<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A
                                 AMENDMENT NO. 1

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

                    For the fiscal year ended January 3, 2004

                           Commission File No. 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)


                                        1
<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       No   X
                                   -----    -----

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 an accelerated filer (as
defined in Rule 12b-2 of the Act).

                               Yes   X   No
                                   -----    -----

The aggregate market value of the common stock held by non-affiliates of the
registrant as of February 26, 2005, was approximately $97.9 million.

Number of shares outstanding of common stock, par value $.01 per share, as of
February 26, 2005: 20,308,849.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


                                        2
<PAGE>
                                EXPLANATORY NOTE

Footstar, Inc. (the "Company") is filing this Amendment No. 1 on Form 10-K/A
(this "Amendment") to its Annual Report on Form 10-K for the year ended January
3, 2004, originally filed with the Securities and Exchange Commission (the
"Commission") on April 8, 2005 (the "Original Form 10-K").

This Amendment reflects the following restatement with respect to our
discontinued Athletic operations. There is no change in net sales, gross
profit, operating profit and net income (loss).

1.   Revised report of Independent Registered Public Accounting Firm issued by
     KPMG LLP

2.   Revised report of Independent Registered Public Accounting Firm issued by
     Amper, Politzner & Mattia PC

3.   In the Fiscal 2002 Consolidated Statement of Operations, an increase of
     $35.7 million in the provision for income taxes in continuing operations
     with a corresponding decrease in loss from discontinued operations. This
     change is primarily required to give effect to the change in the
     beginning-of-the Fiscal Year 2002 balance of the valuation allowance that
     resulted from a change in circumstance that was caused by a change in
     judgment about the realizability of the related deferred tax asset in
     future years. This had previously not been correctly reflected within
     continuing operations.

4.   In the Fiscal 2001 Consolidated Statement of Operations, an increase of
     $1.0 million in the provision from income taxes in continuing operations
     and a $1.0 million decrease in the loss from discontinued operations due to
     a revision in the amount attributable to discontinued operations.

5.   The amounts reported in Note 21, Income Taxes, of Notes to Financial
     Statements have been revised accordingly for items 3 and 4.

6.   In the Consolidated Statement of Operations, interest expense and interest
     income have been revised within continuing operations as intercompany
     interest had been incorrectly eliminated against interest income instead of
     interest expense. There is no change in the amount of interest expense,
     net.

7.   Amounts reported in Item 6, Selected Financial Data, have been revised to
     reflect the above changes.

8.   In Item 6, Selected Financial Data, a decrease in the provision for income
     taxes of continuing operations in Fiscal 2000 and 1999 of $.8 million and
     $8.9, respectively, and an increase in the loss from discontinued
     operations in Fiscal 2000 and a decrease in earnings from discontinued
     operations in Fiscal 1999 by these respective amounts.

9.   Amounts in the Consolidated Statements of Cash Flows have been revised to
     reflect the above and certain other non material changes.

10.  In the MD&A - Fiscal 2003 versus 2002:

          First Quarter Results:
          Restructuring, Asset Impairment and Other Charge - The 2002 inventory
          write downs have been revised from $14.3 million to $13.1 million.

11.  In the MD&A - Fiscal 2002 versus 2001:

          Full Year Results:
          Net Sales: Comparable store sales increase in Shoemart have been
          revised from $9.0 million to $15.0 million

          Second Quarter Results:
          SG&A Expenses: The overall 2002 SG&A rate has been revised from 19.4%
          to 19.5%

          Third Quarter Results:
          Gross Profit:
          Gross Profit has been revised from $100.6 million to $99.0 million and
          depreciation has been revised from $5.9 million to $4.3 million.

          Restructuring, Asset Impairment and Other Charges:
          In 2002, Asset impairment charges and employee severance costs have
          been revised from $4.1 million to $4.9 million

12.  In Note 2 in Notes to Financial Statements, the amounts disclosed for
     advertising costs have been revised from $27.8 million in 2003 and $35.3
     million in 2002 to $27.5 million and $34.3 million, respectively.

Except for the items described above or contained in the Amendment, this
Amendment continues to speak as of the date of the Original From 10-K, and does
not modify, amend or update in any way the financial statements or any other
item or disclosures in the Original Form 10-K.

In addition, in connection with the filing of the Amendment No. 1 on Form 10-K/A
and pursuant to Section 12b-15, the Company is including currently dated
certifications of Executive Officers and consents of Independent Registered
Public Accounting Firms.


                                        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..........................................................   11
General....................................................................   11
The Meldisco Segment.......................................................   11
         Significant Kmart Relationship....................................   12
         Merchandising.....................................................   14
         Marketing.........................................................   14
         Competitive Environment...........................................   14
         Acquisition and Disposition of the Footwear Assets of J. Baker;
         the Ames Bankruptcy Proceeding....................................   15
Chief Executive Officer....................................................   15
Risk Factors...............................................................   16
Trademarks and Service Marks...............................................   21
Employees..................................................................   22
Available Information......................................................   22
Item 2.  Properties........................................................   23
Item 3.  Legal Proceedings.................................................   24
Item 4.  Submission of Matters to a Vote of Security Holders...............   27
PART II....................................................................   28
Item 5.  Market Prices for the Registrant's Common Equity and Related
         Stockholder Matters ..............................................   28
Item 6.  Selected Financial Data...........................................   29
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.............................................   30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........   56
Item 8.  Financial Statements and Supplementary Data.......................   58
Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure..............................................   59
Item 9A. Controls and Procedures...........................................   63
Item 9B. Other Information.................................................   65
PART III...................................................................   66
Item 10. Directors and Executive Officers of the Registrant................   66
Item 11. Executive Compensation............................................   71
Item 12. Security Ownership of Certain Beneficial Owners and Management....   80
Item 13. Certain Relationships and Related Transactions....................   84
Item 14. Principal Accountant Fees and Services............................   84
PART IV....................................................................   85
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...   85
</TABLE>

Footstar, the Footstar logo, Footaction, Shoe Zone, Just For Feet, Thom McAn,
Cobbie Cuddlers, Texas Steer, Cara Mia, Players University and Starclub are, or
were as of January 3, 2004, 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 Amendment. We have not filed our Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 29, 2003, June 28, 2003
and September 27, 2003. In lieu of filing such Quarterly Reports, this Amendment
includes summarized quarterly financial data and other material information that
would have been available in our 2003 Quarterly Reports on Form 10-Q. These
reports were delayed as a result of our internal investigation, the restatement
of our consolidated financial statements included in our previously filed fiscal
2002 Annual Report on Form 10-K and our operation under protection of the
bankruptcy laws, each described below. Similarly, we intend to include in our
fiscal 2004 Annual Report on Form 10-K, which we plan to file as soon as
practicable following the filing of this Amendment, summarized financial data
and other material information that would have been available in our 2004
Quarterly Reports on Form 10-Q. We also intend to file our Form 10-Q's for
fiscal 2005 as soon as practicable following the filing of our fiscal 2004
Annual Report on Form 10-K. In this Amendment, words such as "today,"
"recently," "current" or "currently," or phrases such as "as of the date hereof"
or "as of the date of this report," refer to on or about the date we are filing
this report with the Securities and Exchange Commission (the "SEC").

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 with 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.

We have implemented an Internal Process and Control Plan in order that the
weaknesses identified in internal controls be remedied and we are prepared to
emerge from Chapter 11 protection in full compliance with SEC reporting
requirements and the requirements of the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley".) See Item 9A - Controls and Procedures

Prior to the Company's November 13, 2002 announcement, 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. 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 Litigation" under Item
3 - Legal Proceedings.

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.


                                        5
<PAGE>
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 are being jointly
administered under the caption "In re: Footstar, Inc., et al. Case No. 04-22350
(ASH)" (the "Chapter 11 cases"). The Debtors are currently operating their
businesses and managing their properties as debtors-in-possession pursuant to
Sections 1107(a) and 1108 of the Bankruptcy Code. As a debtor-in-possession, we
are authorized to continue to operate as an ongoing business but may not engage
in transactions outside the ordinary course of business without the approval of
the Court, on notice and an opportunity to be heard.

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 February 26, 2005, Meldisco operated licensed
footwear departments in 1,479 Kmart Corporation ("Kmart") stores and 860 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.

Prior to the Petition Date, Athletic specialized in the sale of branded athletic
footwear, apparel and accessories. Athletic used its three retail chains,
Footaction, Just For Feet and Uprise, to conduct retail sales. 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 the Kmart 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 have exited the Athletic Segment entirely by closing
certain underperforming stores and selling the remainder of the stores and the
other assets. Our financial statements have been restated to reflect the
Athletic Segment as a discontinued operation for all periods presented.

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 of our
continued analysis of our businesses, we determined to sell or liquidate all of
our Shoe Zone stores. 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").


                                        6
<PAGE>
We have sold other assets, including our distribution centers in Mira Loma,
California ("Mira Loma") and Gaffney, South Carolina ("Gaffney"). The purchaser
of Mira Loma, Thrifty Oil Co. has leased Mira Loma to FMI International LLC, a
logistics provider, which will provide us with warehousing and distribution
services through June 30, 2012 under a receiving, warehousing and distribution
services agreement.

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 Fleet National Bank ("Fleet") and GECC Capital
Markets Group, Inc. The DIP Credit Agreement was subsequently amended and, as is
currently constituted (the "DIP and Exit Facility"), we have access to up to
$100.0 million of secured DIP financing, including a sub-limit for letters of
credit with availability determined by a borrowing base formula based upon
inventory and accounts receivable. Upon emergence from Chapter 11, we may, at
our option, and subject to satisfaction of certain conditions, convert the DIP
and Exit Facility to post-emergence financing (the "Exit Facility"), which will
provide for up to $160.0 million in revolving commitments, including a sub-limit
for letters of credit. The conditions include the absence of any default or
event of default, confirmation of a proposed joint plan of reorganization (the
"Plan"), which we filed with the Court on November 12, 2004 and occurrence of
all conditions related thereto, resolution of all issues related to our
assumption of the Master Agreement with Kmart effective as of July 1, 1995, as
amended ("Master Agreement"), our delivery of forward looking projections
acceptable to the lender and specified availability levels. Borrowings under the
DIP and Exit Facility bear interest at either Fleet's prime rate plus 0.0% to
0.5% or LIBOR plus 1.75% to 2.50%, at our option, with the applicable margin
based on excess availability levels. A quarterly fee of 0.3% per annum is
payable on the unutilized balance.

The DIP and Exit Facility has a total term not to exceed five years from the
Petition Date and expires upon Plan confirmation. The Exit Facility is effective
upon our emergence from bankruptcy and its term will be three years. Because
there could be a number of months between confirmation and emergence, we plan to
work with our current lenders to ensure the DIP and Exit Facility is amended to
provide financial support to us during the period from Plan confirmation to
emergence. As of February 26, 2005, there were no loans outstanding under the
DIP and Exit Facility and outstanding letters of credit thereunder totaled $20.2
million. For further information on the DIP and Exit Facility, see "Liquidity
and Capital Resources; The DIP and Exit Facility" under Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.

Pursuant to Court orders, we have been 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. Differences between
liability amounts recorded by us and claims filed by creditors are being
reconciled and, if necessary, the Court will make a final determination of
allowable claims. We continue to evaluate the amount of our pre-petition
liabilities on an ongoing basis and recognize any additional liabilities, which
may be material.


                                        7
<PAGE>
The following is an overview of the pre-petition claims filed against us as of
March 15, 2005:

<TABLE>
<CAPTION>
                             STATUS                                CLAIMS (#)     CLAIMS ($)
                             ------                                ----------   -------------
<S>                                                                <C>          <C>
Total claims received from Creditors                                  6,296     $ 646,353,470
Claims officially withdrawn by Creditors (through Court)                (46)         (402,407)
Claims objected to which were subsequently expunged by the Court       (358)     (324,252,261)
Other Claims formally objected to(1)                                 (2,048)     (208,582,431)
Claims agreed to "As Submitted"                                        (624)       (8,760,492)
Claims still being reviewed                                             (65)       (2,206,979)
                                                                     ------     -------------
Claims still to be reconciled(2)                                      3,155     $ 102,148,900
                                                                     ======     =============
</TABLE>

----------
(1)  A formal objection was filed on March 11, 2005; the Creditor's response
     deadline is April 13, 2005 and the hearing on the objection is scheduled
     for April 19, 2005

(2)  The remaining 3,155 claims consist of:

<TABLE>
<S>                                                                   <C>       <C>
Expenses Payable                                                         33     $     806,297
Real Estate                                                             285        55,760,024
Claims Involving Litigation                                              31        14,786,343
Payroll Tax                                                             140         1,150,885
Income/Sales/All Other Tax                                            2,666        29,645,351
                                                                      -----     -------------
                                                                      3,155     $ 102,148,900
                                                                      =====     =============
</TABLE>

Under the Bankruptcy Code, we have the ability to reject executory contracts,
including leases, subject to the approval of the Court and certain other
conditions. Parties affected by the rejection of a contract may file claims
against us in the Court in accordance with the Bankruptcy Code. We have rejected
a number of executory contracts, and the claims made against us with respect to
those rejected contracts on or prior to March 15, 2005 are included in the
tables above. We expect that as a result of our rejection of additional
executory contracts, including leases of nonresidential real property,
additional claims will be filed. Under the Bankruptcy Code, we may choose to
assume executory contracts subject to the approval of the Court and certain
other conditions, including our payment or "cure" of all outstanding liabilities
thereunder. Due to the uncertain nature of many of the claims, which have been
or may be asserted against us, we are unable to project the total magnitude of
all such claims with any degree of certainty. We have incurred, and will
continue to incur, significant costs associated with the Chapter 11 cases.

In order to exit Chapter 11 successfully, we will need to obtain Court
confirmation of a Chapter 11 plan that satisfies the requirements of the
Bankruptcy Code. At this time, it is not possible to accurately predict the
effect of the Chapter 11 cases on our business, creditors or stockholders or
when we may emerge from Chapter 11, if at all.

On November 12, 2004, we filed the Plan with the Court. The Plan provides for an
orderly reorganization of the Company and cash distributions to impaired parties
and is subject to a vote by eligible ballot holders. Alternatively, the Plan
allows for a sale of all or substantially all of our assets and/or equity
interests in the Meldisco business, following notice and a hearing. The Plan
provides for some flexibility in the timing of its confirmation and our
emergence from bankruptcy. Key events that could impact this timing include
determinations by the Court on our motion to assume the Master Agreement
(including a determination of Kmart's cure claim prior to Plan confirmation).
See "Significant Kmart Relationship" under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations. The Plan also
provides


                                        8
<PAGE>
that we will not emerge from bankruptcy until we are current in filing our
periodic reports with the SEC.

If and when the Plan is confirmed, we expect to make an initial distribution of
cash to creditors. The amount of this initial distribution will be based upon
our cash balance remaining after payment of, or establishing reasonable reserves
for, administrative claims, cure claims to the extent applicable, priority tax
claims, secured tax claims and convenience claims as well as establishing a
working capital cash reserve of $28.0 million. As set forth in the Plan, if the
initial distribution does not exceed the lesser of $121.0 million or 85% of the
then estimated general unsecured claims, we will apply up to $21.0 million of
our working capital cash reserve to increase the initial distribution to an
amount equal to the lesser of $121.0 million or 85% of the then estimated
general unsecured claims. Balances due creditors after the initial distribution,
if any, will be paid subject to our generation of free cash flow, as defined.
Such amounts will be distributed following the first and third quarters of each
fiscal year until such obligations have been satisfied.

As we have sold or otherwise disposed of all of the assets of our Athletic
Segment, the Meldisco business is our sole remaining business and our business
relationship with Kmart is critical to Meldisco. Our sale of discount family
footwear at Kmart stores currently generates over 89% of Meldisco's revenues. If
we lose the revenues from all or a substantial number of Kmart stores, we will
not be able to continue our operations; any reorganization of the Company
depends upon our continued ability to generate revenues through the sale of
footwear at Kmart stores.

Our relationship with Kmart is governed by the Master Agreement and certain
sub-agreements governing the operation of footwear departments in each of
Kmart's stores. We have sought Court approval for us to assume those agreements
so that we can continue operating shoe departments in those stores. Kmart has
objected to our motion to assume the agreements and disputed the amount that we
claim would be required to cure defaults under the Master Agreement if we are
allowed to assume it. In addition, Kmart has sought to lift the automatic stay
which is imposed under Section 362 of the Bankruptcy Code (the "Automatic Stay")
so that it can terminate the Master Agreement. For a more complete discussion of
our relationship with Kmart and this important litigation, see "Risk Factors"
under Item 1 - Business, "Significant Kmart Relationship" under Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations; and "Adversary Proceedings Involving Kmart" under Item 3 - Legal
Proceedings.

Even if we are successful in assuming the Master Agreement and sub-agreements,
we have lost and will continue to lose revenues whenever Kmart closes stores or
transfers stores to entities that are not subject to the Master Agreement.
During the first six months of 2002, while operating under the protection of
Chapter 11 of the U.S. Bankruptcy Code, Kmart closed 283 stores. Kmart closed an
additional 319 stores during the first four months of 2003. While Kmart emerged
from bankruptcy protection on May 6, 2003, we believe that Kmart has continued
and will continue to consider sales of both performing and underperforming
stores. Store sales by Kmart will adversely affect us since virtually all of the
footwear departments in those stores are operated at a profit by us.

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 closed on March 24, 2005.


                                        9
<PAGE>
We received a notice from Kmart instructing us to either vacate approximately 24
of these stores or have the footwear departments relocated within the stores
while their reconfiguration to a new Sears store called Sears Essentials took
place. We believe that the Master Agreement continues to grant us the exclusive
right to operate footwear departments in those stores despite their conversion
to Sears Essentials stores. We asked the Court to find Kmart in contempt for
violation of the Automatic Stay and assess compensatory damages. Kmart replied
by arguing that the Automatic Stay did not prevent them from converting the
stores to Sears Essentials stores because our rights under the Master Agreement
to sell footwear in the stores expires upon their conversion.

Following a preliminary hearing on February 24, 2005, the Court ruled that the
Automatic Stay barred Kmart from taking any actions to remove us from the 24
stores absent a motion for relief from the Automatic Stay. Accordingly, on March
4, 2005, Kmart filed a motion seeking relief from the Automatic Stay to require
us to vacate approximately 24 stores on or before April 13, 2005 (the "Kmart
Stay Motion"). On April 6, 2005, the Court heard legal arguments concerning our
claim that we have the right to continue to operate in the converted stores and
reserved decision. Footstar and Kmart are discussing a schedule for discovery on
any factual issues relating to the Kmart Stay Motion that might remain
outstanding after the Court renders an opinion on the issues raised at the April
6, 2005 hearing. For a more complete discussion of our dispute with Kmart over
this and the related important litigation, see "Risk Factors" under Item 1 -
Business, "Significant Kmart Relationship" under Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations; and
"Adversary Proceedings Involving Kmart" under Item 3 - Legal Proceedings.


                                       10
<PAGE>
ITEM 1. BUSINESS

GENERAL

We are a holding company and operate our businesses through our subsidiaries. We
are principally a retailer conducting business through our Meldisco Segment and,
prior to our sale of certain stores to Foot Locker on May 2, 2004 and the
closing of underperforming stores, our 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.

See "Introductory Note" for a description of certain important events which
occurred subsequent to January 3, 2004, including our Chapter 11 filing, 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 and the sale of all remaining stores within the
Athletic Segment.

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 January 3, 2004, Meldisco operated licensed footwear departments in 1,511
Kmart stores, in 863 Rite Aid drugstores, in 44 Gordmans stores, and in
children's footwear departments in 87 stores operated by Federated. As of
February 26, 2005, Meldisco operated licensed footwear departments in 1,479
Kmart stores and in 860 Rite Aid drugstores located on the West Coast. In
October 2002, Meldisco began selling family footwear on a wholesale basis to
Wal-Mart. 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. As of January 3,
2004, Meldisco also operated Shoe Zone, a chain of stand-alone family footwear
retail stores, that sold quality leather and value-priced fashion footwear,
including the Company-owned Thom McAn and Cara Mia brands.

Meldisco's core licensed footwear operation sells family footwear and
lower-priced basic and seasonal footwear in Kmart and Rite Aid stores and, as of
January 3, 2004, its "better" licensed business sold branded and other
higher-end footwear in department and specialty stores, including Gordmans and
certain Federated 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.

Meldisco had pursued a strategy to increase its licensed footwear business with
other retail outlets since 2001. In February 2001, Meldisco acquired from J.
Baker, Inc. ("J. Baker") 13 new license agreements with retailers covering over
1,000 licensed footwear departments, but subsequently exited these businesses as
none of them performed as expected. See "Meldisco - Acquisition and Disposition
of the Footwear Assets of J. Baker; the Ames Bankruptcy Proceeding". In August
2001, Meldisco expanded its business in the Rite Aid stores from those located
primarily in the western portion of the United States to include Rite Aid's
operations in the eastern portion of the United States. In January 2002, we
announced new licensed footwear department agreements with


                                       11
<PAGE>
Federated and Gordmans. See "Introductory Note" for a description of our exit
from the footwear departments of Federated and Gordmans stores.

We operated 39 Shoe Zone stores as of January 3, 2004. These family footwear
stores featured a selection of fashion accessories, including belts, handbags
and wallets. See "Introductory Note" for a description of our sale or
liquidation of all of our Shoe Zone stores.

In October 2002, Meldisco 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 February 26,
2005, we were supplying Thom McAn family footwear to 1,562 Wal-Mart stores in
the United States and Puerto Rico. Wal-Mart is not contractually obligated to
continue its existing level of purchases from us or to expand the Thom McAn line
into any of its other stores.

Significant Kmart Relationship

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 an even greater
percentage of our sales and profits now that we have exited all of our Athletic
Segment businesses and most of our other Meldisco businesses. The loss of
Meldisco's Kmart business, a significant further reduction in customer traffic
in Kmart stores or the closing of a significant number of Kmart stores would
have a material adverse effect on us and would likely not allow us to continue
to operate.

We operate licensed footwear departments in every Kmart store in the United
States, the U.S. Virgin Islands, Puerto Rico and Guam, through subsidiaries
("Shoemart Subsidiaries" or "Shoemart") that own the inventory and are
responsible for staffing the footwear departments. Kmart owns a 49% equity
interest in each of the Shoemart Subsidiaries, with the exception of 29 Shoemart
Subsidiaries in which we have a 100% equity interest as of February 26, 2005.
Meldisco has operated licensed footwear departments in Kmart since 1961.

Our arrangement with Kmart is governed by the Master Agreement. The Master
Agreement provides us with the non-transferable, exclusive right and license to
operate the footwear departments in Kmart's stores. The initial term of the
Master Agreement expires on July 1, 2012, and is renewable for a 15 year term
upon mutual agreement, unless either party gives notice of termination at least
four years prior to the end of the applicable term. Certain sub-license
agreements for particular Kmart stores allow the parties to terminate those
agreements under specified circumstances.

We have sought Court approval for us to assume the Master Agreement and the
sub-agreements so that we can continue operating shoe departments in those
stores. Kmart has objected to our motion to assume the agreements and disputed
the amount that we claim will be required to cure defaults under the Master
Agreement if we are allowed to assume it. In addition, Kmart has sought to lift
the Automatic Stay so that it can terminate the Master Agreement. For a more
complete discussion of our relationship with Kmart and this important
litigation, see "Significant Kmart Relationship" under Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations; and
"Adversary Proceedings Involving Kmart" under Item 3 - Legal Proceedings.


                                       12
<PAGE>
Even if we are successful in assuming the Master Agreement and sub-agreements,
we have lost and will continue to lose revenues whenever Kmart closes stores or
transfers stores to entities that are not subject to the Master Agreement.
During the first six months of 2002, while operating under the protection of
Chapter 11 of the U.S. Bankruptcy Code, Kmart closed 283 stores. Kmart closed an
additional 319 stores during the first four months of 2003. While Kmart emerged
from bankruptcy protection on May 6, 2003, we believe that Kmart has continued
and will continue to consider sales of both performing and underperforming
stores. Store sales by Kmart will adversely effect us since virtually all of the
footwear departments in those stores are operated at a profit by us.

In June 2004, Kmart announced the sale of 54 of its retail store locations to
Sears but agreed that Kmart would continue to operate such stores until Sears
could complete its conversion plans. Thereafter, in November 2004, Kmart
announced the Sears Acquisition, which closed on March 24, 2005.

Prior to this closing, we received a notice from Kmart instructing us to either
vacate approximately 24 stores or have the footwear departments relocated within
the stores while their reconfiguration to a new Sears store called Sears
Essentials took place. We believe that the Master Agreement continues to grant
us the exclusive right to operate footwear departments in those stores despite
their conversion to Sears Essentials stores. We asked the Court to find Kmart in
contempt for violating the Automatic Stay and assess compensatory damages. Kmart
replied by arguing that the Automatic Stay did not prevent them from converting
the stores to Sears Essentials stores because our rights under the Master
Agreement to sell footwear in the stores expires upon their conversion.

Following a preliminary hearing on February 24, 2005, the Court ruled that the
Automatic Stay barred Kmart from taking any actions to remove us from the stores
absent a motion for relief from the Automatic Stay. Accordingly, on March 4,
2005, Kmart filed the Kmart Stay Motion. On April 6, 2005, the Court heard legal
arguments concerning our claim that we have the right to continue to operate in
the converted stores and reserved decision. Footstar and Kmart are discussing a
schedule for discovery on any factual issues relating to the Kmart Stay Motion
that might remain outstanding after the Court renders an opinion on the issues
raised at the April 6, 2005 hearing.

If Kmart sells stores to independent third parties (i.e., not Sears) we may lose
our right to operate footwear departments in such stores. If the Court rules in
Kmart's favor in connection with the Sears/Kmart conversion litigation, Kmart is
likely to continue to take the position pre and post-bankruptcy that we are not
entitled to sell footwear in stores that get converted to Sears Essentials or
any other name that does not include the Kmart name.

For further information regarding the impact of the Kmart store closings, our
relationship with Kmart, the Master Agreement, our dispute with Kmart over this
issue and the related important litigation, see "Significant Kmart Relationship"
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations and "Adversary Proceedings Involving Kmart" under Item 3 -
Legal Proceedings.


                                       13
<PAGE>
Merchandising

Meldisco's merchandising strategy is focused on building 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) and Everlast.

In its licensed footwear operations, Meldisco seeks to attract non-footwear
shoppers into the footwear departments from other areas of the stores. To this
end, Meldisco consistently offers selected high-quality footwear at prices
significantly lower than those at which comparable merchandise is sold. These
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
Everlast, Route 66, Thalia and Joe Boxer. Meldisco conducts consumer research on
an ongoing basis to gauge new opportunities for brand extensions and to
determine price and positioning of new brands. Our strategy is to leverage our
expertise in branded products to expand our sales in existing licensed
departments as well as in our wholesale operations.

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 mother with children, 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 choice. This message is communicated
primarily through weekly advertising in newspaper inserts and in-store
presentations. Meldisco pays Kmart a sales promotion fee, which Kmart applies
toward footwear advertisements in the Kmart weekly newspaper inserts, a
publication which had a weekly circulation of approximately 44.5 million as of
February 26, 2005.

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 and Target, with a number of traditional off-price
and value retailers such as Shoe Carnival, Famous Footwear and Rack Room also
selling lower-priced footwear. Many of our competitors have grown more rapidly


                                       14
<PAGE>
and have substantially greater financial and marketing resources than us. We
rely on the high consumer acceptance of Meldisco's brands, particularly Thom
McAn, to provide a competitive advantage. We have extended distribution of the
Thom McAn brand into Wal-Mart stores.

Acquisition and Disposition of the Footwear Assets of J. Baker; the Ames
Bankruptcy Proceeding

In February 2001, we acquired, for cash consideration of $59.0 million, the
footwear assets and related license agreements of J. Baker in a transaction
accounted for as a purchase. As of the date of the acquisition, J. Baker
operated 1,163 licensed footwear departments under 13 agreements with retail
chains, including Ames Department Stores, Inc. ("Ames"), Variety Wholesalers,
Inc. and its affiliates (collectively, "Variety"), Stein Mart, Inc. ("Stein
Mart") and Spiegel, Inc. ("Spiegel"). Assets purchased included inventory, store
fixtures, trademarks and license agreements.

During fiscal year 2001, Ames filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. On August 14, 2002, Ames announced
that, as a result of continued weak sales, it would cease operations and close
all of its 327 store locations. We continued to operate licensed footwear
departments within Ames' stores until October 2002 when all stores were closed.

We recorded a charge in fiscal year 2002 of $9.2 million as an allowance for bad
debt in connection with our receivable from Ames. We are pursuing our claim with
respect to the $9.2 million through litigation. Also during fiscal year 2002, we
recorded restructuring, asset impairment and other charges of $14.0 million,
$11.2 million of which related to costs associated with exiting the Ames
business as a result of Ames' announcement in August 2002 that it would close
its remaining stores.

During fiscal year 2002, we announced that we had decided to end two
unprofitable licensed footwear relationships that were part of the J. Baker
acquisition. We exited Variety during fiscal year 2002 and ceased operating the
footwear departments in Stein Mart stores at the end of February 2003, when that
contract expired.

In addition, during fiscal year 2002, we decided to exit Spiegel and five other
smaller licensed footwear relationships that were part of the J. Baker
acquisition. As of April 2003, we had exited substantially all of the licensed
footwear departments acquired in the J. Baker acquisition.

As of the first day of fiscal year 2002, we adopted Statement of Financial
Accounting Standards Board No. 142, Goodwill and Other Intangible Assets,
recording $24.3 million as a cumulative effect of a change in accounting
principle, resulting from the write-off of goodwill arising from the acquisition
of the J. Baker business.

CHIEF EXECUTIVE OFFICER

Since January 19, 2004, Dale W. Hilpert has been our Chairman and Chief
Executive Officer. Prior to joining us, Mr. Hilpert spent two years as Chief
Executive Officer of Williams-Sonoma, Inc. In 1995, he joined Foot Locker where
he was Chairman and CEO. Prior to that, he spent 17 years at May Department
Stores serving in senior management positions, including Chairman and CEO of its
Payless ShoeSource division.


                                       15
<PAGE>
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. Neele E. Stearns, Jr., a member of the Board
of Directors and the then Chairman of the Audit Committee, was appointed
Chairman and Chief Executive Officer on an interim basis. Mr. Stearns served as
our Interim Chairman and Chief Executive Officer until January 18, 2004 and
currently serves as our Interim Vice Chairman.

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.

IF WE ARE UNABLE TO SUCCESSFULLY REORGANIZE OUR CAPITAL STRUCTURE AND OPERATIONS
AND IMPLEMENT OUR BUSINESS PLAN THROUGH THE CHAPTER 11 PROCESS, WE MAY NEVER
EMERGE FROM BANKRUPTCY AND MAY BE REQUIRED TO LIQUIDATE OUR ASSETS.

Commencing March 2, 2004, the Company and most of its subsidiaries filed
voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Risk
factors involving the Chapter 11 filing include, but are not limited to, the
following:

     -    The Chapter 11 cases may adversely affect our business. We believe
          that any such adverse effects may worsen if confirmation of the Plan
          is protracted.

     -    There can be no assurance that the Court will confirm our Plan.

     -    There can be no assurance regarding any adverse actions that creditors
          or equity holders of the Company or other parties in interest in the
          Chapter 11 cases may take that may have the effect of preventing or
          unduly delaying confirmation of the Plan.

     -    There can be no assurance as to the overall long-term viability of our
          operational reorganization and Plan.

     -    There can be no assurance as to our ability to maintain sufficient
          financing sources to fund our Plan and meet future obligations.

     -    We may be unable to retain top management and other key personnel
          through the process of reorganization.

In addition, the uncertainty regarding the eventual outcome of our
restructuring, and the effect of other unknown adverse factors, could threaten
our existence as a going concern. Continuing on a going concern basis is
dependent upon, among other things, the success and Court approval of our Plan,
including the assumption of our Master Agreement with Kmart, maintaining the
support of key vendors and retaining key personnel, along with financial,
business, and other factors, many of which are beyond our control.


                                       16
<PAGE>
MELDISCO IS OUR ONLY CONTINUING BUSINESS AND SUBSTANTIALLY ALL OF OUR CONTINUING
NET SALES AND PROFITS RESULT FROM MELDISCO'S BUSINESS RELATIONSHIP WITH KMART.
KMART STORE CLOSINGS AND REDUCED TRAFFIC IN THE REMAINING KMART STORES HAVE HAD,
AND CONTINUE TO HAVE, A NEGATIVE EFFECT ON SALES AND PROFITS OF MELDISCO. WE ARE
CURRENTLY IN LITIGATION WITH KMART IN THE COURT OVER OUR ABILITY TO ASSUME THE
MASTER AGREEMENT. A FURTHER MATERIAL REDUCTION IN THE NUMBER OF KMART STORES OR
A TERMINATION OF THIS RELATIONSHIP WOULD HAVE A MATERIALLY ADVERSE EFFECT ON US
AND WOULD LIKELY NOT ALLOW US TO CONTINUE TO OPERATE.

We have exited our Athletic Segment business and certain portions of our
Meldisco business. Our sales in the footwear departments operated by Meldisco in
Kmart stores accounted for 89% of our sales and 69% of our profits during 2003.

We are currently in litigation with Kmart regarding numerous aspects of our
business relationship with them. Among other things, Kmart has challenged our
right to assume the Master Agreement, challenged the cure amount associated with
the assumption, and sought to have the Automatic Stay lifted so that it can
terminate the Master Agreement.

Even if we are successful in assuming the Master Agreement, we have lost and
will continue to lose revenues whenever Kmart closes stores or transfers stores
to entities that are not subject to the Master Agreement. While operating under
the protection of Chapter 11 of the U.S. Bankruptcy Code during 2002 and the
first four months of 2003, Kmart closed approximately 600 stores. Kmart has
continued, and we believe will continue, to consider sales of both performing
and underperforming stores. Store sales by Kmart will adversely effect us since
virtually all of the footwear departments in those stores are operated at a
profit by us.

In June 2004, Kmart announced the sale of 54 of its retail store locations to
Sears but agreed that Kmart would continue to operate such stores until Sears
could complete its conversion plans. Thereafter, in November 2004, Kmart
announced the Sears Acquisition which closed on March 24, 2005.

