~~MATTHEW D. SERRA,~~ ~~Chairman of the Board,~~ ~~President and~~ ~~Chief Executive Officer~~
MATTHEW D. SERRA, Chairman of the Board, President and Chief Executive Officer								BRUCE L. HARTMAN, Executive Vice President and Chief Financial Officer

March 28, 2005

~~BRUCE L. HARTMAN,~~
~~Executive Vice President and~~
~~Chief Financial Officer~~

~~April 1, 2004~~

2018

~~INDEPENDENT AUDITORS’~~MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. 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 (iii) 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. Management assessed the effectiveness of the Company’s internal control over financial reporting as of January 29, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of January 29, 2005.

The Company’s independent registered public accounting firm has issued their attestation report on management’s assessment of the Company’s internal control over financial reporting. That report appears in the Company’s 2004 Annual Report on Form 10-K under the heading,Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.


MATTHEW D. SERRA, Chairman of the Board, President and Chief Executive Officer								BRUCE L. HARTMAN, Executive Vice President and Chief Financial Officer

~~To the~~

March 28, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
Foot Locker, Inc.

We have audited the accompanying consolidated balance sheets of Foot Locker, Inc. and subsidiaries as of January 29, 2005 and January 31, 2004, ~~and February 1, 2003,~~ and the related consolidated statements of operations, comprehensive income, ~~(loss),~~ shareholders’ equity, and cash flows for each of the years in the three-year period ended January ~~31, 2004.~~29, 2005. These consolidated financial statements are the responsibility of ~~Foot Locker, Inc.’s~~the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with ~~auditing~~the standards ~~generally accepted in~~of the ~~United States of America.~~Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foot Locker, Inc. and subsidiaries as of January 29, 2005 and January 31, 2004, ~~and February 1, 2003,~~ and the results of their operations and their cash flows for each of the years in the three-year period ended January ~~31, 2004~~29, 2005, in conformity with ~~accounting principles~~U.S. generally accepted accounting principles.

We also have audited, in accordance with the ~~United States~~standards of ~~America.~~the Public Company Accounting Oversight Board (United States), the effectiveness of Foot Locker, Inc.’s internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 28, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

~~As discussed in note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and certain other intangible assets.~~

New York, New York
March 2,28, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders of
Foot Locker, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Foot Locker, Inc. maintained effective internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Foot Locker, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. 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 U.S. 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.

In our opinion, management’s assessment that Foot Locker, Inc. maintained effective internal control over financial reporting as of January 29, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Foot Locker, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Foot Locker, Inc. and subsidiaries as of January 29, 2005 and January 31, 2004, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended January 29, 2005, and our report dated March 28, 2005 expressed an unqualified opinion on those consolidated financial statements.

New York, New York
March 28, 2005

CONSOLIDATED STATEMENTS OF OPERATIONS

	2003			2002			2001			2004		2003			2002
	(in millions, except per share amounts)										(in millions, except per share amounts)
Sales	$	4,779		$	4,509		$	4,379		$	5,355	$	4,779		$	4,509
Costs and expenses
Cost of sales		3,302			3,165			3,071			3,722		3,297			3,161
Selling, general and administrative expenses		987			928			923			1,088		987			928
Depreciation and amortization		147			149			154			154		152			153
Restructuring charges (income)		1			(2	)		34			2		1			(2	)
Interest expense, net		18			26			24			15		18			26
		4,455			4,266			4,206			4,981		4,455			4,266
Other income		—			(3	)		(2	)
Other income (expense)											—		—			(3	)
		4,455			4,263			4,204			4,981		4,455			4,263
Income from continuing operations before income taxes		324			246			175			374		324			246
Income tax expense		115			84			64			119		115			84
Income from continuing operations		209			162			111			255		209			162
Loss on disposal of discontinued operations, net of income tax benefit of $4, $2, and $—, respectively		(1	)		(9	)		(19	)
Cumulative effect of accounting change, net of income tax benefit of $—		(1	)		—			—
Income (loss) on disposal of discontinued operations, net of income tax benefit of $37, $4, and $2, respectively											38		(1	)		(9	)
Cumulative effect of accounting change, net of income tax benefit of $ —											—		(1	)		—
Net income	$	207		$	153		$	92		$	293	$	207		$	153
Basic earnings per share:
Income from continuing operations	$	1.47		$	1.15		$	0.79		$	1.69	$	1.47		$	1.15
Loss from discontinued operations		(0.01	)		(0.06	)		(0.13	)
Income (loss) from discontinued operations											0.25		(0.01	)		(0.06	)
Cumulative effect of accounting change		—			—			—			—		—			—
Net income	$	1.46		$	1.09		$	0.66		$	1.94	$	1.46		$	1.09
Diluted earnings per share:
Income from continuing operations	$	1.40		$	1.10		$	0.77		$	1.64	$	1.40		$	1.10
Loss from discontinued operations		(0.01	)		(0.05	)		(0.13	)
Income (loss) from discontinued operations											0.24		(0.01	)		(0.05	)
Cumulative effect of accounting change		—			—			—			—		—			—
Net income	$	1.39		$	1.05		$	0.64		$	1.88	$	1.39		$	1.05

See Accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

	2003			2002			2001			2004			2003			2002
	(in millions)										(in millions)
Net income	$	207		$	153		$	92		$	293		$	207		$	153
Other comprehensive income (loss), net of tax
Other comprehensive income, net of tax
Foreign currency translation adjustment:
Translation adjustment arising during the period		31			38			(12	)		19			31			38
Cash flow hedges:
Cumulative effect of accounting change, net of income tax expense of $1		—			—			1
Change in fair value of derivatives, net of income tax		—			—			—			(1	)		—			—
Reclassification adjustments, net of income tax benefit of $1		(1	)		—			(1	)
Reclassification adjustments, net of income tax expense (benefit) of $1, ($1), and $—, respectively											1			(1	)		—
Net change in cash flow hedges		(1	)		—			—			—			(1	)		—
Minimum pension liability adjustment:
Minimum pension liability adjustment, net of deferred tax expense (benefit) of $10, $(56) and $(71), respectively		16			(83	)		(115	)
Comprehensive income (loss)	$	253		$	108		$	(35	)
Minimum pension liability adjustment, net of deferred tax expense (benefit) of $(9), $10 and $(56), respectively											(14	)		16			(83	)
Comprehensive income										$	298		$	253		$	108

See Accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

	2003		2002		2004		2003
	(in millions)					(in millions)
ASSETS
Current assets
Cash and cash equivalents	$	448	$	357	$	225	$	190
Short-term investments						267		258
Total cash, cash equivalents and short-term investments						492		448
Merchandise inventories		920		835		1,151		920
Assets of discontinued operations		2		2		1		2
Other current assets		149		90		188		149
		1,519		1,284		1,832		1,519
Property and equipment, net		644		636		715		668
Deferred taxes		194		240		180		194
Goodwill		136		136		271		136
Intangible assets, net		96		80		135		96
Other assets		100		110		104		100
	$	2,689	$	2,486	$	3,237	$	2,713
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	234	$	251	$	381	$	234
Accrued liabilities		300		296		275		300
Liabilities of discontinued operations		2		3		2		2
Current portion of repositioning and restructuring reserves		1		3		1		1
Current portion of reserve for discontinued operations		8		18		7		8
Current portion of long-term debt and obligations under capital leases		—		1		18		—
		545		572		684		545
Long-term debt and obligations under capital leases		335		356		347		335
Other liabilities		434		448		376		458
Total liabilities		1,314		1,376		1,407		1,338
Shareholders’ equity		1,375		1,110		1,830		1,375
	$	2,689	$	2,486	$	3,237	$	2,713

See Accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	2003						2002						2001							2004								2003								2002
	Shares			Amount			Shares			Amount			Shares			Amount			Shares				Amount				Shares				Amount				Shares				Amount
	(shares in thousands, amounts in millions)																			(shares in thousands, amounts in millions)
Common Stock and Paid-In Capital
Par value $0.01 per share, 500 million shares authorized
Issued at beginning of year		141,180		$	378			139,981		$	363			138,691		$	351			144,009			$	411				141,180			$	378				139,981			$	363
Restricted stock issued under stock option and award plans		845			—			60			—			210			(2	)		400				—				845				—				60				—
Forfeitures of restricted stock		—			1			—			1			—			1			—				2				—				1				—				1
Amortization of stock issued under restricted stock option plans		—			4			—			2			—			2			—				8				—				4				—				2
Conversion of convertible debt																					9,490				150				—				—				—				—
Reclassification of convertible debt issuance costs																					—				(3	)			—				—				—				—
Issued under director and employee stock plans, net of tax		1,984			28			1,139			12			1,080			11			2,256				40				1,984				28				1,139				12
Issued at end of year		144,009			411			141,180			378			139,981			363			156,155				608				144,009				411				141,180				378
Common stock in treasury at beginning of year		(105	)		(1	)		(70	)		—			(200	)		(2	)		(57	)			(1	)			(105	)			(1	)			(70	)			—
Reissued under employee stock plans		152			1			—			—			192			1			260				5				152				1				—				—
Restricted stock issued under stock option and award plans		—			—			30			—			210			2			—				—				—				—				30				—
Forfeitures of restricted stock		(80	)		(1	)		(60	)		(1	)		(270	)		(1	)
Forfeitures/cancellations of restricted stock																					(100	)			(2	)			(80	)			(1	)			(60	)			(1	)
Shares of common stock used to satisfy tax withholding obligations																					(137	)			(3	)			—				—				—				—
Exchange of options		(24	)		—			(5	)		—			(2	)		—			(30	)			(1	)			(24	)			—				(5	)			—
Common stock in treasury at end of year		(57	)		(1	)		(105	)		(1	)		(70	)		—			(64	)			(2	)			(57	)			(1	)			(105	)			(1	)
		143,952			410			141,075			377			139,911			363			156,091				606				143,952				410				141,075				377
Retained Earnings
Balance at beginning of year					946						797						705							1,132								946								797
Net income					207						153						92							293								207								153
Cash dividends declared on common stock $0.15, $0.03 and $— per share, respectively					(21	)					(4	)					—
Cash dividends declared on common stock $0.26, $0.15 and $0.03 per share, respectively																									(39	)							(21	)							(4	)
Balance at end of year					1,132						946						797							1,386								1,132								946
Accumulated Other Comprehensive Loss
Foreign Currency Translation Adjustment
Balance at beginning of year					(15	)					(53	)					(41	)						16								(15	)							(53	)
Translation adjustment arising during the period					31						38						(12	)						19								31								38
Balance at end of year					16						(15	)					(53	)						35								16								(15	)
Cash Flow Hedges
Balance at beginning of year					—						—						—							(1	)							—								—
Change during year, net of tax					(1	)					—						—							—								(1	)							—
Balance at end of year					(1	)					—						—							(1	)							(1	)							—
Minimum Pension Liability Adjustment
Balance at beginning of year					(198	)					(115	)					—							(182	)							(198	)							(115	)
Change during year, net of tax					16						(83	)					(115	)						(14	)							16								(83	)
Balance at end of year					(182	)					(198	)					(115	)						(196	)							(182	)							(198	)
Total Accumulated Other Comprehensive Loss					(167	)					(213	)					(168	)						(162	)							(167	)							(213	)
Total Shareholders’ Equity				$	1,375					$	1,110					$	992						$	1,830							$	1,375							$	1,110

See Accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	2003			2002			2001			2004			2003			2002
	(in millions)										(in millions)
From Operating Activities
Net income	$	207		$	153		$	92		$	293		$	207		$	153
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Loss on disposal of discontinued operations, net of tax		1			9			19
(Income) loss on disposal of discontinued operations, net of tax											(38	)		1			9
Restructuring charges (income)		1			(2	)		34			2			1			(2	)
Cumulative effect of accounting change, net of tax		1			—			—			—			1			—
Depreciation and amortization		147			149			154			154			152			153
Impairment of long-lived assets		—			7			2			—			—			7
Restricted stock compensation expense		4			2			2			8			4			2
Tax benefit on stock compensation		2			2			2			10			2			2
Gains on sales of real estate and assets		—			(3	)		(2	)		—			—			(3	)
Deferred income taxes		(5	)		38			38			50			(5	)		38
Change in assets and liabilities, net of dispositions:
Merchandise inventories		(63	)		(22	)		(69	)		(183	)		(63	)		(22	)
Accounts payable and other accruals		(17	)		(22	)		9			157			(17	)		(22	)
Repositioning and restructuring reserves		(1	)		(3	)		(62	)		(1	)		(1	)		(3	)
Pension contribution		(50	)		—			—			(106	)		(50	)		—
Income taxes		9			42			(45	)		—			9			42
Other, net		28			(3	)		30			(57	)		23			(7	)
Net cash provided by operating activities of continuing operations		264			347			204			289			264			347
From Investing Activities
Proceeds from sales of real estate and assets		—			6			20
Acquisitions											(242	)		—			—
Purchases of short-term investments											(2,884	)		(1,546	)		(536	)
Sales of short-term investments											2,875			1,440			384
Lease acquisition costs		(15	)		(18	)		(20	)		(17	)		(15	)		(18	)
Capital expenditures		(144	)		(150	)		(116	)		(156	)		(144	)		(150	)
Proceeds from sales of real estate and assets											—			—			6
Net cash used in investing activities of continuing operations		(159	)		(162	)		(116	)		(424	)		(265	)		(314	)
From Financing Activities
Issuance of convertible long-term debt		—			—			150
Debt issuance costs		—			—			(8	)		(2	)		—			—
Reduction in long-term debt		(19	)		(41	)		(58	)
Increase (reduction) in long-term debt											175			(19	)		(41	)
Reduction in capital lease obligations		—			(1	)		(4	)		—			—			(1	)
Dividends paid on common stock		(21	)		(4	)		—			(39	)		(21	)		(4	)
Issuance of common stock		27			10			9			33			27			10
Net cash (used in) provided by financing activities of continuing operations		(13	)		(36	)		89
Net cash provided by (used in) financing activities of continuing operations											167			(13	)		(36	)
Net Cash Provided by (Used in) Discontinued Operations		7			(10	)		(75	)		1			7			(10	)
Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents		(8	)		3			4			2			(8	)		3
Net Change in Cash and Cash Equivalents		91			142			106			35			(15	)		(10	)
Cash and Cash Equivalents at Beginning of Year		357			215			109			190			205			215
Cash and Cash Equivalents at End of Year	$	448		$	357		$	215		$	225		$	190		$	205
Cash Paid During the Year:
Interest	$	25		$	27		$	36		$	23		$	25		$	27
Income taxes	$	77		$	39		$	35		$	121		$	77		$	39
Non-cash Financing Activities:
Common stock issued upon conversion of convertible debt										$	150		$	—		$	—
Debt issuance costs reclassified to equity upon conversion of convertible debt										$	3		$	—		$	—

See Accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~1 Summary of Significant Accounting Policies~~

Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Foot Locker, Inc. and its domestic and international subsidiaries (the “Company”), all of which are ~~wholly-owned.~~wholly owned. All significant intercompany amounts have been eliminated. The preparation of financial statements in conformity with ~~accounting principles~~U.S. generally accepted ~~in the United States of America~~accounting principles requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Reporting Year

The reporting period for the Company is the Saturday closest to the last day in January. Fiscal years 2004, 2003 ~~2002~~ and ~~2001~~2002 represented the 52 weeks ended January 29, 2005, January 31, 2004 and February 1, 2003, ~~and February 2, 2002,~~ respectively. References to years in this annual report relate to fiscal years rather than calendar years.

Revenue Recognition

Revenue from retail store sales is recognized when the product is delivered to customers. Retail sales include merchandise, net of returns and exclude all taxes. The Company recognizes revenue, including layaway sales, in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial ~~Statements.~~Statements,” as amended by SAB No. 104, “Revenue Recognition.” Revenue from layaway sales is recognized when the customer receives the product, rather than when the initial deposit is paid. Revenue from Internet and catalog sales is recognized when the product is shipped to customers. Sales include shipping and handling fees for all periods presented.

Store Pre-Opening and Closing Costs

Store pre-opening costs are charged to expense as incurred. In the event a store is closed before its lease has expired, the estimated post-closing lease exit costs, less the fair market value of sublease rental income, is provided for once the store ceases to be used, in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal ~~Activities,~~Activities.” ~~which the Company adopted in 2002.~~

Advertising Costs

Advertising and sales promotion costs are expensed at the time the advertising or promotion takes place, net of reimbursements for cooperative advertising. Cooperative advertising ~~income~~reimbursements earned for the launch and promotion of certain products is agreed upon with vendors and is recorded in the same period as the associated expense is incurred. ~~Advertising costs as~~In accordance with EITF 02-16 “Accounting by a ~~component of selling, general and administrative expenses of $74.1 million in 2003, $73.8 million in 2002 and $79.7 million in 2001, net of~~Reseller for Cash Consideration from a Vendor,” the Company accounts for reimbursements ~~for cooperative advertising of $23.4 million in 2003, $15.4 million in 2002 and $8.8 million in 2001. Income recognized~~received in excess of expenses incurred related to specific, incremental advertising, ~~during 2003 was recorded in accordance with EITF 02-16, which was applied~~ as a reduction to the cost of merchandise and is reflected in cost of sales as the merchandise ~~was~~is sold.

Advertising costs, which are included as a component of selling, general and administrative expenses, net of reimbursements for cooperative advertising, were as follows:

	2004			2003			2002
	(in millions)
Advertising expenses	$	102.5		$	97.5		$	89.2
Cooperative advertising reimbursements		(24.8	)		(23.4	)		(15.4	)
Net advertising expense	$	77.7		$	74.1		$	73.8

Catalog Costs

Catalog costs, which primarily comprise paper, printing, and postage, are capitalized and amortized over the expected customer response period to each catalog, generally 6090 days. Cooperative ~~income~~reimbursements earned for the promotion of certain products is agreed upon with vendors and is recorded in the same period as the associated catalog expenses are amortized. Prepaid catalog costs totaled $3.5 million and $2.9 million at January 29, 2005 and January 31, 2004, respectively.

