Litigation Matters

On or about March 3, 2005, a first amended complaint was filed against us in the
U.S. District Court for the District of Oregon, captioned Adidas America, Inc.
and Adidas -Salomon AG v. Kmart Corporation and Footstar, Inc. The first amended
complaint seeks injunctive relief and unspecified monetary damages for trademark
infringement, trademark dilution, unfair competition deceptive trade practices
and breach of contract arising out of our use of four stripes as a design
element on footwear which Adidas alleges infringes on its registered three
stripe trademark. While it is too early in litigation to predict the outcome of
the claims against us, we believe that we have meritorious defenses to the
claims asserted by Adidas and have filed an answer denying the allegations.


                                      F-35

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NAFTA Traders, Inc. ("NAFTA"), a salvage company who previously did business
with our former Footaction division, filed a proof of claim in our bankruptcy
proceeding alleging that NAFTA is owed the amount of $3.8 million. We have
objected to this proof of claim on the basis that we do not owe any amounts to
NAFTA and we are currently involved in an adversary proceeding in the bankruptcy
court regarding resolution of this proof of claim. While it is too early to
predict the outcome of this adversary proceeding, we intend to continue to
object and vigorously defend the proof of claim submitted by NAFTA.

Mr. Robinson's employment as our Chairman, President and Chief Executive Officer
was terminated on September 12, 2003. Mr. Robinson had an employment agreement
with us and initiated arbitration proceedings against us for benefits under such
agreement. In July 2004, the parties agreed to settle such matter for $5.1
million. This amount was accrued in fiscal 2003, and was offset by the reversal
of his $7.2 million SERP liability. See Note 24 "Supplemental Executive
Retirement Plan." In January 2006, the final installment which was due to Mr.
Robinson under the settlement was paid.

A former employee of the company filed a proof of claim in our bankruptcy
proceeding alleging he is owed $2,000,000 based on services rendered and
agreements entered into during his employment. We have objected to and intend to
vigorously defend this proof of claim.

We are involved in other various claims and legal actions arising in the
ordinary course of business. We do not believe that any of them will have a
material adverse effect on our financial position.

FMI Agreement

During our bankruptcy, we sold certain assets, including, among other things,
our distribution center in Mira Loma, California ("Mira Loma"). We sold Mira
Loma to Thrifty Oil Co. ("Thrifty") for approximately $28.0 million. Thrifty has
leased Mira Loma to FMI International LLC ("FMI"), a logistics provider, which
is obligated to provide us with warehousing and distribution services through
June 30, 2012 under a receiving, warehousing and distribution services agreement
(the "FMI Agreement"). Pursuant to the FMI Agreement, FMI is the Company's
exclusive provider of receiving, warehousing and physical distribution services
for (a) imported product where the Company or its subsidiaries are the importer
of record or (b) landed or domestic shipments controlled within the Company's
supply chain. In 2006, we are obligated to pay FMI a minimum of $15.1 million.
Commencing with calendar year 2007, there are no specified minimum payments due
under the FMI Agreement. The Company's obligation with respect to each calendar
year commencing with 2007 through the end of the term of the FMI Agreement is to
provide FMI with an estimated total unit volume, if any, prior to the start of
such year. Such estimated unit volume, if any, will be the basis for any minimum
quantity commitment for such year. If actual unit volume in any year is less
than the estimated unit volume provided by the Company for such year, a payment
will be due by the Company to FMI to make up for any such shortfall within 30
days after the end of each calendar quarter.

26.  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


                                      F-36

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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, but not required, 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.

27.  SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for income taxes and interest from continuing operations for the
fiscal years ended December 31, 2005, January 1, 2005 and January 3, 2004 were
as follows (in millions):

<TABLE>
<CAPTION>
                    2005    2004    2003
                    ----   -----   -----
<S>                 <C>    <C>     <C>
Income taxes        $0.4   $ 1.2   $ 4.9
Interest received   $5.3   $  --   $  --
Interest paid       $3.3   $10.2   $16.1
</TABLE>

28.  VENDOR CONCENTRATION

In general, the retailing business is highly competitive. Price, quality and
selection of merchandise, reputation, store location, advertising and customer
service are important competitive factors in our business. In fiscal 2005,
approximately 99% of Meldisco's products were manufactured in China.

