8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 8–K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported):  May 9, 2008

Footstar, Inc.

(Exact Name of Registrant as Specified in Charter)

Delaware (State or Other Jurisdiction of Incorporation) 1-11681 (Commission File Number)   22-3439443 (IRS Employer Identification No.)

933 MacArthur Boulevard Mahwah, New Jersey (Address of Principal Executive Offices) 07430 (Zip Code)

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

N/A

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

þ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01.         Entry into a Material Definitive Agreement.

On May 9, 2008, Footstar, Inc. (the “Company”) together with its wholly-owned subsidiary Footstar Corporation (together with the Company, the “Borrowers”), entered into a First Amendment to an Amended and Restated Exit Credit Agreement (the “First Amendment”), by and among the Borrowers and Bank of America N.A., as administrative agent, lender, issuing bank and collateral agent (the “Bank”), which modifies certain provisions of the Amended and Restated Exit Credit Agreement, dated February 7, 2006 (the “Credit Agreement”) by and among the Borrowers, the Bank, and other parties from time to time a party thereto.

As previously disclosed, the agreement by and among the Company, Kmart Corporation, certain affiliates of Kmart Corporation (together with Kmart Corporation, “Kmart”) and Sears Holdings Corporation, pursuant to which the Company exclusively operates the footwear departments in all Kmart stores, is scheduled to expire by its terms at the end of 2008 (the “Kmart Agreement”). The First Amendment extends the maturity date of the Credit Agreement to the earlier of December 31, 2008 or the termination of the Kmart Agreement and reduces the revolving commitments thereunder to $50,000,000 (inclusive of a $25,000,000 sublimit for letters of credit).  The Credit Agreement’s former maturity date was the earlier of November 30, 2008 or thirty days prior to the termination of the Kmart Agreement and provided for up to $100,000,000 of revolving commitments (inclusive of a $40,000,000 sublimit for letters of credit). The Credit Agreement continues to be secured by substantially all of the Borrowers’ assets.

The First Amendment provides that a vote by the Board of Directors of the Company (the “Board”) to adopt a plan of liquidation under Section 331 of the Internal Revenue Code of 1986 (as amended) shall not constitute a Default or Event of Default (as each is defined under the Credit Agreement), so long as such plan contemplates the satisfaction in full of the obligations of the Company and certain of its subsidiaries under the Credit Agreement (and appropriate reserves in connection therewith) prior to the dissolution of the Company or such subsidiaries or any final liquidating distribution by such entities.

Subject to all of the terms, conditions and limitations as set forth in the First Amendment (including, without limitation, Section 1.14 thereof), the Company may declare and pay a dividend or distribution to its stockholders in an amount up to $1.00 per share of the Company’s common stock. In addition, subject to the terms, conditions and limitations set forth in the First Amendment and the Credit Agreement (including, without limitation, Section 1.10 of the First Amendment), the Company may declare and pay additional dividends or distributions consisting solely of the net proceeds of the Company’s corporate offices in Mahwah, New Jersey and, at any time and from time to time, with the prior written consent of the Bank.

The above discussion is a summary of certain terms and conditions of the Amendment and is qualified in its entirety by the terms and conditions of the Amendment, which is incorporated by reference and attached hereto as Exhibit 10.1, and the Credit Agreement, which was previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 13, 2006.

Item 8.01.         Other Events.

On May 9, 2008, the Company issued a press release announcing that the Board has adopted a Plan of Complete Liquidation (the “Plan”).  The Plan provides for the complete liquidation of the Company by providing for a series of distributions of cash to the stockholders of the Company generated from cash on hand, the sale of certain assets and the wind-down of the Company’s business as described in the Plan.  Under the terms of the Plan, the Company contemplates submitting a plan of dissolution to the Company’s stockholders in 2009 after expiration of the Company’s agreement with Kmart to exclusively operate the footwear departments in all Kmart stores through the end of December, 2008.

The Company also announced that the Board has declared a special cash distribution to stockholders in the amount of $1.00 per share.  The distribution will be paid on June 3, 2008 to stockholders of record at the close of business on May 28, 2008.

Copies of the Plan and the Company’s press release announcing the adoption of the Plan and the declaration of the distribution are attached hereto as Exhibit 2.1 and Exhibit 99.1, respectively, to this Form 8-K and are incorporated herein by reference.  The foregoing summary of the Plan does not purport to be complete and is subject to and qualified in its entirety by reference to the attached Plan.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

Exhibit No.	Title
2.1	Plan of Complete Liquidation of Footstar, Inc.
10.1	First Amendment to an Amended and Restated Exit Credit Agreement dated May 9, 2008 by and among Footstar, Inc. and Footstar Corporation as Borrowers, the Lenders from time to time party thereto, Bank of America, N.A., as Administrative Agent for itself and the Lenders, as swingline lender, as issuing bank and as collateral agent
99.1	Press Release of Footstar, Inc. dated May 9, 2008

