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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                    For the fiscal year ended January 2, 1999
                         Commission File Number 1-11681

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

       Delaware                                      22-3439443
(State of incorporation)                  (IRS Employer Identification No.)

                933 MacArthur Boulevard, 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:

                                                         Name of each exchange
Title of each class                                      on which registered
--------------------------------------                   -----------------------
Common Stock (par value $.01 per share)                  New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

                                                     Page 1 of 2 page Cover Page

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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. [ ]

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
Registrant as of January 2, 1999 was approximately $577 million.*

Number of shares  outstanding  of Common  Stock,  par value $.01 per  share,  at
January 2, 1999: 23,522,750.

                       Documents Incorporated by Reference

1.    Portions of the Registrant's  Annual Report to Shareholders for the fiscal
      year ended January 2, 1999:  Part I, Item 1; Part II, Items 5, 6, 7 and 8;
      and Part IV, Item 14.

2.    Portions of the  Registrant's  definitive  Proxy Statement  expected to be
      filed  pursuant to Regulation 14A not later than 120 days after the end of
      the fiscal year (January 2, 1999): Part III, Items 10, 11, 12 and 13.

                           Forward-Looking Statements

      This  Report  on Form 10-K and the  documents  incorporated  by  reference
contain  statements  which  constitute  forward-looking  statements  within  the
meaning  of  The  Private  Securities  Litigation  Reform  Act  of  1995.  These
statements  appear in a number of places in this Report as well as the documents
incorporated  by reference and can be  identified by the use of  forward-looking
terminology  such as "believe,"  "expect,"  "estimate,"  "plans," "may," "will,"
"should,"  "anticipates" or similar  statements or the negative thereof or other
variations.   Such  forward-looking   statements  include,  without  limitation,
statements relating to cost savings,  capital  expenditures,  future cash needs,
improvements in  infrastructure,  Year 2000 matters and operating  efficiencies.
Such forward-looking  statements involve known and unknown risks,  uncertainties
and  other  factors  which  may  cause  the  actual   results,   performance  or
achievements to be materially different from any future results,  performance or
achievements expressed or implied by such forward-looking statements. Such risks
and  uncertainties  include,  but are not limited to;  uncertainties  related to
consumer demand for footwear,  warmer than expected weather, consumer acceptance
of the Company's merchandise mix, retail locations, product availability and the
effect  of  competitive   products  and  pricing.   Consequently,   all  of  the
forward-looking   statements,  internal  and  external,   Year  2000  risks  and
uncertainties, are qualified by these cautionary statements, and there can be no
assurance that the actual results,  performance or achievement will be realized.
The  information  contained  in this Report and the  documents  incorporated  by
reference as well as information  contained  under the caption "Risk Factors" in
other Company  filings with the Securities and Exchange  Commission,  identifies
important factors that could cause such results,  performance or achievement not
to be realized.  The Company undertakes no obligation to update  forward-looking
statements to reflect  events or  circumstances  after the date such  statements
were made.

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*     For purposes of this calculation,  only voting stock beneficially owned by
      directors and executive  officers or members of their  immediate  families
      has been excluded.  In making such a calculation,  the Registrant does not
      determine  the  affiliate  or  non-affiliate  status of any shares for any
      other purpose.


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                                     PART I

ITEM 1. BUSINESS

GENERAL

      Footstar, Inc. (the "Company" or the "Registrant") is a holding company,
which directly or indirectly, through its wholly-owned subsidiaries, owns the
capital stock of the subsidiaries that operate its Footaction and Meldisco
businesses and its discontinued Thom McAn segment. The Company was organized in
Delaware on March 21, 1996 and became a publicly traded company as part of the
overall restructuring of Melville Corporation ("Melville"). As part of that
restructuring plan, Melville divested its ownership interest in the Company by
means of a tax-free distribution to its stockholders on October 12, 1996 of all
of the outstanding shares of common stock of the Company.

      The Company is principally a specialty retailer conducting business in the
branded athletic footwear and apparel and discount footwear segments through its
Footaction and Meldisco businesses, respectively. The financial information
concerning industry segments required by Item 101(b) of Regulation S-K is set
forth on page 30 of the Company's Annual Report to Shareholders for the year
ended January 2, 1999 and is incorporated herein by reference.

      In general, the retailing business is seasonal in nature, with peak sales
periods during the Easter, "Back-to-School" and Christmas selling periods.
Competition is generally based upon such factors as price, style, quality,
design of product and location and design of stores.