29.  SUMMARY OF QUARTERLY RESULTS - UNAUDITED

(in millions, except per share data)

<TABLE>
<CAPTION>
                                                1ST QTR   2ND QTR   3RD QTR   4TH QTR
                                                -------   -------   -------   -------
<S>                                             <C>       <C>       <C>       <C>
NET SALES
   2005                                         $154.8    $192.6    $161.7     $206.3
   2004                                         $176.9    $216.5    $186.0     $220.8
                                                ------    ------    ------     ------
GROSS PROFIT
   2005                                         $ 44.3    $ 62.6    $ 47.8     $ 70.3
   2004                                         $ 55.4    $ 72.5    $ 49.0     $ 87.5
                                                ------    ------    ------     ------
(LOSS) INCOME FROM CONTINUING OPERATIONS
   2005 (4)                                     $ (1.4)   $  0.9    $ (6.8)    $ 18.1
   2004 (2) (3)                                 $(11.9)   $ (7.7)   $ (8.4)    $  3.3
                                                ------    ------    ------     ------
</TABLE>


                                      F-37
<PAGE>

<TABLE>
<S>                                             <C>       <C>       <C>       <C>
(LOSS) INCOME FROM DISCONTINUED OPERATIONS(1)
   2005 (4)                                     $   --    $   --    $ (0.5)    $ 14.1
   2004                                         $(46.9)   $  3.6    $ (7.3)    $  5.3
                                                ------    ------    ------     ------
NET (LOSS) INCOME
   2005 (4)                                     $ (1.4)   $  0.9    $ (7.3)    $ 32.2
   2004                                         $(58.8)   $ (4.1)   $(15.8)    $  8.7
                                                ------    ------    ------     ------
(LOSS) EARNINGS PER SHARE(4)
   2005 Basic and Diluted
      Continuing operations                     $(0.07)   $ 0.05    $(0.33)    $ 0.88
      Discontinued operations                       --        --     (0.02)      0.69
                                                ------    ------    ------     ------
      Net (loss) income                         $(0.07)   $ 0.05    $(0.35)    $ 1.57
   2004 Basic and Diluted
      Continuing operations                     $(0.57)    (0.38)   $(0.41)    $ 0.16
      Discontinued operations                    (2.29)     0.18     (0.36)      0.26
                                                ------    ------    ------     ------
      Net (loss) income                         $(2.86)   $(0.20)   $(0.77)    $ 0.42
</TABLE>

(1)  The Athletic Segment, which consisted of certain Footaction stores sold to
     Foot Locker together with the closure of the underperforming Just For Feet
     and Footaction stores, and the exited Meldisco businesses have been
     accounted for as discontinued operations.

(2)  During the fourth quarter of 2004, we recorded a $6.3 million charge in
     connection with the Kmart Settlement

(3)  During the fourth quarter of 2004, we recorded $9.2 million as other income
     in connection with the settlement of our derivative action lawsuits.

(4)  During the fourth quarter of 2005, we recorded an adjustment to our
     prepetition liabilities, which resulted in $1.5 million in income from
     continuing operations and $17.2 million in income from discontinued
     operations. (See Note 13 "Liabilities Subject to Compromise").

(5)  Computations for each quarter are independent. EPS 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.