We are involved in litigation with Kmart regarding their instructions for us to
either vacate approximately 24 stores or have the footwear departments relocated
within the stores while their reconfiguration to a new Sears store called Sears
Essentials took place. While we assert that the Master Agreement continues to
grant us the exclusive right to operate footwear departments in those stores
despite the operation of the stores as Sears Essentials stores, Kmart asserts
that our rights under the Master Agreement to sell footwear in the stores
expires upon their conversion.

If Kmart sells stores to independent third parties (i.e., not Sears) we may lose
our right to operate footwear departments in such stores. If the Court rules in
Kmart's favor in connection with the Sears/Kmart conversion litigation, Kmart is
likely to continue to take the position pre and post-bankruptcy that we are not
entitled to sell footwear in stores that are operated under the Sears Essentials
name or any other name that does not include the Kmart name.

If Kmart were to close a significant number of additional stores or convert a
significant number of stores to formats in which we did not have the right to
operate, it would have a material adverse effect on our net sales and profits.
With or without additional store closings, a continued decline in our per store
sales in the remaining Kmart stores would have a material adverse effect on our
net sales and profits.


                                       17
<PAGE>
For further information regarding the impact of the Kmart store closings, our
relationship with Kmart, the Master Agreement, our dispute with Kmart over this
issue and the related important litigation, see "Significant Kmart Relationship"
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations; and "Adversary Proceedings Involving Kmart" under Item 3
- Legal Proceedings.

WE ARE A DEFENDANT IN CERTAIN SECURITIES LITIGATION AND ARE THE SUBJECT OF AN
SEC ENFORCEMENT PROCEEDING AND CANNOT YET DETERMINE WITH CERTAINTY WHETHER OUR
INSURANCE COVERAGE IS ADEQUATE TO COVER THE CLAIMS. WE MAY ALSO BE SUBJECT TO
ADDITIONAL LITIGATION OR REGULATORY ACTION.

On the Petition Date, we commenced the Chapter 11 cases by filing petitions for
relief under Chapter 11 of the Bankruptcy Code. We have continued to manage our
business and property as debtors-in-possession, subject to the supervision of
the Court and in accordance with the provisions of the Bankruptcy Code. An
immediate effect of the filing of the Chapter 11 cases was the imposition of the
Automatic Stay which, with limited exceptions, enjoins the commencement or
continuation of all collection efforts by creditors, enforcement of liens
against any assets of the Company and litigation against us. However, the
Automatic Stay is applicable only to litigation against us, and not against our
officers and directors. We may request the Court to extend the stay to cover our
officers and directors, but absent Court approval, such litigation may proceed.
Also, the Automatic Stay has no effect on the SEC investigation.

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. The Company has been and intends to continue cooperating fully with
the SEC. We cannot predict the outcome of this proceeding.

The investigation overseen by the Audit Committee of the Board of Directors and
the restatement led to a delay in the filing of this and other SEC reports. See
"Introductory Note". Because of these delays, we were not in compliance with the
listing standards of the NYSE and the NYSE delisted our common stock.

The Company and certain of its directors and officers were defendants in several
purported class action lawsuits (consolidated into a single action) alleging
violations of federal securities laws and breaches of fiduciary duties. Footstar
and the named plaintiffs have mutually agreed to resolve the claims made in the
several purported class action lawsuits, without any admission of liability, for
the amount of $14.3 million, all of which will be funded with insurance
proceeds. See Item 3 - Legal Proceedings. We are in the process of seeking
approval from class members and, upon such approval, seeking an order from the
court before which this litigation is pending, dismissing it with prejudice.

Litigation or other regulatory actions against us by the SEC, the NYSE or other
regulatory bodies could have a material adverse effect on us, and would also
have adverse secondary effects, such as negative reactions from our
stockholders, creditors or vendors. For a further description of our restatement
related litigation, see "Restatement Related Litigation" under Item 3 - Legal
Proceedings.


                                       18
<PAGE>
A FAILURE BY US TO EFFECTIVELY AND EFFICIENTLY MAINTAIN INTERNAL CONTROL OVER
FINANCIAL REPORTING WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS OR
FINANCIAL RESULTS.

We have implemented an Internal Process and Controls Plan to address areas of
control weakness identified in the investigation and the related restatement.
The Internal Process and Controls Plan addresses our control environment,
organization and staffing, policies, procedures and documentation, and
information systems. The Audit Committee of the Board of Directors and
management periodically review and assess the effectiveness of internal controls
and procedures. This Internal Process and Controls Plan supports our efforts to
comply with the requirements of Sarbanes-Oxley.

We are prepared to and may be required to forego sales growth or cost savings
opportunities that might threaten the maintenance of effective internal control
over financial reporting. The Company has and may continue to incur increases in
employee levels, capital expenditures and operating expenses with respect to the
implementation of these changes. If we are unable to implement these changes
effectively or efficiently, or if we are found by our independent external
auditor not to be in compliance with the requirements of Sarbanes-Oxley, or if
we or our independent external auditor determine that we have deficiencies in
our internal control over financial reporting that constitute "material
weaknesses" as defined by the Public Company Accounting Oversight Board's Audit
Standard No. 2, it could have a material adverse effect on our financial
condition, results of operations or liquidity.

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 these foreign manufacturers are unable to secure
sufficient supplies of raw materials or maintain adequate manufacturing
capacity, they may be unable to provide Meldisco 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. Should
we not be able to recover these cost increases with increased pricing to our
customers, it could have a material adverse effect on our operations and
financial condition. In addition, 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.

Meldisco also depends on third parties to receive, transport and deliver its
products. If these third parties are unable to perform for any reason, or if
they increase the price of their services, including but not limited to, as a
result of increases in the cost of fuel, there could be a material adverse
effect on our operations and financial performance.

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. 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, it could
adversely affect our businesses. This risk is acute while we remain in
bankruptcy.


                                       19
<PAGE>
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 the costs
associated with operating as a public company, the expense of being in
bankruptcy, and a substantial portion of our labor expenses. If our sales
continue to decline, we will be unable to reduce our operating expenses
proportionately.

THERE ARE RISKS ASSOCIATED WITH OUR IMPORTATION OF PRODUCTS.

Approximately 92% 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.

The outbreak and spread of severe acute respiratory syndrome ("SARS") in
southern China during the early part of 2003 severely curtailed travel to and
from, as well as general business activities within China. Although our ability
to purchase and import our merchandise from our China-based manufacturers was
not negatively impacted during this outbreak of SARS, an additional outbreak of
SARS, Avian Flu or outbreaks of other infectious diseases could prevent the
manufacturers we use from manufacturing our merchandise or hinder our ability to
import such merchandise, either of which could have an adverse effect on our
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.

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,


                                       20
<PAGE>
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. Many of our competitors have
grown more rapidly and have substantially greater financial and marketing
resources than us.

If we are unable to respond effectively to our competitors, our operations and
financial condition could be materially adversely affected.

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

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 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 like we experienced in
2003, 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.

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


                                       21
<PAGE>
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 February 26, 2005, we had 4,677 employees, of which 1,591 were full-time
and 3,086 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
Amendment, we made all such materials available through our web site as soon as
reasonably practicable after filing such materials with the SEC. As discussed in
the Introductory Note, certain 2003 and 2004 SEC reports have not been filed to
date.

You may also read and copy any materials filed by us with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, 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, that contains reports, proxy and information statements and other
information which we file electronically with the SEC.


                                       22
<PAGE>
ITEM 2. PROPERTIES

As of January 3, 2004, Meldisco operated licensed footwear departments in 2,503
stores and 39 Company-owned Shoe Zone stores. As of February 26, 2005, Meldisco
operated licensed footwear departments in 2,339 stores. The licensed footwear
departments are located in all 50 states, Guam, Puerto Rico and the U.S. Virgin
Islands. Of the licensed departments operated as of January 3, 2004 and February
26, 2005, respectively, 1,511 and 1,479 were located in Kmart discount stores;
863 and 860 licensed departments were in Rite Aid drugstores; 44 and none were
located in Gordmans stores; and 87 and none were located in Federated stores.

Kmart and other retail host stores provide Meldisco with store space to sell
footwear in exchange for certain payments. Meldisco-operated footwear
departments in Kmart stores range from 900 to 4,400 square feet.

Our corporate headquarters and Meldisco's corporate offices are now located in
129,000 square feet of owned office space in Mahwah, New Jersey. Our corporate
tax department is located in 3,500 square feet of leased office space in
Worcester, Massachusetts.

We no longer operated any Footaction or Just For Feet stores as of February 26,
2005. As of January 3, 2004, we operated 433 Footaction stores in 39 states and
Puerto Rico and we operated 89 Just For Feet stores. Footaction's average store
size was 4,800 square feet. Just For Feet's stores ranged from 6,000 to 33,000
square feet with an average store size of 17,000 square feet. Footaction stores
were all leased with a typical lease term of 10 years. Three of Just For Feet's
stores were owned by us; the remainder were leased, with a typical initial lease
term of 15 years.

Until the fourth quarter of 2004, our headquarters was located in 43,000 square
feet of leased office space in West Nyack, New York. Until its relocation to our
Mahwah office building during the third and fourth quarters of 2004, our Shared
Services Center was located in 57,000 square feet of leased office space in
Dallas, Texas. The Athletic Segment's corporate offices were located in
approximately 63,000 square feet of leased office space in Mahwah, New Jersey;
the lease expired as of September 30, 2004. We also maintained approximately
8,300 square feet of leased office space in Wausau, Wisconsin in which our
direct marketing operations were primarily located; that lease ended as of June
2004. We previously operated out of two owned distribution facilities located in
Mira Loma, California, and Gaffney, South Carolina, with a total of 1.2 million
square feet. In addition, we leased a 200,000 square foot distribution facility
in Morrow, Georgia; that lease ended as of January 31, 2005.

See "Introductory Note" for a discussion of our disposition of our facilities.


                                       23
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

As stated in the "Introductory Note" above, we commenced the Chapter 11 cases by
filing petitions for relief under Chapter 11 of the Bankruptcy Code. We have
continued to manage our business as debtors-in-possession, subject to the
supervision of the Court and in accordance with the provisions of the Bankruptcy
Code. An immediate effect of the filing of the Chapter 11 cases is the
imposition of the Automatic Stay, which, with limited exceptions, enjoins the
commencement or continuation of all collection efforts by creditors, enforcement
of liens against any assets of the Company and litigation against us. However,
the Automatic Stay is applicable only to litigation against us, and not against
any of our officers and directors. We may request the Court to extend the stay
to cover our respective officers and directors in any litigation filed, but
absent Court approval, such litigation may proceed. The Automatic Stay has no
effect on the SEC investigation.

In addition to the matters described below, we are involved in other legal
proceedings, lawsuits and other claims incidental to the conduct of our business
and 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 results, assuming a combination of litigation and
settlement strategies. These estimates also take into account that bar dates
have been established in connection with our bankruptcy proceedings. These bar
dates, all of which have passed, require that any claims relating to events that
occurred prior to our bankruptcy filing be reported in a proof of claim filed
with the Court in our bankruptcy case. However, legal proceedings are subject to
significant uncertainties, the outcomes are difficult to predict, and
assumptions and strategies may change. Consequently, except as specified above,
we are unable to ascertain the ultimate financial impact of any legal
proceedings.

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 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 restatement. 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 these proceedings.

The fact-finding investigation authorized by the Formal Order 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. The Company
has been and intends to continue cooperating fully with the SEC.

The Company and certain of its directors and officers were defendants in two
derivative suits (consolidated into a single action as described below) and
several purported class action lawsuits (also consolidated into a single action
as described below) alleging violations of federal securities


                                       24
<PAGE>
laws and breaches of fiduciary duties. Messrs. Stearns, Day, Davies and Olshan,
members of the Company's Board of Directors, and J.M. Robinson, its former
Chairman, President and Chief Executive Officer, and Stephen Wilson, an officer
of the Company, were named as defendants in two derivative complaints filed by
individual shareowners, one in the United States District Court for the Southern
District of New York and one in the Supreme Court of the State of New York,
Rockland County. In New York, the Supreme Court is a trial level court. The
complaints alleged that these directors and officers breached their fiduciary
duties to the Company by failing to implement and maintain an adequate internal
accounting control system, sought unspecified damages against the defendants and
in favor of the Company, as well as costs and expenses associated with the
litigation. These complaints were consolidated in a single action in the United
States District Court for the Southern District of New York captioned, Barry Lee
Bragger v. J.M. Robinson, et al., Civil Action No. 02 Civ. 9163 (SCR). With
Court approval, Footstar and the relevant individual parties mutually agreed to
resolve the claims made in the derivative complaints, without any admission of
liability, for $9.2 million, all of which has been funded with insurance
proceeds paid to the Company. An order has been issued by the court before which
this litigation was pending dismissing the matter with prejudice.

The Company and Messrs. Robinson and Wilson have been named as defendants in
several purported shareholder class action lawsuits for alleged violations of
securities laws. These actions seek unspecified monetary damages and costs and
expenses associated with the litigation. These initial complaints allege that
beginning mid-May 2000, the Company and its officers named above misrepresented
our financial performance. The cases have been consolidated into a single action
pending in the United States District Court for the Southern District of New
York, captioned, Stephen Rush v. Footstar, Inc., et al., 02 Civ. 9130 (SRC)
(Consolidated).

Footstar and the named plaintiffs have mutually agreed to resolve the claims
made in the several purported class action lawsuits, without any admission of
liability, for the amount of $14.3 million, all of which will be funded with
insurance proceeds. We are in the process of seeking approval from class members
and upon such approval, seeking an order from the court before which this
litigation is pending, dismissing it with prejudice.

ADVERSARY PROCEEDINGS INVOLVING KMART

On August 12, 2004, we filed a motion to assume the Master Agreement (the
"Assumption Motion"). 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 are incurable. Finally, Kmart disputed the amount of cure we would owe
should they be authorized to assume the Master Agreement. We contend that, as of
the Petition Date, the cure amount is approximately $19.0 million, while Kmart
asserts that the cure amounts are no less than $57.8 million. In the
Cross-Motion, Kmart argued that, because the Master Agreement is non-assumable,
Kmart should be entitled to exercise a termination provision pursuant to section
365(e)(2) of the Bankruptcy Code.


                                       25
<PAGE>
We contested the factual assertions and arguments contained in the Assumption
Objection and the Cross-Motion. Specifically, we argued that applicable
nonbankruptcy law does not prevent us from assigning the Master Agreement. In
addition, we argued that, even if applicable nonbankruptcy law prevented
assignment of the Master Agreement, section 365(c)(1) did not prevent us from
assuming the Master Agreement. Finally, we argued that section 365(b)(2)(D) did
not prevent assumption. On December 17, 2004, a hearing was held to determine
whether, as a matter of law, we can assume the Master Agreement. On February 16,
2005, the Court issued its Decision on Motion to Assume Executory Contracts (the
"Assumption Decision"). In the Assumption Decision, the Court overruled the
Assumption Objection to the extent it was based upon section 365(c)(1) of the
Bankruptcy Code. Specifically, the Court ruled that section 365(c)(1) does not
prevent assumption of the Master Agreement by us because we do not intend to
assign the Master Agreement. The Court did not resolve the issue of whether the
Master Agreement was assignable under applicable nonbankruptcy law. The Court
reserved its decision on the issue of section 365(b)(2)(D) until the completion
of discovery.

The Court has not rendered a decision on the remaining issues raised by the
Assumption Objection or the Cross-Motion. On February 28, 2005, Kmart filed its
Motion for Reargument of Decision on Motion to Assume Executory Contract (the
"Reargument Motion"). In the Reargument Motion, Kmart requested that the Court
reconsider its Assumption Decision on the grounds that controlling precedent
mandates a reversal of the Assumption Decision. We filed our response to the
Reargument Motion on March 18, 2005. The Court held a hearing on the Reargument
Motion on March 31, 2005. At this hearing, the Court reaffirmed the Assumption
Decision.

Kmart has requested additional briefing and argument before the Court with
respect to the termination of the Master Agreement pursuant to section 365(e)(2)
of the Bankruptcy Code. The hearing date on this matter has been set for April
21, 2005.

On March 17, 2005, the Court entered a scheduling order establishing a timetable
for the resolution of the remaining issues raised by the Assumption Motion, the
Assumption Objection, and the Cross-Motion. While the Court did not schedule a
final hearing date, we anticipate a final hearing will be held in July 2005.

There is no guarantee that the Court will authorize us to assume the Master
Agreement or Kmart to terminate the Master Agreement under section 365(e)(2) of
the Bankruptcy Code. Additionally, we cannot be sure what cure amounts will be
owing to Kmart whether or not the Court authorizes us to assume the Master
Agreement. See "Risk Factors" under Item 1 - Business.

In June 2004, Kmart announced the sale of 54 of its retail store locations to
Sears but agreed that Kmart would continue to operate such stores until Sears
could complete its conversion plans. Subsequently, in November 2004, Kmart
announced the Sears Acquisition, which closed on March 24, 2005. Following the
announcement of the Sears Acquisition, we received inconsistent information from
Kmart regarding its plans 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 Essentials 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 inconsistent information from Kmart regarding its plans for the
stores, we filed a motion with the Court on January 28, 2005 (the "Examination
Motion") 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.


                                       26
<PAGE>
Shortly after we filed the Examination Motion, Kmart announced its plan to begin
the reconfiguration of some of the stores slated for conversion to a new Sears
format. We then received a notice from Kmart instructing us to either vacate
approximately 24 stores or have the footwear departments relocated within the
stores while their reconfiguration took place. We believe that the Master
Agreement continues to grant us the exclusive right to operate footwear
departments in all stores which are directly or indirectly owned by Kmart and
which at one time operated as Kmart stores, whether or not Kmart converts or
operates certain of the stores under a different discount retail name, such as
the Sears Essentials name. Accordingly, after receiving the notice from Kmart,
we filed a motion (the "Enforcement Motion") requesting that the Court adjudge
and determine Kmart to be in contempt for violation of the Automatic Stay and
assess compensatory damages. Kmart replied to the Enforcement Motion by arguing
that the Automatic Stay did not prevent Kmart from converting the stores to a
different format because our rights under the Master Agreement to sell footwear
in the converting stores expires upon their conversion.

On February 24, 2005, the Court held a preliminary hearing with respect to the
Enforcement Motion and ruled that the Automatic Stay barred Kmart from taking
any actions to remove us from the stores absent a motion for relief from the
Automatic Stay. Accordingly, on March 4, 2005, Kmart filed the Kmart Stay
Motion. On April 6, 2005, the Court heard legal arguments concerning our claim
that we have the right to continue to operate in the converted stores and
reserved decision. Footstar and Kmart are currently discussing a schedule for
discovery on any factual issues relating to the Kmart Stay Motion that might
remain outstanding after the Court renders an opinion on the issues raised at
the April 6, 2005 hearing.

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
2003 as no annual meeting was held.


                                       27
<PAGE>
                                     PART II

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

Our common stock was listed on the NYSE under the trading symbol "FTS". On
December 29, 2003, the NYSE suspended trading in our common stock and, at a
later date, our common stock was delisted. See "Introductory Note". Since
December 30, 2003, our common stock has been traded on the over-the-counter
bulletin board ("OTCBB") under the symbol "FTSTQ:PK". Prices shown for quarters
2002 and 2003 reflect the high and low sales prices for the common stock for
each such quarter as reported in the consolidated transaction reporting system.
Prices shown for periods during 2004 reflect the high and low bid prices 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 February
26, 2005, the closing price of our common stock was $5.50 and there were 2,444
shareholders of record. Information concerning the market prices of our common
stock is set forth below:

<TABLE>
<CAPTION>
                  HIGH      LOW
                 ------   ------
<S>              <C>      <C>
2002
First Quarter    $31.87   $22.65
Second Quarter   $32.43   $23.04
Third Quarter    $24.46   $ 7.72
Fourth Quarter   $ 8.88   $ 5.00

2003
First Quarter    $10.00   $ 5.87
Second Quarter   $13.39   $ 8.12
Third Quarter    $13.56   $ 6.65
Fourth Quarter   $ 7.42   $ 3.10

2004
First Quarter    $ 5.55   $ 1.26
Second Quarter   $ 6.75   $ 2.15
Third Quarter    $ 5.60   $ 2.60
Fourth Quarter   $ 4.85   $ 2.40
</TABLE>

We have not paid dividends at any time since we became a public company and we
do not expect to pay any dividends for the foreseeable future. The DIP and Exit
Facility prohibits cash dividends without lender consent.


                                       28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR HISTORICAL FINANCIAL SUMMARY

(dollars in millions)

<TABLE>
<CAPTION>
                                                                2003         2002         2001         2000         1999
                                                             ----------   ----------   ----------   ----------   ----------
                                                                          (restated)   (restated)   (restated)   (restated)
                                                                             (2)         (2)           (2)          (2)
<S>                                                          <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA

Net sales                                                     $1,015.6     $1,346.0     $1,444.2     $1,310.1     $1,236.7
Cost of sales                                                    691.8        917.4        986.9        883.1        845.2
                                                              --------     --------     --------     --------     --------
   Gross profit                                                  323.8        428.6        457.3        427.0        391.5
Store operating, selling, general
   and administrative expenses                                   269.5        316.8        323.2        272.3        257.5
Bad debt expense - Ames Department Stores                           --          9.2           --           --           --
Depreciation and amortization                                     21.1         20.3         18.9         15.1         14.2
Loss on investment                                                  --           --           --          3.0           --
Other income                                                      (5.4)          --           --           --           --
Restructuring, asset impairment
   and other charges (reversals), net                              2.5         14.0          3.3           --         (1.4)
                                                              --------     --------     --------     --------     --------
   Operating profit                                               36.1         68.3        111.9        136.6        121.2
Interest expense                                                  24.4          9.8          3.8          1.4           --
Interest income                                                   (1.1)        (1.1)        (1.6)        (1.4)        (1.3)
Provision for income taxes (1)                                    10.0         70.9         28.8         38.6         29.7
Minority interests in net income                                  17.3         37.1         44.8         51.4         44.6
(Loss) earnings from operations of discontinued
   Athletic Segment (2)(3)                                       (39.9)       (30.8)       (66.7)        (2.2)        11.8
Cumulative effect of a change in accounting principle (4)           --         24.3           --           --           --
                                                              --------     --------     --------     --------     --------
Net (loss) income                                             $  (54.4)    $ (103.5)    $  (30.6)    $   44.4     $   60.0
                                                              ========     ========     ========     ========     ========
Basic (loss) income per share from continuing operations      $  (0.71)    $  (2.36)    $   1.79     $   2.34     $   2.23
Diluted (loss) income per share from continuing operations    $  (0.71)    $  (2.36)    $   1.75     $   2.29     $   2.20

BALANCE SHEET DATA
Current assets:
   Cash and cash equivalents                                  $    1.1     $   13.4     $   12.5     $   14.3     $   31.8
   Inventories                                                   179.7        360.9        389.5        392.1        281.9
   Other                                                          39.7         87.5        123.7         90.5         77.1
   Assets held for sale                                          284.5           --           --           --           --
                                                              --------     --------     --------     --------     --------
   Total current assets                                          505.0        461.8        525.7        496.9        390.8
Property and equipment, net                                      147.2        266.7        256.2        258.5        198.7
Other assets                                                      12.5         46.8        116.9         58.4         32.3
                                                              --------     --------     --------     --------     --------
Total assets                                                     664.7        775.3        898.8        813.8        621.8
                                                              --------     --------     --------     --------     --------
Notes payable                                                    198.0        146.8        146.9         74.0           --
Other current liabilities                                        133.2        319.0        322.4        287.7        243.4
Liabilities held for sale                                        110.5           --           --           --           --
                                                              --------     --------     --------     --------     --------
Total current liabilities                                        441.7        465.8        469.3        361.7        243.4
Other liabilities                                                 58.9         72.8         81.5         71.5         44.1
Minority interests in subsidiaries                                42.2         61.9         70.1         78.9         73.1
                                                              --------     --------     --------     --------     --------
Total liabilities                                                542.8        600.5        620.9        512.1        360.6
                                                              --------     --------     --------     --------     --------
Shareholders' equity                                             121.9        174.8        277.9        301.7        261.2
                                                              --------     --------     --------     --------     --------
Total  liabilities and equity                                 $  664.7     $  775.3     $  898.8     $  813.8     $  621.8
                                                              ========     ========     ========     ========     ========
</TABLE>

(1)  In connection with the preparation of our fiscal 2003 and 2002 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 certain of these
     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 year 2003


                                       29
<PAGE>
     an additional non-cash valuation allowance of $24.7 million and in
     fiscal 2002 recorded $70.2 million.

(2)  Certain amounts in fiscal years 2002, 2001, 2000 and 1999 have been
     restated with respect to our discontinued and continuing operations as
     described in Note 3 to Consolidated Financial Statements. There is no
     change in net sales, gross profit, operating profit or net income (loss) in
     any year.

(3)  During fiscal 1999, we reversed $3.8 million ($2.4 million after taxes) of
     a discontinued business charge of $85.0 million originally recorded in
     fiscal year 1996 which related to our Meldisco Segment.

(4)  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 years 2001, 2000 and 1999 was $2.3
     million, $0.7 million and $0.8 million, respectively.

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:

     -    our ability to successfully assume, with Court approval, the Master
          Agreement with Kmart, and to cure defaults thereunder at a cost
          substantially higher than our estimate thereof;

     -    changes to our relationship with Kmart relating to the Sears
          Acquisition;

     -    the degree to which Kmart transfers additional store locations to
          Sears or to independent third parties, and the success in litigation
          of our position that stores converted to the Sears format remain
          subject to the Master Agreement;

     -    our ability to emerge from bankruptcy protection and operate
          successfully as a going concern;

     -    our ability to operate pursuant to the terms of the DIP and Exit
          Facility and to otherwise obtain financing necessary to operate our
          business on satisfactory terms both during and after our emergence
          from bankruptcy protection;

     -    our ability to obtain Court approval and any other required approvals
          with respect to motions in the Chapter 11 proceeding prosecuted by us
          from time to time;

     -    our ability to develop, prosecute, confirm and consummate one or more
          plans of reorganization with respect to the Chapter 11 cases;

     -    risks associated with third parties seeking and obtaining court
          approval to terminate or shorten the exclusivity period that we have
          to propose and confirm one or more plans of reorganization, to appoint
          a Chapter 11 trustee or to convert the cases to Chapter 7 cases;

     -    our ability to obtain and maintain normal terms with vendors and
          service providers and to maintain contracts that are critical to our
          operations;

     -    the audit of the 2004 fiscal year and the review of subsequent
          quarters by our independent external auditors;

     -    our compliance with the requirements of Sarbanes-Oxley;

     -    negative reactions from our stockholders, creditors or vendors to the
          delay in providing financial information caused by the investigation
          and restatement and the delisting of our common stock by the NYSE;


                                       30
<PAGE>
     -    the impact and result of any litigation (including private
          litigation), any action by the SEC or any investigation by any other
          governmental agency related to us or the financial statement
          restatement process;

     -    additional delays in the filing of other reports with the SEC;

     -    our ability to successfully implement internal controls and procedures
          that ensure timely, effective and accurate financial reporting;

     -    higher than anticipated employee levels, capital expenditures and
          operating expenses, including our ability to reduce overhead and
          rationalize assets, both generally and with respect to changes being
          implemented to address the results of the investigation and the
          restatement;

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

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

     -    intense competition in the markets in which we compete.

Additionally, due to material uncertainties, it is not possible to predict the
length of time we will operate under Chapter 11 protection, the outcome of the
proceeding in general, whether we will continue to operate under our current
organizational structure, or the effect of the proceeding on our businesses and
the interests of various creditors and security holders.

Because the information in this Amendment 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 assumptions, changes in results or other events
subsequent to the date of this Amendment.

OVERVIEW

Management confronts major challenges in reorganizing the Company through the
Chapter 11 process. 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 the 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 are authorized to continue to operate as an ongoing
business but may not engage in transactions outside the ordinary course of
business without the approval of the Court, on notice and an opportunity to be
heard.

Since the Petition Date, actions to collect pre-petition indebtedness are stayed
and other contractual obligations against us may not be enforced. In addition,
under the Bankruptcy Code, we may assume or reject executory contracts,
including leases of non-residential real property. Parties affected by these
rejections may file claims with the Court in accordance with the Bankruptcy Code
and orders issued by the Court. In a Chapter 11 case, holders of pre-petition,
general, unsecured claims are entitled to receive at least as much as they would
receive if we were liquidated under Chapter 7 of the Bankruptcy Code. In a
Chapter 11 case, creditors and equity holders are generally


                                       31
<PAGE>
allowed to vote to approve a Chapter 11 plan. For the period from the Petition
Date to February 26, 2005, we incurred $28.0 million in costs associated with
the Chapter 11 cases. We expect to continue to incur significant additional
costs through the remaining Chapter 11 process.

We have not filed our Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 29, 2003, June 28, 2003 and September 27, 2003. In lieu of filing
such Quarterly Reports, this Amendment includes summarized quarterly financial
data and other material information that would have been disclosed in our 2003
Quarterly Reports on Form 10-Q. These reports were delayed as a result of our
internal investigation, the restatement of our consolidated financial statements
included in our previously filed fiscal 2002 Annual Report on Form 10-K and our
operation under protection of the bankruptcy laws. Similarly, we intend to
include in our fiscal 2004 Annual Report on Form 10-K, which we plan to file as
soon as practicable following the filing of this Amendment, summarized financial
data and other material information that would have been available in our 2004
Quarterly Reports on Form 10-Q. We also intend to file our Form 10-Q's for
fiscal 2005 as soon as practicable following the filing of our fiscal 2004
Annual Report on Form 10-K. Although an Internal Process and Controls Plan has
been implemented, there is no guarantee that it will result in timely and
accurate financial reporting in the future.

As part of our initial reorganization plans after filing for Chapter 11, we
closed 166 underperforming stores within the Athletic Segment, all 88 Just For
Feet stores, 75 Footaction stores and three Uprise stores.

After filing for bankruptcy protection, we received indications of significant
interest from potential acquirers of the remaining 353 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 March 26, 2004, we filed a motion seeking Court approval to conduct an
auction accepting all types of bids with respect to our Athletic Segment,
including, but not limited to, going concern bids, liquidation bids, lease
purchase bids, and any combination of the foregoing. On April 6, 2004, the Court
approved the Procedures Order.

On April 21, 2004, we received Court approval to accept an offer from Foot
Locker to purchase 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 sale price was placed in escrow with respect
to 14 store locations that were on month-to-month leases on the following basis:
if Foot Locker enters into a new lease for any of these store locations, the
escrow amount relating to that location will be paid to us. The escrow amount
relating to any location for which Foot Locker has not entered into a new lease
within one year after the closing is to be paid to Foot Locker, thereby reducing
the purchase price by that amount. As of February 26, 2005, we have been paid
approximately $9.1 million from the escrow account, Foot Locker has been paid
approximately $2.2 million and approximately $1.7 million remained in escrow.


                                       32
<PAGE>
The sale to Foot Locker together with the closure of the Just For Feet and
Footaction stores has been accounted for as discontinued operations in
accordance with FASB Statement No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets". Accordingly, our financial statements have been
restated to reflect the Athletic Segment as a discontinued operation for all
periods presented. The estimated gain on the sale of the Athletic Segment,
including the effect of the closing of the 166 underperforming stores, is
approximately $14.6 million, including the escrow payments through February 26,
2005. The $14.6 million will increase by any remaining escrowed cash that is
released to us.

Under the Procedures Order, we pursued the sale of certain other assets,
including our Mira Loma and Gaffney distribution centers. We sold Mira Loma to
Thrifty Oil Co. ("Thrifty") for approximately $28.0 million. Pursuant to the
terms of the pertinent sale documents, Thrifty has leased Mira Loma to FMI
International, LLC, a logistics provider, which has agreed to provide us with
warehousing and distribution services for the next eight years under a
receiving, warehousing and distribution services agreement. The sale of Mira
Loma closed on July 22, 2004 and resulted in a loss of approximately $24.8
million. On September 8, 2004, we sold Gaffney to Automated Distribution
Systems, L.P., a logistics provider, for approximately $20.2 million. The gain
on the sale of Gaffney was approximately $0.5 million.

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 the Meldisco headquarters building in Mahwah, New Jersey.

Meldisco has historically maintained inventory levels sufficient to support
sales growth potential in the event that Kmart store traffic grew and/or
favorable weather increased seasonal footwear sales. Following its emergence
from bankruptcy in May 2003, Kmart pursued a strategy, which included reducing
advertising in weekly sale circulars that had the effect of lessening traffic in
Kmart stores and, therefore, negatively impacting sales in Meldisco footwear
departments in Kmart stores. We did not anticipate this decline in advertising
and thus were not able to adjust our inventories commensurate with the reduced
customer traffic and sales levels because product purchase lead times are
generally six months. As a result of this inventory situation, we made a
determined effort to both improve the aged content and reduce overall inventory
levels in 2004. In order to effect an improvement in inventory quality and
quantity, we increased markdowns in an effort to move product. This resulted in
gross margins in 2004 being approximately 330 basis points lower than historical
levels. By the end of fiscal 2004, inventory balances were 38% below year-end
2003 and the aged content of the inventory improved from 15% of total inventory
in fiscal 2003 to 6% by fiscal 2004 year end. Our expectation and focus will be
to continue to operate with significantly lower levels of inventory,
particularly in the aged category. We believe this strategy will result in
higher gross margins and more attractive product offerings to the Shoemart
consumer. This focus on maintaining lower and fresher inventory levels is part
of our broader strategy to maximize free cash flow by reducing our working
capital requirements.

On November 12, 2004, we filed our Plan with the Court. The Plan provides for an
orderly reorganization of the Company and cash distributions to impaired parties
and is subject to a vote by


                                       33
<PAGE>
eligible ballot holders. Alternatively, the Plan allows for a sale of all or
substantially all of our assets and/or equity interests in the Meldisco
business, following notice and a hearing.

The Plan provides for some flexibility in the timing of its confirmation and our
emergence from bankruptcy. Key events that could impact this timing include
determinations by the Court on our motion to assume the Master Agreement prior
to Plan confirmation. The Plan also provides that we will not emerge from
bankruptcy until we are current in filing periodic reports with the SEC.

