10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended January 3, 2009

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

For the transition period from                      to                     

Commission File Number 1-11681

FOOTSTAR, INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3439443
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
933 MacArthur Blvd., Mahwah, New Jersey	07430
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

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. þ Yes o No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

For the purpose of reporting the following market value of the registrant’s common stock held by non-affiliates, the common stock held by the directors and executive officers of the registrant have been excluded. The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2008, was approximately $80.8 million based on the closing price on June 30, 2008 of $4.08 per share.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. þ Yes o No

Number of shares outstanding of common stock, par value $.01 per share, as of March 2, 2009: 21,524,831.

Documents Incorporated by Reference

Information required by Part III that is not provided in this report will be in either Footstar, Inc.’s Proxy Statement for the 2009 Annual Meeting of Shareholders or an amendment to this report, one of which will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year, and is incorporated herein by reference.

FOOTSTAR, INC.
ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I	3
Introductory Note	3
Item 1. Business	4
General	4
Employees	5
Executive Officers of the Registrant	5
Available Information	6
Item 1A. Risk Factors	7
Item 1B. Unresolved Staff Comments	10
Item 2. Properties	11
Item 3. Legal Proceedings	11
Item 4. Submission of Matters to a Vote of Security Holders	11
PART II	11
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6. Selected Financial Data	15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	32
Item 8. Financial Statements and Supplementary Data	32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	33
Item 9A. Controls and Procedures	33
Item 9B. Other Information	34
PART III	34
Item 10. Directors, Executive Officers and Corporate Governance	34
Item 11. Executive Compensation	34
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	35
Item 13. Certain Relationships and Related Transactions, and Director Independence	35
Item 14. Principal Accountant Fees and Services	36
PART IV	36
Item 15. Exhibits and Financial Statement Schedules	36
EX-10.12: RESTRICTED STOCK AGREEMENT
EX-10.14: SUPPLEMENTAL RETIREMENT PLAN
EX-21.1: SUBSIDIARIES
EX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATIONS

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PART I

INTRODUCTORY NOTE

Footstar, Inc., which may be referred to as “Footstar”, the “Company”, “we”, or “our” is filing this Annual Report on Form 10-K for its fiscal year ended January 3, 2009.

The Company is a holding company, incorporated under the laws of the State of Delaware in 1996 and operated its businesses through its subsidiaries primarily as a retailer selling family footwear through licensed footwear departments in discount chains and wholesale arrangements since 1961.

Commencing March 2, 2004, Footstar and most of its subsidiaries 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 (“Court”).

On February 7, 2006, the Company successfully emerged from bankruptcy and paid substantially all our creditors in full with interest. Pursuant to the guidance provided by the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”), the Company has not adopted fresh-start reporting because there was no change to the holders of existing voting shares and the reorganization value of the Company’s assets was greater than its post petition liabilities and allowed claims.

Until December 31, 2008, the Company had operated licensed footwear departments in discount chains since 1961, and was the only major operator of licensed footwear departments in the United States. The Company had operated licensed footwear departments in various Kmart Corporation (“Kmart”) stores. The Company also had supplied certain retail stores, including Rite Aid Corporation (“Rite Aid”), with family footwear on a wholesale basis.

As of January 3, 2009, the Company no longer operates licensed footwear departments in Kmart stores and in Rite Aid stores.

As part of its emergence from bankruptcy in February 2006, substantially all of the Company’s business operations consisted of running licensed footwear departments in Kmart stores pursuant to that certain Amended and Restated Master Agreement dated as of August 24, 2005 by and between Kmart, Sears Holding Corporation (“Sears”) and the Company (the “Kmart Master Agreement”), as amended by that certain Master Agreement Amendment, dated as of April 3, 2008, by and among the Company, Kmart, certain affiliates of Kmart and Sears (the “Kmart Master Agreement Amendment” and, collectively with the Kmart Master Agreement, the “Kmart Agreement”). The Kmart Agreement expired by its terms on December 31, 2008.

In 2008, Kmart and the Company entered into discussions with respect to the rights and responsibilities of the respective parties upon termination of the Kmart Agreement as well as the sale of certain intellectual property to Kmart. As a result of such discussions, the Kmart Master Agreement Amendment was entered into on April 3, 2008, pursuant to which the Company sold such intellectual property to Kmart affiliates for approximately $13.0 million, and reached an agreement on how the value of the inventory would be determined when sold to Kmart upon termination of the Kmart Agreement at the end of 2008 (the “Kmart Settlement”).

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In May 2008, the Board of Directors determined that it was in the best interests of the Company and its stockholders to liquidate and ultimately dissolve after the expiration of the Kmart Agreement in December 2008 (and other miscellaneous contracts through the end of such term) and to sell and/or dispose of any of the Company’s other remaining assets, including its Mahwah headquarters. In May 2008, the Board of Directors approved a Plan of Complete Liquidation of Footstar, Inc. (the “Original Plan”), which provides for the complete liquidation and ultimate dissolution of the Company after the expiration of the Kmart Agreement on December 31, 2008. Under the terms of the Kmart Agreement, Kmart was required to purchase from the Company all of the remaining inventory in the Kmart footwear departments at values set forth in the Kmart Agreement. The process of selling the inventory to Kmart commenced immediately after expiration of the Kmart Agreement on December 31, 2008. During 2009, the Company received $52.8 million related to the liquidation sale of inventory from Kmart; however, the Company is currently pursuing the collection of certain additional disputed amounts for which there can be no assurance that any additional cash will be received.

Since the Company’s emergency from bankruptcy on February 7, 2007, the Board of Directors has declared special cash distributions totaling $7.00 per common share. Specifically, the Board of Directors has declared special cash distributions to shareholders in the following amounts and on the following dates: $5.00 per common share on March 27, 2007; $1.00 per common share on May 9, 2008; and $1.00 per common share on January 8, 2009. In addition, the Company anticipates that if the Plan and Dissolution are approved by shareholders, then the Board of Directors will declare a special cash distribution to shareholders in the amount of $1.90 per common share to be paid as soon as practicable following shareholder approval of the Plan and Dissolution.

The Amended Plan of Complete Dissolution and Liquidation of Footstar, Inc. (the “Plan”) reflects technical and legal changes to the Original Plan consistent with Delaware corporate law and is intended to modify, supersede and replace the Original Plan in order to more efficiently facilitate the liquidation and dissolution of the Company in the best interests of shareholders. The Plan was approved by the Board of Directors on March 5, 2009.

The Plan provides for the complete, voluntary liquidation of the Company by providing for the sale of its remaining assets and the wind-down of the Company’s business as described in the Plan and for distributions of available cash to shareholders as determined by the Board of Directors (the “Dissolution”).

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors to Consider”, beginning at page 31, concerning certain other matters in connection with future events, circumstances and uncertainties that may impact the Plan and the timing and amounts of any distributions made to shareholders under the Plan.

ITEM 1. BUSINESS

GENERAL

The Company sold family footwear through licensed footwear departments and wholesale arrangements.

The Company operated licensed footwear departments from 1961 through December 2008 and was the only major operator of licensed footwear departments in the United States.

The following chart represents a summary of stores in which the Company operated licensed footwear departments for fiscal 2008, 2007 and 2006:

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								Contract
	Beginning of Year		Opened		Closed			Expiration			End of Year
Fiscal 2008
Kmart		1,388		—		(11	)		(1,377	)		—
Rite Aid		859		14		(43	)		(830	)		—
Fiscal 2007
Kmart		1,392		—		(4	)		—			1,388
Rite Aid		854		16		(11	)		—			859
Fiscal 2006
Kmart		1,421		—		(29	)		—			1,392
Rite Aid		859		9		(14	)		—			854

The Company’s licensed footwear operation sold family footwear and lower-priced basic and seasonal footwear in Kmart and Rite Aid stores. Our net sales from Kmart and Rite-Aid for fiscal 2008 were $564.1 million and $13.7 million, respectively. In addition to net sales in 2008 was the liquidating sale of the remaining inventory on hand as of December 31, 2008 in Kmart of $52.8 million, in accordance with the Amended Master Agreement, and in Rite Aid of $1.3 million, respectively. In its licensed footwear departments, the Company generally sold a wide variety of family footwear, including men’s, women’s and children’s dress, casual, athletic and seasonal footwear, work shoes and slippers. As of December 31, 2005, we had been supplying Thom McAn family footwear on a wholesale basis to 1,500 Wal-Mart stores in the United States and 13 stores in Puerto Rico. Beginning in January 2006, Wal-Mart stopped purchasing Thom McAn product for its stores in the United States. Beginning in April 2007, Wal-Mart no longer sourced footwear from us for Wal-Mart stores under Wal-Mart’s proprietary brands, and, beginning August 2007, Wal-Mart no longer purchased Thom McAn footwear for Wal-Mart stores in Puerto Rico. Our total sales to Wal-Mart were approximately $0 in fiscal 2008, approximately $2.0 million in fiscal 2007 and approximately $8.9 million in fiscal 2006.

EMPLOYEES

In connection with the wind-down of our business, we terminated substantially all of our employees. As of January 3, 2009, the Company had approximately 90 employees to assist in the wind-down and anticipates it will continue to reduce this number to 10 or fewer by the end of June, 2009 as it winds down.

EXECUTIVE OFFICERS OF THE REGISTRANT

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

Jonathan M. Couchman, 39, became President and Chief Executive Officer of Footstar effective January 1, 2009. Prior to that, on December 9, 2008 Mr. Couchman became Chief Wind-Down Officer of the Company. He was appointed Chairman of the Board of Footstar on February 7, 2006. He is the Managing Member of Couchman Capital LLC, which is the investment manager of Couchman Investments LP and Couchman International Ltd., private partnerships established in

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2001. Couchman Capital LLC is also the general partner of Couchman Partners LP, a private investment partnership established in 2001. In addition, Mr. Couchman is the President of Couchman Advisors, Inc., a management advisory company. Mr. Couchman currently serves on the Board of Directors of Golf Trust Inc., a position he has held since 2007. He is a member of the CFA Institute and the New York Society of Security Analysts and holds a Bachelor of Science in Finance from the California State University at Chico.

Michael J. Lynch, age 42, has been the Chief Financial Officer — Senior Vice President of Footstar since February 7, 2006. Prior to that, he served as Senior Vice President of Finance of Meldisco. Since joining the Company in August 1995, he also served as the Division Vice President — Finance at both Footstar’s former Athletic and Meldisco divisions.

Maureen Richards, age 52, has been the Senior Vice President, General Counsel and Corporate Secretary of Footstar since March 2001 and was an executive officer of Footstar at the time it filed for reorganization under Chapter 11 in March 2004 and prior to March 2001, was Vice President, General Counsel and Corporate Secretary of Footstar.

Craig M. Haines, age 36, has been Vice President and Controller, and Principal Accounting Officer of Footstar since March 31, 2006. Prior thereto, he was the Company’s Vice President and Controller since he joined the Company in June 2005. From November 2002 through May 2005, Mr. Haines served as Executive Vice President, Finance and Administration for National Vision Administrators, LLC.

AVAILABLE INFORMATION

We make available free of charge through our web site, www.footstar.com, all materials that we file electronically with the Securities and Exchange Commission (the “Commission” or 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, as amended (the “Exchange Act”). During the period covered by this Form 10-K, we made all such materials available through our web site as soon as reasonably practicable after filing such materials with the SEC.

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

A copy of Footstar’s Corporate Governance Guidelines and its Code of Conduct and Compliance Program are posted on the Corporate Governance section of the Company’s website, www.footstar.com, and are available in print to any shareholder who requests copies by contacting Maureen Richards, Senior Vice President, General Counsel and Corporate Secretary, at the Company’s principal executive office set forth above.

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ITEM 1A. RISK FACTORS

The matters discussed in this Annual Report on Form 10-K include forward-looking statements that involve significant risks and uncertainties and that are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements may be identified by the use of words, such as: “anticipate,” “estimates,” “should,” “expect,” “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, future operating or financial performance and other future events and circumstances. These statements are neither promises nor guarantees. A number of important risks and uncertainties, including those identified below and those factors included in this Annual Report on Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors to Consider”, beginning at page 31, each of which is a risk factor and is incorporated into this Item 1A by reference and “Recent Events”, beginning on page 19, each of which is a risk factor and is incorporated into this Item 1A by reference, as well as risks and uncertainties discussed elsewhere in this Form 10-K, could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. In addition to the above-referenced statements and factors which are set forth elsewhere in our Annual Report on Form 10-K and incorporated herein by reference, we set forth the following risks and uncertainties related to our business.

We may not meet the anticipated timing for the Dissolution and liquidation.

Promptly following the meeting, if our shareholders approve the Plan and our Dissolution, we intend to file a certificate of dissolution with the Secretary of State of Delaware and work toward the sale of our remaining assets and the winding up of our remaining business. The Company anticipates that if the Plan and Dissolution are approved by shareholders, then its Board of Directors will declare a special cash distribution to shareholders in the amount of $1.90 per common share to be paid to shareholders as soon as practicable following shareholder approval of the Plan and Dissolution. After paying all of our liabilities and obligations, we plan to establish a contingency reserve to cover any unknown liabilities. We intend to begin making distributions of liquidation proceeds to our shareholders within three to six months (or sooner) from the time we file our certificate of dissolution. Thereafter, we intend to distribute remaining liquidation proceeds as promptly as practicable following the sale of our remaining assets, subject to payment or provision for the payment of operating and administrative expenses during the liquidation, known obligations and establishing a contingency reserve. There are a number of factors that could delay our anticipated timetable, including the following:

• delays in the disposition of our remaining assets;

• unanticipated lawsuits or other claims asserted against us;

• unanticipated legal, regulatory, governmental, tax or administrative requirements; and

• delays in settling our remaining obligations.

We cannot determine with certainty the amount of distributions that will be made to our shareholders.

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We cannot determine with precision at this time the amount of distributions to our shareholders pursuant to the Plan. This determination depends on a variety of factors, including, but not limited to, the amount required to settle known and unknown debts and liabilities, the resolution of any contingent liabilities, the amount of any necessary or appropriate contingency reserve, the net proceeds, if any, from the sale of our remaining assets, and other factors.

Adverse U.S. economic conditions and the current turmoil in the U.S. capital and credit markets could limit demand for our property in Mahwah, New Jersey, which contains our corporate headquarters and 21 acres of land, and, thus, we may not be able to timely sell our property in Mahwah or on acceptable terms.

The economy in the United States is currently experiencing unprecedented disruptions, including increased levels of unemployment, the failure and near failure of a number of large financial institutions, reduced liquidity and increased credit risk premiums for a number of market participants. Economic conditions may be affected by numerous factors, including inflation and employment levels, energy prices, recessionary concerns, changes in currency exchange rates, the availability of debt and interest rate fluctuations. At this time, it is unclear whether, and to what extent, the actions taken by the U.S. government, including the passage of the Emergency Stabilization Act of 2008, the Troubled Assets Relief Program, the American Recovery and Reinvestment Act of 2009 and other measures currently being implemented or contemplated will mitigate the effects of the crisis. The current turmoil in the capital and credit markets could limit demand for our property in Mahwah, New Jersey, which contains our corporate headquarters and 21 acres of land and which we have been marketing since March 2007. At this time we cannot predict the extent or duration of any negative impact that the current disruptions in the U.S. economy will have on our ability to timely sell our corporate headquarters or on acceptable terms.

We may not be able to settle all of our obligations to creditors.

We have current obligations to creditors. Our estimate of ultimate distributions to our shareholders takes into account all of our known obligations and our best estimate of the amount reasonably required to satisfy such obligations. As part of our dissolution process, we will attempt to settle those obligations with our creditors. We cannot assure you that we will be able to settle all of these obligations or that they can be settled for the amounts we have estimated for purposes of calculating the likely distribution to shareholders. If we are unable to reach agreement with a creditor relating to an obligation, that creditor may bring a lawsuit against us. Amounts required to settle obligations or defend lawsuits in excess of the estimated amounts will result in distributions to shareholders that are smaller than those that we presently estimate or may eliminate distributions entirely.

We will continue to incur claims, liabilities and expenses, which will reduce the amount available for distribution to shareholders.

We will continue to incur claims, liabilities and expenses (such as salaries and benefits, directors’ and officers’ insurance, payroll and local taxes, facilities costs, legal, accounting and consulting fees and miscellaneous office expenses) as we wind up. These expenses will reduce the amount ultimately available for distribution to our shareholders.

We will continue to incur the expenses of complying with public company reporting requirements.

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We currently comply with the applicable reporting requirements of the Exchange Act. In order to curtail these expenses, after filing our certificate of dissolution with the Delaware Secretary of State, we intend to deregister our common stock or seek relief from certain of our public company reporting requirements from the SEC. We anticipate that, if we are unable to deregister our securities and have to pursue SEC relief and such relief is granted by the SEC, we will continue to file current reports on Form 8-K to disclose material events relating to our liquidation, along with any other reports that the SEC may require. However, we cannot offer any assurances as to when, if ever, the SEC may grant such relief or as to the actual savings that we may realize should such relief be granted.

Each shareholder may be liable to our creditors for an amount up to the amount distributed to such shareholder by us if our reserves for payments to creditors are inadequate.

If our shareholders approve the Plan and our Dissolution, we expect to file a certificate of dissolution with the Secretary of State of Delaware promptly following the Meeting. Although the legal effect of the filing and effectiveness of the certificate of dissolution will be to dissolve the Company, as required by Delaware law we will continue to exist as a non-operating entity for at least three years after the Dissolution becomes effective (which we expect will be the date on which we file the certificate of dissolution with the Delaware Secretary of State) or for such longer period as the Delaware Court of Chancery directs, for the purpose of prosecuting and defending lawsuits, settling and closing our business, disposing of our property, discharging our liabilities and distributing to our shareholders any remaining assets. Under applicable Delaware law, in the event we do not resolve all claims against the Company, each of our shareholders could be held liable for payment to our creditors up to the amount distributed to such shareholder in the liquidation. In such event, a shareholder could be required to return up to all amounts received as distributions pursuant to the Plan and ultimately could receive nothing under the Plan. Moreover, even though a shareholder has paid taxes on amounts previously received, a repayment of all or a portion of such amount will not result in a recalculation of the gain or loss on the liquidation. Instead, a shareholder’s repayment will generally be deductible as a capital loss in the year in which the contingent liability is paid, and such capital loss cannot be carried back to offset any liquidation gain recognized earlier. See “Certain Federal Income Tax Consequences.” We cannot assure you that any contingency reserve that we plan to establish will be adequate to cover all expenses and liabilities.

Recordation of transfers of our common stock on our stock transfer books will be restricted as of the Final Record Date, and thereafter it generally will not be possible for shareholders to change record ownership of our stock.

The Company intends to discontinue recording transfers of our common stock at the close of business on the date specified by the Board for the effectiveness of the certificate of dissolution (the “Final Record Date”). Thereafter, certificates representing our common stock will not be assignable or transferable on the books of the Company except by will, intestate succession or operation of law. However, until trading is halted through termination of registration of our shares of common stock, after the Final Record Date, we believe that any trades of shares of our common stock will be tracked and marked with a due bill by the Depository Trust Company.

On or after the Final Record Date, we intend to make liquidation distributions pursuant to the Plan and deregister our common stock or seek relief from the SEC of certain of our public company

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reporting requirements. The liquidation distributions under the Plan shall be in complete cancellation of all of the outstanding shares of our common stock. From and after the Final Record Date, and subject to applicable law, each holder of our common stock will have the right to receive distributions pursuant to, and in accordance with, the Plan. The proportionate interests of all of the shareholders of the Company will be fixed in the books of the Company on the basis of their respective stock holdings at the close of business on the Final Record Date. Further, after the Final Record Date, any distributions made by the Company will be made solely to the shareholders of record at the close of business on the Final Record Date, except as may be necessary to reflect subsequent transfers recorded on the books of the Company as a result of any assignments by will, intestate succession or operation of law.

Shareholders may not be able to recognize a loss for federal income tax purposes until they receive a final distribution from us, which may be three years or more after our Dissolution.

As a result of our liquidation, for federal income tax purposes shareholders will recognize gain or loss equal to the difference between (1) the sum of the amount of cash and the aggregate fair market value of any property distributed to them (reduced by any liability assumed or subject to which it is taken), and (2) their tax basis in their shares of our common stock. A shareholder’s tax basis in our shares will depend upon various factors, including the shareholder’s cost and the amount and nature of any distributions received with respect thereto. A shareholder generally may recognize a loss only when he, she or it has received a final distribution from us, which may be as much as three years (or ten years if our Board of Directors determines to liquidate our assets in accordance with Section 281(b) of the Delaware General Corporation Law) after our Dissolution. However, if we are unable to sell our Mahwah property prior to the third anniversary of the filing of the certificate of dissolution, we may transfer such property into a liquidating trust, in which event we may make a final distribution after the third anniversary of the filing of the certificate of dissolution.

Our Board of Directors may amend, modify, abandon or delay implementation of the Plan and our Dissolution, even if approved by our shareholders.

Even if the Plan and our Dissolution are approved by our shareholders, our Board of Directors has the right, in its discretion, to amend, modify, abandon or delay implementation of the Plan and our Dissolution to the extent permitted by the Delaware General Corporation Law, if it determines that doing so is in the best interests of the Company and our shareholders.

We have a dispute with Kmart under the Kmart Agreement related to the sale of all our remaining inventory to Kmart and additional disputes with Kmart may arise in the future.

Notwithstanding the Company’s sale of all its remaining inventory to Kmart under the terms of the Kmart Agreement immediately following termination of the Kmart Agreement in accordance with the provisions thereof, there is an outstanding dispute with respect to the value of inventory and that we are in the process of trying to resolve and additional disputes may arise related to the Kmart Agreement.

See “Forward-Looking Statements” in Item 7 for additional risk factors to consider.

ITEM 1 B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

As of January 3, 2009, we no longer operated licensed footwear departments.

Our corporate headquarters is located in 129,000 square feet of owned office space at our 21 acre property in Mahwah, New Jersey. In connection with the wind-down of our business, we are actively pursuing the sale of our property in Mahwah.

Our corporate tax department is located in 3,500 square feet of leased office space in Worcester, Massachusetts. The lease for this property expires at the end of April 2009 and no renewals are currently anticipated.

In connection with the Company’s discontinued operations in 1995, the Company entered into two subleases of locations formerly occupied by its Thom McAn stores. One of these subleases expired on December 31, 2008 but the subtenant failed to vacate the premises and the overlandlord has commenced holdover proceedings to evict such tenant. The other lease expires effective February 1, 2014. The Company believes that there has been a novation of its obligations under such lease and may in the future bring litigation to have a court finally determine such issue.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various claims and legal proceedings arising in the ordinary course of business. We intend to defend vigorously against such claims in all such proceedings. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert management’s attention from our business objectives and could adversely affect our business. We do not believe any of them will have a material adverse effect on our financial position. Estimates of the probable costs for resolution of these claims are accrued to the extent that they can be reasonably estimated. These estimates are based on an analysis of potential outcomes, assuming a combination of litigation and settlement strategies. These estimates also take into account any claim relating to events that occurred prior to our bankruptcy filing, which were required to be reported in a proof of claim filed with the Bankruptcy Court. However, legal proceedings are subject to significant uncertainties, the outcomes of which are difficult to predict, and assumptions and strategies may change. Consequently, we are unable to ascertain the ultimate financial impact of any legal proceedings.

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

None

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

After the delisting of our common stock from the NYSE on December 30, 2003, our common stock was traded on the over-the-counter bulletin board (“OTCBB”) under the symbol “FTSTQ.PK.” Effective March 13, 2006 our symbol changed to FTAR.OB. Our common stock is quoted on the OTCBB and on the Pink Sheets LLC. Prices shown below reflect the quarterly high and low bid

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quotations 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, may not necessarily reflect actual transactions and have not been adjusted for dividends. As of February 27, 2009, there were 1,972 shareholders of record (not including the number of persons or entities holding stock in nominee or street name through various banks and brokerage firms). Information concerning the high and low closing bid quotations of our common stock is set forth below:

	HIGH		LOW
2007
First Quarter	$	8.50	$	6.10
Second Quarter	$	9.12	$	4.10
Third Quarter	$	4.72	$	4.00
Fourth Quarter	$	4.92	$	4.20
2008
First Quarter	$	4.70	$	4.25
Second Quarter	$	5.35	$	4.10
Third Quarter	$	4.09	$	3.40
Fourth Quarter	$	3.64	$	2.80

Since the Company emerged from bankruptcy on February 7, 2006, the Board of Directors has declared special cash distributions totaling $7.00 per common share.

On March 27, 2007, the Company announced that its Board of Directors declared a special cash distribution to stockholders in the amount of $5.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. The special cash distribution totaling $104.8 million was paid on April 30, 2007.