30.  SUBSEQUENT EVENTS

On January 25, 2006, the Bankruptcy Court approved the Company's Plan of
Reorganization and on February 7, 2006, we successfully emerged from bankruptcy
(See Note 1 "Business Risks - Bankruptcy Filing"). Effective on the date of
emergence, the Company installed new members of the Board of Directors. In
addition, the Company's Chief Executive Officer and Chief Administrative Officer
were no longer employed by the Company and Jeffrey Shepard became the Company's
new Chief Executive Officer. Also, employment agreements with certain executives
became effective and obligated the Company for the following (assuming continued
employment up until the end of December, 2008):

<TABLE>
<CAPTION>
            2006   2007   2008
            ----   ----   ----
<S>         <C>    <C>    <C>
Salary      $4.8   $4.8   $4.8
Retention   $1.5   $1.5   $1.5
Severance   $ --   $ --   $4.1
</TABLE>

In addition, as discussed in Note 24 "Supplemental Executive Retirement Plan",
participants in the SERP will be paid approximately $9.0 million upon
termination.


                                      F-38
<PAGE>

Schedules not included above have been omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
related notes.

(A)(3) EXHIBITS

The exhibits to this report are listed in the Exhibit Index included elsewhere
herein.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


                                        By /s/ JEFFREY A. SHEPARD
                                           -------------------------------------
                                           JEFFREY A. SHEPARD
                                           Chief Executive Officer and President


                                       61

<PAGE>

                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
          Valuation and Qualifying Accounts for the Fiscal Years ended
             December 31, 2005, January 1, 2005 and January 3, 2004
                                  (in millions)

                                                                     Schedule II

<TABLE>
<CAPTION>
                                                        Additions
                                        Balance at     Charged to
                                         Beginning      Costs and                          Balance at
Description                           of Fiscal Year    Expenses    Deductions(1)(2)   End of Fiscal Year
-----------                           --------------   ----------   ----------------   ------------------
<S>                                   <C>              <C>          <C>                <C>
Fiscal Year Ended December 31, 2005
   Allowance for Doubtful Accounts         $0.4           $1.0           $(0.4)               $1.0
   Aged Inventory Reserve                  $0.1           $0.3           $(0.3)               $0.1
   Allowance for Sales Returns             $1.2           $0.5           $(0.9)               $0.8

Fiscal Year Ended January 1, 2005
   Allowance for Doubtful Accounts         $0.3           $0.1           $  --                $0.4
   Aged Inventory Reserve                  $1.0           $ --           $(0.9)               $0.1
   Allowance for Sales Returns             $1.8           $ --           $(0.6)               $1.2

Fiscal Year Ended January 3, 2004
   Allowance for Doubtful Accounts         $2.3           $0.2           ($2.2)               $0.3
   Aged Inventory Reserve                  $0.5           $0.5              --                $1.0
   Allowance for Sales Returns             $0.4           $1.4              --                $1.8
</TABLE>

              This Schedule II reflects continuing operations only.

(1)  Deductions of allowance for doubtful accounts include write-offs, net of
     recoveries.

(2)  We determine the aged inventory reserve and allowance for sales returns as
     of the end of each reporting period. Accordingly, the above schedule
     reflects net additions (deductions) for each period, as applicable.


                                       62

<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
 Number                                 DESCRIPTION
-------                                 -----------
<S>       <C>
3.1       Second Amended and Restated Certificate of Incorporation of Footstar,
          Inc. and Certificate of Amendment of Second Amended and Restated
          Certificate of Incorporation of Footstar, Inc. (incorporated by
          reference to Exhibit 3.1, and Exhibit 3.2 to Footstar, Inc.'s Current
          Report on Form 8-K filed on February 7, 2006).

3.2       Amended and Restated Bylaws of Footstar, Inc. (incorporated by
          reference to Exhibit 3.3 to Footstar's Current Report on Form 8-K
          filed on February 7, 2006).

4.1       Rights Agreement, dated as of March 8, 1999, between Footstar, Inc.
          and Chase Mellon Shareholder Services, L.L.C. (now Mellon Investor
          Services LLC), as Rights Agent, which includes, as Exhibit A, the
          Certificate of Designation, Preferences and Rights of Series A Junior
          Participating Preferred Stock of Footstar, Inc., as Exhibit B, the
          Form of Right Certificate, and as Exhibit C, the Summary of Rights to
          Purchase Preferred Shares (incorporated by reference to Exhibit 1 to
          Footstar, Inc.'s Form 8-A filed on March 9, 1999) and Amendment No. 1
          dated as of May 31, 2002 (incorporated by reference to Exhibit 2 to
          Footstar, Inc.'s Form 8-A filed on June 4, 2002).