If and when the Plan is confirmed, we expect to make an initial distribution of
cash to creditors. The amount of this initial distribution will be based upon
our cash balance remaining after payment of, or establishing reasonable reserves
for, administrative claims, cure claims to the extent applicable, priority tax
claims, secured tax claims and convenience claims as well as establishing a
working capital cash reserve of $28.0 million. As set forth in the Plan, if the
initial distribution does not exceed the lesser of $121.0 million or 85% of the
then estimated general unsecured claims, we will apply up to $21.0 million of
our working capital cash reserve to increase the initial distribution to an
amount equal to the lesser of $121.0 million or 85% of the then estimated
general unsecured claims. Balances due creditors after the initial distribution,
if any, will be paid subject to our generation of free cash flow, as defined.
Such amounts will be distributed following the first and third quarters of each
fiscal year until such obligations have been satisfied.

The DIP and Exit Facility expires upon Plan confirmation and the ensuing Exit
Facility is effective upon our emergence from bankruptcy (See "Introductory
Note"). Because there could be a number of months between confirmation and
emergence, we plan to work with our current lenders to ensure the DIP and Exit
Facility is amended to provide continuous financial support to us during this
interim period.

Meldisco's sales decreased $191.3 million, or 18.8%, from $1,015.6 million in
fiscal 2003 to $824.3 million in fiscal 2004. Fiscal 2004 was a 52 week period
compared with a 53 week period in fiscal 2003. The additional week in fiscal
2003 represented approximately $12.2 million in increased sales compared with
2004. Shoemart sales declined by $137.9 million with approximately $57.7 million
due to stores closed during 2003 and 2004 as a result of Kmart's bankruptcy and
their store rationalization strategy. In addition, Shoemart experienced a 9.8%
comparable store sales decline in 2004 primarily due to Kmart's strategy of
increasing gross margins at the expense of customer traffic and sales. This
comparable store sales decline in 2004 resulted in an $80.2 million sales
decrease. During the twelve months ended January 26, 2005, Kmart stores
registered an overall 11.0% comparable store sales decline and the apparel
division registered a 13.5% comparable store sales decline. The balance of the
Meldisco sales decline in 2004 of $41.2 million was primarily due to our
decision to streamline our Meldisco businesses by selling or liquidating all of
our Shoe Zone stores ($11.6 million) and exit the footwear departments in
Federated ($8.8 million) and Gordmans ($7.5 million).

SIGNIFICANT KMART RELATIONSHIP

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 an even greater
percentage of our sales and profits now that we have exited all of our Athletic
Segment businesses and most of our other Meldisco businesses. The loss of
Meldisco's Kmart business, a significant further reduction in customer traffic
in Kmart stores or the


                                       34
<PAGE>
closing of a significant number of Kmart stores would have a material adverse
effect on us and would likely not allow us to continue to operate.

We operate licensed footwear departments in every Kmart store in the United
States, the U.S. Virgin Islands, Puerto Rico and Guam, through Shoemart
Subsidiaries that own the inventory and are responsible for staffing the
footwear departments. Kmart owns a 49% equity interest in each of the Shoemart
Subsidiaries, with the exception of 29 Shoemart Subsidiaries in which we have a
100% equity interest as of February 26, 2005. Meldisco has operated licensed
footwear departments in Kmart since 1961.

Our arrangement with Kmart is governed by the Master Agreement. The Master
Agreement provides us with the non-transferable, exclusive right and license to
operate a footwear department in every Kmart store. The initial term of the
Master Agreement expires on July 1, 2012, and is renewable for a 15 year term
upon mutual agreement, unless either party gives notice of termination at least
four years prior to the end of the applicable term. Certain sub-agreements for
particular Kmart stores allow the parties to terminate those agreements under
specified circumstances.

On August 12, 2004, we filed the Assumption Motion. Assuming that the Court
concludes that we have the right to assume the Master Agreement, we will be
required under Section 365 of the Bankruptcy Code to cure existing defaults
under the Master Agreement as a pre-condition to that assumption. Kmart asserts
that the cure amounts are no less than $57.8 million. Without taking into
account any claims we may have against Kmart in connection with Kmart's cure
claim, we estimate that, as of the Petition Date, we owed Kmart no more than
approximately $19.0 million.

Kmart objected to our motion to assume the Master Agreement and the
sub-agreements, arguing that assumption is barred as a matter of law under
Section 365(a) of the Bankruptcy Code and challenging the cure amount associated
with the assumption. Kmart has also sought to lift the Automatic Stay so that it
can terminate the Master Agreement. On February 16, 2005, the Court issued a
decision overruling Kmart's objection that assumption is barred as a matter of
law under Section 365(a). Kmart then filed a motion for reargument of the
decision on the motion to assume the Master Agreement, which was the subject of
a hearing held on March 31, 2005. At this hearing, the Court reaffirmed the
Assumption Decision. For a more complete discussion of this important litigation
and other hearings on the Assumption Motion, see "Adversary Proceedings
Involving Kmart" under Item 3 - Legal Proceedings.

Even if we are successful in assuming the Master Agreement and sub-agreements,
we have lost and will continue to lose revenues whenever Kmart closes stores or
transfers stores to entities that are not subject to the Master Agreement.
During the first six months of 2002, while operating under the protection of
Chapter 11 of the U.S. Bankruptcy Code, Kmart closed 283 stores. Kmart closed an
additional 319 stores during the first four months of 2003. Kmart emerged from
bankruptcy protection on May 6, 2003 and Kmart has continued and we believe will
continue, to consider sales of both performing and underperforming stores. Store
sales by Kmart will adversely effect us since virtually all of the footwear
departments in those stores are operated at a profit by us.

In June 2004, Kmart announced the sale of 54 of its retail store locations to
Sears but agreed that Kmart would continue to operate such stores until Sears
could complete its conversion plans. Thereafter, in November 2004, Kmart
announced the Sears Acquisition which closed on March 24, 2005.


                                       35
<PAGE>
Following the announcement of the Sears Acquisition, Kmart advised us of its
intent to convert certain of the 54 stores to a Sears retail format, and that
Kmart expected us to discontinue operating the footwear departments in those
stores. We received a notice from Kmart instructing us to either vacate
approximately 24 stores or have the footwear departments relocated within the
stores while their reconfiguration to a new Sears format took place. We believe
that the Master Agreement continues to grant us the exclusive right to operate
footwear departments in all stores which are directly or indirectly owned by
Kmart and which were at one time operated as Kmart stores, whether or not Kmart
operates certain of the stores under a different retail name, such as Sears
Essentials. Accordingly, we filed the Enforcement Motion requesting that the
Court adjudge and determine Kmart to be in contempt for violation of the
Automatic Stay and assess compensatory damages. Kmart replied to the Enforcement
Motion by arguing that the Automatic Stay did not prevent Kmart from converting
the stores to a different format because our rights under the Master Agreement
to sell footwear in the converting stores expire upon their conversion.

On February 24, 2005, the Court held a preliminary hearing with respect to the
Enforcement Motion and ruled that the Automatic Stay barred Kmart from taking
any actions to remove us from the stores absent a motion for relief from the
Automatic Stay. Accordingly, on March 4, 2005, Kmart filed the Kmart Stay
Motion. On April 6, 2005, the Court heard legal arguments concerning our claim
that we have the right to continue to operate in the converted stores and
reserved decision. Footstar and Kmart are discussing a schedule for discovery on
any factual issues relating to the Kmart Stay Motion that might remain
outstanding after the Court renders an opinion on the issues raised at the April
6, 2005 hearing. For a more complete discussion of this important litigation,
see "Adversary Proceedings Involving Kmart" under Item 3 - Legal Proceedings.

If Kmart sells stores to independent third parties (i.e., not Sears) we may lose
our right to operate footwear departments in such stores. If the Court clearly
rules in Kmart's favor in connection with the Sears/Kmart conversion litigation
after any appeals have been exhausted, Kmart is likely to continue to take the
position pre and post-bankruptcy that we are not entitled to sell footwear in
stores that are converted to Sears Essentials or any other name that does not
include the Kmart name.

RESTATEMENT

This Amendment reflects a restatement with respect to our discontinued Athletic
operations. As described in the "Explanatory Note" the primary effect relates to
our fiscal 2002 Consolidated Statement of Operations which reflects an increase
of $35.7 million in the provision for income taxes in continuing operations with
a corresponding decrease in loss from discontinued operations. This change is
primarily required to give effect to a change in the beginning-of-the-fiscal
year 2002 balance of the valuation allowance that resulted from a change in
circumstance that was caused by a change in judgment about the realizability of
the related deferred tax asset in future years. There is no change in net sales,
gross profit, operating profit or net income (loss). This had previously not
been correctly reflected within continuing operations. See the "Explanatory
Note" and Note 3 to the Consolidated Financial Statements for other restatement
details.

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 2003 VERSUS 2002

Meldisco represents substantially all of our operations. Corporate expenses, net
of royalties and commissions, were approximately $13.6 million in 2003 and $10.0
million in 2002.

2003 VERSUS 2002 - CORPORATE

Royalties and commissions, which were approximately $19.5 million in 2003 and
$17.9 million in 2002, consisted of the following:


                                       36
<PAGE>
     -    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, which were approximately $33.1 million in 2003 and $27.9
million in 2002, 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.

     -    In fiscal 2002, we recorded a $2.8 million write-down of trademarks
          acquired from J. Baker.

MELDISCO FINANCIAL PERFORMANCE - 2003 VERSUS 2002

<TABLE>
<CAPTION>
                                                   1st Quarter      2nd Quarter      3rd Quarter         FULL YEAR
                                                 --------------   --------------   --------------   -------------------
(in millions)                                     2003     2002    2003     2002    2003     2002     2003       2002
-------------                                    ------   -----   ------   -----   ------   -----   --------   --------
<S>                                              <C>      <C>     <C>      <C>     <C>      <C>     <C>        <C>
Net Sales                                        $240.9   315.6   $262.4   367.6   $239.6   321.6   $1,015.6   $1,346.0
                                                 ------   -----   ------   -----   ------   -----   --------   --------
Gross Profit                                       63.7    81.1     84.5   119.8     65.9    92.7      304.4      410.7
SG&A Expenses                                      63.2    78.0     58.6    71.6     60.6    69.0      236.2      294.2
Bad Debt Expense - Ames                              --      --       --     9.2       --      --         --        9.2
Depreciation/Amortization                           3.8     3.9      4.2     4.0      4.1     3.8       16.1       15.4
Restructuring, Asset Impairment & Other Charge      2.5     1.7       --     7.0       --     4.9        2.3       13.6
                                                 ------   -----   ------   -----   ------   -----   --------   --------
Operating (Loss) Profit                          $ (5.8)   (2.5)  $ 21.7    28.0   $  1.2    15.0   $   49.8   $   78.3
                                                 ======   =====   ======   =====   ======   =====   ========   ========
</TABLE>

Meldisco operates through our Shoemart subsidiaries primarily in the discount
footwear market through its operation of 1,511 Kmart licensed footwear
departments as of January 3, 2004, 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 89%, 86% and 84% of Meldisco's
sales in 2003, 2002 and 2001, respectively.

MELDISCO - FULL YEAR RESULTS

NET SALES

Net sales decreased $330.4 million, or 24.5%, in 2003, to $1,015.6 million
compared with $1,346.0 million in 2002. The 2003 sales results include a
fifty-three week period compared with a fifty-two week period in 2002. This
sales decrease was primarily due to Kmart store closures ($193 million), a 7.8%
comparable store sales decline in Shoemart during 2003 predominantly due to
weaker seasonal product sales and reduced Kmart advertising in the second half
of 2003 ($60 million), the closing of all Ames stores ($81 million) and the
decision to exit other unprofitable landlords acquired as part of the J. Baker
acquisition ($53 million). This sales decrease was partially offset by increased
store counts at Wal-Mart for Thom McAn product ($35 million), the first full
year of operations in both the Federated and Gordmans licensed footwear
businesses ($17 million) and an expansion of Shoe Zone stores ($11 million).


                                       37
<PAGE>
GROSS PROFIT

Gross profit decreased $106.3 million, or 25.9%, to $304.4 million in 2003
compared with $410.7 million in 2002. This decrease is primarily due to the
aforementioned 24.5% decrease in sales. Overall gross margin rates deteriorated
to 30.0% in 2003 from 30.5% in 2002. This reduction in gross margin rates was
primarily due to additional markdowns in Shoemart that were taken in connection
with our efforts to liquidate inventory in the Kmart stores that were closed
during 2003.

SG&A EXPENSES

Store operating, selling, general and administrative expenses ("SG&A expenses")
decreased $58.0 million, or 19.7%, to $236.2 million in 2003 compared with
$294.2 million in 2002. SG&A expenses in Shoemart decreased by $36 million, or
15%, compared with the balance of Meldisco which declined by $22 million, or
45%. The overall SG&A rate as a percentage of sales increased to 23.3% in 2003
compared with 21.9% in 2002, as Shoemart was unable to reduce store selling and
fixture rental costs commensurate with the overall sales decline due to a
certain portion of these costs being fixed in nature.

RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

In 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 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.

During 2002, we approved several plans in which we recorded net restructuring,
asset impairment and other charges of $43.9 million principally in connection
with our exiting various license arrangements acquired in the J. Baker
acquisition and the closing of certain Kmart stores. The inventory portion,
which amounted to $29.1 million, is included as a component of cost of sales.
The inventory write-downs did not materially impact the decrease in gross margin
rates in 2003 versus 2002.

The other charges, which amounted to $13.6 million, related to asset impairments
of $7.9 million, severance costs of $4.2 million and lease exit costs of $1.5
million.

OPERATING PROFIT

Operating profit decreased $28.5 million, or 36.4%, to $49.8 million in 2003
compared with $78.3 million in 2002. Operating profit margin rates decreased to
4.9% in 2003 from 5.8% in 2002 primarily due to the reasons noted above.


                                       38
<PAGE>
MELDISCO - FIRST QUARTER RESULTS

<TABLE>
<CAPTION>
                                                  2003     2002    % SALES - 2003   % SALES - 2002
                                                 ------   ------   --------------   --------------
<S>                                              <C>      <C>      <C>              <C>
Net Sales                                        $240.9   $315.6
                                                 ------   ------
Gross Profit                                       63.7     81.1        26.4%            25.7%
SG&A Expenses                                      63.2     78.0        26.2%            24.7%
Depreciation/Amortization                           3.8      3.9         1.6%             1.2%
Restructuring, Asset Impairment & Other Charge      2.5      1.7         1.0%              .5%
                                                 ------   ------
Operating Loss                                   $ (5.8)  $ (2.5)       (2.4%)            (.8%)
                                                 ------   ------
</TABLE>

NET SALES

Net sales decreased $74.7 million, or 23.7%, to $240.9 million in 2003 compared
with $315.6 million in 2002. This sales decrease was primarily due to Kmart
store closures ($29 million), an 11.1% comparable store sales decline in
Shoemart during 2003 predominantly due to weaker winter seasonal product sales
($23 million), the closing of all Ames stores ($22 million) and the decision to
exit other unprofitable landlords acquired as part of the J. Baker acquisition
($12 million). This sales decrease was partially offset by increased store
counts at Wal-Mart for Thom McAn product ($5 million), the first full year of
operations in 2003 for both the Federated and Gordmans licensed footwear
businesses ($5 million) and an expansion of Shoe Zone stores ($3 million).

GROSS PROFIT

Gross profit decreased $17.4 million, or 21.5%, to $63.7 million in 2003
compared with $81.1 million in 2002. This decrease is primarily due to the
aforementioned 23.7% decrease in sales. Overall gross margin rates improved to
26.4% in 2003 from 25.7% in 2002. This increase in gross margin rates was
primarily due to lower excess rent payments in Shoemart in connection with lower
profitability in these stores.

SG&A EXPENSES

SG&A expenses decreased $14.8 million, or 19.0%, to $63.2 million in 2003
compared with $78.0 million in 2002. SG&A expenses in Shoemart decreased by $8.1
million, or 12.7% compared with the balance of Meldisco which declined by $6.7
million, or 48.0%. The overall SG&A rate as a percentage of sales increased to
26.2% in 2003 compared with 24.7% in 2002, as Shoemart was unable to reduce
store selling and fixture rental costs commensurate with the overall sales
decline due to a certain portion of these costs being fixed in nature.

RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

During 2003, we recorded inventory write-downs of $15.7 million, which are
recorded in cost of sales and employee severance and asset impairments of $2.5
million in connection with the closing of 318 Kmart stores and a $0.8 million
reserve reversal related to a prior period. In 2002, we recorded inventory
write-downs of $13.1 million (restated) and employee severance and asset
impairments of $1.7 million in connection with the closing of 283 Kmart stores.
The inventory write-downs did not materially impact the decrease in gross margin
rates in 2003 versus 2002.


                                       39
<PAGE>
OPERATING LOSS

Operating loss increased $3.3 million to $(5.8) million in 2003 compared with
$(2.5) million in 2002 primarily due to the reasons noted above.

MELDISCO - SECOND QUARTER RESULTS

<TABLE>
<CAPTION>
                                                  2003     2002    % SALES - 2003   % SALES - 2002
                                                 ------   ------   --------------   --------------
<S>                                              <C>      <C>      <C>              <C>
Net Sales                                        $262.4   $367.6
                                                 ------   ------
Gross Profit                                       84.5    119.8        32.2%            32.6%
SG&A Expenses                                      58.6     71.6        22.3%            19.5%
Bad Debt Expense - Ames                              --      9.2         N/A              2.5%
Depreciation/Amortization                           4.2      4.0         1.6%             1.1%
Restructuring, Asset Impairment & Other Charge       --      7.0         N/A              1.9%
                                                 ------   ------
Operating Profit                                 $ 21.7   $ 28.0         8.3%             7.6%
                                                 ------   ------
</TABLE>

NET SALES

Net sales decreased $105.2 million, or 28.6%, in 2003, to $262.4 million
compared with $367.6 million in 2002. This sales decrease was primarily due to
Kmart store closures ($68 million), a 5.4% comparable store sales decline in
Shoemart during 2003 predominantly due to reduced Kmart traffic levels ($11
million), the closing of all Ames stores ($28 million) and the decision to exit
other unprofitable landlords acquired as part of the J. Baker acquisition ($16
million). This sales decrease was partially offset by increased store counts at
Wal-Mart for Thom McAn product ($10 million), the first full year of operations
in 2003 for both the Federated and Gordmans licensed footwear businesses ($7
million) and an expansion of Shoe Zone stores ($2 million).

GROSS PROFIT

Gross profit decreased $35.3 million, or 29.5%, to $84.5 million in 2003
compared with $119.8 million in 2002. This decrease is primarily due to the
aforementioned 28.6% decrease in sales. Overall gross margin rates decreased to
32.2% in 2003 from 32.6% in 2002. This reduction in gross margin rates was
primarily due to additional markdowns in Shoemart that were taken in connection
with our efforts to liquidate additional inventory in the Kmart stores due to
the aforementioned comparable store sales decline.

SG&A EXPENSES

SG&A expenses decreased $13.0 million, or 18.2%, to $58.6 million in 2003
compared with $71.6 million in 2002. SG&A expenses in Shoemart decreased by $7
million, or 11.8%, compared with the balance of Meldisco which declined by $6
million, or 50.3%. The overall SG&A rate as of percentage of sales increased to
22.3% in 2003 compared with 19.5% in 2002, as Shoemart was unable to reduce
store selling and fixture rental costs commensurate with the overall sales
decline due to a certain portion of these costs being fixed in nature.


                                       40
<PAGE>
BAD DEBT EXPENSE - AMES

As a result of the Ames bankruptcy, we recorded a charge of $9.2 million in 2002
as an allowance for bad debt expense in connection with our receivable from
Ames.

RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

During 2002, we recorded inventory write-downs of $7.6 million, which are
included in cost of sales and asset impairment charges, lease exit costs and
severance costs of $7.0 million associated with our termination of two
unprofitable licensed footwear departments. There were no restructuring charges
recorded in 2003.

OPERATING PROFIT

Operating profit decreased $6.3 million, or 22.5%, to $21.7 million in 2003
compared with $28.0 million in 2002 primarily due to the reasons noted above.

MELDISCO - THIRD QUARTER RESULTS

<TABLE>
<CAPTION>
                                                  2003     2002    % SALES - 2003   % SALES - 2002
                                                 ------   ------   --------------   --------------
<S>                                              <C>      <C>      <C>              <C>
Net Sales                                        $239.6   $321.6
                                                 ------   ------
Gross Profit                                       65.9     92.7        27.5%            28.8%
SG&A Expenses                                      60.6     69.0        25.3%            21.5%
Depreciation/Amortization                           4.1      3.8         1.7%             1.2%
Restructuring, Asset Impairment & Other Charge       --      4.9         N/A              1.5%
                                                 ------   ------
Operating Profit                                 $  1.2   $ 15.0         0.5%             4.7%
                                                 ------   ------
</TABLE>

NET SALES

Net sales decreased $82.0 million, or 25.5%, in 2003, to $239.6 million compared
with $321.6 million in 2002. This sales decrease was primarily due to Kmart
store closures ($44 million), an 8.6% comparable store sales decline in Shoemart
during 2003 predominantly due to reduced Kmart traffic levels ($10 million), the
closing of all Ames stores ($33 million) and the decision to exit other
unprofitable landlords acquired as part of the J. Baker acquisition ($10
million). This sales decrease was partially offset by increased store counts at
Wal-Mart for Thom McAn product ($10 million), the first full year of operations
in 2003 for both the Federated and Gordmans licensed footwear businesses ($4
million) and an expansion of Shoe Zone stores ($3 million).

GROSS PROFIT

Gross profit decreased $26.8 million, or 28.9%, to $65.9 million in 2003
compared with $92.7 million in 2002. This decrease is primarily due to the
aforementioned 25.5% decrease in sales. Overall gross margin rates deteriorated
to 27.5% in 2003 from 28.8% in 2002. This reduction in gross margin rates was
primarily due to additional markdowns in Shoemart that were taken in connection
with our efforts to liquidate inventory in the Kmart stores due to the
aforementioned comparable store sales decline.


                                       41
<PAGE>
SG&A EXPENSES

SG&A expenses decreased $8.4 million, or 12.2%, to $60.6 million in 2003
compared with $69.0 million in 2002. SG&A expenses in Shoemart decreased by $7.9
million, or 13.5%. The overall SG&A rate as a percentage of sales increased to
25.3% in 2003 compared with 21.5% in 2002, as Shoemart was unable to reduce
store selling and fixture rental costs commensurate with the overall sales
decline due to a certain portion of these costs being fixed in nature.

RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

In 2002, we recorded inventory write-downs of $8.4 million in cost of sales and
asset impairment charges and employee severance costs of $4.9 million in
connection with Ames store closings. There were no restructuring charges
recorded in 2003.

OPERATING PROFIT

Operating profit decreased $13.8 million to $1.2 million in 2003 compared with
$15.0 million in 2002 primarily due to the reasons noted above.

FISCAL 2002 VERSUS 2001

Meldisco represents substantially all of our operations. Corporate expenses, net
of royalties and commissions, were approximately $10.0 million in fiscal 2002
and $8.8 million in fiscal 2001.

2002 VERSUS 2001 - CORPORATE

Royalties and commissions, which were approximately $17.9 million in fiscal 2002
and $16.2 million in fiscal 2001, 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, which were approximately $27.9 million in fiscal 2002 and
$25.0 million in fiscal 2001, 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.

     -    In fiscal 2002, we recorded a $2.8 million write-down of trademarks
          acquired from J. Baker.


                                       42
<PAGE>
MELDISCO FINANCIAL PERFORMANCE - 2002 VERSUS 2001

<TABLE>
<CAPTION>
                                    1st Quarter      2nd Quarter        3rd Quarter            FULL YEAR
                                  --------------   --------------   -------------------   -------------------
(dollars in millions)              2002     2001    2002     2001    2002       2001        2002       2001
---------------------             ------   -----   ------   -----   ------   ----------   --------   --------
                                                                             (restated)
<S>                               <C>      <C>     <C>      <C>     <C>      <C>          <C>        <C>
Net Sales                         $315.6   276.6   $367.6   410.1   $321.6      357.4     $1,346.0   $1,444.2
                                  ------   -----   ------   -----   ------      -----     --------   --------
Gross Profit                        81.1    77.9    119.8   139.4     92.7       99.0        410.7      441.2
SG&A Expenses                       78.0    68.9     71.6    77.4     69.0       74.0        294.2      299.7
Bad Debt Expense - Ames               --      --      9.2      --       --         --          9.2         --
Depreciation/Amortization            3.9     3.9      4.0     4.6      3.8        4.3         15.4       17.7
Restructuring, Asset Impairment
   and Other Charge                  1.7      --      7.0      --      4.9        2.0         13.6        3.3
                                  ------   -----   ------   -----   ------      -----     --------   --------
Operating Profit (Loss)           $ (2.5)    5.1   $ 28.0    57.4   $ 15.0       18.7     $   78.3   $  120.5
                                  ======   =====   ======   =====   ======      =====     ========   ========
</TABLE>

MELDISCO - FULL YEAR RESULTS

NET SALES

Net sales decreased $98.2 million, or 6.8%, in 2002, to $1,346.0 million
compared with $1,444.2 million in 2001. This sales decrease was primarily due to
Kmart store closures ($64 million), the closing of certain Ames stores ($54
million) and the decision to exit other unprofitable landlords acquired as part
of the J. Baker acquisition ($21 million). This sales decrease was partially
offset by increased store counts at Wal-Mart for Thom McAn product ($6 million),
the commencement of operations in both the Federated and Gordmans licensed
footwear businesses ($12 million), an expansion of Shoe Zone stores ($12
million) and a 1.3% comparable store sales increase in Shoemart ($15 million)
(restated).

GROSS PROFIT

Gross profit decreased $30.5 million, or 6.9%, to $410.7 million in 2002
compared with $441.2 million in 2001. This decrease is primarily due to the
aforementioned 6.8% decrease in sales. Overall gross margin rates were 30.5% in
2002 compared with 30.6% in 2001.

SG&A EXPENSES

SG&A expenses decreased $5.5 million, or 1.8%, to $294.2 million in 2002
compared with $299.7 million in 2001. SG&A expenses in Shoemart decreased by
$3.2 million, or 1.3%, compared with the balance of Meldisco which declined by
$2.3 million, or 4.7%. The overall SG&A rate as a percentage of sales increased
to 21.9% in 2002 compared with 20.8% in 2001, as Shoemart was unable to reduce
store selling and fixture rental costs commensurate with the overall sales
decline due to a certain portion of these costs being fixed in nature.

BAD DEBT EXPENSE - AMES

As a result of the Ames bankruptcy, we recorded a charge of $9.2 million in 2002
as an allowance for bad debt expense in connection with our receivable from
Ames.


                                       43
<PAGE>
RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

During 2002, we approved several plans in which we recorded net restructuring,
asset impairment and other charges of $43.9 million principally in connection
with our exiting various license arrangements acquired in the J. Baker
acquisition and the closing of certain Kmart stores. The inventory portion
amounted to $29.1 million and is included as a component of cost of sales. The
other charges, which amounted to $13.6 million, related to asset impairments of
$7.9 million, severance costs of $4.2 million and lease exit costs of $1.5
million.

In 2001, we approved a restructuring plan totaling $9.0 million, which consisted
of $5.8 million for the write-down of inventory which is included in cost of
sales and $3.3 million of other charges, consisting of $1.8 million for asset
impairments $0.9 million for store exit costs and $0.6 million for severance
costs. The inventory write-downs did not have a material impact on gross margin
performance in 2002 versus 2001.

OPERATING PROFIT

Operating profit decreased $42.2 million, or 35.0%, to $78.3 million in 2002
compared with $120.5 million in 2001 primarily due to the reasons noted above.

MELDISCO - FIRST QUARTER RESULTS

<TABLE>
<CAPTION>
                                                    % SALES -   % SALES -
                                   2002     2001       2002        2001
                                  ------   ------   ---------   ---------
<S>                               <C>      <C>      <C>         <C>
Net Sales                         $315.6   $276.6
                                  ------   ------
Gross Profit                        81.1     77.9     25.7%       28.2%
SG&A Expenses                       78.0     68.9     24.7%       24.9%
Depreciation/Amortization            3.9      3.9      1.2%        1.4%
Restructuring, Asset Impairment
   and Other Charge                  1.7       --       .5%        N/A
                                  ------   ------
Operating Profit (Loss)           $ (2.5)  $  5.1      (.8)%       1.8%
                                  ------   ------
</TABLE>

NET SALES

Net sales increased $39.0 million, or 14.1%, in 2002 to $315.6 million compared
with $276.6 million in 2001. This sales increase was primarily due to a 12.6%
comparable store sales increase in Shoemart during 2002 predominantly due to
robust seasonal product sales and a shift in the Easter holiday to March in 2002
from April in 2001 ($31 million) and the full period results of J. Baker, which
was acquired in February 2001 ($5 million).

GROSS PROFIT

Gross profit increased $3.2 million, or 4.1%, to $81.1 million in 2002 compared
with $77.9 million in 2001. This increase is primarily due to the aforementioned
14.1% increase in sales. Overall gross margin rates decreased to 25.7% in 2002
from 28.2% in 2001. This reduction in gross margin rates was primarily due to
additional markdowns in Shoemart that were taken in connection with going out of
business sales associated with the closing of 283 Kmart stores ($13 million).
The impact of these markdowns was partially offset by the aforementioned sales
increase.


                                       44
<PAGE>
SG&A EXPENSES

SG&A expenses increased $9.1 million, or 13.2%, to $78.0 million in 2002
compared with $68.9 million in 2001. SG&A expenses in Shoemart increased by $4.7
million, or 7.8%, compared with the balance of Meldisco which increased by $4.4
million, or 46.9% due to full period results of J. Baker. The overall SG&A rate
as of percentage of sales was essentially unchanged at 24.7% in 2002 compared
with 24.9% in 2001.

RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

During 2002, we recorded inventory write-downs of $14.3 million in cost of sales
and employee severance and asset impairments of $1.7 million in connection with
the closing of 283 Kmart stores. There were no restructuring charges recorded in
2001.

OPERATING PROFIT (LOSS)

We recorded an operating (loss) of $2.5 million in 2002 compared with an
operating profit of $5.1 million 2001 primarily due to the reasons noted above.

MELDISCO - SECOND QUARTER RESULTS

<TABLE>
<CAPTION>
                                                    % SALES -   % SALES -
                                   2002     2001       2002        2001
                                  ------   ------   ---------   ---------
<S>                               <C>      <C>      <C>         <C>
Net Sales                         $367.6   $410.1
                                  ------   ------
Gross Profit                       119.8    139.4     32.6%       34.0%
SG&A Expenses                       71.6     77.4     19.5%       18.9%
Bad Debt Expense - Ames              9.2       --      2.5%        N/A
Depreciation/Amortization            4.0      4.6      1.1%        1.1%
Restructuring, Asset Impairment
   and Other Charge                  7.0       --      1.9%        N/A
                                  ------   ------
Operating Profit                  $ 28.0   $ 57.4      7.6%       14.0%
                                  ------   ------
</TABLE>

NET SALES

Net sales decreased $42.5 million, or 10.4%, in 2002 to $367.6 million compared
with $410.1 million in 2001. This sales decrease was primarily due to Kmart
store closures ($12 million), a 4.9% comparable store sales decline in Shoemart
during 2002 predominantly due to the aforementioned Easter shift from April to
March and weaker seasonal product sales ($14 million). The Ames store closures
and other store closures associated with the J. Baker acquisition ($20 million)
also contributed to the sales decrease.

GROSS PROFIT

Gross profit decreased $19.6 million, or 14.1%, to $119.8 million in 2002
compared with $139.4 million in 2001. This decrease is primarily due to the
aforementioned 10.4% decrease in sales. Overall gross margin rates decreased to
32.6% in 2002 from 34.0% in 2001. This reduction in gross margin rates was
primarily due to additional markdowns in Shoemart that were taken in connection
with our efforts to liquidate inventory in the Kmart stores that were closed
during 2002.


                                       45
<PAGE>
SG&A EXPENSES

SG&A expenses decreased $5.8 million, or 7.5%, to $71.6 million in 2002 compared
with $77.4 million in 2001. SG&A expenses in Shoemart decreased by $2.9 million,
or 4.6%, compared with the balance of Meldisco which declined by $2.9 million,
or 20.9%. The overall SG&A rate as of percentage of sales increased to 19.5%
(restated) in 2002 compared with 18.9% in 2001, as Shoemart was unable to reduce
store selling and fixture rental costs commensurate with the overall sales
decline due to a certain portion of these costs being fixed in nature.

BAD DEBT EXPENSE - AMES

As a result of the Ames bankruptcy, Meldisco recorded a charge of $9.2 million
as an allowance for bad debt expense in connection with our receivable from
Ames.

RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

In 2002, we recorded inventory write-downs of $7.6 million which is included in
cost of sales and asset impairment charges, lease exit costs and employee
severance costs of $7.0 million associated with our termination of two
unprofitable licensed footwear departments. There were no restructuring charges
recorded in 2001. The inventory write-downs did not have a material impact on
gross margin performance in 2002 versus 2001.

OPERATING PROFIT

Operating profit decreased $29.4 million, or 51.2%, to $28.0 million in 2002
compared with $57.4 million in 2001 primarily due to the reasons noted above.

MELDISCO - THIRD QUARTER RESULTS

<TABLE>
<CAPTION>
                                                                         % SALES   % SALES
                                                    2001       2002       - 2002    - 2001
                                                   ------   ----------   -------   -------
                                                            (restated)
<S>                                                <C>      <C>          <C>       <C>
Net Sales                                          $321.6     $357.4
                                                   ------     ------
Gross Profit                                         92.7       99.0      28.8%     27.7%
SG&A Expenses                                        69.0       74.0      21.5%     20.7%
Depreciation/Amortization                             3.8        4.3       1.2%      1.2%
Restructuring, Asset Impairment and Other Charge      4.9        2.0       1.5%      0.6%
                                                   ------     ------
Operating Profit                                   $ 15.0     $ 18.7       4.7%      5.2%
                                                   ------     ------
</TABLE>

NET SALES

Net sales decreased $35.8 million, or 10.0%, in 2002 to $321.6 million compared
with $357.4 million in 2001. This sales decrease was primarily due to Kmart
closures ($29 million), a 2.5% comparable store sales decline in Shoemart during
2002 predominantly due to weaker seasonal product sales ($6 million), the
closing of certain Ames stores ($7 million) and the decision to exit other
unprofitable landlords acquired as part of the J. Baker acquisition ($7
million). This sales decrease was partially offset by the July 2002 launch of
operations in both the Federated and Gordmans licensed footwear businesses ($5
million) as well as an expansion of Shoe Zone stores ($3 million) and initial
product shipments to Wal-Mart ($4 million).