Catalog costs, which are included as a component of selling, general and administrative expenses, ~~of $38.9 million in 2003, $39.0 million in 2002 and $37.7 million in 2001 were~~ net of reimbursements for cooperative reimbursements, ~~of $3.5 million in 2003, $2.9 million in 2002 and $2.3 million in 2001. Prepaid catalog costs totaled $2.9 million and $3.5 million at January 31, 2004 and February 1, 2003, respectively.~~were as follows:

	2004			2003			2002
	(in millions)
Catalog costs	$	50.3		$	42.4		$	41.9
Cooperative reimbursements		(2.9	)		(3.5	)		(2.9	)
Net catalog expense	$	47.4		$	38.9		$	39.0

Earnings Per Share

Basic earnings per share is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options and the conversion of convertible long-term debt. The following table reconciles the numerator and denominator used to compute basic and diluted earnings per share for continuing operations.

	2003		2002		2001		2004		2003		2002
	(in millions)							(in millions)
Income from continuing operations	$	209	$	162	$	111	$	255	$	209	$	162
Effect of Dilution:
Convertible debt		5		5		3		2		5		5
Income from continuing operations assuming dilution	$	214	$	167	$	114	$	257	$	214	$	167
Weighted-average common shares outstanding		141.6		140.7		139.4		150.9		141.6		140.7
Effect of Dilution:
Stock options and awards		1.8		0.6		1.3		3.0		1.8		0.6
Convertible debt		9.5		9.5		6.2		3.2		9.5		9.5
Weighted-average common shares outstanding assuming dilution		152.9		150.8		146.9		157.1		152.9		150.8

Options to purchase 1.5 million, 3.6 million ~~6.8 million~~ and ~~3.1~~6.8 million shares of common stock ~~for the years ended~~as of January 29, 2005, January 31, 2004 and February 1, 2003, ~~and February 2, 2002,~~ respectively, were not included in the computations because the exercise price of the options was greater than the average market price of the common shares and, therefore, the effect of their inclusion would be antidilutive.

Stock-Based Compensation

The Company accounts for stock-based compensation ~~by applying APB No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), as~~plans in accordance with the intrinsic-value based method permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”)~~. In accordance with APB No. 25,~~ which has not resulted in compensation cost for stock options and shares purchased under employee stock purchase plans. No compensation expense for employee stock options is ~~not recorded for~~reflected in net income, as all stock options granted ~~if the option~~under those plans had an exercise price is not less than the quoted market price at the date of grant. ~~Compensation~~The market value at date of grant of restricted stock is recorded as compensation expense ~~is also not recorded for employee purchases~~over the period of ~~stock under~~vesting.

The following table illustrates the ~~1994 Stock Purchase Plan. The plan, which is compensatory~~effect on net income and earnings per share as ~~defined in~~if the Company had applied the fair value recognition provisions of SFAS No. 123 ~~is non-compensatory as defined in APB No. 25. SFAS No. 123 requires disclosure of the impact on earnings per share if the fair value method of accounting for~~to measure stock-based compensation ~~is applied for companies electing to continue to account for stock-based plans under APB No. 25. Accounting for the Company’s stock-based compensation~~expense during the three-year period ended January ~~31, 2004, in accordance with the fair value method provisions of SFAS No. 123 would have resulted in the following:~~29, 2005.

	2003			2002			2001			2004			2003			2002
	(in millions, except per share amounts)										(in millions, except per share amounts)
Net income:
As reported	$	207		$	153		$	92		$	293		$	207		$	153
Compensation expense included in reported net income, net of income tax benefit		2			1			1			5			2			1
Total compensation expense under fair value method for all awards, net of income tax benefit		(7	)		(6	)		(7	)		(13	)		(7	)		(6	)
Pro forma	$	202		$	148		$	86		$	285		$	202		$	148
Basic earnings per share:
As reported	$	1.46		$	1.09		$	0.66		$	1.94		$	1.46		$	1.09
Pro forma	$	1.43		$	1.05		$	0.62		$	1.89		$	1.43		$	1.05
Diluted earnings per share:
As reported	$	1.39		$	1.05		$	0.64		$	1.88		$	1.39		$	1.05
Pro forma	$	1.36		$	1.02		$	0.61		$	1.83		$	1.36		$	1.02

~~SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of FASB Statement No. 123,” which was issued in~~On December 2002, provides alternative methods of transition for an entity that changes to the fair value based method of accounting for stock-based compensation and requires more prominent disclosure of the pro forma impact on earnings per share. The disclosure portion of the statement was adopted in 2002. On April 22, 2003, the FASB determined that fair value of stock-based compensation should be recognized as a cost in the financial statements. On March 31,15, 2004, the FASB issued ~~an exposure draft~~SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires companies to measure compensation cost for share-based payments at fair value. The Statement is effective as of the beginning of the first interim or annual reporting period that ~~provides for a comment period, which ends~~begins after June ~~30, 2004. The proposed statement would be effective for awards that are granted, modified, or settled in fiscal years beginning after December~~ 15, ~~2004.~~2005. The Company has not yet determined the ~~impact~~effect of this statement on its consolidated financial position, results of operations or cash flows.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents at January 29, 2005 and January 31, 2004 ~~and February 1, 2003~~ were ~~$388~~$140 million and ~~$297~~$130 million, respectively.

Short-Term Investments

The Company accounts for its short-term investments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” At January 29, 2005, all of the Company’s investments were classified as available for sale, and accordingly are reported at fair value. Short-term investments comprise auction rate securities. Auction rate securities are perpetual preferred or long-dated securities whose dividend/coupon resets periodically through a Dutch auction process. A Dutch auction is a competitive bidding process designed to determine a rate for the next term, such that all sellers sell at par and all buyers buy at par. Accordingly, there were no realized or unrealized gains or losses for any of the periods presented.

Merchandise Inventories and Cost of Sales

Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail inventory method. Cost for retail stores is determined on the last-in, first-out (LIFO) basis for domestic inventories and on the first-in, first-out (FIFO) basis for international inventories. Merchandise inventories of the Direct-to-Customers business are valued at ~~FIFO cost.~~the lower of cost or market using weighted-average cost, which approximates FIFO. Transportation, distribution center and sourcing costs are capitalized in merchandise inventories.

Cost of sales is comprised of the cost of merchandise, occupancy, buyers’ compensation and shipping and handling costs. The cost of merchandise is recorded net of amounts received from vendors for damaged product returns, markdown allowances and volume rebates as well as cooperative advertising ~~income~~reimbursements received in excess of specific, incremental advertising expenses. Occupancy reflects the amortization of amounts received from landlords for tenant improvements.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Significant additions and improvements to property and equipment are capitalized. Maintenance and repairs are charged to current operations as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Owned property and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets: ~~25 to 45~~maximum of 50 years for buildings and 3 to 10 years for furniture, fixtures and equipment. Property and equipment

under capital leases and improvements to leased premises are generally amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the remaining lease term. Capitalized software reflects certain costs related to software developed for internal use that are capitalized and amortized. After substantial completion of the project, the costs are amortized on a straight-line basis over a 2 to 811 year period. Capitalized software, net of accumulated amortization, is included in property and equipment and was ~~$55.4~~$50 million at January 29, 2005 and $55 million at January 31, ~~2004 and $63.0 million at February 1, 2003.~~2004.

The Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”) as of February 2, 2003. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate can be made. The carrying amount of the related long-lived asset shall be increased by the same amount as the liability and that amount will be amortized over the useful life of the underlying long-lived asset. The difference between the fair value and the value of the ultimate liability will be accreted over time using the credit-adjusted risk-free interest rate in effect when the liability is initially recognized. Asset retirement obligations of the Company may at any time include structural alterations to store locations and equipment removal costs from distribution centers required by certain leases. On February 2, 2003, the Company recorded a liability of $2 million for the expected present value of future retirement obligations, increased property and equipment by $1 million and recognized a $1 million after tax charge for the cumulative effect of the accounting change. Additional asset retirement obligations recorded during 2003 were approximately $1 million. Accretion and amortization expense recorded during 2003 were not material. The pro forma effects of the asset retirement liability assuming adoption of SFAS No. 143 as of February 3, 2002 were not material to the liability, the net earnings or the per share amounts, and therefore, have not been presented.

Recoverability of Long-Lived Assets

~~Effective as of the beginning of 2002, the~~The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), which superseded SFAS No. 121. In accordance with SFAS No. 144, an impairment loss is recognized whenever events or changes in circumstances indicate that the carrying amounts of long-lived tangible and intangible assets with finite lives may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company has identified this lowest level to be principally individual stores. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset with its estimated fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the Company’s weighted-average cost of capital. The Company estimates fair value based on the best information available using estimates, judgments and projections as considered necessary.

Goodwill and Intangible Assets

~~In 2002, the~~The Company ~~adopted~~accounts for goodwill and other intangibles in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and intangible assets with indefinite lives no longer be amortized but reviewed for impairment if impairment indicators arise and, at a minimum, annually. The Company performs its annual impairment review as of the beginning of each fiscal year. The fair value of each reporting unit ~~which was~~evaluated as of the beginning of each year, determined using a combination of market and discounted cash flow ~~approach,~~approaches, exceeded the carrying value of each respective reporting unit.

Previously, goodwill was amortized on a straight-line basis over 20 years for acquisitions after 1995 and over 40 years prior to 1995. The following would have resulted had the provisions of the new standards been applied for 2001:

	~~2001~~
	~~(in millions, except~~ ~~per share amounts)~~
~~Income from continuing operations:~~
~~As reported~~	$	~~111~~
~~Pro forma~~	$	~~118~~
~~Basic earnings per share:~~
~~As reported~~	$	~~0.79~~
~~Pro forma~~	$	~~0.84~~
~~Diluted earnings per share:~~
~~As reported~~	$	~~0.77~~
~~Pro forma~~	$	~~0.82~~

Separable intangible assets that are deemed to have finite lives will continue to be amortized over their estimated useful ~~lives (but with no maximum life).~~lives. Intangible assets with finite lives primarily reflect lease acquisition costs and are amortized over the lease term.

Derivative Financial Instruments

All derivative financial instruments are recorded in the Consolidated Balance Sheets at their fair values. Changes in fair values of derivatives are recorded each period in earnings or other comprehensive ~~income (loss),~~loss, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. The effective portion of the gain or loss on the hedging derivative instrument is reported as a component of other comprehensive ~~income (loss)~~loss and reclassified to earnings in the period in which the hedged item affects earnings. To the extent derivatives do not qualify as hedges, or are ineffective, their changes in fair value are recorded in earnings immediately, which may subject the Company to increased earnings volatility. ~~The adoption of SFAS No. 133 in 2001 did not have a material impact on the Company’s consolidated earnings and reduced accumulated other comprehensive loss by approximately $1 million.~~

Fair Value of Financial Instruments

The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The carrying value of cash and cash equivalents, short-term investments and other current receivables and payables approximate fair value due to the short-term ~~maturities~~nature of these assets and liabilities. Quoted market prices of the same or similar instruments are used to determine fair value of long-term debt and forward foreign exchange

contracts. Discounted cash flows are used to determine the fair value of long-term investments and notes receivable if quoted market prices on these instruments are unavailable.

Income Taxes

The Company determines its deferred tax provision under the liability method, whereby deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using presently enacted tax rates. Deferred tax assets are recognized for tax ~~credit~~credits and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A taxing authority may challenge positions that the Company has adopted in its income tax filings. Accordingly, the Company may apply different tax treatments for transactions in filing its income tax returns than for income tax financial reporting. The Company regularly assesses its tax position for such transactions and records reserves for those differences.

Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries is made only on those amounts in excess of the funds considered to be permanently reinvested.

Insurance Liabilities

The Company is primarily self-insured for health care, workers’ compensation and general liability costs. Accordingly, provisions are made for the Company’s actuarially determined estimates of discounted future claim costs for such risks for the aggregate of claims reported and claims incurred but not yet reported. Self-insured liabilities totaled ~~$14.0 million and $16.1~~$14 million at January 29, 2005 and January 31, ~~2004 and February 1, 2003, respectively.~~2004. The Company discounts its workers’ compensation and general liability using a risk-free interest rate. Imputed interest expense related to these liabilities was $1 million in each of 2004, 2003 and ~~$2 million in both 2002~~2002.

Accounting for Leases

The Company recognizes rent expense for operating leases as of the earlier of possession date for store leases or the commencement of the agreement for a non-store lease. Rental expense, inclusive of rent holidays, concessions and ~~2001.~~tenant allowances are recognized over the lease term on a straight-line basis. Contingent payments based upon sales and future increases determined by inflation related indices cannot be estimated at the inception of the lease and accordingly, are charged to operations as incurred.

Foreign Currency Translation

The functional currency of the Company’s international operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted-average rates of exchange prevailing during the year. The unearned gains and losses resulting from such translation are included as a separate component of accumulated other comprehensive loss within shareholders’ equity.

Reclassifications

Certain balances in prior fiscal years have been reclassified to conform to the presentation adopted in the current year. ~~In addition,~~

The Company reclassified short-term investments on its Consolidated Balance Sheets in 2003 and on its 2003 and 2002 Statements of Cash Flows, which were previously presented as cash and cash equivalents. The amounts reclassified totaled $258 million and $152 million in 2003 and 2002, respectively. The purchases and sales related to the ~~adoption~~investments held in each of ~~SFAS No. 144~~the three years ended January 29, 2005 have been presented on the Consolidated Statements of Cash Flows in ~~2002,~~the investing activities section.

The Company receives allowances from landlords to improve tenant locations. Historically, the Company has recorded tenant allowances as a reduction to the cost of the leasehold improvements and amortized the credits through amortization expense over the term of the lease period, which was not in accordance with U.S. generally accepted accounting principles. The Company corrected its accounting during the fourth quarter of 2004, by reclassifying those amounts received in past years from property and equipment to the deferred rent liability on the Consolidated Balance Sheets. Balances reclassified from property and equipment to the straight-line liability, which is included in other liabilities, was $22 million in 2004 and $24 million in 2003. The Company also ~~supersedes~~reclassified amounts on the ~~accounting and reporting requirements of APB No. 30, “Reporting the Results~~Consolidated Statements of Operations ~~— Reporting~~to reflect an increase in amortization expense and a decrease in occupancy costs, a component of costs of sales, in each of the ~~Effects of Disposal of a Segment of a Business,~~respective years. Reclassified in the income statement was $5 million in 2004 and ~~Extraordinary, Unusual~~ in 2003

and ~~Infrequently Occurring Events,” required balance sheet reclassifications~~$4 million in 2002. There was no change to net income for the ~~presentation~~years presented. The effect on the Consolidated Statements of ~~discontinued operations~~Cash Flows was not significant for the years ended January 31, 2004 and ~~other long-lived assets held for disposal.~~February 1, 2003 and therefore have not been reclassified.

Recent Accounting Pronouncements Not Previously Discussed Herein

~~Several recent accounting pronouncements~~In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB 43, Chapter 4.” This Statement amends the guidance to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversions be based on the normal capacity of the production facilities. The Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not ~~previously discussed herein became effective during 2003. The~~believe that the effect of the adoption of this Statement will have a material effect on its financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This Statement requires that exchanges should be recorded and measured at the fair value of the assets exchanged, with certain exceptions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Management does not believe that the adoption of this Statement will have a material effect on its financial position and results of operations as the Company does not currently have any exchanges of nonmonetary assets.

Acquisitions

Footaction

The Company consummated its purchase of 349 Footaction stores from Footstar, Inc. on May 7, 2004. Footstar, Inc. filed for Chapter 11 bankruptcy protection on March 2, 2004; consequently, the disposition of its Footaction stores was conducted under a Bankruptcy Code Section 363 sale process. The U.S. Bankruptcy Court approved the sale on April 21, 2004 and the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired on May 4, 2004. The agreement to acquire the Footaction stores was in line with the Company’s strategic priorities, including the acquisition of compatible athletic footwear and apparel retail companies. The Company’s consolidated results of operations include those of Footaction beginning with the date that the acquisition was consummated.

The Company integrated the Footaction business into the Athletic Stores segment and is operating the majority of the stores under the Footaction name. The purchase price of $222 million was increased for direct costs related to the acquisition totaling $4 million. Direct costs include investment banking, legal and accounting fees and other costs. The Company has allocated the purchase price of approximately $226 million based, in part, upon internal estimates of cash flows, recoverability and independent appraisals, and may be revised as more definitive facts and evidence become available. Pro forma effects of the acquisition have not been presented, as their effects were not significant to the consolidated results of operations. The allocation of the purchase price is detailed below:

	(in millions)
Inventory	$	39
Property and equipment		45
Intangible assets — amortizing		29
Goodwill		122
Total assets		235

Accounts payable and accrued liabilities⁽¹⁾		5
Other liabilities⁽²⁾		4
Total liabilities		9
Total purchase price	$	226

(1)

“Accounts payable and accrued liabilities” include approximately $3 million for anticipated payments to landlords to cancel two of the acquired leases. Also included is approximately $1 million of liabilities related to gift cards assumed. The remaining $1 million relates to transfer taxes and real estate charges assumed from Footstar, Inc. as part of the acquisition.

(2)

“Other liabilities” includes $4 million of liabilities assumed for leased locations with rents above their fair value.

In accordance with the purchase agreement, $13.7 million of the purchase price was deposited into an escrow account pending resolution of 15 lease related issues. During 2004, 12 of the issues were resolved and $9.1 million was released from escrow to the seller and $2.2 million was returned to the Company. Accordingly, this reduced the purchase price and goodwill by $2.2 million and as of January 29, 2005, $2.4 million remained in escrow.