FOOTACTION:  THE BRANDED ATHLETIC FOOTWEAR AND APPAREL BUSINESS

      Footaction, which opened its first store in 1976, is a leading mall-based
specialty retailer of branded athletic footwear, apparel and related
accessories. Its primary customers are 12 to 24 year olds for whom having the
most up-to-date athletic footwear and apparel is an important consideration. As
of January 2,1999, Footaction operated 572 stores in 45 states and the Caribbean
region. During 1998, the Company opened 42 new Footaction stores and remodeled,
relocated or expanded 66 existing Footaction stores.

      Footaction's stores are located predominantly in enclosed regional malls
anchored by major department stores to take advantage of customer traffic and
the shopping preferences of Footaction's target customers. The athletic footwear
industry, as well as Footaction, had a difficult year in 1998 with Footaction
posting flat same store sales. Total sales increased 8% to $654 million and
operating profit before non-recurring charges decreased 26% to $39 million. For
the fiscal year ended January 2, 1999, Footaction accounted for approximately
36% of the Company's net sales and approximately 28% of the Company's operating
profit.

      The ability of Footaction to maintain a high level of sales is dependent
in part on a high volume of mall traffic, fashionability of branded athletic
footwear and apparel, and the continued popularity of mall shopping among
Footaction's primary customers. Its future growth is also dependent on its
ability to open new stores in desirable mall locations. Unfavorable developments
with respect to any of these factors could have a material adverse effect on the
Company.


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      Footaction--Merchandising

      Footaction seeks to be one of the first to offer the most current and
innovative brand-name athletic footwear and apparel available to its target
customer group. Footaction constantly monitors product trends to help identify
styles which are, or may become, popular. Footaction carries the leading
athletic footwear brands, including Nike, Adidas, Reebok, Fila, And 1, Converse,
New Balance, Asics, K Swiss and Saucony. Footaction offers a selection of
brand-name apparel and accessories including warm-up suits, T-shirts, athletic
shorts, caps, socks and shoe care products. Athletic apparel and accessory
brands include Nike, Adidas, Reebok, And 1 and Fila, among others. Footaction
also offers footwear, apparel and accessories in fashion brands such as FUBU,
DADA and Lugz. The following table sets forth the approximate percentage of
Footaction's net sales attributable to footwear, apparel and accessories:

                Approximate Percentage of Footaction's Net Sales

                                  1998      1997      1996
                                  ----      ----      ----

                   Footwear        79%      78%        77%
                   Apparel         16%      16%        17%
                   Accessories      5%       6%         6%
                                  ----      ----     ----
                                  100%      100%      100%
                                  ====      ====     ====

      Footaction also seeks to differentiate itself from other branded
athletic  footwear and apparel  retailers by increasing  consumer  awareness and
name  recognition  of  Footaction  and  establishing  in the minds of its target
customer group the perception  that  Footaction is one of the first to offer the
latest styles.  As part of this strategy,  Footaction works with leading vendors
such as Nike,  Adidas,  Reebok  and Fila to  design  and  develop  product  line
exclusives, either unique designs or color variations.

      Footaction tailors merchandise assortments and store space allocations to
customer preferences at each store location. This is accomplished by recognizing
subtle differences in fashion preferences and demographic factors in the region
or market in which each store is located. This store-by-store merchandising
results in differences in brands, classifications, sizes, colors, and timing of
the assortment and space allocated to present such merchandise. Footaction
maintains information systems designed to manage aged inventory, assuring that
its product lines remain current.

      Footaction--Marketing

      Footaction believes that its core customers--teens and young adults, age
12 to 24--constitute 54% of total branded athletic footwear sales. Within the
target age group, male and female teens (age 12-17) are over-represented among
Footaction customers, accounting for 32% of Footaction shoppers and 41% of
sales.

     Footaction's  marketing  strategy  is to build  traffic,  sales,  and brand
awareness with its primary customers by increasing awareness of Footaction among
individuals in the target customer group and by increasing the perception  among
these individuals that Footaction is one of the first to have the latest styles.

     Footaction's media  advertisements  typically feature both Footaction and a
branded product, and may include celebrity  endorsements.  A portion of the cost
of such advertising is offset by co-operative advertising allowances. 


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Footaction focuses its mass media advertising during key selling periods on core
customers in the 12 to 24 year old age group.