10.1      Master Agreement, dated as of June 9, 1995, as amended, between the
          Kmart Corporation and Footstar, Inc. (incorporated by reference to
          Exhibit 10.1 to Footstar, Inc.'s Form 10/A Information Statement filed
          on May 24, 1996 and the exhibits filed with Exhibit 10.1 to Footstar,
          Inc.'s Form 10/A Information Statement filed on July 23, 1996. Certain
          portions of these Exhibits have been accorded confidential treatment).

10.1(a)   Amended and Restated Master Agreement dated as of August 24, 2005 by
          and between Kmart Corporation, Sears Holding Corporation as guarantor
          of payments to be made by Kmart Corporation and Footstar, Inc.
          (incorporated by reference to Exhibit 10.1 to Footstar, Inc.'s Current
          Report on From 8-K filed on August 26, 2005).

10.2      1996 Incentive Compensation Plan of Footstar, Inc. (incorporated by
          reference to Exhibit 10.3 to Footstar, Inc.'s Form 10/A Information
          Statement filed on September 13, 1996).*

10.2(a)   Form of Restricted Stock Agreement with Executive Officers
          (incorporated by reference to Exhibit 10.2(a) to Footstar, Inc.'s Form
          10-K/A filed on March 16, 2006)

10.3(a)   Footstar, Inc. 2006 Non-Employee Director Stock Plan (incorporated by
          reference to Exhibit 10.1 to Footstar, Inc.'s Current Report on Form
          8-K filed on February 7, 2006).*

10.3(b)   Form of Restricted Stock Agreement with Non-Employee Directors
          (incorporated by reference to Exhibit 10.3(b) to Footstar, Inc.'s Form
          10-K/A filed on March 16, 2006)


10.3(b)   1996 Non-Employee Director Stock Plan of Footstar, Inc. (incorporated
          by reference to Exhibit 10.4 to Footstar, Inc.'s Form 10/A Information
          Statement filed on September 13, 1996).*

10.4      Motion of the Registrant to Assume the Employment Contract with Dale
          W. Hilpert and Establish a Retention Plan for Key Employees with
          Related Orders Dated May 6, 2004 and May 27, 2004 (incorporated by
          reference to Exhibit 10.5 of Footstar, Inc.'s 2002 Annual Report on
          Form 10-K filed on September 3, 2004).*
</TABLE>


                                       63

<PAGE>

<TABLE>
<CAPTION>
Exhibit
 Number                                 DESCRIPTION
-------                                 -----------
<S>       <C>
10.5(a)   Employment Agreement with Jeffrey Shepard dated as of October 28, 2005
          (incorporated by reference to Exhibit 10.1 of Footstar Inc.'s Current
          Report on Form 8-K filed on November 3, 2005).*

10.5(b)   Employment Agreement with William Lenich dated as of December 16, 2005
          (incorporated by reference to Exhibit 10.1 of Footstar, Inc.'s Current
          Report on Form 8-K filed on December 22, 2005).*

10.5(c)   Employment Agreement with Dennis M. Lee dated as of December 16, 2005
          (incorporated by reference to Exhibit 10.2 of Footstar, Inc.'s Current
          Report on Form 8-K filed on December 22, 2005).*

10.5(d)   Employment Agreement with Michael J. Lynch dated as of December 16,
          2005 (incorporated by reference to Exhibit 10.3 of Footstar, Inc.'s
          Current Report on Form 8-K filed on December 22, 2005).*

10.5(e)   Employment Agreement with Randall Proffitt dated as of December 16,
          2005 (incorporated by reference to Exhibit 10.4 of Footstar, Inc.'s
          Current Report on Form 8-K filed on December 22, 2005).*