On May 9, 2008, the Company announced that its Board of Directors declared a special cash distribution to stockholders in the amount of $1.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. The special cash distribution totaling $21.3 million was paid on June 3, 2008.

On January 8, 2009, the Company announced that its Board of Directors declared a special cash distribution to stockholders in the amount of $1.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. The special cash distribution totaling $21.5 million was paid on January 27, 2009.

On February 4, 2009, the Company entered into Amendment No. 2 (“Amendment No. 2”) to its Rights Agreement, dated as of March 8, 1999, as amended as of May 31, 2002 (as amended, the “Rights Agreement”), between it and Mellon Investor Services LLC, a New Jersey limited liability company (formerly ChaseMellon Shareholder Services, L.L.C.), as Rights Agent, pursuant to which the terms of the outstanding preferred share purchase rights were amended.

The Rights Agreement was amended by Amendment No. 2 in order to protect stockholder value by attempting to prevent a possible limitation on the Company’s ability to use its U.S. net operating loss carryovers. The Company has experienced significant losses in the United States, and under the Internal Revenue Code of 1986, as amended (the “Code”), and rules and regulations promulgated by the Internal Revenue Service, the Company may “carry forward” these losses in certain

12

circumstances to offset any current and future taxable income and thus reduce federal income tax liability, subject to certain requirements and restrictions. However, if the Company experiences an “ownership change” as defined in Section 382 of the Code, the Company’s ability to use the net operating losses could be severely limited.

After approval of the Plan and Dissolution by our shareholders and the filing of our certificate of dissolution with the Delaware Secretary of State, we plan to sell or liquidate any remaining assets and pay all of our known and undisputed liabilities and obligations. We intend to then establish a contingency reserve to cover any unknown, disputed or contingent liabilities and intend to distribute remaining amounts to shareholders as and when our Board of Directors deems appropriate. We expect that if the Plan and Dissolution are approved by shareholders, then our Board of Directors will declare a special cash distribution to shareholders in the amount of $1.90 per common share to be paid to shareholders as promptly as practicable following shareholder approval of the Plan and Dissolution. We anticipate that we will begin making distributions of liquidation proceeds to our shareholders within three to six months (or sooner) from the time we file our certificate of dissolution, in accordance with the Plan and Delaware law. We also intend to distribute remaining liquidation proceeds as promptly as practicable following the sale or liquidation of our remaining assets, subject to payment or provisions for the payment of known obligations and establishing a contingency reserve. It is possible that unanticipated lawsuits or other claims will be asserted against us, which could result in certain distributions to our shareholders being delayed for possibly several years until the resolution of any such lawsuit or other claim.

Because of the uncertainties as to the ultimate settlement amount of our remaining liabilities and expenditures we will face during liquidation, we are not able to predict with precision or certainty specific amounts, or timing, of future liquidation distributions. We are currently evaluating the market value of our limited remaining non-cash assets. At the present time, although we are not able to predict with certainty whether sales proceeds from our remaining assets will differ materially from amounts recorded for those assets on our balance sheet at January 3, 2009, we currently estimate that the amount ultimately distributed to our shareholders will be between $2.65 and $3.45 per common share, including the special cash distribution to shareholders in the amount of $1.90 per common share that we anticipate will be declared by the Board of Directors if the Plan and Dissolution are approved by shareholders. To the extent that the value of our assets is less, or the amount of our liabilities or the amounts that we expend during liquidation are greater, than we anticipate, our shareholders could receive less than we currently estimate.

Please refer to “Introductory Note” and Item 1A, Risk Factors, above, in connection with the wind-down of the Company’s businesses in connection with the termination of the Kmart Agreement.

Stock Performance Graph

The graph set forth below shows the cumulative total return to stockholders over the five-year fiscal period ended January 2, 2009, assuming an investment of $100 on January 2, 2004 in each of Footstar’s common stock, the NASDAQ Composite Index and the S&P Footwear Index. The graph assumes all dividends have been reinvested. The stock price performance included in the graph is not necessarily indicative of future stock price performance.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Footstar, Inc., The NASDAQ Composite Index
And The S&P Footwear Index

*   $100 invested on 1/2/04 in stock & index-including reinvestment of dividends.

     Fiscal year ending January 2.

     Copyright © 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

     Copyright © 2009 Dow Jones & Co. All rights reserved.

The Performance Graph in this Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.

Recent Sales of Unregistered Securities

We did not make any unregistered sales of our common stock during the 2008 fiscal year.

Issuer Purchases of Equity Securities

We did not repurchase any shares of our common stock during the three months ended January 3, 2009.

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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR HISTORICAL FINANCIAL SUMMARY

The following selected consolidated financial data presented below are derived from the Consolidated Financial Statements and related Notes of the Company, and should be read in connection with those statements, some of which are included herein. The information set forth below is not necessarily indicative of future results and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(dollars in millions except per share data)	2008			2007			2006			2005			2004
Revenue:
Net sales	$	580.0		$	637.0		$	666.7		$	715.4		$	800.2
Liquidation of inventory		54.2			—			—			—			—
Total revenue		634.2			637.0			666.7			715.4			800.2
Cost:
Cost of sales		396.7			427.4			452.1			490.4			535.8
Cost of liquidation of inventory		59.1			—			—			—			—
Total cost		455.8			427.4			452.1			490.4			535.8
Total gross profit		178.4			209.6			214.6			225.0			264.4
Store operating, selling, general and administrative expenses		146.8			148.6			160.6			183.1			236.1
Depreciation and amortization		4.5			8.1			8.8			7.7			21.7
Loss on impairment of long-lived assets		10.8			—			—			—			—
Gain on cancellation of retiree benefit plan		(22.3	)		—			—			—			—
Gain on sale of intangible assets		(10.5	)		—			—			—			—
(Gain) loss on Kmart Agreement (1)		(5.0	)		—			—			—			6.3
Other income		—			(0.6	)		—			—			(9.2	)
Interest expense		1.1			1.2			1.6			4.6			11.0
Interest income		(0.7	)		(2.6	)		(3.8	)		—			—
Income (loss) before reorganization items, income taxes, minority interests and discontinued operations		53.7			54.9			47.4			29.6			(1.5	)
Reorganization items (2)		—			—			—			(14.6	)		(37.1	)
Income (loss) before income taxes, minority interests and discontinued operations		53.7			54.9			47.4			15.0			(38.6	)
(Provision) benefit for income taxes (3)		(1.3	)		(2.1	)		(1.4	)		(4.2	)		2.9
Income (loss) before minority interests and discontinued operations		52.4			52.8			46.0			10.8			(35.7	)
Minority interests in loss		—			—			—			—			11.0
Income (loss) from continuing operations		52.4			52.8			46.0			10.8			(24.7	)
Income (loss) from discontinued operations, net of tax (4)		1.3			(0.8	)		(0.8	)		4.7			(66.7	)
Gain from disposal of discontinued operations, net of tax		—			—			0.1			8.9			21.4
Net income (loss)	$	53.7		$	52.0		$	45.3		$	24.4		$	(70.0	)
Basic income (loss) per share from continuing operations	$	2.51		$	2.56		$	2.23		$	0.53		$	(1.20	)
Diluted income (loss) per share from continuing operations	$	2.48		$	2.52		$	2.21		$	0.53		$	(1.20	)
Special distribution declared per common share	$	1.00		$	5.00			—			—			—

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ITEM 6. SELECTED FINANCIAL DATA, cont.
FIVE-YEAR HISTORICAL FINANCIAL SUMMARY

(dollars in millions)	2008		2007		2006		2005		2004
Balance Sheet Data
Current assets:
Cash and cash equivalents	$	56.6	$	53.8	$	101.3	$	196.1	$	189.6
Inventories		—		86.7		92.0		89.2		98.9
Receivables and other		65.1		15.8		18.5		30.3		50.5
Assets held for sale		6.2		—		—		—		—
Assets related to discontinued operations		—		—		—		0.1		6.2
Total current assets		127.9		156.3		211.8		315.7		345.2
Property and equipment, net		—		20.7		25.2		28.9		35.4
Other assets		1.0		4.6		8.3		12.1		13.5
Total assets	$	128.9	$	181.6	$	245.3	$	356.7	$	394.1
Current liabilities:
Amount due under Kmart Settlement (1)	$	—	$	5.1	$	—	$	—	$	45.0
Other current liabilities		20.7		69.9		78.5		107.8		98.0
Liability held for sale		2.0		—		—		—		—
Liabilities related to discontinued operations		0.5		0.9		2.3		7.4		3.5
Liabilities subject to compromise		—		0.5		1.2		125.5		152.3
Total current liabilities		23.2		76.4		82.0		240.7		298.8
Other long term liabilities		1.2		26.1		26.6		35.0		38.5
Amount due under Kmart Settlement (1)		—		—		5.2		5.5		5.5
Total liabilities		24.4		102.5		113.8		281.2		342.8
Shareholders’ equity		104.5		79.1		131.5		75.5		51.3
Total liabilities and shareholders equity	$	128.9	$	181.6	$	245.3	$	356.7	$	394.1

(1)	Represents additional charge incurred on Kmart Settlement and the elimination of the minority interests as part of the cure payment and amount due relating to future store closings for fiscal 2004 and 2007. Upon the expiration of the Kmart Agreement all claims not yet due or payable relating to future store closings were waived for any remaining stores. As such the Company recorded a gain on the elimination of the amount due under Kmart Settlement of $5.0 million during fiscal 2008.
(2)	Represents income and expenses associated with our bankruptcy. See Note 18 “Reorganization Items” of Notes to Consolidated Financial Statements.
(3)	We reviewed the valuation of our deferred tax assets based on objective positive evidence, such as projections of our future taxable earnings along with negative evidence, such as operational uncertainties, no taxable income in carryback period, and the liquidation of our business. 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 a (reduction) increase of the valuation allowance of $17.3 million in 2008, $(20.3) million in fiscal 2007, $(22.1) million in fiscal 2006, $(6.4) million in fiscal 2005 and $21.4 million in fiscal 2004.
(4)	Income (loss) from discontinued operations includes the gains and losses from the operations of our discontinued Athletic Segment and the gains and losses from the operations of our discontinued Meldisco operations including Shoe Zone stores and the footwear departments of Gordmans and Federated (“Meldisco”). We discontinued the Athletic Segment in 2003 and Meldisco in 2004. Additionally, during 2007, the Company increased its liability for an environmental remediation project which relates to a landfill used by one of the Company’s former manufacturing facilities that was closed over 20 years ago. In April 2008, the Company entered into an agreement with CVS Pharmacy, Inc. (“CVS”), its former parent entity, pursuant to which CVS agreed to assume any and all of Footstar’s obligations with respect to the environmental remediation. The assumption by CVS eliminated the previously recorded obligation of $1.6 million for cash consideration of $0.9 million, resulting in a gain of $0.7 million, net of tax, included in income from discontinued operations. As such, the accounting for the additional obligation has been recorded in Discontinued Operations. The income (loss) from discontinued operations includes the following (in millions):

	2008		2007			2006			2005			2004
Athletic Segment	$	0.6	$	—		$	(0.9	)	$	5.1		$	(38.9	)
Meldisco Businesses		—		—			0.1			(0.4	)		(27.8	)
Closed Manufacturing Facility	$	0.7	$	(0.8	)		—			—			—
Total	$	1.3	$	(0.8	)	$	(0.8	)	$	4.7		$	(66.7	)

See Note 4 “Discontinued Operations” of Notes to Consolidated Financial Statements.

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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, and Section 21E of the Exchange Act. These statements may be identified by the use of words such as “anticipate,” “estimates,” “should,” “expect,” “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, future operating or financial performance and other future events and circumstances. Factors that could affect our forward-looking statements include, among other things:

• the impact of any dividends or any other special distributions to stockholders on the Company’s future cash requirements and liquidity needs, both in connection with the wind-down of the Company’s operations and all contingencies;

• the Plan and our Dissolution are subject to approval and adoption by the Company’s stockholders;

• under the Plan, the Company’s remaining assets would be disposed of, known liabilities would be paid or provided for and reserves would be established for contingent liabilities, with only any remaining assets available for ultimate distribution;

• uncertainties exist as to the disposition value of our remaining assets as well as the amount of our liabilities and obligations, and, in connection with the Plan and our Dissolution, there can be no assurance as to the amount of any cash or other property that may potentially be distributed to stockholders or the timing of any distributions;

• there can be no assurance that additional issues will not arise in connection with the obligations, adjustments and payments as a result of the expiration of the Kmart Agreement;

• we do not expect to be able to fully realize the benefits of our net operating loss carry forwards; and

• the difficulty of selling the Company’s property in Mahwah, New Jersey on satisfactory terms, taking into account the current decline in the economic conditions and the current disruption in the capital and credit markets.

Because the information in this Annual Report on Form 10-K is based solely on data currently available, it is subject to change and should not be viewed as providing any assurance regarding our future operations or performance. Actual results, operations, performance, events, plans and expectations may differ materially from our current projections, estimates and expectations and the differences may be material, individually or in the aggregate, to our financial condition, results of operations, liquidity and prospects. Additionally, we do not plan 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 Annual Report on Form 10-K, other than as included in any future required SEC filings, or as may otherwise be legally required.

17

RECENT EVENTS

On January 8, 2009, the Company announced that its Board of Directors declared a special cash distribution to stockholders in the amount of $1.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. This special cash distribution totaling $21.5 million was paid on January 27, 2009.

On February 4, 2009, the Rights Agreement was amended by Amendment No. 2 in order to protect stockholder value by attempting to prevent a possible limitation on the Company’s ability to use its U.S. net operating loss carryovers. The Company has experienced significant losses in the United States, and under the Code, and rules and regulations promulgated by the Internal Revenue Service, the Company may “carry forward” these losses in certain circumstances to offset any current and future taxable income and thus reduce federal income tax liability, subject to certain requirements and restrictions. To the extent that the net operating losses do not otherwise become limited, the Company believes that it may be able to utilize a significant portion of such losses and, therefore, these net operating losses could be a substantial asset to the Company. However, if the Company experiences an “ownership change” as defined in Section 382 of the Code, the Company’s ability to use the net operating losses could be severely limited.

The Board of Directors adopted the Plan on March 5, 2009 and directed that the Plan be submitted for shareholder action at a special meeting. The Plan will take effect on the date that it is approved by our shareholders.

If the Plan and our Dissolution are approved by the shareholders, we anticipate that our activities will be limited to actions we deem necessary or appropriate to accomplish, inter alia, the following:

• filing a certificate of dissolution with the Secretary of State of Delaware and, thereafter, remaining in existence as a non-operating entity for at least three years as required under Delaware law;

• complete the sale or liquidation of the Company’s remaining assets including its property in Mahwah, New Jersey, which may include, without limitation, entering into commercial leases to enhance or facilitate the disposition of real estate if advisable;

• collecting, or providing for the collection of, accounts receivable, debts and other claims owing to the Company;

• paying, or providing for the payment of, our debts and liabilities, including both known liabilities and those that are contingent, conditional, unmatured or unknown, in accordance with Delaware law;

• winding up our remaining business activities and withdrawing from any jurisdiction in which we remain qualified to do business;

• complying with the SEC’s filing requirements for so long as we are required to do so;

• making ongoing tax and other regulatory filings; and

18

• preparing to make, and making, distributions to our shareholders of any liquidation proceeds that may be available for such distributions.

Under Delaware law, following approval of the Plan and subject to the terms of the Plan, our Board of Directors may take such actions as it deems necessary or appropriate in furtherance of the Dissolution and the winding up of the Company’s affairs.

OVERVIEW

The following points highlight the Company’s operations, cash flows and financial position for the year ended January 3, 2009:

• On December 31, 2008, we concluded our operations in the Kmart and Rite Aid stores;

• Operating profit increased by $1.2 million to $54.1 million in fiscal 2008 as compared to $52.9 million in fiscal 2007. The $37.8 million of gains recorded on the cancellation of the retiree benefit plan, sale of intangible assets and expiration of the Kmart Agreement along with the decrease of depreciation and amortization expense of $3.6 million were offset by the $31.2 million decrease in gross profit from net sales and an impairment loss on the corporate headquarters building of $10.8 million;

• The Company’s operating activities provided $11.4 million in cash during fiscal 2008, as compared to cash provided by operating activities of $60.4 million during fiscal 2007;

• As of January 3, 2009, the Company had $56.6 million of cash and cash equivalents;

• On May 9, 2008, the Company paid a special cash distribution of $1.00 per common share totaling $21.3 million; and

Kmart Agreement

Until the Kmart Agreement expired on December 31, 2008, our business relationship with Kmart was extremely important to us. The licensed footwear departments in Kmart provided substantially all of our net sales and net profits and operated pursuant to the terms of the Kmart Agreement.

We were required to pay Kmart 14.625% of the gross sales of the footwear departments along with a miscellaneous expense fee of $23,500 per open store per year. The Kmart Agreement expired at the end of 2008 at which time Kmart purchased our inventory related to the Kmart footwear departments at book value, as defined in the agreement. The process of selling the inventory to Kmart commenced immediately after the expiration of the Kmart Agreement. During 2009, the Company received $52.8 million related to the liquidation sale of the inventory from Kmart; however, the Company is currently pursuing the collection of certain additional disputed amounts for which there can be no assurance that any additional cash will be received.

The Kmart Agreement set forth the parties’ obligations with respect to staffing and advertising. Specifically, we were required to spend at least 10% of gross sales in the footwear departments on staffing costs, as defined in the agreement, for the stores and we were required to schedule the

19

staffing in each store at a minimum of 40 hours per week. In addition, Kmart was required to allocate at least 52 weekend newspaper advertising insert pages per year to our products.

Kmart had a claim against us in the amount of $11,000 for each store that was an existing store, as defined in the agreement, on August 25, 2005, which was disposed of, closed or converted to another retail format and such claim was generally payable by us to Kmart at the time of store closing, disposal or conversion. However, upon the expiration of the Kmart Agreement all such claims not yet due and payable were waived for any remaining stores. As such, the Company recorded a gain on the elimination of the amount due under Kmart Settlement of $5.0 million.

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 2008 VERSUS FISCAL 2007

						% of
						Total			% of Total
						Sales –			Sales -
(in millions)	2008			2007		2008			2007
Net Sales	$	580.0		$	637.0
Liquidation of Inventory		54.2			—
Total Revenues		634.2			637.0		100	%		100	%
Gross Profit on Net Sales		183.3			209.6		28.9			32.9
Loss on Liquidation of Inventory		(4.9	)		—		(0.8	)		—
Total Gross Profit		178.4			209.6		28.1			32.9
SG&A Expenses		146.8			148.6		23.1			23.3
Depreciation/Amortization		4.5			8.1		0.7			1.3
Loss on Impairment of Long-Lived Asset		10.8			—		1.7			—
Gain on Cancellation of Retiree Benefit Plan		(22.3	)		—		3.5			—
Gain on Sale of Intangible Assets		(10.5	)		—		1.7			—
Gain on Expiration of Kmart Agreement		(5.0	)		—		0.8			—
Operating Profit	$	54.1		$	52.9		8.5			8.3

NET SALES

Net sales decreased $57.0 million, or 8.9%, to $580.0 million in fiscal 2008 compared with $637.0 million in 2007. Sales within the footwear departments in Kmart stores (“Shoemart”) were approximately $564.1 million in fiscal 2008 and $614.2 million in 2007. Shoemart comparable store sales decreased 8.4% and store counts were down 0.5% on average for the year. The Shoemart comparable store sales decline was due to consistently lower traffic levels and weaker full priced sales. Rite Aid comparable store sales were down 14.0% and average store counts were down 2.4%. Fiscal year 2008 contained 53 weeks of sales versus 52 weeks in fiscal 2007. The 53^rd

20

week was represented by the period from December 28, 2008 to January 3, 2009, however, we ceased operations within Kmart and Rite Aid on December 31, 2008.

GROSS PROFIT ON NET SALES

Gross profit on net sales decreased $26.3 million or 12.5% to $183.3 million in fiscal 2008 compared with $209.6 million in fiscal 2007. The 12.5% decrease in gross profit was largely the result of the 8.9% sales decline in fiscal 2008. The Company’s gross profit was also lower due to severance and benefit related charges within cost of sales of $2.8 million.

LIQUIDATION OF INVENTORY

On December 31, 2008, the Company sold the remaining inventory on hand in the Kmart and Rite Aid stores for $54.2 million.

LOSS ON LIQUIDATION OF INVENTORY

Total loss on the liquidation of inventory was $4.9 million primarily due to the seasonal inventory being sold for 40% of cost pursuant to the previously agreed upon terms of sale. The Company has accrued for the expected loss on the liquidation of inventory throughout fiscal 2008 and 2007.

SG&A EXPENSES

SG&A expenses decreased $1.8 million, or 1.2%, to $146.8 million in fiscal 2008 compared with $148.6 million in fiscal 2007. While overall SG&A expenses were relatively flat, administrative costs were lower due to lower compensation and benefit costs resulting from lower headcount ($7.2 million) and lower professional fees ($3.3 million). As an offset to these decreases were approximately $7.1 million of charges reflecting the cost of severance and other benefits for associates who were informed of their expected termination dates in 2008 and 2009, along with wind down related expenses of $2.3 million.

DEPRECIATION/AMORTIZATION

Depreciation and amortization decreased $3.6 million to $4.5 million in fiscal 2008 compared with $8.1 million in fiscal 2007. The decrease is due to lower amortization costs since the Company ceased trademark amortization with the sale of these trademarks in April 2008.

LOSS ON IMPAIRMENT OF LONG-LIVED ASSET

During fiscal 2008, the Company recorded an impairment charge of $10.8 million to reduce the carrying amount of its property in Mahwah, New Jersey to its fair value of $6.2 million and has recorded the asset as held for sale. The Company used significant other observable inputs to determine fair value, less costs to dispose of the property of approximately $0.3 million, in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The impairment was caused by the significant decrease in the real estate market particularly in the fourth quarter of 2008, along with the Company’s decision to market the building to financial buyers in addition to the user owner community as the Company had previously.

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GAIN ON CANCELLATION OF RETIREE BENEFIT PLAN

In connection with the previously announced anticipated wind-down of the Company’s business at the end of fiscal 2008, the Company terminated its retiree medical and retiree life insurance plan for all active employees who had been eligible to participate in such plan and for all retiree participants effective June 6, 2008. As a result of this termination, during the second quarter of 2008, the Company eliminated its accumulated postretirement benefit obligation of approximately $14.6 million and its unamortized net gain and prior service costs included in accumulated other comprehensive income of $7.7 million, and recorded a gain of approximately $22.3 million.

GAIN ON SALE OF INTANGIBLE ASSETS

Under the terms of the IP Purchase Agreement, the Company sold to Sears Brands substantially all of the Company’s intellectual property, including the intellectual property related to the Company’s Kmart business, for a purchase price of approximately $13.0 million. The Company recognized the gain of $10.5 million at the expiration of the Kmart Agreement on December 31, 2008.

GAIN ON EXPIRATION OF KMART AGREEMENT

Kmart had a claim against us in the amount of $11,000 for each store that was an existing store, as defined in the Kmart Agreement, on August 25, 2005, which was disposed of, closed or converted to another retail format and such claim was generally payable by us to Kmart at the time of store closing, disposal or conversion. However, upon the expiration of the Kmart Agreement all such claims not yet due and payable were waived for any remaining stores. As such, the Company recorded a gain on the elimination of the amount due under Kmart Settlement of $5.0 million.

OPERATING PROFIT

Operating profit increased $1.2 million to $54.1 million in fiscal 2008 compared with $52.9 million in fiscal 2007. The $37.8 million of gains recorded on the cancellation of the retiree benefit plan, sale of intangible assets and expiration of the Kmart Agreement along with the decrease of depreciation and amortization expense of $3.6 million offset primarily by the $31.2 million decrease in gross profit from net sales and the impairment loss on the corporate headquarters building of $10.8 million during fiscal 2008.

FISCAL 2007 VERSUS FISCAL 2006

					% of Sales -		% of Sales –
(in millions)	2007		2006		2007		2006
Net Sales	$	637.0	$	666.7		100.0		100.0
Gross Profit		209.6		214.6		32.9		32.2
SG&A Expenses		148.6		160.6		23.3		24.0
Depreciation/Amortization		8.1		8.8		1.3		1.3
Operating Profit	$	52.9	$	45.2		8.3		6.8

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NET SALES

Net sales decreased $29.7 million, or 4.5%, to $637.0 million in fiscal 2007 compared with $666.7 million in fiscal 2006. Sales within the footwear departments in Kmart stores (“Shoemart”) were approximately $614.2 million in fiscal 2007 and $636.6 million in fiscal 2006 for a 3.5% decrease during fiscal 2007. The Shoemart sales decrease was the result of a decrease in comparable store sales of 3.1% and average store counts that were 0.6% lower than last year. There were 1,388 Kmart stores open at the end of fiscal 2007 versus 1,392 at the end of fiscal 2006. The balance of the sales decline was due to a 4.6% comparable store sales decline at Rite Aid and lower wholesale shipments to Wal-Mart.