      In-store visual merchandising programs are also an important part of
Footaction's marketing effort. Footaction believes these initiatives create
excitement at the store level and support the marketplace message that
Footaction carries the latest products. Footaction enhances the presentation of
new product with a "New Arrivals" tower for the latest lines, and uses
"exclusive tags" to highlight products only available at Footaction.

      Another key component of Footaction's marketing strategy is its direct
marketing effort aimed at increasing customer loyalty. Footaction has created a
preferred customer card, called the Star Card, which is designed to build a
marketing database that enables the chain to communicate directly with customers
and gain more information about their buying habits. Star Card members receive
individualized birthday greetings, selected vendor mailings and the Footaction
Star magazine. As of the end of 1998 there were 3.7 million Star Card members.
The Footaction Star magazine is a magazine/catalog combination that is mailed to
Star Card holders at least four times a year. It is an entertaining and
informative marketing tool featuring the latest in athletic footwear and apparel
along with product availability dates. It also includes interviews with popular
athletes who appear in current Footaction advertising campaigns, vendor profiles
and other teen-relevant sports features.

      Footaction has a web site at www.footaction.com, which allows customers to
view the latest in athletic footwear and apparel.

      Footaction--Competitive Environment

      Historically, the athletic footwear industry has been served by a variety
of distribution channels, including mall-based specialty athletic footwear
retailers, department stores, discount retailers, traditional shoe stores,
sporting goods stores, and "category killers" (i.e. retailers providing a
dominant assortment of selected lines of merchandise at competitive prices).
Footaction competes in the brand-name segment of the athletic footwear market,
and faces competition primarily from other mall-based athletic footwear and
sporting goods stores.

      Within the mall-based specialty athletic footwear retail environment,
Footaction's primary competitors are Venator Athletic, The Finish Line and
Athletes Foot. Venator Athletic is the largest athletic footwear retailer,
offering multiple formats designed to compete in this market segment including
Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs, Athletic Express and
Going To The Game. Footaction believes that it differentiates itself from its
competitors by offering the latest styles demanded by fashion-conscious,
status-oriented consumers in an exciting shopping environment. With the slower
demand for athletic footwear, principally "hero" shoes associated with star
athletes, there has been an increase in promotional activity among this group of
retailers as compared to prior years. Footaction has also experienced
competition from outside the malls, such as big box strip mall retailer Just for
Feet and sporting goods super stores such as Sports Authority. 

      As part of its restructuring plans, the Company announced that it would be
closing approximately 30 underperforming Footaction Stores, reconfiguring
Footaction merchandise assortments and refining store layouts to place greater
emphasis on better-performing, higher-potential categories. There can be no
assurances, however, that these measures will be successful or that in the
future the above or other competitors will not have a material adverse effect on
the Company.

MELDISCO:  THE DISCOUNT FOOTWEAR BUSINESS

      Meldisco has operated leased footwear departments in discount chains since
1961 and is the leading operator of leased footwear departments today. As of
January 2, 1999, Meldisco operated leased footwear departments in 2,161 Kmart
department stores, 357 former PayLess Drug Stores and Thrifty Drug Stores now


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operated under the name "Rite Aid stores," and 20 Tesco department stores
located in the Czech Republic, Slovakia, Hungary, and Poland. As part of its
restructuring plans, the Company announced it will be exiting the Central
European business prior to the 1999 Christmas selling season. In its Kmart
leased footwear departments, Meldisco sells a wide variety of family footwear,
including men's, women's and children's dress, casual and athletic footwear,
work shoes and slippers. The majority of the shoes offered by Meldisco in its
leased footwear departments are private label brands, although Meldisco also
sells some national brand merchandise at discounted prices.

      For the fiscal year ended January 2, 1999, Meldisco's net sales from
Kmart's operations accounted for approximately 62% of the Company's net sales
and 97% of Meldisco's net sales.

      Pursuant to an agreement between the Company and Kmart Corporation
("Kmart") entered into effective July 1, 1995, and amended as of March 1996
(collectively, the "Kmart Agreement"), and an agreement between the Company and
Thrifty PayLess, Inc. a wholly owned subsidiary of Rite Aid Corporation, entered
into in principle effective January 1, 1999, the Company has the exclusive right
to operate the footwear departments in Kmart and in the former Payless/Thrifty
drug stores now operated under the name Rite Aid ("Rite Aid stores"). All
license agreements relating to the Kmart leased departments expire July 1, 2012
and all agreements relating to certain TPI stores have an initial term that
expires December 31, 2001 with the option to extend the term until either party
terminates upon six months prior written notice. The Kmart Agreement is subject
to certain performance standards. Payments by the Company under all such license
agreements are based on a percentage of sales, with additional payments under
the Kmart Agreement to be made based on profits. The Company has a 51 percent
equity interest and Kmart has a 49 percent equity interest in all the
subsidiaries which operate leased departments in Kmart stores, with the
exception of 40 such subsidiaries in which the Company has a 100 percent equity
interest ("the Meldisco Subsidiaries"). The Company has a 100 percent equity
interest in all the subsidiaries which operate leased departments in certain TPI
stores.