*          *            *            *            *

Note on Forward-Looking Statements

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

· the impact of any dividends or any other special distributions to shareholders on the Company’s future cash requirements and liquidity needs, both in connection with the Company’s operations and all contingencies and obligations;

· the plan of dissolution is subject to approval and adoption by the Company’s shareholders;

· under a plan of dissolution, 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 any remaining assets available for ultimate distribution; uncertainties exist as to the disposition value of remaining assets as well as the amount of our liabilities and obligations, and, in connection with the liquidation plan and subsequent dissolution, there can be no assurance as to the amount of any cash or other property that may potentially be distributed to shareholders or the timing of any distributions;

· there can be no assurance that issues will not arise in connection with the obligations, adjustments and payments to occur on the termination of the Kmart Agreement;

· as our Kmart business winds down during 2008, we may encounter problems and other issues that may adversely impact our Kmart Agreement or our other business obligations or our financial results;

· we do not currently expect to generate any material revenues or operating income following the termination of our Kmart business, although we will continue to incur significant costs in connection with any of our ongoing operations and continued corporate existence as well as costs to wind-down our business;

· the  Company will likely be unable to realize the benefits of our net operating loss carry forwards;

· the Company’s ability to manage the anticipated wind-down of its current businesses in connection with the termination of the Company’s Kmart business by the end of 2008 (subject to any earlier termination by mutual agreement of Kmart and the Company or, in certain particular circumstances provided for in the Kmart Agreement, unilaterally by a party pursuant to the existing early termination or default terms of the Kmart Agreement);

· whether the Company continues to operate the footwear departments in Kmart stores through December 2008;

· the Company’s ability to obtain and maintain adequate terms and service with vendors and service providers and to ensure timely delivery of goods through December 2008;

· the effect of making more current certain vendor payable terms effective February 2008;

· the ability to maintain contracts that are critical to the Company’s operations;

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

· the Company’s ability to reduce overhead costs commensurate with any decline in sales and in connection with the winding down of the Company’s business;

· the Company’s ability to manage and plan for the disposal of, closing or conversion of Kmart stores;

· intense competition in the markets in which the Company competes; and

· retention of employees.

The Company’s operation of the footwear departments in Kmart stores accounts for substantially all of the Company’s net sales and net profits. The Kmart Agreement, pursuant to which the Company operates these footwear departments, is scheduled to expire at the end of 2008 (subject to any earlier termination by mutual agreement of Kmart and the Company or, in certain particular circumstances provided for in the Kmart Agreement, unilaterally by a party pursuant to the existing early termination or default terms of the Kmart Agreement) at which time Kmart has agreed to purchase the inventory in the Kmart footwear departments operated by the Company.

You should also consider the “risk factors” and “factors to consider” included in the Company’s 2007 Annual Report on Form 10-K and the 2008 first quarter Quarterly Report on Form 10-Q, each of which is available on the Company’s website under Investor Relations at www.footstar.com.

Because the information in this Current Report on Form 8-K is based solely on data currently available, it is subject to change and should not be viewed as providing any assurance regarding the Company’s future performance. Actual results, performance, events, plans and expectations may differ from the Company’s current projections, estimates and expectations and the differences may be material, individually or in the aggregate, to the Company’s business, financial condition, results of operations, liquidity and prospects. Additionally, the Company does not plan to update any of its forward looking statements based on changes in assumptions, changes in results or other events subsequent to the date of this Current Report on Form 8-K, other than as included in the Company’s future required SEC filings, or as may otherwise be legally required.

Proxy Disclosure

On May 7, 2008, the Company filed with the SEC a preliminary proxy statement in connection with its 2008 Annual Meeting of Stockholders.  The Company plans to file with the SEC and furnish to its stockholders a definitive proxy statement in connection with its 2008 Annual Meeting of Stockholders and advises its security holders to read the definitive proxy statement when it becomes available because it will contain important information.  Security holders may obtain a free copy of the definitive proxy statement and other documents (when available) that the Company files with the SEC at the SEC’s website at www.sec.gov.  The definitive proxy statement and these other documents may also be obtained for free from the Company by directing a request to Footstar, Inc., Attention: Corporate Secretary, 933 MacArthur Boulevard, Mahwah, NJ 07430.

The Company, its directors and certain named executive officers may be deemed to be participants in the solicitation of the Company’s security holders in connection with its 2008 Annual Meeting of Stockholders.  Security holders may obtain information regarding the names, affiliations and interests of such individuals in the Company’s preliminary proxy statement filed on May 7, 2008 with the SEC.