GROSS PROFIT

Gross profit decreased $5.0 million or 2.3% to $209.6 million in fiscal 2007 compared with $214.6 million in fiscal 2006. The gross margin decline is due to the lower sales volumes in fiscal 2007, offset by the gross margin rate improvement to 32.9% in fiscal 2007 from 32.2% in fiscal 2006. The improvement in gross margin rate is predominantly due to the decrease in the fixed minimum revenue commitment with our third party logistics provider, FMI. (See Note 22 of our Notes to Consolidated Financial Statements for additional information regarding our relationship with FMI.)

SG&A EXPENSES

SG&A expenses decreased $12.0 million, or 7.5%, to $148.6 million in fiscal 2007 compared with $160.6 million in fiscal 2006. The overall SG&A rate as a percentage of sales decreased to 23.3% in fiscal 2007 versus 24.0% in fiscal 2006. The decrease in SG&A expenses was due to lower compensation and benefit costs ($7.6 million) and administrative costs ($4.4 million).

DEPRECIATION/AMORTIZATION

Depreciation and amortization decreased $0.7 million to $8.1 million in fiscal 2007 compared with $8.8 million in fiscal 2006.

OPERATING PROFIT

Operating profit increased $7.7 million to $52.9 million in fiscal 2007 compared with $45.2 million in fiscal 2006 primarily due to the increase in the gross margin rate, which partially offset the effect of reduced sales, and decrease in expenses noted above.

LIQUIDITY AND CAPITAL RESOURCES

Our primary uses of cash are funding working capital requirements and operating expenses. The Company also has and continues to incur additional severance, liquidation costs and professional fees in connection with the anticipated wind-down of its business. The Company intends to fund such cash requirements through current balances in cash and cash equivalents. The Amended Credit Facility dated May 9, 2008, between the Company and the Bank of America, N.A. (the “Amended Credit Facility”), matured on December 31, 2008 and all amounts due thereunder were paid as of that date. At January 3, 2009, we had cash and cash equivalents of approximately $56.6 million.

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As of January 3, 2009 accounts receivable totaled $56.8 million, of which $56.6 million was collected through February 27, 2009.

On May 9, 2008, the Company announced that its Board of Directors declared a $1.00 per share special cash distribution to stockholders of record as of May 28, 2008. The distribution totaling $21.3 million was paid on June 3, 2008 from balances in cash and cash equivalents and did not cause the Company to borrow under the Amended Credit Facility. Lender consent to such declaration and payment was provided for under the Amended Credit Facility effective as of May 9, 2008.

On January 8, 2009, the Company announced that its Board of Directors declared another $1.00 per share special cash distribution to stockholders of record as of January 20, 2009. The distribution totaling $21.5 million was paid on January 27, 2009 from current balances in cash and cash equivalents.

Subsequent to our emergence from Chapter 11 on February 7, 2006 through January 3, 2009, we made payments to creditors totaling $127.8 million, including interest where applicable.

Net cash provided by operating activities of continuing operations in fiscal 2008 was $11.4 million, primarily related to income from continuing operations of $53.7 million, a decrease in inventories of $86.7 million and the loss on impairment of long-lived assets of $10.8 million, partially offset by an increase in accounts receivable of $45.5 million, an increase in prepaid expenses and other assets of $3.5 million, a decrease in accounts payable and amount due under Kmart Settlement of $54.1 million, a gain on the cancellation of the retiree benefit plan of $22.3 million, a gain on the sale of intellectual property of $10.5 million, and other miscellaneous items totaling $3.9 million. Net cash provided by operating activities of continuing operations in 2007 was $60.4 million, primarily consisting of income from continuing operations of $52.8 million, depreciation and amortization of $8.1 million and decreases in inventory, prepaids and other assets of $9.1 million offset by a decrease of accounts payable and accrued expenses of $8.9 million and miscellaneous items of $0.7 million.

Cash provided by investing activities was $13.0 million and cash used in financing activities was $22.5 million in 2008 compared to using $0.3 million in cash in investing activities and using $105.9 million in cash in financing activities in 2007. The Company paid a special cash distribution to shareholders totaling $21.3 million and $104.8 million during 2008 and 2007, respectively.

Cash provided by operating activities of discontinued operations was $0.9 million in fiscal 2008 compared with cash used in operating activities of discontinued operations of $1.7 million in fiscal 2007. Cash provided by discontinued operations during fiscal 2008 includes $0.6 million due to a settlement of a class action lawsuit relating to the Company’s Athletic Segment which was discontinued in 2004. Cash used in operating activities of discontinued operations for fiscal 2007 consisted primarily of payments of pre-petition claims and interest.

Factors that could affect our short and long term liquidity relate primarily to the final wind-down of the businesses and include, among other things, the payment of any further dividends or distributions, our ability to sell our property in Mahwah, New Jersey, which contains our corporate headquarters and 21 acres of land, or on acceptable terms, and managing costs associated with the management, liquidation and dissolution of the Company.

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The Board of Directors approved the Plan on March 5, 2009, which is intended to modify, supersede and replace the Original Plan in order to more efficiently facilitate the liquidation and dissolution of the Company in the best interests of shareholders. The Plan provides for the complete liquidation of the Company by providing for the sale of its remaining assets and the wind-down of the Company’s business as described in the Plan and for distributions of available cash to shareholders as determined by the Board of Directors. We plan to call for a Special Meeting of our shareholders at which we will ask the shareholders to consider and vote on the Plan and Dissolution.

Although we cannot reasonably assess the impact of all of these or other uncertainties, we believe that our cash will be sufficient to fund our working capital needs and anticipated expenses for at least the next twelve months.

As of February 27, 2009, the Company has received proceeds of $52.8 million in connection with the sale of inventory to Kmart pursuant to the Kmart Agreement. In addition, the Company received proceeds of $1.3 million in connection with the sale of its remaining Rite-Aid inventory.

After approval of the Plan and Dissolution by our shareholders and the filing of our certificate of dissolution with the Delaware Secretary of State, we plan to sell or liquidate any remaining assets and pay all of our known and undisputed liabilities and obligations. We plan to then establish a contingency reserve to cover any unknown, disputed or contingent liabilities and intend to distribute remaining amounts to shareholders as and when our Board of Directors deems appropriate. We anticipate that if the Plan and Dissolution are approved by our shareholders, then our Board of Directors will declare a special cash distribution to shareholders in the amount of $1.90 per common share to be paid as soon as practicable following shareholder approval of the Plan and Dissolution. We anticipate that we will begin making distributions of liquidation proceeds to our shareholders within three to six months (or sooner) from the time we file our certificate of dissolution, in accordance with the Plan and Delaware law. We also intend to distribute remaining liquidation proceeds as promptly as practicable following the sale or liquidation of our remaining assets, subject to payment or provisions for the payment of known obligations and establishing a contingency reserve. It is possible that unanticipated lawsuits or other claims will be asserted against us, which could result in certain distributions to our shareholders being delayed for possibly several years until the resolution of any such lawsuit or claim. Any sales of our assets will be made in private or public transactions and on such terms as are approved by our Board of Directors. Under the Plan, we may, if we deem it advisable, enter into commercial leases to enhance or facilitate the disposition of our real estate.

Subject to the payment or the provision for payment of our indebtedness and other obligations, we expect to distribute from time to time pro rata to the holders of our common stock any cash on hand, together with the cash proceeds of any sales of our remaining assets. While the Plan permits us to distribute non-cash assets to our shareholders, we do not anticipate making such non-cash distributions. We intend to establish a reserve, referred to as the Contingency Reserve, in an amount determined by our Board of Directors to be sufficient to satisfy potential liabilities, expenses, and obligations. The net balance, if any, of any Contingency Reserve remaining after payment, provision, or discharge of all of our liabilities, expenses, and obligations will also be distributed to our shareholders pro rata.

Amended Credit Facility

On May 9, 2008, the Company entered into the First Amendment with Bank of America, N.A. which amended certain terms of the Amended Credit Facility with total commitments available of $50 million and letter of credit sub-limit of $25 million.

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The Amended Credit Facility was secured by a perfected first priority security interest in substantially all of the assets of the Company and contained various affirmative and negative covenants, representations, warranties and events of default to which we were subject. The Company was in compliance with all of its covenants under the Amended Credit Facility through the maturity date of December 31, 2008. As of January 1, 2009 the Amended Credit Facility was terminated.

On April 3, 2008, the Company entered into the IP Purchase Agreement and a Master Agreement Amendment. Under the terms of the IP Purchase Agreement, the Company sold to Sears Brands substantially all intellectual property, including intellectual property related to the Company’s Kmart business, for a purchase price of approximately $13.0 million.

We enter into standby letters of credit to secure certain obligations, including insurance programs and duties related to the import of our merchandise. As of January 3, 2009, we had standby letters of credit which were cash collateralized at 103% of face value, plus a reserve for future fees (the “L/C Cash Collateral”) totaling $7.1 million, with Bank of America as issuing bank, simultaneous with the termination of the Amended Credit Facility as of December 31, 2008. Accordingly, Bank of America has been granted a first priority security interest and lien upon the L/C Cash Collateral. Amounts held in the L/C Cash Collateral will be refunded to the Company as letters of credit are reduced, terminated or expire, which the Company expects will be during 2009.

CONTRACTUAL OBLIGATIONS

The following is a summary of our significant contractual obligations, excluding interest, as of January 3, 2009 (in millions):

	Payments Due By Period
									After 5
	Total		Less than 1 Year		1-3 Years		4-5 Years		Years
Mortgage payable	$	2.0	$	2.0	$	—	$	—	$	—
Operating leases		0.1		0.1		—		—		—
Compensation obligations		13.7		13.7		—		—		—
Workers’ compensation obligations		1.8		0.5		1.1		0.2		—
Total	$	17.6	$	16.3	$	1.1	$	0.2	$	—

The above table also does not include any unrecognized tax positions as of January 3, 2009 as the Company has no unrecognized tax benefits.

CRITICAL ACCOUNTING ESTIMATES

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

The preparation of the Consolidated Financial Statements required 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

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reasonable, the results of which form the bases for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. Our management has discussed with the Audit Committee of the Board of Directors the development, selection and disclosure of our critical accounting estimates and the application of these estimates. We considered the following to be our critical accounting estimates in the preparation of the Consolidated Financial Statements included in this report.

Valuation and Aging of Inventory and Shrink Reserve

Merchandise inventory was a significant portion of our consolidated balance sheets; however, based upon the expiration of our Kmart agreement and the purchase of all our inventory on hand as of December 31, 2008, we do not have any inventory on hand as of our fiscal year end of January 3, 2009.

Through December 31, 2008, inventories were 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 utilized 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 required management to make estimates, such as merchandise mark-on, mark-ups, markdowns and shrinkage, which can significantly impact the ending inventory valuation at cost as well as resulting gross margins. These significant estimates, coupled with the fact that the RIM is an averaging process, may not, in all circumstances, reflect actual historical experience, and could result in significant differences to amounts recorded.

As a supplement to the inventory values established under the RIM, we established reserves for additional markdowns associated with shrink and aged product. The shrink expense reserve represented a reserve for the unidentified loss of inventory. Management used historical percentages to accrue shrink expense. Physical inventory counts are performed at each store and distribution center throughout the year. At the completion of the inventory count, actual shrink expense was quantified and compared to the shrink reserve. Any difference between actual shrink expense and the reserve was 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 represented an estimate of the markdown required to liquidate aged inventory, which is generally defined as inventory that was aged 12 months or more. In addition, the Company estimated the portion of current inventory that would be on hand and considered aged or seasonal on the expiration date, which was December 31, 2008, and reserved for that amount as Kmart was only obligated to purchase aged inventory at 40% of cost upon expiration of our contract. 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

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analyzed the quantity and quality of all inventory in seasonal aging brackets (i.e., aged one season, two seasons, etc.). The expected markdowns necessary to liquidate each aging bracket are thus analyzed to determine if the related cost exceeds the net realizable value and a reserve, if necessary, is established.

Impairment of Long-Lived Assets

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

A review is performed to determine whether the carrying value of an asset is impaired based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using quoted market prices. Impairment is based on the excess of the carrying amount over the fair value of those assets.

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

Factors that management must estimate when performing impairment tests include, among other items, possible liquidation of our business. Actual results may differ materially from these estimates and, as a result, the fair values may be adjusted in the future.

During the fourth quarter of fiscal 2008, the Company recorded an impairment charge of $10.8 million to reduce the carrying amount of its corporate headquarters to $6.2 million and has recorded the asset as held for sale.

Insurance and Self-Insurance Liabilities

Prior to 2008 we were primarily self-insured for medical costs, as our deductible under third party coverage was $250,000 per claim. We establish accruals for our insurance programs based on available claims data and historical trends and experience, as well as loss development factors prepared by third party actuaries. Loss development factors are estimates based on our actual historical data and other retail industry data. Commencing in 2008, the Company was no longer self-insured for medical costs (the Company was self-insured for workers’ compensation insurance in fiscal 2004 and prior).

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

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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 $1.8 million at the end of fiscal year 2008 and $3.3 million at the end of fiscal year 2007. 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 is available to reduce taxable income in future periods subject to many conditions and contingencies (and use against taxable income after 2008 will not be possible if the Company has no operating income or if the Company liquidates and dissolves).

As of January 3, 2009 we have recorded a net deferred tax asset of $50.1 million and a related valuation allowance of $50.1 million. In connection with the preparation of our fiscal years 2008, 2007, and 2006 consolidated financial statements, we reviewed the valuation of our deferred tax assets based on objective positive evidence, such as projections of our future taxable earnings along with negative evidence, such as operational uncertainties, no taxable income in carryback period, and liquidation of our business. For accounting purposes, we cannot rely on anticipated long-term future profits to utilize our deferred tax assets. As a result, we could not conclude that it is more likely than not that certain deferred tax assets will be realized and have recorded a non-cash valuation allowance on our net deferred tax asset.

In June 2006 the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). The Company adopted the provisions of FIN 48 effective December 31, 2006. The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate resolution. In implementing FIN 48, the Company evaluated individual tax benefits using these evaluation methods and made judgments on how to disaggregate its various tax positions and then analyzed the tax positions. At the adoption date of December 31, 2006, December 29, 2007 and January 3, 2009, the Company did not have any unrecognized tax benefits.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles followed in the United States (“GAAP”), and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. In

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February 2008 the FASB issued FASB Staff Position FAS No. 157-2 (“FAS No. 157-2”) in which it agreed to defer for one year the effective date of Statement No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company has only partially adopted Statement No. 157. In accordance with FAS No. 157-2, the Company has not applied the provisions of Statement No. 157 in recognizing its liability for employee termination benefits at fair value (see Note 3 “Reduction in Workforce”) and in recognizing its asset held for sale at fair value (see Note 7 “Assets and Liability Held for Sale”). We do not expect the complete adoption of FASB Statement No. 157 to have a material impact on the Company’s results of operations, financial condition or liquidity.

In October 2008, the FASB issued FSP 157-3, Determining Fair Value of a Financial Asset in a Market That Is Not Active (“FSP 157-3”). FSP 157-3 clarified the application of FASB No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have a material impact on the Company’s results of operations, financial condition or liquidity.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“Statement No. 162”). The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP. Prior to the issuance of Statement No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Unlike SAS No. 69, Statement No. 162 is directed to the entity rather than the auditor. Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. Statement No. 162 is not expected to have any material impact on the Company’s results of operations, financial condition or liquidity.

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. EITF 03-6-1 requires that unvested share-based payments that contain nonforfeitable rights to dividends are participating securities and they shall be included in the computation of EPS pursuant to the two class method. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company is in the process of evaluating the impact that the adoption of EITF 03-6-1 will have on its financial statements.

FACTORS TO CONSIDER

In connection with the Plan and our Dissolution, there can be no assurance as to the amount, if any, of cash or other property that could be distributed to our shareholders or the timing of any such future distribution.

The Plan and our Dissolution are subject to approval by the Company’s shareholders. The Board of Directors has no fixed timetable for when a decision concerning when any distribution to our shareholders may occur due to the many contingencies and uncertainties inherent in winding up and liquidating a business.

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Under the Plan the Company’s assets will be sold or otherwise disposed of, known liabilities will be paid or provided for, reserves will be established for contingent liabilities and any remaining assets ultimately will be distributed to shareholders.

If the Plan and our Dissolution is approved by our shareholders, it is expected that the Company will have limited or no new revenue generation sources or activities and that it will not engage in further business activities following the adoption of the Plan, except for winding up the business of the Company, selling or disposing of any of its remaining saleable assets and satisfying and providing for its liabilities and claims. The amount and timing of any distributions to shareholders will be determined by the Board of Directors (or the trustee of a liquidating trust if our assets and liabilities are transferred to a liquidating trust pursuant to the Plan) in its sole discretion, and will depend, in part, on our ability to settle or otherwise resolve and provide for all of our remaining liabilities and contingencies and convert any remaining assets into cash.

If the shareholders approve the Plan and our Dissolution, uncertainties as to the amount of our liabilities and the disposition value, if any, of our remaining assets make it impractical to predict the net value which might ultimately be distributable to the shareholders. No assurance can be given that available cash and any amounts received on any sale of assets will be adequate to provide for our obligations, liabilities, expenses and claims and to make cash distributions to shareholders. We also cannot assure you that any distribution in liquidation would equal the price or prices at which our common stock has recently traded or may trade in the future.

We do not currently expect to generate any material revenues or operating income as an independent company.

Following the termination of the Kmart Agreement on December 31, 2008, we do not expect to own or manage any material revenue-producing assets and we will not generate any meaningful revenues. We will endeavor to operate the Company on a scaled back basis. However, we will continue to incur costs to maintain our ongoing administrative operations and continued corporate existence as well as costs to wind- down our business, without corresponding revenues.

If we are deemed to be an investment company after we wind-down our current businesses, we could be required to institute burdensome compliance requirements and our activities could be restricted, which could make it difficult to implement any future business opportunities.

In the period following termination of our Kmart business, in order not to be regulated as an investment company under the Investment Company Act of 1940, the Company must ensure that it is engaged primarily in a business other than investing, reinvesting or trading of securities and that its activities do not include investing, reinvesting, owning, holding or trading investment securities, unless the Company can qualify for an exclusion.

We would seek to manage our activities in such a manner so as to avoid being subject to the Investment Company Act of 1940.

We likely will be unable to realize the benefits of our net operating loss carryforwards.

As discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates – Deferred Tax Assets,” we currently have

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significant deferred tax assets resulting from net operating loss carryforwards. Our ability to use these tax benefits in future years depends upon the amount of our otherwise taxable income, among many other factors and conditions. We would lose the benefit of these net operating loss carryforwards under the Plan and Dissolution as well as under many other circumstances.

Also, if we underwent an ownership change, we or a successor might be unable to use all or a significant portion of our net operating loss to offset taxable income. In order to avoid an adverse impact on our ability to utilize our net operating losses for federal income tax purposes, we had earlier amended our certificate of incorporation in February 2006 to include certain restrictions on the transfer of our stock when we emerged from bankruptcy. These restrictions were intended to prevent an ownership change within the meaning of Section 382 of the Internal Revenue Code from occurring. These restrictions expired on December 31, 2008. On February 4, 2009, we amended our Rights Agreement to continue to prevent a possible ownership change but we can provide no assurances that an ownership change will not occur, which may eliminate our ability to utilize our net operating losses.

For accounting purposes, we cannot currently conclude that it is more likely than not that certain deferred tax assets, including our net operating losses, will be realized and, as a result, we have recorded a non-cash valuation allowance equal to our net deferred tax asset.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVES

As of January 3, 2009, we were not materially exposed to changes in the underlying values of our assets or liabilities nor were we materially exposed to changes in the value of expected foreign currency cash flows. We historically have not entered into derivative instruments for any purpose other than to manage our interest rate exposure. That is, we do not hold derivative financial investments for trading or speculative purposes.

INTEREST RATES

As of January 3, 2009, the Company had a mortgage totaling $2.0 million which bears a fixed annual rate of interest of 8.08% and $7.1 million of cash collaterized standby letters of credit outstanding.

FOREIGN EXCHANGE

A significant percentage of the Company’s products were sourced or manufactured offshore, with China accounting for approximately 98% of all sources. Our offshore product sourcing and purchasing activities were denominated in U.S. dollars, and, therefore, we did not 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The reports of independent registered public accounting firm, the Consolidated Financial

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Statements of the Company, the Notes to the Consolidated Financial Statements, and the supplementary financial information called for by this Item 8 are filed as part of this Annual Report on Form 10-K. An index to the Consolidated Financial Statements and supplementary financial data is provided under Item 15, “Exhibits and Financial Statement Schedules”, beginning at page 37, below.

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

The Company has established controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and President and Chief Financial Officer — Senior Vice President, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of our Chief Executive Officer and President and Chief Financial Officer — Senior Vice President, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, the Chief Executive Officer and President and Chief Financial Officer — Senior Vice President concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

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

As defined by the Public Company Accounting Oversight Board (“PCAOB”) in Auditing Standard No. 5, a “material weakness” is defined as “a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The term “significant deficiency” is defined as “a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than

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a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.”

Management, with the participation of the Company’s Chief Executive Officer and President and Chief Financial Officer — Senior Vice President, assessed the effectiveness of the Company’s internal control over financial reporting as of the Evaluation Date. In making this assessment, management used the criteria described in Internal Control — Integrated Framework issued by The Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this assessment, management (including our Chief Executive Officer and President and our Chief Financial Officer — Senior Vice President) concluded that, as of the Evaluation Date, we had not identified any material weakness in our internal control over financial reporting and our internal control over financial reporting was effective.

The Company’s internal control over financial reporting as of the Evaluation Date was audited by Amper Politziner & Mattia, LLP, the independent registered public accounting firm which audited the financial statements in this Annual Report, as stated in their report which appears herein.

(c) Changes in Internal Control Over Financial Reporting

No changes in the Company’s internal control over financial reporting have occurred during the quarter ended January 3, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by Part III, Item 10, that is not provided in this report will be included in either Footstar, Inc.’s Proxy Statement for the 2009 Annual Meeting of Shareholders or an amendment to this report, one of which will be filed with the SEC within 120 days after the end of the Company’s fiscal year, and is incorporated herein by reference.

Certain information required by this Item 10 concerning executive officers is set forth in Item 1 of this report under the caption “Executive Officers of the Registrant.”

ITEM 11. EXECUTIVE COMPENSATION

Information required by Part III, Item 11, will be included in either Footstar, Inc.’s Proxy Statement for the 2009 Annual Meeting of Shareholders or an amendment to this report, one of which will be filed with the SEC within 120 days after the end of the Company’s fiscal year, and is incorporated herein by reference except that the information under the caption “Compensation Committee Report” shall be deemed “furnished” with this report and shall not be deemed “filed” with this report and not deemed incorporated by reference into any filing under the Securities Act or Exchange Act except only as many be expressly set forth in any such filing by specific reference.

34

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by Part III, Item 12, that is not provided in this report will be included in either Footstar, Inc.’s Proxy Statement for the 2009 Annual Meeting of Shareholders or an amendment to this report, one of which will be filed with the SEC within 120 days after the end of the Company’s fiscal year, and is incorporated herein by reference.

EQUITY COMPENSATION PLAN INFORMATION

	(a)		(b)		(c)
					Number of securities
					remaining available for
	Number of securities to		Weighted-average exercise		future issuance under
	be issued upon exercise		price of outstanding		equity compensation plans
	of outstanding options,		options,		(excluding securities
Plan category	warrants and rights		warrants and rights		reflected in column (a))
Equity compensation plans approved by security holders (1)		725,358	$	12		1,628,495	(3)
Equity compensation plans not approved by security holders (2)		101,215	$	32		1,752,442	(4)
Total		826,573	$	15		3,380,937

(1)	1996 Non-Employee Director Stock Plan, 1996 Incentive Compensation Plan and 2006 Non-Employee Director Stock Plan
(2)	2000 Equity Incentive Plan.
(3)	The 1996 Incentive Compensation Plan includes 1,621,873 shares available for issuance other than upon the exercise of an option or other right. The 2006 Non-Executive Director Stock Plan includes 6,622 shares available for issuance other than upon the exercise of an option or other right.
(4)	The 2000 Equity Incentive Plan includes 1,752,442 shares available for issuance other than upon the exercise of an option or other right.