10.5(f)   Employment Agreement with Maureen Richards dated as of December 16,
          2005 (incorporated by reference to Exhibit 10.5 of Footstar, Inc.'s
          Current Report on Form 8-K filed on December 22, 2005).*

10.5(g)   Employment Agreement with Stuart E. Werner dated as of December 16,
          2005 (incorporated by reference to Exhibit 10.6 of Footstar, Inc.'s
          Current Report on Form 8-K filed on December 22, 2005).*

10.5(h)   Confidentiality and Non-Competition Agreement with Jeff Shepard
          (incorporated by reference to Exhibit 10.5(h) of Footstar, Inc.'s 2003
          Annual Report on Form 10-K filed on April 8, 2005).*

10.5(i)   Confidentiality and Non-Competition Agreement with Maureen Richards
          (incorporated by reference to Exhibit 10.5(i) of Footstar, Inc.'s 2003
          Annual Report on Form 10-K filed on April 8, 2005).*

10.5(j)   Agreement and General Release with Mark G. Morrison (incorporated by
          reference to Exhibit 10.1 to Footstar, Inc.'s Current Report on Form
          8-K filed on February 22, 2005).*

10.5(k)   Agreement and General Release with Stephen R. Wilson (incorporated by
          reference to Exhibit 10.1 to Footstar's Current Report on Form 8-K
          filed on February 22, 2006).

10.5(l)   Amended and Restated Employment Agreement for Dale W. Hilpert as
          amended by Court order dated May 27, 2004 (incorporated by reference
          to Exhibit 10.5(a) of Footstar, Inc.'s 2003 Annual Report on Form 10-K
          filed on April 8, 2005).*

10.5(m)   Employment Agreement with Neele E. Stearns, Jr. (incorporated by
          reference to Exhibit 99.2 to Footstar, Inc.'s 8-K filed on February
          18, 2004). *

10.5(n)   Employment Agreement with Stephen R. Wilson (incorporated by reference
          to Exhibit 10.5(d) of Footstar, Inc.'s 2002 Annual Report on Form 10-K
          filed on September 3, 2004).*
</TABLE>


                                       64
<PAGE>

<TABLE>
<CAPTION>
Exhibit
 Number                                 DESCRIPTION
-------                                 -----------
<S>       <C>
10.5(o)   Settlement Agreement with J.M. Robinson (incorporated by reference to
          Exhibit 99.2 to Footstar, Inc.'s Form 8-K filed on July 7, 2004).*

10.5(p)   Confidentiality and Non-Competition Agreement with Richard Robbins
          (incorporated by reference to Exhibit 10.5(j) of Footstar, Inc.'s 2003
          Annual Report on Form 10-K filed on April 8, 2005).*

10.5(q)   Amendment to Employment Agreement with Dale W. Hilpert (incorporated
          by reference to Footstar, Inc.'s Current Report on Form 8-K filed on
          January 28, 2005).*

10.6      Footstar Deferred Compensation Plan (incorporated by reference to
          Exhibit 10.8 to Footstar, Inc.'s 1996 Annual Report on Form 10-K filed
          on March 28, 1997).*

10.7(a)   Supplemental Retirement Plan for Footstar, Inc., as Amended and
          Restated effective on June 19, 2002 (incorporated by reference to
          Exhibit 10.9(a) to Footstar, Inc.'s Quarterly Report on Form 10-Q
          filed on August 13, 2002).*

10.7(b)   Compensation program covering executive officers (incorporated by
          reference to Footstar, Inc.'s Current Report on Form 8-K filed on
          December 20, 2004). *

10.7(c)   Performance Criteria under 2005 Annual Bonus Plan (incorporated by
          reference to Footstar, Inc.'s Current Report on Form 8-K filed on
          January 28, 2005). *

10.8(a)   2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.11
          to Footstar, Inc.'s 1999 Annual Report on Form 10-K filed on March 31,
          2000). *