      The business relationship between Meldisco and Kmart is very significant
to the Company, and the loss of Meldisco's Kmart operations would have a
material adverse effect on the Company. The Kmart Agreement or any license
agreement for a particular Kmart store, may only be terminated: (i) by Kmart
with respect to any Kmart store with a footwear department which is to cease to
operate and be open for business to the public; (ii) by Kmart or Meldisco with
respect to any affected Kmart store, in the event that any footwear department
premises become unfit for use and occupancy by reason of material damage or
destruction, or as a result of condemnation; (iii) by Kmart or Meldisco if the
other party shall fail to make any material payments when due or to deliver any
material accounting reports as required by the Kmart Agreement, or in the event
of a material breach of any covenant, representation or warranty of the other
party, subject to the right of the party so charged to cure the breach or
failure within a specified period; (iv) by either party if Kmart or Meldisco
shall fail to pay its debts when due or becomes subject to certain insolvency,
bankruptcy or similar events; (v) at the option of the non-selling or
non-transferring party, in the event of a sale or transfer of a majority of the
outstanding shares of the other party to a single person or entity or an
affiliated group under common control; or (vi) in the event that the Meldisco
Subsidiaries fail to achieve the performance standards outlined in the Kmart
Agreement.

      Meldisco--Merchandising

      Meldisco's merchandising strategy focuses on solidifying and building upon
its current industry position while attracting Kmart shoppers who do not
currently purchase their footwear at Kmart. The essence of this two-pronged
strategy is to satisfy Meldisco's core customer with high in-stock availability
rates of its footwear products while generating interest among Kmart's


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non-footwear shoppers by providing a wider selection of well-known national
brands.

      Meldisco seeks to attract more affluent Kmart non-footwear shoppers into
the footwear department from other areas of the store. To this end, Meldisco
increasingly offers selected high-quality footwear licensed by well-known
national brands at prices significantly lower than comparable merchandise sold
by full-price retailers. These branded products are also intended to change
customer perceptions of "sameness" among discount footwear retailers. Licensed
brands available only at Meldisco include "Route 66," "Texas Steer," and "Cobbie
Cuddlers," a brand name licensed from Nine West. Meldisco also launched in
November 1997 the "Thom McAn" line of premium-quality shoes for men. The Thom
McAn line for men was very successful in 1998 and was extended to include
Women's and Children's styles. Meldisco is currently conducting consumer
research to assess the fit of additional brands in terms of price, positioning,
and discount category suitability.

      Meldisco's traditional strength has been in seasonal, work, value-priced
athletic, women's casuals and children's shoes. Meldisco works to solidify its
strength in these segments by ensuring high levels of customer service and
satisfaction. Meldisco's "narrow and deep" merchandising strategy and its
planned systems innovations 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 level.

      Meldisco is taking steps to increase customer perception of assortment
availability without increasing store inventories. Meldisco believes that
customer satisfaction and perception of assortment availability should improve
as Meldisco develops and implements systems enabling it to offer the optimal
product mix at the individual store level.

      Meldisco--Marketing

      Meldisco believes that Kmart's typical footwear shopper generally
parallels the average Kmart softlines shopper who is a "busy, budget-conscious
mom" in the 25 to 49 age group, 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 Kmart
footwear shoppers while attracting more affluent current Kmart non-footwear
shoppers into the footwear department from softlines and other areas of the
store.

      Meldisco's marketing strategy is designed to convey to prospective Kmart
customers that Meldisco carries the right combination of product selection,
quality, and price to position Meldisco-operated Kmart leased footwear
departments as their discount footwear destination of choice.

      This message is communicated through weekly advertising in Kmart's
newspaper insert. Meldisco currently pays Kmart a sales promotional fee that
Kmart applies toward its footwear advertisements in the Kmart weekly newspaper
insert, a publication with a circulation of approximately 68 million. Meldisco
advertises primarily through the Kmart newspaper insert but continuously
evaluates other alternatives for promotion of its products. Meldisco's marketing
strategy was supported by the announced Kmart "Big K" concept remodeling program
which includes the relocation of the footwear department to an improved location
near the center of the softlines area of the store. Meldisco shoe departments
within Big K locations have out performed non-converted stores


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throughout 1998. As of January 2, 1999, Kmart had converted 57% of their chain
to the Big K format.