SIGNATURES

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

	Footstar, Inc.
Date:  May 9, 2008	By:	/s/  Maureen Richards
		Name:    Maureen Richards
		Title:      Senior Vice President, General Counsel                and Corporate Secretary

Exhibit Index

Exhibit No.	Title
2.1	Plan of Complete Liquidation
10.1	First Amendment to an Amended and Restated Exit Credit Agreement dated May 9, 2008 by and among Footstar, Inc. and Footstar Corporation as Borrowers, the Lenders from time to time party thereto, Bank of America, N.A., as Administrative Agent for itself and the Lenders, as swingline lender, as issuing bank and as collateral agent
99.1	Press Release of Footstar, Inc. dated May 9, 2008

EX-2.1

Exhibit 2.1

PLAN OF COMPLETE LIQUIDATION

OF FOOTSTAR, INC.

This Plan of Complete Liquidation (the “Plan”) is intended to accomplish a complete liquidation of Footstar, Inc., a Delaware corporation (the “Company”), in a  manner that satisfies Section 331 of the Internal Revenue Code of 1986, as amended (the “Code”), as follows:

1. Scope of Plan.  The Plan provides for the complete liquidation of the Company by providing for a series of distributions of cash to the stockholders of the Company (the “Stockholders”) generated from cash on hand, the sale of certain assets and the wind-down of the Company’s business as described in the Plan, including the submission of a plan of dissolution to the Company’s Stockholders in 2009 after expiration of the Company’s agreement with Kmart to exclusively operate the footwear departments in all Kmart stores through the end of December, 2008 (the “Kmart Agreement”).

2. Adoption of Plan by the Board of Directors.  The Board of Directors of the Company (the “Board”) intends to adopt the Plan at a regular or special meeting of the Board or pursuant to a unanimous written consent.  The Plan shall constitute the adopted Plan of the Company on the date on which the Plan is formally adopted by the Board at such a meeting or pursuant to unanimous written consent (the “Adoption Date”).

3. Liquidation of the Company’s Business.  As part of its emergence from bankruptcy in February 2006, substantially all of the Company’s business operations were related to the Kmart Agreement. At the end of such term the Kmart Agreement provided for the purchase by Kmart of the remaining  inventory in the Kmart footwear departments at which time the Company would be forced to liquidate unless it identified, developed or implemented a viable business alternative to offset its Kmart business.  Following its emergence from bankruptcy, the Company’s Board of Directors (the “Board”), with the assistance of investment bankers, evaluated a number of possible alternatives to enhance shareholder value, including acquisition opportunities, changes in the terms of the Company’s principal contracts, including the early termination of or extension of the Kmart Agreement, the payment of one or more dividends, and the sale of our assets or stock.   As of early 2007, the Board determined the best course of action was to operate under the Kmart Agreement through its expiration in December 2008, unless earlier terminated.  In March 2007, the Company engaged a real estate broker in order to sell its headquarters building.

In 2008, Kmart and the Company entered into discussions with respect to the termination of the Kmart Agreement and the sale of certain intellectual property to Kmart.  As a result of such discussions on April 3, 2008 the Company sold such intellectual property to Kmart affiliates for approximately $13 million, and reached an agreement on how inventory would be valued upon termination of the Kmart Agreement at the end of 2008.

Based on the above, the Board determined that it is in the best interest of the Company and its Stockholders to liquidate its business and ultimately dissolve after the expiration of Kmart Agreement (and other miscellaneous contracts through the end of such term) and to sell the Company’s other assets.  Such dissolution is anticipated to be effected pursuant to a plan of dissolution which will be submitted for the approval of Stockholders in 2009 after expiration of the Kmart Agreement and the satisfaction in full of the Obligations under the Company’s Amended and Restated Exit Credit Agreement dated as of February 7, 2006 (as amended).

4. Reserve for Liabilities.  After the Adoption Date, the Company shall, when and as determined by the Board in its absolute discretion, pay, or shall 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 under the Company’s Amended and Restated Exit Credit Agreement dated as of February 7, 2006 (as amended)) and shall set aside from its cash-on-hand such additional amount as the Board in its absolute discretion determines to be appropriate from time to time in connection with other, unascertained or contingent, liabilities of the Company.

5. Distributions to Stockholders.  In connection with the Company’s previous pursuit of strategic alternatives to continue a viable business beyond the expiration of the Kmart Agreement, at the end of December 2006 the Company had retained a significant amount of cash-on-hand.  Since the Company had concluded such investigation, the Company declared, on March 27, 2007, a pro rata cash distribution of $5.00 per share to its Stockholders of record on April 13, 2007.  In connection with the Company’s adoption of the Plan, it has declared on the Adoption Date that it shall make a pro rata cash distribution of $1.00 per share to its Stockholders of record at the close of business on May 28, 2008.  In addition, the Company shall make pro rata liquidating distributions to the Stockholders in cash from time to time after the Adoption Date as determined by the Board in its absolute discretion; provided that, in the determination of the Board, amounts contemplated to be held as a reserve under Section 4 of this Plan are so reserved.  Since the Kmart contract does not terminate until the end of December 2008, it is anticipated that the final liquidating distribution will not be distributed to the Stockholders until after such date and the date of approval by the Stockholders of a plan of dissolution.