10.8(b)   Performance Criteria under 2006 Annual Incentive Plan (incorporated by
          reference to Footstar, Inc.'s Current Report on From 8-K filed on
          March 8, 2006).*

10.9(a)   Debtor-In-Possession Credit Agreement dated as of March 4, 2004 among
          Footstar, Inc., as Lead Borrower for Footstar, Inc. and Footstar
          Corporation; the Lenders party thereto, Fleet National Bank, as
          Administrative Agent and Swingline Lender; Fleet Retail Group, Inc. as
          collateral Agent; General Electric Capital Corporation and Congress
          Financial Corporation, as Syndication Agents; Back Bay Capital
          Funding LLC, as Term Agent; and JP Morgan Chase Bank and Wells Fargo
          Foothill, LLC, as Documentation Agents (incorporated by reference to
          Exhibit 10.13(a) of Footstar, Inc.'s 2002 Annual Report on Form 10-K
          filed on September 3, 2004).

10.9(b)   Amended and Restated Debtor-In-Possession Credit Agreement dated as of
          May 11, 2004 among Footstar, Inc., as Lead Borrower for Footstar, Inc.
          and Footstar Corporation; the Lenders party thereto; Fleet National
          Bank, as Administrative Agent and Swingline Lender; Fleet Retail
          Group, Inc., as Collateral Agent; General Electric Capital Corporation
          as Syndication Agent; and Wells Fargo Foothill, LLC as Documentation
          Agent (incorporated by reference to Exhibit 10.13(b) of Footstar,
          Inc.'s 2002 Annual Report on Form 10-K filed on September 3, 2004).

10.9(c)   Amended and Restated Debtor-In-Possession and Exit Credit Agreement
          dated as of June 25, 2004 among Footstar, Inc., as Lead Borrower for
          Footstar, Inc. and Footstar Corporation; the Lenders party thereto;
          Fleet National Bank, as Administrative Agent and Swingline Lender;
          Fleet Retail Group, Inc., as Collateral Agent; General Electric
          Capital Corporation, as Syndication Agent; and Wells Fargo Foothill,
          LLC, as Documentation Agent (incorporated by reference to Exhibit
          10.13(c) of Footstar, Inc.'s 2002 Annual Report on Form 10-K filed on
          September 3, 2004).
</TABLE>


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<PAGE>

<TABLE>
<CAPTION>
Exhibit
 Number                                 DESCRIPTION
-------                                 -----------
<S>       <C>
10.9(d)   Waiver, dated as of January 24, 2005, to Amended and Restated
          Debtor-in-Possession and Exit Credit Agreement (incorporated by
          reference to Exhibit 10.13(d) of Footstar, Inc.'s 2003 Annual Report
          on Form 10-K filed on April 8, 2005).

10.9(e)   First Amendment to Amended and Restated Debtor-in-Possession and Exit
          Credit Agreement dated as of May 31, 2005 among Footstar, Inc., as
          Lead Borrower for Footstar, Inc. and Footstar Corporation; the Lenders
          party thereto; Fleet National Bank, as Administrative Agent and
          Swingline Lender; Fleet Retail Group, as Collateral Agent; and General
          Electric Capital Corporation, as Syndication Agent (incorporated by
          reference to Exhibit 10.1 of Footstar, Inc.'s Current Report on Form
          8-K filed on June 3, 2005).

10.9(f)   Second Amendment to Amended and Restated Debtor-in-Possession and Exit
          Credit Agreement dated as of November 18, 2005 among Footstar, Inc.,
          as Lead Borrower for Footstar, Inc. and Footstar Corporation; the
          Lenders party thereto; Fleet National Bank, as Administrative Agent
          and Swingline Lender; Fleet Retail Group, as Collateral Agent; and
          General Electric Capital Corporation, as Syndication Agent
          (incorporated by reference to Exhibit 10.1 of Footstar, Inc.'s Current
          Report on Form 8-K filed on November 23, 2005.