Our 2000 Equity Incentive Plan was adopted by the Board and became effective on March 10, 2000. 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 19 to the Consolidated Financial Statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by Part III, Item 13, will be included in either Footstar, Inc.’s Proxy Statement for the 2009 Annual Meeting of Shareholders or an amendment to this report, one of which will be

35

filed with the SEC within 120 days after the end of the Company’s fiscal year, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by Part III, Item 14, will be included in either Footstar, Inc.’s Proxy Statement for the 2009 Annual Meeting of Shareholders or an amendment to this report, one of which will be filed with the SEC within 120 days after the end of the Company’s fiscal year, and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements

The following financial statements are included within this report:

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Statements of Operations for the Fiscal Years ended January 3, 2009, December 29, 2007 and December 30, 2006		F-4
Consolidated Balance Sheets as of January 3, 2009 and December 29, 2007		F-5
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Fiscal Years ended January 3, 2009, December 29, 2007 and December 30, 2006		F-6
Consolidated Statements of Cash Flows for the Fiscal Years ended January 3, 2009, December 29, 2007 and December 30, 2006		F-7
Notes to Consolidated Financial Statements		F-8
Selected Quarterly Data (see Note 28 to the Consolidated Financial Statements)		F-33

(a)(2) Schedule

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

	Page
Schedule II – Valuation and Qualifying Accounts for the Fiscal Years ended January 3, 2009, December 29, 2007 and December 30, 2006		38

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.

36

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/ JONATHAN M. COUCHMAN
	Jonathan M. Couchman
	Chairman of the Board, Chief Executive     Officer and President
	March 9, 2009

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

Signature	Title	Date
/s/ JONATHAN M. COUCHMAN Jonathan M. Couchman	Chairman of the Board, Chief Executive Officer & President	March 9, 2009
/s/ MICHAEL J. LYNCH Michael J. Lynch	Chief Financial Officer- Senior Vice President	March 9, 2009
/s/ CRAIG M. HAINES Craig M. Haines	Vice President-Controller and Principal Accounting Officer	March 9, 2009
/s/ EUGENE I. DAVIS Eugene I. Davis	Director	March 4, 2009
/s/ADAM W. FINERMAN Adam W. Finerman	Director	March 3, 2009
/s/ MICHAEL A. O’HARA Michael O’Hara	Director	March 5, 2009
/s/ ALAN I. WEINSTEIN Alan I. Weinstein	Director	March 1, 2009
/s/ GERALD F. KELLY, JR. Gerald F. Kelly, Jr.	Director	March 2, 2009
/s/ STEVEN D. SCHEIWE Steven D. Scheiwe	Director	March 2, 2009

37

FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts for the Fiscal Years ended
January 3, 2009, December 29, 2007 and December 30, 2006
(in millions)

Schedule II

			Additions
	Balance at		Charged to					Balance at
	Beginning		Costs and					End of
Description	of Fiscal Year		Expenses		Deductions(1)(2)			Fiscal Year
Fiscal Year Ended January 3, 2009
Allowance for Doubtful Accounts	$	—	$	0.4	$	(0.3	)	$	0.1
Aged Inventory Reserve	$	0.9	$	3.0	$	(3.9	)	$	—
Allowance for Sales Returns	$	0.9	$	0.1	$	(1.0	)	$	—
Fiscal Year Ended December 29, 2007
Allowance for Doubtful Accounts	$	0.1	$	—	$	(0.1	)	$	—
Aged Inventory Reserve	$	0.1	$	1.0	$	(0.2	)	$	0.9
Allowance for Sales Returns	$	0.9	$	0.3	$	(0.3	)	$	0.9
Fiscal Year Ended December 30, 2006
Allowance for Doubtful Accounts	$	1.0	$	0.2	$	(1.1	)	$	0.1
Aged Inventory Reserve	$	0.1	$	0.5	$	(0.5	)	$	0.1
Allowance for Sales Returns	$	0.8	$	0.2	$	(0.1	)	$	0.9

This Schedule II reflects continuing operations only.

(1)	Deductions of allowance for doubtful accounts include write-offs, net of recoveries.
(2)	We determine the aged inventory reserve and allowance for sales returns as of the end of each reporting period. Accordingly, the above schedule reflects net additions (deductions) for each period, as applicable.

38

EXHIBIT INDEX

Exhibit
Number	DESCRIPTION
2.1	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 Exhibit 2.1 and Exhibit 2.2 to Footstar, Inc.’s Current Report on Form 8-K filed on November 15, 2004 and to Exhibit 2.1 to Footstar, Inc.’s Current Report on Form 8-K filed on November 23, 2004).
2.2	First Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code as filed with the Bankruptcy Court for the Southern District of New York (Case No. 04-22350 (ASH)) on November 30, 2005 and related Disclosure Statement (incorporated by reference to Exhibits 2.1 and 2.2 to Footstar, Inc.’s Current Report on Form 8-K filed on December 2, 2005 and to Exhibit 2.1 to Footstar, Inc.’s Current Report on Form 8-K filed on February 2, 2006).
2.3	Plan of Complete Liquidation of Footstar, Inc. (incorporated by reference to Exhibit 2.1 of Footstar, Inc.’s Form 8-K filed on May 09, 2008).
3.1	Second Amended and Restated Certificate of Incorporation of Footstar, Inc. and Certificate of Amendment of Second Amended and Restated Certificate of Incorporation of Footstar, Inc. (incorporated by reference to Exhibits 3.1 and 3.2 to Footstar, Inc.’s Current Report on Form 8-K filed on February 7, 2006).
3.2	Amended and Restated Bylaws of Footstar, Inc. (incorporated by reference to Exhibit 3.3 to Footstar Inc.’s Current Report on Form 8-K filed on February 7, 2006).
4.1	Rights Agreement, dated as of March 8, 1999, between Footstar, Inc. and Chase Mellon Shareholder Services, L.L.C. (now Mellon Investor Services LLC), as Rights Agent, which includes, as Exhibit A, the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Footstar, Inc., as Exhibit B, the Form of Right Certificate, and as Exhibit C, the Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 1 to Footstar, Inc.’s Form 8-A filed on March 9, 1999), Amendment No. 1 to the Rights Agreement dated as of May 31, 2002, which includes as Exhibit C, the modified and amended Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 2 to Footstar, Inc.’s Form 8-A/A filed on June 4, 2002) and Amendment No. 2 to the Rights Agreement, dated as of February 4, 2009 (incorporated by reference to Exhibit 4.1 to Footstar’s Current Report on Form 8-K filed on February 4, 2009).
10.1	Amended and Restated Master Agreement dated as of August 24, 2005 by and

39

Exhibit
Number	DESCRIPTION
	between Kmart Corporation, Sears Holding Corporation as guarantor of payments to be made by Kmart Corporation and Footstar, Inc. (incorporated by reference to Exhibit 10.1 to Footstar, Inc.’s Current Report on Form 8-K filed on August 26, 2005).
10.2	1996 Incentive Compensation Plan of Footstar, Inc. (incorporated by reference to Exhibit 10.3 to Footstar, Inc.’s Amendment No. 5 to Form 10/A filed on September 13, 1996).*
10.3	Form of Restricted Stock Agreement with Executive Officers (incorporated by reference to Exhibit 10.2(a) to Footstar, Inc.’s Amendment No. 1 to Annual Report on Form 10-K/A filed on March 16, 2006).*
10.4	Footstar, Inc. 2006 Non-Employee Director Stock Plan (incorporated by reference to Exhibit 10.1 to Footstar, Inc.’s Current Report on Form 8-K filed on February 7, 2006).*
10.5	First Amendment, dated June 17, 2008, to Footstar, Inc. 2006 Non-Employee Director Stock Plan (incorporated by reference to Exhibit 10.4 to Footstar’s Quarterly Report on Form 10-Q filed on August 6, 2008).*
10.6	Form of Restricted Stock Agreement with Non-Employee Directors (incorporated by reference to Exhibit 10.3(b) to Footstar, Inc.’s Amendment No.1 to Annual Report on Form 10-K/A filed on March 16, 2006).*
10.7	1996 Non-Employee Director Stock Plan of Footstar, Inc. (incorporated by reference to Exhibit 10.4 to Footstar, Inc.’s Amendment No. 5 to Form 10/A filed on September 13, 1996).*
10.8	Employment Agreement with Michael J. Lynch dated as of December 16, 2005 (incorporated by reference to Exhibit 10.3 of Footstar, Inc.’s Current Report on Form 8-K filed on December 22, 2005).*
10.9	Employment Agreement with Maureen Richards dated as of December 16, 2005 (incorporated by reference to Exhibit 10.5 of Footstar, Inc.’s Current Report on Form 8-K filed on December 22, 2005).*
10.10	Footstar, Inc. Senior Executive Base Salary Review (incorporated by reference to Item 1.01 of Footstar, Inc.’s Current Report on Form 8-K filed on March 24, 2006).*
10.11	Employment Agreement, by and between Craig Haines and Footstar, Inc., dated as of December 30, 2005 (incorporated by reference to Footstar, Inc.’s Current Report on Form 8-K filed on March 24, 2006).*
10.12	Employment Agreement, by and between Jonathan M. Couchman and Footstar, Inc., dated as of December 9, 2008 (incorporated by reference to Footstar Inc.’s Current

40

Exhibit
Number	DESCRIPTION
	Report on Form 8-K filed on December 9, 2008). Form of Restricted Stock Agreement with Jon Couchman effective December 9, 2008*
10.13	Footstar, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.8 to Footstar, Inc.’s Annual Report on Form 10-K filed on March 28, 1997, Reg. No. 001-11681).*
10.14	Supplemental Retirement Plan for Footstar, Inc., as Amended and Restated effective October 14, 1996, Amended and Restated effective as of January 1, 2005.
10.15	2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 to Footstar, Inc.’s Annual Report on Form 10-K filed on March 31, 2000, Reg. No. 001-11681).*
10.16	Performance Criteria under the Company’s Annual Incentive Plan (incorporated by reference to Footstar, Inc.’s Current Report on From 8-K filed on March 8, 2006).*
10.17	Intellectual Property Purchase Agreement, dated as of April 3, 2008, by and among Footstar Corporation, Sears Brands LLC and Sears Holdings Corporation (incorporated by reference to Exhibit 10.1 of Footstar, Inc.’s Current Report on Form 8-K filed on April 04, 2008).
10.18	Master Agreement Amendment, dated as of April 3, 2008, by and among Footstar, Inc., Kmart Corporation, certain affiliates of Kmart Corporation and Sears Holdings Corporation (incorporated by reference to Exhibit 10.2 of Footstar, Inc.’s Current Report on Form 8-K filed on April 04, 2008).
10.19	Amended and Restated Exit Credit Agreement dated as of February 7, 2006 among Footstar, Inc. and Footstar Corporation, certain parties as lenders, Bank of America, N.A., as administrative agent, swingline lender and collateral agent, and General Electric Capital Corporation, as syndication agent (incorporated by reference to Exhibit 10.1 of Footstar, Inc.’s Current Report on Form 8-K filed on February 13, 2006).
10.20	First Amendment to an Amended and Restated Exit Credit Agreement, dated as of May 9, 2008, by and among Footstar, Inc. and Footstar Corporation, certain parties as lenders, and Bank of America, N.A., as administrative agent, swingline lender, issuing bank and collateral agent (incorporated by reference to Exhibit 10.1 of Footstar, Inc.’s Current Report on Form 8-K filed on May 9, 2008).
21.1	Subsidiaries of Footstar, Inc.
23.1	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.
31.2	Certification of Chief Financial Officer — Senior Vice President (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.

* Management contract or compensatory plan.

41

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

INDEX

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations for the Fiscal Years Ended January 3, 2009, December 29, 2007 and December 30, 2006	F-4
Consolidated Balance Sheets as of January 3, 2009 and December 29, 2007	F-5
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Fiscal Years Ended January 3, 2009, December 29, 2007 and December 30, 2006	F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended January 3, 2009, December 29, 2007 and December 30, 2006	F-7
Notes to Consolidated Financial Statements	F-8
Schedule II – Valuation and Qualifying Accounts for the Fiscal Years ended January 3, 2009, December 29, 2007 and December 30, 2006	38 (Part IV, Item 15(a)(2))

F-1

FOOTSTAR, INC. and SUBSIDIARY COMPANIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Footstar, Inc. as of January 3, 2009 and December 29, 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended January 3, 2009. We also have audited Footstar, Inc.‘s internal control over financial reporting as of January 3, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Footstar, Inc.‘s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Footstar, Inc. as of January 3, 2009 and December 29, 2007, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our

F-2

FOOTSTAR, INC. and SUBSIDIARY COMPANIES

opinion, Footstar, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 3, 2009, based on criteria established in Internal Control-Internal Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

As discussed in Note 1 to the accompanying consolidated financial statements, the Company’s Kmart Agreement expired by its terms on December 31, 2008 and all operations of the Company effectively ceased.

We have also audited the consolidated financial statement schedule listed in the index at Item 15(a), Schedule II for each of the three years in the period ended January 3, 2009. 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.

Amper, Politziner and Mattia, LLP
Edison, New Jersey
March 6, 2009

F-3

FOOTSTAR, INC. and SUBSIDIARY COMPANIES

Consolidated Statements of Operations
(in millions, except per share amounts)

	For the Fiscal Years Ended
	January 3, 2009			December 29, 2007			December 30, 2006
Revenue:
Net sales	$	580.0		$	637.0		$	666.7
Liquidation of inventory		54.2			—			—
Total revenue		634.2			637.0			666.7
Cost:
Cost of sales		396.7			427.4			452.1
Cost of liquidation of inventory		59.1			—			—
Total cost		455.8			427.4			452.1
Total gross profit		178.4			209.6			214.6
Store operating, selling, general and administrative expenses		146.8			148.6			160.6
Depreciation and amortization		4.5			8.1			8.8
Loss on impairment of long-lived assets		10.8			—			—
Gain on cancellation of retiree benefit plan		(22.3	)		—			—
Gain on sale of intangible assets		(10.5	)		—			—
Gain on expiration of Kmart Agreement		(5.0	)		—			—
Other income		—			(0.6	)		—
Interest expense		1.1			1.2			1.6
Interest income		(0.7	)		(2.6	)		(3.8	)
Income before income taxes and discontinued operations		53.7			54.9			47.4
Provision for income taxes		(1.3	)		(2.1	)		(1.4	)
Income from continuing operations		52.4			52.8			46.0
Income (loss) discontinued operations, net of tax		1.3			(0.8	)		(0.8	)
Gain from disposal of discontinued operations, net of tax		—			—			0.1
Net income	$	53.7		$	52.0		$	45.3
Weighted Average common shares outstanding
Basic		20.9			20.7			20.6
Diluted		21.1			21.0			20.8
Income (loss) per share:
Basic:
Income from continuing operations	$	2.51		$	2.56		$	2.23
Income (loss) from discontinued operations		0.06			(0.04	)		(0.03	)
Net income	$	2.57		$	2.52		$	2.20
Diluted:
Income from continuing operations	$	2.48		$	2.52		$	2.21
(Loss) income from discontinued operations		0.06			(0.04	)		(0.03	)
Net income	$	2.54		$	2.48		$	2.18

See accompanying notes to consolidated financial statements.

F-4

FOOTSTAR, INC. and SUBSIDIARY COMPANIES

Consolidated Balance Sheets
(in millions, except per share and share amounts)

	January 3, 2009			December 29, 2007
Assets
Current assets:
Cash and cash equivalents	$	56.6		$	53.8
Accounts receivable, net		56.8			11.4
Inventories		—			86.7
Assets held for sale		6.2			—
Prepaid expenses and other current assets		8.3			4.4
Total current assets		127.9			156.3
Property and equipment, net		—			20.7
Intangible assets, net		—			3.3
Deferred charges and other noncurrent assets		1.0			1.3
Total assets	$	128.9		$	181.6
Liabilities and Shareholders’ Equity
Current liabilities:
Liabilities not subject to compromise
Accounts payable	$	0.2		$	48.0
Accrued expenses		19.2			20.7
Amount due under Kmart Settlement		—			5.1
Income taxes payable		1.3			1.2
Liability held for sale		2.0			—
Liabilities related to discontinued operations		0.5			0.9
Liabilities subject to compromise		—			0.5
Total current liabilities		23.2			76.4
Other long-term liabilities		1.2			26.1
Total liabilities		24.4			102.5
Shareholders’ equity:
Common stock $.01 par value: 100,000,000 shares Authorized 32,236,400 and 31,836,762 shares issued		0.3			0.3
Additional paid-in capital		330.1			328.9
Treasury stock: 10,711,569 shares, at cost		(310.6	)		(310.6	)
Retained earnings		84.1			51.7
Accumulated other comprehensive income		0.6			8.8
Total shareholders’ equity		104.5			79.1
Total liabilities and shareholders’ equity	$	128.9		$	181.6

See accompanying notes to consolidated financial statements.

F-5

FOOTSTAR, INC. and SUBSIDIARY COMPANIES

Consolidated Statements of Shareholders’ Equity and Comprehensive Income
(in millions, except share amounts)

																			Accum.
																			Other
										Add’l			Unearned						Compre-
	Common Stock				Treasury Stock					Paid-in			Compen-			Retained			hensive
	Shares		Amount		Shares		Amount			Capital			sation			Earnings			Income			Total
Balance as of December 31, 2005		31,084,647	$	0.3		10,711,569	$	(310.6	)	$	342.6		$	(0.1	)	$	43.3		$	—		$	75.5
Comprehensive income:
Net income		—		—		—		—			—			—			45.3			—			45.3
Total comprehensive income																							45.3
Adjustment to initially apply FASB Statement No. 158, net of tax		—		—		—		—			—			—			—			9.5			9.5
Common stock incentive plans		549,595		—		—		—			1.1			0.1			—			—			1.2
Balance as of December 31, 2006		31,634,242	$	0.3		10,711,569	$	(310.6	)	$	343.7		$	—		$	88.6		$	9.5		$	131.5
Comprehensive income:
Net income																	52.0						52.0
Defined benefit plans, net of tax (see notes 20 and 21):
Amortization of prior service credit		—		—		—		—			—			—			—			(1.4	)		(1.4	)
Net gain																				0.7			0.7
Total comprehensive income																							51.3
Effect of changing the SERP measurement date pursuant to FASB Statement No. 158:
Service and interest cost for December 1- December 29, 2007, net of tax		—		—		—		—			—			—			(0.1	)		—			(0.1	)
Special cash distribution		—		—		—		—			(16.0	)		—			(88.8	)		—			(104.8	)
Common stock incentive plans		202,520		—		—		—			1.2			—			—			—			1.2
Balance as of December 29, 2007		31,836,762	$	0.3		10,711,569	$	(310.6	)	$	328.9		$	—		$	51.7		$	8.8		$	79.1
Comprehensive income:
Net income																	53.7						53.7
Defined benefit plans, net of tax (see notes 21 and 22):
Amortization of prior service credit		—		—		—		—			—			—			—			(0.6	)		(0.6	)
Cancellation of post retirement benefit plan		—		—		—		—			—			—			—			(7.7	)		(7.7	)
Amortization of gain		—		—		—		—			—			—			—			(0.4	)		(0.4	)
Net gain																				0.5			0.5
Total comprehensive income																							45.5
Special cash distribution		—		—		—		—			—			—			(21.3	)		—			(21.3	)
Common stock incentive plans		399,638		—		—		—			1.2			—			—			—			1.2
Balance as of January 3, 2009		32,236,400	$	0.3		10,711,569	$	(310.6	)	$	330.1		$	—		$	84.1		$	0.6		$	104.5

See accompanying notes to consolidated financial statements.

F-6

FOOTSTAR, INC. and SUBSIDIARY COMPANIES

Consolidated Statements of Cash Flows
(in millions)

	January 3,			December 29,			December 30,
	2009			2007			2006
Cash flows from operating activities:
Net income	$	53.7		$	52.0		$	45.3
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations, net of tax		(1.3	)		0.8			0.7
Depreciation and amortization		4.5			8.1			8.8
Gain on retiree medical plan cancellation		(22.3	)		—			—
Gain on sale of intellectual property		(10.5	)		—			—
Loss on impairment of long-lived assets		10.8			—			—
Stock incentive plans		1.2			1.2			1.3
Changes in operating assets and liabilities:
Increase in accounts receivable, net		(45.5	)		(0.8	)		(1.8	)
Decrease (increase) in inventories		86.7			5.4			(2.9	)
(Increase) decrease in prepaid expenses and other assets		(3.5	)		3.8			14.0
Decrease in accounts payable, accrued expenses and amount due under Kmart Settlement		(54.1	)		(9.4	)		(56.1	)
Decrease in income taxes payable and other long-term liabilities		(8.3	)		(0.7	)		(3.9	)
Net cash provided by operating activities		11.4			60.4			5.4
Cash flows provided by (used in) investing activities:
Proceeds from sale of intellectual property		13.0			—			—
Additions to property and equipment		—			(0.3	)		(1.9	)
Net cash provided by (used) in investing activities		13.0			(0.3	)		(1.9	)
Cash flows used in financing activities:
Special cash distribution paid		(21.3	)		(104.8	)		—
Payments on mortgage note		(1.2	)		(1.1	)		(1.0	)
Net cash used in financing activities		(22.5	)		(105.9	)		(1.0	)
Cash flows from discontinued operations:
Net cash provided by (used in) operating activities of discontinued activities		0.9			(1.7	)		(97.3	)
Net increase (decrease) in cash — discontinued operations		0.9			(1.7	)		(97.3	)
Net increase (decrease) in cash and cash equivalents		2.8			(47.5	)		(94.8	)
Cash and cash equivalents, beginning of year		53.8			101.3			196.1
Cash and cash equivalents, end of year	$	56.6		$	53.8		$	101.3

See accompanying notes to consolidated financial statements.

F-7

FOOTSTAR, INC. and SUBSIDIARY COMPANIES

Notes to Consolidated Financial Statements

1. Nature of Company

Background

Footstar, Inc. (“Footstar”, the “Company”, “we”, “us”, or “our”) is a holding company that operated its businesses through its subsidiaries which principally operated as a retailer selling family footwear through licensed footwear departments in Kmart stores (our “Shoemart” business). These operations comprised substantially all of our sales and profits.

Commencing March 2, 2004, Footstar and most of its subsidiaries 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 (“Court”).

On February 7, 2006, we successfully emerged from bankruptcy and paid substantially all our creditors in full with interest. Pursuant to the guidance provided by the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”), the Company did not adopt fresh-start reporting because there was no change to the holders of existing voting shares and the reorganization value of the Company’s assets was greater than its post petition liabilities and allowed claims.

Expected Liquidation of the Company’s Business.

As part of its emergence from bankruptcy in February 2006, substantially all of the Company’s business operations consisted of running licensed footwear departments in Kmart stores pursuant to an Amended and Restated Master Agreement among Kmart, Sears Holding Corporation (“Sears”) and the Company (as amended, the “Kmart Agreement”). The Kmart Agreement expired by its terms at the end of 2008.

In 2008, Kmart and the Company entered into discussions with respect to the rights and responsibilities of the respective parties upon termination of the Kmart Agreement as well as the sale of certain intellectual property to Kmart. As a result of such discussions, on April 3, 2008, the Company, Kmart, and certain affiliates of Kmart and Sears entered into a Master Agreement Amendment (the “Master Agreement Amendment”) pursuant to which the Company sold such intellectual property to Kmart affiliates for approximately $13.0 million, and reached an agreement on how the value of the inventory would be determined when sold to Kmart upon termination of the Kmart Agreement at the end of 2008 (the Kmart Settlement)(see “Master Agreement Amendment; Intellectual Property Purchase Agreement” in this section below).

In May 2008 the Board of Directors determined that it was in the best interests of the Company and its stockholders to liquidate and ultimately dissolve after the expiration of the Kmart Agreement in December 2008 (and other miscellaneous contracts through the end of such term) and to sell and/or dispose of any of the Company’s other remaining assets, including its property in Mahwah New Jersey, which contains its corporate headquarters and 21 acres of land. In May 2008, the Board of Directors approved a Plan of Complete Liquidation of Footstar, Inc. (the “Original Plan”), which provides for the complete liquidation and ultimate dissolution of the Company after the expiration of the Kmart Agreement on December 31, 2008. Under the terms of the Kmart Agreement, Kmart is required to purchase from the Company all of the remaining inventory in the Kmart footwear departments at values set forth in the Kmart Agreement. The process of selling the inventory to Kmart commenced immediately after expiration of the Kmart Agreement on December 31, 2008. During 2009, the Company received $52.8 million from Kmart related to the liquidation sale of inventory; however, the Company is currently pursuing the collection of certain additional disputed amounts for which there can be no assurance that any additional cash will be received.