6. Liquidation under Section 331.  It is intended that the Plan shall be a plan of complete liquidation within the terms of Section 331 of the Code.  The Plan shall be deemed to authorize such action as may be necessary to conform with the provision of said Section 331.

7. Form 966.  No later than thirty (30) days following the Adoption Date, the Company shall file U.S. Treasury Form 966 with the Internal Revenue Service.

8. Authorization.  The proper officers of the Company are hereby authorized to do and perform, any and all acts and to make, execute, deliver or adopt any and all agreements, resolutions, conveyances, certificates and other documents of every kind which are deemed necessary, appropriate or desirable, to implement the Plan and the transactions contemplated hereby, as authorized in the absolute discretion of the Board, including without limiting the foregoing, all filings or acts required by state or federal law or regulation to engage in a plan of complete liquidation (within the meaning of Section 331 of the Code).

9. No Third Party Beneficiaries.  Nothing contained herein shall create any rights in favor of any person or entity other than the Company.

 2

EX-10.1

Exhibit 10.1

FIRST AMENDMENT TO AN

AMENDED AND RESTATED EXIT CREDIT AGREEMENT

This FIRST AMENDMENT TO AN AMENDED AND RESTATED EXIT CREDIT AGREEMENT, dated as of May 9, 2008 (this “Amendment”), by and among FOOTSTAR, INC., (“Footstar”) and FOOTSTAR CORPORATION (“Footstar Corp.” and, together with Footstar, the “Borrowers”), the lenders from time to time party thereto (the “Lenders”), BANK OF AMERICA, N.A., as administrative agent for itself and the Lenders (in such capacity, the “Administrative Agent”), as swingline lender, as issuing bank and as collateral agent, modifies certain provisions of the Amended and Restated Exit Credit Agreement, dated as of February 7, 2006 (as amended and in effect from time to time, the “Credit Agreement”), by and among the Borrowers, the Lenders, the Administrative Agent  and GENERAL ELECTRIC CAPITAL CORPORATION, as syndication agent.  Terms not otherwise defined herein which are defined in the Credit Agreement shall have the same respective meanings herein as therein.

WHEREAS, the Borrowers have requested that the Administrative Agent and the Lenders extend the Maturity Date of the Credit Agreement to December 31, 2008 and reduce the Lenders’ Commitment; and

WHEREAS, the Administrative Agent and the Lenders have agreed to such extension and reduction as provided more fully herein below;

WHEREAS, the Borrowers have informed the Administrative Agent and the Lenders that they would like to declare and pay a dividend or distribution in favor of their equity holders and the Lenders have agreed to such declaration and payment provided that no further dividends or distributions shall be permitted as provided more fully herein below;

WHEREAS, the Borrowers have requested certain other amendments to the Credit Agreement and the Lenders agree to the same as more fully described below, subject to the conditions set forth below;

NOW THEREFORE, in consideration of the mutual agreements contained in the Credit Agreement and herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.1.           Amendment to §1.1 of the Credit Agreement (Defined Terms).  §1.1 of the Credit Agreement is hereby amended by deleting the definition of “Appraisal Percentage” in its entirety and substituting in lieu thereof the following definition: “”Appraisal Percentage” shall mean (a) 50%, or (b) if an Inventory appraisal, conducted by an independent appraiser mutually acceptable to the Administrative Agent and Borrower, in form and substance similar to the most recent Inventory appraisal and satisfactory to the Administrative Agent, is conducted on or after May 7, 2008, then 85% after the date of such appraisal.”

1.2.           Amendment to §1.1 of the Credit Agreement (Defined Terms).  §1.1 of the Credit Agreement is hereby amended by deleting clause (ii) of the definition of “Borrowing Base” in its entirety and substituting in lieu thereof the following:  “(ii)  the Appraisal Percentage times the sum of the Appraised Value of Eligible Inventory (other than Eligible L/C Inventory) and the Appraised Value of Eligible In-Transit Inventory (and net of applicable Inventory Reserves); plus”

1.3.           Amendment to §1.1 of the Credit Agreement (Defined Terms).  §1.1 of the Credit Agreement is hereby amended by deleting the definition of “Inventory Advance Rate” in its entirety.

1.4.           Amendment to §1.1 of the Credit Agreement (Defined Terms).  §1.1 of the Credit Agreement is hereby amended by deleting the definition of “Maturity Date” in its entirety and substituting in lieu thereof the following definition: “”Maturity Date” means the earlier to occur of (a) the termination of the Kmart Agreement in accordance with Article 4.2 of the Kmart Agreement and (b) December 31, 2008.”