10.10     Amended and Restated Exit Credit Agreement dated as of February 2006
          among Footstar, Inc., as Lead Borrower for Footstar, Inc., and
          Footstar Corporation, the Lenders party thereto, Bank of America,
          N.A., as Administrative Agent, Swingline Lender and Collateral Agent
          and General Electric Capital Corporation as Syndication Agents
          (incorporated by reference to Exhibit 10.1 of Footstar, Inc.'s Current
          Report on Form 8-K filed on February 13, 2006).

10.11     Receiving, Warehousing and Physical Distribution Services Agreement
          dated as of July 8, 2004 by and between Footstar Corporation and FMI
          International, LLC, as amended (incorporated by reference to Exhibits
          99.2 and 99.3 to Footstar, Inc.'s Current Report on Form 8-K filed on
          August 5, 2004).

10.12     Asset Purchase Agreement dated as of April 13, 2004 by and among
          Footstar, Inc. and its subsidiaries set forth on the signature pages
          thereto; FL Specialty Operations LLC; FL Retail Operations LLC; Foot
          Locker Stores, Inc.; Foot Locker Retail, Inc. and Foot Locker, Inc. as
          amended by First Amendment to Asset Purchase Agreement dated as of
          April 28, 2004 and Second Amendment to Asset Purchase Agreement dated
          as of May 7, 2004 (incorporated by reference to Exhibit 10.15 of
          Footstar, Inc.'s 2002 Annual Report on Form 10-K filed on September 3,
          2004).

10.13     First Amendment to Asset Purchase Agreement dated as of April 28, 2004
          by and among Footstar, Inc. and its subsidiaries set forth on the
          signature pages thereto; FL Specialty Operations LLC; FL Retail
          Operations LLC; Foot Locker Stores, Inc.; Foot Locker Retail, Inc. and
          Foot Locker, Inc. (incorporated by reference to Exhibit 10.16 of
          Footstar, Inc.'s 2002 Annual Report on Form 10-K filed on September 3,
          2004).

10.14     Second Amendment to Asset Purchase Agreement dated May 7, 2004 by and
          among Footstar, Inc. and its subsidiaries set forth on the signature
          pages thereto; FL Specialty Operations LLC; FL Retail Operations LLC;
          Foot Locker Stores, Inc.; Foot Locker Retail, Inc. and Foot Locker,
          Inc. (incorporated by reference to Exhibit 10.17 of Footstar, Inc.'s
          2002 Annual Report on Form 10-K filed on September 3, 2004).

21.1      Description of subsidiaries of Footstar, Inc.

23.1      Consent of Independent Registered Public Accounting Firm.
</TABLE>


                                       66

<PAGE>

<TABLE>
<CAPTION>
Exhibit
 Number                                 DESCRIPTION
-------                                 -----------
<S>       <C>
31.1      Certification of Chief Executive Officer pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002.

31.2      Certification of Senior Vice President of Financial Reporting and
          Control (Principal Financial Officer) pursuant to Section 302 of the
          Sarbanes-Oxley Act of 2002.

32.1      Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002.

99        Joint Plan of Reorganization and related Disclosure Statement as filed
          with the United States Bankruptcy Court for the Southern District of
          New York (Case No. 04-22350(ASH)) on November 12, 2004 (incorporated
          by reference to Item 9.01 to Footstar, Inc.'s Form 8-K filed on
          November 15, 2004 and to Footstar, Inc.'s Form 8-K filed on November
          23, 2004).

99.1      First Amended Join Plan of Reorganization under Chapter 11 of the
          Bankruptcy Code as filed with the Bankruptcy Court for the Southern
          District of New York (Case No. 04-22350 (ASH)) on November 30, 2005
          and related Disclosure Statement (incorporated by reference to
          Exhibits 2.1 and 2.2 to Footstar, Inc.'s Current Report on Form 8-K
          filed on December 2, 2005 and to Exhibit 2.1 to Footstar, Inc.'s
          Current Report on Form 8-K filed on February 2, 2006).
</TABLE>

*    Management contract or compensatory plan.


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