      Meldisco--Competitive Environment

      The discount footwear industry is a highly competitive environment that
has experienced significant consolidation. Competition within the discount
segment is heavily concentrated among four retailers including Meldisco.
Payless ShoeSource, Inc. ("Payless") (which is not affiliated with PayLess
Thrifty Drug Stores), and two discount department stores, Wal-Mart and Dayton
Hudson's Target, are Meldisco's primary retail footwear competitors. These
competitors have grown more rapidly and have substantially greater resources
than the Company. The Company believes that it has been able to maintain its
overall unit market share during this period of rapid growth by its primary
competitors due to the relative strength of Meldisco's business. There can be no
assurance however that in the future the operations of competitors will not have
a material effect on the Company.

      J. Baker,Inc.'s JBI footwear division is Meldisco's primary competitor
among operators of leased footwear departments. JBI footwear, through its
subsidiaries, operates leased self-selection footwear departments in discount
and promotional department store chains located throughout the U. S., including
footwear departments at Bradlees, Ames and ShopKo stores. JBI footwear
constitutes a competitor insofar as Meldisco is seeking to expand its leased
footwear department operations. Neither JBI footwear nor any other operator,
however, is a competitor with respect to Kmart since the Meldisco agreement with
Kmart provides for Meldisco's continued operation of Kmart's footwear
departments through 2012, unless terminated earlier in the case of breach or
certain other limited circumstances.

      The Meldisco business competes with the other discounters on the basis of
price and that product selection, style and brand recognition are important
factors that differentiate Meldisco from other discount footwear retailers.

Fashion Trends

      The success of the Company depends in part on its ability to anticipate
and respond to changing fashion and merchandise trends and consumer demands in a
timely manner. Accordingly, any failure by the business segments to identify and
respond to emerging trends could adversely affect consumer acceptance of the
merchandise which in turn could adversely affect the Company's business.

Key Vendors

      Footaction's product sourcing is driven by its relationships with athletic
footwear and apparel vendors. In 1998, approximately 80% of Footaction's net
sales were generated by merchandise purchased from Nike, Adidas, Reebok and Fila
with the most significant percentage attributable to Nike. The loss of the
Company's relationship with certain key vendors could have a materially adverse
impact on the Company.

Foreign Purchasing

      The Company's sourcing and purchasing of product is conducted by the
merchandising department of each of its segments. A significant percentage of
the Company's products are sourced or manufactured offshore, with China
accounting for approximately 91% of all sources. There are risks inherent in
foreign sourcing and manufacturing and although the Company has not historically
experienced any material adverse effects from these risks, there


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can be no assurances that they will not have a material adverse effect in the
future.

Trademarks and Service Marks

      The Company or its subsidiaries own all rights to "Footaction" for use as
a trademark or service mark in connection with footwear and related products and
services. The Company or its subsidiaries have registered or have common law
rights to over 100 trademarks and/or service marks under which the Company
markets private label merchandise or its 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. As
necessary, the Company vigorously protects its trademarks and service marks both
domestically and internationally.

Employees

      As of January 2, 1999, the Company had approximately 14,979 employees
including approximately 8,738 at Meldisco and 6,068 at Footaction. As of January
2, 1999 Meldisco had approximately 3,276 full-time and 5,462 part-time employees
and Footaction had approximately 1,595 full-time and 4,473 part-time employees.

Discontinuation of Thom McAn Segment

      Thom McAn, which had been part of Melville since 1922, was primarily a
mall-based, specialty retailer, marketing moderately-priced men's and women's
private label footwear and accessories. As a result of extreme competitive
pressures in the moderately-priced footwear retail market, Melville decided to
exit the Thom McAn business in 1996 by converting 76 Thom McAn stores to
Footaction stores, and selling or closing the remaining locations. As of January
2, 1999, all Thom McAn stores are closed.