1.5.           Amendment to §1.1 of the Credit Agreement (Defined Terms).  §1.1 of the Credit Agreement is hereby amended by deleting the definition of “Required Lenders” in its entirety and substituting in lieu thereof the following definition: “”Required Lenders” means, at any time, Lenders having Commitments in excess of 50% of the Total Commitments, or if the Commitments have been terminated, Lenders whose percentage of the outstanding Credit Extensions aggregate (after settlement and repayment of all Swingline Loans by the Lenders and taking into account each Lender’s Commitment Percentage of the Letter of Credit Outstandings) in excess of 50% of all such Credit Extensions.”

1.6.           Amendment to §1.1 of the Credit Agreement (Defined Terms).  Pursuant to §2.15 of the Credit Agreement, each of the Borrowers, the Agent and each Lender hereby (a) agrees to the reduction of the Total Commitment from $100,000,000 to $50,000,000 (b) waives the requirement that the Borrowers provide prior written notice thereof as set forth in §2.15 of the Credit Agreement, (c) agrees to the pro-rata reduction of each Lender’s Commitment, and (d) confirms that all fees and amounts owing under §2.15 on the date hereof equal $29,105.01.  To give effect to the reduction of the Total Commitment,  §1.1 of the Credit Agreement is hereby amended by deleting the definition of “Total Commitment” in its entirety and substituting in lieu thereof the following definition: “”Total Commitment” means the sum of the Commitments of the Lenders to make Loans in an aggregate amount not to exceed $50,000,000.”

1.7.           Amendment to §2.6(a)(i) of the Credit Agreement (Letters of Credit).  §2.6(a)(i) of the Credit Agreement is hereby amended by (a) deleting the word “$40,000,000” and (b) replacing it with the word “$25,000,000”.

1.8.           Amendment to §6.1(e) of the Credit Agreement (Financial Statements and Other Information).  §6.1(e) of the Credit Agreement is hereby amended by (a) deleting each reference to the word “$40,000,000” and (b) replacing each such reference with the words “twenty percent (20%) of the Borrowing Base”.

1.9.           Amendment to §7.5 of the Credit Agreement (Asset Sales; Blocked Sales; Transfers).  §7.5 of the Credit Agreement is hereby amended by (i) adding the word “and” at the end of clause (g) in such section 7.5 and (ii) inserting the following new clause (h) following existing clause (g): “(h)  the sale or disposition of any assets of any Loan Party on the Maturity Date, provided that (i) all Obligations under the Loan Documents have been paid in full in cash and all Loan Documents and Commitments thereunder have been terminated before the Maturity Date or simultaneously with such sale or disposition on the Maturity Date and in a manner acceptable to the Administrative Agent, and (ii) all Letters of Credit have been terminated or fully cash collateralized in a manner acceptable to the issuer thereof.

1.10.           Amendment to §7.6 of the Credit Agreement (Restricted Payments).  §7.6 of the Credit Agreement is hereby amended by deleting clause (a)(iv) thereof in its entirety and substituting in lieu thereof the following:

“(iv) the Lead Borrower may declare and pay a dividend or distribution to its shareholders (1) consisting solely of the net proceeds of a sale of the Borrowers’ corporate office located at 933 MacArthur Boulevard, Mahwah, NJ, or (2) with the prior written consent of the Administrative Agent at any time and from time to time, in each case provided that (w) such dividend or distribution may not be paid using the proceeds of any Loan or other extension of credit under the Loan Documents, (x) no Default or Event of Default shall exist on the date that such dividend or distribution is paid or shall result after giving effect thereto, (y) the Lead Borrower is solvent both before and after giving effect to such dividend or distribution, and (z) the Lead Borrower delivers to the Agent an officer’s certificate which certifies the amount of net proceeds received from such sale, the amount of the dividend or distribution that will be paid under §7.6(a)(iv) and that such dividend or distribution is being paid in compliance with this §7.6(a)(iv) (including clauses (w) through (y) of this proviso);”

1.11.           Amendment to §7.12 of the Credit Agreement (Fixed Charge Coverage Ratio).  §7.12 of the Credit Agreement is hereby amended by (a) deleting the words “twenty percent (20%)” and (b) replacing them with the words “ten percent (10%)”.