                                       46
<PAGE>
GROSS PROFIT

Gross profit decreased $6.3 million (restated), or 6.4%, (restated) to $92.7
million in 2002 compared with $99.0 million (restated) in 2001. This decrease is
primarily due to the aforementioned 10.0% decrease in sales.

SG&A EXPENSES

SG&A expenses decreased $5.0 million, or 6.8%, to $69.0 million in 2002 compared
with $74.0 million in 2001. SG&A expenses in Shoemart decreased by $2.6 million,
or 4.3%, compared with the balance of Meldisco which declined by $2.4 million,
or 17.9%. The overall SG&A rate as of percentage of sales increased to 21.5% in
2002 compared with 20.7% in 2001, as Shoemart was unable to reduce store selling
and fixture rental costs commensurate with the overall sales decline due to a
certain portion of these costs being fixed in nature.

RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGE

In 2002, we recorded inventory write-downs of $8.4 million which are included in
cost of sales and asset impairment charges and employee severance costs of $4.9
million (restated) in connection with Ames' store closings. In 2001, we recorded
a $2.0 million restructuring charge related to the termination of certain
landlord relationships and store exit costs. The inventory write-downs did not
have a material impact on gross margin performance in 2002 versus 2001.

OPERATING PROFIT

Operating profit decreased $3.7 million, or 19.8%, to $15.0 million in 2002
compared with $18.7 million in 2001 primarily due to the reasons noted above.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity used in funding short-term operations are our
operating cash flows and our DIP and Exit Facility. The DIP and Exit Facility is
structured to support general corporate borrowing requirements while operating
under Chapter 11 and upon emergence. We were also able to successfully negotiate
and obtain improved payment terms with our vendors and factories overseas
applicable to orders for merchandise placed on or after December 1, 2004.

Our Plan provides for the assumption of the Master Agreement (including a
determination of Kmart's cure claim) prior to Plan confirmation. If and when the
Plan is confirmed, we expect to make an initial distribution of cash to
creditors. The amount of this initial distribution will be based upon our cash
balance remaining after payment of, or establishing reasonable reserves for,
administrative claims, cure claims to the extent applicable, priority tax
claims, secured tax claims and convenience claims as well as establishing a
working capital cash reserve of $28.0 million. As set forth in the Plan, if the
initial distribution does not exceed the lesser of $121.0 million or 85% of the
then estimated general unsecured claims, we will apply up to $21.0 million of
our working capital cash reserve to increase the initial distribution to an
amount equal to the lesser of $121.0 million or 85% of the then estimated
general unsecured claims. Balances due creditors after the initial distribution,
if any, will be paid subject to our generation of free cash flow, as defined.
Such


                                       47
<PAGE>
amounts will be distributed following the first and third quarters of each
fiscal year until such obligations have been satisfied.

We believe that our cash on hand, cash flows from operations and the DIP and
Exit Facility will provide sufficient financing to meet our currently
foreseeable liquidity and capital requirements, including, but not limited to,
payments to creditors as set forth in the Plan.

As of February 26, 2005, we had no loans outstanding and $20.2 million of
outstanding letters of credit under the DIP and Exit Facility. Letters of credit
reduce the borrowing capacity of the DIP and Exit Facility.

Prior to filing the Chapter 11 cases, we were in negotiations with our lending
syndicate with respect to obtaining necessary liquidity. In addition, we had
initiated discussions with alternative financing sources. We had also explored
the possibility of a sale of certain of our assets to obtain liquidity. As none
of these alternatives were successful, we filed voluntary petitions for relief
under Chapter 11 in order to obtain necessary liquidity and restructure our
debt. See "Overview"

The DIP and Exit Facility

Effective March 4, 2004, we entered into a senior secured $300.0 million DIP
Credit Agreement. The DIP Credit Agreement provided for revolving loans of up to
$240.0 million (including a sub-limit of $75.0 million for letters of credit)
and a term loan of $60.0 million. The DIP Credit Agreement had a term of two
years.

The DIP Credit Agreement was subsequently amended to, among other things, reduce
the amount of DIP financing available to reflect the operating needs of our
smaller business base resulting from our sales and other restructuring
activities. On July 22, 2004, the DIP Credit Agreement was further amended and
became the DIP and Exit Facility. Under the DIP and Exit Facility we have access
to up to $100.0 million of secured DIP financing, including a sub-limit for
letters of credit. Availability under the DIP and Exit Facility is determined by
a borrowing base formula based upon inventory and accounts receivable. Upon
emergence from Chapter 11, we may, at our option and upon satisfaction of
certain conditions, convert the DIP and Exit Facility to the Exit Facility,
which will provide for up to $160.0 million in revolving commitments, including
a sub-limit for letters of credit. The conditions include the absence of any
default or event of default, confirmation of the Plan and satisfaction of all
conditions related thereto, resolution of all issues related to our assumption
of the Master Agreement and our delivery of forward looking projections
acceptable to the lender and specified availability levels. Borrowings under the
DIP and Exit Facility will bear interest at Fleet's prime rate plus 0.0% to 0.5%
or LIBOR plus 1.75% to 2.50%, at our option with the applicable margin based on
excess availability levels. A quarterly fee of 0.3% per annum is payable on the
unutilized balance.

The DIP and Exit Facility has a total term not to exceed five years from the
Petition Date and expires upon Plan confirmation. The Exit Facility is effective
upon our emergence from bankruptcy and its term will be three years. Because
there could be a number of months between confirmation and emergence, we plan to
work with our current lenders to ensure the DIP and Exit Facility is amended to
provide continued financial support to us during the period from Plan
confirmation to emergence.


                                       48
<PAGE>
The Pre-Petition Credit Facility

Prior to our filing under Chapter 11, our principal sources of liquidity used in
funding our short-term operations were our operating cash flows and our senior
secured credit facility ("Credit Facility") with a syndicate of lenders led by
Fleet. The Credit Facility has since been replaced by the DIP and Exit Facility.
As of January 3, 2004, there was $213.4 million outstanding under the Credit
Facility, including letters of credit.

Based on the borrowing base availability calculation contained in the Credit
Facility, as of January 3, 2004, we had approximately $60.5 million of excess
availability remaining after the application of $30.0 million in required
minimum excess availability. On that date, the interest rate on the term loan
was 15.0%, the weighted average interest rate on the outstanding revolving loans
was 3.6% and the weighted average interest rate of all outstanding borrowings
was 8.7%.

Operating Cash Flows from Continuing Operations

Net cash provided by operating activities totaled $19.6 million in fiscal year
2003. During fiscal year 2003, net cash requirements for operations, capital
additions and dividends to Kmart were funded from cash flows from operations and
the Credit Facility.

In March 2004, 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 the Kmart bankruptcy. Other factors included intense competition in
the discount retailing industry, unsuccessful sales and marketing initiatives
and capital market volatility.

All proceeds due to Meldisco from the sale of products in the licensed footwear
departments at Kmart stores through February 26, 2005 have been paid to Meldisco
in a timely manner.

2003 First Quarter

Our principal sources of liquidity used in funding our short-term operations
were our operating cash flows and borrowing capacity under the Credit Facility.
Effective March 21, 2003, we amended the Credit Facility to, among other things,
waive certain financial covenant compliance for prior periods.

As of March 29, 2003, we had $70.0 million outstanding under the term loan
portion of the Credit Facility and $132.6 million outstanding under the
revolving commitments, including outstanding letters of credit. Based upon the
borrowing base availability calculation contained in the Credit Facility, as of
March 29, 2003, we had approximately $67.1 million of excess availability
remaining after application of excess availability and reserve requirements. On
that date, the interest rate on the term loan was 14.25%, the weighted average
interest rate on the outstanding revolving loans was 3.7% and the weighted
average interest rate of all outstanding borrowings was 7.4%.


                                       49
<PAGE>
2003 Second Quarter

Our principal sources of liquidity used in funding our short-term operations
were our operating cash flows and borrowing capacity under the Credit Facility.
As of June 28, 2003, we had $70.0 million outstanding under the term loan
portion of the Credit Facility and $180.0 million outstanding under the
revolving commitments, including outstanding letters of credit. Based upon the
borrowing base availability calculation contained in the Credit Facility, as of
June 28, 2003, we had approximately $36.6 million of excess availability
remaining after application of $20.0 million in required excess availability. On
that date, the interest rate on the term loan was 14.25%, the weighted average
interest rate on the outstanding revolving loans was 3.6% and the weighted
average interest rate of all outstanding borrowings was 6.5%.

2003 Third Quarter

Our principal sources of liquidity used in funding our short-term operations
were our operating cash flows and borrowing capacity under the Credit Facility.
Effective September 24, 2003, we further amended the Credit Facility to among
other things, increase the term loan portion of the Credit Facility from $70.0
million to $90.0 million and the overall principal amount of the Credit Facility
from $325.0 million to $345.0 million. As of September 27, 2003, we had $179.6
million outstanding under the term loan portion of the Credit Facility and
$174.1 million outstanding under the revolving commitments, including
outstanding letters of credit. Based upon the borrowing base availability
calculation contained in the Credit Facility, as of September 27, 2003, we had
approximately $26.8 million of excess availability remaining after application
of $20.0 million in required excess availability. On that date, the interest
rate on the term loan was 15.0%, the weighted average interest rate on the
outstanding revolving loans was 3.5% and the weighted average interest rate of
all outstanding borrowings was 7.6%.

2002 First Quarter

Our principal sources of liquidity used in funding our short-term operations
were our operating cash flows and revolver borrowings. We had a $325.0 million
three year revolving senior unsecured credit facility with a syndicate of banks,
which was effective May 25, 2000 (collectively, with all amendments the "2000
Credit Facility"). The 2000 Credit Facility contained various operating
covenants, which, among other things, imposed certain limitations on our ability
to incur liens or indebtedness, merge, consolidate, make capital expenditures or
declare and make dividend payments. Under the 2000 Credit Facility, we were
required to comply with financial covenants relating to debt and interest
coverage. As of March 30, 2002, we had $193.3 million in loans outstanding under
the 2000 Credit Facility and the weighted average interest rate on the
outstanding loan balance was 3.9%.

2002 Second Quarter

Our principal sources of liquidity used in funding our short-term operations
were our operating cash flows and the 2000 Credit Facility. As of June 29, 2002,
we had outstanding loans and letters of credit totaling $213.8 million and $6.1
million, respectively, under the 2000 Credit Facility and the weighted average
interest rate on the outstanding loan balance was 3.9%.


                                       50
<PAGE>
2002 Third Quarter

Our principal sources of liquidity used in funding our short-term operations
were our operating cash flows and the 2000 Credit Facility. As of September 28,
2002, we had outstanding loans and letters of credit totaling $218.0 million and
$6.1 million, respectively, under the 2000 Credit Facility and the weighted
average interest rate on the outstanding loan balance was 3.5%.

On October 18, 2002, we entered into the Credit Facility, which was a three year
$325.0 million senior secured credit facility, which replaced the 2000 Credit
Facility. The Credit Facility was comprised of a $255.0 million revolving credit
facility and a fully-drawn $70.0 million term loan and had a maturity date of
October 17, 2005.

Commitments

As of January 3, 2004, we leased various properties of which the vast majority
were operating leases and, as such, were not included in the assets or
liabilities of the Company. As these leases related to our rejected Athletic
Segment properties, they are not included in the summary below.

Following is a summary of our significant contractual obligations as of January
3, 2004 (in millions):

<TABLE>
<CAPTION>
                                                    Payments Due By Period
                                   --------------------------------------------------------
Contractual Obligations    Total   Less than 1 Year   1-3 Years   4-5 Years   After 5 Years
-----------------------   ------   ----------------   ---------   ---------   -------------
<S>                       <C>      <C>                <C>         <C>         <C>
Credit Facility           $213.4        $213.4           $ --        $ --          $ --
Mortgage payable             7.1           0.9            3.0         2.5           0.7
Operating leases            12.0           7.3            3.5         0.7            --
                          ------        ------           ----        ----          ----
   Total                  $232.5        $221.6           $6.5        $3.2          $0.7
                          ------        ------           ----        ----          ----
</TABLE>

The above table does not include (i) the license fees and excess fees, as
defined in the Master Agreement, as such fees are based on sales and profits and
(ii) contingent fees relating to store leases, as such fees are based on sales.
License fees, excess fees and contingent fees were approximately $101.6 million,
$145.6 million and $158.1 million in 2003, 2002 and 2001, respectively.

CRITICAL ACCOUNTING POLICIES

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 basis 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,


                                       51
<PAGE>
selection and disclosure of our critical accounting policies and estimates and
the application of these policies and estimates. We considered the following to
be our critical accounting policies 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 47% of total assets of continuing operations
as of January 3, 2004 compared with 46% of total assets as of December 28, 2002.
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 estimates, such as
merchandise mark-on, mark-ups, markdowns and shrinkage, that 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


                                       52
<PAGE>
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, sales volume, the related cost of product, markdowns, 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.

Insurance and Self-Insurance Liabilities

We are primarily self-insured for worker's compensation and medical costs, as
our deductible under third party coverage is $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. 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 $12.4 million at
the end of fiscal year 2003 and $12.3 million at the end of fiscal year 2002.
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 will reduce taxable income
in future periods.

As of January 3, 2004 we have recorded a net deferred tax asset of $99.2 million
and a related valuation allowance of $94.9 million. In connection with the
audits of our fiscal years 2003 and 2002 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 certain of 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 in fiscal year 2003 an additional non-cash
valuation allowance of $24.7 million and in fiscal 2002 recorded $70.2 million.



                                       53
<PAGE>

Goodwill and Other Assets

FASB Statement No. 142, Goodwill and Other Intangible Assets, requires annual
testing for the impairment of goodwill and unamortized intangibles at a
reporting unit level. Statement No. 142 also required a goodwill impairment test
as of the first day of fiscal year 2002, the adoption date. We identified our
reporting units under Statement No. 142 as the Meldisco Segment and, prior to
its sale, the Athletic Segment. We maintained goodwill at the Athletic Segment
relating to the assets of Footaction in the amount of $18.0 million and at the
Meldisco Segment relating to the assets acquired from J. Baker in the amount of
$24.3 million. The fair value of these reporting units was estimated using the
expected present value of associated future cash flows and market values of
related businesses, where appropriate. We completed our impairment test during
the third quarter of fiscal year 2002 and determined that the $24.3 million of
goodwill of the Meldisco Segment relating to the assets acquired from J. Baker
was impaired under the fair value test. This impairment was the result of
sequential periods of decreased operating profit and the exit of most of the
leases acquired. Accordingly, we recognized a charge for the cumulative change
of adopting the accounting standard as shown in the consolidated statements of
operations.

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 25 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.

Excess Rent and Minority Interest Payments

As set forth in the Master Agreement, Kmart collects the sales proceeds for our
inventory and remits those sales proceeds on a weekly basis to us less certain
applicable fees outlined in the Master Agreement. In addition, at the end of the
first quarter of each fiscal year, Meldisco pays Kmart a portion of profits
representing Kmart's 49% minority interest in Meldisco subsidiaries for the
preceding fiscal year and an excess rent payment for the preceding fiscal year
end which is contingent upon store-by-store or store level profits above certain
levels.

Under the Master Agreement, Kmart may audit the books and records of the
Shoemart Subsidiaries. In addition, we may audit the deductions taken by Kmart
from the weekly sales proceeds. Under the bankruptcy claims procedures, Kmart
asserts that we owe them no less than $57.8 million in cure obligations under
the Master Agreement. We contend that, as of the Petition Date, the cure amount
is approximately $19.0 million.


                                       54
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003 the FASB issued FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation clarifies the application of Accounting Research
Bulletin ("ARB") No. 51, (Consolidated Financial Statements for companies that
have interests in entities that are Variable Interest Entities ("VIE") as
defined under FIN 46.) According to this interpretation, if a company has an
interest in a VIE and is at risk for a majority of the VIE's expected losses or
receives a majority of the VIE's expected gains it shall consolidate the VIE.
FIN 46-R also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. For entities acquired or created before
February 1, 2003, this interpretation is effective no later than the end of the
first interim or reporting period ending after March 15, 2004, except for those
VIE's that are considered to be special purpose entities, for which the
effective date is no later than the end of the first interim or annual reporting
period ending after December 15, 2003. For all entities that were acquired
subsequent to January 31, 2003, this interpretation is effective as of the first
interim or annual period ending after December 31, 2003. As of January 3, 2004,
we did not have interests in VIEs. The adoption of the provisions of this
interpretation did not have a material effect on our financial statements.

In December 2003 the FASB issued FAS No. 132 (Revised) ("FAS 132-R"),
(Employer's Disclosure about Pensions and Other Postretirement Benefits). FAS
132-R retains disclosure requirements of the original FAS 132 and requires
additional disclosures relating to assets, obligations, cash flows, and net
periodic benefit cost. FAS 132-R is effective for fiscal years ending after
December 15, 2003, except that certain disclosures are effective for fiscal
years ending after June 15, 2004.

In January 2004 the FASB issued FASB Staff Position ("FSP") No. FAS 106-1,
(Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003), which permits a sponsor of a
postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. Regardless of
whether a sponsor elects that deferral, FSP FAS 106-1 requires certain
disclosures pending further consideration of the underlying accounting issues.
The guidance in FSP FAS 106-1 is effective for interim or annual financial
statements of fiscal years ending after December 7, 2003. See Note 25 of the
Notes to the Consolidated Financial Statements for information on our
Postretirement Benefit Obligation. In 2004, the FASB issued FASB Staff Position
106-2, which requires that employers that qualify for a prescription drug
subsidy must recognize the reduction in costs as employees provide services in
future years, commencing with reporting periods ending after June 15, 2004. We
estimate that the medical drug subsidy that we will receive from 2006 through
2013 will be approximately $2.4 million.

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.


                                       55
<PAGE>
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 June 15, 2005. We intend to adopt this Statement using the modified
prospective method. We can not yet determine the impact that any future
share-based payment transactions will have on our financial position or results
of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVES

As of January 3, 2004, 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. As of February 26,
2005, there were no borrowings outstanding under the DIP and Exit Facility,
other than approximately $20.2 million of outstanding letters of credit.

INTEREST RATES

As of January 3, 2004, we had $213.4 million outstanding under the Credit
Facility, including letters of credit. The Credit Facility was subject to
variable and fixed rates. The Company, from time to time, undertakes borrowings
to finance working capital and other corporate requirements. Our peak borrowing
periods coincide with peak inventory purchases.

We incurred variable rate debt through the revolving credit portion of the
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 million, which fixed the
interest rate at approximately 3.6% on the notional amount of $60 million.
Changes in the fair value of interest rate swaps designated as hedging
instruments that effectively offset the variability of cash flows associated
with variable-rate, long-term debt obligations are reported in accumulated other
comprehensive loss. These amounts subsequently are reclassified into interest
expense as a yield adjustment of the hedged interest payments in the same period
in which the related interest affects earnings. The four interest rate swap
agreements expired on January 8, 2004. For the year ended January 3, 2004, the
interest rate cash flow hedges were highly effective. As of January 3, 2004, the
fair value of each interest rate swap is reflected in the consolidated balance
sheet as a current payable in accrued expenses totaling $367,000. For the years
ended January 3, 2004 and December 28, 2002, we reclassified $1.5 million and
$1.0 million, respectively, into interest expense. 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 four 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


                                       56
<PAGE>
hold derivative financial investments for trading or speculative purposes. No
swap agreements were discontinued during fiscal year 2003 or 2002.

We assess interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future
cash flows and by evaluating hedging opportunities. Credit risk of derivative
instruments is considered minimal as we maintain risk management control systems
to monitor the financial condition of the counterparties to the contract and
interest rate cash flow risk attributable to both our outstanding or forecasted
debt obligations, as well as our offsetting hedge positions.

FOREIGN EXCHANGE

A significant percentage of Meldisco's products are sourced or manufactured
offshore, with China accounting for approximately 92% 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.


                                       57
<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:

                                      INDEX

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

Report of Independent Registered Public Accounting Firm                      F-3

Consolidated Statements of Operations for the Fiscal Years
Ended January 3, 2004, December 28, 2002 and December 29, 2001               F-4

Consolidated Balance Sheets as of January 3, 2004 and December 28, 2002      F-5

Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Fiscal Years Ended January 3, 2004, December 28, 2002 and
December 29, 2001                                                            F-6

Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 3, 2004, December 28, 2002 and December 29, 2001                     F-7

Notes to Consolidated Financial Statements                                   F-8

Schedule II - Valuation and Qualifying Accounts for the Fiscal Years
ended January 3, 2004, December 28, 2002 and December 29, 2001                87
</TABLE>


                                       58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

At a meeting held on December 14, 2004, the Company's Audit Committee of the
Board of Directors approved the dismissal of KPMG LLP and the hiring of Amper,
Politziner & Mattia, P.C. ("APM") as the Company's independent accountant.

In connection with the audits of the two fiscal years ended December 28, 2002
and December 29, 2001, and the subsequent interim period through December 14,
2004, there were no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to their satisfaction, would
have caused them to make reference in connection with their opinion to the
subject matter of the disagreement.

The audit reports of KPMG LLP on our consolidated financial statements as of
December 28, 2002 and December 29, 2001 and for the three fiscal years then
ended, included in our Annual Report on Form 10-K for Fiscal Year 2002 did not
contain any adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle, except that
KPMG LLP's report on our consolidated financial statements as of December 28,
2002 and December 29, 2001 and for the three fiscal years then ended contained
(1) a separate paragraph stating that "the accompanying consolidated financial
statements and the financial statement schedule have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, on March 2, 2004 the Company filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. This
filing for reorganization raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty", and (2) a
separate paragraph stating that the consolidated balance sheet as of December
29, 2001 and the related consolidated statements of operations, shareholders'
equity and comprehensive income and cash flows for the years ended December 29,
2001 and December 30, 2000 included therein were restated.

In connection with the audits of the fiscal years 2002 and 2001 and the
subsequent interim period through December 14, 2004, there were no reportable
events as defined in Item 304(a)(1)(v) of Regulation S-K, except that KPMG LLP
advised us of the following matters which it considered to be "material
weaknesses" or "reportable conditions". Substantially all of the matters
identified herein have subsequently been remediated by us, with several
remaining in the process of remediation:

     -    Control Environment (Tone at the Top, Adequacy of Resources and
          Organizational Structure) - Needed to improve the control environment
          of the Company.

     -    Accounts Payable Reconciliation - These reconciliations were
          incorrectly prepared and were not properly reviewed as part of the
          year end closing process.

     -    Management Override of Controls - Vendor payables were written off to
          reduce expenses.

     -    Three-way Auto Match Process of Purchase Order, Receiver and Invoice -
          Controls over the three-way match of vendor purchase orders, receiving
          reports and invoices were not consistently effective.


                                       59
<PAGE>
     -    Inventory In-Transit - The process and systems used to track and
          record inventory in-transit were inadequate and flawed resulting in
          errors in the timing of recording inventory receipts.

     -    Warehouse 15 Shrink - There was a lack of controls over and
          accountability for inventory shipped between distribution centers and
          stores.

     -    Processing of Proof of Delivery Payments - Certain policies and
          procedures needed to be implemented in order to enhance the overall
          control over payments to vendors outside the normal accounts payable
          three-way auto match process.

     -    Purge Process - There was no formal policy in place to assure that all
          manual entries recorded to the general ledger for items such as proof
          of delivery payments, electronic funds transfer payments and manual
          checks agree with the related items deleted (purged) from the accounts
          payable subledger and the unmatched vendor invoice file.

     -    Manual Entries - Certain manual entries lacked appropriate
          documentation and systems improvements were necessary to reduce the
          large number of manual entries required in order to close the books.

     -    Vendor Debit Balances - There were a number of unapplied debit
          balances which were not appropriately reviewed and resolved.

     -    Communications between Departments and Personnel - There was a need
          for improved communication between the Registrant's various
          departments and the Registrant's finance department.

     -    Document Retention - Retention policies and procedures were not
          clearly defined and documented.

     -    Payroll Withholding Tax - Improved procedures were required to
          eliminate the significant number of tax deficiency notices being
          received, specifically in the payroll withholding area. Controls were
          required to quantify and record changes to reserves required for
          estimated adjustments.

     -    Sales and Use Tax - The system to identify and assist compliance with
          use tax obligations needed to be improved.

     -    Book to Budget Process - The method by which the Company estimates
          several of its quarterly and annual accruals needed to be improved.

     -    Intercompany Reconciliations - Stronger controls over the
          reconciliation of intercompany accounts needed to be implemented.

     -    Accrued Royalty to 3rd Parties - Stronger controls over the
          calculation of the royalty accrual needed to be implemented.

     -    Inventory Reconciliations - Stronger controls over inventory
          reconciliation procedures needed to be implemented.

     -    Minority Interest/Excess Rent Calculation - Needed to improve the
          reconciliation process to ensure the accuracy of related balances
          recorded in the general ledger.


                                       60
<PAGE>
     -    Accounting for Shrink - Stronger controls over the accounting for
          shrink needed to be implemented.

     -    Reconciliation of Inventory Shrink to the General Ledger - Needed to
          document a process of reviewing shrink by store and reconciling the
          cumulative year to date store shrink expense to the general ledger on
          a quarterly and annual basis.

     -    Worn and Damaged Receivables - Needed to improve the tracking and
          monitoring of worn and damaged receivables by vendor.

     -    Family Plan Accrual - Needed to improve the supporting calculations
          used in determining this accrual.

     -    Contingent Rent Liability - Procedures needed to be put in place to
          ensure that the contingent rent liability is computed accurately.

     -    Physical Inventory Process - Needed to improve procedures governing
          the physical inventory process.

     -    Co-Op Advertising - Needed to improve procedures to enhance overall
          controls in this area.

     -    Communication between Internal and External Auditors - Needed to
          improve communications between internal and external auditors.

     -    Actuarial Calculations - Needed to utilize a qualified actuary to
          assist in performing all relevant calculations.

     -    Formalization of Policies and Procedures - Needed to document formal
          written policies and procedures available for accounting and operating
          personnel.

     -    Segregation of Duties of Generation of Purchase Orders and Matching
          Invoices - Needed to implement a formal policy with proper segregation
          of duties over the Construction and Store Planning Department.

     -    Inventory Aging Reserve - Needed to improve the supporting
          calculations used in determining this reserve.

     -    Sales Return Analysis - Needed to improve the supporting calculations
          used in determining sales returns.

     -    Bank Reconciliation - Needed to reconcile all bank accounts on a
          timely basis.

     -    401K Profit Sharing Accrual and Employer Match Contribution - Needed
          to improve the supporting calculation used in determining the 401K
          profit sharing and employer match accrual.

     -    Straight-Line Rent - Procedures needed to be put in place to ensure
          that straight line rent is being computed accurately.

     -    Access to the Data Center - Needed to restrict data center access to
          authorized personnel only.


                                       61
<PAGE>
     -    Password Lockout Controls - Needed to implement password lockout
          controls for all critical applications.

     -    Forced Password Changes - Needed to change passwords on a periodic
          basis.

     -    Sharing of IDs and Passwords - Needed to improve controls related to
          the sharing of ids and passwords.

     -    Server Analysis - Needed to develop minimum baseline build
          requirements for all operating systems.

     -    Segregation of Duties/Data Integrity of an Affinity SQL Query - Needed
          to improve controls over the integrity of the affinity SQL query.

     We did not consult with APM on any matters relating to the application of
     accounting principles or reportable events prior to their engagement.


                                       62
<PAGE>
ITEM 9A. CONTROLS AND PROCEDURES

On November 13, 2002, we announced that management had discovered discrepancies
in the reporting of its accounts payable balances. An investigation of the
discrepancies was conducted with 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.

The restatement process identified certain deficiencies in our internal controls
that existed in 2002 and years prior to 2002. We have concluded that the
following internally identified control deficiencies constituted "material
weaknesses" as defined in Audit Standard No. 2 adopted by the Public Company
Accounting Oversight Board:

     -    Accounts Payable Reconciliations -These reconciliations were
          incorrectly prepared and were not properly reviewed as part of the
          year end closing process.

     -    Management Override of Controls - Vendor payables were written off to
          reduce expenses.

     -    Inventory In-Transit - The process and systems used to track and
          record inventory in-transit were inadequate and flawed resulting in
          errors in the timing of recording inventory receipts.

     -    Warehouse Shrink - There was a lack of controls over and
          accountability for inventory shipped between distribution centers and
          stores.

     -    Vendor Three-way Match - Controls over the three-way match of vendor
          purchase orders, receiving reports and invoices were not consistently
          effective, for example, improved procedures were required to reduce
          the number of Proof of Delivery ("POD") payments.

     -    Manual Entries - Certain manual entries lacked appropriate
          documentation and systems improvements were necessary to reduce the
          large number of manual entries required in order to close the books.

     -    Vendor Debit Balances - There were a number of unapplied debit
          balances which were not appropriately reviewed and resolved.

     -    Accruals -The quarterly and annual accrual of certain costs such as
          bonuses, 401k contributions, insurance and royalties were not
          adequately documented and supported.

     -    Document Retention - Retention policies and procedures were not
          clearly defined and documented.

     -    Intercompany Reconciliations - Stronger controls over the
          reconciliation of intercompany accounts needed to be implemented.

     -    Inventory Reconciliations - Stronger controls over inventory
          reconciliation procedures needed to be implemented.

     -    Payroll Withholding - Improved procedures were required to eliminate
          the significant number of tax deficiency notices being received,
          specifically in the payroll withholding area. Controls were required
          to quantify and record changes to reserves required for estimated
          adjustments.

     -    "Tone at the Top" - Needed to improve the control environment at the
          Company.

     -    Organization and Structure - Some levels of the organization were not
          being sufficiently trained, staffed or supervised to perform as
          expected.


                                       63
<PAGE>
     -    Sales and Use Tax System - The system to identify and assist
          compliance with use tax obligations needed to be improved.

     -    Straight Line Rent - Procedures needed to be put in place to ensure
          that straight line rent is being computed accurately.

     -    Minority Interest/Excess Calculation - Needed to improve the
          reconciliation process to ensure the accuracy of related balances
          recorded in the general ledger.

     -    Material weakness that was identified as a result of filing of this
          Amendment - Primarily needed to restate allocation of deferred income
          taxes between continuing and discontinued operations.

We are committed to maintaining disclosure controls and procedures that are
designed to ensure that the information required to be disclosed in the reports
we file under the Securities Exchange Act of 1934 ("Exchange Act") is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that this information is accumulated and communicated
to our management, including our Chief Executive Officer and Senior Vice
President of Financial Reporting and Control, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

The effectiveness of the Company's or any systems of disclosure controls and
procedures and internals controls is subject to certain limitations, including
the exercise of judgment in designing, implementing and evaluating the controls
and procedures, the assumptions used in identifying the likelihood of future
events, and the inability to eliminate misconduct completely. As a result, there
can be no assurance that our disclosure controls and procedures and internal
controls will prevent all errors or fraud or ensure that all material
information will be made known to management in a timely fashion.

Rule 13a-15(b), which became applicable to us during the third quarter of our
2003 fiscal year, requires that we evaluate the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of each fiscal
quarter. Because of the late filing of this report, we conducted an evaluation
both as of January 3, 2004, the end of the period covered by this report, and as
of February 26, 2005. The evaluations were conducted by our management, under
the supervision and with the participation of our Chief Executive Officer and
our Senior Vice President of Financial Reporting and Control.

Based upon this evaluation and the investigation discussed above, our Chief
Executive Officer and Senior Vice President of Financial Reporting and Control
previously concluded that, as of December 28, 2002, our disclosure controls and
procedures were not effective at the reasonable assurance level to ensure that
information required to be disclosed in our Exchange Act reports was accumulated
and communicated to our management, including our Chief Executive Officer and
our Senior Vice President of Financial Reporting and Control, as appropriate to
allow timely decisions regarding required disclosure. With assistance from a
professional services firm, during 2003 we implemented an Internal Process and
Controls Plan (formerly the "Remediation Plan") and revised our Disclosure
Controls Policy and Procedures (together, the "Internal Process and Controls
Plan") designed to improve our internal controls. The Internal Process and
Controls Plan, which is administered by an Internal Process and Controls
Committee, has been finalized and implemented. The Internal Process and Controls
Plan provides for continuous updates as improvements in internal controls are
identified and implemented and for new processes and systems or changes to the
existing processes and systems. During 2003, we also adopted a comprehensive
certification


                                       64
<PAGE>
process to ensure that our Chief Executive Officer and Senior Vice President of
Financial Reporting and Controls are provided with timely and accurate
information and to provide them with the opportunity to address the quality and
accuracy of operating and financial results in order to enable them to provide
their certifications which accompany our Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q.

The processes described above to improve internal and disclosure controls
commenced during 2003 and have continued through the date of the filing of this
Amendment. We are committed to continuing this process. As we are unable to
determine the extent of the progress and improvements achieved as of January 3,
2004, the date of the financial statements included in this Amendment, our Chief
Executive Officer and Senior Vice President of Financial Reporting and Controls,
have concluded that it is likely that the "material weaknesses" described above
continued to exist as of January 3, 2004. However, based on the new policies and
procedures referred to above, our Chief Executive Officer and Senior Vice
President of Financial Reporting and Control concluded that, as of July 30,
2005, our disclosure controls and procedures were effective at the reasonable
assurance level to ensure that the information required to be disclosed in this
Amendment was accumulated and communicated to our management, including our
Chief Executive Officer and our Senior Vice President of Financial Reporting and
Control, as appropriate to allow timely decisions regarding disclosure.

ITEM 9B. OTHER INFORMATION

None.