F-8

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

The Amended Plan of Complete Dissolution and Liquidation of Footstar, Inc. (the “Plan”) reflects technical and legal changes to the Original Plan consistent with Delaware corporate law and is intended to modify, supersede and replace the Original Plan in order to more efficiently facilitate the liquidation and dissolution of the Company in the best interests of shareholders. The Plan was approved by the Board of Directors on March 5, 2009.

The Plan provides for the complete liquidation of the Company by providing for the sale of its remaining assets and the wind-down of the Company’s business as described in the Plan and for distribution of available cash to shareholders as determined by the Board of Directors.

In connection with the anticipated liquidation, wind—down and ultimate dissolution of the Company, the Company will, when and as determined by the Board of Directors in its absolute discretion, pay, or make adequate provision for payment of, all known and uncontroverted liabilities of the Company (including indemnification obligations and expenses associated with the liquidation and dissolution of the Company and the satisfaction in full of the obligations of the Company) and will set aside from its cash-on-hand such additional amount as the Board of Directors in its absolute discretion determines to be appropriate from time to time in connection with other, unascertained or contingent, liabilities of the Company.

Since the Company emerged from bankruptcy on February 7, 2006, the Board of Directors has declared special cash distributions totaling $7.00 per common share.

On March 27, 2007, the Company announced that its Board of Directors declared a special cash distribution to stockholders in the amount of $5.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. The special cash distribution totaling $104.8 million was paid on April 30, 2007.

On May 9, 2008, the Company announced that its Board of Directors declared a special cash distribution to stockholders in the amount of $1.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. The special cash distribution totaling $21.3 million was paid on June 3, 2008.

On January 8, 2009, the Company announced its Board of Directors declared a special cash distribution to stockholders in the amount of $1.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. This special cash distribution totaling $21.5 million was paid on January 27, 2009.

After approval of the Plan and Dissolution by the shareholders and the filing of our certificate of dissolution with the Delaware Secretary of State, we plan to sell or liquidate any remaining assets and pay all of our known and undisputed liabilities and obligations. We plan to then establish a contingency reserve to cover any unknown, disputed or contingent liabilities and intend to distribute remaining amounts to shareholders as and when our Board of Directors deems appropriate. We anticipate that if the Plan and Dissolution are approved by shareholders, then our Board of Directors will declare a special cash distribution to shareholders as promptly as practicable after approval of the Plan and Dissolution by our shareholders. We anticipate that we will begin making distributions of liquidation proceeds to our shareholders within three to six months (or sooner) from the time we file our certificate of dissolution, in accordance with the Plan and Delaware law. We also intend to distribute remaining liquidation proceeds as promptly as practicable following the sale or liquidation of our remaining assets, subject to payment or provisions for the payment of known obligations and establishing a contingency reserve.

F-9

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

Because of the uncertainties as to the ultimate settlement amount of our remaining liabilities and expenditures we will face during liquidation, we are not able to predict with precision or certainty specific amounts, or timing, of future liquidation distributions. We are currently evaluating the market value of our limited remaining non-cash assets. To the extent that the value of our assets is less, or the amount of our liabilities or the amounts that we expend during liquidation are greater, than we anticipate, our shareholders could receive less than we currently estimate.

Master Agreement Amendment; Intellectual Property Purchase Agreement

As discussed above, on April 3, 2008, the Company entered into (i) the Master Agreement Amendment with Kmart, certain affiliates of Kmart and Sears, which amends the Kmart Agreement, and (ii) an Intellectual Property Purchase Agreement (the “IP Purchase Agreement”) with Sears and its subsidiary, Sears Brand LLC (“Sears Brand”).

Pursuant to the terms of the Master Agreement Amendment, Kmart offered employment to substantially all of the Company’s store managers and district manager level employees in connection with the termination of the Kmart Agreement.

The Master Agreement Amendment also sets forth provisions concerning Kmart’s purchase of the inventory at the termination of the Kmart Agreement and establishes procedures for determining the book value of such inventory (and the additional consideration to be paid). The Master Agreement Amendment provides, among other things, that Kmart will purchase the inventory in our Kmart footwear departments (excluding inventory that is damaged or unsaleable) at book value, plus $1.35 million, less $0.95 million and less a shrink adjustment of $0.2 million. Under the Master Agreement Amendment, the Company exercised its option to have Kmart also purchase its seasonal inventory, as defined, at 40% of book value, less $1 million. During the remaining term of the Kmart Agreement, the Company was required to provide Kmart with certain information, including a business analysis and category analysis report and aged inventory reports. During 2009, the Company received $52.8 million from Kmart related to the liquidations sale of inventory; however, the Company is currently pursuing the collection of certain additional disputed amounts for which there can be no assurance that any additional cash will be received.

Under the terms of the IP Purchase Agreement, the Company sold to Sears Brands substantially all of the Company’s intellectual property, including the intellectual property related to the Company’s Kmart business, for a purchase price of approximately $13.0 million. The Company recognized the gain of $10.5 million at the expiration of the Kmart Agreement on December 31, 2008. The purchase and sale was effective as of the signing of the IP Purchase Agreement and was not subject to any closing conditions.

Under the IP Purchase Agreement, Sears Brands granted the Company a royalty-free, exclusive license to use the intellectual property to operate the Company’s Kmart business until the Kmart Agreement termination and a royalty-free, non-exclusive license for a short period following the termination of the Kmart Agreement to liquidate any remaining inventory, if applicable.

As set forth in the Kmart Agreement, Kmart collected proceeds from the sale of our inventory and remitted those sales proceeds to us on a weekly basis less applicable fees. The Kmart Agreement provided that we pay Kmart 14.625% of the gross sales of the footwear departments and a miscellaneous expense fee of $23,500 each year per open store. Such fees were $114.9 million, $122.4 million and $125.9 million for fiscal 2008, 2007 and 2006, respectively. As of January 3, 2009 and

F-10

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

December 29, 2007, we had outstanding accounts receivable due from Kmart of $54.3 million and $9.0 million respectively, which were subsequently collected in January 2008 and January 2009, respectively.

Kmart had a claim against us in the amount of $11,000 for each store that was an existing store on August 25, 2005, which was generally payable by us to Kmart at the time a store was disposed of, closed or converted to another retail format. However, upon the expiration of the Kmart Agreement on December 31, 2008, all such claims not yet due and payable were waived for any remaining stores. As such, the Company recorded a gain on the elimination of the amount due under Kmart Settlement of $5.0 million.

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

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.

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

Basis of Presentation

Our financial statements have been prepared in accordance with the provisions of SOP 90-7. Pursuant to SOP 90-7, our pre-petition liabilities that were subject to compromise are reported separately in the accompanying balance sheet as an estimate of the amount that will ultimately be allowed by the Court.

Fiscal Years

The accompanying financial statements include our consolidated results of operations, assets and liabilities for the 53-week fiscal year ended January 3, 2009 and for the 52-week fiscal years ended December 29, 2007 and December 30, 2006.

Use of Estimates in Preparation of Financial Statements

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting estimates, which may be impacted by management’s estimates and assumptions, are discussed in these notes and include the valuation and aging of inventory and shrink reserve, the impairment of long-lived assets, insurance liabilities and the valuation of deferred taxes.

F-11

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid instruments with maturities of three months or less from the date acquired and are stated at cost that approximates their fair market value. At times the Company has cash and cash equivalents balances in excess of the FDIC and SIPC insured limits.

Merchandise Inventories and Cost of Sales

Inventories are finished goods, consisting of merchandise purchased from domestic and foreign vendors, and are carried at the lower of cost or market value, determined by the retail inventory method on a first-in, first-out (“FIFO”) basis. The retail inventory method is commonly used by retail companies to value inventories at cost by applying a cost-to-retail percentage to the retail value of inventories. The retail inventory method is a system of averages that requires management’s estimates and assumptions regarding initial mark-ons, mark-ups, markdowns and shrink, among others and, as such, could result in distortions of inventory amounts. The cost of inventories includes the cost of merchandise, freight-in, duties, royalties and related fees and the cost of our merchandise sourcing operations. Cost of sales is comprised of the cost of merchandise, warehousing and delivery costs, inventory shrinkage, rent and buying/merchandising costs.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization of property and equipment are computed on a straight-line basis, generally over the estimated useful lives of the assets or, when applicable, the life of the lease, whichever is shorter. Capitalized software costs are amortized on a straight-line basis over their estimated useful lives.

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, such as a significant economic slow-down in the real estate market indicate that the carrying amounts of long-lived assets 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. A review is performed to determine whether the carrying value of an asset is impaired based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using quoted market prices. Impairment is based on the excess of the carrying amount over the fair value of those assets. We estimate fair value based on the best information available using estimates, judgments and projections as considered necessary. During the fourth quarter of fiscal 2008, the Company recorded an impairment charge of $10.8 million to reduce the carrying amount of its corporate headquarters to its fair value of $6.2 million and has recorded the asset as held for sale. The Company used significant other observable inputs to determine fair value, less costs to dispose of the property of approximately $0.3 million, in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The impairment was caused by the significant decrease in the real estate market during 2008, along with the Company’s decision to market the building to financial

F-12

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

buyers in addition to the user owner community as the Company had previously.

Revenue Recognition

Revenues from retail stores were recorded at the point of sale when the product was delivered to customers and revenues from wholesale operations were recorded when the product was 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 $1.6 million, $2.8 million and $3.0 million in 2008, 2007, and 2006, respectively.

Income Taxes

Effective December 31, 2006 the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. At the adoption date of December 31, 2006 and also as of December 29, 2007 and January 3, 2009, the Company did not have any unrecognized tax benefits. We do not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company’s policy is to recognize interest and penalties related to tax matters in the income tax provision in the Consolidated Statements of Operations. The amount of interest and penalties for the years ended December 29, 2007 and January 3, 2009 were insignificant. Tax years beginning in 2005 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

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.

As of January 3, 2009 we have recorded a net deferred tax asset of $50.1 million and a related valuation allowance of $50.1 million. In connection with the preparation of our fiscal years 2008, 2007 and 2006 consolidated financial statements, we reviewed the valuation of our deferred tax assets based on objective positive evidence, such as projections of our future taxable earnings along with negative evidence, such as operational uncertainties, no taxable income in carryback period, and anticipated liquidation of our Kmart business (which accounts for substantially all of our net sales and net profits) by no later than the end of 2008. For accounting purposes, we cannot rely on anticipated

F-13

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

long-term future profits to utilize our deferred tax assets. As a result, we could not conclude that it is more likely than not that certain deferred tax assets will be realized and have recorded a non-cash valuation allowance on our net deferred tax asset (see Note 17 “Income Taxes”).

Insurance Liabilities

We were primarily self-insured for health care costs for fiscal 2007 and prior. We were self-insured for workers’ compensation insurance for fiscal 2004 and prior. Our health care and workers’ compensation (fiscal 2004 and prior) had a deductible of $250,000, property insurance with deductibles ranging between $25,000 to $100,000 and general liability insurance with no deductible. For self-insured claims, provisions are made for our actuarially determined estimates of discounted future claim costs for such risks. Commencing in 2005, the Company is no longer self-insured for workers’ compensation insurance and we maintained workers’ compensation insurance with no deductible. Commencing January 1, 2008, the Company entered into premium based health care programs and therefore is no longer self-insured for health care costs.

Earnings Per Share

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

	2008	2007	2006
Average shares outstanding	20.9	20.6	20.5
Average contingently issuable shares (1)	—	0.1	0.1
Average shares outstanding — basic	20.9	20.7	20.6
Average shares outstanding — diluted (2)	21.1	21.0	20.8

(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. Shares that could potentially dilute EPS in the future, but which were not included in the calculation of diluted EPS because to do so would have been antidilutive, totaled 327,725 at January 3, 2009, 472,435 at December 29, 2007 and 513,275 at December 30, 2006.

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments and the variability of the respective interest rates where applicable. The carrying value of the mortgage, which approximated fair value, was $2.0 million and $3.2 million as of January 3, 2009 and December 29, 2007, respectively. Pursuant to Statement No. 157 “Fair Value Measurements”, the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded value of our mortgage approximates its current fair value since the obligation is expected to be settled within one year. As of January 3, 2009 the mortgage payable is classified as liability held for sale in the

F-14

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

accompanying Consolidated Balance Sheet.

3. Reduction in Workforce

As previously discussed, the Company is in the process of winding down its business. In connection with this anticipated wind-down, on April 24, 2008 and on May 28, 2008, the Board of Directors of the Company approved a plan to reduce operating expenses and align its workforce with its anticipated staffing needs by reducing the Company’s workforce by approximately 236 employees. The Company notified these employees of their estimated termination dates, which ranged from June 28, 2008 through June 30, 2009. The Company expects to incur cash charges of approximately $9.6 million for one-time severance costs and $1.9 million for benefit costs associated with these employees, which will be accounted for on a straight-line basis over the period from notification through each employee’s termination date. For the year-to-date period ended January 3, 2009 the Company recorded severance and benefit charges totaling $9.9 million, of which $7.1 million is included within store operating, selling, general and administrative expenses and $2.8 million is included within cost of sales in the accompanying Condensed Consolidated Statements of Operations. Cash payments to terminated employees totaling $3.1 million were paid during the year-to-date period ended January 3, 2009. As of January 3, 2009 the Company had an accrual of $6.8 million relating to severance and benefit costs included in accrued expenses. In order to continue to retain key employees as it winds down its businesses the Company may commit to additional cash charges when and if such plans are approved by the Board of Directors.

The following are reconciliations of the beginning and ending severance and benefit costs accrual for the year-to-date period ended January 3, 2009 (in millions):

	Year-to-date period
	January 3, 2009
Beginning balance of termination benefits accrual	$	—
Costs charged to expense		9.9
Cash payments		(3.1	)
Ending balance of termination benefits accrual	$	6.8

4. Discontinued Operations

During 2007, the Company received notification that its potential obligations with respect to an environmental remediation project had increased by $0.8 million, net of taxes. The environmental remediation project relates to a landfill that has been designated as a superfund site which was used by one of the Company’s former manufacturing facilities that was closed over 20 years ago. As such, the accounting for the additional obligation has been recorded in Discontinued Operations in 2007. The total potential obligation accrued as of December 29, 2007 was $1.6 million and is included in other long term liabilities.

In April 2008, the Company entered into an agreement with CVS Pharmacy, Inc. (“CVS”), its former parent entity, pursuant to which CVS agreed to assume any and all of Footstar’s obligations with respect to the environmental remediation. The assumption by CVS eliminated the previously recorded obligation of $1.6 million for cash consideration of $0.9 million, resulting in a gain of $0.7 million, net of tax, included in income from discontinued operations.

Net sales, operating income (loss), interest expense and income (loss) from discontinued operations for

F-15

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

the years ended January 3, 2009 and December 29, 2007 were as follows (in millions):

	2008		2007
Net sales	$	—	$	—
Operating income (loss) from discontinued operations		0.7		(0.8	)
Interest expense		—		—
Provision for income taxes		—		—
Income (loss) from discontinued operations	$	0.7	$	(0.8	)

In 2004, 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, has been accounted for as discontinued operations. Our financial statements reflect the Athletic Segment as discontinued operations for all periods presented.

In addition, in February 2008, the Company received $0.6 million, net of tax, due to a settlement of a class action lawsuit relating to the Company’s Athletic segment, which was discontinued in 2004.

Net sales, operating income (loss), interest expense, provision for income taxes and income (loss) from our Athletic Segment for 2008, 2007 and 2006 were as follows (in millions):

	2008		2007		2006
Net sales	$	—	$	—	$	—
Operating income (loss) from discontinued operations		0.6		—		(0.2	)
Interest expense		—		—		(0.7	)
Provision for income taxes		—		—		—
Income (loss) from discontinued operations	$	0.6	$	—	$	(0.9	)

5. Impact of Recently Issued Accounting Standards

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles followed in the United States (“GAAP”), and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. In February 2008 the FASB issued FASB Staff Position FAS No. 157-2 (“FAS No. 157-2”) in which it agreed to defer for one year the effective date of Statement No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company has only partially adopted Statement No. 157. In accordance with FAS No. 157-2, the Company has not applied the provisions of Statement No. 157 in recognizing its liability for employee termination benefits at fair value (see Note 3 “Reduction in Workforce”) and in recognizing its asset held for sale at fair value (see Note 7 “Assets and Liability Held for Sale”). We do not expect the complete adoption of FASB Statement No. 157 to have a material impact on the Company’s results of operations, financial condition or liquidity.

F-16

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

In October 2008, the FASB issued FSP 157-3, Determining Fair Value of a Financial Asset in a Market That Is Not Active (“FSP 157-3”). FSP 157-3 clarified the application of FASB No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have a material impact on the Company’s results of operations, financial condition or liquidity.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“Statement No. 162”). The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP. Prior to the issuance of Statement No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Unlike SAS No. 69, Statement No. 162 is directed to the entity rather than the auditor. Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. Statement No. 162 is not expected to have any material impact on the Company’s results of operations, financial condition or liquidity.

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. EITF 03-6-1 requires that unvested share-based payments that contain nonforfeitable rights to dividends are participating securities and they shall be included in the computation of EPS pursuant to the two class method. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company is in the process of evaluating the impact that the adoption of EITF 03-6-1 will have on its financial statements.

6. Accounts Receivable

Accounts receivable consisted of the following (in millions):

	2008			2007
Due from Kmart	$	54.3		$	9.0
Other — primarily trade		2.6			2.4
		56.9			11.4
Less: Allowance for doubtful accounts		(0.1	)		—
Total	$	56.8		$	11.4

7. Assets and Liability Held For Sale

In connection with the anticipated wind-down of the Kmart business, the Company has been marketing its 21 acre property in Mahwah, New Jersey, which includes its corporate headquarters, for sale. As such the corporate headquarters building has been classified as assets held for sale. As of January 3, 2009 the Company estimates that the fair value of the assets held for sale, less estimated closing costs, is approximately $6.2 million. During fiscal 2008 the Company recorded an impairment charge of approximately $10.8 million and recorded the assets held for sale at fair value. The assets held for sale are summarized as follows:

F-17

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

Building and improvements	$	20.3
Less accumulated depreciation		(17.3	)
		3.0
Land		3.2
Assets held for sale	$	6.2

The Company’s mortgage assumed in connection with the purchase of the property in Mahwah, New Jersey, totaling approximately $2.0 million as of January 3, 2009 has been classified as liability held for sale. The liability held for sale is summarized as follows:

Accrued expenses	$	2.0
Liabilities held for sale	$	2.0

8. Prepaid Expenses and Other Current Assets

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

	2008		2007
Income tax refund receivable and other prepaid taxes	$	0.6	$	0.5
Cash collaterized letters of credit		7.1		—
Other prepaids		0.6		3.9
Total	$	8.3	$	4.4

9. Liabilities Related to Discontinued Operations

Liabilities related to discontinued operations as of January 3, 2009 and December 29, 2007 consisted of the following (in millions).

	2008		2007
Liabilities
Accrued expenses	$	0.5	$	0.9
	$	0.5	$	0.9

10. Property and Equipment

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

	Original useful lives (in yrs.)		2008		2007
Land			$	—	$	3.2
Buildings and improvements		10-40		—		20.3
Computer hardware and software, equipment and furniture		3-10		17.9		38.4
Leasehold improvements		6		—		0.1
				17.9		62.0
Less: Accumulated depreciation				17.9		41.3
Total			$	—	$	20.7

Depreciation expense was $3.7 million, $4.8 million and $5.4 million in 2008, 2007 and 2006, respectively.

F-18

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

We reviewed our corporate headquarters building for impairment in accordance with SFAS 144. An impairment in the carrying value of an asset is recognized whenever anticipated future undiscounted cash flows from an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the assets and their fair values. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. We utilized significant other observable inputs to determine the reasonableness of the fair values estimated using the discounted cash flow methodology. Based on the results of this assessment, as of January 3, 2009, the Company recorded an impairment charge of $10.8 million to reduce the carrying amount of its corporate headquarters to $6.2 million and has recorded the asset as held for sale.

11. Other Intangible Assets

As of January 3, 2009 and December 29, 2007, the Company had trade names with a gross carrying amount of $0 and $11.3 million, respectively (see Note 1 “Nature of Company” for information on sale of intellectual property to Sears Brands). The accumulated amortization associated with these trade names was $0 million and $8.0 million at January 3, 2009 and December 29, 2007, respectively. Amortization expense for fiscal 2008, 2007 and 2006 was $0.8 million, $3.3 million and $3.3 million, respectively.

12. Accrued Expenses

Accrued expenses consisted of the following (in millions):

	2008		2007
Taxes other than federal income taxes	$	0.3	$	0.6
Salaries, bonus and severance		8.8		7.7
Employee benefit costs		6.9		3.8
Other — individually not in excess of 5%		3.2		8.6
Total	$	19.2	$	20.7

13. Liabilities Subject to Compromise

Liabilities subject to compromise represent our current estimate of the amount of the pre-petition claims that are subject to restructuring during our bankruptcy. Pursuant to Court orders, we were authorized to pay certain pre-petition operating liabilities incurred in the ordinary course of business and reject certain of our pre-petition obligations. We notified all known pre-petition creditors of the establishment of a bar date by which creditors must file a proof of claim, which bar date has now passed for all creditors. Differences between liability amounts recorded by us and claims timely filed by creditors have been substantially reconciled and paid upon our emergence on February 7, 2006.

Liabilities subject to compromise as of January 3, 2009 and December 29, 2007 consisted of the following (in millions):

	2008		2007
Accrued expenses	$	—	$	0.5
Total	$	—	$	0.5

F-19

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

14. Credit Facility

On May 9, 2008, the Company entered into the Amended Credit Facility with Bank of America, N.A. The Amended Credit Facility reflects a voluntary reduction in total commitments available from $100 million to $50 million and letter of credit sub-limit from $40 million to $25 million. The amount we could borrow under the Amended Credit Facility was limited to total commitments or, if lower, the calculated borrowing base, based upon eligible inventory and accounts receivable and other terms determined in accordance with the Amended Credit Facility. Loans under the Amended Credit Facility bear interest, at our option, either at the alternate base rate, as defined, plus a variable margin of 0.0% to 0.5% or the London Interbank Offered Rate (“LIBOR”) plus a variable margin of 1.75% to 2.50%. The variable margin was based upon quarterly excess availability levels specified in the Amended Credit Facility. A quarterly fee of 0.3% per annum was payable on the unused balance. The Amended Credit Facility reflected an extension in maturity date to the earlier of December 31, 2008 or the termination of the Kmart Agreement, from November 30, 2008 or thirty days prior to the termination of the Kmart Agreement.

The Amended Credit Facility was secured by a perfected first priority security interest in substantially all of the assets of the Company and contains various affirmative and negative covenants, representations, warranties and events of default to which we were subject, including certain financial covenants and restrictions such as limitations on additional indebtedness, other liens, dividends, distributions, investments, disposal of assets, stock repurchases and capital expenditures. The Company was required to maintain a minimum excess availability level at all times, equal to at least 10% of the borrowing base. In addition, if at any time minimum excess availability fell below 10% of the borrowing base, the Company’s fixed charge coverage ratio for the period of four consecutive fiscal quarters most recently ended must have been no less than 1.10 to 1.00. If an event of default was to occur under the Amended Credit Facility, the lender may have declared all amounts outstanding immediately due and payable and may have exercised any rights and remedies they had by law or agreement, including the ability to cause all or any part of the collateral to be sold. The Company was in compliance with all of its covenants under the Amended Credit Facility through the maturity date of December 31, 2008. As of January 1, 2009 the Amended Credit Facility was terminated.

On April 3, 2008, the Company entered into the IP Purchase Agreement and a Master Agreement Amendment. Under the terms of the IP Purchase Agreement, the Company sold to Sears Brands substantially all intellectual property, including intellectual property related to the Company’s Kmart business, for a purchase price of approximately $13.0 million. We were required to and did obtain lender consent under our revolving credit facility in connection with this sale and the amendment of the Kmart Agreement.

We enter into standby letters of credit to secure certain obligations, including insurance programs and duties related to the import of our merchandise. As of January 3, 2009, we had standby letters of credit which were cash collateralized at 103% of face value, plus a reserve for future fees (the “L/C Cash Collateral”) totaling $7.1 million, with Bank of America as issuing bank, simultaneous with the termination of the Amended Credit Facility as of the December 31, 2008. Accordingly, Bank of America has been granted a first priority security interest and lien upon the L/C Cash Collateral. Amounts will be refunded to the Company as letters of credit are reduced, terminated or expired.