The Republic of Ireland

On October 18, 2004, the Company purchased 11 stores in the Republic of Ireland from the Champion Sports Group Limited, an athletic footwear and apparel company. The transaction was effected through a wholly owned subsidiary. The Company operates these ~~pronouncements~~stores under the Foot Locker brand as part of the Athletic Stores segment.

The Company has allocated the purchase price of approximately €13 million (approximately $17 million), inclusive of $1 million of direct costs related to the acquisition, based, in part, upon internal estimates of cash flows, recoverability and independent appraisals, and may be revised as more definitive facts and evidence become available. Pro forma effects of the acquisition have not been presented, as their effects were not significant to the consolidated results of operations.

The allocation of the purchase price is detailed below:

	(in millions)
Intangible assets — amortizing	$	2
Intangible assets — non-amortizing		3
Goodwill		12
Total assets		17
Other amounts due and payable⁽¹⁾		(1	)
Cash paid as of January 29, 2005	$	16

(1)

“Other amounts due and payable” includes professional fees related to the transaction.

Goodwill

The carrying value of goodwill related to the Athletic Stores segment was $191 million at January 29, 2005 and $56 million at January 31, 2004. The carrying value of goodwill related to the Direct-to-Customers segment was $80 million at January 29, 2005 and January 31, 2004.

				Jan. 31, 2004				Acquisitions⁽¹⁾				Additions				Other⁽²⁾				Jan. 29, 2005
				(in millions)
Goodwill				$	136				134				—				1			$	271

(1)

Attributable to the acquisition of 349 Footaction stores and 11 stores in the Republic of Ireland.

(2)

Includes effect of foreign currency translation.

4 Intangible Assets, net

	2004		2003
	(in millions)
Intangible assets not subject to amortization	$	4	$	2
Intangible assets subject to amortization (net of accumulated amortization of $70 and $51, respectively)		131		94
	$	135	$	96

Intangible assets not subject to amortization at January 29, 2005, include the 11 stores acquired in the Republic of Ireland of $3 million related to the trademark. The minimum pension liability required at January 29, 2005 and January 31, 2004, which represented the amount by which the accumulated benefit obligation exceeded the fair market value of U.S. defined benefit plan’s assets, was offset by an intangible asset to the extent of previously unrecognized prior service costs of $1 million at January 29, 2005 and $2 million at January 31, 2004.

The changes in the carrying amount of intangibles subject to amortization for the year ended January 29, 2005 are as follows:

	2003			Acquisitions⁽¹⁾		Additions		Amortization / Other⁽²⁾			2004
	(in millions)
Finite life intangible assets
Lease acquisition costs	$	94		$	—	$	17	$	(9	)	$	102	12.2
Trademark		—			21		—		(1	)		20	20.0
Loyalty program		—	��		1		—		—			1	2.0
Favorable leases		—			9		—		(1	)		8	4.1
Total	$	94		$	31	$	17	$	(11	)	$	131	12.6

(1)

Attributable to the acquisition of 349 Footaction stores and 11 stores in the Republic of Ireland.

(2)

Includes effect of foreign currency translation.

Lease acquisition costs represent amounts that are required to secure prime lease locations and other lease rights, primarily in Europe. Included in finite life intangibles, as a result of the Footaction and Republic of Ireland purchases, are the trademark for the Footaction name, amounts paid for leased locations with rents below their fair value for both acquisitions and amounts paid to obtain names of members of the Footaction loyalty program.

Amortization expense for the intangibles subject to amortization was approximately $17 million, $11 million and $8 million for 2004, 2003 and 2002, respectively. Annual estimated amortization expense for finite life intangible assets is expected to approximate $19 million for 2005, $18 million for 2006, $16 million for 2007, $14 million for 2008 and $13 million for 2009.

Segment Information

The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of January 29, 2005, the Company has two reportable segments, Athletic Stores, which sells athletic footwear and apparel through its various retail stores, and Direct-to-Customers, which includes the Company’s catalogs and Internet business.

The accounting policies of both segments are the same as those described in the “Summary of Significant Accounting Policies.” The Company evaluates performance based on several factors, of which the primary financial measure is division results. Division profit reflects income from continuing operations before income taxes, corporate expense, non-operating income and net interest expense.

Sales

	2004		2003		2002
	(in millions)
Athletic Stores	$	4,989	$	4,413	$	4,160
Direct-to-Customers		366		366		349
Total sales	$	5,355	$	4,779	$	4,509

Operating Results

	2004			2003			2002
	(in millions)
Athletic Stores⁽¹⁾	$	420		$	363		$	280
Direct-to-Customers		45			53			40
		465			416			320
All Other⁽²⁾		(2	)		(1	)		1
Division profit		463			415			321
Corporate expense⁽³⁾		(74	)		(73	)		(52	)
Operating profit		389			342			269
Non-operating income⁽⁴⁾		—			—			3
Interest expense, net		(15	)		(18	)		(26	)
Income from continuing operations before income taxes	$	374		$	324		$	246

(1)

2002 includes reductions in restructuring charges of $1 million. Additionally, the Company recorded non-cash pre-tax charges in selling, general and administrative expenses of approximately $7 million in 2002, which represented impairment of long-lived assets such as store fixtures and leasehold improvements related to Athletic Stores.

(2)

2004 includes restructuring charges of $2 million. 2003 includes restructuring charges of $1 million. 2002 includes a $1 million reduction in restructuring charges.

(3)

2004 includes integration costs of $5 million related to the acquisitions of Footaction and the 11 stores in the Republic of Ireland.

(4)

2002 includes $2 million gain related to the condemnation of a part-owned and part-leased property for which the Company received proceeds of $6 million and real estate gains from the sale of corporate properties of $1 million during 2002.

	Depreciation and Amortization						Capital Expenditures						Total Assets
	2004		2003		2002		2004		2003		2002		2004		2003		2002
	(in millions)
Athletic Stores	$	126	$	123	$	123	$	139	$	126	$	124	$	2,335	$	1,739	$	1,591
Direct-to-Customers		5		4		4		8		6		8		190		183		177
		131		127		127		147		132		132		2,525		1,922		1,768
Corporate		23		25		26		9		12		18		711		789		744
Discontinued operations														1		2		2
Total Company	$	154	$	152	$	153	$	156	$	144	$	150	$	3,237	$	2,713	$	2,514

Sales and long-lived asset information by geographic area as of and for the fiscal years ended January 29, 2005, January 31, 2004 and February 1, 2003 are presented below. Sales are attributed to the country in which the sales originate, which is where the legal subsidiary is domiciled. Long-lived assets reflect property and equipment. No individual country included in the International category is significant.

Sales

	2004		2003		2002
	(in millions)
United States	$	3,982	$	3,597	$	3,639
International		1,373		1,182		870
Total sales	$	5,355	$	4,779	$	4,509

Long-Lived Assets

	2004		2003		2002
	(in millions)
United States	$	547	$	525	$	544
International		168		143		120
Total long-lived assets	$	715	$	668	$	664

Short-Term Investments

These auction rate security investments are accounted for as available-for-sale securities. The fair value of all investments approximate their carrying cost as the investments are generally not held for more than 49 days and they are traded at par value.

	2004		2003
	(in millions)
Tax exempt municipal bonds	$	50	$	44
Taxable bonds		40		—
Equity securities		177		214
	$	267	$	258

Contractual maturities of the bonds outstanding at January 29, 2005 range from 2021 to 2039.

Merchandise Inventories

	2004		2003
	(in millions)
LIFO inventories	$	856	$	651
FIFO inventories		295		269
Total merchandise inventories	$	1,151	$	920

The value of the Company’s LIFO inventories, as calculated on a LIFO basis, approximates their value as calculated on a FIFO basis.

Other Current Assets

	2004		2003
	(in millions)
Net receivables	$	47	$	41
Prepaid expenses and other current assets		47		45
Prepaid income taxes		40		—
Deferred taxes		53		60
Current portion of Northern Group note receivable		1		2
Fair value of derivative contracts		—		1
	$	188	$	149

Property and Equipment, net

	2004			2003
	(in millions)

Land	$	3		$	3
Buildings:
Owned		31			32
Furniture, fixtures and equipment:
Owned		1,072			1,015
Leased		14			14
		1,120			1,064
Less: accumulated depreciation		(755	)		(706	)
		365			358
Alterations to leased and owned buildings, net of accumulated amortization		350			310
	$	715		$	668

Other Assets

	2004		2003
	(in millions)
Deferred tax costs	$	25	$	35
Investments and notes receivable		22		23
Northern Group note receivable, net of current portion		8		6
Income taxes receivable		—		1
Fair value of derivative contracts		2		—
Other		47		35
	$	104	$	100

Accrued Liabilities

	2004		2003
	(in millions)
Pension and postretirement benefits	$	30	$	57
Incentive bonuses		34		38
Other payroll and payroll related costs, excluding taxes		51		44
Taxes other than income taxes		45		44
Property and equipment		22		32
Gift cards and certificates		22		16
Income taxes payable		9		9
Fair value of derivative contracts		3		3
Current deferred tax liabilities		1		—
Other operating costs		58		57
	$	275	$	300

Revolving Credit Facility

At January 29, 2005, the Company had unused domestic lines of credit of $175 million, pursuant to a $200 million unsecured revolving credit agreement. $25 million of the line of credit was committed to support standby letters of credit. These letters of credit are primarily used for insurance programs.

On May 19, 2004, shortly after the Footaction acquisition, the Company amended its revolving credit agreement, thereby, extending the maturity date to May 2009 from July 2006. The agreement includes various restrictive financial covenants with which the Company was in compliance on January 29, 2005. Existing unamortized financing fees as well as new up-front fees paid, and direct costs incurred, to amend the agreement are amortized over the life of the facility on a straight-line basis, which is comparable to the interest method, totaling approximately $4 million at January 29, 2005. Interest is determined at the time of borrowing based on variable rates and the Company’s fixed charge coverage ratio, as defined in the agreement. The rates range from LIBOR plus 1.375 percent to LIBOR plus 2.25 percent. In addition, the quarterly facility fees paid on the unused portion during 2004, which is also based on the Company’s fixed charge coverage ratio, ranged from 0.25 percent in the earlier part of 2004 to 0.175 percent by the end of 2004, which was based on the Company’s third quarter fixed charge coverage ratio. Quarterly facility fees paid in 2003 ranged from 0.50 percent, in the earlier part, to 0.25 percent during the fourth quarter of 2003, also based on the Company’s improved fixed charge coverage ratio. There were no short-term borrowings during 2004 or 2003.

Interest expense, including facility fees, related to the revolving credit facility was $2 million in 2004 and $3 million in both 2003 and 2002.

Long-Term Debt and Obligations under Capital Leases

In 2001, the Company issued $150 million of subordinated convertible notes due 2008, at an interest rate of 5.50 percent. The notes were convertible into the Company’s common stock at the option of the holder at a conversion price of $15.806 per share. The Company notified The Bank of New York, as Trustee under the indenture, that it intended to redeem its entire $150 million outstanding 5.50 percent convertible subordinated notes. Effective June 4, 2004, all of the convertible subordinated notes were cancelled and approximately 9.5 million new shares of the Company’s common stock were issued. The Company reclassified the remaining $3 million of unamortized deferred costs related to the original issuance of the convertible debt to equity as a result of the conversion.

During 2002, the Company purchased and retired $9 million of the $200 million 8.50 percent debentures payable in 2022. In 2003, the Company purchased and retired an additional $19 million of the $200 million debentures, bringing the total amount retired to date to $28 million. The Company entered into an interest rate swap agreement in December 2002 to convert $50 million of the 8.50 percent debentures to variable rate debt. The interest rate swap did not have a ~~material impact~~significant effect on interest expense in 2002. In 2003, the Company entered into two additional swaps, to convert an additional $50 million of the 8.50 percent debentures to variable rate debt. The outstanding interest rate swaps during 2003 converted a total of $100 million of the 8.50 percent fixed rate on the ~~Company’s consolidated financial position, results~~debentures to lower variable rates resulting in a reduction of ~~operations or~~interest expense of approximately $4 million. During July 2004, the Company entered into an additional $100 million of interest rate swaps to further reduce the existing $100 million of outstanding swaps to a lower average rate. The effect of all swaps resulted in a combined reduction in interest expense of $3 million in 2004. As of January 29, 2005, swaps converting a total of $100 million of debentures were outstanding.

The fair value of the interest rate swaps at January 29, 2005 comprised $2 million, which was included in other assets. The carrying value of the 8.50 percent debentures was increased by $4 million for the swaps that were classified as fair value hedges and the remaining $2 million of swaps were classified as cash ~~flows.~~flow hedges, whereby the changes in their fair value have been included in other comprehensive loss. The ~~adopted pronouncements~~fair value of the swaps, included in other liabilities, was approximately $1 million at January 31, 2004 and the carrying value of the 8.50 percent debentures was decreased by the corresponding amount.

On May 19, 2004, the Company obtained a 5-year, $175 million amortizing term loan from the bank group participating in its existing revolving credit facility to finance a portion of the purchase price of the Footaction stores. The initial interest rate on the LIBOR-based, floating-rate loan was 2.625 percent and was 3.875 percent on January 29, 2005. The loan requires minimum principal payments each May, equal to a percentage of the original principal amount of 10 percent in years 2005 and 2006, 15 percent in years 2007 and 2008 and 50 percent in year 2009. Closing and upfront fees totaling approximately $1 million were paid for the term loan and these fees are being amortized using the interest rate method as ~~follows:~~determined by the principal repayment schedule.

•

~~SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”~~

•

~~SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”~~

•

~~FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”~~

Following is a summary of long-term debt and obligations under capital leases:

	2004		2003
	(in millions)
8.50% debentures payable 2022	$	176	$	171
$175 million term loan		175		—
5.50% convertible notes		—		150
Total long-term debt		351		321
Obligations under capital leases		14		14
		365		335
Less: Current portion		18		—
	$	347	$	335

3138

Maturities of long-term debt and minimum rent payments under capital leases in future periods are:

	Long-Term Debt		Capital Leases		Total
	(in millions)
2005	$	18	$	—	$	18
2006		18		—		18
2007		26		14		40
2008		26		—		26
2009		87		—		87
Thereafter		176		—		176
		351		14		365
Less: Current portion		18		—		18
	$	333	$	14	$	347

Interest expense related to long-term debt and capital lease obligations, including the amortization of the associated debt issuance costs, was $19 million in 2004, $22 million in 2003 and $28 million in 2002.

~~2 Discontinued Operations~~14 Leases

The Company is obligated under operating leases for almost all of its store properties. Some of the store leases contain purchase or renewal options with varying terms and conditions. Management expects that in the normal course of business, expiring leases will generally be renewed or, upon making a decision to relocate, replaced by leases on other premises. Operating lease periods generally range from 5 to 10 years. Certain leases provide for additional rent payments based on a percentage of store sales. Rent expense includes real estate taxes, insurance, maintenance, and other costs as required by some of the Company’s leases. The present value of operating leases is discounted using various interest rates ranging from 4 percent to 13 percent.

Rent expense consists of the following:

	2004			2003			2002
	(in millions)
Rent	$	605		$	532		$	491
Contingent rent based on sales		11			11			11
Sublease income		(1	)		(1	)		(1	)
Total rent expense	$	615		$	542		$	501

Future minimum lease payments under non-cancelable operating leases are:

	(in millions)
2005	$	449
2006		423
2007		383
2008		322
2009		256
Thereafter		890
Total operating lease commitments	$	2,723
Present value of operating lease commitments	$	1,989

Other Liabilities

	2004		2003
	(in millions)
Pension benefits	$	130	$	175
Postretirement benefits		95		113
Straight-line rent liability		77		67
Income taxes		29		62
Workers’ compensation / general liability reserves		11		12
Reserve for discontinued operations		11		11
Repositioning and restructuring reserves		3		2
Fair value of derivatives		—		1
Unfavorable leases		3		—
Other		17		15
	$	376	$	458

Discontinued Operations

On January 23, 2001, the Company announced that it was exiting its ~~694 store~~694-store Northern Group segment. The Company recorded a charge to earnings of $252 million before-tax, or $294 million after-tax, in 2000 for the loss on disposal of the segment. Major components of the charge included expected cash outlays for lease buyouts and real estate disposition costs of $68 million, severance and personnel related costs of $23 million and operating losses and other exit costs from the measurement date through the expected date of disposal of $24 million. Non-cash charges included the realization of a $118 million currency translation loss, resulting from the movement in the Canadian dollar during the period the Company held its investment in the segment and asset write-offs of $19 million. The Company also recorded a tax benefit for the liquidation of the Northern U.S. stores of $42 million, which was offset by a valuation allowance of $84 million to reduce the deferred tax assets related to the Canadian operations to an amount that is more likely than not to be realized.