1.12.           Amendment to §8.1(o) of the Credit Agreement (Events of Default).  §8.1(o) of the Credit Agreement is hereby amended by inserting the following proviso at the end of clause (o): “, provided that any vote by any Loan Party’s board of directors to adopt a plan of liquidation for the purposes of satisfying Section 331 of the Internal Revenue Code of 1986 (as amended) shall not constitute a Default or Event of Default hereunder so long as such plan contemplates the satisfaction in full of the Obligations (and appropriate reserves in connection therewith) prior to the dissolution of any Loan Party or the final liquidating distribution by any Loan Party to its equity holders (it being hereby agreed and understood that this provision shall in no way be construed as consenting to, authorizing or permitting any Loan Party to take any action not otherwise permitted under the Loan Documents in furtherance of such plan of liquidation);”

1.13.           Amendment to Schedule 1.1(a) of the Credit Agreement (Pricing Grid - Revolving Loans).  Schedule 1.1(a) of the Credit Agreement is hereby amended by deleting the pricing grid set forth thereon in its entirety and substituting in lieu thereof the following pricing grid:

Level	Average Excess Availability	Applicable Margin for Eurodollar Loans	Applicable Margin for Base Rate Loans
I	Greater than or equal to $25,000,000	1.75%	0.0%
II	Greater than or equal to $17,500,000 and less than $25,000,000	2.00%	0.25%
III	Greater than or equal to $10,000,000 and less than $17,500,000	2.25%	0.50%
IV	Less than $10,000,000	2.50%	0.50%

1.14.           Consent.  Notwithstanding any provision of the Credit Agreement or the Credit Agreement as amended by this Amendment to the contrary and in reliance on the representations and warranties contained herein, the Agent and each Lender hereby consent to the declaration and payment of a dividend or distribution by the Lead Borrower to its shareholders in an amount less than or equal to $1.00 per share of common stock of Footstar, Inc., provided that such dividend or distribution is paid within 60 days of the date hereof, and provided further that (1) such dividend or distribution may not be paid using the proceeds of any Loan or other extension of credit under the Loan Documents, (2) no Default or Event of Default shall exist on the date that such dividend or distribution is paid or shall result after giving effect thereto, (3) the Lead Borrower is solvent both before and after giving effect to such dividend or distribution and (4) the Lead Borrower delivers to the Agent an officer’s certificate which certifies that such dividend or distribution is being paid in compliance with this §1.14 (including clauses (1) through (3) of this proviso).

1.15.           Conditions to Effectiveness.  This Amendment shall be deemed to be effective upon the Administrative Agent's confirmation of receipt of the following:

a) a counterpart signature page to this Amendment duly executed and delivered by each Loan Party and each Lender under the Credit Agreement;

b) good standing certificates from each of the Borrowers and the other Loan Parties;

c) certificates of the secretary or assistant secretary of each Loan Party certifying as to (i) the legal existence of each Loan Party, (ii) resolutions authorizing the amendments contemplated herein, and (ii) confirmation that there have been no changes to the charter or bylaws of such Loan Party since February 7, 2006 and such charters and bylaws remain in full force and effect, or an Exhibit to such certificate evidencing any such changes;

d) payment of fees and amounts owing (i) pursuant to §2.15 of the Credit Agreement in the aggregate amount of $29,105.01, and  (ii) any other fees and expenses payable on or before the effective date hereof;

e) a favorable written opinion (addressed to the Agent and each Lender and dated the date hereof) of Day Pitney LLP, with respect to (i) the enforceability of this Amendment, the Credit Agreement as amended hereby, and confirming that the security interests granted by the Loan Parties in favor of the Collateral Agent and the Lenders under the Loan Documents is continuing after giving effect to this Amendment, and (ii) with respect to each Loan Party, corporate status, authority, due authorization and no conflicts as well as due execution and delivery of this Amendment; and

f) a favorable written opinion (addressed to the Agent and each Lender and dated the date hereof) of Maureen Richards, Corporate Counsel of Footstar, Inc., with respect to Meldisco K-M Cranston, R.I., Inc.’s corporate authority, due authorization and lack of conflicts.

1.16.           Conditions Subsequent.  The agreement by the Administrative Agent and Lender evidenced hereby is expressly conditioned upon receipt by the Administrative Agent of a favorable written opinion (addressed to the Agent and the Lender and dated the date hereof and in form and substance satisfactory to the Administrative Agent) of Texas counsel (choice of such counsel to be reasonably acceptable to the Administrative Agent) with respect to Footstar Corporation’s corporate authority, due authorization and lack of conflicts, by May 16, 2008.  Failure to comply with this condition subsequent shall render the Administrative Agent’s and Lender’s agreement hereto ineffective and shall render this Amendment null and void.

1.17.           Borrower Representations and Warranties.  Each of the Borrowers hereby represents and warrants to the Administrative Agent and the Lenders as follows:

   (a)                      Representations and Warranties in the Credit Agreement.  The representations and warranties of each of the Borrowers contained in the Credit Agreement were true and correct in all material respects as of the date when made and are true and correct in all material respects on and as of the date hereof, except to the extent of changes resulting from transactions or events contemplated or permitted by the Credit Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not reasonably expected to have a Material Adverse Effect, or to the extent that such representations and warranties relate expressly to an earlier date.