15. Other Long-Term Liabilities

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

F-20

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

	2008		2007
Employee benefit costs	$	—	$	20.8
Workers compensation		1.2		1.8
Other		—		3.5
Total	$	1.2	$	26.1

Our postretirement benefits plan and supplemental executive retirement plan are included in employee benefit costs at December 29, 2007. As of January 3, 2009 the supplemental executive retirement obligation is included in accrued expenses. See Note 21 “Postretirement Benefits” and Note 22 “Supplemental Executive Retirement Plan”.

In connection with our purchase of the 21 acre property in Mahwah, New Jersey which includes our corporate headquarters building in September 2000, we assumed a 10-year term mortgage, of which $2.0 million and $3.2 million were outstanding as of January 3, 2009 and December 29, 2007, respectively. As of January 3, 2009, the total mortgage is included in liability held for sale. As of December 29, 2007, $2.0 million of the mortgage is included in long term liabilities and $1.2 million is included in accrued expenses. Under the terms of the mortgage agreement, we are required to make quarterly payments of approximately $350,000, representing both principal and interest, through May 1, 2010, when the mortgage will be repaid.

The mortgage bears a fixed annual rate of interest of 8.08%. As of January 3, 2009, the future principal payments under the mortgage are as follows:

2009	$	1.3
2010		0.7

16. Leases

We lease office facilities and various equipment through operating leases with remaining lease terms less than one year. Net rental expense for all operating leases for each of the fiscal years in the three-year period ended January 3, 2009 was as follows (in millions):

	2008		2007		2006
Minimum rentals	$	1.1	$	1.2	$	1.6
Percentage rentals		84.7		92.3		95.8
Total	$	85.8	$	93.5	$	97.4

Percentage rentals represent rent paid to licensors.

As of January 3, 2009, the future minimum rental payments under operating leases are $0.1 million in 2009.

17. Income Taxes

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

	2008		2007		2006
Federal	$	—	$	1.1	$	0.1
State		1.3		1.0		1.3
Total	$	1.3	$	2.1	$	1.4

F- 21

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

There was no provision for income taxes relating to discontinued operations in 2008, 2007 and 2006, due to the elimination of the valuation allowance for the reversal of temporary differences and the utilization of net operating loss carryforwards.

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):

	2008			2007			2006
Computed “expected” income tax expense (benefit)	$	18.8		$	19.3		$	16.6
Increases (decreases) in income taxes resulting from:
State income taxes, net of federal tax benefit		1.1			0.7			0.8
Other		(1.3	)		2.4			1.0
Valuation allowance		(17.3	)		(20.3	)		(17.0	)
Net income tax expense	$	1.3		$	2.1		$	1.4

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 2008 and 2007 fiscal years were as follows (in millions):

	2008			2007
Deferred tax assets:
Kmart Settlement Agreement	$	—		$	1.7
Restructuring reserves		—			0.6
Inventories		—			5.9
Postretirement benefits		—			6.2
Employee benefits		2.5			4.9
NOL carryforward		41.3			40.3
Intangible assets		—			6.0
Tax credit carryforward		1.1			1.1
Property and equipment		5.1			—
Other		0.1			0.7
Total gross deferred tax assets		50.1			67.4
Less valuation allowance		(50.1	)		(67.4	)
Total deferred tax assets	$	—			—

As of January 3, 2009, we had $1.1 million of Federal alternative minimum tax (“AMT”) credit carryforwards, which do not expire and we have net operating loss carry forwards for federal income tax purposes of approximately $107.3 million which, if not utilized, will begin expiring for federal purposes in 2025 and began expiring in 2006 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.

F-22

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

As of January 3, 2009 we have recorded a net deferred tax asset of $50.1 million and a related valuation allowance of $50.1 million. In connection with the preparation of our fiscal years 2008, 2007 and 2006 consolidated financial statements, we reviewed the valuation of our deferred tax assets based on objective positive evidence, such as projections of our future taxable earnings along with negative evidence, such as operational uncertainties, no taxable income in carryback period, and liquidation of our Kmart business at December 31, 2008. For accounting purposes, we cannot rely on long-term future profits to utilize our deferred tax assets. As a result, we could not conclude that it is more likely than not that certain deferred tax assets will be realized and have recorded a non-cash valuation allowance on our net deferred tax asset.

During fiscal years 2008, 2007 and 2006, the Company recorded a reduction of the valuation allowance of $17.3 million, $20.3 million and $22.1 million, respectively.

18. Reorganization Items

Reorganization items, which consist of income and expenses that are related to our bankruptcy proceedings, were comprised of the following for 2008, 2007 and 2006 (in millions):

	2008		2007		2006
Professional fees	$	—	$	—	$	1.5
Trustee fees		—		—		0.1
Gain on disposition of bankruptcy claims		—		—		(0.9	)
Interest income		—		—		(0.7	)
Total	$	—	$	—	$	—

SOP 90-7 requires that interest income earned on cash accumulated during bankruptcy proceedings be included as a reorganization item. During fiscal 2006 interest income of $0.7 million was earned on cash that would otherwise have been used to pay such pre-petition liabilities.

19. Share-Based Compensation Plans

Our stock incentive plans include the shareholder-approved 1996 Incentive Compensation Plan (the “1996 Plan”) and the shareholder-approved 1996 Non-Employee Director Stock Plan (the “Director Plan”) and the non-shareholder-approved 2000 Equity Incentive Plan (the “2000 Plan”), which is to be used exclusively for non-executive officers of the Company and the non-shareholder-approved 2006 Non-Employee Director Stock Plan (the “2006 Director Stock Plan”). 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. A total of 200,000 shares of our common stock were reserved for issuance under the Director Plan. The total number of shares of common stock reserved and available for delivery under the 2006 Director Stock Plan is 458,044 shares. The number of shares of common stock available under such plans is subject to adjustment for recapitalization, merger, and other similar events.

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.

F-23

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

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. All unvested deferred restricted stock units are expected to vest during 2009, unless forfeited. Certain restricted stock units provide for vesting upon termination of employment with the Company under certain conditions.

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

These performance-based stock awards vest over a period of time ranging from a minimum of three years to a maximum of the employee’s attainment of retirement age. Compensation expense related to grants under these provisions is based on the current market price of our common stock at the date of grant and the extent to which performance criteria are being met. The 1996 Plan and 2000 Plan also offered incentive opportunities based upon performance results against pre-established earnings targets and other selected measures for each fiscal year. We may also make cash award payments which employees may elect to defer up to 75% of such payment in deferred shares and receive a matching Company grant. The elective deferrals and matched amounts are deferred for a five year vesting period. The amount deferred will be paid in shares.

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

	Number of
	Shares to be		Weighted		Number of				Number of Shares
	Issued upon		Average		Shares		Number of Shares		Remaining
	Exercise of		Exercise Price		Issued,		Remaining Available		Available for Future
	Outstanding		of Outstanding		Inception to Date		for Future Issuance,		Issuance, as of
Plan Category	Options/Awards		Options		as of 1/3/2009		as of 1/3/2009		12/29/2007
1996 Incentive Compensation Plan		546,394	$	15		931,733		1,621,873		1,443,157
2000 Equity Incentive Plan		101,215	$	32		146,343		1,752,442		1,649,169
1996 Non-Employee Director Stock Plan		4,000	$	41		189,441		—		—
2006 Non-Employee Director Stock Plan		174,964	$	4		276,458		6,622		136,256
Total		826,573	$	15		1,543,975		3,380,937		3,228,582

The table below provides information relating to employee stock options:

F-24

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

Employee Stock Options

								Weighted
				Weighted		Aggregate		Average
	Employee			Average		Intrinsic		Remaining
	Stock			Exercise		Value		Contractual
	Options			Price		($000)		Term
Outstanding December 30, 2006		507,275		$	31
Canceled or expired		(38,840	)	$	29
Outstanding, December 29, 2007		468,435		$	31
Canceled or expired		(144,710	)	$	31
Outstanding, January 3, 2009		323,725		$	31	$	5.1	1.9 years
Exercisable, January 3, 2009		323,725		$	31	$	5.1	1.9 years

Net income for 2008, 2007 and 2006 includes a charge for stock option-based compensation expense of $0 million, $0 million and $0.4 million, respectively. The recognition of stock option-based compensation expense in 2006 reduced both our basic and diluted earnings per share by approximately $0.02. As of January 3, 2009, December 29, 2007 and December 30, 2006 there was $0 total unrecognized compensation costs related to stock options. In recognizing 2006 stock option-based compensation expense, we used the fair value of each option outstanding estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	2006
Expected volatility		47.1	%
Expected life in years		6
Risk-free interest rate		4.6	%
Assumed forfeiture rate		—

The table below provides information relating to deferred restricted stock units and performance-based stock awards:

Deferred Restricted Stock Units and Shares
and Performance-Based Stock Awards

	Deferred			Weighted
	Shares and			Average Grant
	Units			Date Fair Value
Non-vested December 30, 2006		363,936		$	5
Granted		37,680		$	4
Canceled		(778	)	$	25
Shares vested		(1,930	)	$	25
Non-vested, December 29, 2007		398,908		$	5
Granted		174,352		$	3
Canceled		(1,069	)	$	6
Shares vested		(382,808	)	$	5
Non-vested, January 3, 2009		189,383		$	4

As of January 3, 2009 there was $0.4 million of unrecognized compensation costs related to restricted stock and performance-based awards. These costs are expected to be recognized over a weighted average period of 5 months. The total fair value of shares vested during 2008, 2007 and 2006 was $1.5 million, $0 million and $0 million, respectively.

F-25

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

1996 Director Stock Plan

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

The 1996 Director Plan also provided for automatic grants of 4,000 stock units (“Stock Units”) to each non-employee director on the date of the annual meeting of our shareholders. Each Stock Unit represented the right to receive one share of our common stock at the end of a specified period and vests six months and a day after the grant date. Fifty percent of such Stock Units were payable upon vesting, provided the non-employee director had not ceased to serve as a director for any reason other than death, disability or retirement. The remaining fifty percent of such Stock Units were payable upon the latter of ceasing to be a director or attaining age 65, provided that settlement of such Stock Units were accelerated in the event of death, disability or a change in control. On our emergence from bankruptcy on February 7, 2006, the 1996 Directors Stock Plan was frozen so that no further grants may be made under the plan. Additionally, on February 7, 2006 all stock granted under the plan was immediately vested and issued.

The following table provides information relating to the status of, and changes in, options granted under the 1996 Director Plan:

	Director Plan Stock Options
						Aggregate
				Weighted		Intrinsic		Weighted Average
	Stock			Average		Value		Remaining
	Options			Exercise Price		($000)		Contractual Term
Outstanding, December 30, 2006		6,000		$	35
Expired		(2,000	)	$	22
Outstanding, December 29, 2007		4,000		$	41
Expired		—		$	—
Outstanding, January 3, 2009		4,000		$	41	$	0.1	10 months
Options exercisable, January 3, 2009		4,000		$	41	$	0.1	10 months

2006 Non-Employee Director Stock Plan

On our emergence from bankruptcy on February 7, 2006, the 2006 Director Stock Plan became effective. The 2006 Director Stock Plan allows for the grant of common stock of the Company.

The 2006 Director Stock Plan provides for an automatic initial grant of 10,000 shares of restricted common stock to each eligible director. Beginning with the 2007 annual meeting of the Company, the Company shall make additional, annual grants to each eligible director of 10,000 shares of restricted common stock, or such other amount determined by the Board of Directors of the Company (the “Board”), subject to the provisions of the 2006 Director Stock Plan. In connection with the annual grant in 2007, the Board of Directors determined that for equitable reasons 20,965 shares of restricted stock should be granted to each eligible director instead of the 10,000 shares that would otherwise have been automatically granted under the terms of the plan.

F-26

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

Unless the Board shall determine otherwise at the time of grant, each award of restricted common stock shall vest with respect to 50% of the shares on the first anniversary of the date of grant, an additional 25% of the shares on the second anniversary of the date of grant, and with respect to the remaining 25% of the shares on the third anniversary of the date of grant. In the event of a participant’s retirement, all unvested shares of restricted common stock shall become vested as of the effective date of such retirement. In the event of a change in control (as specified in the 2006 Director Stock Plan and which includes, among other things, shareholder approval of a complete liquidation or dissolution of the Company or a sale or disposition of all or substantially all of its assets), all unvested shares of restricted common stock shall become vested as of the effective date of such change in control.

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

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

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

The following table provides information relating to the status of, and changes in, stock units granted under the 2006 Director Stock Plan:

F-27

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

Director Stock Plan Units

				Weighted Average Grant Date
	Stock Units			Fair Value
Non-vested, December 30, 2006		80,000		$	5
Granted		200,258		$	5
Shares Vested		(77,538	)	$	6
Non-vested, December 29, 2007		202,720		$	5
Granted		129,634		$	4
Shares Vested		(157,390	)	$	4
Non-vested, January 3, 2009		174,964		$	4

As of January 3, 2009 and December 29, 2007 there was $0.4 million and $0.6 million, respectively, of unrecognized compensation costs related to Director Stock units. These costs are expected to be recognized over a weighted average period of 11 months. The total fair value of shares vested during 2008, 2007 and 2006 was $0.6 million, $0.5 million and $0.2 million, respectively.

Associate Stock Purchase Plan

An Associate Stock Purchase Plan (“ASPP”) provided substantially all employees who had completed service requirements an opportunity to purchase shares of our common stock through payroll deductions of up to 10% of eligible compensation to a maximum of $25,000 (in fair market value of common stock purchased) annually. Quarterly, participant account balances were 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, 2009. There were no shares purchased under this plan in fiscal years 2008, 2007 and 2006, 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 suspended purchases of our common stock through the ASPP effective December 29, 2003.

20. 401(k) Profit Sharing Plan

We had a tax qualified 401(k) Profit Sharing Plan available to full-time employees who meet the plan’s eligibility requirements. This plan, which was also a defined contribution plan, contained a profit sharing component, with tax-deferred contributions to each employee based on certain performance criteria, and also permitted 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 matched 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 were made in cash. Our stock is not used to fund the plan, nor is it an investment option for employees under the plan.

Contributions to the plan by us for both profit sharing and matching of employee contributions were approximately $1.8 million, $2.0 million and $2.7 million for fiscal years 2008, 2007 and 2006, respectively.

F-28

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

21. Postretirement Benefits

We provided postretirement health benefits for current retirees and a “closed” group of active employees who met certain eligibility requirements (see Note 1 “Nature of Company” for information on the cancellation of the postretirement benefit plan).

The following table represents our change in benefit obligations and a reconciliation of our plan’s funded status with amounts recognized in the consolidated balance sheets (in millions):

	2008			2007
Change in benefit obligation
Benefit obligation at beginning of year	$	14.7		$	15.0
Service cost		0.1			0.2
Interest cost		0.4			0.9
Actuarial (gain) loss		—			(0.5	)
Benefits paid		(0.8	)		(1.3	)
Participant contributions		—			0.3
Retiree drug subsidy receipt		0.2			0.1
Cancellation of benefit obligation		(14.6	)		—
Benefit obligation at end of year		—			14.7
Reconciliation of funded status
Funded status		—			14.7
Accrued benefit cost (unfunded)	$	—		$	14.7

The following was included in Accumulated Other Comprehensive Income (“AOCI”) (in millions):

	2008		2007
Net gain	$	—	$	4.3
Prior service credit		—		4.1
Total amount included in AOCI	$	—	$	8.4

The following table shows the sources of change in other comprehensive income related to postretirement benefits (in millions):

	2008			2007
Amortization of net gain included in net income	$	(0.2	)	$	(0.3	)
Net gain arising during period		—			0.5
Gain on cancellation of postretirement medical plan		(7.7	)		—
Amortization of prior service credit included in net income		(0.5	)		(1.4	)
Total other comprehensive loss during period attributable to postretirement benefits	$	(8.4	)	$	(1.2	)

	2007
Weighted-average assumptions as of December 31
Discount rate		6.3	%

The components of our net periodic benefit gain were as follows (in millions):

	2008			2007			2006
Service cost	$	0.1		$	0.2		$	0.1
Interest cost		0.4			0.9			0.8
Amortization of prior service cost		(0.5	)		(1.5	)		(1.4	)
Amortization of net actuarial gain		(0.2	)		(0.3	)		(0.2	)
Net periodic benefit gain	$	(0.2	)	$	(0.7	)	$	(0.7	)

F-29

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

22. 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 in the plan.

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

• The assumed discount rate was 0% and 4.8% in fiscal 2008 and 2007, respectively.

• The assumed salary rate of increase was 0% in fiscal 2008 and 2007.

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

Expense related to the SERP was $0.4 million, $1.1 million and $1.0 million in fiscal years 2008, 2007 and 2006, respectively. Expense related to the SERP during 2008 includes a curtailment credit of approximately $0.2 million and a settlement credit of approximately $0.2 million. The SERP liability was approximately $5.1 million and $7.0 million as of January 3, 2009 and December 29, 2007, respectively, and is included in accrued expenses and other long term liabilities as of January 3, 2009 and December 29, 2007, respectively. The Company expects to pay the $5.1 million SERP liability during 2009.

The following was included in AOCI related to SERP (in millions):

	2008		2007
Net gain	$	0.6	$	0.4
Total amount included in AOCI	$	0.6	$	0.4

The Company estimates that $0.6 million will be amortized from AOCI into net periodic benefit cost during 2009. In 2008, the Company recorded a $0.5 million net gain arising during the period in AOCI and $0.1 million of actuarial gain was amortized from AOCI and recognized as part of net periodic benefit cost. Additionally, a curtailment gain of $0.2 million was removed form AOCI and recognized as income. In 2007, the Company recorded a $0.5 million net gain arising during the period in AOCI. To initially adopt the measurement date provisions of Statement No. 158, the Company recorded a charge of $0.1 million and $0 million to retained earnings and AOCI, respectively during 2007.

23. Commitments and Contingencies

Kmart Relationship

F-30

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

The Kmart Agreement expired at December 31, 2008. During 2009, the Company received $52.8 million from Kmart related to the liquidation sale of inventory; however, the Company is currently pursuing the collection of certain additional disputed amounts for which there can be no assurance that any additional cash will be received.

Litigation Matters

On or about March 3, 2005, an action was filed against us in the U.S. District Court for the District of Oregon, captioned Adidas America, Inc. and Adidas –Salomon AG v. Kmart Corporation and Footstar, Inc. seeking injunctive relief and unspecified monetary damages for alleged trademark infringement, trademark dilution, unfair competition, deceptive trade practices and breach of contract arising out of our use of four stripes as a design element on footwear which Adidas claims infringes on its registered three stripe trademark. This matter was settled amicably effective May 2, 2008 and the action was dismissed with prejudice.

We are involved in various other 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.

24. Shareholder Rights Plan

On February 4, 2009, the Company entered into Amendment No. 2 (“Amendment No. 2”) to its Rights Agreement, dated as of March 8, 1999, as amended as of May 31, 2002 (as amended, the “Rights Agreement”), with Mellon Investor Services LLC (formerly ChaseMellon Shareholder Services, L.L.C.), as Rights Agent, pursuant to which the terms of the outstanding preferred share purchase rights were amended. The Rights Agreement expires on March 8, 2012, unless terminated or extended. Under the Rights Agreement, Preferred Stock Purchase “Rights” have been distributed as a dividend to shareholders at the rate of one Right for each share of common stock outstanding. Initially, the Rights are not exercisable. Upon a “trigger event,” each Right entitles its holder (other than the holder who caused the trigger event) to purchase at an “Exercise Price” of $100 the equivalent of that number of shares of common stock of the Company worth twice the Exercise Price.

The Rights are exercisable only if a person or group whose beneficial ownership, as of the close of business on February 4, 2009, was not 4.75 percent or more acquires beneficial ownership of 4.75 percent or more of the Company’s common stock. Amendment No. 2 also eliminates provisions of the Rights Agreement exempting certain “Qualifying Offer” for the Company’s common stock from triggering the exercisability of the outstanding rights issued pursuant to the Rights Agreement. Shareholders who owned at least 4.75 percent of the stock as of the close of business on February 4, 2009 are “grandfathered” under this plan as long as they do not purchase additional shares.

The Company is entitled, but not required, to redeem the Rights at a price of $0.01 per Right at any time prior to the earlier of the trigger or expiration of the Rights.

Amendment No. 2 is intended to help preserve the value of the Company’s net operating loss carryforwards (“NOLs”) and related tax benefits. The Company’s ability to use its NOLs could be substantially reduced if the Company experiences an “ownership change,” as defined under Section 382 of the Internal Revenue Code of 1986 (the “Code”). The calculation of an ownership change under the Code is based on ownership changes in the Company’s common shares, and changes are tested over a rolling three-year period.

Amendment No. 2 does not ensure that the Company’s NOLs will be protected from an ownership change as defined in the Code, and there can be no assurance that such an ownership change will not occur.

F-31

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

25. Supplemental Cash Flow Information

Cash payments for income taxes and interest from continuing operations for the fiscal years ended January 3, 2009, December 29, 2007 and December 30, 2006 were as follows (in millions):

	2008			2007			2006
Income taxes received	$	(1.2	)	$	(1.2	)	$	(11.1	)
Interest received	$	0.8		$	2.9		$	4.6
Interest paid	$	1.2		$	1.1		$	1.8

26. 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 2008, approximately 98% of the Company’s products were directly imported by us and manufactured in China.

27. Special Cash Distribution

On March 27, 2007, the Company announced that its Board of Directors declared a special cash distribution to shareholders in the amount of $5.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. As such, the Company recorded a special cash distribution which reduced retained earnings by the amount available on the date of declaration ($88.8 million) and reduced additional paid-in capital for the amount in excess of retained earnings ($16.0 million). The special cash distribution was paid on April 30, 2007.

On May 9, 2008, the Company announced that its Board of Directors declared a special cash distribution to shareholders in the amount of $1.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. The special cash distribution totaling $21.3 million was paid on June 3, 2008.

On January 8, 2009, the Company announced that its Board of Directors declared a special cash distribution to shareholders in the amount of $1.00 per common share. The Company recorded this distribution effective the date the declaration was made by the Board of Directors. The special cash distribution of $21.5 was paid on January 27, 2009.

F-32

FOOTSTAR, INC. and SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements

28. Summary of Quarterly Results – Unaudited

(in millions, except per share data)	1st Qtr			2nd Qtr		3rd Qtr			4th Qtr
Total revenue(3)
2008	$	117.9		$	153.2	$	133.1		$	230.0
2007	$	134.1		$	173.4	$	147.8		$	181.7
Total gross profit(3)
2008	$	34.3		$	48.3	$	36.8		$	59.0
2007	$	40.9		$	60.7	$	44.2		$	63.8
(Loss) income from continuing operations(4)
2008	$	(2.8	)	$	30.4	$	0.1		$	24.7
2007	$	0.8		$	21.5	$	4.9		$	25.6
Income (loss) from discontinued operations (1)(2)
2008	$	1.3		$	—	$	—		$	—
2007	$	—		$	—	$	(0.8	)	$	—
Net (loss) income
2008	$	(1.5	)	$	30.4	$	0.1		$	24.7
2007	$	0.8		$	21.5	$	4.1		$	25.6

Earnings (loss) per share(4)

2008 Basic
Continuing operations	$	(0.13	)	$	1.46	$	—		$	1.17
Discontinued operations		0.06			—		—			—
Net (loss) income	$	(0.07	)	$	1.46	$	—		$	1.17
2008 Diluted
Continuing Operations	$	(0.13	)	$	1.44	$	—		$	1.16
Discontinued Operations		0.06			—		—			—
Net (loss) income	$	(0.07	)	$	1.44	$	—		$	1.16
2007 Basic
Continuing operations	$	0.04		$	1.04	$	0.24		$	1.24
Discontinued operations		—			—		(0.04	)		—
Net income	$	0.04		$	1.04	$	0.20		$	1.24
2007 Diluted
Continuing Operations	$	0.04		$	1.02	$	0.24		$	1.22
Discontinued Operations		—			—		(0.04	)		—
Net income	$	0.04		$	1.02	$	0.20		$	1.22

(1)	The Athletic Segment, which consisted of certain Footaction stores sold to Foot Locker together with the closure of the underperforming Just For Feet and Footaction stores, and the exited Meldisco businesses have been accounted for as discontinued operations.
(2)	During the third quarter of fiscal 2007, the Company increased its liability for an environmental remediation project which relates to a landfill used by one of the Company’s former manufacturing facilities that was closed over 20 years ago. In April 2008, the company entered into an agreement with CVS Pharmacy, Inc. (“CVS”), its former parent entity, pursuant to which CVS agreed to assume any and all of Footstar’s obligations with respect to the environmental remediation. The assumption by CVS eliminated the previously recorded obligation of $1.6 million for cash consideration of $0.9 million, resulting in a gain of $0.7 million, net of tax, included in income from discontinued operations.
(3)	During the fourth quarter of fiscal 2008, the Company sold its remaining inventory on hand for $54.2 million. Loss on liquidation of inventory totaled $4.9 million and is included in Total Gross Profit.
(4)	During the fourth quarter of fiscal 2008, the Company recorded an impairment charge $10.8 million to reduce the carrying amount of its corporate headquarters building to its fair value of $6.2 million.
(5)	Computations for each quarter are independent. EPS data would neither be restated retroactively nor adjusted currently to obtain quarterly (or other period) amounts to equal the amount computed for the year to date due to fluctuations in stock price.