~~In the first quarter of 2001, the Company recorded a tax benefit of $5 million as a result of the implementation of tax planning strategies related to the discontinuance of the Northern Group.~~ During the second quarter of 2001, the Company completed the liquidation of the 324 stores in the United States and recorded a charge to earnings of $12 million before-tax, or $19 million after-tax. The charge comprised the write-down of the net assets of the Canadian business to their net realizable value pursuant to the then pending transaction, which was partially offset by reduced severance costs as a result of the transaction and favorable results from the liquidation of the U.S. stores and real estate disposition activity.States. On September 28, 2001, the Company completed the stock transfer of the 370 Northern Group stores in Canada, through one of its ~~wholly-owned~~wholly owned subsidiaries for approximately CAD$59 million (approximately US$38 million), which was paid in the form of a note (the “Note”). ~~The purchaser agreed to obtain a revolving line of credit with a lending institution, satisfactory to the Company, in an amount not less than CAD$25 million (approximately US$17 million).~~ Another ~~wholly-owned~~wholly owned subsidiary of the Company was the assignor of the store leases involved in the transaction and therefore retains potential liability for such leases. The Company also entered into a credit agreement with the purchaser to provide a revolving credit facility to be used to fund its working capital needs, up to a maximum of CAD$5 million (approximately US$3 million). The net amount of the assets and liabilities of the former operations was written down to the estimated fair value of the ~~Note (approximately US$18 million).~~Note. The transaction was accounted for pursuant to SEC Staff Accounting Bulletin Topic 5:E “Accounting for Divestiture of a Subsidiary or Other Business Operation,” ~~(“SAB Topic 5:E”)~~ as a “transfer of assets and liabilities under contractual arrangement” as no cash proceeds were received and the consideration comprised the Note, the repayment of which iswas dependent on the future successful operations of the business. The assets and liabilities related to the former operations were presented under the balance sheet captions as “Assets of business transferred under contractual arrangement (note receivable)” and “Liabilities of business transferred under contractual arrangement.”

In the fourth quarter of 2001, the Company further reduced its estimate for real estate costs by $5 million based on then current negotiations, which was completely offset by increased severance, personnel and other disposition costs.

The Company recorded a charge of $18 million in the first quarter of 2002 reflecting the poor performance of the Northern Group stores in Canada since the date of the transaction. There was no tax benefit recorded related to the $18 million charge, which comprised a valuation allowance in the amount of the operating losses incurred by the purchaser and a further reduction in the carrying value of the net amount of the assets and liabilities of the former operations to zero, due to greater uncertainty with respect to the collectibility of the Note. This charge was recorded pursuant to SAB Topic 5:E, which requires accounting for the Note in a manner somewhat analogous to equity accounting for an investment in common stock. In the third quarter of 2002, the Company recorded a charge of approximately $1 million before-tax for lease exit costs in excess of previous estimates. In addition, the Company recorded a tax benefit of $2 million, which also reflected the impact of the tax planning strategies implemented related to the discontinuance of the Northern Group.

On December 31, 2002, the Company-provided revolving credit facility expired, without having been used. Furthermore, the operating results of the Northern Group had significantly improved during the year such that the Company had reached anAn agreement in principle had been reached during December 2002 to receive CAD$5 million (approximately US$3 million) cash consideration in partial prepayment of the Note and accrued interest, and further, the Company agreed to reduce the face value of the Note to CAD$17.5 million (approximately US$12 million). Based upon the improved results of the Northern Canada business, the Company believes there is no substantial uncertainty as to the amount of the future costs and expenses that could be payable by the Company. As indicated above, as the assignor of the Northern Canada leases, the Company remains secondarily liable under those leases. As of January 31, 2004, the Company estimates that its gross contingent lease liability is between CAD$71 to $65 million (approximately US$53 to $49 million). Based upon its assessment of the risk of having to satisfy that liability and the resultant possible outcomes of lease settlement, the Company currently estimates the expected value of the lease liability to be approximately US$2 million. The Company believes that it is unlikely that it would be required to make such contingent payments, and further, such contingent obligations would not be expected to have a material effect on the Company’s consolidated financial position, liquidity or results of operations. As a result of the aforementioned developments, duringDuring the fourth quarter of 2002, circumstances had changed sufficiently such that it became appropriate to recognize the transaction as an accounting divestiture.

~~During the fourth quarter of 2002, as a result of the accounting divestiture,~~ Accordingly, the Note was recorded in the financial statements at its estimated fair value of CAD$16 million (approximately US$10 million). The Company, with the assistance of an independent third party, determined the estimated fair value by discounting expected cash flows at an interest rate of 18 percent. This rate was selected considering such factors as the credit rating of the purchaser, rates for similar instruments and the lack of marketability of the Note. As the net assets of the former operations were previously written down to zero, the fair value of the Note was recorded as a gain on disposal within discontinued operations. The Company will no longer present the assets and liabilities of Northern Canada as “Assets of business transferred under contractual arrangement (note receivable)” and “Liabilities of business transferred under contractual arrangement,” but rather will record the Note, initially at its estimated fair value.

On May 6, 2003, the amendments to the Note were executed and a cash payment of CAD$5.2 million ~~(approximately US$3.5 million)~~ was received from the purchasers of the Northern Group, representing principal and interest through the date of the amendment. ~~After taking into account this payment,~~On January 15, 2004, the ~~remaining principal due under the Note was reduced to CAD$17.5 million (approximately US$12 million). Under the terms of the renegotiated Note, a principal~~Company received an additional payment of CAD$1 million, ~~was due and received on January 15, 2004, further reducing the principal balance on the note. Under the terms~~representing a partial repayment of the ~~amended Note, an accelerated principal~~Note. On August 20, 2004, the Company received a contingent payment of CAD$1 million, ~~may be due if~~which was based upon a certain ~~events occur. The remaining amount~~transaction that occurred. As a result of the settlement of the contingent transaction, the CAD$17.5 million Note ~~is required to be repaid upon~~was replaced with a new CAD$15.5 million note. The terms of the ~~occurrence of “payment events,”~~new note are substantially the same as ~~defined in~~ the ~~purchase agreement, but no later than September 28, 2008. Interest is payable semiannually~~May 6, 2003 Note, including the expiration date and began to accrue on May 1, 2003 at a rate of 7.0 percent per annum. At January 31, 2004 and February 1, 2003, US$2 million and US$4 million, respectively, are classified as a current receivable, with the remainder classified as long term within other assets in the accompanying Condensed Consolidated Balance Sheet.interest payment terms.

Future adjustments, if any, to the carrying value of the Note will be recorded pursuant to SEC Staff Accounting Bulletin Topic 5:Z:5, “Accounting and Disclosure Regarding Discontinued Operations,” which requires changes in the carrying value of assets received as consideration from the disposal of a discontinued operation to be classified within continuing operations. Interest income will also be recorded within continuing operations. The Company will recognize an impairment loss when, and if, circumstances indicate that the carrying value of the Note may not be recoverable. Such circumstances would include a deterioration in the business, as evidenced by significant operating losses incurred by the purchaser or nonpayment of an amount due under the terms of the Note. The purchaser has made all payments required under the terms of the Note, however the business has sustained unexpected operating losses during the past fiscal year. The Company has evaluated the projected performance of the business and will continue to monitor its results during the coming year.

AsAt January 29, 2005 and January 31, 2004, US$1 million and US$2 million, respectively, are classified as a current receivable, with the ~~stock transfer on September 28, 2001 was accounted for~~remainder classified as long term within other assets in the accompanying Consolidated Balance Sheets. All scheduled principal and interest payments have been received timely and in accordance with ~~SAB Topic 5:E, a disposal was not achieved pursuant to APB No. 30. If~~ the ~~Company had applied~~terms of the provisions of Emerging Issues Task Force 90-16, “Accounting for Discontinued Operations Subsequently Retained” (“EITF 90-16”), prior-reporting periods would not be restated, accordingly reported net income would not have changed. However,Note.

As indicated above, as the ~~results of operations~~assignor of the Northern ~~business segment in all prior periods would have been reclassified from discontinued operations to continuing operations.~~Canada leases, the Company remained secondarily liable under these leases. As of January 29, 2005, the Company estimates that its gross contingent lease liability is CAD$31 million (approximately US$25 million). The ~~incurred loss on disposal at September 28, 2001 would continue to be classified as discontinued operations, however,~~Company currently estimates the ~~remaining accrued loss on disposal at this date,~~expected value of ~~U.S. $24 million, primarily relating to~~ the lease liability of the Northern U.S. business, would have been reversed as part of discontinued operations. Since the liquidation of this business was complete, this lease liability would have been recorded in continuing operations in the same period pursuant to EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” With respect to Northern Canada, the business was legally sold as of September 28, 2001 and thus operations would no longer be ~~recorded, but instead the business~~approximately US$1 million. The Company believes that it is unlikely that it would be ~~accounted for pursuant~~required to SAB Topic 5:E. In the first quarter of 2002, the $18 million charge recorded within discontinued operations would be classified as continuing operations. Similarly, the $1 million benefit recorded in the third quarter of 2002 would also have been classified as continuing operations. Having achieved divestiture accounting in the fourth quarter of 2002 and applying the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company would have then reclassified all prior periods’ of the Northern Group to discontinued operations. Reported net income in each of the periods would not have changed and therefore the Company did not amend any of its prior filings.make such contingent payments.

During the third quarter of 2003, a charge in the amount of $1 million before-tax was recorded to cover additional liabilities related to the exiting of the former leased corporate office in excess of the previous estimate. In the fourth quarter of 2003, the Company made a CAD$10 million payment (approximately US$7 million) to the landlord, which released the Company from all future liability related to the lease.

~~Net disposition activity of $6 million in 2003 primarily related to the $7 million payment for the buyout of the former leased corporate office.~~ Net disposition activity of $13 million in 2002 included the $18 million reduction in the carrying value of the net assets and liabilities, recognition of the ~~note receivable~~Note of $10 million, real estate disposition activity of $1 million and severance and other costs of $4 million. ~~The remaining reserve balance of $2 million at January 31, 2004 is expected to be utilized within twelve months.~~

In 1998, the Company exited both its International General Merchandise and Specialty Footwear segments. InDuring the ~~second~~first quarter of ~~2002,~~2004, the Company recorded aincome of $1 million, ~~charge for a lease liability~~after-tax, related to a ~~Woolco store in the former International General Merchandise segment, which was more than offset by a net reduction~~refund of ~~$2 million before-tax, or $1 million after-tax, for each~~Canadian customs duties related to certain of the ~~second and third quarters of 2002 in~~businesses that comprised the Specialty Footwear ~~reserve primarily reflecting real estate costs more favorable than original estimates.~~segment.

In 1997, the Company ~~announced that it was exiting~~exited its Domestic General Merchandise segment. In ~~the second quarter of~~ 2002, ~~the Company recorded a charge of $4 million before-tax, or $2 million after-tax, for legal actions related to this segment, which have since been settled. In addition,~~ the successor-assignee of the leases of a former business included in the Domestic General Merchandise segment ~~has~~ filed a petition in bankruptcy, and rejected in the bankruptcy proceeding 15 leases it originally acquired from a subsidiary of the ~~Company. There are currently several~~Company, two of the actions ~~pending~~brought against this subsidiary ~~by former landlords for the lease obligations. In the fourth quarter~~remain unresolved as of 2002, the Company recorded a charge of $1 million after-tax related to certain actions. In each of the second and fourth quarters of 2003, the Company recorded an additional after-tax charge of $1 million, related to certain actions.January 29, 2005. The ~~Company estimates the~~ gross contingent lease liability, related to ~~the remaining actions as~~these two leases, is approximately $6$3 million. The Company believes that it may have valid defenses; however, the outcome of ~~these~~the remaining actions cannot be predicted with any degree of certainty.

The ~~remaining reserve balances for these three discontinued segments totaled $17~~Company recorded charges totaling $4 million ~~as of January 31, 2004, $6 million of which is expected to be utilized within twelve months and the remaining $11 million thereafter.~~

~~The major components of the pre-tax losses (gains) on disposal and disposition activity~~ related to certain of these actions, as well as others that have been settled, during the ~~reserves are presented below:~~second and fourth quarters of 2003.

~~Northern Group~~

     2000
     2001
     2002
     2003


     Balance
     Charge/
(Income)
     Net
Usage*
     Balance
     Charge/
(Income)
     Net
Usage*
     Balance
     Charge/
(Income)
     Net
Usage*
     Balance

     (in millions)

Realized loss — currency movement                  $ —            $ —            $ —            $ —            $ —            $ —            $ —            $ —            $ —            $ —
Asset write-offs & impairments                     —               23               (23 )             —               18               (18 )             —               —               —               —
Recognition of note receivable                     —               —               —               —               (10 )             10               —               —               —               —
Real estate & lease liabilities                     68               (16 )             (46 )             6               1               (1 )             6               1               (7 )             —
Severance & personnel                     23               (13 )             (8 )             2               —               (2 )             —               —               —               —
Operating losses & other costs                     24               18               (39 )             3               —               (2 )             1               —               1               2
Total                  $ 115            $ 12            $ (116 )          $ 11            $ 9            $ (13 )          $ 7            $ 1            $ (6 )          $ 2

~~International General Merchandise~~

     2000
     2001
     2002
     2003


     Balance
     Charge/
(Income)
     Net
Usage*
     Balance
     Charge/
(Income)
     Net
Usage*
     Balance
     Charge/
(Income)
     Net
Usage*
     Balance

     (in millions)

Woolco                  $ —            $ 4            $ (4 )          $ —            $ 1            $ —            $ 1            $ —            $ (1 )          $ —
The Bargain! Shop                     7               —               (1 )             6               —               —               6               —               (1 )             5
Total                  $ 7            $ 4            $ (5 )          $ 6            $ 1            $ —            $ 7            $ —            $ (2 )          $ 5

~~Specialty Footwear~~

     2000
     2001
     2002
     2003


     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance

     (in millions)

Lease liabilities                  $ 9            $ —            $ (2 )          $ 7            $ (4 )          $ (1 )          $ 2            $ —            $ —            $ 2
Operating losses & other costs                     3               —               (1 )             2               —               (1 )             1               —               (1 )             —
Total                  $ 12            $ —            $ (3 )          $ 9            $ (4 )          $ (2 )          $ 3            $ —            $ (1 )          $ 2

~~Domestic General Merchandise~~

     2000
     2001
     2002
     2003


     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance

     (in millions)

Lease liabilities                  $ 16            $ —            $ (6 )          $ 10            $ —            $ (3 )          $ 7            $ —            $ (1 )          $ 6
Legal and other costs                     2               3               (3 )             2               5               (4 )             3               4               (3 )             4
Total                  $ 18            $ 3            $ (9 )          $ 12            $ 5            $ (7 )          $ 10            $ 4            $ (4 )          $ 10

~~Net usage includes effect of foreign exchange translation adjustments~~

The results of operations and assets and liabilities for the Northern Group segment, the International General Merchandise segment, the Specialty Footwear segment and the Domestic General Merchandise segment have been classified as discontinued operations for all periods presented in the Consolidated Statements of Operations and Consolidated Balance Sheets.

~~Presented below is a summary~~The assets of the discontinued operations consisted primarily of fixed assets related to the Domestic General Merchandise segment as of January 29, 2005 and ~~liabilities~~as of January 31, 2004. Liabilities of discontinued operations at January 29, 2005 and January 31, 2004, ~~and February 1, 2003. The Northern Group assets and liabilities of discontinued operations primarily comprised the Northern Group stores in the U.S. Liabilities~~ included accounts payable, restructuring reserves and other accrued ~~liabilities. The net assets of~~liabilities related to the ~~Specialty Footwear~~Northern Group and the Domestic General Merchandise segments.

The remaining reserve balances for all of the discontinued segments ~~consist primarily~~totaled $18 million as of ~~fixed assets~~January 29, 2005, $7 million of which is expected to be utilized within twelve months and ~~accrued liabilities.~~the remaining $11 million thereafter.

The major components of the pre-tax losses (gains) on disposal and disposition activity related to the reserves are presented below:

Northern Group

	2001		2002							2003							2004
	Balance		Charge/ (Income)		Net Usage*			Balance		Charge/ (Income)		Net Usage*			Balance		Charge/ (Income)		Net Usage*		Balance
	(in millions)
Asset write-offs & impairments	$	—	$	18	$	(18)		$	—	$	—	$	—		$	—	$	—	$	—	$	—
Recognition of note receivable		—		(10)		10			—		—		—			—		—		—		—
Real estate & lease liabilities		6		1		(1	)		6		1		(7	)		—		—		—		—
Severance & personnel		2		—		(2	)		—		—		—			—		—		—		—
Operating losses & other costs		3		—		(2	)		1		—		1			2		—		1		3
Total	$	11	$	9	$	(13	)	$	7	$	1	$	(6	)	$	2	$	—	$	1	$	3

International General Merchandise

     Northern
Group
     Specialty
Footwear
     Domestic
General
Merchandise
     Total

     (in millions)

2003

Assets                  $ —            $ —            $ 2            $ 2
Liabilities                     1               —               1               2
                 $ (1 )          $ —            $ 1            $ —
2002

Assets                  $ —            $ —            $ 2            $ 2
Liabilities                     1               —               2               3
                 $ (1 )          $ —            $ —            $ (1 )

	2001		2002						2003							2004
	Balance		Charge/ (Income)		Net Usage*		Balance		Charge/ (Income)		Net Usage*			Balance		Charge/ (Income)		Net Usage*		Balance
	(in millions)
Woolco	$	—	$	1	$	—	$	1	$	—	$	(1	)	$	—	$	—	$	—	$	—
The Bargain! Shop		6		—		—		6		—		(1	)		5		—		—		5
Total	$	6	$	1	$	—	$	7	$	—	$	(2	)	$	5	$	—	$	—	$	5

35Specialty Footwear

	2001		2002								2003							2004
	Balance		Charge/ (Income)			Net Usage			Balance		Charge/ (Income)		Net Usage			Balance		Charge/ (Income)			Net Usage		Balance
	(in millions)
Lease liabilities	$	7	$	(4)		$	(1)		$	2	$	—	$	—		$	2	$	—		$	—	$	2
Operating losses & other costs		2		—			(1	)		1		—		(1	)		—		(1	)		1		—
Total	$	9	$	(4	)	$	(2	)	$	3	$	—	$	(1	)	$	2	$	(1	)	$	1	$	2

Domestic General Merchandise

	2001		2002							2003							2004
	Balance		Charge/ (Income)		Net Usage			Balance		Charge/ (Income)		Net Usage			Balance		Charge/ (Income)		Net Usage			Balance
	(in millions)
Lease liabilities	$	10	$	—	$	(3	)	$	7	$	—	$	(1	)	$	6	$	—	$	—		$	6
Legal and other costs		2		5		(4	)		3		4		(3	)		4		—		(2	)		2
Total	$	12	$	5	$	(7	)	$	10	$	4	$	(4	)	$	10	$	—	$	(2	)	$	8

Net usage includes effect of foreign exchange translation adjustments

317 Repositioning and Restructuring Reserves

1999 Restructuring

~~Total~~The Company recorded restructuring charges ~~of $96 million before-tax were recorded~~ in 1999 for ~~the Company’s restructuring program~~programs to sell or liquidate eight non-core businesses. The restructuring plan also included an accelerated store-closing program in North America and Asia, corporate headcount reduction and a distribution center shutdown. The dispositions of Randy River Canada, Foot Locker Outlets, Colorado, Going to the Game!, Weekend Edition and the store-closing program were essentially completed in 2000 and an additional charge of $8 million was recorded. Also in 2000, management decided to continue to operate 32 stores included in the store-closing program as a result of favorable lease renewal terms offered during negotiations with landlords. The impact on the reserve was not significant and was, in any event, offset by lease buy-out costs for other stores in excess of original estimates. Of the original 1,400 planned terminations associated with the store-closing program, approximately 200 positions were retained as a result of the continued operation of the 32 stores.