ITEM 2. PROPERTIES

      Footaction has a nationwide presence. As of January 2, 1999, it operated
572 stores in 45 states and the Caribbean. Footaction's prototype store design
is a 4,000 to 6,500 square foot large store format, which the Company believes
operates more profitably while satisfying the needs of its customers more
effectively than its 2,500 square foot traditional store format. At January 2,
1999, 389 of the Company's 572 Footaction stores were of the large store format
and 183 were of the traditional store format. Footaction stores are all leased
with a typical lease term of 10 years. These leases call for minimum annual rent
subject to periodic adjustments, plus other charges, including a proportionate
share of taxes, insurance and common area maintenance, and percentage rent based
on the store's sales volume.

      At January 2, 1999, Meldisco operated leased footwear departments in 2,538
stores. Collectively, these leased departments are located in all 50 states,
Guam, the Caribbean, the Czech Republic, Slovakia, Hungary and Poland. All but
377 of the leased departments operated at January 2, 1999 were located in Kmart
discount department stores. Of these 377 stores, 357 leased departments were
located in Rite Aid stores and 20 in Tesco department stores.

      Kmart and Rite Aid stores provide Meldisco with store space to sell
footwear in exchange for certain payments. Meldisco-operated footwear
departments in traditional Kmart stores average 2,900 square feet and 3,600
square feet in Super Kmart Centers. Meldisco's footwear departments in Rite Aid
stores generally occupy approximately 100 linear feet of selling space.


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Company headquarters and Meldisco's corporate offices are located in 190,000
square feet of leased office space in Mahwah, New Jersey. Footaction's corporate
offices are located in 50,000 square feet of leased office space in Irving,
Texas. The new Shared Service Center, that was opened in the fall of 1998, is
located in 57,000 square feet of leased office space in Irving, Texas. Meldisco
operates out of its two new distribution facilities located in Mira Loma,
California and Gaffney, South Carolina, with a total of 906,500 square feet. In
1998 Footaction's Distribution facility was closed in Dallas, Texas.
Footaction's distribution needs are now being handled by the distribution center
in Gaffney, South Carolina.

ITEM 3. LEGAL PROCEEDINGS

      The Company is from time to time involved in routine litigation incidental
to the conduct of its business, none of which, the Company believes, will have a
material adverse effect on its financial position or results of operations.

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

      There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended January 2, 1999.


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                      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 Registrant. For each
officer named below, the term of office extends to the date of the Board of
Directors Meeting following the next Annual Meeting of Stockholders of the
Company.

      J.M. Robinson, age 53, is and has been the Chairman, Chief Executive
Officer and President of the Company since October 12, 1996. Mr. Robinson was
President and Chief Executive Officer of the Meldisco division of Melville since
June 1988.

      Carlos E. Alberini, age 43, is and has been the Senior Vice President,
Chief Financial Officer of the Company since October 12, 1996. From February,
1996 to July 10, 1996, Mr. Alberini was the Acting Chief Financial Officer of
Melville, having joined Melville in May 1995 as Vice President of Finance. Prior
to that time, Mr. Alberini served as the Chief Financial Officer and Senior Vice
President (1990-1995) of The Bon Ton Stores Inc., a chain of 64 department
stores.

      Maureen Richards, age 42, is and has been the Vice President, General
Counsel and Corporate Secretary of the Company since October 12, 1996. From
October 1995, Ms. Richards had been Vice President, Corporate Counsel and
Assistant Secretary of Melville and its Corporate and Trademark Counsel and
Assistant Secretary from October 1991 to October 1995.

      Robert D. Ravener, Jr., age 40, is and has been the Vice President and
Chief Personnel Officer of the Company since March 1998. From February 1997 to
March 1998, Mr. Ravener was Director of Safety and Risk, and from February 1994
to February 1997, a Director of Human Resources for Pepsi-Cola Company.

                                     PART II

ITEM 5. MARKET PRICES OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
        RELATED STOCKHOLDER MATTERS

      The information required by this item is included in the Company's
Annual Report to Shareholders  for the year ended January 2, 1999 on pages 9, 12
and 28 and is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

      The information required by this item is included in the Company's Annual
Report to Shareholders for the fiscal year ended January 2, 1999 on page 32 and
is incorporated herein by reference.

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

      The information required by this item is included in the Company's Annual
Report to Shareholders for the fiscal year ended January 2, 1999 on pages 9
through 13 and is incorporated herein by reference.


                                       11
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Derivatives

      The Company is not materially exposed to changes in the underlying values
of its assets or liabilities nor is it materially exposed to changes in the
value of expected foreign currency cashflows. Therefore, the Company has not
engaged in the purchase or sale of any derivative instruments.