   (b)                      Ratification, Etc.  Except as expressly amended, modified or waived hereby, the Credit Agreement and the other Loan Documents, and all documents, instruments and agreements related thereto, are hereby ratified and confirmed in all respects and shall continue in full force and effect.  The Credit Agreement shall, together with this Amendment, be read and construed as a single agreement.  All references to the Credit Agreement in the Credit Agreement, the Loan Documents or any related agreement or instrument shall hereafter refer to the Credit Agreement subject to this Amendment.

   (c)                      Authority, Etc.  The execution and delivery by each of the Borrowers of this Amendment and the performance by such Person of all of its agreements and obligations under the Credit Agreement subject to this Amendment are within the corporate, limited partnership or limited liability company authority, as applicable, of such Person and have been duly authorized by all necessary entity proceedings on the part of such Person.

   (d)                      Enforceability of Obligations.  This Amendment and the Credit Agreement subject hereto constitute the legal, valid and binding obligations of each of the Borrowers enforceable against such Person in accordance with their terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of, creditors' rights and except to the extent that availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefore may be brought.

   (e)                      Solvency.  The Lead Borrower is solvent on the date hereof and will be solvent both before and after giving effect to the distribution contemplated by §1.14(Consent) hereof.

   (f)                      No Default.  No Default or Event of Default has occurred and is continuing as of the date hereof or will occur after giving effect to the provisions hereof.

1.18.           No Other Consents or Amendments.  Each Loan Party hereby agrees that, except as expressly provided in this Amendment, all of the terms and conditions of the Credit Agreement and the other Loan Documents, expressly including but not limited to the Facility Guaranty or any other Guaranty securing any obligations arising under the Loan Documents, remain in full force and effect.  Nothing contained in this Amendment shall (a) be construed to imply a willingness on the part of the Administrative Agent or the Lenders to grant any similar or other future amendment, waiver or consent of any of the terms and conditions of the Credit Agreement or the other Loan Documents, (b) establish a custom or a course of dealing or conduct among the Administrative Agent, any Lender or any Borrower, or (c) in any way prejudice, impair or effect any rights or remedies of the Administrative Agent or the Lenders under the Credit Agreement or the other Loan Documents.  The Facility Guarantors hereby affirm their agreement to secure the Obligations (as defined in the Facility Guaranty) pursuant to the Facility Guaranty, after giving effect to this Amendment.

1.19.           Authorization to Take Further Action.  Each Lender hereby agrees that the Administrative Agent and the Collateral Agent are hereby authorized to take such further action and shall execute and deliver such additional documents and instruments as the Administrative Agent may reasonably determine in its sole discretion are necessary or appropriate to effectuate the terms of this Amendment.  Each Lender also agrees that each of them shall take such further action and shall execute and deliver such additional documents and instruments as the Administrative Agent may reasonably request to effectuate the same.

1.20.           Execution in Counterparts.  This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but which together shall constitute one instrument.  In proving this Amendment, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought.  Delivery of an executed signature page of this Amendment by facsimile or other electronic transmission shall be effective as delivery of a manually executed counterpart thereof.

1.21.           Expenses.  Pursuant to §10.3 of the Credit Agreement, all reasonable out of pocket costs and expenses incurred by the Administrative Agent in connection with this Amendment, including the reasonable fees, charges and disbursements of legal counsel for the Administrative Agent in producing, reproducing and negotiating this Amendment, will be for the account of the Borrowers whether or not the transactions contemplated by this Amendment are consummated.

1.22.           Miscellaneous. THIS AMENDMENT IS A CONTRACT UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE OF NEW YORK (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW).    The captions in this Amendment are for convenience of reference only and shall not define or limit the provisions hereof.

[signature pages follow]

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a document under seal as of the date first above written.

FOOTSTAR, INC., as Lead Borrower and as Borrower
By:	/s/ Vincent Zanna
	Name: Vincent Zanna
	Title: Treasurer

FOOTSTAR, INC., as Borrower
By:	/s/ Vincent Zanna
	Name: Vincent Zanna
	Title: Treasurer

IN WITNESS WHEREOF, the Facility Guarantors have hereby acknowledged this document under seal as of the date first written above for the purposes set forth in the last sentence of §1.18 hereof.

FOOTSTAR HQ, LLC, as Facility Guarantor By: Footstar Corporation, the sole member
By:	/s/ Vincent Zanna
	Name: Vincent Zanna
	Title: Treasurer

MELDISCO K-M CRANSTON, R.I., INC. as Facility Guarantor
By:	/s/ Vincent Zanna
	Name: Vincent Zanna
	Title: Treasurer

BANK OF AMERICA, N.A., as Administrative Agent, as Swingline Lender and as Issuing Bank
By:	/s/ Keith Vercauteren
	Name: Keith Vercauteren
	Title: Managing Director

BANK OF AMERICA, N.A., as Collateral Agent
By:	/s/ Keith Vercauteren
	Name: Keith Vercauteren
	Title: Managing Director