                                       65
<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
February 26, 2005:

Dale W. Hilpert, age 62, was appointed Chairman of the Board, Chief Executive
Officer and President on January 19, 2004. From 2001 to 2003, Mr. Hilpert was
President and Chief Executive Officer of Williams-Sonoma, Inc. From 1998 to
2001, he was Chairman and Chief Executive Officer of Foot Locker. Prior to that,
he spent 17 years at May Department Stores serving in senior management
positions, including Chairman and Chief Executive Officer of its Payless Shoe
Source division.

Neele E. Stearns, Jr., age 68, has been Interim Vice Chairman of the Board of
Directors since January 2004. Since July 2004, Mr. Stearns has been Interim
Chief Executive Officer of Boulevard Healthcare. From September 2003 to January
2004, he was Interim Chairman and Chief Executive Officer of the Company. Since
February 2001 he has been Chairman of Financial Investments Corporation, a
private equity investment firm. Mr. Stearns was Chairman of the Board of Wallace
Computer Services, Inc. from January 2000 through November 2000. Prior to 1995,
he was President and Chief Executive Officer of CC Industries, Inc.

Stephen R. Wilson, age 58, is Executive Vice President and Chief Administrative
Officer. He was Executive Vice President and Chief Financial Officer of the
Company from May 2001 to December 2003. From 2000 to 2001, Mr. Wilson was
Executive Vice President, Finance and Administration, of Bridge Information
Systems. Bridge Information Systems filed a voluntary petition for
reorganization under the U.S. bankruptcy laws in February 2001. In May 2001, the
bankruptcy court approved the sale of substantially all of the assets of Bridge
Information Systems to Reuters, which sale closed in September 2001; From 1999
to 2000, he was Finance Director in the United Kingdom of Reckitt & Colman, plc;
and from 1995 to September 1997, Executive Vice President, Chief Financial
Officer, for The Reader's Digest Association.

Jeffrey A. Shepard, age 54, was appointed to the Board of Directors in January
2005. He has been an Executive Vice President of the Company since March 2002
and has been Chief Executive Officer and President of Meldisco since 1996.

Maureen Richards, age 48, has been the Senior Vice President, General Counsel
and Corporate Secretary of the Company since March 2001. From October 1996 to
March 2001, Ms. Richards was Vice President, General Counsel and Corporate
Secretary of the Company.

Richard L. Robbins, age 64, was appointed as Senior Vice President, Financial
Reporting and Control 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 the Company. 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.


                                       66
<PAGE>
BOARD OF DIRECTORS

General. The Board currently consists of eight members divided into three
classes. Directors are generally elected for three-year terms 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. Footstar's last annual meeting was held in May
2002. All of the directors, other than Dale W. Hilpert and Jeffrey A. Shepard,
have served since that time. The term of Class I directors would have expired at
the 2003 Annual Meeting of Shareholders. The term of Class II directors would
have expired at the 2004 Annual Meeting of Shareholders. The term of Class III
directors would have expired at the 2005 Annual Meeting of Shareholders.
Directors whose terms would have expired continue to serve until their
successors are elected. The names of the directors and certain information about
each of them are set forth below.

<TABLE>
<CAPTION>
                                                                                   Director
Name and Age                Principal Occupation and Background                      Since       Term
------------                -----------------------------------                    --------   ---------
<S>                         <C>                                                    <C>        <C>
Dale W. Hilpert, 62         Chairman of the Board, Chief Executive Officer and       2004     Class II
                            President. From 2001 to 2003, Mr. Hilpert was
                            President and Chief Executive Officer of
                            Williams-Sonoma, Inc. From 1998 to 2001, he was
                            Chairman and Chief Executive Officer of Foot Locker.
                            Prior to that, he spent 17 years at May Department
                            Stores serving in senior management positions,
                            including Chairman and Chief Executive Officer of
                            its Payless Shoe Source division. He is a member of
                            the Board of Directors and the Audit Committee of
                            the Signet Group plc. and he is a member of the
                            Board of Directors and the Audit Committee of Ann
                            Taylor Stores Corporation.
</TABLE>


                                       67
<PAGE>
<TABLE>
<S>                         <C>                                                    <C>        <C>
Neele E. Stearns, Jr., 68   Presently Interim Vice Chairman of the Board of          2000     Class I
                            Directors. Also presently Interim Chief Executive
                            Officer of Boulevard Healthcare since July 2004.
                            From September 2003 to January 2004, Interim
                            Chairman and Chief Executive Officer of the Company.
                            Mr. Stearns has been Chairman of Financial
                            Investments Corporation, a private equity investment
                            firm since February 2001. He was Chairman of the
                            Board of Wallace Computer Services, Inc. from
                            January 2000 through November 2000. Prior to 1995,
                            he was President and Chief Executive Officer of CC
                            Industries, Inc. Mr. Stearns is a Director of Maytag
                            Corporation and a member of its Executive Committee
                            and Chairman of the Audit Committee. He is also a
                            Director of Click Commerce, Inc. and Chairman of the
                            Audit Committee. He is a Trustee of Evanston
                            Northwestern Healthcare and Presbyterian Homes.

Stanley P. Goldstein, 70    Former Chairman and Chief Executive Officer of CVS       1996     Class I
                            Corporation and former Chief Executive Officer of
                            Melville Corporation (CVS's predecessor). Mr.
                            Goldstein serves as a Director and Chairman of the
                            Audit Committee of Linens 'n Things, Inc. He is also
                            a Director of CVS Corporation.

Robert A. Davies, III, 69   Chairman of Church & Dwight Co., Inc. since July         1998     Class II
                            2004, Chairman and Chief Executive Officer of Church
                            & Dwight Co., Inc. from February 2001 to July 2004.
                            President, Chief Executive Officer and Director of
                            Church & Dwight Co., Inc. from October 1995 to
                            January 2001.

George S. Day, 67           Geoffrey T. Boisi Professor of Marketing and             1996     Class III
                            Co-Director, Mack Center for Technological
                            Innovation and former Director of Huntsman Center
                            for Global Competition and Innovation at The Wharton
                            School, University of Pennsylvania; consultant to
                            companies including AT&T, Eastman Kodak, General
                            Electric, Nortel Networks and IBM Corporation.
</TABLE>


                                       68
<PAGE>
<TABLE>
<S>                         <C>                                                    <C>        <C>
Bettye Martin Musham, 72    Chairwoman and Chief Executive Officer of Gear           1996     Class III
                            Holdings, Inc., which she co-founded in 1977.

Kenneth S. Olshan, 72       Former Chairman and Chief Executive Officer of Wells     1996     Class III
                            Rich Greene/BDDP. Mr. Olshan also serves as a
                            director of Charming Shoppes, Inc., WellGen, Inc.
                            and as a Trustee of the Central Park Conservancy.

Jeffrey A. Shepard, 54      Appointed Director of the Company in January 2005.       2005     Class II
                            Mr. Shepard has been an Executive Vice President of
                            Footstar, Inc. since March 2002 and has been Chief
                            Executive Officer and President of Meldisco since
                            1996.
</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 these filings, we believe that
all filings were timely made during fiscal 2004 except a form 4, reporting a
single transaction, which was filed late on behalf of Mr. Davies.

We make available free of charge through our web site,
www.footstar.com/financial/pdf/Code_of_Conduct_andCompliance_Program.pdf, our
Code of Conduct.

Item 406 of Regulation S-K requires a company to disclose whether it has adopted
a code of ethics that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions. If the company has not adopted such a code of
ethics, it must explain why it has not done so. In addition, if a company
intends to satisfy the disclosure requirement under Item 10 of Form 8-K Item
5.05 under new rules regarding an amendment to, or a waiver from, a provision of
its code of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions by posting such information on its Internet
website, the company must disclose its Internet address and such intention. The
following paragraph responds to this disclosure:

     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 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 Internet website:
www.footstar.com.


                                       69
<PAGE>
     The Board of Directors has determined that Robert A. Davies, III is an
audit committee financial expert within the meaning of the SEC regulations. This
designation is an SEC disclosure requirement related to Mr. Davies' experience
and understanding of accounting and auditing matters and is not intended to
impose any additional duty, obligation or liability on Mr. Davies.


                                       70
<PAGE>
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
                                                                                 ----------------------------------
                                                    ANNUAL COMPENSATION             AWARDS
                                            ----------------------------------   Restricted/                PAYOUTS
                                                                  Other Annual     Deferred    Securities     LTIP      All Other
Name and Principal                 Fiscal                            Compen-        Stock      Underlying   Payouts   Compensation
Position                            Year    Salary($)    Bonus      sation($)    Award(s)($)   Options(#)    ($)(1)      ($)(2)
------------------                 ------   ---------   -------   ------------   -----------   ----------   -------   ------------
<S>                                <C>      <C>         <C>       <C>            <C>           <C>          <C>       <C>
J.M. Robinson,                      2003     642,788          0    102,146(3)           0              0          0   5,100,000(6)
Former Chairman of the              2002     837,500    510,000    125,714(3)           0        150,000          0       7,000
Board, Chief Executive              2001     787,500     15,000          0        167,328(5)     150,000    161,804       6,100
Officer and President*

Neele E. Stearns,**                 2003     263,076          0          0              0              0          0      91,750(7)
Former Chairman of the
Board, Chief Executive
Officer

Jeffrey A. Shepard,                 2003     561,500    368,550          0              0              0          0       8,000
Executive Vice President            2002     540,000    294,300          0        110,358(4)      40,000          0       7,000
                                    2001     503,750          0          0         63,684(5)      40,000     63,702       6,100

R. Shawn Neville,                   2003     539,423          0          0              0              0          0       7,000
Former Executive Vice President*    2002     536,500    250,250    125,116(3)     261,000(4)      40,000          0      13,690
                                    2001     489,000     68,448          0         77,230(5)      30,000     60,215       6,915

Stephen R. Wilson, ***              2003     439,538    223,000          0              0              0          0       2,500
Executive Vice President,           2002     421,250    212,500          0              0         12,000          0       2,500
Chief Financial Officer             2001     273,333     92,250          0        293,524(5)      20,000     29,060       1,340

Maureen Richards, Senior            2003     300,076    137,250          0              0              0          0       7,000
Vice President, General             2002     285,500    130,050          0          7,520(4)      14,000          0       6,500
Counsel and Corporate Secretary     2001     269,750      2,750          0         27,770(5)      14,000     27,835       6,100
</TABLE>

*    Messrs. Robinson and Neville ceased employment in September 2003 and March
     2004, respectively. See "Separation from Employment" below.

**   Served as Chairman of the Board and CEO from September, 2003 - January,
     2004. Became Interim Vice Chairman of the Board effective January 19, 2004.

***  Became Chief Administrative Officer in January, 2004.

     (1) Amounts include one-half of the award, if any, pursuant to the Career
Equity Program (our long term incentive plan) payable in cash for the three year
cycles ended January 3, 2004, December 28, 2002 and December 29, 2001.

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

     (3) For Mr. Robinson, this amount represents perquisites including $64,465
and $68,312 for payments on a long-term disability plan in 2003 and 2002,
respectively. For Mr. Neville, this amount represents a relocation bonus and
related tax gross up made in June 2002.


                                       71
<PAGE>
     (4) Amounts include the following match by the Company in deferred shares
as a result of the voluntary deferral of a portion of the annual incentive
bonus: Mr. Shepard, 13,516 shares; and Ms. Richards, 921 shares. 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, including
those identified in Footnote (5) below, which were held by each of the Named
Officers as of January 3, 2004 was: Mr. Robinson, 37,524 (all of which were
forfeited in connection with the settlement of the dispute arising from his
separation from employment); Mr. Shepard, 34,409 shares valued at $129,034; Mr.
Neville, 27,827 shares valued at $104,352 (all of which were forfeited); Mr.
Wilson, 8,637 shares valued at $32,389; Ms. Richards, 7,765 shares valued at
$29,117; and Mr. Stearns, 3,000 shares valued at $11,250. Dividends are not paid
on restricted stock units or deferred shares.

     (5) Amounts include the following match by the Company in deferred shares
as a result of the voluntary deferral of a portion of the annual incentive
bonus: Mr. Robinson, 215 shares (all of which was forfeited in connection with
the settlement of the dispute arising from his separation from employment); Mr.
Neville, 655 shares (all of which were forfeited); and Mr. Wilson, 1,325 shares.
The annual incentive bonus to Mr. Wilson was guaranteed for 2001. The amounts
shown also include the following deferred shares awarded as part of our Career
Equity Program, 50% of which shares vest in five years and the remaining 50% of
which shares vest at retirement: Mr. Robinson, 6,196 shares (all of which were
forfeited); Mr. Shepard, 2,440 shares; Mr. Neville, 2,304 shares (all of which
were forfeited); Mr. Wilson, 1,110 shares; and Ms. Richards, 1,064 shares. The
amount shown for Mr. Wilson also includes the value of shares of our common
stock underlying 6,202 restricted stock units that vest five years from the date
of grant contingent upon continued employment. Dividends are not paid on
deferred shares.

     (6) Mr. Robinson's employment as our Chairman, President and Chief
Executive Officer was terminated effective September 12, 2003. We entered into a
Settlement Agreement and Release with Mr. Robinson under which we paid Mr.
Robinson an initial payment of $2.5 million and agreed to pay another $2.5
million on the later date of the effective date of the Plan, or between 12 and
18 months from entry of the court order approving the Settlement Agreement. In
addition, we paid Mr. Robinson's attorney's fees of $100,000.

     (7) Mr. Stearns was paid $91,750 for services as Director in 2003.


                                       72
<PAGE>
Option Grants in Last Fiscal Year. There were no grants of stock options made to
the Named Officers during fiscal year 2003.

Option Exercises and Fiscal Year-End Option Holdings. The following table shows
information regarding option exercises during fiscal year 2003 as well as fiscal
year 2003 year-end option holdings for each of the Named Officers.

                 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>
J.M. Robinson(1)            0              0             609,213/311,058                   0/0

Neele E. Stearns            0              0                1,200/800                      0/0

Jeffrey A. Shepard          0              0              81,837/75,398                    0/0

R. Shawn Neville(1)         0              0              51,997/63,003                    0/0

Stephen R. Wilson           0              0              10,398/21,602                    0/0

Maureen Richards            0              0              48,777/30,098                    0/0
</TABLE>

(1)  As a result of their separation from employment, Messrs. Robinson and
     Neville no longer have any remaining stock options.


                                       73
<PAGE>
Supplemental Retirement Plan. The following table indicates the approximate
amount of annual retirement income that would be payable under the Supplemental
Retirement Plan for Select Senior Management of Footstar (the "Supplemental
Retirement Plan"), including to each of the Named Officers, 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         15         20         25
------------   --------   --------   --------   --------
<S>            <C>        <C>        <C>        <C>
 $  200,000    $ 40,000   $ 60,000   $ 80,000   $100,000
    400,000      80,000    120,000    160,000    200,000
    800,000     160,000    240,000    320,000    400,000
  1,000,000     200,000    300,000    400,000    500,000
  1,200,000     240,000    360,000    480,000    600,000
  1,400,000     280,000    420,000    560,000    700,000
  1,600,000     320,000    480,000    640,000    800,000
  1,800,000     360,000    540,000    720,000    900,000
</TABLE>

The Supplemental Retirement Plan 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 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 or change in control plus annual
target incentive compensation in effect for the year termination or change in
control occurs. In the case of retirement on or after age 55 but before age 60,
a reduced benefit is provided. Except in the event of a change in control (as
defined in the Supplemental Retirement Plan) or as provided in the Employment
Agreements referred to below, no benefits are payable to an eligible executive
who terminates employment prior to age 55 and prior to completing ten years of
credited service. Benefits are generally payable in annual installments for the
life of the executive, but other forms of payment of equivalent actuarial value
may be elected by the participant. By order of the Court dated December 15,
2004, we are authorized to continue to honor our obligations under the
Supplemental Retirement Plan with certain modifications in the event the Company
is sold pursuant to a Plan of Reorganization as follows: future benefit
calculations are modified to reflect current salary levels of participating
employees, however, bonus payments used to make such calculations will be
approved at the 2004 bonus level. The Supplemental Retirement Plan will not vest
but will continue under its terms if a reorganization of


                                       74
<PAGE>
Meldisco is effected as contemplated by the Plan of Reorganization; and no
additional participants will be added to the Supplemental Retirement Plan.

Covered compensation (base pay plus annual incentive target bonus) under the
Supplemental Retirement Plan as of January 1, 2004 for Mr. Robinson(1), Mr.
Shepard, Mr. Neville, Mr. Wilson and Ms. Richards was $0, $935,550, $0,
$669,000, and $442,250, respectively. (Mr. Stearns was not eligible for the
Supplemental Retirement Plan under the terms of his employment agreement). As of
January 1, 2004, the credited years of service under the Supplemental Retirement
Plan for Mr. Robinson (no longer an employee nor entitled to any benefits under
the Supplement Retirement Plan), Mr. Shepard, Mr. Neville (no longer an employee
nor entitled to any benefits under the Supplement Retirement Plan), Mr. Wilson
and Ms. Richards, were 22, 7, 4, 2, and 7 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 Supplemental Retirement Plan)
contemporaneously with or within two years following a change in control, and
after reaching age 60, the executive would receive a lump sum payment equal to
the actuarial equivalent of the executive's normal retirement benefit; where
such termination following a change in control occurs after 10 years of service
but prior to the executive attaining age 60, the executive would receive a lump
sum payment equal to the actuarial equivalent of the executive's normal
retirement benefit in the form of a single life annuity commencing upon reaching
age 60; and where such termination following a change in control occurs prior to
10 years of service, the executive would receive, payable upon attaining age 60,
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 January 3, 2004, we had employment agreements with each of Messrs.
Robinson, Shepard, Neville, Wilson, Stearns and Ms. Richards. The employment
agreements of Messrs. Robinson and Neville were terminated and each entered into
a settlement agreement and release on June 1, 2004 and April 19, 2004,
respectively. Mr. Shepard and Ms. Richards each waived their rights under their
employment agreements when they entered into the Meldisco Compensation Plan (the
"Meldisco Plan") subject to retention of rights to assert claims should we
breach any portion of the Meldisco Plan or non-compete agreements. The following
briefly summarizes the principal terms of the employment agreements, the
Meldisco Plan and the settlement agreements, subject in each case to the actual
terms of the applicable agreement.

Mr. Wilson

Mr. Wilson is a participant in the Key Employee Retention Plan ("KERP") approved
by order of the Court in May 2004. The retention plan provides for bonuses and
severance 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, Mr.
Wilson would be eligible to receive the following amounts in a lump sum, less
applicable deductions within fourteen days of separation under the KERP plan,
provided that we are in receipt of an executed copy of a release agreement
(inclusive of a release of all rights under his employment agreement) and the
revocation period has expired: (i) $669,000 pursuant to the order, and (ii)
seventy-eight (78) weeks of guaranteed severance.

----------
(1)  Messrs. Robinson and Neville are no longer employees nor eligible for
     benefits under the Supplemental Retirement Plan.


                                       75
<PAGE>
Under the release agreement Mr. Wilson would be eligible to participate in our
medical and dental plans for a period of up to eighteen (18) months following
separation, unless such coverage becomes available to Mr. Wilson through other
employment. We would provide outplacement services for Mr. Wilson for a period
of eighteen (18) months following separation. Mr. Wilson's outstanding stock
options as of his separation would be exercisable for a period of ninety (90)
days. Mr. Wilson would also receive 100% of his deferred vested shares under our
Switch to Equity Plan. In consideration of the payments to Mr. Wilson pursuant
to the release agreement, he would agree to fully release us and all related
persons and entities from any and all claims.

Mr. Wilson becomes eligible for benefits under the KERP only if he enters into a
release waiving all rights under his employment agreement. He cannot receive the
benefit of both.

Mr. Wilson's current employment agreement provides for automatic one-year
extensions unless either party provides 180 days notice of non-renewal. Mr.
Wilson's salary is reviewed annually but may not be decreased. The agreement
provides for annual incentive compensation with a target at 50% of base salary
and long term incentive compensation with a target award opportunity at 30% of
base salary.

Mr. Wilson's agreement generally provides for (i) participation in benefit plans
and programs including retirement benefits, life insurance, medical benefits,
and the Supplemental Retirement Plan; (ii) deferred compensation arrangements;
and (iii) restrictive covenants including an 18-month non-competition,
non-disclosure, non-solicitation of employees and availability for litigation
support.

Mr. Wilson's employment agreement provides that if he is terminated without
cause prior to a change in control, (before taking into account any limitations
imposed by the Bankruptcy Court) for the receipt of (i) base salary earned
through termination; (ii) continued payment of base salary for 18 months; (iii)
a lump sum amount equal to his pro rata annual incentive award for the year in
which termination occurs at an annual incentive target level of base salary;
(iv) an amount equal to 1.5 times an annual incentive target level of base
salary payable in monthly installments over 18 months; (v) a grant of common
stock equal to any outstanding award of contingent shares including any matching
grant under our "STEP" program and under our "Founder's Stock" or similar
program (multiplied by a fraction the numerator of which is the number of
completed years of service and the denominator is the vesting period); (vi) the
right to exercise all vested stock options for the shorter of 18 months or the
remainder of the exercise period; (vii) immediate vesting and lump sum payment
of all outstanding awards under our Career Equity Program (which is 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) relating to completed performance cycles; (viii) payment of
the balance of any unpaid incentive awards earned as of December 31 of the prior
year; (ix) settlement of all deferred compensation arrangements and (x)
continued participation in all medical, health and life insurance plans until
the earlier of 18 months or the receipt from a subsequent employer of equivalent
coverage.

Mr. Wilson's employment agreement further provides that if employment is
terminated without cause following a change in control (as defined) (before
taking into account any limitations imposed by the Court) for the receipt of the
above benefits except that options would be exercisable for 24 months,
participation in medical and insurance programs could continue for 24 months;
receipt of a lump sum severance payment of 2 times base salary and a lump sum
severance payment of 2 times


                                       76
<PAGE>
base salary multiplied by an annual incentive target level; and grants of common
stock under our "STEP" program and the "Founder's Stock" or similar program
would be made without regard to designated vesting periods. If any such payments
are subject to the "golden parachute" excise tax, we are required to make an
additional "gross-up" payment sufficient to ensure that the net after-tax amount
retained by Mr. Wilson (taking into account all taxes, including those on the
gross-up payment) would be the same as would have been the case had such excise
tax not applied.

In the event of a termination for cause, Mr. Wilson's employment agreement
provides for: (i) payment of base salary earned through the cessation of
employment; (ii) payment of the balance of any unpaid incentive award earned as
of December 31 of the prior year; (iii) settlement of all deferred compensation
arrangements; and (iv) other or additional benefits then due or earned in
accordance with our applicable plans or programs including but not limited to
the Supplemental Retirement Plan.

The employment agreement also provides for indemnification to the fullest extent
permitted by law including the advancement of expenses and reimbursement of
expenses incurred in seeking enforcement of his agreement unless his assertion
of rights was in bad faith or frivolous.

Mr. Shepard & Ms. Richards

Mr. Shepard and Ms. Richards are participants under the Meldisco Plan. The
Meldisco Plan is designed to retain the services of key executives critical to
our business. The Meldisco Plan was approved by the Court on December 15, 2004.
Under the Meldisco Plan, after entering into an confidentiality and
non-competition agreement providing that the executives would not compete with
us during their employment and for a period ending at the earlier of (a) 12
months after the executives are terminated or (b) 12 months after the Master
Agreement is terminated, these executives are eligible for:

     -    A performance bonus for fiscal year 2005 upon achievement of certain
          free cash flow goals. For Mr. Shepard, the performance bonus at target
          is 100% of base salary in effect on January 1, 2005. For Ms. Richards,
          the performance bonus at target is 50% of base salary. Performance
          bonuses will be pro-rated in the event of an involuntary termination
          during fiscal year 2005.

     -    A retention bonus equal to 75% of the employee's normal 2004
          performance target award level for fiscal year 2005. For Mr. Shepard,
          the retention bonus is calculated to be $316,875. For Ms. Richards,
          the retention bonus is calculated to be $123,750. Retention bonuses
          will be pro-rated in the event of an involuntary termination during
          fiscal year 2005. If there is a sale of the Company, we will also pay
          the retention bonus on a pro rated basis.

     -    If there is a sale of the Company, and the executive is not offered
          comparable employment by the acquiring entity, Mr. Shepard would be
          entitled to receive a guaranteed severance payment in an amount equal
          to 24 months of base pay and an annual target incentive, a KERP
          payment of $936,000 and a fixed Supplemental Retirement Plan payment
          of $1,010,300. Under the same circumstances, Ms. Richards would be
          entitled to receive a guaranteed severance payment in an amount equal
          to 18 months of base pay and an annual target incentive, a KERP
          payment of $495,000 and a fixed Supplemental Retirement Plan payment
          of $462,700.


                                       77
<PAGE>
     -    In the event of involuntary termination other than in connection with
          a sale of the Company, Mr. Shepard would receive a guaranteed
          severance payment in an amount equal to 18 months of base pay and an
          annual target incentive, a KERP payment of $936,000 and a pro-rata
          payment of fiscal year 2005 performance and retention bonuses. Ms.
          Richards would receive a guaranteed severance payment in an amount
          equal to 18 months of base pay and an annual target incentive, a KERP
          payment of $495,000 and a pro rata payment of fiscal year 2005
          performance and retention bonuses.

     -    If we effect our plan of reorganization, upon emergence from
          bankruptcy provided that the executive is employed by us on the
          emergence date, the executive will receive the balance of any KERP
          payment due, performance (provided free cash flow goals are achieved)
          and retention bonuses not yet paid for fiscal 2005 and the right to
          continued participation in the Supplemental Retirement Plan.

Mr. Stearns

The initial period of employment under Mr. Stearns employment agreement was from
September 12, 2003 through December 31, 2003 and related to his employment as
Chairman and Chief Executive Officer on an interim basis and his agreement to
continue to serve as a director.

Mr. Stearns' original employment agreement provided for (i) an annual base
salary; (ii) a one-time payment of $100,000 in consideration for entering into
the agreement; (iii) an opportunity for a bonus upon expiration of the term of
employment (or any renewal); (iv) eligibility to participate in benefit plans
and programs including long and short term incentive plans and programs,
employee welfare and pension plans programs and arrangements, executive
perquisites and insurance; (v) restrictive covenants including non-disclosure
and availability for litigation support; and (vi) severance benefits upon
termination of employment.

Mr. Stearns' employment agreement was amended on January 16, 2004 to reflect
that effective March 1, 2004 his employment changed to a per diem basis, as
needed. He would continue to serve as Interim Vice Chairman of the Board of
Directors and as a director of the Company. He is no longer eligible to
participate in any employee benefits programs but is compensated at the rate of
$5,000 per diem, as needed. He is also no longer eligible to participate in
severance benefits upon termination of employment.

Mr. Robinson

Mr. Robinson's employment as our Chairman, President and Chief Executive Officer
was terminated effective September 12, 2003. We entered into a settlement
agreement and release with Mr. Robinson under which we paid Mr. Robinson an
initial payment of $2.5 million and agreed to pay another $2.5 million on the
later date of the effective date of our Plan, or between 12 and 18 months from
entry of the court order approving the agreement. In addition, we paid Mr.
Robinson's attorney's fees of $100,000.

Mr. Neville

Mr. Neville's employment was terminated in March, 2004. We entered into an
agreement and general release with Mr. Neville in April 2004 under which we paid
Mr. Neville severance in the amount of $171,346 representing (16) weeks pay and
forgave loans in the aggregate amount of $150,000.


                                       78
<PAGE>
Director Compensation

Directors, as of January 1, 2004, who are not receiving compensation as officers
or employees of the Company or any affiliate ("non-employee directors") are paid
an annual retainer of $25,500 and a $1,000 fee for attendance at each meeting of
the Board or any committee of the Board. Non-employee directors are entitled to
a $2,500 annual fee for serving as a committee chair, other than for the Audit
Committee Chair, who is paid an annual retainer of $7,500. Non-employee
directors are also eligible to participate in the 1996 Non-Employee Director
Stock Plan (the "1996 Director Plan"). Under the 1996 Director Plan, each
non-employee director receives a one-time non-qualified option to purchase 2,000
shares of common stock at an exercise price equal to the fair market value of
common stock on the grant date. Each option becomes exercisable in 20%
increments beginning one year from the date of grant, and thereafter remains
exercisable until the option expires. As of January 1, 2004, the 1996 Director
Plan also provides for an automatic grant of 4,000 stock units ("Stock Units")
to each non-employee director on the date of each annual meeting of the
Company's stockholders. Each Stock Unit represents the right to receive one
share of common stock at the end of a specified period. Fifty percent of such
Stock Units vest six months and a day after the grant date, provided the
non-employee director has not ceased to serve as a director for any reason other
than death, disability, or retirement at or after attaining age 65, except that
payment of such Stock Units will be accelerated in the event of a change in
control. The remaining fifty percent of such Stock Units become payable upon the
later of ceasing to be a director or attaining age 65, provided that delivery of
such Stock Units is accelerated in the event of death, disability, or a change
in control.

The 1996 Director Plan permits a non-employee director to elect to defer receipt
of all or a portion of the shares otherwise deliverable in connection with Stock
Units. The 1996 Director Plan also permits a non-employee director to elect to
defer receipt of fees otherwise payable in cash, with such deferred amounts
deemed invested in Stock Units.

In 2000, the Board approved voluntary stock ownership guidelines for all
independent directors providing for ownership of common stock of the Company in
an amount equal to at least five times their annual retainer and fees, to be
achieved over a five-year period.

Compensation Committee Interlocks and Insider Participation. The Compensation
Committee of the Board is comprised of three outside independent directors,
George S. Day, Stanley P. Goldstein and Bettye Martin Musham.


                                       79
<PAGE>
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 February 26, 2005, 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.

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

   Robert A. Davies, III                         15,993(2)                   *
   George S. Day                                 26,705(2)                   *
   Stanley P. Goldstein                          73,292(2)(3)                *
   Dale W. Hilpert                                    0                      *
   Bettye Martin Musham                          16,347(2)                   *
   Kenneth S. Olshan                             20,677(2)                   *
   Neele E. Stearns, Jr.                          8,600(2)                   *
   Jeffrey A. Shepard                           238,514(2)                   *
   Stephen R. Wilson                             31,569(2)                   *
   Maureen Richards                             104,344(2)                   *

   All current executive officers and
      directors as a group                      536,041(2)(3)

   J.M. Robinson (4)                             18,000(4)                   *

   R. Shawn Neville(5)                            6,294(5)                   *

5% Stockholders:
   FMR Corp.
   Edward C. Johnson, 3d and
   Abigail P. Johnson
      82 Devonshire Street
      Boston, MA 02109                        2,047,200(6)                10.0%

   ESL Partners, L.P.
   ESL Institutional Partners, L.P.
   ESL Investors, L.L.C.
   ESL Investment Management, L.L.C.
   200 Greenwich Avenue
   Greenwich, CT 06830                        1,999,800(7)                 9.8%

   North Run Capital, L.P.
   North Run GP, L.P.
</TABLE>


                                       80
<PAGE>
<TABLE>
<S>                                       <C>                       <C>
   North Run Advisors, L.L.C.
   Todd B. Hammer
   Thomas B. Ellis
      One International Place, Ste 2401
      Boston, MA 02110                        2,000,000(8)                 9.8%

   Triage Management, L.L.C.
   Leonid Frenkel
      401 City Avenue, Suite 526
      Bala Cynwyd, PA  19004
   Triage Offshore Fund, Ltd.
      c/o International Fund
      Administration, Ltd.
      48 Par-la-Ville Road, Suite 464
      Hamilton, HM11 Bermuda                  1,849,859(9)                 9.1%

   Dimensional Fund Advisors Inc.
      1299 Ocean Avenue, 11th Floor
      Santa Monica, CA 90401                  1,194,000(10)                5.9%

   Schultze Asset Management, LLC
      3000 Westchester Avenue
      Purchase, NY 10577                      1,143,413(11)                5.6%

   Couchman Partners, L.P.
      c/o Hedge Fund Services (BVI)
      Limited
      Skelton Building, 2nd Floor
      Road Town, Tortola
      British Virgin Islands
   Couchman Capital, L.L.C.
   Jonathan Couchman
      800 Third Avenue, 31st Floor
      New York, NY 10022                      1,121,900(12)                5.5%
</TABLE>

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 or deferred shares.

2.   The amounts shown also include the following shares issuable pursuant to
     stock options which, as of February 26, 2005, were currently exercisable or
     would become exercisable within 60 days: Mr. Shepard, 133,234; Mr. Wilson,
     19,198; Ms. Richards, 70,474; Mr. Davies, 2,000; Dr. Day, 2,000; Mr.
     Hilpert, 0; Mr. Goldstein, 2,000; Ms. Musham, 2,000; Mr. Olshan, 2,000; and
     Mr. Stearns, 1,600.


                                       81
<PAGE>
3.   Of the shares shown, 5,758 shares are owned by Mr. Goldstein's wife. Mr.
     Goldstein disclaims beneficial ownership of such shares.

4.   Ceased employment as an executive officer in September 2003; this amount is
     based on a Form 5 filed by Mr. Robinson dated February 13, 2004.

5.   Ceased employment in March 2004 and calculations based on information
     available to us as of February 26, 2005.

6.   Pursuant to a Schedule 13G filed on February 14, 2005, FMR Corp., Edward C.
     Johnson, 3d and Abigail P. Johnson (collectively "FMR"), FMR has sole
     voting power with respect to no shares and sole dispositive power with
     respect to 2,047,200 shares.

7.   Pursuant to a Schedule 13G filed on July 2, 2004, ESL Partners, L.P. has
     sole voting and sole dispositive power with respect to 1,483,798 shares;
     ESL Investment Management L.L.C has sole voting and sole dispositive power
     with respect to 2,313 shares; ESL Institutional Partners, L.P. has sole
     voting and sole dispositive power with respect to 9,847 shares; and ESL
     Investors, L.L.C. has sole voting and sole dispositive power with respect
     to 503,842 shares.

8.   Pursuant to a Schedule 13G filed on March 17, 2004, North Run Capital, L.P.
     North Run GP, L.P., North Run Advisors, L.L.C., Todd B. Hammer and Thomas
     B. Ellis (collectively "North Run"), North Run has sole voting and sole
     dispositive power with respect to 2,000,000 shares.