F-33

EX-10.12

RESTRICTED STOCK AGREEMENT

     THIS RESTRICTED STOCK AGREEMENT (the “Agreement”) is made and entered into between Footstar, Inc., a Delaware corporation (the “Company”), and Jonathan M. Couchman (the “Grantee”) pursuant to the terms and conditions of the Footstar, Inc. 1996 Incentive Compensation Plan (the “Plan”).

     THE PARTIES AGREE AS FOLLOWS:

     1. Grant of Restricted Stock. In consideration of services provided and to be provided by Grantee pursuant to the employment agreement dated as of December 1, 2008 between the Company and Grantee (the “Employment Agreement”), the Company hereby grants to Grantee 169,492 restricted shares of the Company’s common stock, $.01 par value (the “Stock”) on the terms and conditions set forth in this Agreement.

     2. Issuance of Stock. The Company shall cause to be issued a certificate or certificates representing the Stock granted pursuant to this award, registered in the name of Grantee (or in the names of such person and his or her spouse as community property or as joint tenants with right of survivorship). As a condition to the issuance of the Stock, Grantee shall execute the stock power, endorsed in blank that is attached hereto, which shall permit the Company to effect the forfeiture of the Stock as described below without further action on the part of Grantee. Stock certificates shall be held in escrow until such time as the Stock is vested.

     3. Rights as Stockholder. On the date of this Agreement and thereafter unless and until the Company reacquires the Stock pursuant to Section 5, Grantee shall have all the rights of a stockholder of the Company (including, without limitation, voting, dividend and liquidation rights) with respect to the Stock.

     4. Vesting. Except as provided below, this award shall vest (and the forfeiture provision shall lapse) in accordance with the following schedule; provided, that, Grantee remains continuously employed by the Company on the relevant vesting dates set forth below:

Percentage of Restricted Shares	Vesting Date
50%	February 28, 2009
25%	May 31, 2009
15%	August 30, 2009
10%	November 30, 2009

Notwithstanding the foregoing, if Grantee’s employment with the Company terminates due to any of the following reasons: (i) death, (ii) Disability or (iii) termination without Cause (as such terms are defined in the Employment Agreement), 100% of the unvested portion of the award shall vest (and the forfeiture provision shall lapse). The provisions

1

in Section 9 of the Plan (providing for accelerated vesting upon a change in control) shall not apply to this award.

     5. Forfeiture Provision. The Company shall have the right to reacquire the Stock for zero consideration and the holder shall be required to transfer the Stock to the Company if Grantee’s employment with the Company terminates and the Stock has not vested as provided in Section 4 above. The Company shall reacquire the Stock pursuant to this forfeiture provision effective on the date employment terminates (unless prior to such date the Company provides written notice to Grantee that it will not exercise its right to reacquire the Stock). After the date employment terminates, the person from whom the Stock is to be acquired shall no longer have any rights as a holder of the Stock and such Stock shall be deemed to have been reacquired by the Company. Once a forfeiture is effected, this award shall be canceled and the Company shall have no further obligation with respect thereto. The forfeiture provision contained in Section 7(e) of the Plan (permitting the Company to effect certain cancellations and rescissions of awards) shall not apply to this award.

     6. Transfer Restrictions.

          (a) General Rule. Until such time as the Stock is vested, Grantee shall not transfer, assign, encumber or otherwise dispose of any of the Stock, except pursuant to a “permitted transfer”. Once vested, Grantee may transfer the Stock but the Stock shall at all times that the Company’s common stock is not registered under the Securities Act of 1933, as amended (the “Securities Act”) be subject to a right of first offer. Grantee shall give the Company at least thirty (30) days advance notice of any proposed transfer of the Stock. If Grantee transfers the Stock, the terms of this Agreement shall apply to such transferee to the same extent as to Grantee and the term “Grantee” as used in this Agreement shall refer to Grantee’s successor in interest.

          (b) Permitted Transfer. For purposes of this Agreement, a “permitted transfer” is: (i) a transfer by beneficiary designation, will or intestate succession or (ii) a transfer for no consideration to Grantee’s spouse, children or grandchildren (or their issue) or to a trust established by Grantee for the benefit of Grantee or Grantee’s spouse, children or grandchildren (or their issue), provided in either case that the transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement.

     7. Additional Restrictions.

          (a) Compliance with Law and this Agreement. Regardless of whether the Stock is vested or the offering and sale of Stock under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the transfer, assignment, encumbrance or other disposal of the Stock (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer

2

instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law, or the restrictions described in this Agreement.

          (b) Grantee Undertaking. Grantee agrees to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable to carry out or effect one or more of the obligations or restrictions imposed on either Grantee or upon the Stock pursuant to the provisions of this Agreement.

     8. Miscellaneous.

          (a) Notice. Any notice given to a party shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the party concerned at the address indicated in the Employment Agreement or to such changed address as such party may subsequently give such notice of.

          (b) Entire Agreement. This Agreement, the Employment Agreement and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations or understandings (whether oral or written and whether express or implied) which relate to the subject matter hereof.

          (c) Waiver. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition whether of like or different nature.

          (d) Effective Date. This award is made and this Agreement is effective as of December 9, 2008 (the “Grant Date”).

     9. Tax Withholding.

          (a) Grantee agrees that, no later than the first to occur of (i) the date as of which the restrictions on the Stock shall lapse with respect to all or any of the Stock covered by this Agreement or (ii) the date required by Section 9(b) below, Grantee shall pay to the Company (in cash or by bank check) any federal, state, or local taxes of any kind required by law to be withheld, if any, with respect to the Stock for which restrictions shall lapse. The Company shall, to the extent permitted by law, also have the right to deduct from any payment of any kind otherwise due to Grantee any federal, state or local taxes of any kind required by law to be withheld with respect to the Stock.

          (b) Grantee may elect, within thirty (30) days of the Grant Date, to include in gross income for federal income tax purposes an amount equal to the fair market value of the Stock less the amount, if any, paid by Grantee (other than by

3

prior services) for the Stock granted hereunder pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended. In connection with any such Section 83(b) election, Grantee shall pay to the Company, or make such other arrangements satisfactory to the Company to pay to the Company based on the fair market value of the Stock on the Grant Date, any federal, state or local taxes required by law to be withheld with respect to such Stock at the time of such election. If Grantee fails to make such payments, the Company shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to Grantee any federal, state or local taxes required by law to be withheld with respect to such Stock.

     10. Representations and Warranties of Grantee. Grantee represents and warrants to the Company that:

          (a) Agrees to Terms of the Plan and the Agreement. Grantee has received a copy of the Plan and the Agreement and has read and understands the terms thereof. Grantee acknowledges that there may be adverse tax consequences upon the vesting of Stock or disposition of the shares of Stock once vested, and that Grantee should consult a tax advisor prior to such time.

          (b) Stock Ownership. Grantee is the record and beneficial owner of the shares of Stock with full right and power to vote and receive dividends on such shares; provided, that, Grantee understands that the stock certificates evidencing the Stock will bear a legend referencing this Agreement. Any dividends which are paid in cash shall be distributed to Grantee as soon as practicable. If any dividends are paid in Stock during an applicable period of restriction, Grantee shall receive such shares subject to the same restrictions as the Stock with respect to which they were issued.

     11. Adjustments. This award is subject to the adjustment provisions set forth in the Plan.

     12. Restrictive Legends and Stop-Transfer Orders.

          (a) Legends. Grantee understands and agrees that the Company will place the legends set forth below or similar legends on any stock certificate(s) evidencing the Stock, together with any other legends that may be required by state or U.S. Federal securities laws, the Company’s Certificate of Incorporation or Bylaws, any other agreement between Grantee and the Company or any agreement between Grantee and any third party:

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON PUBLIC RESALE AND TRANSFER, AS SET FORTH IN A RESTRICTED STOCK AWARD AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES. SUCH PUBLIC SALE AND TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SHARES.

4

          (b) Stop-Transfer Instructions. Grantee agrees that, to ensure compliance with the restrictions imposed by this Agreement, the Company may issue appropriate “stop-transfer” instructions to its transfer agent, if any, and if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

          (c) Refusal to Transfer. The Company will not be required (i) to transfer on its books any shares of Stock that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such shares, or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such shares have been so transferred.

     13. Modification. Except as specifically provided in the Plan, the Agreement may not be modified except in writing signed by both parties.

     14. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Grantee or the Company to the Board of Directors of the Company (the “Board”) for review. The resolution of such a dispute by the Board shall be final and binding on the Company and Grantee.

[SIGNATURE PAGE FOLLOWS]

5

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement.

FOOTSTAR, INC.

By:                                        
Name:
Title:

     Grantee hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement and the Plan.

                                        
Jonathan M. Couchman

6

Stock Power

     FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto Footstar, Inc. (the “Company”), ___(___) shares of the common stock, par value $.01 per share, of the Company standing in his/her/their/its name on the books of the Company represented by Certificate No. ___herewith and do(es) hereby irrevocably constitute and appoint ___his/her/their/its attorney-in-fact, with full power of substitution, to transfer such shares on the books of the Company.

Dated:	Signature:
	Print Name and Mailing Address

Instructions: Please do not fill in any blanks other than the signature line and printed name and mailing address. Please print your name exactly as you would like your name to appear on the issued stock certificate. The purpose of this stock power is to enable the Company to reacquire unvested stock granted to you (i.e., effect a forfeiture) in connection with an employment termination that does not result in the vesting of your award without requiring additional signatures on your part.

7

EX-10.14

SUPPLEMENTAL RETIREMENT PLAN
FOR
SENIOR MANAGEMENT OF
FOOTSTAR, INC.
Effective October 14, 1996
Amended and Restated Effective as of January 1, 2005

TABLE OF CONTENTS

ARTICLE 1. INTRODUCTION	1
ARTICLE 2. DEFINITIONS	2
2.01 Actuarial Equivalent	2
2.02 Beneficiary	2
2.03 Benefit Commencement Date	2
2.04 Board	2
2.05 Cause	2
2.06 Change in Control	3
2.07 Committee	4
2.08 Code	4
2.09 Compensation	4
2.10 Corporation	5
2.11 Early Retirement Date	5
2.12 Footstar	5
2.13 Normal Retirement Date	5
2.14 Participant	5
2.15 Plan	5
2.16 Retiree	5
2.17 Retirement Administration Committee	6
2.18 Service; Year of Service	6
2.19 Supplemental Retirement Benefit	6
2.20 Vested Retirement Benefit	6
ARTICLE 3. PARTICIPATION	7
3.01 Eligible Executives	7
3.02 Participation	7
3.03 Reclassification	7
ARTICLE 4. SUPPLEMENTAL RETIREMENT BENEFIT	8
4.01 Eligibility for Supplemental Retirement Benefit	8
4.02 Normal Retirement Benefit	8
4.03 Early Retirement Benefit	8
4.04 Benefit Commencement Date	8
4.05 Form of Benefit Payment	9
ARTICLE 5. DEATH BENEFIT	10
5.01 Death After Early Retirement Date	10
5.02 Death Prior to Early Retirement Date	10
5.03 Death After Benefit Commencement Date	11
5.04 Designation of Beneficiary	11
ARTICLE 6. PARTICIPANT OBLIGATIONS	12
6.01 Confidentiality; Cooperation with Regard to Litigation	12
6.02 Non-competition	12
6.03 Non-solicitation of Employees	13
6.04 Definitions	13
ARTICLE 7. CHANGE IN CONTROL	14
7.01 Applicability	14
7.02 Retirees and Beneficiaries At Time of Change in Control	14
7.03 Termination of Employment Within 24 Months Following a Change in Control	15
7.04 Termination of Employment More Than 24 Months Following a Change in Control	16

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ARTICLE 8. FORFEITURE OF BENEFITS	17
ARTICLE 9. ADMINISTRATION	18
9.01 Powers and Duties of the Committee	18
9.02 Retirement Administration Committee	18
9.03 Delegation of Duties	18
9.04 Expenses	18
9.05 Indemnification of Retirement Administration Committee	19
9.06 Liability	19
9.07 Appeals Procedure	19
ARTICLE 10. AMENDMENT OR TERMINATION	20
ARTICLE 11. GENERAL PROVISIONS	21
11.01 Right to Withhold Taxes	21
11.02 No Right to Continued Employment	21
11.03 Benefits Non-Assignable	21
11.04 Unfunded Plan	21
11.05 Mental or Physical Incompetency	21
11.06 Governing Laws	21
11.07 Severability	21

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ARTICLE 1. INTRODUCTION

The Supplemental Retirement Plan for Senior Management of Footstar, Inc. is designed to provide a benefit which, when added to the retirement income provided under other Company plans, will ensure the payment of a competitive level of retirement income to key senior executives of Footstar, Inc., thereby providing an additional incentive for assuring orderly management succession.

The Plan is intended to be an unfunded plan maintained “primarily for the purpose of providing deferred compensation for a select group of management or other highly compensated individuals” within the meaning of the Employee Retirement Income Security Act.

Eligibility for participation in the Plan shall be limited to executives designated by the Compensation Committee of the Board of Directors of Footstar, Inc.

This Plan became effective as of October 14, 1996. The Plan subsequently was amended and restated effective                     , 2002.

This document sets forth the provisions of the Plan as amended and restated effective as of January 1, 2005 to comply with the requirements of Section 409A of the Internal Revenue Code.

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ARTICLE 1. DEFINITIONS

Wherever used herein, the following terms shall have the meanings set forth below:

1.01 Actuarial Equivalent

“Actuarial Equivalent” means a benefit which is equivalent in value to another benefit when computed on the basis of the following actuarial assumptions:

(a) Mortality: The 1983 Group Annuity Mortality Table

(b) Interest: The Pension Benefit Guaranty Corporation rate used in the calculation of immediate annuities applicable to the month that benefits will commence MINUS 0.5%.

1.02 Beneficiary

“Beneficiary” means the person designated by the Participant in accordance with Section 5.04 to receive benefits in the event of the Participant’s death.

1.03 Benefit Commencement Date

“Benefit Commencement Date” means the first day on which benefits are scheduled to commence for a Participant pursuant to Section 4.04.

1.04 Board

“Board” means the Board of Directors of Footstar, Inc.

1.05 Cause

“Cause” means, in connection with an involuntary termination by the Corporation of a Participant’s employment, (a) the Participant’s willful and material breach of Article 6 of this Plan; (b) the Participant is convicted of a felony involving moral turpitude; or (c) the Participant engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out his duties under this Plan, resulting, in either case, in material harm to the financial condition or reputation of Footstar. For purposes of this Plan, an act or failure to act on Participant’s part shall be considered “willful” if it was done or omitted to be done by him or her not in good faith, and shall not include any act or failure to act resulting from any incapacity of a Participant.

A termination for Cause shall not take effect unless the following provisions are complied with. The Participant shall be given written notice by Footstar of its intention to terminate him or her or her for Cause, such notice (i) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for Cause is based and (ii) to be given within 90 days of Footstar’s learning of such act or acts or failure or failures to act. The Participant shall have 10 days after the date that such written notice has been given to him or her in which to cure such conduct, to the extent such cure is possible. If he or she fails to cure such conduct, the Participant shall then be entitled to a hearing before the Committee at which the Participant is entitled to appear. Such hearing shall be held within 15 days of such notice to the Participant, provided he or she requests such hearing within 10 days of the written notice from Footstar of the intention to terminate him or her or her for Cause. If, within five days following such hearing, the Participant is furnished written notice by the Board confirming that, in its judgment, grounds for Cause on the basis of the original notice exist, he or she shall thereupon be terminated for Cause.

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1.06 Change in Control

(a) Effective on and after January 1, 2005, “Change in Control” means (i) a change in the ownership of Footstar as determined in accordance with Treasury Regulation section 1.409A-3(i)(5)(v), (ii) a change in effective control of Footstar as determined in accordance with Treasury Regulation section 1.409A-3(i)(5)(vi), or (iii) a change in the ownership of a substantial portion of the assets of Footstar as determined in accordance with Treasury Regulation section 1.409A-3(i)(5)(vii).

(b) Effective prior to January 1, 2005, “Change in Control” means any of the following occurrences:

(i) An acquisition by any Person of Beneficial Ownership of the shares of common stock of Footstar then outstanding (the “Footstar Common Stock Outstanding”) or the voting securities of Footstar then outstanding entitled to vote generally in the election of directors (the “Footstar Voting Securities Outstanding”), if such acquisition of Beneficial Ownership results in the Person’s Beneficially Owning 25% or more of Footstar Common Stock Outstanding or 25% or more of the combined voting power of Footstar Voting Securities Outstanding; or

(ii) The approval by the stockholders of Footstar of a reorganization, merger, consolidation, complete liquidation or dissolution of Footstar, the sale or disposition of all or substantially all of the assets of Footstar or similar corporate transaction (in each case referred to in this Section 2.06(b) as a (“Corporate Transaction”) or, if consummation of such Corporate Transaction is subject, at the time of such approval by stockholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly); provided however, that any merger, consolidation, sale, disposition or other similar transaction to or with a Participant or entities controlled by a Participant shall not constitute a Corporate Transaction; or

(iii) A change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (such Board shall be hereinafter referred to as the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided however, for purposes of this Section 2.06(b), that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by Footstar’s stockholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act, including any successor to such Rule) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall in no event be considered as a member of the Incumbent Board.

(iv) Notwithstanding the provisions set forth in paragraphs (a) and (b) above, the following shall not constitute a Change in Control for purposes of this Section 2.06(b):

(A) Any acquisition by or consummation of a Corporate Transaction with any entity that was a subsidiary of Footstar immediately prior to the transaction or an

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Amended and Restated effective 1/1/2005

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employee benefit plan (or related trust) sponsored or maintained by Footstar or an entity that was a subsidiary of Footstar immediately prior to the transaction if, immediately after such transaction (including consummation of all related transactions), the surviving entity is controlled by no Person other than such employee benefit plan (or related trust) and/or other Persons who controlled Footstar immediately prior to such transactions; or

(B) Any acquisition or consummation of a Corporate Transaction following which more than 50% of, respectively, the shares then outstanding of common stock of the corporation resulting from such acquisition or Corporate Transaction and the combined voting power of the voting securities then outstanding of such corporation entitled to vote generally in the election of directors is then Beneficially Owned, directly or indirectly, by all or substantially all of the individuals and entities who were Beneficial Owners, respectively, of the Footstar Common Stock Outstanding and Footstar Voting Securities Outstanding immediately prior to such acquisition or Corporate Transaction in substantially the same proportions as their ownership, immediately prior to such acquisition or Corporate Transaction, of the Footstar Common Stock Outstanding and Footstar Voting Securities Outstanding, as the case may be.

(v) For purposes of this Section 2.06(b),

(A) The terms “Beneficial Ownership”, “Beneficially Owning”, “Beneficially Owned” and “Beneficial Owners” shall have the meanings ascribed to such terms in Rule 13d-3 under the Exchange Act (including any successor to such rule).

(B) The term “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.

(C) The term “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including “group” as defined in Section 13(d) thereof.

1.07 Committee

“Committee” means the Compensation Committee of the Board.

1.08 Code

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

1.09 Compensation

“Compensation” means the sum of:

(a) The average of the Participant’s annual rate of base pay for the highest three (3) years out of the last ten (10) years ending with the year in which the Participant’s Compensation Measurement Date occurs; plus

(b) The Participant’s full target annual incentive compensation award in effect for the year in which the Participant’s Compensation Measurement Date occurs.

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“Compensation Measurement Date” means (i) the date on which the Participant terminates employment with the Corporation for any reason; or (ii) in the event of a Change in Control, the date of the Change in Control if such date would result in a higher amount of Compensation for the Participant.

1.10 Corporation

(a) On and after January 1, 2005, “Corporation” means Footstar and any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b) but applying such section using a fifty percent (50%) ownership threshold instead of eighty percent (80%)) which includes Footstar and any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c) but applying such section using a fifty percent (50%) ownership threshold instead of eighty percent (80%)) with Footstar.

(b) Prior to January 1, 2005, “Corporation” means Footstar, Inc. and any subsidiary or other entity at any time at which 50% or more of the voting power or beneficial interest of such subsidiary or other entity, is owned directly or indirectly, by Footstar.

1.11 Early Retirement Date

“Early Retirement Date” means the date on which the Participant completes 10 Years of Service and attains age 55. A Participant whose employment terminates for any reason within 60 days of the date on which he or she would have satisfied both of the conditions set forth in the preceding sentence shall be deemed to have reached his or her Early Retirement Date.

1.12 Footstar

“Footstar” means Footstar, Inc. and any successor to all or a substantial portion of its assets or business which assumes the obligations of Footstar.

1.13 Normal Retirement Date

“Normal Retirement Date” means the date on which the Participant completes 10 Years of Service and attains age 60. A Participant whose employment terminates for any reason within 60 days of the date on which he or she would have satisfied both of the conditions set forth in the preceding sentence shall be deemed to have reached his or her Normal Retirement Date.

1.14 Participant

“Participant” means any employee who is participating in the Plan pursuant to Article 3.

1.15 Plan

“Plan” means the Supplemental Retirement Plan for Senior Management of Footstar, Inc. as set forth herein, and any amendments thereto.

1.16 Retiree

     “Retiree” means a Participant who has terminated employment and is eligible to receive, or is receiving, a Supplemental Retirement Benefit pursuant to Article 4.

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1.17 Retirement Administration Committee

“Retirement Administration Committee means the Committee of the Starfund 401(k) Profit Sharing Plan of Footstar, Inc. and Affiliated Companies.

1.18 Service; Year of Service

“Service” means a Participant’s period of active employment with the Corporation while a Participant, but excluding, unless otherwise provided by the Committee, any period during which the Participant was (a) engaged as a consultant or (b) receiving salary continuance or severance payments. “Service” also shall include any additional periods that may be credited to a Participant by the Committee in its sole discretion.

“Year of Service” means a period of 12 consecutive months of Service.

1.19 Supplemental Retirement Benefit

“Supplemental Retirement Benefit” means the retirement benefit payable to a Retiree as determined pursuant to Article 4.

1.20 Vested Retirement Benefit

“Vested Retirement Benefit” means the aggregate annualized value of any benefits in respect of a Participant under any pension, retirement, or deferred profit sharing plan maintained by the Corporation (other than this Plan) that either have been paid prior to the Participant’s Benefit Commencement Date or are vested as of the Participant’s Benefit Commencement Date. For this purpose,

(a) Any elective pre-tax or after-tax contributions made by or on behalf of the Participant, and any earnings attributable to such contributions, shall not be taken into account; and

(b) The aggregated annualized value of such benefits shall be computed in the form of a single life annuity for the Participant’s life in accordance with the Actuarial Equivalent assumptions set forth in Section 2.01.

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ARTICLE 2. PARTICIPATION

2.01 Eligible Executives

Participation in this Plan shall be limited to such employees of the Corporation as selected by the Committee who, in the opinion of the Committee, occupy a position of senior management with the Corporation.

2.02 Participation

An executive shall become a Participant in the Plan only if the executive is individually selected by, and specifically named by, the Committee for inclusion in the Plan. In addition, the Committee shall have the complete discretionary authority to impose such conditions upon initial participation by an executive or continuing participation by an executive who is already a Participant, as the Committee, in its sole discretion, determines appropriate, including the execution by the Participant of such documents and agreements, which may include restrictive covenants and other conditions, that the Committee requires.

2.03 Reclassification

If a Participant is reclassified to a responsibility which, in the opinion of the Committee, is not a senior management position at any time prior to becoming eligible for benefits in accordance with Article 4, the Participant’s continuing eligibility will be subject to the approval of the Committee.

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ARTICLE 3. SUPPLEMENTAL RETIREMENT BENEFIT

3.01 Eligibility for Supplemental Retirement Benefit

(a) A Participant shall be eligible to receive the Supplemental Retirement Benefit under this Plan if he or she terminates employment for any reason other than death or termination by the Corporation for Cause after attaining his or her Early Retirement Date or Normal Retirement Date.