      Interest Rates

      The Company's investment and debt portfolios are short-term, seasonal in
nature. The Company's investment portfolio consists of highly rated short-term
marketable securities with peak amounts coinciding with the year-end peak
selling season. The Company, from time to time, undertakes short-term borrowings
to finance working capital. The Company's peak borrowing periods coincide with
peak inventory purchases. The Company had no borrowings outstanding as of the
fiscal year end.

      Foreign Exchange

      International operations constitute approximately 0.6% of 1998 net sales.
Translating the income statements of these operations for the affects of foreign
currency changes does not have a material impact on the Company's financial
positions. The Company does not have material exposure to cash flows denominated
in foreign currency nor have net foreign exchange gains or losses been material
to operating results in the past three reporting periods.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The information required by this item is included in the Company's Annual
Report to Shareholders for the fiscal year ended January 2, 1999 on pages 14
through 32 and is incorporated herein by reference.

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

      Not applicable

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information regarding the executive officers is furnished under the
heading "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I of this report since
such information will not be furnished in the Company's definitive proxy
statement other than for Mr. Robinson.

      Any other information required by this Part III (Items 10, 11, 12 and 13)
will be included in the Company's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A and is
incorporated herein by reference. The Compensation Committee report on executive
compensation and the performance graph included in such proxy statement shall
not be deemed incorporated herein by reference.


                                       12
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(l) Financial Statements

      The following financial statements and reports are incorporated by
reference to pages 14 through 32 of the Company's Annual Report to Shareholders
for the fiscal year ended January 2, 1999.

Independent Auditors' Report                                                  14

Consolidated Statements of Operations for the fiscal years 
      ended January 2, 1999, January 3, 1998 and 
      December 28, 1996                                                       15

Consolidated Balance Sheets as of January 2, 1999 
      and January 3, 1998                                                     16

Consolidated Statements of Shareholders' Equity and 
      Comprehensive Income for the fiscal years ended 
      January 2, 1999, January 3, 1998 and December 28, 1996                  17

Consolidated  Statements  of Cash Flows for the fiscal 
      years ended  January 2, 1999, January 3, 1998 and 
      December 28, 1996                                                       18

Notes to Consolidated Financial Statements                                    19

(a)(2)  Schedules

The following schedules are included in Part IV of this Report:             Page

Independent Auditors' Report on Schedule                                     F-1

Schedule II - Valuation  and  Qualifying  Accounts  for the 
      fiscal years ended January 2, 1999, January 3, 1998 and 
      December 28, 1996                                                      F-2


                                       13
<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.

(b) Reports on Form 8-K

Current Report on Form 8-K dated October 25, 1998 was filed by the Company with
the SEC relating to the stock repurchase program, third quarter results and
outlook.

Current Report on Form 8-K dated December 4, 1998 was filed by the Company with
the SEC relating to earnings.

                                       14
<PAGE>

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

      Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons in the capacities and on the date
indicated.


         Signature                     Title                        Date
         ---------                     -----                        ----

/s/ CARLOS E. ALBERINI        Senior Vice President and         March 29, 1999
-----------------------       Chief Financial Officer
    Carlos E. Alberini

/s/ ROBERT A. DAVIES, III     Director                          March 29, 1999
-------------------------
    Robert A. Davies, III

/s/ GEORGE S. DAY             Director                          March 29, 1999
-------------------------
    George S. Day

/s/ STANLEY P. GOLDSTEIN      Director                          March 29, 1999
-------------------------  
    Stanley P. Goldstein

/s/ TERRY R. LAUTENBACH       Director                          March 27, 1999
-------------------------  
    Terry R. Lautenbach

/s/ BETTYE MARTIN MUSHAM      Director                          March 29, 1999
-------------------------  
    Bettye Martin Musham

/s/ KENNETH S. OLSHAN         Director                          March 27, 1999
------------------------- 
    Kenneth S. Olshan

                                       15
<PAGE>

                    Independent Auditor's Report on Schedule

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

Under the date of February 8, 1999, we reported on the consolidated balance
sheets of Footstar, Inc. and Subsidiary Companies as of January 2, 1999 and
January 3, 1998, and the related consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows for each of the
years in the three-year period ended January 2, 1999, as contained in the 1998
Annual Report to Shareholders. These consolidated financial statements and our
report thereon are incorporated by reference in the Annual Report on Form 10-K
for the year ended January 2, 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule listed in answer to Part IV, Item 14(a)(2)
of Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