2000. In 2001, the Company completed the sales of The San Francisco Music Box Company (“SFMB”) and the assets related to its Burger King and Popeye’s ~~franchises for cash proceeds of approximately $14 million and $5 million, respectively. In the fourth quarter of 2001, the Company recorded a $1 million restructuring charge in connection with the~~franchises. The termination of ~~its~~the Maumelle distribution center lease ~~which~~ was completed in 2002. Restructuring charges of $33 million in 2001 and reductions to the reserves of $2 million in 2002 were primarily due to the SFMB sale. Included in the consolidated results of operations are sales of $54 million and operating losses of $12 million in 2001, for the above non-core businesses.

In connection with the sale of SFMB, the Company remained as an assignor or guarantor of leases of SFMB related to a distribution center and five store locations. In May 2003, SFMB filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. During July and August 2003, SFMB rejected ~~five~~four of the store leases and the distribution center lease and assumed one of the store leases in the bankruptcy proceedings. During the second quarters of 2003 and 2004, the Company recorded charges of $1 million and $2 million, respectively, primarily related to the distribution center lease. The lease for the distribution center expires January 31, 2010, while the ~~remaining~~ store leases expired on January 31, 2004. As of January ~~31, 2004,~~29, 2005, the Company estimates its gross contingent lease liability for the distribution center lease to be approximately $4 million, offset in part by the estimated sublease income of $2 million. ~~During~~The Company entered into a sublease on November 15, 2004 for a significant portion of the ~~second quarter of 2003,~~distribution center that will expire concurrent with the Company’s lease term. In addition, the Company ~~recorded a charge of $1 million, primarily related to this lease, representing~~is considering additional sublease offers for the ~~expected cost to exit this lease.~~

~~The~~ remaining square footage. Accordingly, at January 29, 2005 the reserve balance ~~related to the above businesses of $1 million at January 31, 2004~~ is ~~expected to be utilized within twelve months.~~$2 million.

1993 Repositioning and 1991 Restructuring

The Company recorded charges ~~of $558 million~~ in 1993 and ~~$390 million~~ in 1991 to reflect the anticipated costs to sell or close under-performing specialty and general merchandise stores in the United States and Canada. ~~Under~~As of January 29, 2005 the ~~1993 repositioning program, approximately 970 stores were identified for closing. Approximately 900 stores were closed under the 1991 restructuring program. The remaining~~ reserve balance ~~totaled~~is $2 ~~million at January 31, 2004, of which, $1 million is expected to be utilized within the next twelve months~~million.

Total Repositioning and ~~the remaining $1 million thereafter.~~

Restructuring Reserves

The components of the pre-tax losses (gains) on restructuring charges and disposition activity related to the reserves are presented below:

~~Non-Core Businesses~~

	2000		2001							2002								2003								2001		2002								2003							2004
	Balance		Charge/ (Income)		Net Usage			Balance		Charge/ (Income)			Net Usage			Balance		Charge/ (Income)		Net Usage			Balance		Balance		Charge/ (Income)			Net Usage			Balance		Charge/ (Income)		Net Usage			Balance		Charge/ (Income)		Net Usage			Balance
	(in millions)																									(in millions)
Real estate	$	4	$	—	$	(3	)	$	1	$	—		$	—		$	1	$	1	$	(1	)	$	1	$	3	$	—		$	(1	)	$	2	$	1	$	(1	)	$	2	$	2	$	(1	)	$	3
Asset impairment		—		30		(30	)		—		—			—			—		—		—			—
Severance & personnel		2		—		(2	)		—		—			—			—		—		—			—
Other disposition costs		3		3		(3	)		3		(2	)		(1	)		—		—		—			—		5		(2	)		(2	)		1		—		—			1		—		—			1
Total	$	9	$	33	$	(38	)	$	4	$	(2	)	$	(1	)	$	1	$	1	$	(1	)	$	1	$	8	$	(2	)	$	(3	)	$	3	$	1	$	(1	)	$	3	$	2	$	(1	)	$	4

~~Corporate Overhead and Logistics~~

     2000
     2001
     2002
     2003


     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance

     (in millions)

Real estate                  $ —            $ 1            $ —            $ 1            $ —            $ (1 )          $ —            $ —            $ —            $ —
Severance & personnel                     2               —               (2 )             —               —               —               —               —               —               —
Other disposition costs                     —               —               —               —               —               —               —               —               —               —
Total                  $ 2            $ 1            $ (2 )          $ 1            $ —            $ (1 )          $ —            $ —            $ —            $ —

~~Total 1999 Restructuring~~

     2000
     2001
     2002
     2003


     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance

     (in millions)

Real estate
                 $ 4            $ 1            $ (3 )          $ 2            $ —            $ (1 )          $ 1            $ 1            $ (1 )          $ 1
Asset impairment
                    —               30               (30 )             —               —               —               —               —               —               —
Severance & personnel
                    4               —               (4 )             —               —               —               —               —               —               —
Other disposition costs
                    3               3               (3 )             3               (2 )             (1 )             —               —               —               —
Total
                 $ 11            $ 34            $ (40 )          $ 5            $ (2 )          $ (2 )          $ 1            $ 1            $ (1 )          $ 1

~~1993 Repositioning and 1991 Restructuring~~

     2000
     2001
     2002
     2003


     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance

     (in millions)

Real estate                  $ 3            $ —            $ (2 )          $ 1            $ —            $ —            $ 1            $ —            $ —            $ 1
Other disposition costs                     3               —               (1 )             2               —               (1 )             1               —               —               1
Total                  $ 6            $ —            $ (3 )          $ 3            $ —            $ (1 )          $ 2            $ —            $ —            $ 2

~~Total Restructuring Reserves~~

     2000
     2001
     2002
     2003


     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance
     Charge/
(Income)
     Net
Usage
     Balance

     (in millions)

Real estate
                 $ 7            $ 1            $ (5 )          $ 3            $ —            $ (1 )          $ 2            $ 1            $ (1 )          $ 2
Asset impairment
                    —               30               (30 )             —               —               —               —               —               —               —
Severance & personnel
                    4               —               (4 )             —               —               —               —               —               —               —
Other disposition costs
                    6               3               (4 )             5               (2 )             (2 )             1               —               —               1
Total
                 $ 17            $ 34            $ (43 )          $ 8            $ (2 )          $ (3 )          $ 3            $ 1            $ (1 )          $ 3

~~4 Other Income~~

In 2002, other income of $2 million related to the condemnation of a part-owned and part-leased property for which the Company received proceeds of $6 million. Other income also included real estate gains from the sale of corporate properties ofAt January 29, 2005, $1 million ~~in both 2002 and 2001.~~

~~In 2001, the Company recorded an additional $1 million gain related to the 1999 sale~~ of the ~~assets of its Afterthoughts retail chain.~~

~~5 Impairment of Long-Lived Assets~~

The Company recorded non-cash pre-tax charges in selling, general and administrative expenses of approximately $7 million and $2 million in 2002 and 2001, respectively, which represented impairment of long-lived assets such as store fixtures and leasehold improvements related to Athletic Stores.

In addition, the Company recorded non-cash pre-tax asset impairment charges of $30 million related to assets held for sale in 2001. These charges primarily related to the disposition of The San Francisco Music Box Company, which was sold in 2001, and were included in the nettotal restructuring ~~charges of $34 million recorded in 2001.~~

~~6 Segment Information~~

The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of January 31, 2004, the Company has two reportable segments, Athletic Stores, which sells athletic footwear and apparel through its various retail stores, and Direct-to-Customers, which includes the Company’s catalogs and Internet business. The disposition of all formats presented as “All Other” was completed during 2001.

~~Sales~~

     2003
     2002
     2001

     (in millions)

Athletic Stores                  $ 4,413           $ 4,160           $ 3,999
Direct-to-Customers                     366               349               326
                    4,779              4,509              4,325
All Other                     —               —               54
Total sales                  $ 4,779           $ 4,509           $ 4,379

~~Operating Results~~

     2003
     2002
     2001

     (in millions)

Athletic Stores⁽¹⁾
                 $ 363            $ 280            $ 283
Direct-to-Customers                     53               40               24
                    416               320               307
All Other⁽²⁾
                    (1 )             1               (45 )
Division profit                     415               321               262
Corporate expense⁽³⁾
                    (73 )             (52 )             (65 )
Operating profit                     342               269               197
Non-operating income                     —               3               2
Interest expense, net                     (18 )             (26 )             (24 )
Income from continuing operations before income taxes                  $ 324            $ 246            $ 175

~~(1)~~

~~2002 includes reductions in restructuring charges of $1 million.~~

~~(2)~~

~~2003 includes restructuring charges of $1 million. 2002 includes a $1 million reduction in restructuring charges. 2001 includes restructuring charges of $33 million.~~

~~(3)~~

~~2001 includes restructuring charges of $1 million.~~

     Depreciation and
Amortization
     Capital Expenditures
     Total Assets


     2003
     2002
     2001
     2003
     2002
     2001
     2003
     2002
     2001

     (in millions)

Athletic Stores                  $ 118            $ 119            $ 115            $ 126            $ 124            $ 106            $ 1,715           $ 1,564           $ 1,474
Direct-to-Customers⁽¹⁾
                    4               4               11               6               8               4               183               177               179
                    122               123               126               132               132               110               1,898              1,741              1,653
Corporate                     25               26               28               12               18               6               789               743               612
Assets of business transferred under contractual arrangement                                                                                                         —               —               30
Discontinued operations, net                                                               ��                                       2               2               5
Total Company                  $ 147            $ 149            $ 154            $ 144            $ 150            $ 116            $ 2,689           $ 2,486           $ 2,300

~~(1)~~

~~Decrease in 2002 depreciation and amortization primarily reflects the impact of no longer amortizing goodwill.~~

Sales and long-lived asset information by geographic area as of and for the fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002 are presented below. Sales are attributed to the country in which the sales originate, which is where the legal subsidiary is domiciled. Long-lived assets reflect property and equipment. No individual country included in the International category is significant.

~~Sales~~

     2003
     2002
     2001

     (in millions)

United States                  $ 3,597           $ 3,639           $ 3,686
International                     1,182              870               693
Total sales                  $ 4,779           $ 4,509           $ 4,379

~~Long-Lived Assets~~

     2003
     2002
     2001

     (in millions)

United States                  $ 504            $ 518            $ 549
International                     140               118               88
Total long-lived assets                  $   644            $   636            $   637

~~7 Merchandise Inventories~~

     2003
     2002

     (in millions)

LIFO inventories                  $ 651            $ 622
FIFO inventories                     269               213
Total merchandise inventories                  $ 920            $ 835

~~The value of the Company’s LIFO inventories, as calculated on a LIFO basis, approximates their value as calculated on a FIFO basis.~~

~~8 Other Current Assets~~

     2003
     2002

     (in millions)

Net receivables                  $ 41            $ 33
Prepaid expenses and other current assets                     45               37
Deferred taxes                     60               15
Current portion of Northern Group note receivable                     2               4
Fair value of derivative contracts                     1               1
                 $ 149            $ 90

~~9 Property and Equipment, net~~

     2003
     2002

     (in millions)

Land
                 $ 3            $ 3
Buildings:

Owned                     32               32
Leased                     —               1
Furniture, fixtures and equipment:

Owned                     1,015              994
Leased                     14               18
                    1,064              1,048
Less: accumulated depreciation                     (706 )             (675 )
                    358               373
Alterations to leased and owned buildings,
net of accumulated amortization
                    286               263
                 $ 644            $ 636

~~10 Goodwill~~

The carrying value of goodwill related to the Athletic Stores segment was $56 million at January 31, 2004 and February 2, 2003. The carrying value of goodwill related to the Direct-to-Customers segment was $80 million at January 31, 2004 and February 1, 2003.

~~11 Intangible Assets, net~~

     2003
     2002

     (in millions)

Intangible assets not subject to amortization                  $ 2            $ 2
Intangible assets subject to amortization                     94               78
                 $ 96            $ 80

Intangible assets not subject to amortization relate to the Company’s U.S. defined benefit retirement plan. The minimum liability required at January 31, 2004 and February 1, 2003, which represented the amount by which the accumulated benefit obligation exceeded the fair market value of plan assets, was offset by an intangible asset to the extent of previously unrecognized prior service costs of $2 million at each of the periods.

The net intangible asset balance increased by $16 million from February 1, 2003. The increase is primarily a result of additional lease acquisition costs of $15 million and the effect of foreign exchange rates of $12 million, resulting from the rise in the euro as compared to the U.S. dollar, offset by amortization expense of $11 million.

Intangible assets subject to amortization comprise lease acquisition costs, which are required to secure prime lease locations and other lease rights, primarily in Europe. The weighted-average amortization period as of January 31, 2004 was 12.4 years. Amortization expense for lease acquisition costs was $11 million in 2003, $8 million in 2002 and $7 million in 2001. Annual estimated amortization expensereserves is expected to be ~~$13 million for 2004, $12 million in 2005, 2006 and 2007 and approximately $11 million for 2008. Finite life intangible assets subject to amortization, were as follows:~~

Lease Acquisition Costs (in millions)
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
2003                  $ 145            $ (51 )          $ 94
2002                  $ 114            $ (36 )          $ 78

~~12 Other Assets~~

     2003
     2002

     (in millions)

Deferred tax costs                  $ 35            $ 39
Investments and notes receivable                     23               23
Northern Group note receivable, net of current portion                     6               6
Income taxes receivable                     1               8
Fair value of derivative contracts                     —               1
Other                     35               33
                 $ 100            $ 110

~~13 Accrued Liabilities~~

     2003
     2002

     (in millions)

Pension and postretirement benefits                  $ 57            $ 59
Incentive bonuses                     38               29
Other payroll and payroll related costs, excluding taxes                     44               38
Taxes other than income taxes                     44               36
Property and equipment                     32               25
Gift cards and certificates                     16               21
Income taxes payable                     9               23
Fair value of derivative contracts                     3               8
Other operating costs                     57               57
                 $ 300            $ 296

~~14 Revolving Credit Facility~~

~~At January 31, 2004,~~utilized within the Company had unused domestic lines of credit of $176 million, pursuant to a $200 million unsecured revolving credit agreement. $24 million of the line of credit was committed to support standby letters of credit.

~~On July 30, 2003, the Company amended its revolving credit agreement. As a result of the amendment, the credit facility was increased by $10 million to $200 million~~next twelve months and the maturity date was extended to July 2006 from June 2004. The amendment also provided for a lower pricing structure and increased covenant flexibility. The agreement includes various restrictive financial covenants with which the Company was in compliance on January 31, 2004. Interest is determined at the time of borrowing based on variable rates and the Company’s fixed charge coverage ratio, as defined in the agreement. The rates range from LIBOR plus 1.50 percent to LIBOR plus 2.00 percent. Up-front fees paid and direct costs incurred to amend the agreement are amortized over the life of the facility on a pro-rata basis. In addition, the quarterly facility fees paid on the unused portion ranged from 0.50 percent in the earlier part of 2003 to 0.25 percent during the fourth quarter, based on the Company’s third quarter fixed charge coverage ratio. Fees paid in 2002 had been reduced to 0.5 percent based on the Company’s then fixed charge coverage ratio. There were no short-term borrowings during 2003.

~~Interest expense, including facility fees, related to the revolving credit facility was~~remaining $3 million ~~in 2003, $3 million in 2002 and $4 million in 2001.~~thereafter.

~~15 Long-Term Debt and Obligations under Capital Leases~~

In 2001, the Company issued $150 million of subordinated convertible notes due 2008, which bear interest at 5.50 percent and are convertible into the Company’s common stock at the option of the holder, at a conversion price of $15.806 per share. The Company may redeem all or a portion of the notes at any time on or after June 4, 2004. During 2002, the Company repaid the remaining $32 million of the $40 million 7.00 percent medium-term notes that matured in October 2002, in addition to purchasing and retiring $9 million of the $200 million 8.50 percent debentures payable in 2022. The Company entered into an interest rate swap agreement in December 2002 to convert $50 million of the 8.50 percent debentures to variable rate debt. The interest rate swap did not have a significant impact on interest expense in 2002.

In 2003, the Company purchased and retired an additional $19 million of the $200 million 8.50 percent debentures payable in 2022, bringing the total amount retired to date to $28 million. Also in 2003, the Company entered into two additional swaps, to convert an additional $50 million of the 8.50 percent debentures to variable rate debt. The outstanding interest rate swaps during 2003 converted a total of $100 million of the 8.50 percent fixed rate on the debentures to lower variable rates resulting in a reduction of interest expense of approximately $4 million. As of January 31, 2004, swaps totaling $100 million were outstanding.