9.   Pursuant to a Schedule 13G filed on July 1, 2004, Triage Management L.L.C.,
     Leonid Frenkel and Triage Offshore Fund, Ltd., Triage Management L.L.C. and
     Leonid Frenkel have shared voting power with respect to 1,849,859 shares
     and shared dispositive power with respect to 1,695,567 shares and Triage
     Offshore Fund, Ltd. has shared voting and shared dispositive power with
     respect to 1,245,276 shares.

10.  Pursuant to a Schedule 13G filed on February 9, 2005, Dimensional Fund
     Advisors Inc. has sole voting and sole dispositive power with respect to
     1,194,000 shares.

11.  Pursuant to a Schedule 13D filed on November 24, 2004, Schultze Asset
     Management, LLC has sole voting and sole dispositive power with respect to
     1,143,413 shares.

12.  Pursuant to a Schedule 13G filed on March 12, 2004, Couchman Partners,
     L.P., Couchman Capital, L.L.C. and Jonathan Couchman (collectively
     "Couchman"), Couchman has sole voting and sole dispositive power with
     respect to 1,121,900 shares.


                                       82
<PAGE>
                      EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                                    (a)                    (b)                    (c)
                                                                          Number of securities
                                                                          remaining available
                                                                          for future issuance
                           Number of securities                              under equity
                             to be issued upon      Weighted-average      compensation plans
                                exercise of         exercise price of    (excluding securities
                           outstanding options,   outstanding options,       reflected in
     Plan category          warrants and rights    warrants and rights        column (a))
------------------------   --------------------   --------------------   ---------------------
<S>                        <C>                    <C>                    <C>
Equity compensation
   plans approved by
   security holders (1)           1,977,017              $29.00                  450,507

Equity compensation
   plans not approved by
   security holders (2)             890,833              $29.00                1,071,059
                                  ---------              ------                ---------
   Total                          2,867,850              $29.00                1,521,566
</TABLE>

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

(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 22 to the
Consolidated Financial Statements.


                                       83
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We made a $75,000 loan to Mr. Neville in 1999 and a $75,000 loan in 2002. The
1999 loan bore interest at 8.0% and was due upon separation of employment. The
2002 loan bore no interest and would be forgiven after Mr. Neville completed
five years of employment from the loan date with the Company. Both loans were
forgiven upon Mr. Neville's separation of employment in March, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees for (1) professional audit services rendered
by KPMG LLP for the audit of our annual financial statements for fiscal 2001 and
2002, and fees billed for other services rendered by KPMG LLP and (2)
professional audit services rendered by APM for fiscal 2003.

<TABLE>
<CAPTION>
                                     2001         2002        2003
                                  ----------   ----------   --------
<S>                               <C>          <C>          <C>
Audit fees (1)                    $  808,000   $6,377,000   $900,000
Audit-related fees (2)                13,000       38,000     16,800
                                  ----------   ----------   --------
   Audit and audit related fees      821,000    6,415,000    916,800
Tax fees (3)                         221,000       40,000         --
All other fees                            --           --         --
                                  ----------   ----------   --------
   Total fees                     $1,042,000   $6,455,000   $916,800
                                  ==========   ==========   ========
</TABLE>

(1)  Audit fees for fiscal 2002 include fees relating to our restatement of our
     consolidated financial statements. The audit fees above exclude KPMG fees
     of $100,000 incurred in 2005 in connection with the reissuance of its
     opinions and the discontinued operations restatement as it relates to
     the 2003 Form 10-K.

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

(3)  Tax fees consist of tax compliance services and tax advice.


                                       84
<PAGE>
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

Report of Independent Registered Public Accounting Firm                      F-3

Consolidated Statements of Operations for the Fiscal Years ended
   January 3, 2004, December 28, 2002 and December 29, 2001                  F-4

Consolidated Balance Sheets as of January 3, 2004 and December 28, 2002      F-5

Consolidated Statements of Shareholders' Equity and Comprehensive Income
   for the Fiscal Years ended January 3, 2004, December 28, 2002 and
   December 29, 2001                                                         F-6

Consolidated Statements of Cash Flows for the Fiscal Years ended
   January 3, 2004, December 28, 2002 and December 29, 2001                  F-7

Notes to Consolidated Financial Statements                                   F-8
</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 January 3, 2004, December 28, 2002 and December 29, 2001            87
</TABLE>

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.


                                       85
<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX

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

Report of Independent Registered Public Accounting Firm                      F-3

Consolidated Statements of Operations for the Fiscal Years Ended January
3, 2004, December 28, 2002 and December 29, 2001                             F-4

Consolidated Balance Sheets as of January 3, 2004 and December 28, 2002      F-5

Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Fiscal Years Ended January 3, 2004, December 28, 2002 and
December 29, 2001                                                            F-6

Consolidated Statements of Cash Flows for the Fiscal Years Ended January
3, 2004, December 28, 2002 and December 29, 2001                             F-7

Notes to Consolidated Financial Statements                                   F-8

Schedule II - Valuation and Qualifying Accounts for the Fiscal Years
ended January 3, 2004, December 28, 2002 and December 29, 2001               (Part IV, Item 15(a)2)
</TABLE>


                                   F-1
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the consolidated balance sheet of Footstar, Inc. and
subsidiaries (the "Company") as of January 3, 2004, and the related consolidated
statements of operations, stockholders' equity, comprehensive income and cash
flows for the year then ended. 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 audit.

We conducted our audit 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 audit provides 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 January 3, 2004 and the results of its operations and its
cash flows for the year ended January 3, 2004 in conformity with accounting
principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, on March 2, 2004 the Company filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. This
filing for reorganization raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

We have also audited the consolidated financial statement schedule listed in the
index at item 15(a), Schedule II for the year ended January 3, 2004. 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
April 6, 2005


                                       F-2
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Footstar, Inc.
and Subsidiary Companies as of December 28, 2002 and the related consolidated
statements of operations, stockholders' equity and comprehensive income and cash
flows for the years ended December 28, 2002 and December 29, 2001. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule for the years ended December 28, 2002 and
December 29, 2001. These consolidated financial statements and the financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. 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
audit provides a reasonable basis for our opinion.

In our opinion, the 2002 and 2001 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Footstar, Inc. and Subsidiary Companies as of December 28, 2002 and the results
of its operations and its cash flows for each of the years then ended December
28, 2002 and December 29, 2001 in conformity with United States generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule referred to above when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Note 3 to Consolidated Financial Statements, the accompanying
consolidated statements of operations and cash flows for the fiscal years ended
December 28, 2002 and December 29, 2001 have been restated.

As discussed in Note 15 to the Consolidated Financial Statements, effective
December 30, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.

The accompanying consolidated financial statements and the financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, on
March 2, 2004 the Company filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. This filing for reorganization raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


/s/ KPMG LLP
New York, New York
August 27, 2004, except as to
Note 3 as it relates to fiscal 2002 and 2001,
which is as of September 27, 2005


                                       F-3
<PAGE>
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in millions, except per share amounts)

<TABLE>
<CAPTION>
                                                                                   For the Fiscal Years Ended
                                                                             -------------------------------------
                                                                             December 28, 2002   December 29, 2001
                                                                                  Restated            Restated
                                                           JANUARY 3, 2004      (See Note 3)        (See Note 3)
                                                           ---------------   -----------------   -----------------
<S>                                                        <C>               <C>                 <C>
Net sales                                                     $1,015.6           $1,346.0            $1,444.2
Cost of sales                                                    691.8              917.4               986.9
                                                              --------           --------            --------
GROSS PROFIT                                                     323.8              428.6               457.3
Store operating, selling, general and administrative
   expenses                                                      269.5              316.8               323.2
Bad debt expense - Ames Department Stores                           --                9.2                  --
Depreciation and amortization                                     21.1               20.3                18.9
Other income                                                      (5.4)                --                  --
Restructuring, asset impairment and other charges, net             2.5               14.0                 3.3
                                                              --------           --------            --------
OPERATING PROFIT                                                  36.1               68.3               111.9
Interest expense                                                  24.4                9.8                 3.8
Interest income                                                   (1.1)              (1.1)               (1.6)
                                                              --------           --------            --------
INCOME FROM OPERATIONS BEFORE INCOME TAXES, MINORITY
   INTERESTS, DISCONTINUED OPERATIONS AND CUMULATIVE
   EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE                     12.8               59.6               109.7
Provision for income taxes                                        10.0               70.9                28.8
                                                              --------           --------            --------
INCOME (LOSS) FROM OPERATIONS BEFORE MINORITY
   INTERESTS, LOSS FROM DISCONTINUED OPERATIONS AND
   CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE           2.8              (11.3)               80.9
Minority interests in net income                                  17.3               37.1                44.8
Loss from operations of discontinued Athletic Segment,
   net of tax                                                     39.9               30.8                66.7
                                                              --------           --------            --------
LOSS FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF A
   CHANGE IN ACCOUNTING PRINCIPLE                                (54.4)             (79.2)              (30.6)
Cumulative effect of a change in accounting principle               --               24.3                  --
                                                              --------           --------            --------
NET LOSS                                                      $  (54.4)          $ (103.5)           $  (30.6)
                                                              --------           --------            --------
AVERAGE COMMON SHARES OUTSTANDING
Basic                                                             20.5               20.4                20.2
                                                              --------           --------            --------
Diluted                                                           20.5               20.4                20.7
                                                              --------           --------            --------
LOSS PER SHARE:
Basic:
   (Loss) income from continuing operations                   $  (0.71)          $  (2.36)           $   1.79
   Loss from discontinued operations                             (1.94)             (1.51)              (3.30)
   Cumulative effect of a change in accounting principle            --              (1.19)                 --
                                                              --------           --------            --------
   Net loss                                                   $  (2.65)          $  (5.06)           $  (1.51)
                                                              --------           --------            --------
Diluted
   (Loss) income from continuing operations                   $  (0.71)          $  (2.36)           $   1.75
   Loss from discontinued operations                             (1.94)             (1.51)              (3.23)
   Cumulative effect of a change in accounting principle            --              (1.19)                 --
                                                              --------           --------            --------
   Net loss                                                   $  (2.65)          $  (5.06)           $  (1.48)
                                                              --------           --------            --------
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-4
<PAGE>
                           CONSOLIDATED BALANCE SHEETS
                       (IN MILLIONS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                            JANUARY 3,   December 28,
                                                               2004          2002
                                                            ----------   ------------
<S>                                                         <C>          <C>
ASSETS
Current assets:
   Cash and cash equivalents                                 $   1.1       $  13.4
   Accounts receivable, net                                     16.6          51.1
   Inventories                                                 179.7         360.9
   Prepaid expenses and other current assets                    23.1          36.4
   Assets held for sale                                        284.5            --
                                                             -------       -------
      Total current assets                                     505.0         461.8
Property and equipment, net                                    147.2         266.7
Goodwill                                                          --          18.0
Intangible assets, net                                          11.0          17.9
Deferred charges and other noncurrent assets                     1.5          10.9
                                                             -------       -------
      Total assets                                           $ 664.7       $ 775.3
                                                             =======       =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Notes payable                                             $ 198.0       $ 146.8
   Accounts payable                                             79.8         169.4
   Accrued expenses                                             51.4         144.6
   Income taxes payable                                          2.0           5.0
   Liabilities held for sale                                   110.5
                                                             -------       -------
      Total current liabilities                                441.7         465.8
Other long-term liabilities                                     58.9          72.8
Minority interests in subsidiaries                              42.2          61.9
                                                             -------       -------
      Total liabilities                                        542.8         600.5
                                                             -------       -------
Shareholders' equity:
   Common stock $.01 par value: 100,000,000 shares
      Authorized; 30,949,958 and 30,896,192 shares issued        0.3           0.3
   Additional paid-in capital                                  345.2         346.3
   Accumulated other comprehensive loss                         (0.4)         (1.6)
   Treasury stock: 10,711,569 shares, at cost                 (310.6)       (310.6)
   Unearned compensation                                        (1.5)         (2.9)
   Retained earnings                                            88.9         143.3
                                                             -------       -------
      Total shareholders' equity                               121.9         174.8
                                                             -------       -------
      Total liabilities and shareholders' equity             $ 664.7       $ 775.3
                                                             =======       =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-5
<PAGE>
    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                       (IN MILLIONS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                                  Accum.
                                                                                                                   Other
                                                                                                                  Compre-
                                         Common Stock        Treasury Stock      Add'l                            hensive
                                      ------------------  --------------------  Paid-in    Unearned    Retained   Income
                                        Shares    Amount    Shares     Amount   Capital  Compensation  Earnings   (Loss)    Total
                                      ----------  ------  ----------  --------  -------  ------------  --------  --------  -------
<S>                                   <C>         <C>     <C>         <C>       <C>      <C>           <C>       <C>       <C>
BALANCE AS OF DECEMBER 30, 2000       30,636,884   $0.3   10,782,106   $(312.6)  $342.1     $(5.4)      $277.4     $(0.1)  $ 301.7
Net loss                                      --     --           --        --       --        --        (30.6)       --     (30.6)
Common stock incentive plans             133,488     --       70,537       2.0      4.2      (0.4)          --        --       5.8
Tax benefit of stock incentive plans          --     --           --        --      1.0        --           --        --       1.0
                                      ----------  ------  ----------  --------  -------  ------------  --------  --------  -------
BALANCE AS OF DECEMBER 29, 2001       30,770,372   $0.3   10,711,569   $(310.6)  $347.3     $(5.8)      $246.8     $(0.1)  $ 277.9
Comprehensive loss:
   Net loss                                   --     --           --        --       --        --       (103.5)       --    (103.5)
   Unrealized loss on interest
      rate swap agreement                     --     --           --        --       --        --           --      (1.5)     (1.5)
                                                                                                                           -------
Total comprehensive loss                                                                                                    (105.0)
Common stock incentive plans             125,820     --           --        --     (1.0)      2.9           --        --       1.9
                                      ----------  ------  ----------  --------  -------  ------------  --------  --------  -------
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
                                      ----------  ------  ----------  --------  -------  ------------  --------  --------  -------
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-6
<PAGE>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (in millions)

<TABLE>
<CAPTION>
                                                                                          For the Fiscal Years Ended
                                                                           -------------------------------------------------------
                                                                                             December 28, 2002   December 29, 2001
                                                                                                  Restated            Restated
                                                                           JANUARY 3, 2004      (See Note 3)        (See Note 3)
                                                                           ---------------   -----------------   -----------------
<S>                                                                        <C>               <C>                 <C>
Cash flows from operating activities:
   Net loss                                                                     $(54.4)           $(103.5)             $(30.6)
   Loss from discontinued Athletic Segment                                       (39.9)             (30.8)              (66.7)
                                                                                ------            -------              ------
(Loss) income from continuing operations                                         (14.5)             (72.7)               36.1
Adjustments to reconcile (loss) income from continuing operations to
   net cash provided by operating activities:
         Restructuring, asset impairment and other charges
            (reversals), net                                                      18.2               43.1                 9.0
         Bad debt expense                                                           --                9.4                  --
         Minority interests in net income                                         17.3               37.1                44.8
         Depreciation and amortization                                            21.1               20.3                18.9
         Cumulative effect of change in  accounting principle                       --               24.3                  --
         Loss on disposal of fixed assets                                         17.5                2.2                 1.9
         Deferred income taxes                                                    (0.9)              50.8                (8.8)
         Stock incentive plans                                                     0.7                0.4                 2.1
         Changes in operating assets and liabilities:
            Decrease (increase) in accounts receivable, net                       20.9               10.2               (20.3)
            (Increase) decrease in inventories                                    (7.8)              15.2               (22.5)
            Increase in prepaid expenses and other assets                         (0.7)             (21.4)              (20.3)
            (Decrease) increase in accounts payable and accrued expenses         (24.3)              (9.2)                9.5
            (Decrease) increase in income taxes payable and other long-
               term liabilities                                                  (27.9)               7.0                (5.8)
                                                                                ------            -------              ------
               Net cash  provided by operating activities                         19.6              116.7                44.6
                                                                                ------            -------              ------
Cash flows used in investing activities:
      Acquisitions, net of cash acquired                                            --                 --               (59.0)
      Additions to property and equipment                                        (24.8)             (46.6)              (44.2)
      Proceeds from sale of furniture and equipment and building                    --                3.7                 0.3
                                                                                ------            -------              ------
               Net cash used in investing activities                             (24.8)             (42.9)             (102.9)
                                                                                ------            -------              ------
Cash flows provided by (used in) financing activities:
      Net (payments) proceeds from note payable                                   51.2               (0.1)               72.9
      Dividends paid to minority interests                                       (36.2)             (44.8)              (51.2)
      Payments for return of capital to minority shareholders                       --               (0.5)                 --
      Proceeds from exercise of stock options                                       --                1.0                 2.4
      Treasury stock issued                                                         --                 --                 2.0
      Payments on capital leases                                                  (0.8)              (0.8)               (0.8)
      Payments on mortgage note                                                   (0.8)              (0.7)               (0.7)
      Other                                                                       (1.4)              (1.4)                2.6
                                                                                ------            -------              ------
               Net cash provided by (used in) financing activities                12.0              (47.3)               27.2
                                                                                ------            -------              ------
Discontinued operations                                                          (19.1)             (25.6)               29.3
                                                                                ------            -------              ------
               Net (decrease) increase in cash and cash equivalents              (12.3)               0.9                (1.8)
                                                                                ------            -------              ------
Cash and cash equivalents, beginning of year                                      13.4               12.5                14.3
Cash and cash equivalents, end of year                                          $  1.1            $  13.4              $ 12.5
                                                                                ------            -------              ------
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       F-7
<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 specialty 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 at mass merchandisers and
wholesale arrangements. The Athletic Segment sold athletic footwear and apparel
through its Footaction, Just For Feet, and Uprise chains.

1.   BUSINESS RISKS - BANKRUPTCY FILING

On 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").

As a debtor-in-possession, we are authorized to continue to operate as an
ongoing business but may not engage in transactions outside the ordinary course
of business without the approval of the Court, on notice and an opportunity to
be heard.

As part of our initial reorganization plans after filing Chapter 11, we closed
166 underperforming stores within the Athletic Segment: all 88 Just For Feet
stores; 75 Footaction stores and three Uprise stores. Within the Meldisco
Segment, we committed to and exited during fiscal 2004 the footwear departments
in 87 stores operated by subsidiaries of Federated Department Stores, Inc., and
44 Gordmans, Inc. stores; closed 13 Shoe Zone stores and sold 26 Shoe Zone
stores located in Puerto Rico. These Meldisco businesses will be reflected as
discontinued operations in fiscal 2004. In fiscal 2003, the net sales of these
Meldisco businesses were $53.2 million. We also pursued the sale of the
remaining 353 Footaction retail stores that comprised the Athletic Segment.

On April 21, 2004, we received Court approval to sell 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 three remaining Footaction stores. (see
Note 3 "Discontinued Operations" and Note 12 "Assets and Liabilities Held for
Sale").

In March 2004, the Debtors entered into a debtor-in-possession credit agreement,
which was substantially amended in May 2004 and July 2004 ("DIP and Exit
Facility") with a syndicate of lenders co-led by Fleet National Bank ("Fleet")
and GECC Capital Markets Group, Inc. ("GECC"). (see Note 16 "The DIP and Exit
Facility").

We pursued the sale of 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") for approximately $28.0
million. Thrifty has leased Mira Loma to FMI International LLC, a logistics
provider, which will provide us with warehousing and distribution services
through June 30, 2012 under a receiving, warehousing and physical distribution
services agreement. We sold Gaffney to Automated Distribution Systems, L.P., a
logistics provider, for approximately $20.2 million.


                                       F-8
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to Court orders, we have been authorized to pay certain pre-petition
operating liabilities incurred in the ordinary course of business and reject
certain of our pre-petition obligations. We have notified all known pre-petition
creditors of the establishment of a bar date by which creditors must file a
proof of claim. The bar date for creditors was July 30, 2004 and the bar date
for government entities was August 30, 2004 (excluding the U.S. Internal Revenue
Service for which the bar date was October 29, 2004). Differences between
liability amounts recorded by us and claims filed by creditors will be
reconciled and, if necessary, the Court will make a final determination of
allowable claims. We will continue to evaluate the amount of our pre-petition
liabilities on an ongoing basis and recognize any additional liabilities which
may be material.

Under the Bankruptcy Code, we have the ability to reject executory contracts,
including leases, subject to the approval of the Court and certain other
conditions. Parties affected by the rejection of a contract may file claims
against us in the Court in accordance with the Bankruptcy Code. Due to the
uncertain nature of many of the potential claims, which have been or may be
asserted against us, we are unable to project the magnitude of such claims with
any degree of certainty. We have incurred, and will continue to incur,
significant costs associated with our reorganization.

On November 12, 2004, we filed a proposed joint plan of reorganization (the
"Plan") with the Court. The Plan provides for an orderly reorganization of the
Company and cash distributions to impaired parties and is subject to a vote by
eligible ballot holders. Alternatively, the Plan allows for a sale of all or
substantially all of our assets and/or equity interests in the Meldisco
business, following notice and a hearing.

The Plan provides for some flexibility in the timing of its confirmation and our
emergence from bankruptcy. Key events that could impact this timing include
determinations by the Court on our motion to assume our Master Agreement with
Kmart effective as of July 1, 1995, as amended ("Master Agreement") (including a
determination of Kmart's cure claim - see Note 27 "Commitments and
Contingencies") prior to Plan confirmation. The Plan also provides that we will
not emerge from bankruptcy until we are current in filing our periodic reports
with the Securities and Exchange Commission ("SEC").

If and when the Plan is confirmed, we expect to make an initial distribution of
cash to creditors. The amount of this initial distribution will be based upon
our cash balance remaining after payment of, or establishing reasonable reserves
for, administrative claims, cure claims to the extent applicable, priority tax
claims, secured tax claims and convenience claims as well as establishing a
working capital cash reserve of $28.0 million. As set forth in the Plan, if the
initial distribution does not exceed the lesser of $121.0 million or 85% of the
then estimated general unsecured claims, we will apply up to $21.0 million of
our working capital cash reserve to increase the initial distribution to an
amount equal to the lesser of $121.0 million or 85% of the then estimated
general unsecured claims. Balances due creditors after the initial distribution,
if any, will be subject to our generation of free cash flow, as defined. Such
amounts will be distributed following the first and third quarters of each
fiscal year until such obligations have been satisfied.


                                       F-9
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In order to exit Chapter 11 successfully, we will need to obtain Court
confirmation of a Chapter 11 plan that satisfies the requirements of the
Bankruptcy Code. At this time, it is not possible to predict accurately the
effect of our reorganization on our business, creditors or stockholders or when
we may emerge from Chapter 11, if at all.

These factors raise substantial doubt about the ability of the Company to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

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. The minority interests represent the 49% participation of Kmart in
the ownership of substantially all subsidiaries of Meldisco formed or to be
formed for the purpose of operating licensed footwear departments in Kmart
stores. For simplicity of presentation, these consolidated financial statements
are referred to as financial statements herein.

FISCAL YEARS

The accompanying financial statements include our consolidated results of
operations, assets and liabilities for the 53-week fiscal year ended January 3,
2004 and for the 52-week fiscal years ended December 28, 2002 and December 29,
2001.

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 policies, 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, other intangible assets, the
valuation of retiree medical benefits and the reserve for excess rent and
minority interest.

CASH AND CASH EQUIVALENTS

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. Our cash management program utilizes zero balance
accounts. Accordingly, all book overdraft balances have been reclassified to
current liabilities.


                                      F-10
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 not exceeding five years.
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 have generally
identified this lowest level to be principally individual stores or leased
departments. 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.


                                      F-11
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER INTANGIBLES

Goodwill represents the excess of costs over fair value of assets of businesses
acquired. We adopted the provisions of Statement No. 142, Goodwill and Other
Intangible Assets, ("Statement No. 142") as of the first day of fiscal year
2002. Statement No. 142 requires that goodwill and 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 14 "Goodwill and 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.

Intangible assets that do not have indefinite useful lives consist of trade
names and trademarks and are classified within other noncurrent assets in the
accompanying consolidated balance sheets. The cost of these intangibles is
amortized on a straight-line basis over the estimated useful lives of the
respective assets and liabilities, which range from 5 to 20 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 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 $27.8 million, $34.3 million
(restated) and $35.2 million in 2003, 2002 and 2001, respectively.

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 21 "Income Taxes.")


                                      F-12
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 January 3, 2004 and December 28, 2002, we had an
accrual of $29.3 million and $30.9 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 25 "Postretirement Benefits".)

INSURANCE LIABILITIES

We are primarily self-insured for health care costs. We maintain workers'
compensation insurance that has a deductible of $250,000, property insurance
with deductibles ranging between $50,000 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.

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 stock-based compensation 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 is also not recorded for
employee purchases of stock under the 1997 Associate Stock Purchase Plan since
the plan is non-compensatory as defined in APB 25. We plan to adopt FASB
Statement No. 123 (Revised 2004), which requires that the fair value of
share-based payments to employees be expensed, in 2005 (see Note 4 "Impact of
Recently Issued Accounting Standards".)

As of January 3, 2004, we have three stock-based employee compensation plans
(see Note 22 "Stock Incentive Plans.") We have adopted the disclosure standards
of Statement No. 123 and Statement No. 148, Accounting for Stock-Based
Compensation - Transition and 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 made in 1995 and subsequent
years as if the fair value method of accounting for stock options as defined in
Statement No. 123 had been applied. The following table illustrates the effect
on net loss and loss per share amounts if we had applied the fair


                                      F-13
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

value recognition provisions of Statement No. 123 to stock-based employee
compensation (in millions, except per share amounts):

<TABLE>
<CAPTION>
                                               2003      2002     2001
                                              ------   -------   ------
<S>                                           <C>      <C>       <C>
NET LOSS:
   Reported                                   $(54.4)  $(103.5)  $(30.6)
      Stock-based employee compensation
      expense determined under fair value
      method for all awards, net of related
      tax effects in 2001                       (0.8)     (7.0)    (4.0)
                                              ------   -------   ------
      Pro forma net loss                       (55.2)  $(110.5)  $(34.6)
                                              ------   -------   ------

LOSS PER SHARE:
   Basic
      Reported                                $(2.65)  $ (5.06)  $(1.51)
      Pro forma                                (2.69)    (5.41)   (1.71)

   Diluted
      Reported                                $(2.65)  $ (5.06)  $(1.48)
      Pro forma                               $(2.69)  $ (5.41)  $(1.68)
</TABLE>

The weighted average fair value of options granted during fiscal years 2002 and
2001 was $13.75 and $22.64, respectively. There were no options granted during
fiscal 2003. The fair value of each option granted was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:

<TABLE>
<CAPTION>
                          2002   2001
                          ----   ----
<S>                       <C>    <C>
Expected volatility       49.6%  45.0%
Expected life in years     6.0    6.0
Risk-free interest rate    4.4%   4.8%
Assumed forfeiture rate     --     --
</TABLE>

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 reconciles shares outstanding


                                      F-14
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

at the beginning of the year to average shares outstanding used to compute basic
and diluted loss per share (in millions):

<TABLE>
<CAPTION>
                                           2003   2002   2001
                                           ----   ----   ----
<S>                                        <C>    <C>    <C>
Shares outstanding at beginning of year    20.2   20.1   19.9
Contingently issuable shares (1)            0.3    0.3    0.3
                                           ----   ----   ----
Average shares outstanding - basic         20.5   20.4   20.2
                                           ----   ----   ----
Average shares outstanding - diluted (2)   20.5   20.4   20.7
                                           ----   ----   ----
</TABLE>

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

(2)  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 3, 2004, December 28, 2002 and December 29, 2001,
     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 841
     shares and 20,158 shares for the years ended January 3, 2004, and December
     28, 2002, 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, notes payable, 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 mortgages as of January 3, 2004 was $7.1
million, which approximated its fair value. The carrying value of mortgages as
of December 28, 2002 was $7.9 million. The fair value of mortgages as of
December 28, 2002 was $8.5 million and was estimated using the present value of
future cash flows at a discount rate of 6.0%. The fair value of our four
interest rate swap agreements is reflected in accrued expenses in the
accompanying consolidated balance sheets and totaled approximately $0.4 million
and $1.5 million as of January 3, 2004 and December 28, 2002, respectively.

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.

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,


                                      F-15
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

3.   DISCONTINUED OPERATIONS

The sale 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 in 2004 has been accounted for as discontinued operations.
Accordingly, our financial statements have been restated to reflect the Athletic
Segment as a discontinued operation in our consolidated statements of operations
and cash flows for all periods presented. In addition, the 2003 consolidated
balance sheet reflects the assets and liabilities of the discontinued operations
as held for sale. Statement of operations information presented in the notes to
consolidated financial statements has been restated to reflect continuing
operations for all periods presented. Balance sheet information presented in the
notes to consolidated financial statements has been restated to reflect
continuing operations for fiscal 2003 only.

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 sale price was placed
in escrow with respect to 14 store locations that were leased on a
month-to-month basis. During the year following the closing of the sale, if Foot
Locker enters into a new lease for any of these store locations, the escrow
amount relating to that location shall be paid to us. The escrow amount relating
to any location for which Foot Locker has not entered into a new lease within
one year after the closing shall be paid to Foot Locker, thereby reducing the
purchase price by such amount.


                                      F-16
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net sales and operating loss from discontinued operations for 2003 was (in
millions):

<TABLE>
<CAPTION>
                                               2003
                                              ------
<S>                                           <C>
Net sales                                     $973.2
Operating loss from discontinued operations   $(32.6)
</TABLE>

Certain amounts in the consolidated statements of operations and cash flows for
fiscal years 2002 and 2001 have been restated with respect to discontinued and
continuing operations as follows (in millions):

<TABLE>
<CAPTION>
Consolidated Statements of Operations
-------------------------------------
                                                AS ORIGINALLY
                                                   REPORTED     AS RESTATED
                                                -------------   -----------
                                                      FISCAL YEAR 2002
                                                ---------------------------
<S>                                             <C>             <C>
Interest expense                                   $  17.9        $   9.8
                                                   =======        =======
Interest income                                    $  (9.2)       $  (1.1)
                                                   =======        =======
Income from operations before income taxes,
   minority interests, discontinued
   operations and cumulative effect of a
   change in accounting principle                  $  59.6        $  59.6
Provision for income taxes                            35.2           70.9
                                                   -------        -------
Income (loss) from operations before
   minority interests, loss from
   discontinued operations and cumulative
   effect of a change in accounting principle         24.4          (11.3)
                                                   =======        =======
Loss from operations of discontinued Athletic
    Segment, net of tax                              (66.5)         (30.8)
                                                   =======        =======
Net loss                                           $(103.5)       $(103.5)
                                                   =======        =======

                                                      FISCAL YEAR 2001
                                                ---------------------------
Interest expense                                   $  21.5        $   3.8
                                                                  =======
Interest income                                    $ (19.3)       $  (1.6)
                                                   =======        =======
Income from operations before income taxes,
   minority interests, discontinued
   operations and cumulative effect of a
   change in accounting principle                  $ 109.7        $ 109.7
Provision for income taxes                            27.8           28.8
                                                   -------        -------
Income from operations before minority
   interests and loss from discontinued
   operations                                         81.9           80.9
                                                   =======        =======
Loss from operations of discontinued Athletic
   Segment, net of tax                               (67.7)         (66.7)
                                                   =======        =======
Net loss                                           $ (30.6)       $ (30.6)
                                                   =======        =======
</TABLE>


<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
-------------------------------------
                                                AS ORIGINALLY
                                                   REPORTED     AS RESTATED
                                                -------------   -----------
                                                      FISCAL YEAR 2002
                                                ---------------------------
<S>                                             <C>             <C>
Loss from discontinued Athletic Segment            $ (66.5)       $ (30.8)
                                                   =======        =======
Loss from continuing operations                    $ (37.0)       $ (72.7)
                                                   =======        =======
Loss on disposal of fixed assets                   $   6.9        $   2.2
                                                   =======        =======
Decrease in accounts payable and
   accrued expenses                                $  (8.6)       $  (9.2)
                                                   =======        =======
Increase in income taxes payable and
   other long-term liabilities                     $   9.0        $   7.0
                                                   =======        =======
Net cash provided by operating activities          $ 159.7        $ 116.7
                                                   =======        =======
Additions to property and equipment                $ (47.7)       $ (46.6)
                                                   =======        =======
Net cash used in investing activities              $ (44.0)       $ (42.9)
                                                   =======        =======
Discontinued operations                            $ (67.5)       $ (25.6)
                                                   =======        =======


                                                      FISCAL YEAR 2001
                                                ---------------------------
Income from continuing operations                  $  37.1        $  36.1
                                                   =======        =======
(Gain) loss on disposal of fixed assets            $  (2.6)       $   1.9
                                                   =======        =======
Deferred income taxes                              $ (31.1)       $  (8.8)
                                                   =======        =======
(Decrease) increase in prepaid expenses
   and other assets                                $   2.0        $ (20.3)
                                                   =======        =======
Net cash provided by operating activities          $  41.1        $  44.6
                                                   =======        =======
Discontinued operations                            $  32.8        $  29.3
                                                   =======        =======
</TABLE>

                                      F-17
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the 2002 and 2001 consolidated statements of operations, interest expense and
interest income have been revised within continuing operations as intercompany
interest had been incorrectly eliminated against interest income instead of
interest expense.

In the fiscal 2002 consolidated statement of operations, the provision for
income taxes in continuing operations was increased by $35.7 million with a
corresponding decrease in loss from discontinued operations primarily to give
effect to a change in the beginning-of-the-fiscal year 2002 balance of the
valuation allowance that resulted from a change in circumstances that was caused
by a change in judgment about the realizability of the related deferred tax
asset in future years. This had previously not been correctly reflected within
continuing operations.

In the fiscal 2001 consolidated statement of operations, the provision for
income taxes in continuing operations was increased by $1.0 million with a
corresponding decrease in loss from discontinued operations due to a revision in
the amount attributable to discontinued operations.