BANK OF AMERICA, N.A., as a Lender
By:	/s/ Keith Vercauteren
	Name: Keith Vercauteren
	Title: Managing Director

EX-99.1

Exhibit 99.1

Media Contact: Wendi Kopsick/Kimberly Kriger  Kekst and Company 212-521-4800   Investor Contact: Michael Lynch Chief Financial Officer 201-934-2577

FOR IMMEDIATE RELEASE

FOOTSTAR DECLARES SPECIAL $1.00 PER SHARE CASH DISTRIBUTION

MAHWAH, NEW JERSEY, May 9, 2008 -- Footstar, Inc. today announced that its Board of Directors has declared a special cash distribution to shareholders of $1.00 per common share.  The Company also said that it is proceeding with steps to prepare for the previously reported, anticipated wind-down of its business in 2009.

The special distribution will be paid on June 3, 2008 to shareholders of record at the close of business on May 28, 2008.   The Company is reviewing the tax characterization of the distribution, but the distribution  is expected to be treated as a return of capital for tax reporting purposes.  Shareholders will receive further information on Form 1099 after the end of 2008 and are encouraged to consult their own tax advisors regarding the tax treatment of the distribution.

Footstar also said that its Board has adopted a plan of liquidation in connection with the orderly dissolution of the Company following the expiration at year-end 2008 of its agreement with Kmart to exclusively operate the footwear departments in all Kmart stores.  As previously announced, Footstar will continue to operate the business through December 2008 and then it will be transitioned to Kmart.  The plan provides for the complete liquidation of the Company after the end of 2008 by providing for a series of distributions of cash to the stockholders of the Company generated from cash on hand, the sale of certain assets and the wind-down of the Company’s business.  Under the terms of the plan, the Company contemplates submitting a plan of dissolution to the Company’s stockholders in 2009.

In support of the continued operation of the Kmart business through year-end, the Company has entered into an amended credit agreement with Bank of America to extend the term of its existing credit agreement to the earlier of December 31, 2008 or the termination of the Kmart agreement.  The amended agreement also lowers the maximum amount that may be borrowed from $100 million to $50 million, reflecting the Company’s reduced needs.

The Company has focused on carefully managing its business and financial position in light of the scheduled expiration of its agreement with Kmart at the end of 2008 and, accordingly, has sought to return excess cash to shareholders.  In 2007, the Company declared and paid a $5.00 per share distribution.  In anticipation of the wind-down of its businesses, in April 2008, the Company monetized the value of its brands by selling them to Kmart for approximately $13.0 million.  With this additional cash, the Board determined that the Company could pay a $1.00 per share distribution at this time, while maintaining an appropriate liquidity position to properly manage the business through the end of the year.

About Footstar, Inc.

Footstar, Inc. (Pink Sheets: FTAR) is a discount footwear retailer. The Company operates licensed footwear departments nationwide in Kmart and Rite Aid Stores.

NOTE:  Footstar's certificate of incorporation contains restrictions that prohibit parties from acquiring 4.75% or more of Footstar's common stock without its prior consent and as further provided therein.

Proxy Disclosure

On May 7, 2008, the Company filed with the SEC a preliminary proxy statement in connection with its 2008 Annual Meeting of Stockholders.  The Company plans to file with the SEC and furnish to its stockholders a definitive proxy statement in connection with its 2008 Annual Meeting of Stockholders and advises its security holders to read the definitive proxy statement when it becomes available because it will contain important information.  Security holders may obtain a free copy of the definitive proxy statement and other documents (when available) that the Company files with the SEC at the SEC’s website at www.sec.gov.  The definitive proxy statement and these other documents may also be obtained for free from the Company by directing a request to Footstar, Inc., Attention: Corporate Secretary, 933 MacArthur Boulevard, Mahwah, NJ 07430.

The Company, its directors and certain named executive officers may be deemed to be participants in the solicitation of the Company’s security holders in connection with its 2008 Annual Meeting of Stockholders.  Security holders may obtain information regarding the names, affiliations and interests of such individuals in the Company’s preliminary proxy statement filed on May 7, 2008 with the SEC.

Forward-Looking Statements

This release contains forward-looking statements made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These statements may be identified by the use of words such as "anticipate," "estimates," "should," "expect," "guidance," "project," "intend," "plan," "believe" and other words and terms of similar meaning, in connection with any discussion of our financial statements, business, results of operations, liquidity, future operating or financial performance and other future events and circumstances.  Factors that could affect our forward-looking statements include, among other things, our ability to manage the anticipated wind-down of our current businesses in connection with the termination of our Kmart business, the impact of the payment of the $1.00 per share special distribution on June 3, 2008 on our future cash requirements and liquidity needs, both for our operating plans and any contingencies and obligations, and the other risks and uncertainties discussed more fully in our 2007 Annual Report on Form 10-K and the 2008 first quarter report on Form 10-Q.

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

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