The fair value of the swaps, included as an addition to other liabilities, was approximately $1 million at January 31, 2004 and the carrying value of the 8.50 percent debentures was decreased by the corresponding amount. The fair value of the swap, included in other assets, was approximately $1 million at February 1, 2003 and the carrying value of the 8.50 percent debentures was increased by the corresponding amount.

~~Following is a summary of long-term debt and obligations under capital leases:~~

     2003
     2002

     (in millions)

8.50% debentures payable 2022                  $ 171            $ 192
5.50% convertible notes payable 2008                     150               150
Total long-term debt                     321               342
Obligations under capital leases                     14               15
                    335               357
Less: Current portion                     —               1
                 $ 335            $ 356

Income Taxes

~~Maturities of long-term debt and minimum rent payments under capital leases in future periods are:~~

     Long-Term
Debt
     Capital
Leases
     Total

     (in millions)

2004                  $ —            $ —            $ —
2005                     —               —               —
2006                     —               —               —
2007                     —               14               14
2008                     150               —               150
Thereafter                     171               —               171
                    321               14               335
Less: Current portion                     —               —               —
                 $ 321            $ 14            $ 335

Interest expense related to long-term debt and capital lease obligations, including the amortization of the associated debt issuance costs, was $22 million in 2003, $28 million in 2002 and $29 million in 2001.

~~16 Leases~~

The Company is obligated under operating leases for almost all of its store properties. Some of the store leases contain purchase or renewal options with varying terms and conditions. Management expects that in the normal course of business, expiring leases will generally be renewed or, upon making a decision to relocate, replaced by leases on other premises. Operating lease periods generally range from 5 to10 years. Certain leases provide for additional rent payments based on a percentage of store sales. Rent expense includes real estate taxes, insurance, maintenance, and other costs as required by some of the Company’s leases. The present value of operating leases is discounted using various interest rates ranging from 6 percent to 13 percent.

~~Rent expense consists of the following:~~

     2003
     2002
     2001

     (in millions)

Rent                  $ 537            $ 495            $ 475
Contingent rent based on sales                     11               11               11
Sublease income                     (1 )             (1 )             (1 )
Total rent expense                  $ 547            $ 505            $ 485

~~Future minimum lease payments under non-cancelable operating leases are:~~

     (in millions)
2004                  $ 387
2005                     361
2006                     332
2007                     296
2008                     237
Thereafter                     753
Total operating lease commitments                  $ 2,366
Present value of operating lease commitments                  $ 1,683

~~17 Other Liabilities~~

     2003
     2002

     (in millions)

Pension benefits                  $ 175            $ 237
Postretirement benefits                     113               132
Income taxes                     62               16
Straight-line rent liability                     43               30
Other                     12               10
Workers’ compensation / general liability reserves                     12               14
Reserve for discontinued operations                     11               9
Asset retirement obligations                     3               —
Repositioning and restructuring reserves                     2               —
Fair value of derivatives                     1               —
                 $ 434            $ 448

~~18 Income Taxes~~

Following are the domestic and international components of pre-tax income from continuing operations:

     2003
     2002
     2001

     (in millions)

Domestic                  $ 186            $ 160            $ 113
International                     138               86               62
Total pre-tax income                  $ 324            $ 246            $ 175

	2004		2003		2002
	(in millions)
Domestic	$	222	$	186	$	160
International		152		138		86
Total pre-tax income	$	374	$	324	$	246

The income tax provision consists of the following:

	2003			2002		2001			2004			2003			2002
	(in millions)									(in millions)
Current:
Federal	$	48		$	16	$	7		$	11		$	48		$	16
State and local		14			5		(5	)		6			14			5
International		58			25		24			52			58			25
Total current tax provision		120			46		26			69			120			46
Deferred:
Federal		11			31		32			43			11			31
State and local		(6	)		—		7			8			(6	)		—
International		(10	)		7		(1	)		(1	)		(10	)		7
Total deferred tax provision		(5	)		38		38			50			(5	)		38
Total income tax provision	$	115		$	84	$	64		$	119		$	115		$	84

Provision has been made in the accompanying Consolidated Statements of Operations for additional income taxes applicable to dividends received or expected to be received from international subsidiaries. The amount of unremitted earnings of international subsidiaries, for which no such tax is provided and which is considered to be permanently reinvested in the subsidiaries, totaled $327 million and $239 million at January 29, 2005 and January 31, ~~2004.~~2004, respectively.

A reconciliation of the significant differences between the federal statutory income tax rate and the effective income tax rate on pre-tax income from continuing operations is as follows:


Federal statutory income tax rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal tax benefit	2.4		2.0		3.5		2.3		2.4		2.0
International income taxed at varying rates	0.5		1.0		(1.0	)	(0.6	)	0.5		1.0
Foreign tax credit utilization	(1.0	)	(1.2	)	(0.8	)	(2.5	)	(1.0	)	(1.2	)
Increase (decrease) in valuation allowance	(1.5	)	(2.0	)	—		0.1		(1.5	)	(2.0	)
Change in Canadian tax rates	—		—		1.1
Federal/foreign tax settlements							(3.3	)	—		—
State and local tax settlements	(0.2	)	(0.3	)	(4.1	)	—		(0.2	)	(0.3	)
Goodwill amortization	—		—		1.5
Tax exempt obligations	(0.2	)	(0.1	)	—		(0.2	)	(0.2	)	(0.1	)
Work opportunity tax credit	(0.1	)	(0.3	)	(0.5	)	(0.2	)	(0.1	)	(0.3	)
Other, net	0.6		0.1		1.9		1.1		0.6		0.1
Effective income tax rate	35.5	%	34.2	%	36.6	%	31.7	%	35.5	%	34.2	%

Items that gave rise to significant portions of the deferred tax accounts are as follows:

	2004			2003
	(in millions)
Deferred tax assets:
Tax loss/credit carryforwards	$	89		$	99
Employee benefits		116			135
Reserve for discontinued operations		5			8
Repositioning and restructuring reserves		3			2
Property and equipment		89			81
Allowance for returns and doubtful accounts		7			10
Straight-line rent		19			17
Goodwill		—			1
Other		17			22
Total deferred tax assets		345			375
Valuation allowance		(124	)		(122	)
Total deferred tax assets, net	$	221		$	253

     2003
     2002

     (in millions)

Deferred tax assets:

Tax loss/credit carryforwards                  $ 99            $ 95
Employee benefits                     135               162
Reserve for discontinued operations                     8               10
Repositioning and restructuring reserves                     2               3
Property and equipment                     82               76
Allowance for returns and doubtful accounts                     10               6
Straight-line rent                     17               11
Other                     22               25
Total deferred tax assets                     375               388
Valuation allowance                     (122 )             (121 )
Total deferred tax assets, net                  $ 253            $ 267

Deferred tax liabilities:

Inventories                  $ 13            $ 25
Other                     1               3
Total deferred tax liabilities                     14               28
Net deferred tax asset                  $ 239            $ 239

Balance Sheet caption reported in:

Deferred taxes                  $ 194            $ 240
Other current assets                     60               15
Other liabilities                     (15 )             (16 )
                 $ 239            $ 239

4544

	2004			2003
	(in millions)
Deferred tax liabilities:
Inventories	$	8		$	13
Goodwill		2			—
Other		1			1
Total deferred tax liabilities		11			14
Net deferred tax asset	$	210		$	239
Balance Sheet caption reported in:
Deferred taxes	$	180		$	194
Other current assets		53			60
Other current liabilities		(1	)		—
Other liabilities		(22	)		(15	)
	$	210		$	239

The Company operates in multiple taxing jurisdictions and is subject to audit. Audits can involve complex issues and may require an extended period of time to resolve. A taxing authority may challenge positions that the Company has adopted in its income tax filings. Accordingly, the Company may apply different tax treatments for transactions in filing its income tax returns than for income tax financial reporting. The Company regularly assesses its tax position for such transactions and records reserves for those differences.

The Company’s U.S. Federal income tax filings have been examined by the Internal Revenue Service (the “IRS”) through 2003. The IRS has begun a voluntary pre-filing review process for 2004. The pre-filing review process is expected to conclude during 2005. The Company has also agreed to participate in the IRS’ Compliance Assurance Process (“CAP”) for 2005.

The American Jobs Creation Act of 2004 (the “Act”) was signed into law on October 22, 2004. The Act contains numerous amendments and additions to the U.S. corporate income tax rules. None of these changes, either individually or in the aggregate, is expected to have a significant effect on the Company’s income tax liability. The Company does not expect to take advantage of the Act’s repatriation provisions.

As of January ~~31, 2004,~~29, 2005, the Company had a valuation allowance of ~~$122~~$124 million to reduce its deferred tax assets to an amount that is more likely than not to be realized. The valuation allowance primarily relates to the deferred tax assets arising from state tax loss carryforwards, tax loss carryforwards of certain foreign operations and capital loss carryforwards and unclaimed tax depreciation of the Canadian operations. The net change in the total valuation allowance for the year ended January ~~31, 2004,~~29, 2005, was principally due to current utilization and future benefit relating to state and foreign net operating losses for which a valuation allowance is no longer necessary, and the expiration of certain state net operating losses for which there was a full valuation allowance, offset by an increase in the Canadian and state valuation ~~allowance~~allowances relating, respectively, to a current year increase in Canadian deferred tax assets and state net operating losses for which the Company does not expect to receive future benefit.

Based upon the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are anticipated to reverse, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowances at January ~~31, 2004.~~29, 2005. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.

At January ~~31, 2004,~~29, 2005, the Company’s tax loss/credit carryforwards included international operating loss carryforwards with a potential tax benefit of ~~$31~~$33 million. Those expiring between ~~2004~~2005 and 2011 ~~are $30~~total $32 million and those that do not expire ~~are~~total $1 million. The Company also had state net operating loss carryforwards with a potential tax benefit of ~~$30~~$28 million, which principally related to the 16 states where the Company does not file a combined return. These loss carryforwards expire between ~~2004~~2005 and ~~2022~~2025 as well as foreign tax credits totaling $4$1 million, which expire ~~between 2008 and 2009.~~2015. The Company had U.S. Federal alternative minimum tax credits and Canadian capital loss carryforwards of approximately ~~$24~~$17 million and $10 million, respectively, which do not expire.

The Company operates in multiple taxing jurisdictions and is subject to audit. Audits can involve complex issues and may require an extended period of time to resolve. Management believes that the Company has filed income tax returns with positions that may be challenged by the tax authorities. Although the outcome of tax audits is uncertain, in management’s opinion, adequate provisions for income taxes have been made for potential liabilities resulting from such positions.

The Company’s U.S. Federal income tax filings have been examined by the Internal Revenue Service (the “IRS”) through 1998. The IRS has indicated it will survey the Company’s income tax returns for the years from 1999-2001 and has begun an examination for the 2002 year and a voluntary pre-filing review process for 2003. The examination and pre-filing review process may conclude during 2004, in which case, adjustments to the reserve for potential tax liabilities will be reviewed and adjusted appropriately.

Financial Instruments and Risk Management

~~19 Financial Instruments and Risk Management~~

Foreign Exchange Risk Management

The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to ~~third-party~~third party and intercompany forecasted transactions. Also, the Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings. Such strategies may at times include holding a variety of derivative instruments, which includes entering into forwards and option contracts, whereby the changes in the fair value of these financial instruments are charged to the statements of operations immediately. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and the methods of assessing hedge effectiveness and hedge ineffectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction ~~will~~would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings immediately. No such gains or losses were recognized in earnings during ~~2003~~2004 or ~~2002.~~ 2003.

Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged ~~period. The Company does not hold derivative financial instruments for trading or speculative purposes.~~period, which management evaluates periodically.

The primary currencies to which the Company is exposed are the euro, the British Pound and the Canadian Dollar. When using a forward contract as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. The change in a forward contract’s time value is reported in earnings. For forward foreign exchange contracts designated as cash flow hedges of inventory, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized as a component of cost of sales when the related inventory is sold. ~~For 2003 and 2002, gains reclassified~~Amounts classified to cost of sales related to such contracts were a loss of approximately $1 million in 2004 and a gain of $2 million in 2003. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings in 2004 was approximately $1 million ~~respectively.~~and was not significant in 2003. The Company also enters into other forward contracts to hedge intercompany ~~foreign currency~~ royalty cash ~~flows.~~flows that are denominated in foreign currencies. The effective portion of gains and losses associated with these forward contracts is reclassified from accumulated other comprehensive loss to selling, general and administrative expenses in the same quarter as the underlying intercompany royalty transaction ~~occurs. For 2003, amounts related to these royalty contracts~~occurs and were not ~~significant;~~significant for ~~2002, losses reclassified to selling, general and administrative expenses related to such contracts were approximately $1 million; and for 2001, such amounts were not material.~~any of the periods presented.

~~For 2003,~~At each year-end, the fair value of forward contracts designated as cash flow hedges of inventory was offset by the change in fair value of forward contracts designated as cash flow hedges of intercompany royalties, which wasCompany had not significant. For 2002, the fair value of forward contracts designated as cash flow hedges of inventory increased by approximately $1 million and was substantially offset by the change in fair value of forward contracts designated as cash flow hedges of intercompany royalties. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings in 2003 and 2002 was not material. The Company is hedginghedged forecasted transactions for no more than the next twelve months, and the Company expects all derivative-related amounts reported in accumulated other comprehensive loss to be reclassified to earnings within twelve months.

The changes in fair value of forward contracts and option contracts that do not qualify as hedges are recorded in earnings. In ~~2002,~~2004, the Company entered into certain forward foreign exchange contracts to hedge intercompany foreign-currency denominated firm commitments and recorded losses of approximately $9$2 million in selling, general and administrative expenses to reflect their fair value. These losses were ~~more than~~ offset by the foreign exchange gains on the revaluation of ~~approximately $13 million related to~~ the underlying commitments, which were expected to be settled in ~~2003~~2004 and ~~2004.~~2005.

In 2003, the Company recorded a gain of approximately $7 million for the change in fair value of derivative instruments not designated as hedges, which was offset by a foreign exchange loss related to the underlying transactions. These amounts were primarily related to the intercompany foreign-currency denominated firm commitments, as the gains on the other forward contracts ~~was~~were not significant.

The fair value of derivative contracts outstanding at January 29, 2005 comprised other assets of $2 million and current liabilities of $3 million. The fair value of derivative contracts outstanding at January 31, 2004 comprised current assets of $1 million, current liabilities of $3 million, and other liabilities of $1 million. ~~The fair value of derivative contracts outstanding at February 1, 2003 comprised current assets of $1 million, other assets of $1 million and current liabilities of $8 million.~~

Foreign Currency Exchange Rates

The table below presents the fair value, notional amounts, and weighted-average exchange rates of foreign exchange forward contracts outstanding at January ~~31, 2004.~~29, 2005.

     Fair Value
(US in millions)
     Contract Value
(US in millions)
     Weighted-Average
Exchange Rate
Inventory

Buy euro/ Sell British pound                  $ (1 )          $ 41               0.7028
Buy $US/Sell euro                     —               2               1.2631
                 $ (1 )          $ 43 ��
Intercompany

Buy $US/Sell euro                  $ —            $ 78               1.2331
Buy $US/Sell CAD$                     —               6               0.7588
Buy euro/Sell British pound                     (1 )             27               0.7086
                 $ (1 )          $ 111

	Fair Value (US in millions)			Contract Value (US in millions)
Inventory

Buy €/Sell British £	$	—		$	59	0.6996

Intercompany

Buy €/Sell $US	$	—		$	6	1.2290
Buy $US/Sell €		(3	)		69	1.2432
Buy €/Sell British £		—			17	0.7187
	$	(3	)	$	151

Interest Rate Risk Management

The Company has employed interest rate swaps to minimize its exposure to interest rate fluctuations. In 2002, the Company entered into an interest rate swap agreement with a notional amount of $50 million to receive interest at a fixed rate of 8.50 percent and pay interest at a variable 6-month rate of LIBOR in arrears plus 3.1 percent. The swap, which matures in 2022, had been designated as a fair value hedge of the changes in fair value of $50 million of the Company’s 8.50 percent debentures payable in 2022 attributable to changes in interest rates. During 2003, the Company entered into two additional swaps to convert an additional $50 million of the 8.50 percent debentures to an average variable 6-month rate ~~debt. The variable rates on~~of LIBOR in arrears plus 3.313 percent. These swaps, which mature in 2022, have been designated as a fair value hedge of the ~~portfolio~~changes in fair value of ~~swaps range from LIBOR plus 3.1~~$100 million of the Company’s 8.50 percent debentures payable in 2022 attributable to ~~LIBOR plus 3.33 percent. The outstanding~~changes in interest rates. During July 2004, the Company entered into an additional $100 million of interest rate swaps, ~~during 2003 totaling~~designated as cash flow hedges, to effectively convert the interest rate on its existing $100 million ~~reduced interest expense~~swaps from a 6-month variable rate to a 1-month variable rate of LIBOR plus 0.25 percent.

The fair value of the swaps was approximately $2 million at January 29, 2005. The carrying value of the 8.50 percent debentures was increased by ~~approximately~~ $4 ~~million. As~~million for the portion of ~~January 31, 2004,~~the swaps ~~totaling $100~~designated as fair value hedges. Accumulated other comprehensive loss was decreased by the fair value of $2 million related to the swaps that were ~~outstanding.~~designated as cash flow hedges.