The following is a summary of financial information of our discontinued and
continuing operations before minority interests and cumulative effect of a
change in accounting principle for 2002 and 2001 (in millions):

<TABLE>
<CAPTION>
                                                      Consolidated                    Continuing
                                                     (As Reported)   Discontinued   (As Restated)
                                                     -------------   ------------   -------------
<S>                                                  <C>             <C>            <C>
2002
Net sales                                              $2,299.9         $953.9        $1,346.0
Cost of sales                                           1,625.3          707.9           917.4
                                                       --------         ------        --------
Gross profit                                              674.6          246.0           428.6
Operating expenses                                        635.2          274.9           360.3
                                                       --------         ------        --------
Operating profit (loss)                                    39.4          (28.9)           68.3
Interest expense, net                                      14.2            5.5             8.7
                                                       --------         ------        --------
Income (loss) from operations                              25.2          (34.4)           59.6
Provision for income taxes (Restated)                      67.3           (3.6)           70.9
                                                       --------         ------        --------
Income (loss) before minority interests (Restated)     $  (42.1)        $(30.8)       $  (11.3)
                                                       ========         ======        ========
</TABLE>

<TABLE>
<CAPTION>
                                                      Consolidated                    Continuing
                                                     (As Reported)   Discontinued   (As Restated)
                                                     -------------   ------------   -------------
<S>                                                  <C>             <C>            <C>
2001
Net sales                                              $2,460.5        $1,016.3        $1,444.2
Cost of sales                                           1,762.2           775.3           986.9
                                                       --------        --------        --------
Gross profit                                              698.3           241.0           457.3
Operating expenses                                        676.7           331.3           345.4
                                                       --------        --------        --------
Operating profit (loss)                                    21.6           (90.3)          111.9
Interest expense, net                                      15.2            13.0             2.2
                                                       --------        --------        --------
Income (loss) from operations                               6.4          (103.3)          109.7
Provision (benefit) for income taxes (Restated)            (7.8)          (36.6)           28.8
                                                       --------        --------        --------
Income (loss) before minority interests (Restated)     $   14.2        $  (66.7)       $   80.9
                                                       ========        ========        ========
</TABLE>


                                      F-18
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.   IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003 the FASB issued FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities. In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation clarifies the application of Accounting Research
Bulletin ("ARB") No. 51, Consolidated Financial Statements for companies that
have interests in entities that are Variable Interest Entities (VIE) as defined
under FIN 46. According to this interpretation, if a company has an interest in
a VIE and is at risk for a majority of the VIE's expected losses or receives a
majority of the VIE's expected gains it shall consolidate the VIE. FIN 46-R also
requires additional disclosures by primary beneficiaries and other significant
variable interest holders. For entities acquired or created before February 1,
2003, this interpretation is effective no later than the end of the first
interim or reporting period ending after March 15, 2004, except for those VIE's
that are considered to be special purpose entities, for which the effective date
is no later than the end of the first interim or annual reporting period ending
after December 15, 2003. For all entities that were acquired subsequent to
January 31, 2003, this interpretation is effective as of the first interim or
annual period ending after December 31, 2003. As of January 3, 2004, we did not
have interests in VIE's and the adoption of the provisions of this
interpretation did not have a material effect on our financial statements.

In December 2003, FASB Statement No. 132 (revised), Employers' Disclosures about
Pensions and Other Postretirement Benefits ("Statement 132 Revised"), was
issued. Statement 132 Revised prescribes employers' disclosures about pension
plans and other postretirement benefit plans; it does not change the measurement
or recognition of those plans. Statement 132 Revised retains and revises the
disclosure requirements contained in the original Statement 132. It also
requires additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. Statement 132 Revised is effective for fiscal
years ending January 3, 2004.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was enacted. The Act introduces a prescription drug
benefit under Medicare ("Medicare Part D") as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. FASB Statement No. 106,
Employers ' Accounting for Postretirement Benefits Other Than Pensions,
addresses employers' accounting for postretirement health care benefits. FASB
Staff Position 106-2 requires that employers that qualify for a prescription
drug subsidy must recognize the reduction in costs as employees provide services
in future years, commencing with reporting periods ending after June 15, 2004.
We estimate that the medical drug subsidy that we will receive from 2006 through
2013 will approximate $1.7 million.

In December 2003, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
03-10, Application of EITF Issue No. 02-16, Accounting by a Customer (Including
a Reseller) for Certain Consideration Received from a Vendor, by Reseller to
Sales Incentives Offered to Consumers by Manufacturers. According to EITF No.
03-10, manufacturers' coupons that meet certain criteria should be recorded
gross-basis as revenue, and are not subject to the guidance in EITF No. 02-16.
EITF No. 03-10 is not expected to have a material impact on our financial
statements.


                                      F-19
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 June 15, 2005. We intend to adopt this Statement using the modified
prospective method. We do not yet know the impact that any future share-based
payment transactions will have on our financial position or results of
operations.

5.   MELDISCO'S RELATIONSHIP WITH KMART

We operated the footwear departments in 1,511 Kmart stores (the "Shoemart
Subsidiaries") as of January 3, 2004. Kmart owns a 49% equity interest in
substantially all of the subsidiaries that operate these footwear departments.
The business relationship between Meldisco and Kmart is extremely important to
us, particularly now that we have exited all of our Athletic Segment businesses
and have exited certain Meldisco footwear departments. 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 Shoemart Subsidiaries own the inventory and
are responsible for staffing the departments. The Kmart licensed footwear
departments account for a substantial majority of our total sales and operating
profit from continuing operations, as shown in the tables below (in millions):

<TABLE>
<CAPTION>
                                                       2003       2002       2001
                                                     --------   --------   --------
<S>                                                  <C>        <C>        <C>
Sales from continuing operations
   Footstar                                          $1,015.6   $1,346.0   $1,444.2
   Kmart footwear departments                        $  901.4   $1,154.3   $1,209.3

Kmart footwear sales from continuing operations as
   percentage of Footstar                                  89%        86%        84%
</TABLE>


                                      F-20
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                         2003    2002     2001
                                                        -----   ------   ------
<S>                                                     <C>     <C>      <C>
Operating profit from continuing operations
   Footstar                                             $36.1   $ 68.3   $111.9
   Meldisco                                             $49.8   $ 78.3   $120.5
   Kmart footwear departments                           $55.6   $109.4   $120.3

Kmart's interest in footwear departments'
   operating profit                                     $24.8   $ 50.9   $ 56.2
                                                        -----   ------   ------
Operating profit adjusted to exclude Kmart's 49%
   interest in footwear departments' operating income
   Footstar                                             $11.3   $ 17.4   $ 55.7
   Meldisco                                             $25.0   $ 27.4   $ 64.3
   Kmart footwear departments                           $30.8   $ 58.5   $ 64.1
</TABLE>

The Master Agreement provides us with the non-transferable exclusive right and
license to operate a footwear department in each applicable Kmart store. The
initial term of the Master Agreement expires July 1, 2012, and is renewable for
a 15-year term upon mutual agreement, unless either party gives notice of
termination at least four years prior to the end of the applicable term. The
license agreement for particular Kmart stores allow the parties to terminate
those agreements under specified circumstances.

As set forth in the Master Agreement, Kmart collects proceeds from the sale of
our inventory and remits those sales proceeds on a weekly basis to us less any
applicable fees outlined in the Master Agreement. Such deductions and fees were
$136.0 million, $171.0 million and $179.7 million for fiscal 2003, 2002 and
2001, respectively. As of January 3, 2004 and December 28, 2002, we had
outstanding accounts receivable due from Kmart of $12.1 million and $31.0
million respectively, which were subsequently collected in January 2004 and
January 2003, respectively.

Under our arrangement with Kmart, Meldisco distributes annually at the end of
the first quarter of each fiscal year, 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 is contingent upon store-by-store or store level
profits above certain levels. As of January 3, 2004 and December 28, 2002,
Kmart's undistributed equity percentage share of the retained earnings (minority
interests) amounted to $13.2 million and $32.9 million, respectively. As our
fiscal 2002 audited financial statements were not finalized by March 31, 2003,
the payment due date, we made an estimated payment of $36.2 million for the
fiscal 2002 dividend on March 31, 2003.

In addition to the minority interest dividends, as of January 3, 2004 and
December 28, 2002, we had a liability for undistributed excess fees of $4.7
million and $15.8 million, respectively. We made an estimated excess fee payment
of $15.2 million for fiscal 2002 on March 31, 2003.


                                      F-21
<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 have been paid as of January 3, 2004.

7.   2002 RESTRUCTURING PLAN AND OTHER CHARGES

During fiscal year 2002, we approved several plans in which we recorded net
restructuring, asset impairment and other charges (the "Charge") of $43.9
million principally in connection with our exiting various license arrangements
acquired in the J. Baker acquisition and the closing of certain Kmart stores.
The inventory portion of the Charge, which amounted to $29.1 million, has been
reflected in the consolidated statements of operations as a component of cost of
sales. The non-inventory amounts, which amounted to $14.8 million, net, have
been reflected as restructuring, asset impairment and other charges in the
accompanying consolidated statements of operations. In addition to the Charge,
net reversals of $(0.8) million were recorded during 2002 related to
restructuring and other charges recorded in fiscal 2001.

<TABLE>
<CAPTION>
                                                  2002                    2003
                                       --------------------------   ---------------
                                       Initial
                                        Charge    Usage   Balance   Usage   Balance
                                       -------   ------   -------   -----   -------
<S>                                    <C>       <C>      <C>       <C>     <C>
Non-cash components
Inventory write-downs                   $29.1     $29.1     $ --     $ --     $--
Lease exit costs                          1.2       1.2       --       --      --
Asset impairment                          7.9       7.9       --       --      --
                                        -----     -----     ----     ----     ---
Subtotal                                 38.2      38.2       --       --      --

Cash Components
Severance                                 4.6       3.5      1.1      1.1     $--
Store, building and lease exit costs      1.1       1.1       --       --      --
                                        -----     -----     ----     ----     ---
Subtotal                                  5.7       4.6      1.1      1.1      --
                                        -----     -----     ----     ----     ---
Total                                   $43.9     $42.8      1.1      1.1     $--
                                        =====     =====     ====     ====     ===
</TABLE>

8.   2001 RESTRUCTURING PLAN AND OTHER CHARGES

In fiscal year 2001, we approved a plan (the "2001 Plan") including
restructuring, asset impairment and other charges totaling $9.0 million for the
write-down of inventory, the impairment of assets, severance, and costs
associated with the early termination of leases.

The most significant component of these charges included the write-down of
certain inventory, which totaled $5.8 million and related to markdowns for
inventory at certain Ames stores and for inventory at


                                      F-22
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

licensed departments, which have since been closed. The inventory component of
the charge was recorded as a component of cost of sales and was used in fiscal
year 2001 to directly write-down the related inventory.

The charges for asset impairments and lease terminations were related to certain
costs to exit non-strategic landlord relationships acquired in the J. Baker
acquisition and certain costs to close Ames stores in connection with its
reorganization plan.

The 2001 Plan included a fixed asset and goodwill impairment charge of $1.8
million. Of this amount, $1.1 million related to the termination of certain
landlord relationships and $0.7 million related to the impairment of certain
assets associated with additional Ames closings. The asset impairment charge was
primarily recorded as a reduction of fixed assets, principally representing
fixtures and leasehold improvements. The fixed assets written off could not
readily be used at other store locations nor was there a ready market outside
the Company to determine fair value; the assets were discarded at the time of
closing.

In connection with the store closings, we established a reserve of $0.9 million
for store exit costs. These store exit costs were principally for future lease
payments, offset by sublease activity and lease buyouts based upon historical
experience. We also established a reserve of $0.5 million for various severance
costs in connection with the restructuring plan.

The following table displays the activity and the significant components of the
fiscal year 2001 Plan and other charges (in millions):

<TABLE>
<CAPTION>
                                         2001                          2002
                        --------------------------------------   ---------------
                                  Additional
                        Initial     Charge/
                         Charge   (Reversal)   Usage   Balance   Usage   Balance
                        -------   ----------   -----   -------   -----   -------
<S>                     <C>       <C>          <C>     <C>       <C>     <C>
Non-cash components
Inventory write-downs     $5.8       $ --       $5.8     $ --     $ --     $--
Asset impairment           1.8         --        1.8       --       --      --
                          ----       ----       ----     ----     ----     ---
Subtotal                   7.6         --        7.6       --       --      --

Cash Components
Severance                   --        0.5         --      0.5      0.5     $--
Store exit costs           0.9         --         --      0.9      0.9      --
                          ----       ----       ----     ----     ----     ---
Subtotal                   0.9        0.5         --      1.4      1.4      --
                          ----       ----       ----     ----     ----     ---

Total                     $8.5       $0.5       $7.6     $1.4     $1.4     $--
                          ====       ====       ====     ====     ====     ===
</TABLE>

9.   J. BAKER ACQUISITION

In February 2001, we completed the acquisition of the footwear assets of J.
Baker. The business operated 1,163 licensed footwear departments under 13
agreements with retail chains including Ames, Variety, Stein Mart, Today's Man
and Spiegel, Inc. Assets we purchased included inventory, store fixtures,
trademarks and license agreements. The cash consideration paid for the assets
was $59.0 million. The acquisition was accounted for under the purchase method
of accounting for business


                                      F-23
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

combinations. The purchase price was allocated to the acquired assets and
liabilities assumed, both tangible and intangible, based upon valuations from
outside experts and certain management estimates. Management estimated the value
of acquired inventory as the net realizable value of the acquired inventory,
less a normal profit margin. Accordingly, our financial statements include the
results of operations of J. Baker from the acquisition date. The excess of the
purchase price over the fair market value of the net assets acquired which
amounted to $26.0 million, was recorded as goodwill and was being amortized over
15 years. As discussed in Note 14, "Goodwill and Other Intangible Assets," the
remaining unamortized goodwill related to this acquisition, which totaled $24.3
million, was written off in fiscal 2002. As of January 3, 2004, we had exited
all of the J. Baker businesses.

10.  ACCOUNTS RECEIVABLE

     Accounts receivable consisted of the following (in millions):

<TABLE>
<CAPTION>
                                         2003    2002
                                        -----   -----
<S>                                     <C>     <C>
Due from Kmart                          $12.1   $31.0
Other - primarily trade                   4.8    23.0
                                        -----   -----
                                         16.9    54.0
Less: Allowance for doubtful accounts     0.3     2.9
                                        -----   -----
   Total                                $16.6   $51.1
                                        =====   =====
</TABLE>

In fiscal 2001, Ames, whose footwear department license was acquired by us in
the J. Baker acquisition (see Note 9 "J. Baker Acquisition"), filed a voluntary
petition for reorganization under Chapter 11. On August 14, 2002, Ames announced
that, as a result of continued weak sales, it would cease operations and close
all of its 327 store locations. We continued to operate licensed footwear
departments within Ames stores until all the stores were closed in October 2002.
As a result of Ames' decision to cease operations and close all its stores, we
recorded a charge in fiscal 2002 of $9.2 million as a write off to bad debt
expense in connection with the receivables from Ames. We are currently pursuing
our claim with respect to the $9.2 million receivable through litigation.

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 acquiror 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 would be paid in two installments of $2.7 million, the first
payable in August 2003, and the second in January 2004. Based upon these
revisions and due to our collection of the first installment of $2.7 million, we
recorded the $5.4 million as other income in the accompanying consolidated
statements of operations during fiscal 2003 and established a receivable for the
final installment of $2.7 million. The second installment due in January 2004
has been collected.


                                      F-24
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

<TABLE>
<CAPTION>
                                2003    2002
                               -----   -----
<S>                            <C>     <C>
Deferred income taxes          $ 4.3   $ 3.4
Income tax refund receivable     5.8    15.8
Other prepaid taxes              8.7    10.1
Other                            4.3     7.1
                               -----   -----
   Total                       $23.1   $36.4
                               =====   =====
</TABLE>

See Note 21, "Income Taxes," for information on the deferred income taxes.

12.  ASSETS AND LIABILITIES HELD FOR SALE

During fiscal 2003, we commenced the process to dispose of our Athletic Segment
(see Note 1 "Business Risks - Bankruptcy Filing" and Note 3 "Discontinued
Operations"). Assets and liabilities held for sale as of January 3, 2004
consisted of the following (in millions):

<TABLE>
<S>                                             <C>
ASSETS HELD FOR SALE
Cash and cash equivalents                       $ 10.5
Accounts receivable, net                           5.2
Inventories                                      167.6
Prepaid expenses and other current assets          2.5
Property and equipment, net                       79.0
Goodwill                                          18.0
Intangible assets, net                             0.3
Deferred charges and other non current assets      1.4
                                                ------
                                                $284.5
                                                ======

LIABILITIES HELD FOR SALE
Accounts payable                                $ 41.3
Accrued expenses                                  57.4
Income taxes payable                               0.1
Other long-term liabilities                       11.7
                                                ------
                                                $110.5
                                                ======
</TABLE>


                                      F-25
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                     Useful lives
                                       (in yrs.)         2003     2002
                                 --------------------   ------   ------
<S>                              <C>                    <C>      <C>
Land                                                    $ 13.2   $ 14.8
Buildings and improvements                      10-40     65.5     50.3
Equipment and furniture                          5-10    166.0    249.0
Capital leases                                   5-10      2.4      7.0
Leasehold improvements           10 or life of lease,      8.2     90.1
                                 whichever is shorter
Construction in progress                                   0.7     41.7
                                                        ------   ------
                                                         256.0    452.9
Less: Accumulated depreciation
   and amortization                                      108.8    186.2
                                                        ------   ------
   Total                                                $147.2   $266.7
                                                        ======   ======
</TABLE>

Depreciation expense was $19.9 million, $16.9 million and $16.3 million in 2003,
2002 and 2001, respectively.

14.  GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001, the FASB issued Statement No. 142 which requires that goodwill and
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. 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.

We adopted the provisions of Statement No. 142 effective the first day of fiscal
year 2002. We ceased the amortization of all unamortized goodwill and ceased the
amortization of a $10.5 million trademark, which was determined to have an
indefinite useful life. Amortization expense related to goodwill was $2.3
million for the year ended December 29, 2001. Amortization expense related to
the intangible asset with an indefinite useful life was $0.5 million for the
year ended December 29, 2001.

Statement No. 142 requires the annual testing for the impairment of goodwill at
a reporting unit level. The Standard also required a goodwill impairment test as
of the adoption date. We identified our reporting units under Statement No. 142
to be the Meldisco Segment and, prior to its sale, the Athletic Segment. We
maintained goodwill at the Meldisco Segment relating to the assets acquired from
J. Baker in the amount of $24.3 million. The fair value of these reporting units
was estimated using the present value of expected future cash flows or market
values of related businesses, where appropriate. We completed our impairment
test during the second quarter of fiscal year 2002 and determined that the $24.3
million of unamortized goodwill of the Meldisco Segment relating to the assets
acquired


                                      F-26
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

from J. Baker was impaired. This impairment was the result of sequential periods
of decreased operating profit and the exit of most of the leases acquired.
Accordingly, we recognized a charge for the cumulative change of adopting the
accounting standard as shown in the accompanying consolidated statements of
operations.

In connection with the adoption of Statement No. 142, we reassessed the useful
lives of our amortizable intangible assets; there were no changes from previous
years. Additionally, a trademark was determined to have an indefinite useful
life due to its expected ability to generate cash flows indefinitely. During
fiscal year 2003, we evaluated the fair value of our intangible assets and
determined that certain trade names of approximately $1.1 million and our
customer database were impaired and written off.

The following table shows information regarding intangible asset (in millions).

<TABLE>
<CAPTION>
                                                 AS OF JANUARY 3, 2004    As of December 28, 2002
                                                -----------------------   -----------------------
                             Weighted-Average     GROSS                     Gross
                               Amortization     CARRYING    ACCUMULATED   Carrying    Accumulated
                                  Period         AMOUNT    AMORTIZATION    Amount    Amortization
                             ----------------   --------   ------------   --------   ------------
<S>                          <C>                <C>        <C>            <C>        <C>
Amortizable assets
Trade names and trademarks       10 years         $ 1.7        $0.6         $13.0        $6.1
Customer Database                                    --          --           2.7         1.6
Unamortizable asset
Trademark                                           9.9          --          10.5         0.6
                                                  -----        ----         -----        ----
   Total                                          $11.6        $0.6         $26.2        $8.3
                                                  -----        ----         -----        ----
</TABLE>


                                      F-27
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows the reconciliation between net loss and adjusted net
loss which excludes the amortization of goodwill and amortization of trademark
with an indefinite life, net of tax, as well as the related impact on basic and
diluted loss per share for the fiscal year ended (in millions, except per share
amounts):

<TABLE>
<CAPTION>
                                    JANUARY 3,   December 28,   December 29,
                                       2004          2002           2001
                                    ----------   ------------   ------------
<S>                                 <C>          <C>            <C>
Net loss                              $(54.4)      $(103.5)        $(30.6)
Add back: Goodwill amortization           --            --            1.8
Add back: Trade name amortization         --            --            0.3
                                      ------       -------         ------
Adjusted net loss                     $(54.4)      $(103.5)        $(28.5)
                                      ======       =======         ======
BASIC LOSS PER SHARE:
Net loss                              $(2.65)      $ (5.06)        $(1.51)
Goodwill amortization                     --            --           0.09
Trade name amortization                   --            --           0.01
                                      ------       -------         ------
Adjusted net loss                     $(2.65)      $ (5.06)        $(1.41)
                                      ======       =======         ======
DILUTED LOSS PER SHARE:
Net loss                              $(2.65)      $ (5.06)        $(1.48)
Goodwill amortization                     --            --           0.09
Trade name amortization                   --            --           0.01
                                      ------       -------         ------
Adjusted net loss                     $(2.65)      $ (5.06)        $(1.38)
                                      ======       =======         ======
</TABLE>

The following table lists amortization expense relating to amortizable
intangible assets for the fiscal year ended January 3, 2004 and currently
projected amortization expense for the next five fiscal years (in millions):

<TABLE>
<S>                <C>
Fiscal year 2003   $1.2
Fiscal year 2004    0.7
Fiscal year 2005    0.1
Fiscal year 2006    0.1
Fiscal year 2007    0.1
Fiscal year 2008    0.1
</TABLE>


                                      F-28
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  ACCRUED EXPENSES

Accrued expenses consisted of the following (in millions):

<TABLE>
<CAPTION>
                                            2003    2002
                                           -----   ------
<S>                                        <C>     <C>
Rent                                       $ 4.8   $ 33.8
Taxes other than federal income taxes        7.6     28.6
Salaries                                    11.1     21.9
2002 restructuring reserve                    --      4.0
2001 restructuring reserve                    --      7.6
Other - individually not in excess of 5%    27.9     48.7
                                           -----   ------
Total                                      $51.4   $144.6
                                           =====   ======
</TABLE>

16.  THE DIP AND EXIT CREDIT FACILITY

Effective March 4, 2004, we entered into a senior secured $300.0 million
Debtor-in-Possession Credit Agreement ("DIP Credit Agreement") with a syndicate
of lenders co-led by Fleet and GECC. The DIP Credit Agreement provided for
revolving loans of up to $240.0 million (including a sublimit of $75.0 million
for letters of credit) and a term loan of $60.0 million. The DIP Credit
Agreement had a term of two years.

The DIP Credit Agreement was amended on May 11, 2004 to, among other things,
reduce the amount of DIP financing available to $130.0 million.

By Court order dated July 22, 2004, we further amended the DIP Credit Agreement
to also provide for financing upon emergence from Chapter 11 (as so amended, the
"DIP and Exit Facility"). Under the DIP and Exit Facility, we will have access
to up to $100.0 million of secured DIP financing, including a sub-limit for
letters of credit, subject to a borrowing base formula based upon inventory and
accounts receivable. We may, at our option and upon satisfaction of certain
conditions, convert the DIP and Exit Facility to post emergence financing ("Exit
Facility"), which will provide for up to $160.0 million in revolving
commitments, including a sub-limit for letters of credit. These conditions
include the absence of any default or event of default, confirmation of the Plan
and occurrence of all conditions related thereto, resolution of all issues
related to our assumption of the Master Agreement and our delivery of forward
looking projections acceptable to the lender and specified availability levels.
Borrowings under the DIP and Exit Facility will bear interest at Fleet's prime
rate plus 0.0% to 0.5% or LIBOR plus 1.75% to 2.50%, at our option, with the
applicable margin at any time based on excess availability levels. A quarterly
unused fee of 0.3% per annum is payable on the unutilized balance.

The DIP and Exit Facility has a total term not to exceed five years from the
Petition Date and expires upon Plan confirmation. The Exit Facility is effective
upon our emergence from bankruptcy and its term will be three years. Because
there could be a number of months between confirmation and emergence, we plan to
work with our current lenders to ensure the DIP and Exit Facility is amended to
provide continued financial support to us during the period from Plan
confirmation to emergence.

The DIP and Exit Facility is secured by substantially all of our assets and
contains various affirmative and negative covenants, representations,
warranties, and events of default to which we are subject, all


                                      F-29
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

as specified in the DIP and Exit Facility, including certain financial covenants
and restrictions such as limitations on additional indebtedness, other liens,
dividends, stock repurchases, and capital expenditures. The DIP and Exit
Facility contains a minimum excess availability covenant as well as a maximum
capital expenditure covenant. Upon emergence from Chapter 11, if minimum excess
availability falls below 20% of the borrowing base, we will be subject to a
fixed charge coverage covenant. The DIP and 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 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 under the DIP and Exit Facility would result in default or other
adverse impact under the DIP and Exit Facility. Upon the request of the Company,
the lenders have extended the time for the delivery of the fiscal 2003 and 2004
annual consolidated financial statements and certain compliance certifications
until we exit from Chapter 11.

17.  THE PRE-PETITION CREDIT FACILITY

Effective October 18, 2002, we entered into a three-year $325 million senior
secured credit facility (the "Credit Facility") with a syndicate of lenders led
by Fleet, which replaced our then existing $325 million senior revolving credit
facility. The Credit Facility also included revisions to the cash management
arrangement whereby funds received are deposited directly into an account at
Fleet and, at our discretion, automatically applied as a reduction of amounts
outstanding under the revolving loan component of the Credit Facility. As of
December 28, 2002, the Credit Facility consisted of a $255.0 million revolving
credit facility including a sub-limit for letters of credit and a $70.0 million,
14.25%, term loan, which term loan was subordinate to the revolving loan portion
of the Credit Facility. As of December 28, 2002, there was $146.8 million
outstanding under the Credit Facility, excluding outstanding letters of credit
amounting to $7.2 million. As we were unable to confirm compliance during fiscal
2002 with certain of the covenants described above, borrowings under the Credit
Facility were classified as short-term debt as of December 28, 2002.

As of September 24, 2003, the Company and the syndicate of lenders entered into
an amendment to the Credit Facility which, among other things, increased the
amount of the term loan to $90 million (with the aggregate Credit Facility
thereby increased to $345 million). The Credit Facility was secured by
substantially all our assets and was subject to advance rates applied to
inventory, accounts receivable, and certain inventory not yet received by us but
supported by trade letters of credit, which determines the amount available for
borrowing by us.

The Credit Facility contained various obligations, affirmative and negative
covenants, representations, warranties, and events of default to which we were
subject, all as specified in the Credit Facility, including, among other things,
certain financial covenants as well as limits and restrictions on additional
indebtedness, other liens, dividends, stock repurchases, and capital
expenditures. Initially, the Credit Facility included a leverage
(debt-to-EBITDA) financial ratio covenant and an interest coverage
(EBITDAR-to-interest plus rent expense) financial ratio covenant, a minimum
excess availability covenant, and a maximum annual capital expenditure limit.
Initially, our performance against the interest coverage ratio affected the cost
of the revolving loan portion of the Credit Facility and as of September 24,
2003, such provision was amended so that our average excess availability
affected the cost of the revolving loan portion of the Credit Facility. On March
21, 2003, the Company and the syndicate of lenders amended the financial
covenants in the Credit Facility by replacing the leverage and interest coverage
covenants with a minimum consolidated EBITDA covenant and by


                                      F-30
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

revising the minimum excess availability covenant, and the maximum annual
capital expenditure limit. The Credit Facility also included representations and
warranties that, on an ongoing basis, there were no material adverse events
affecting our business, operations, property, assets, or condition, and that the
Master Agreement was in full force and effect and not in default. A failure by
us to satisfy any of the covenants, representations or warranties under the
Credit Facility would result in default or other adverse impact under the Credit
Facility.

As of January 3, 2004, there was $108.0 million outstanding under the Credit
Facility, excluding outstanding letters of credit amounting to $15.4 million,
and $90.0 million outstanding under the term loan. As borrowings under the
Credit Facility were repaid in fiscal 2004, such borrowings were classified as
current notes payable in the accompanying consolidated balance sheets as of
January 3, 2004. The lenders extended the time for the delivery of annual and
quarterly financial statements and certain compliance certifications until
February 27, 2004 and waived inaccuracies in or breaches of certain provisions
of the Credit Facility solely arising from the restatement of our financial
statements until February 27, 2004. We did not comply with the provisions of
this waiver. On March 4, 2004, we entered into the DIP Credit Agreement (See
Note 16 "The DIP and Exit Credit Facility").

The Credit Facility had a weighted average interest rate of 8.7% on outstanding
borrowings as of January 3, 2004. The weighted average interest rate on
outstanding borrowings was 7.7%, 4.6% and 5.5% in fiscal years 2003, 2002 and
2001, respectively. Interest on the revolving portion of the Credit Facility was
determined based upon several alternative rates and could have automatically
increased or decreased based upon our average excess availability. Interest on
the term loan was fixed at 15.0% through September 24, 2004 and was thereafter
subject to fluctuating rates. A facility fee was paid based on the aggregate
commitments. Up-front fees paid were amortized over the life of the Credit
Facility.

18.  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 years ended January 3, 2004 and December 28, 2002,
interest rate cash flow hedges were highly effective. As of January 3, 2004 and
December 28, 2002, the fair value of each interest rate swap is reflected in
accrued expenses in the accompanying consolidated balance sheets and totaled
approximately $0.4 million and $1.5 million, respectively. For the years ended
January 3, 2004 and December 28, 2002, we recorded interest expense of $1.5
million and $1.0 million related to the interest rate swap agreements,
respectively. 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. No cash flow hedges were discontinued
during fiscal year 2003.


                                      F-31
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.  OTHER LONG-TERM LIABILITIES

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

<TABLE>
<CAPTION>
                          2003    2002
                         -----   -----
<S>                      <C>     <C>
Employee benefit costs   $33.3   $40.2
Kmart reserve             10.9    10.3
Other                     14.7    22.3
                         -----   -----
   Total                 $58.9   $72.8
                         -----   -----
</TABLE>

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 $7.1
million and $7.9 million were outstanding as of January 3, 2004 and December 28,
2002, respectively. 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%. The long-term
portion of the mortgage is included in other long-term liabilities. As of
January 3, 2004, the future principal payments under the mortgage are as
follows:

<TABLE>
<S>          <C>
2004         $0.9
2005          0.9
2006          1.0
2007          1.1
2008          1.2
Thereafter    2.0
</TABLE>

20.  LEASES

We leased a warehouse and office facilities through operating leases over
periods ranging from 5 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 January 3,
2004 was as follows (in millions):

<TABLE>
<CAPTION>
                      2003    2002     2001
                     -----   ------   ------
<S>                  <C>     <C>      <C>
Minimum rentals      $10.2   $ 14.2   $ 14.6
Percentage rentals    87.5    143.6    166.0
                     -----   ------   ------
   Total             $97.7   $157.8   $180.6
                     -----   ------   ------
</TABLE>

Excess rent expense consists primarily of excess rent fees under the Master
Agreement, which are contingently based on store profitability. Accordingly, the
future minimum rental payments disclosed below exclude future excess rent fees
to Kmart.


                                      F-32
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of January 3, 2004, the future minimum rental payments under operating leases
were as follows (in millions):

<TABLE>
<S>    <C>
2004   $7.3
2005    2.5
2006    1.0
2007    0.5
2008    0.2
</TABLE>

21.  INCOME TAXES

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

<TABLE>
<CAPTION>
                       2002           2001
                     Restated       Restated
            2003   (See Note 3)   (See Note 3)
           -----   ------------   ------------
<S>        <C>     <C>            <C>
Federal    $ 7.1       $59.4          $20.4
State        2.9        11.5            8.4
           -----       -----          -----
   Total   $10.0       $70.9          $28.8
           -----       -----          -----
</TABLE>

Included in the consolidated provision for income taxes are net deferred tax
(benefit) provision of $(0.9) million, $50.8 million and $(8.8) million for the
fiscal years ended January 3, 2004, December 28, 2002 and December 29, 2001,
respectively.

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

<TABLE>
<CAPTION>
                                                                    2002           2001
                                                                  Restated       Restated
                                                         2003   (See Note 3)   (See Note 3)
                                                        -----   ------------   ------------
<S>                                                     <C>     <C>            <C>
Computed "expected" income tax expense                  $ 4.5      $ 20.9         $ 38.4
Increases (decreases) in income taxes resulting from:
   State income taxes, net of
   federal tax benefit                                    2.3         6.1            6.6
   51% owned subsidiaries                                (4.0)      (13.2)         (13.0)
   Goodwill                                                --         0.1            0.1
   Non-Deductible items                                   0.1         0.1            0.1
   Changes in prior year estimates                         --          --           (2.0)
   Loss carryback                                          --          --           (2.0)
   Other                                                   --        (0.1)           0.6
Valuation allowance                                       7.1        57.0             --
                                                        -----      ------         ------
Net income tax expense                                   10.0      $ 70.9         $ 28.8
                                                        -----      ------         ------
</TABLE>


                                      F-33
<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 2003 and 2002 fiscal years were
as follows (in millions):

<TABLE>
<CAPTION>
                                          2003     2002
                                         ------   ------
<S>                                      <C>      <C>
DEFERRED TAX ASSETS:
   Restructuring reserves                $  1.6   $  7.0
   Inventories                              9.1      7.9
   Postretirement benefits                 11.3     11.6
   Employee benefits                       16.8     15.0
   NOL Carry forward                       50.4     30.3
   Intangible assets                        9.3      9.0
   Other                                    3.5      4.4
                                         ------   ------
Total gross deferred tax assets           102.0     85.2
                                         ------   ------
Less valuation allowance                  (94.9)   (70.2)
                                         ------   ------
Total deferred tax assets                   7.1     15.0
                                         ------   ------
DEFERRED TAX LIABILITIES:
   Property and equipment                  (2.8)    (8.1)
   Other                                     --     (3.5)
                                         ------   ------
Total gross deferred tax (liabilities)     (2.8)   (11.6)
                                         ------   ------
NET DEFERRED TAX ASSETS                     4.3   $  3.4
                                         ------   ------
</TABLE>

As of January 3, 2004, we have net operating loss carry forwards for federal
income tax purposes of approximately $130.9 million which, if not utilized, will
expire for federal purposes in 2022 and will begin expiring 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 projected results, for
accounting purposes we cannot rely on anticipated long term 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 all of the deferred tax assets will be
realized and have recorded in fiscal year 2003 an additional non-cash valuation
allowance of $24.7 million and in fiscal 2002 recorded $70.2 million.