/s/KPMG LLP

Short Hills, NJ
February 8, 1999

                                       F-1


                                       16
<PAGE>

                                   Schedule II
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                        Valuation and Qualifying Accounts
       Years ended January 2, 1999, January 3, 1998 and December 28, 1996
                                 ($ in Millions)

                                              Additions
                                 Balance at   Charged to                 Balance
                                  Beginning   Costs and                  at End
        Description                of Year     Expenses   Deductions(1)  of Year
        -----------              ----------   ----------  -------------  -------

Accounts Receivable:

Allowance for Doubtful Accounts:

Year Ended January 2, 1999          $1.5        $ 1.7        $(2.0)       $1.2
                                    ====        =====        =====        ====

Year Ended January 3, 1998          $0.4        $ 1.1        $ 0.0        $1.5
                                    ====        =====        =====        ====

Year Ended December 28, 1996        $1.0        $(0.3)       $(0.3)       $0.4
                                    ====        =====        =====        ====

(1) Write-offs, net of recoveries

                                       F-2


                                       17
<PAGE>

                                  Exhibit Index

Exhibit
Number                              DESCRIPTION

  2.1       Form of Distribution Agreement among Melville Corporation
            ("Melville"), Footaction Center, Inc., and Footstar, Inc.
            (incorporated by reference to Exhibit 2.1 to Footstar, Inc.'s Form
            10/A Information Statement dated September 26, 1996).

  3.1       Amended and Restated Articles of Incorporation of Footstar, Inc.
            (incorporated by reference to Exhibit 3.1 to Footstar, Inc.'s Form
            10/A Information Statement dated September 26, 1996).

  3.2       Amended and Restated Bylaws of Footstar, Inc. (incorporated by
            reference to Exhibit 3.2 to Footstar, Inc.'s Form 10/A Information
            Statement dated September 26, 1996).

  4.1       Rights Agreement, dated as of March 8, 1999 between Footstar, Inc.
            and ChaseMellon Shareholder Services, L.L.C., 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 dated March 9, 1999).

 10.1       Master Agreement, dated as of June 9, 1995, between Kmart
            Corporation and Footstar, Inc., as amended (incorporated by
            reference to Exhibit 10.1 to Footstar, Inc.'s Form 10/A Information
            Statement dated September 26, 1996. Certain portions of this Exhibit
            have been accorded confidential treatment).

 10.2       Tax Disaffiliation Agreement between Melville and Footstar, Inc.
            (incorporated by reference to Exhibit 10.2 to Footstar, Inc.'s Form
            10/A Information Statement dated September 26, 1996).

 10.3       1996 Incentive Compensation Plan of Footstar, Inc. (incorporated by
            reference to Exhibit 10.3 to Footstar, Inc.'s Form 10/A Information
            Statement dated September 26, 1996).*

 10.4       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 dated September 26, 1996).*

 10.5       Employment Agreements with Executive Officers (incorporated by
            reference to Exhibit 10.5 to Footstar, Inc.'s 1996 Annual Report on
            Form 10-K).*

 10.6       Credit Agreement, dated as of September 18, 1997, among the Banks
            listed therein, the Bank of New York, as Issuing Bank, Morgan
            Guaranty Trust Company of New York, as Administrative Agent and
            Swingline Lender, and Footstar, Inc. (incorporated by reference to
            Exhibit 10.6 to Footstar, Inc.'s Form 10-Q dated November 10, 1997).


                                       18
<PAGE>

10.7(a)     Amendment dated as of April 30, 1998 to Credit Agreement dated as of
            September 18, 1997, among the Banks listed therein, The Bank of New
            York, as Issuing Bank, Morgan Guaranty Trust Company of New York, as
            Administrative Agent and Swingline Lender, and Footstar, Inc.

10.7(b)     Amendment dated as of October 23, 1998 to Credit Agreement dated
            as of September 18, 1997, among the Banks listed therein, The
            Bank of New York, as Issuing Bank, Morgan Guaranty Trust Company of
            New York, as Administrative Agent and Swingline Lender, and 
            Footstar, Inc.

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

10.9        Supplemental Retirement Plan for select senior management
            (incorporated by reference to Exhibit 10.9 to Footstar, Inc.'s 1996
            Annual Report on Form 10-K).*


13.1        Portions of Annual Report to Shareholders for the fiscal year ended
            January 2, 1999.

21.1        A list of subsidiaries of Footstar, Inc.

23.1        Consent of KPMG LLP.

27.1        Financial Data Schedule for the fiscal year ended January 2, 1999.

* Management contract or compensatory plan.


                                       19