The fair value of the swaps, included as an addition to other liabilities, was approximately $1 million at January 31, 2004 and the carrying value of the 8.50 percent debentures was decreased by the corresponding amount. The fair value of the swaps of approximately $1 million at February 1, 2003 was included in other assets and the carrying value of the 8.50 percent debentures was increased by the corresponding amount.

The following table presents the Company’s outstanding interest rate derivatives:

	2004			2003			2002
	($ in millions)
Interest Rate Swaps:
Fixed to Variable ($US)	$	100		$	100		$	50
Average pay rate		6.46	%		5.07	%		4.53	%
Average receive rate		8.50	%		8.50	%		8.50	%
Variable to variable ($US)	$	100		$	—		$	—
Average pay rate		2.73	%		—	%		—	%
Average receive rate		3.25	%		—	%		—	%

Interest Rates

The Company’s major exposure to market risk is to changes in interest rates, primarily in the United States. There were no short-term borrowings outstanding as of January 29, 2005 or January 31, 2004, ~~or February 1, 2003.~~respectively.

The table below presents the fair value of principal cash flows and related weighted-average interest rates by maturity dates, including the ~~impact~~effect of the interest rate ~~swap~~swaps outstanding at January ~~31, 2004,~~29, 2005, of the Company’s long-term debt obligations.

     2004
     2005
     2006
     2007
     2008
     Thereafter
     Jan. 31,
2004
Total
     Feb. 1,
2003
Total

     (in millions)

Long-term debt      $ —      —      —      —      239      196      $ 435          $ 341
Fixed rate
     weighted-average interest rate      5.9 %      5.9 %      5.9 %      5.9 %      6.1 %      6.3 %

	2005													Jan. 29, 2005 Total		Jan. 31, 2004 Total
	($ in millions)
Long-term debt	$	18		18		26		26		87		193		$	368	$	435
Weighted-average interest rate		5.2	%	5.3	%	5.4	%	5.6	%	6.6	%	6.9	%

Fair Value of Financial Instruments

The carrying value and estimated fair value of long-term debt was $351 million and $368 million, respectively, at January 29, 2005 and $321 million and $435 million, respectively, at January 31, ~~2004 and $342 million and $341 million, respectively, at February 1, 2003.~~2004. The carrying value and estimated fair value of long-term investments and notes receivable was $32 million and $33 million, respectively, at January 29, 2005, and $31 million and $33 million, respectively, at January 31, ~~2004, and $33 million and $32 million, respectively, at February 1, 2003.~~2004. The carrying values of cash and cash equivalents, short-term investments and other current receivables and payables approximate their fair value.

Business Risk

The retailing business is highly competitive. Price, quality and selection of merchandise, reputation, store location, advertising and customer service are important competitive factors in the Company’s business. The Company operates in 1618 countries and purchases merchandise from hundreds of vendors worldwide. In ~~2003,~~2004, the Company purchased approximately 4045 percent of its athletic merchandise from one major vendor and approximately 1413 percent from another major vendor. The Company generally considers all vendor relations to be satisfactory.

Included in the Company’s Consolidated Balance Sheet as of January ~~31, 2004,~~29, 2005, are the net assets of the Company’s European operations totaling ~~$303~~$415 million, which are located in 1214 countries, 910 of which have adopted the euro as their functional currency.

48
20 Retirement Plans and Other Benefits

~~20 Retirement Plans and Other Benefits~~

Pension and Other Postretirement Plans

The Company has defined benefit pension plans covering most of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These plans are contributory and are not funded. The measurement date of the assets and liabilities is the last day of January each year.

The following tables set forth the plans’ changes in benefit obligations and plan assets, funded status and amounts recognized in the Consolidated Balance ~~Sheet,~~Sheets, measured at January 29, 2005 and January 31, ~~2004 and February 1, 2003:~~2004:

	Pension Benefits						Postretirement Benefits							Pension Benefits						Postretirement Benefits
	2003			2002			2003			2002			2004			2003			2004			2003
	(in millions)													(in millions)
Change in benefit obligation
Benefit obligation at beginning of year	$	685		$	655		$	30		$	37		$	697		$	685		$	27		$	30
Service cost		8			8			—			—			9			8			—			—
Interest cost		43			44			1			2			39			43			1			1
Plan participants’ contributions		—			—			5			5			—			—			5			5
Actuarial (gain) loss		18			43			1			(3	)
Actuarial loss															16			18			—			1
Foreign currency translation adjustments		11			3			—			—			5			11			—			—
Benefits paid		(68	)		(68	)		(10	)		(11	)		(63	)		(68	)		(9	)		(10	)
Benefit obligation at end of year	$	697			685		$	27			30		$	703		$	697		$	24		$	27
Change in plan assets
Fair value of plan assets at beginning of year	$	380		$	500								$	474		$	380
Actual return on plan assets		101			(57	)								28			101
Employer contribution		54			2									108			54
Foreign currency translation adjustments		7			3									4			7
Benefits paid		(68	)		(68	)								(63	)		(68	)
Fair value of plan assets at end of year	$	474		$	380								$	551		$	474
Funded status
Funded status	$	(223	)	$	(305	)	$	(27	)	$	(30	)
Unrecognized prior service cost (benefit)		5			5			(11	)		(12	)
Unrecognized net (gain) loss		296			337			(80	)		(96	)
Prepaid asset (accrued liability)	$	78		$	37		$	(118	)	$	(138	)
Balance Sheet caption reported in:
Intangible assets	$	2		$	2		$	—		$	—
Accrued liabilities		(52	)		(53	)		(5	)		(6	)
Other liabilities		(175	)		(237	)		(113	)		(132	)
Accumulated other comprehensive income, pre-tax		303			325			—			—
	$	78		$	37		$	(118	)	$	(138	)

	Pension Benefits						Postretirement Benefits
	2004			2003			2004			2003
	(in millions)
Funded status
Funded status	$	(152	)	$	(223	)	$	(24	)	$	(27	)
Unrecognized prior service cost (benefit)		4			5			(10	)		(11	)
Unrecognized net (gain) loss		324			296			(67	)		(80	)
Prepaid asset (accrued liability)	$	176		$	78		$	(101	)	$	(118	)
Balance Sheet caption reported in:
Intangible assets	$	1		$	2		$	—		$	—
Accrued liabilities		(24	)		(52	)		(6	)		(5	)
Other liabilities		(130	)		(175	)		(95	)		(113	)
Accumulated other comprehensive loss, pre-tax		329			303			—			—
	$	176		$	78		$	(101	)	$	(118	)

The change in the additional minimum liability in ~~2003~~2004 was an increase of $14 million after-tax and ~~2002 was~~ a decrease of $16 million after-tax ~~and an increase of $83 million after-tax, respectively~~in 2003 to accumulated other comprehensive loss.

As of January 29, 2005 and January 31, 2004, ~~and February 1, 2003,~~ the accumulated benefit obligation for all pension plans, totaling ~~$696~~$702 million and ~~$664~~$696 million, respectively, exceeded plan assets.

The following weighted-average assumptions were used to determine the benefit obligations under the plans:

	Pension Benefits						Postretirement Benefits							Pension Benefits						Postretirement Benefits
	2003			2002			2003			2002			2004			2003			2004			2003
Discount rate		5.90	%		6.50	%		5.90	%		6.50	%		5.50	%		5.90	%		5.50	%		5.90	%
Rate of compensation increase		3.72	%		3.65	%								3.79	%		3.72	%

The components of net benefit expense (income) are:

	Pension Benefits									Postretirement Benefits										Pension Benefits									Postretirement Benefits
	2003			2002			2001			2003			2002			2001			2004			2003			2002			2004				2003				2002
	(in millions)																			(in millions)
Service cost	$	8		$	8		$	8		$	—		$	—		$	—		$	9		$	8		$	8		$	—			$	—			$	—
Interest cost		43			44			45			2			2			3			39			43			44			1				2				2
Expected return on plan assets		(46	)		(50	)		(58	)		—			—			—			(48	)		(46	)		(50	)		—				—				—
Amortization of prior service cost		—			1			1			(1	)		(1	)		(2	)
Amortization of prior service cost (benefit)																					1			—			1			(1	)			(1	)			(1	)
Amortization of net (gain) loss		9			3			—			(16	)		(12	)		(9	)		11			9			3			(13	)			(16	)			(12	)
Net benefit expense (income)	$	14		$	6		$	(4	)	$	(15	)	$	(11	)	$	(8	)	$	12		$	14		$	6		$	(13	)		$	(15	)		$	(11	)

The following weighted-average assumptions were used to determine net benefit cost:

	2003							2003
	Pension Benefits							Postretirement Benefits
	(in millions)														2004		2003		2002		2004		2003			2002
Discount rate		6.50	%	7.00	%	7.44	%		6.50	%	7.00	%	7.50	%	5.90	%	6.50	%	7.00	%	5.90	%	6.50	%		7.00	%
Rate of compensation increase		3.72	%	3.53	%	4.96	%								3.79	%	3.72	%	3.53	%
Expected long-term rate of return on assets		8.88	%	8.87	%	9.93	%								8.89	%	8.88	%	8.87	%					��

The expected long-term rate of return on invested plan assets is based on historical long-term performance and future expected performance of those assets based upon current asset allocations.

Beginning inwith 2001, new retirees were charged the expected full cost of the medical plan and existing retirees will incur 100 percent of the expected future increase in medical plan costs. ~~The substantive plan change increased postretirement benefit income by approximately $3 million for 2001 and was recorded as a prior service benefit.~~ Any changes in the health care cost trend rates assumed would not ~~impact~~affect the accumulated benefit obligation or net benefit income since retirees will incur 100 percent of such expected future increases. In 2002, based on historical experience, the drop out rate assumption was increased for the medical plan, thereby shortening the expected amortization period, which decreased the accumulated postretirement benefit obligation at February 1, 2003 by approximately $6 million, and increased postretirement benefit income by approximately $3 million in 2002.

In December 2003, the United States enacted into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act establishes a prescription drug benefit under Medicare, known as “Medicare Part D,” and a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In ~~January~~May 2004, the FASB issued FASB Staff Position No. ~~FAS 106-1,~~106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of ~~2003,”~~2003” (“FSP ~~106-1”~~106-2”). ~~As permitted by~~ FSP ~~106-1,~~106-2 requires companies to account for the effect of the subsidy on benefits attributable to past service as an actuarial experience gain and as a reduction of the service cost component of net postretirement health care costs for amounts attributable to current service, if the benefit provided is at least actuarially equivalent to Medicare Part D. Management has concluded that the health care benefits that it provides to retirees is not actuarially equivalent to Medicare Part D and, therefore, the Company ~~has elected~~will not be eligible to ~~defer accounting for~~receive the effects of the Act as specific authoritative guidance is pending and that guidance, when issued, could require the Company to change previously reported information. Accordingly, the Company’s accumulated postretirement benefit obligation and net periodic benefit cost does not reflect the effects of the Act.Federal subsidy.

The Company’s pension plan weighted-average asset allocations at January 29, 2005 and January 31, 2004, ~~and February 1, 2003,~~ by asset category are as follows:

	2003
	Plan Assets as of
Asset Category
Equity securities		63	%	61	%	63	%	63	%
Foot Locker, Inc. common stock		2	%	1	%	2	%	2	%
Debt securities		33	%	36	%	33	%	33	%
Real estate		1	%	1	%	1	%	1	%
Other		1	%	1	%	1	%	1	%
Total		100	%	100	%	100	%	100	%

The U.S. defined benefit plan held 396,000 shares of Foot Locker, Inc. common stock as of January 29, 2005 and January 31, 2004. Currently, the target composition of the weighted-average plan assets is 64 percent equity and 36 percent fixed income securities, although the Company may alter the targets from time to time depending on market conditions and the funding requirements of the pension plans. The Company believes that plan assets are invested in a prudent manner with an objective of providing a total return that, over the long term, provides sufficient assets to fund benefit obligations, taking into account the Company’s expected contributions and the level of risk deemed appropriate. The Company’s investment strategy is to utilize asset classes with differing rates of return, volatility and correlation to reduce risk by providing diversification relative to equities. Diversification within asset classes is also utilized to reduce the ~~impact~~effect that the return of any single investment may have on the entire portfolio.

The Company currently expects to contribute ~~$50~~$22 million to its pension plans during ~~2004~~2005 to the extent that the contributions are tax deductible. However, this is subject to change, and is based upon the Company’s overall financial performance as well as plan asset performance significantly above or below the assumed long-term rate of return.

Estimated future benefit payments for each of the next five years and the five years thereafter are as follows:

	Pension Benefits
	(in millions)
2005		$63	$5
2006		62	4
2007		60	3
2008		58	3
2009		58	2
2010–2014		266	8

~~401(k) Plan~~Savings Plans

The Company has two qualified savings plans, a ~~qualified~~ 401(k) ~~savings plan~~Plan that is available to employees whose primary place of employment is the U.S., and an 1165 (e) Plan, which began during 2004 that is available to employees whose primary place of employment is in Puerto Rico. Both plans require that the employees have attained at least the age of twenty-one and have completed one year of service consisting of at least 1,000 hours. ~~Effective January 1, 2002, this~~The savings ~~plan allows~~plans allow eligible employees to contribute up to 25 percent and 10 percent, for the U.S. and Puerto Rico plans, respectively, of their compensation on a pre-tax basis. ~~Previously, the savings plan allowed eligible employees to contribute up to 15 percent.~~ The Company matches 25 percent of the first 4 percent of the employees’ contributions with Company ~~stock. Such~~stock and such matching Company contributions are vested incrementally over 5 ~~years.~~years for both plans. The charge to operations for the Company’s matching contribution for the U.S. plan was $1.3 million, $1.6 million and $1.4 million in 2004, 2003 and ~~$1.3 million in 2003,~~ 2002, ~~and 2001,~~ respectively.

21 Stock Plans

In 2003, the Company adopted the 2003 Stock Option and Award Plan (the “2003 Stock Option Plan”) and the 2003 Employees Stock Purchase Plan (the “2003 Stock Purchase Plan”). Under the 2003 Stock Option Plan, options, restricted stock, stock appreciation rights (SARs), or other stock-based awards may be granted to officers and other employees at not less than the market price on the date of the grant. Unless a longer or shorter period is established at the time of the option grant, generally, one-third of each stock option grant becomes exercisable on each of the first three anniversary dates of the date of grant. The maximum number of shares of stock reserved for issuance pursuant to the 2003 Stock Option Plan is 4,000,000 shares. The number of shares reserved for issuance as restricted stock and other stock-based awards cannot exceed 1,000,000 shares. The ~~terms of~~Company adopted the 2003 Stock Purchase Plan whose terms are substantially the same as the 1994 Employees Stock Purchase Plan (the “1994 Stock Purchase Plan”), which ~~expires~~expired in June 2004. Under ~~this plan,~~the 2003 Stock Purchase Plan, 3,000,000 shares of common stock ~~are~~will be available for purchase beginning June 2005.

~~Under the~~The Company’s 1998 Stock Option and Award Plan (the “1998 Plan”), options to purchase shares of common stock may be granted to officers and ~~key~~other employees at not less than the market price on the date of grant. Under the plan, the Company may grant officers and other ~~key~~ employees, including those at the subsidiary level, stock options, ~~stock,~~ SARs, restricted stock or other stock-based awards. ~~Unless a longer period is established at the time of the option grant, up to one-half of each stock option grant may be exercised on each of the first two anniversary dates of the date of grant.~~ Generally, one-third of each stock option grant becomes exercisable on each of the first three anniversary dates of the date of grant. The options terminate up to 10 years from the date of grant. In 2000, the Company amended the 1998 Plan to provide for awards of up to 12,000,000 shares of the Company’s common stock. The number of shares reserved for issuance as restricted stock and other stock-based awards, as amended, cannot exceed 3,000,000 shares.

In addition, options to purchase shares of common stock remain outstanding under the Company’s 1995 and 1986 stock option plans. The 1995 Stock Option and Award Plan (the “1995 Plan”) is substantially the same as the 1998 Plan. The number of shares authorized for awards under the 1995 Plan is 6,000,000 shares. The number of shares reserved for issuance as restricted stock under the 1995 Plan is limited to 1,500,000 shares. No further awards may be made under the 1995 Plan as of March 8, 2005. Options granted under the 1986 Stock Option Plan (the “1986 Plan”) generally become exercisable in two equal installments on the first and the second anniversaries of the date of grant. No further options may be granted under the 1986 Plan.

The 2002 Foot Locker Directors’ Stock Plan replaced both the Directors’ Stock Plan, which was adopted in 1996, and the Directors’ Stock Option Plan, which was adopted in 2000. There are 500,000 shares authorized under the 2002 plan. No further grants or awards may be made under either of the prior plans. Options granted prior to 2003 have a three-year vesting schedule. Options granted beginning in 2003 become exercisable one year from the date of grant.

Under the Company’s 1994 Stock Purchase Plan, participating employees ~~may~~were able to contribute up to 10 percent of their annual compensation to acquire shares of common stock at 85 percent of the lower market price on one of two specified dates in each plan year. Of the 8,000,000 shares of common stock authorized for purchase under this plan, ~~572~~1,552 participating employees purchased ~~120,208~~593,913 shares in ~~2003. To date, a~~2004. A total of ~~1,628,176~~2,222,089 shares ~~have been~~were purchased under this plan. No further shares may be issued under this plan after June 1, 2004.

When common stock is issued under these plans, the proceeds from options exercised or shares purchased are credited to common stock to the extent of the par value of the shares issued and the excess is credited to additional paid-in capital. When treasury common stock is issued, the difference between the average cost of treasury stock used and the proceeds from options exercised or shares awarded or purchased is charged or credited, as appropriate, to either additional paid-in capital or retained earnings. The tax benefits relating to amounts deductible for federal income tax purposes, which are not included in income for financial reporting purposes, have been credited to additional paid-in capital.