(b) Except as otherwise provided pursuant to Article 7, a Participant shall not be eligible to receive the Supplemental Retirement Benefit under this Plan if he or she does not meet the conditions set forth in this Section 4.01.

3.02 Normal Retirement Benefit

The amount of the Supplemental Retirement Benefit payable to a Participant who terminates employment at or after reaching his or her Normal Retirement Date shall be an annual benefit payable for the life of the Participant equal to the lesser of (a) or (b):

(a) the excess, if any, of

(i) 2% of the Participant’s Compensation multiplied by his or her Years of Service;

REDUCED BY

(ii) the Actuarial Equivalent value of the Participant’s Vested Retirement Benefits determined as of his or her employment termination date.

(b) 50% of the Participant’s Compensation.

3.03 Early Retirement Benefit

The amount of the Supplemental Retirement Benefit payable to a Participant who terminates employment after reaching his or her Early Retirement Date but prior to his or her Normal Retirement Date shall be an annual benefit payable for the life of the Participant equal to the Normal Retirement Benefit determined under Section 4.02 reduced by 4% for each whole and partial year (treating a partial year as a whole year) prior to the date the Participant would have reached his or her Normal Retirement Date.

3.04 Benefit Commencement Date

Payment of a Participant’s Supplemental Retirement Benefit shall commence as of the first day of the month next following the Participant’s employment termination date.

Notwithstanding the foregoing, in no event shall payment to a Participant who is a “specified employee” within the meaning of Code Section 409A on his or her employment termination date, commence earlier than the first day following the end of the six (6) month period following such termination date.

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3.05 Form of Benefit Payment

(a) Single Life Annuity. A Participant’s Supplemental Retirement Benefit shall be payable in the form of a single life annuity for the life of the Participant unless he or she elects an optional form of payment pursuant to paragraph (b) or (c).

(b) Optional Annuity Forms of Payment. A Participant may elect to have his or her Supplemental Retirement Benefit paid in the form of an annuity payable for the life of the Participant with a survivor annuity continuing for the life of his or her Beneficiary. The amount of the annuity continued to the Beneficiary shall be 50% or 100% of the amount payable to the Participant. The amount of such benefit shall be equal to the Actuarial Equivalent value of the single life annuity payable under paragraph (a). An election of an optional annuity form of payment must be made at least 12 months prior to the Participant’s Benefit Commencement Date in accordance with the procedures established by Retirement Administration Committee.

(c) Lump Sum Payment Option. A Participant may elect to have his or her Supplemental Retirement Benefit paid in a single lump sum payment equal to the Actuarial Equivalent present value of the single life annuity payable under paragraph (a) in accordance with the with the procedures established by Retirement Administration Committee; provided that in no event may such election be made later than the following date, as applicable:

	Lump sum payment election must be made by
Benefit Commencement Date:	no later than:
On or before December 31, 2006	December 31, 2005
On or before December 31, 2007	December 31, 2006
On or before December 31, 2008	December 31, 2007
On or after January 1, 2009	December 31, 2008

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ARTICLE 4. DEATH BENEFIT

4.01 Death After Early Retirement Date

(a) In the event that a Participant dies

(i)	while still an employee after attaining his or her Early Retirement Date or Normal Retirement Date, or
(ii)	after becoming eligible to receive a Supplemental Retirement Benefit but prior to the Benefit Commencement Date,

	his or her Beneficiary shall be entitled to receive the benefit described in (b).
(b)	The amount of the benefit payable to the Beneficiary shall be an annual benefit for the life of the Beneficiary in an amount equal to one-half of the Normal Retirement Benefit or Early Retirement Benefit that would have been payable to the Participant (determined pursuant to Section 4.02 or 4.03, as applicable) if the Participant had retired immediately prior to the date of his or her death, provided, that if the age difference between the Participant and the Beneficiary is greater than 5 years, the benefit payable shall be actuarially adjusted to reflect the differences in the life expectancy of the Participant and the Beneficiary. Such benefit shall be payable commencing as of the first day of the month next following the Participant’s death.
(c)	If Participant’s Beneficiary is his or her estate, then the benefit payable such Beneficiary shall be an immediate single lump sum payment in an amount equal to the Actuarial Equivalent value of the one-half of the Normal Retirement Benefit or Early Retirement Benefit that would have been payable (determined pursuant to Section 4.02 or 4.03, as applicable) in the form of a single life annuity to the Participant if the Participant had retired immediately prior to his or her death.

4.02 Death Prior to Early Retirement Date

(a) In the event that a Participant dies

(i)	while still an employee prior to attaining his or her Early Retirement Date, and
(ii)	the Participant is survived by his or her spouse or, the Participant is not survived by his or her spouse but is survived by a Dependent Child or Dependent Children,

such spouse or Dependent Child or Children shall be entitled to receive the benefit described in paragraph (b).

(b)

The amount of the benefit payable to the surviving spouse shall be an annual benefit payable for the life of the spouse amount equal to one-half of the Normal Retirement Benefit that would have been payable to the Participant (determined pursuant to Section 4.02) if the Participant had retired immediately prior to the date of his or her death, reduced by 4% for each whole and partial year (treating a partial year as a whole year) prior to the date the Participant would have reached his or her Normal Retirement Date, and provided, that if the age difference between the Participant and the Beneficiary is greater than 5 years, the benefit payable shall be actuarially adjusted to reflect the differences in the life expectancy of the Participant and the Beneficiary. Such benefit shall be payable commencing as of the first day of the month next following the Participant’s death.

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(c)

In the event that the Participant is not survived by his or her spouse, but is survived by a Dependent Child or Children, then an annual benefit equal to the annual benefit that would have been payable to a surviving spouse pursuant to paragraph (b) above, shall be paid to each such Dependent Child, in equal shares, until the date such Dependent Child attains age 21 or, if earlier, the date such Dependent Child dies.

(d)

For purposes of this Section 5.02, “Dependent Child” or “Dependent Children” means each natural and/or adopted child of a Participant who is under the age of 21.

4.03 Death After Benefit Commencement Date

In the event that a Participant dies after his or her Benefit Commencement Date, then benefits shall be payable only in accordance with form of benefit payment in effect on the Participant’s date of death.

4.04 Designation of Beneficiary

(a)	Each Participant may designate, in the form and manner prescribed by the Committee, one or more persons as the Beneficiary under this Plan. A Participant also may designate one or more persons as a contingent beneficiary in the event that the Participant’s primary Beneficiary does not survive the Participant.
(b)	Any Beneficiary designation made by a Participant may be changed or revoked by the Participant at any time or from time to time prior to his or her Benefit Commencement Date, or death, if earlier.
(c)	If no Beneficiary is designated or survives the Participant, then the Participant’s Beneficiary shall be his or her spouse, if living; otherwise, the Participant’s estate.

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ARTICLE 5. PARTICIPANT OBLIGATIONS

5.01 Confidentiality; Cooperation with Regard to Litigation

(a)	During a Participant’s employment with Footstar and thereafter, the Participant shall not, without the prior written consent of Footstar, disclose to anyone except in good faith in the ordinary course of business to a person who will be advised by the member to keep such information confidential or make use of any Confidential Information, except when required to do so by legal process, by any governmental agency having supervisory authority over the business of Footstar or by any administrative or legislative body (including a committee thereof) that requires him or her to divulge, disclose or make accessible such information. In the event that the Participant is so ordered, he or she shall give prompt written notice to Footstar in order to allow Footstar the opportunity to object to or otherwise resist such order.
(b)	“Confidential Information” shall mean all information that is not known or available to the public concerning the business of Footstar or any Subsidiary relating to any of their products, product development, trade secrets, customer suppliers, finances, and business plans and strategies. For this purpose, information known or available generally within the trade or industry of Footstar or any Subsidiary shall be deemed to be known or available to the public. Confidential Information shall include information that is, or becomes, known to the public as a result of a breach by the Executive of the provisions of Section 6.01(a) above.
(c)	The Participant agrees to cooperate with Footstar, (including following the Participant’s termination of employment for any reason), by making himself or herself available to testify on behalf of Footstar or any Subsidiary or affiliate of Footstar, in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to assist Footstar, or any Subsidiary or affiliate of Footstar, in any such action, suit, or proceeding, by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to Footstar, or any Subsidiary or affiliate of Footstar, as requested. Footstar agrees to reimburse the Participant, on an after-tax basis, for all expenses actually incurred in connection with his provision of testimony or assistance.

5.02 Non-competition

During the Restriction Period (as defined below), the Participant shall not engage in Competition with Footstar, or any Subsidiary. “Competition” shall mean engaging in any activity, except as provided below, for a Competitor of Footstar or any Subsidiary, whether as an employee, consultant, principal, agent, officer, director, partner, shareholder (except as a less than one percent shareholder of a publicly trade company) or otherwise. A “Competitor” shall mean (i) those companies designated by Footstar and communicated to the Participant in an Employment Agreement, Change in Control Agreement or otherwise) and any successor or successors thereto) or (ii) the portion of any other corporation or other entity or start-up corporation or entity that is engaged in the Discount Retail Footwear Business within fifty (50) miles of any Discount Retail Footwear Business outlet in the United States of Footstar or any Subsidiary, provided that a corporation or entity described in clause (ii) above shall not be deemed to be a Competitor if the Participant shall not either directly or indirectly oversee or manage the activities of such corporation or entity’s division or unit engaged in the Discount Retail Footwear Business. If the Participant commences employment or becomes a consultant, principal, agent, officer, director, partner, or shareholder of any entity that is not a Competitor at the time the Participant initially becomes employed or becomes a consultant, principal, agent, officer, director, partner, or shareholder of any entity, future activities of such entity shall not result in a violation of this provision unless (x) such activities

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were contemplated at the time the Participant initially became employed or becomes a consultant, principal, agent, officer, director, partner or shareholder of the entity (and the contemplation of such activities was known to the Participant) or (y) the Participant commences directly or indirectly overseeing or managing the activities of Footstar or Subsidiary so long as he or she does not regularly participate in discussions with regard to the competing business. For purposes of the foregoing, “Discount Retail Footwear Business” shall mean a group of four or more stores which primarily sell discount footwear.

5.03 Non-solicitation of Employees

During the portion of the Restriction Period following the termination of the Participant’s employment, the Participant shall not induce employees of Footstar or any Subsidiary to terminate their employment. During the portion of the Restriction Period following the termination of the Participant’s employment, the Participant shall not directly or indirectly hire any employee of Footstar or any Subsidiary or any person who was employed by Footstar or any Subsidiary within 180 days of such hiring.

5.04 Definitions

For purposes of this Article 6 —

(a)	“Restriction Period” shall mean the period beginning with the Participant’s initial date of employment by Footstar and ending the date of a Change in Control except that if the Participant has an Employment Agreement with Footstar it shall have the meaning contained in such employment agreement.
(b)	“Subsidiary” shall mean any corporation controlled directly or indirectly by Footstar and any affiliate of Footstar.

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ARTICLE 6. CHANGE IN CONTROL

6.01 Applicability

This Article 7 shall apply in the event of a “Change in Control”.

6.02 Retirees and Beneficiaries At Time of Change in Control

The following rules shall apply to the payment of benefits to individuals who are Retirees or Beneficiaries of deceased Participants at the time a Change in Control occurs:

(a) Retirees.

Status of benefits at time of Change
in Control	Effect of Change in Control
Single Life Annuity If receiving payment of benefits in the form of a single life annuity -OR- If Retiree has not elected the joint and survivor annuity option pursuant to Section 4.05(b)(i) and payments have not yet begun	Retiree to receive immediate lump sum payment equal to Actuarial Equivalent of future benefits in lieu of annuity payments.
Joint and Survivor Annuity If receiving payment of benefits in the form of a joint and survivor annuity -OR- If Retiree has elected the joint and survivor annuity option pursuant to Section 4.05(b)(i) and payments have not yet begun	Retiree and Beneficiary to receive immediate lump sum payments equal to Actuarial Equivalent of respective portions of future benefits in lieu of annuity payments.

(b) Beneficiaries of Deceased Participants.

Status of benefits at time
of Change in Control	Effect of Change in Control
Payment of benefits has begun	Beneficiary to receive immediate lump sum payment equal to Actuarial Equivalent of future benefits in lieu of annuity payments.
Payment of benefits has not yet begun	Beneficiary to receive immediate lump sum payment equal to Actuarial Equivalent of the death benefit determined pursuant to Article 5 in lieu of annuity payments.

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6.03 Termination of Employment Within 24 Months Following a Change in Control

(a) Participants. A Participant shall be entitled to benefits under this Section 7.03 if during the 24-month period following a Change in Control

(i)	the Participant’s employment is terminated by the Corporation for any reason other than Cause, or
(ii)	the Participant terminates employment for “Good Reason” (as defined below).

Status of at time of
employment termination	Effect of Change in Control
Termination occurs at or after reaching Normal Retirement Date	Participant to receive immediate lump sum payment equal to Actuarial Equivalent of Participant’s Normal Retirement Benefit.
Termination occurs prior to Normal Retirement Date but after 10 Years of Service	Participant to receive immediate lump sum payment equal to Actuarial Equivalent of Participant’s Normal Retirement Benefit payable in the form of a single life annuity commencing as of the date on which the Participant would have reached his or her Normal Retirement Date if he or she had continued in employment.
Termination occurs prior to completing 10 Years of Service	Participant to receive immediate lump sum payment equal to Actuarial Equivalent of the benefit determined pursuant to the following formula payable in the form of a single life annuity commencing as of the date on which the Participant would have reached his or her Normal Retirement Date if he or she had continued in employment.
	Participant’s Normal Retirement Benefit TIMES
	Years of Service as of date of employment termination
	10

(b)	Beneficiaries. In the event that a Participant dies while employed during the 24-month period following a Change in Control, then his or her Beneficiary shall be entitled to receive immediate lump sum payment equal to Actuarial Equivalent of the death benefit determined pursuant to Article 5 in lieu of annuity payments.
(c)	Good Reason. For purposes of this Section 7.03, “Good Reason” means any of the following which occur after the occurrence of a Change in Control without the express written consent of the affected Participant:

(i) An assignment of any duties to the Participant which are inconsistent with his or her status as a senior executive of Footstar.

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(ii)	Any decrease in annual base pay or any reduction in annual target incentive compensation opportunity.
(iii)	Any other failure by Footstar to perform any material obligation under, or breach by Footstar of any material provision of an employment agreement with the Participant that is not cured within 30 days.
(iv)	Any failure to secure the agreement of any successor corporation or other entity to the Corporation to fully assume Footstar’s obligations under an employment agreement with the Participant.
(v)	A relocation of the Participant’s principal place of employment outside a 35-mile radius of his or her principal place of employment as in effect immediately prior to such Change in Control.

6.04 Termination of Employment More Than 24 Months Following a Change in Control

(a) Participants. The following rules shall apply to a Participant whose employment is terminated by the Corporation for any reason other than Cause after the end of the 24-month period following a Change in Control:

Status of at time of
employment termination	Effect of Change in Control
Termination occurs after Participant reaches his or her Early Retirement Date or Normal Retirement Date	Benefits payable in accordance with Article 4.
Termination occurs prior to Participant reaching his or her Early Retirement Date	Participant shall receive the benefit determined pursuant to the following formula commencing as of the date on which the Participant would have reached his or her Normal Retirement Date if he or she had continued in employment.
	Participant’s Normal Retirement Benefit TIMES Years of Service as of date of the Change in Control 10 The benefit will be payable in one of the payment forms described in Section 4.05.

(b) Beneficiaries. In the event that a Participant dies after end of the 24-month period following a Change in Control, then his or her Beneficiary shall be entitled to receive death benefits in accordance with Article 5.

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ARTICLE 7. FORFEITURE OF BENEFITS

Notwithstanding any other provision of the Plan, future payment of benefits hereunder to a Participant or Beneficiary will, at the discretion of the Committee, be discontinued and forfeited, and the Corporation will have no further obligation hereunder to such Participant or Beneficiary, if any of the following circumstances occur:

(a)	The Participant is discharged from employment with the Corporation for Cause;
(b)	The Participant at any time violates any of the provisions of Article 6; or
(c)	The Participant is convicted of a crime involving dishonesty or fraud on the part of such Participant in his relationship with the Corporation.

The Committee shall have sole discretion with respect to the application of the provisions of this paragraph and such exercise of discretion shall be conclusive and binding upon the Participant, his or her Beneficiary and all other persons.

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ARTICLE 8. ADMINISTRATION

8.01 Powers and Duties of the Committee

The Committee shall have the sole discretion and authority:

(a)	To determine the eligibility of employees to participate in the Plan;
(b)	To credit a Participant with additional Service; and
(c)	To waive any or all of the requirements set forth in this Plan with respect to any Participant.

The Committee’s exercise of its discretion under this Plan with respect to any Participant will not create a precedent for any other Participant.

8.02 Retirement Administration Committee

The Plan shall be administered by the Retirement Administration Committee. Except as otherwise provided in Section 9.01, the Retirement Administration Committee shall have full authority and power to administer and construe the Plan, subject to applicable requirements of law. Without limiting the generality of the foregoing, the Retirement Administration Committee shall have the following powers and duties:

(a)	To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan;
(b)	To interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan;
(c)	To decide all questions concerning the Plan; and
(d)	To appoint such agents, counsel, accountants, consultants and other persons as may be required to assist in administering the Plan.

All decisions made by the Retirement Administration Committee pursuant to the provisions of the Plan shall be made in its sole discretion and shall be final, conclusive, and binding upon all parties.

8.03 Delegation of Duties

The Retirement Administration Committee may delegate such of its duties and may engage such experts and other persons as it deems appropriate in connection with administering the Plan. The Retirement Administration Committee shall be entitled to rely conclusively upon, and shall be fully protected in any action taken by the Retirement Administration Committee in good faith in reliance upon any opinions or reports furnished them by any such experts or other persons.

8.04 Expenses

All expenses incurred prior to the termination of the Plan that shall arise in connection with the administration of the Plan, including, without limitation, administrative expenses and compensation and other expenses and charges of any actuary, counsel, accountant, specialist or other person who shall be

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employed by the Retirement Administration Committee in connection with the administration of the plan, shall be paid by the Corporation.

8.05 Indemnification of Retirement Administration Committee

Footstar agrees to indemnify and to defend to the fullest extent permitted by law any person serving as a member of the Retirement Administration Committee, and each employee of the Corporation or any of its affiliates appointed by the Retirement Administration Committee to carry out duties under this Plan, against all liabilities, damages, costs and expenses (including attorneys’ fees and amounts paid in settlement of any claims approved by Footstar) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith.

8.06 Liability

To the extent permitted by law, neither the Retirement Administration Committee nor any other person shall incur any liability for any acts or for any failure to act except for liability arising out of such person’s own willful misconduct or willful breach of the Plan.

8.07 Appeals Procedure

(a)	The Retirement Administration Committee shall approve or wholly or partially deny all claims for benefits under the Plan within a reasonable period of time after all required documentation has been furnished to the Retirement Administration Committee.
(b)	If a claim is wholly or partially denied, the Retirement Administration Committee shall provide the claimant with written notice setting forth the specific reasons for the denial, making reference to the pertinent provisions of the Plan or the Plan documents on which the denial is based; describe any additional material or information that should be received before the claim may be acted upon favorably, and explain why such material or information, if any, is needed; and inform the person making the claim of his right pursuant to this Section to request review of the decision by the Retirement Administration Committee.
(c)	A claimant shall have the right to request a review of the decision denying the claim. Such request must be made by filing a written application for review with the Retirement Administration Committee no later than sixty (60) days after receipt by the claimant of written notice of the denial of his claim. The claimant may review pertinent Plan documents and shall submit such written comments and other information which he wishes the Retirement Administration Committee to consider in connection with his claim.
(d)	The Retirement Administration Committee may hold any hearing or conduct any independent investigation which it deems necessary to render its decision on review. Such decision shall be made as soon as practicable after the Retirement Administration Committee receives the request for review. Written notice of the decision on review shall be promptly furnished to the claimant and shall include specific reasons for the decision.
(e)	For all purposes under the Plan, decisions on claims (where no review is requested) and decisions on review (where review is requested) shall be final, binding and conclusive on all interested persons.

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ARTICLE 9. AMENDMENT OR TERMINATION

The Committee reserves the right to modify or amend, in whole or in part, or to terminate, this Plan at any time; provided, however, that no such modification, amendment or termination shall adversely affect the right of any Participant (or Beneficiary) to receive the benefits of such Participant (or Beneficiary) should have received under the Plan upon termination of employment with the Corporation for any reason, including retirement, death or disability had the Plan not been so modified, amended or terminated, taking into account the Participant’s Service and age at the time of such Participant’s actual termination of employment with the Corporation for any reason including retirement, death or disability.

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ARTICLE 10. GENERAL PROVISIONS

10.01 Right to Withhold Taxes

The Corporation shall have the right to withhold such amounts from any payment under this Plan as it determines necessary to fulfill any federal, state, or local wage or compensation withholding requirements.

10.02 No Right to Continued Employment

Neither the Plan, nor any action taken under the Plan, shall confer upon any Participant any right to continuance of employment by the Corporation nor shall it interfere in any way with the right of the Corporation to terminate any Participant’s employment at any time.

10.03 Benefits Non-Assignable

Benefits under the Plan may not be anticipated, assigned or alienated, and will not be subject to claims of his creditors by any process whatsoever, except as specifically provided in this Plan or by the Retirement Administration Committee in its sole discretion.

10.04 Unfunded Plan

Nothing in this Plan shall be construed as giving any Participant or his or her legal representative, or designated beneficiary, any claim against any specific assets of the Corporation or as imposing any trustee relationship upon the Corporation in respect of the Participant. The Corporation shall not be required to segregate any assets in order to provide for the satisfaction of the obligations hereunder. If and to the extent that the Participant or his or her legal representative or designated beneficiary acquires a right to receive any payment pursuant to this Plan, such right shall be no greater than the right of an unsecured general creditor of the Corporation.

10.05 Mental or Physical Incompetency

If the Retirement Administration Committee determines that any person entitled to payments under the Plan is incompetent by reason of physical or mental disability, as established by a court of competent jurisdiction, the Retirement Administration Committee may cause all payments thereafter becoming due to such person to be made to any other person for his benefit, without responsibility to follow the application of amounts so paid. Payments made pursuant to this Section shall completely discharge the Retirement Administration Committee and the Corporation.

10.06 Governing Laws

The provisions of the Plan shall be construed, administered and enforced according to applicable Federal law and the laws of the State of New York.

10.07 Severability

The provisions of the Plan are severable. If any provision of the Plan is deemed legally or factually invalid or unenforceable to any extent or in any application, then the remainder of the provision and the Plan, except to such extent or in such application, shall not be affected, and each and every provision of

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the Plan shall be valid and enforceable to the fullest extent and in the broadest application permitted by law.

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EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF FOOTSTAR, INC.

The registrant is the direct parent corporation of Footstar Corporation, a Texas corporation, which owns all of the outstanding membership interests of Footstar HQ, LLC, a New Jersey limited liability company.

All of the subsidiaries referred to herein are included in the Consolidated Financial Statements of the registrant.

The names of other subsidiaries are omitted as, considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary.

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

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

We consent to incorporation by reference in the registration statements (No. 333-20731, No. 333-30011, No. 333-41390 and 333-131652) on Form S-8 of Footstar, Inc. (“the Company”) of our report dated March 6, 2009 with respect to the consolidated financial statements, the related financial statement schedule and the effectiveness of internal control over financial reporting as of January 3, 2009, which report appears in the January 3, 2009 Annual Report on Form 10-K.

/s/ Amper, Politziner & Mattia, LLP
Edison, New Jersey
March 6, 2009

EX-31.1

EXHIBIT 31.1

I, Jonathan M. Couchman, certify that:

1. I have reviewed this Annual Report on Form 10-K of Footstar, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 9, 2009

By:	/s/ Jonathan M. Couchman
Jonathan M. Couchman
Chief Executive Officer and President

EX-31.2

EXHIBIT 31.2

I, Michael J. Lynch, certify that:

1. I have reviewed this Annual Report on Form 10-K of Footstar, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 9, 2009

By:	/s/ Michael J. Lynch
Michael J. Lynch
Chief Financial Officer — Senior Vice President
(Principal Financial Officer)

EX-32

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Annual Report on Form 10-K of Footstar, Inc. (the “Company”) for the fiscal year ended January 3, 2009, as filed with the Securities and Exchange Commission on the date hereof, (the “Report”), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 9, 2009

By:	/s/ Jonathan M. Couchman
Jonathan M. Couchman
Chief Executive Officer and President

By:	/s/ Michael J. Lynch
Michael J. Lynch
Chief Financial Officer — Senior Vice President
(Principal Financial Officer)