Earnings of our 51%-owned subsidiaries are distributed and, accordingly, we
provide for federal and state income taxes on their undistributed taxable
earnings.


                                      F-34
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22.  STOCK INCENTIVE PLANS

As of October 12, 1996, we adopted the shareholder-approved 1996 Incentive
Compensation Plan (the "1996 Plan") and the shareholder-approved 1996
Non-Employee Director Stock Plan (the "Director Plan"). As of March 16, 2000, we
adopted 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.

In connection with the grant of these deferred restricted stock units, we
recorded a net increase to unearned compensation of $0 million, $0.3 million and
$0.6 million in fiscal 2003, 2002 and 2001, respectively. We amortized $0
million, $0.4 million and $0.5 million in 2003, 2002 and 2001, respectively,
which is recorded as a 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 offer incentive opportunities based upon
performance results against pre-established earnings targets and other selected
measures for each fiscal year. We 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.

In connection with the grant of these performance-based stock awards, we
recorded an increase (decrease) to unearned compensation of $0.3 million and
($3.4 million) in 2003 and 2002, respectively. We also amortized $0.7 million,
$0 million and $1.6 million into expense in 2003, 2002 and 2001, 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 2003


                                      F-35
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and paid $0.6 million in cash in 2002.

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 Issued                                                    Number of Shares       Number of Shares
                         upon Exercise of     Weighted Average      Number of Shares      Remaining Available    Remaining Available
                            Outstanding      Exercise Price of    Issued, Inception to   for Future Issuance,   for Future Issuance,
     Plan Category        Options/Awards    Outstanding Options    Date as of 1/3/2004      as of 1/3/2004        as of 12/28/2002
     -------------       ----------------   -------------------   --------------------   --------------------   --------------------
<S>                      <C>                <C>                   <C>                    <C>                    <C>
1996 Incentive
   Compensation Plan         1,857,667              $29                  849,870                 392,463                189,576
2000 Equity
   Incentive Plan              890,833              $29                   38,108               1,071,059              1,018,094
1996 Non-Employee
   Director Stock Plan         119,350              $29                   22,606                  58,044                 71,390
                             ---------              ---                  -------               ---------              ---------
Total                        2,867,850              $29                  910,584               1,521,566              1,279,060
                             ---------              ---                  -------               ---------              ---------
</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
                           -----------------------------------------
                                   2003                  2002                  2001
                           -------------------   -------------------   -------------------
                            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       2,630,379     $30     2,286,050     $31     1,808,546     $25
Granted                           --      --       559,200     $26       635,275     $45
Cancelled                   (255,543)    $30      (179,061)    $33       (80,401)    $29
Shares issued                     --               (35,810)    $22       (77,370)    $24
                           ---------             ---------     ---     ---------     ---
Outstanding,
   end of year             2,374,836             2,630,379     $30     2,286,050     $31
                           =========             =========     ===     =========     ===
Exercisable, end of year   1,449,251             1,114,457               739,979
</TABLE>

<TABLE>
<CAPTION>
                            Deferred Restricted Stock Units and Shares
                                and Performance-Based Stock Awards
                           -------------------------------------------
                                   2003                   2002                   2001
                           --------------------   --------------------   --------------------
                            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         427,739      $30      518,397       $29       578,483      $25
Granted                      119,273      $ 8       49,352       $26       102,018      $45
Cancelled                   (119,583)     $30      (54,000)      $27       (38,449)     $25
Shares issued                (53,766)     $29      (86,010)      $27      (123,655)     $26
                            --------      ---      -------       ---      --------      ---
Outstanding, end of year     373,663      $23      427,739       $30       518,397      $29
                            ========      ===      =======       ===      ========      ===
</TABLE>


                                      F-36
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized information about stock options outstanding as of January 3, 2004 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>
$7 - 9                        250         0.9          $ 7             50       $ 7
$10 - 19                    8,460         1.1          $14          1,820       $13
$20 - 29                1,461,731         2.5          $24        866,492       $23
$30 - 39                  456,885         1.8          $33        385,929       $32
$40 - 47                  447,510         3.0          $46        194,960       $46
                        ---------         ---          ---      ---------       ---
Total                   2,374,836         2.4          $30      1,449,251       $29
</TABLE>

DIRECTOR STOCK PLAN

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

Commencing in 2003, the Director Plan also provides 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 Director Plan
provided for automatic amounts of 2,000 stock units. Each Stock Unit represents
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 are payable upon vesting, provided the non-employee director
has not ceased to serve as a director for any reason other than death,
disability or retirement. The remaining fifty percent of such Stock Units are
payable upon the latter of ceasing to be a director or attaining age 65,
provided that settlement of such Stock Units shall be accelerated in the event
of death, disability or a change in control.

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

<TABLE>
<CAPTION>
                                           Director Plan Stock Options
                                      -----------------   -----------------
                                             2003                2002                2001
                                      -----------------   -----------------   -----------------
                                                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    15,200              14,400              13,600
</TABLE>


                                      F-37
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                    Director Plan Stock Units
                                    --------------------------------------------------------
                                           2003                2002               2001
                                    ------------------   ----------------   ----------------
                                               AVERAGE            Average            Average
                                      STOCK      UNIT     Stock     Unit     Stock     Unit
                                    UNITS(1)    PRICE     Units    Price     Units    Price
                                    --------   -------   ------   -------   ------   -------
<S>                                 <C>        <C>       <C>      <C>       <C>      <C>
Outstanding, at beginning of year    66,000      $32     56,000     $33     45,000     $33
Granted                                  --      N/A     14,000      27     14,000      36
Shares Issued                            --      N/A     (4,000)     27     (3,000)     36
                                     ------      ---     ------     ---     ------     ---
Outstanding, at end of year          66,000      $32     66,000     $32     56,000     $33
                                     ======      ===     ======     ===     ======     ===
</TABLE>

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

ASSOCIATE STOCK PURCHASE PLAN

During 1997, we adopted an Associate Stock Purchase Plan ("ASPP") to provide
substantially all employees who have completed service requirements an
opportunity to purchase shares of our common stock through payroll deductions,
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 January 3, 2004. There were 180,276, 168,187 and 68,216 shares
purchased under this plan in fiscal year 2003, 2002, and 2001, respectively.

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 have suspended purchases of our common stock
through the ASPP effective December 29, 2003.

23.  TREASURY STOCK

From May 1997 through the end of fiscal year 2002, our Board of Directors
authorized five stock repurchase programs of approximately 3,050,000, 3,000,000,
2,450,000, 2,210,000 and 2,000,000 shares. As of January 3, 2004, an aggregate
of 11,218,200 shares for an aggregate purchase amount of $325.3 million, or
approximately 37% of the total common stock outstanding prior to the repurchase
programs, have been repurchased in the open market during this period. The
treasury shares may be used under our equity incentive plans and for other
corporate purposes.

During fiscal years 2003 and 2002, we issued no shares out of treasury in
connection with our stock incentive plans.

24.  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


                                      F-38
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $2.3 million, $2.6 million and $2.6 million for
fiscal years 2003, 2002 and 2001, respectively.

25.  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>
                                           2003    2002
                                          -----   -----
<S>                                       <C>     <C>
Benefit obligation at beginning of year   $19.8   $19.8
Service cost                                0.3     0.3
Interest cost                               1.3     1.3
Amendments                                   --    (2.2)
Actuarial loss                              1.4     2.4
Benefits paid                              (1.6)   (1.4)
Participant contributions                   0.3     0.2
                                          -----   -----
Benefit obligation at end of year          21.5   $20.4
Unrecognized net actuarial gain             0.5     2.0
Unrecognized prior service cost             7.3     8.5
                                          -----   -----
Accrued benefit cost (unfunded)           $29.3   $30.9
                                          -----   -----
</TABLE>

<TABLE>
<CAPTION>
                                                 2003   2002
                                                 ----   ----
<S>                                              <C>    <C>
Weighted-average assumptions as of December 31
Discount Rate                                    6.25%  6.75%
</TABLE>

For measurement purposes, a 13% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal year 2003. The rate was
assumed to decrease gradually to 5.0% for


                                      F-39
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

fiscal year 2013 and remain at that level thereafter. The components of our net
periodic benefit cost were as follows (in millions):

<TABLE>
<CAPTION>
                                     2003   2002   2001
                                     ----   ----   ----
<S>                                  <C>    <C>    <C>
Service cost                         $0.3   $0.3   $0.3
Interest cost                         1.3    1.3    1.3
Amortization of prior service cost   (1.3)  (1.2)  (1.0)
Recognized net actuarial gain          --   (0.2)  (0.3)
                                     ----   ----   ----
Net periodic benefit cost            $0.3   $0.2   $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                                        0.2             (0.2)
Effect on postretirement benefit obligation          2.9             (2.4)
</TABLE>

Our estimate of our future postretirement health benefit payments, net of
participant contributions and estimated medical drug subsidies of approximately
$2.4 million for 2006 through 2013, is as follows (in millions):

<TABLE>
<S>           <C>
2004          $1.4
2005           1.2
2006           1.1
2007           1.1
2008           1.1
2009 - 2013    5.9
</TABLE>

26.  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.

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

     -    The benefits are generally payable in annual installments for the life
          of the executive, but, other forms of payment equivalent to actuarial
          value may be elected.

     -    The assumed discount rate was 6.75% and 7.25% in fiscal 2003 and 2002,
          respectively.


                                      F-40
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     -    The assumed salary rate of increase was 5.0% in both fiscal 2003 and
          2002.

(Income)/expense related to the SERP was $(5.3) million, $1.5 million and $1.3
million in fiscal years 2003, 2002 and 2001, respectively. The SERP liability
was approximately $3.5 million and $8.7 million as of January 3, 2004 and
December 28, 2002, respectively.

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 27
"Commitments and Contingencies").

27.  COMMITMENTS AND CONTINGENCIES

On the Petition Date, we commenced the Chapter 11 cases under the Bankruptcy
Code. We have continued to manage our business as debtors in possession, subject
to the supervision of the Court and in accordance with the provisions of the
Bankruptcy Code. An immediate effect of the filing of the Chapter 11 cases was
the imposition of the automatic stay under Section 362 of the Bankruptcy Code
(the "Automatic Stay"), which, with limited exceptions, enjoins the commencement
or continuation of all collection efforts by creditors, enforcement of liens
against any assets of the Company, and litigation against us. However, the
Automatic Stay is applicable only to litigation against us, and not against any
of our officers and directors. We may request the Court to extend the Automatic
Stay to cover our respective officers and directors in any litigation filed, but
absent Court approval, such litigation may proceed. The Automatic Stay has no
effect on the SEC investigation discussed below.

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 SEC began a regulatory proceeding captioned, In
the Matter of Footstar, Inc., MNY-7122, including an investigation into the
facts and circumstances giving rise to the restatement. On November 25, 2003 the
SEC issued a Formal Order in that regulatory 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 these proceedings.

The fact-finding investigation authorized by the Formal Order 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. The Company
has been and intends to continue cooperating fully with the SEC.


                                      F-41
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company and certain of its directors and officers were defendants in two
derivative suits (consolidated into a single action as described below) and
several purported class action lawsuits (also consolidated into a single action
as described below) alleging violations of federal securities laws and breaches
of fiduciary duties. Messrs. Stearns, Day, Davies and Olshan, members of the
Company's Board of Directors, and J.M. Robinson, its former Chairman, President
and Chief Executive Officer, and Stephen Wilson, an officer of the Company, were
named as defendants in two derivative complaints filed by individual
shareowners, one in the United States District Court for the Southern District
of New York and one in the Supreme Court of the State of New York, Rockland
County. In New York, the Supreme Court is a trial level court. The complaints
alleged that these directors and officers breached their fiduciary duties to the
Company by failing to implement and maintain an adequate internal accounting
control system, sought unspecified damages against the defendants and in favor
of the Company, as well as costs and expenses associated with the litigation.
These complaints were consolidated in a single action in the United States
District Court for the Southern District of New York captioned, Barry Lee
Bragger v. J.M. Robinson, et al., Civil Action No. 02 Civ. 9163 (SCR). With
Court approval, Footstar and the relevant individual parties mutually agreed to
resolve the claims made in the derivative complaints, without any admission of
liability, for $9.2 million, all of which has been funded with insurance
proceeds paid to the Company. An order has been issued by the court before which
this litigation was pending dismissing the matter with prejudice.

The Company and Messrs. Robinson and Wilson have been named as defendants in
several purported shareholder class action lawsuits for alleged violations of
securities laws. These actions seek unspecified monetary damages and costs and
expenses associated with the litigation. These initial complaints allege that
beginning mid-May 2000, the Company and its officers named above misrepresented
our financial performance. The cases have been consolidated into a single action
pending in the United States District Court for the Southern District of New
York, captioned, Stephen Rush v. Footstar, Inc., et al., 02 Civ. 9130 (SRC)
(Consolidated).

Footstar and the named plaintiffs have mutually agreed to resolve the claims
made in the several purported class action lawsuits, without any admission of
liability, for the amount of $14.3 million, all of which will be funded with
insurance proceeds. Footstar is in the process of seeking approval from class
members and upon such approval, seeking an order from the court before which
this litigation is pending, dismissing it with prejudice.

Adversary Proceedings Involving Kmart

On January 22, 2002, Kmart filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code. Kmart's final Plan of Reorganization was confirmed on
April 23, 2003 and Kmart assumed our Master Agreement when the plan became
effective on May 6, 2003. All proceeds due to Meldisco from the sale of products
in the licensed footwear departments at Kmart stores, both before and after the
bankruptcy filing date, have been paid to Meldisco in a timely manner.

On August 12, 2004, we filed a motion to assume the Master Agreement (the
"Assumption Motion"). 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").


                                      F-42
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 are incurable. Finally, Kmart disputed the amount of cure we would owe
should they be authorized to assume the Master Agreement. We contend that the
cure amount is approximately $19.0 million, as of the Petition Date, while Kmart
asserts that the cure amount is not less than $57.8 million. In the
Cross-Motion, Kmart argued that, because the Master Agreement is non-assumable,
it should be entitled to exercise a termination provision pursuant to section
365(e)(2) of the Bankruptcy Code.

We contested the factual assertions and arguments contained in the Assumption
Objection and the Cross-Motion. Specifically, we argued that applicable
nonbankruptcy law does not prevent us from assigning the Master Agreement. In
addition, we argued that, even if applicable nonbankruptcy law prevented
assignment of the Master Agreement, section 365(c)(1) did not prevent us from
assuming the Master Agreement. Finally, we argued that section 365(b)(2)(D) did
not prevent assumption. On December 17, 2004, a hearing was held to determine
whether, as a matter of law, we can assume the Master Agreement. On February 16,
2005, the Court issued its Decision on Motion to Assume Executory Contracts (the
"Assumption Decision"). In the Assumption Decision, the Court overruled the
Assumption Objection to the extent it was based upon section 365(c)(1) of the
Bankruptcy Code. Specifically, the Court ruled that section 365(c)(1) does not
prevent assumption of the Master Agreement by us because we do not intend to
assign the Master Agreement. The Court did not reach the issue of whether the
Master Agreement was assignable under applicable nonbankruptcy law. The Court
reserved its decision on the issue of section 365(b)(2)(D) upon the completion
of discovery.

The Court has not rendered a decision on the remaining issues raised by the
Assumption Objection or the Cross-Motion. On February 28, 2005, Kmart filed its
Motion for Reargument of Decision on Motion to Assume Executory Contract (the
"Reargument Motion"). In the Reargument Motion, Kmart requested that the Court
reconsider its Assumption Decision on the grounds that controlling precedent
mandates a reversal of the Assumption Decision. We filed our response to the
Reargument Motion on March 18, 2005. The Court held a hearing on the Reargument
Motion on March 31, 2005. At this hearing, the Court reaffirmed the Assumption
Decision.

Kmart has requested additional briefing and argument before the Court with
respect to the termination of the Master Agreement pursuant to section 365(e)(2)
of the Bankruptcy Code. The hearing date on this matter has been set for April
21, 2005.

On March 17, 2005, the Court entered a scheduling order establishing a timetable
for the resolution of the remaining issues raised by the Assumption Motion, the
Assumption Objection, and the Cross-Motion. While the Court did not schedule a
final hearing date, we anticipate a final hearing will be held in July of 2005.

There is no guarantee that the Court will authorize us to assume the Master
Agreement or Kmart to terminate the Master Agreement under section 365(e)(2) of
the Bankruptcy Code. Additionally, we cannot be sure what cure amounts will be
owing to Kmart if the Court authorizes us to assume the Master Agreement.


                                      F-43
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 closed on March 24, 2005. Following the announcement of the Sears
Acquisition, we received inconsistent information from Kmart regarding its plans
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 a Sears
retail format, 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 inconsistent
information from Kmart regarding its plans for the stores, we filed a motion
with the Court on January 28, 2005 (the "Examination Motion") 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.

Shortly after we filed the Examination Motion, Kmart announced its plan to begin
the reconfiguration of some of the stores slated for conversion to a new Sears
format. We then received a notice from Kmart instructing us that we should
either vacate approximately 24 stores or have the footwear departments relocated
within the stores while the reconfiguration took place. We believe that the
Master Agreement continues to grant us the exclusive right to operate footwear
departments in all stores which are directly or indirectly owned by Kmart and
which at one time operated as Kmart stores, whether or not Kmart converts
certain of the stores to a different discount retail format, such as the Sears
format. Accordingly, after receiving the notice from Kmart, we filed a motion
(the "Enforcement Motion") requesting that the Court adjudge and determine Kmart
to be in contempt for violation of the Automatic Stay and assess compensatory
damages. Kmart replied to the Enforcement Motion by arguing that the automatic
stay did not prevent Kmart from converting the stores to a different format
because our rights under the Master Agreement to sell footwear in the converting
stores expires upon their conversion.

On February 24, 2005, the Court held a preliminary hearing with respect to the
Enforcement Motion and ruled that the automatic stay barred Kmart from taking
any actions to remove us from the stores absent a motion for relief from the
automatic stay. Accordingly, on March 4, 2005, Kmart filed a motion seeking
relief from the Automatic Stay to require us to vacate approximately 24 stores
on or before April 13, 2005 (the "Kmart Stay Motion"). On April 6, 2005, the
Court heard legal arguments concerning our claim that we have the right to
continue to operate in the converted stores and reserved decision. Footstar and
Kmart are discussing a schedule for discovery on any factual issues relating to
the Kmart Stay Motion that might remain outstanding after the Court renders an
opinion on the issues raised at the April 6, 2005 hearing.

Other Matters

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 SERP liability (see Note 26 "Supplemental Executive Retirement
Plan").

In 2002, we estimated our contingent liability for various payroll tax related
exposures, all of which relate to our discontinued Athletic Segment, to be in
the range of $4.2 million to $10.2 million and


                                      F-44
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

provided for $4.2 million as of December 28, 2002. As of January 3, 2004, we
provided $1.9 million for the estimated various payroll tax related exposures.
We will continue to assess this estimated reserve in future periods as amounts
are settled with taxing authorities.

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.

28.  SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for income taxes and interest from continuing operations for the
fiscal years ended January 3, 2004, December 28, 2002 and December 29, 2001 were
as follows (in millions):

<TABLE>
<CAPTION>
               2003    2002    2001
               ----   -----   -----
<S>            <C>    <C>     <C>
Income taxes  $ 5.1   $24.7   $30.4
Interest      $16.8   $ 8.9   $ 3.8
</TABLE>

29.  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 2003,
approximately 92% of Meldisco's products were manufactured in China.


                                      F-45
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

30.  SUMMARY OF QUARTERLY RESULTS - UNAUDITED

<TABLE>
<CAPTION>
(in millions, except per share data)   1ST QTR   2ND QTR   3RD QTR(2)   4TH QTR(3)
------------------------------------   -------   -------   ----------   ----------
<S>                                    <C>       <C>       <C>          <C>
NET SALES(1)
   2003                                $240.9    $262.4      $239.6       $272.7
   2002                                $315.6    $367.6      $321.6       $341.2
                                       ------    ------      ------       ------
GROSS PROFIT(1)
   2003                                $ 66.9    $ 89.7      $ 71.5       $ 95.7
   2002                                $ 85.4    $124.9      $ 96.9       $121.4
                                       ------    ------      ------       ------
(LOSS) INCOME FROM CONTINUING
   OPERATIONS(1)
   2003(2)(6)(8)                       $ (6.4)   $ 13.7      $  2.5       $(24.3)
   2002 (Restated)(3)(4)(5)(7)         $(20.8)   $  5.1      $(49.7)      $ (7.3)
                                       ------    ------      ------       ------
(LOSS) INCOME FROM DISCONTINUED
   OPERATIONS(1)
   2003(9)                             $ (4.5)   $ (4.0)     $ (1.7)      $(29.7)
   2002 (Restated)                     $ (2.4)   $ (5.3)     $ (3.9)      $(19.2)
                                       ------    ------      ------       ------
NET (LOSS) INCOME
   2003                                $(10.9)   $  9.7      $  0.8       $(54.0)
   2002                                $(23.2)   $ (0.2)     $(53.6)      $(26.5)
</TABLE>

<TABLE>
<CAPTION>
(LOSS) EARNINGS PER SHARE(10)
-----------------------------
<S>                             <C>       <C>       <C>       <C>
2003 Basic
   Continuing operations        $(0.31)   $ 0.66    $ 0.12    $(1.18)
   Discontinued operations       (0.22)    (0.19)    (0.09)    (1.44)
                                ------    ------    ------    ------
   Net (loss) income            $(0.53)   $ 0.47    $ 0.03    $(2.62)
2003 Diluted
   Continuing operations        $(0.31)   $ 0.66    $ 0.12    $(1.18)
   Discontinued operations       (0.22)    (0.19)    (0.09)    (1.44)
                                ------    ------    ------    ------
   Net (loss) income            $(0.53)   $ 0.47    $ 0.03    $(2.62)
2002 Basic (Restated)
   Continuing operations        $(1.02)   $ 0.25    $(2.43)   $(0.35)
   Discontinued operations       (0.12)    (0.26)    (0.19)    (0.94)
                                ------    ------    ------    ------
   Net loss                     $(1.14)   $(0.01)   $(2.62)   $(1.29)
2002 Diluted (Restated)
   Continuing operations        $(1.02)   $ 0.25    $(2.43)   $(0.35)
   Discontinued operations       (0.12)    (0.26)    (0.19)    (0.94)
                                ------    ------    ------    ------
   Net (loss) income            $(1.14)   $(0.01)   $(2.62)   $(1.29)
</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, has been accounted for as discontinued operations.

(2)  During the first quarter of 2003, we recorded restructuring and asset
     impairment charges totaling $18.2 million related to inventory write-downs,
     employee severance and asset impairments in connection with the closing of
     316 Kmart stores.

(3)  During the first quarter of 2002, we recorded restructuring and asset
     impairment charges totaling $16.0 million related to inventory write-downs
     and employee severance in connection with the closing of 283 Kmart stores.


                                      F-46
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)  In connection with our adoption of FASB No. 142, we recorded a retroactive
     reduction in net income of $24.3 million in 2002 as a cumulative effect of
     a change in accounting principle.

(5)  During the second quarter of 2002, we recorded restructuring, asset
     impairment and other charges totaling $14.6 million in inventory
     write-downs, asset impairment charges, lease exit costs and severance costs
     associated with our decision to terminate two unprofitable licensed
     footwear departments. In addition, we recorded a charge for bad debts of
     $9.2 million in connection with our receivable from Ames.

(6)  During the third quarter of 2003, we recorded a reversal of SERP liability
     of $7.2 million and other income of $5.4 million related to the Land Rover
     trademark.

(7)  During the third quarter of fiscal year 2002, we recorded restructuring,
     asset impairment and other charges totaling $13.3 million and which related
     to inventory write-downs, employee severance and asset impairment charges
     associated with Ames' decision to liquidate and close all of its stores.

(8)  During the fourth quarter of 2003, we recorded charges totaling $14.5
     million related to the write-off of deferred financing costs, returns and
     allowances, fixed assets and taxes other than income taxes

(9)  During the fourth quarter of 2003, we recorded charges in discontinued
     operations totaling $10.5 million related to the write-off of Just For Feet
     intangible assets and the write-down of inventory.

(10) 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.


                                      F-47
<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/ DALE W. HILPERT
                                           -------------------------------------
                                           DALE W.  HILPERT
                                           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.

<TABLE>
<CAPTION>
        Signature                          Title                      Date
        ---------                          -----                      ----
<S>                         <C>                                  <C>


/s/ DALE W. HILPERT         Chairman of the Board and
-------------------------   Chief Executive Officer
Dale W. Hilpert             (Principal Executive Officer)        September 26, 2005


/s/ NEELE E. STEARNS, JR.
-------------------------
Neele E. Stearns, Jr.       Interim Vice Chairman and Director   September 26, 2005


/s/ JEFFREY A. SHEPARD
-------------------------   Executive Vice President
Jeffrey A. Shepard          and Director                         September 26, 2005


/s/ RICHARD L. ROBBINS      Senior Vice President Financial
-------------------------   Reporting and Control
Richard L. Robbins          (Principal Financial Officer and
                            Principal Accounting Officer)        September 26, 2005


/s/ ROBERT A. DAVIES, III
-------------------------
Robert A. Davies, III       Director                             September 26, 2005


/s/ GEORGE S. DAY
-------------------------
George S. Day               Director                             September 25, 2005


/s/ STANLEY P. GOLDSTEIN
-------------------------
Stanley P. Goldstein        Director                             September 26, 2005


/s/ BETTYE MARTIN MUSHAM
-------------------------
Bettye Martin Musham        Director                             September 26, 2005


/s/ KENNETH S. OLSHAN
-------------------------
Kenneth S. Olshan           Director                             September 26, 2005


</TABLE>


                                       86
<PAGE>
                     FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
          Valuation and Qualifying Accounts for the Fiscal Years ended
            January 3, 2004, December 28, 2002 and December 29, 2001
                                  (in millions)

                                                                     Schedule II

<TABLE>
<CAPTION>
                                                        Additions
                                        Balance at      Charged to
                                         Beginning      Costs and                           Balance at
Description                           of Fiscal Year   Expenses(3)   Deductions(2)(3)   End of Fiscal Year
-----------                           --------------   -----------   ----------------   ------------------
<S>                                   <C>              <C>           <C>                <C>
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

Fiscal Year Ended December 28, 2002
   Allowance for Doubtful Accounts         $1.9          $9.7(1)          $ (9.3)              $2.3
   Aged Inventory Reserve                  $0.9            --              ($0.4)              $0.5
   Allowance for Sales Returns             $0.5            --              ($0.1)              $0.4

Fiscal Year Ended December 29, 2001
   Allowance for Doubtful Accounts         $1.9          $0.1              ($0.1)              $1.9
   Aged Inventory Reserve                  $0.6          $0.3                 --               $0.9
   Allowance for Sales Returns             $0.5            --                 --               $0.5
</TABLE>

Note: This Schedule II has been restated to reflect continuing operations only.

(1)  Additions include $9.2 million of expense relating to uncollectible
     receivables from Ames Department Stores.

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

(3)  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.


                                       87
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number                                 DESCRIPTION
--------                                -----------
<S>        <C>
   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 filed on September 13, 1996).

   3.1     Amended and Restated Certificate of Incorporation of Footstar, Inc.
           (incorporated by reference to Exhibit 3.1 to Footstar, Inc.'s Form
           10/A Information Statement filed on September 13, 1996).

   3.2     Bylaws of Footstar, Inc. (incorporated by reference to Exhibit 3.2(a)
           to Footstar, Inc.'s Annual Report on Form 10-K filed on March 30,
           2001).

   4.1     Rights Agreement, dated as of March 8, 1999, between Footstar, Inc.
           and ChaseMellon 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).

  10.2     Form of Tax Disaffiliation Agreement between Melville and Footstar,
           Inc. (incorporated by reference to Exhibit 10.2 to Footstar, Inc.'s
           Form 10/A Information Statement filed on September 13, 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 filed on September 13, 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 filed on September 13, 1996).*

  10.5     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).

 10.5(a)   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(b)   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).*
</TABLE>


                                       88
<PAGE>
<TABLE>
<S>        <C>
 10.5(c)   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).*

 10.5(d)   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(e)   Agreement and General Release with R. Shawn Neville (incorporated by
           reference to Exhibit 10.5(k) of Footstar, Inc.'s 2002 Annual Report
           on Form 10-K filed on September 3, 2004).

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

 10.5(g)   Agreement and General Release with James DeVeau (incorporated by
           reference to Exhibit 10.5(g) of Footstar, Inc.'s 2003 Annual Report
           on Form 10-K filed on April 8, 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)   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).*

  10.6     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)   Credit Agreement, dated as of October 18, 2002, by and among
           Footstar, Inc., Footstar Corporation, the Lenders listed therein,
           Fleet National Bank, as Swingline Lender and Administrative Agent,
           Fleet Retail Finance, Inc., as Collateral Agent, Congress Financial
           Corporation and Wells Fargo Retail Finance, LLC, as Syndication
           Agents and JPMorgan Chase Bank, as Documentation Agent ("Credit
           Agreement") (incorporated by reference to Exhibit 99.1 of Footstar,
           Inc.'s Current Report on Form 8-K filed on October 23, 2002).

 10.8(b)   Amendment No. 1, dated as of January 3, 2003, to Credit Agreement
           (incorporated by reference to Exhibit 10.2 of Footstar, Inc.'s
           Current Report on Form 8-K filed on September 16, 2003).

 10.8(c)   Amendment No. 2, dated as of March 21, 2003, to Credit Agreement
           (incorporated by reference to Exhibit 10.3 of Footstar, Inc.'s
           Current Report on Form 8-K filed on September 16, 2003).

 10.8(d)   Amendment No. 3, dated as of June 28, 2003, to Credit Agreement
           (incorporated by reference to
</TABLE>


                                       89
<PAGE>
<TABLE>
<S>        <C>
           Exhibit 10.6 of Footstar, Inc.'s Current Report on Form 8-K filed on
           September 16, 2003).

 10.8(e)   Amendment No. 4, dated as of September 24, 2003, to Credit Agreement
           (incorporated by reference to Exhibit 99.1 of Footstar, Inc.'s
           Current Report on Form 8-K filed on September 29, 2003).

 10.8(f)   Amendment No. 5 dated as of October 31, 2003 to Credit Agreement
           (incorporated by reference to Exhibit 99.1 of Footstar, Inc.'s
           Current Report on Form 8-K filed on November 3, 2003).

 10.8(g)   Amendment No. 6 dated as of January 30, 2004 to Credit Agreement
           (incorporated by reference to Exhibit 10.8(g) of Footstar, Inc.'s
           2002 Annual Report on Form 10-K filed on September 3, 2004).*

 10.8(h)   Amendment No. 7 dated as of February 11, 2004 to Credit Agreement
           (incorporated by reference to Exhibit 10.8(h) of Footstar, Inc.'s
           2002 Annual Report on Form 10-K filed on September 3, 2004).*

 10.8(i)   Waiver, dated as of November 12, 2002, to Credit Agreement
           (incorporated by reference to Exhibit 10.1 of Footstar, Inc.'s
           Current Report on Form 8-K filed on September 16, 2003).

 10.8(j)   Waiver, dated as of April 30, 2003, to Credit Agreement (incorporated
           by reference to Exhibit 10.4 of Footstar, Inc.'s Current Report on
           Form 8-K filed on September 16, 2003).

 10.8(k)   Waiver, dated as of May 29, 2003, to Credit Agreement (incorporated
           by reference to Exhibit 10.5 of Footstar, Inc.'s Current Report on
           Form 8-K filed on September 16, 2003).

 10.10     Asset Purchase Agreement, dated as of February 16, 2000, by and among
           Footstar, Inc. and Just For Feet, Inc., Just For Feet of Nevada,
           Inc., Sneaker Stadium Inc., Just For Feet of Texas, Inc., Just For
           Feet Specialty Stores, Inc., SNKR Holding Corp. and Athletic Attic
           Marketing, Inc. (incorporated by reference to Exhibit 10.10 to
           Footstar, Inc.'s Current Report on Form 8-K filed on March 22, 2000).

 10.11     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). *

 10.12     Asset Purchase Agreement, dated as of November 16, 2000, by and among
           Footstar Corporation, J. Baker, Inc., JBI, Inc. and Morse Shoe, Inc.
           (incorporated by reference to Exhibit 10.13 to Footstar, Inc.'s 2000
           Annual Report on Form 10-K filed on March 30, 2001).

10.13(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).*

10.13(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).
</TABLE>


                                       90
<PAGE>
<TABLE>
<S>        <C>
10.13(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).

10.13(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).

 10.14     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).

10.14(a)   Purchase and Sale Agreement and Escrow Instructions dated as of July
           19, 2004 between Footstar Corporation, as Seller, and Thrifty Oil
           Co., as Buyer (incorporated by reference to Exhibit 10.14(a) of
           Footstar, Inc.'s 2002 Annual Report on Form 10-K filed on September
           3, 2004).

 10.15     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).

 10.16     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).

 10.17     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).

 10.18     Agreement of Sale and Purchase dated as of August 16, 2004 between
           Footstar Corporation, as Seller and ADS Logistics Services - Gaffney
           LLC, as Buyer (incorporated by reference to Exhibit 10.18 of
           Footstar, Inc.'s 2003 Annual Report on Form 10-K filed on April 8,
           2005).

  21.1     Description of subsidiaries of Footstar, Inc.

  23.1     Consent of Independent Registered Public Accounting Firm.

  23.2     Consent of Independent Registered Public Accounting Firm.

  31.1     Certification of Chief Executive Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002.
</TABLE>


                                       91
<PAGE>
<TABLE>
<S>        <C>
  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      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).
</TABLE>

*    Management contract or compensatory plan.


                                       92