The fair values of the issuance of the stock-based compensation pursuant to the Company’s various stock option and purchase plans were estimated at the grant date using a Black-Scholes ~~option pricing~~option-pricing model.

     Stock Option Plans
     Stock Purchase Plan


     2003
     2002
     2001
     2003
     2002
     2001
Weighted-average risk free
rate of interest                     2.26 %             4.17 %             4.17 %             1.11 %             2.59 %             3.73 %
Expected volatility                     37 %             42 %             48 %             31 %             35 %             40 %
Weighted-average expected award life                     3.4 years             3.5 years             4.0 years             .7 years             .7 years             .7 years
Dividend yield                     1.2 %             1.2 %             —               —               —               —
Weighted-average fair value                  $ 2.90           $ 5.11           $ 5.31           $ 14.15           $ 4.23           $ 4.42

	Stock Option Plans									Stock Purchase Plan
	2004			2003			2002			2004			2003			2002
Weighted-average risk free rate of interest		2.57	%		2.26	%		4.17	%		1.33	%		1.11	%		2.59	%
Expected volatility		33	%		37	%		42	%		32	%		31	%		35	%
Weighted-average expected award life		3.7	years		3.4	years		3.5	years		.7	years		.7	years		.7	years
Dividend yield		1.1	%		1.2	%		1.2	%		—			—			—
Weighted-average fair value	$	6.51		$	2.90		$	5.11		$	11.44		$	14.15		$	4.23

The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options, and because the Company’s options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options.

The information set forth in the following table covers options granted under the Company’s stock option plans:

	2003				2002				2001					2004				2003				2002
	Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price
	(in thousands, except prices per share)													(in thousands, except prices per share)
Options outstanding at beginning of year		7,676	$	15.18		7,557	$	14.63		7,696	$	14.49		6,886	$	14.73		7,676	$	15.18		7,557	$	14.63
Granted		1,439	$	10.81		1,640	$	15.72		2,324	$	12.81		1,183	$	25.20		1,439	$	10.81		1,640	$	15.72
Exercised		1,830	$	12.50		783	$	6.67		995	$	7.28		1,853	$	14.43		1,830	$	12.50		783	$	6.67
Expired or canceled		399	$	19.55		738	$	19.80		1,468	$	15.98		307	$	19.13		399	$	19.55		738	$	19.80
Options outstanding at end of year		6,886	$	14.73		7,676	$	15.18		7,557	$	14.63		5,909	$	16.69		6,886	$	14.73		7,676	$	15.18
Options exercisable at end of year		4,075	$	15.99		4,481	$	15.94		4,371	$	16.83		3,441	$	15.34		4,075	$	15.99		4,481	$	15.94
Options available for future grant at end of year		8,780				6,739				7,389				7,464				8,780				6,739

The following table summarizes information about stock options outstanding and exercisable at January ~~31, 2004:~~29, 2005:

     Options Outstanding
     Options Exercisable

Range of Exercise Prices
     Shares
     Weighted-
Average
Remaining
Contractual
Life
     Weighted-
Average
Exercise
Price
     Shares
     Weighted-
Average
Exercise
Price

     (in thousands, except prices per share)

$ 4.53 to $10.78                     1,815              8.0           $ 9.58              553            $ 8.10
$10.90 to $12.99                     1,891              7.0              12.28              1,476              12.13
$13.21 to $16.02                     1,726              7.4              15.77              711               15.67
$16.19 to $28.13                     1,454              4.0              23.08              1,335              23.69
$ 4.53 to $28.13                     6,886              6.7           $ 14.73              4,075           $ 15.99

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Shares		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
	(in thousands, except prices per share)
$ 4.53 to $10.75		1,230		7.7	$	9.85		483	$	9.25
$10.78 to $15.75		1,529		5.9		12.53		1,487		12.51
$15.85 to $21.88		1,318		7.0		16.55		772		16.70
$22.19 to $28.13		1,832		6.7		24.84		699		24.09
$ 4.53 to $28.13		5,909		6.8	$	16.69		3,441	$	15.34

~~22 Restricted Stock~~

Restricted Stock

Restricted shares of the Company’s common stock may be awarded to certain officers and key employees of the Company. There were 330,000, 845,000 ~~90,000~~ and ~~420,000~~90,000 restricted shares of common stock granted in 2004, 2003 and 2002, ~~and 2001,~~ respectively. In 2004, 72,005 restricted stock units were granted to certain executives located outside of the United States; each restricted unit represents the right to receive one share of the Company’s common stock provided that the vesting conditions are satisfied. The market values of the shares and units at the date of grant amounted to $10.2 million in 2004, $9.8 million in 2003 and $1.3 million in ~~2002 and $5.4 million in 2001.~~2002. The market values are recorded within shareholders’ equity and are amortized as compensation expense over the related vesting periods. These awards fully vest after the passage of a restriction period, generally three ~~to five~~ years, except for acertain grants in 2004 and 2003. The Company granted 75,000 shares of restricted stock in 2004, which vest over 13 months and in 2003 ~~grant of~~granted 200,000 shares ~~which vests~~of restricted stock that vested 50 percent one year ~~from~~following the date of grant and 50 percent will vest two years from the date of grant. During 2004, 2003 and 2002, respectively, 30,000, 80,000 and ~~2001, respectively, 80,000,~~ 60,000 ~~and 270,000~~ restricted shares were forfeited. The deferred compensation balance, reflected as a reduction to shareholders’ equity, was $9.0 million, $7.1 million ~~$2.4 million~~ and ~~$3.9~~$2.4 million as of January 29, 2005, January 31, 2004 and February 1, 2003, ~~and February 2, 2002,~~ respectively. The Company recorded compensation expense related to restricted shares, net of forfeitures, of $8.0 million in 2004, $4.1 million in 2003 and $1.9 million in ~~2002 and $1.6 million in 2001.~~2002.

~~23 Shareholder Rights Plan~~52

Shareholder Rights Plan

A Shareholder’s Rights Plan was established in April 1998. On November 19, 2003 the Board of Directors of the Company amended the Shareholder Rights Agreement between the Company and The Bank of New York, successor Rights Agent (the “Rights Agreement”), the effect of which was to accelerate the expiration date of the Rights, and to terminate the Rights Agreement, effective January 31, 2004.

53
24 Legal Proceedings

~~24 Legal Proceedings~~

Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incident to the businesses of the Company, as well as litigation incident to the sale and disposition of businesses that have occurred in the past several years. Management does not believe that the outcome of such proceedings will have a material effect on the Company’s consolidated financial position, liquidity, or results of operations.

~~25 Commitments~~

Commitments

In connection with the sale of various businesses and assets, the Company may be obligated for certain lease commitments transferred to third parties and pursuant to certain normal representations, warranties, or indemnifications entered into with the purchasers of such businesses or assets. Although the maximum potential amounts for such obligations cannot be readily determined, management believes that the resolution of such contingencies will not have a material effect on the Company’s consolidated financial position, liquidity, or results of operations. The Company is also operating certain stores for which lease agreements are in the process of being negotiated with landlords. Although there is no contractual commitment to make these payments, it is likely that a lease will be executed.

~~26 Shareholder Information~~

The Company does not have any off-balance sheet financing, other than operating leases entered into in the normal course of business and ~~Market Prices (Unaudited)~~disclosed above or unconsolidated special purpose entities. The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities.

Shareholder Information and Market Prices (Unaudited)

Foot Locker, Inc. common stock is listed on ~~the~~The New York ~~stock exchange~~Stock Exchange as well as on the ~~boerse-stuttgart~~böerse-stuttgart stock exchange in Germany and the Elektronische Börse Schweiz (EBS) stock exchange in Switzerland. In addition, the stock is traded on the Cincinnati stock exchange. Effective March 31, 2003, the ticker symbol for the Company’s common stock was changed to “FL” from “Z.”

AtAs of January ~~31, 2004,~~29, 2005, the Company had ~~28,480~~26,638 shareholders of record owning ~~143,952,080~~156,091,363 common shares.

Market prices for the Company’s common stock were as follows:

	2003				2002					2004				2003
	High		Low		High		Low		High		Low		High		Low
Common Stock Quarter
Common Stock
Quarter
1^st Q	$	11.40	$	9.28	$	17.95	$	14.35	$	27.59	$	21.75	$	11.40	$	9.28
2^nd Q		15.20		10.10		16.00		9.02		25.03		19.97		15.20		10.10
3^rd Q		18.20		13.85		11.19		8.20		24.80	��	19.98		18.20		13.85
4^th Q		25.97		18.01		13.73		9.75		27.26		22.75		25.97		18.01

During 2004, the Company declared quarterly dividends of $0.06 per share during the first, second and third quarters. On November 17, 2004, the Company increased the quarterly dividend per share to $0.075, beginning in the fourth quarter of 2004.

During 2003, the ~~Company’s dividend policy was to pay a~~Company declared quarterly ~~dividend~~dividends of $0.03 per ~~share.~~share during the first, second and third quarters. On November 19, 2003, the Company doubled the quarterly dividend per share to $0.06, beginning in the fourth quarter of 2003.

5453

~~27 Quarterly Results (Unaudited)~~

Quarterly Results (Unaudited)

		1^st Q											1^st Q
		(in millions, except per share amounts)												(in millions, except per share amounts)
Sales
2004													$	1,186		1,268		1,366	1,535	5,355
2003		$	1,128		1,123		1,194		1,334		4,779			1,128		1,123		1,194	1,334	4,779
2002			1,090		1,085		1,120		1,214		4,509
Gross margin^(a)
2004													$	361		369		426	477	1,633
2003		$	345		331		389		412		1,477			346		332		390	414	1,482
2002			320		312		343		369		1,344
Operating profit^(b)
2004													$	78		61		117	133	389
2003		$	67		59		102		114		342			67		59		102	114	342
2002			64		55		72	^(c)	78	^(d)	269
Income from continuing operations
2004													$	47		45		74	89	255
2003		$	39		37		62		71		209			39		37		62	71	209
2002	��		38	^(e)	33		43	^(e)	48		162	^(e)
Net income
2004													$	48		82		74	89	293
2003		$	38		36		62		71		207			38		36		62	71	207
2002			20	^(e)	31		45	^(e)	57		153	^(e)
Basic earnings per share:
2004
Income from continuing operations													$	0.33		0.30		0.47	0.58	1.69
Income from discontinued operations														—		0.25		—	—	0.25
Net income														0.33		0.55		0.47	0.58	1.94
2003
Income from continuing operations		$	0.28		0.26		0.43		0.50		1.47		$	0.28		0.26		0.43	0.50	1.47
Loss from discontinued operations			—		(0.01	)	—		—		(0.01	)		—		(0.01	)	—	—	(0.01	)
Cumulative effect of accounting change^(f)			(0.01	)	—		—		—		—
Net income			0.27		0.25		0.43		0.50		1.46
2002
Income from continuing operations		$	0.27	^(e)	0.23		0.30	^(e)	0.35		1.15	^(e)
Income (loss) from discontinued operations			(0.13	)	(0.01	)	0.02		0.06		(0.06	)
Cumulative effect of accounting change^(c)														(0.01	)	—		—	—	—
Net income			0.14	^(e)	0.22		0.32	^(e)	0.41		1.09	^(e)		0.27		0.25		0.43	0.50	1.46
Diluted earnings per share:
2004
Income from continuing operations													$	0.31		0.29		0.47	0.57	1.64
Income from discontinued operations														—		0.24		—	—	0.24
Net income														0.31		0.53		0.47	0.57	1.88
2003
Income from continuing operations		$	0.27		0.25		0.41		0.47		1.40		$	0.27		0.25		0.41	0.47	1.40
Loss from discontinued operations			—		(0.01	)	—		—		(0.01	)		—		(0.01	)	—	—	(0.01	)
Cumulative effect of accounting change^(f)			(0.01	)	—		—		—		—
Cumulative effect of accounting change^(c)														(0.01	)	—		—	—	—
Net income			0.26		0.24		0.41		0.47		1.39			0.26		0.24		0.41	0.47	1.39
2002
Income from continuing operations		$	0.26	^(e)	0.22		0.29	^(e)	0.33		1.10	^(e)
Income (loss) from discontinued operations			(0.12	)	(0.01	)	0.02		0.06		(0.05	)
Net income			0.14	^(e)	0.21		0.31	^(e)	0.39		1.05	^(e)

(a)

Gross margin represents sales less cost of sales. Includes the effects of the reclassification of tenant allowances as deferred credits, which are amortized as a reduction of rent expense as a component of costs of sales. Costs of sales was reduced by $1 million in each of the first three quarters of 2004 and 2003 and by $2 million for each of the fourth quarters of 2004 and 2003.

(b)

Operating profit represents income from continuing operations before income taxes, interest expense, net and non-operating income.

(c)

~~Includes asset impairment charge of $1 million.~~

~~(d)~~

~~Includes asset impairment charge of $6 million.~~

~~(e)~~

As more fully described in note 2, in applying EITF 90-16 to the first quarter of 2002, the $18 million Northern charge recorded within discontinued operations would have been classified as continuing operations. Similarly, the $1 million benefit recorded in the third quarter of 2002 would have been classified as continuing operations. Income from continuing operations for the first and third quarters would have been $20 million and $44 million, respectively. Diluted earnings per share would have been $0.14 and $0.30 for the first and third quarters, respectively. Reported net income for the first quarter and third quarters would have remained unchanged. After achieving divestiture accounting for Northern in the fourth quarter of 2002, these amounts would have been reclassified to reflect the results as shown above and as originally reported by the Company. As such, the Company has not amended these prior filings.

~~(f)~~

Cumulative effect of accounting change became further diluted during the second quarter, and therefore is not shown in the year-to-date amount.

5554

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

The selected financial data below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and other information contained elsewhere in this report. All selected financial data have been restated for discontinued ~~operations.~~operations and the reclassification of tenant allowances as deferred rent credits.

	2003											2004
	($ in millions, except per share amounts)
($ in millions, except per share amounts)
Summary of Continuing Operations
Sales	$	4,779		4,509		4,379		4,356		4,263		$	5,355		4,779		4,509		4,379		4,356
Gross margin(1)		1,477		1,344		1,308		1,309		1,164	⁽¹⁾		1,633		1,482		1,348		1,312		1,312
Selling, general and administrative expenses		987		928		923		975		985			1,088		987		928		923		975
Restructuring charges (income)		1		(2	)	34		1		85			2		1		(2	)	34		1
Depreciation and amortization(1)		147		149		154		151		169			154		152		153		158		154
Interest expense, net		18		26		24		22		51			15		18		26		24		22
Other income		—		(3	)	(2	)	(16	)	(223	)
Other (income) expense													—		—		(3	)	(2	)	(16	)
Income from continuing operations		209		162		111	⁽⁴⁾	107	⁽⁴⁾	59	⁽⁴⁾		255		209		162		111	⁽³⁾	107	⁽³⁾
Cumulative effect of accounting change⁽²⁾		(1	)	—		—		(1	)	8			—		(1	)	—		—		(1	)
Basic earnings per share from continuing operations		1.47		1.15		0.79	⁽⁴⁾	0.78	⁽⁴⁾	0.43	⁽⁴⁾		1.69		1.47		1.15		0.79	⁽³⁾	0.78	⁽³⁾
Basic earnings per share from cumulative effect of accounting change		—		—		—		(0.01	)	0.06			—		—		—		—		(0.01	)
Diluted earnings per share from continuing operations		1.40		1.10		0.77	⁽⁴⁾	0.77	⁽⁴⁾	0.43	⁽⁴⁾		1.64		1.40		1.10		0.77	⁽³⁾	0.77	⁽³⁾
Diluted earnings per share from cumulative effect of accounting change		—		—		—		(0.01	)	0.06			—		—		—		—		(0.01	)
Common stock dividends declared		0.15		0.03		—		—		—			0.26		0.15		0.03		—		—
Weighted-average common shares outstanding (in millions)		141.6		140.7		139.4		137.9		137.2			150.9		141.6		140.7		139.4		137.9
Weighted-average common shares outstanding assuming dilution (in millions)		152.9		150.8		146.9		139.1		138.2			157.1		152.9		150.8		146.9		139.1
Financial Condition
Cash and cash equivalents	$	448		357		215		109		162
Cash, cash equivalents and short-term investments												$	492		448		357		215		109
Merchandise inventories		920		835		793		730		697			1,151		920		835		793		730
Property and equipment, net(4)		644		636		637		684		754			715		668		664		665		712
Total assets(4)		2,689		2,486		2,300		2,278		2,525			3,237		2,713		2,514		2,328		2,306
Short-term debt		—		—		—		—		71			—		—		—		—		—
Long-term debt and obligations under capital leases		335		357		399		313		418			365		335		357		399		313
Total shareholders’ equity		1,375		1,110		992		1,013		1,139			1,830		1,375		1,110		992		1,013
Financial Ratios
Return on equity (ROE)		16.8	%	15.4		11.1		10.0		5.4			15.9	%	16.8		15.4		11.1		10.0
Operating profit margin		7.2	%	6.0		4.5		4.2		(1.8	)		7.3	%	7.2		6.0		4.5		4.2
Income from continuing operations as a percentage of sales		4.4	%	3.6		2.5	⁽⁴⁾	2.5	⁽⁴⁾	1.4	⁽⁴⁾		4.8	%	4.4		3.6		2.5	⁽³⁾	2.5	⁽³⁾
Net debt capitalization percent⁽³⁾⁽⁵⁾		53.3	%	58.6		61.1		60.9		61.2			50.4	%	53.3		58.6		61.1		60.9
Net debt capitalization percent (without present value of operating leases)⁽³⁾⁽⁵⁾		—		—		15.6		16.8		22.3			—		—		—		15.6		16.8
Current ratio		2.8		2.2		2.0		1.5		1.5			2.7		2.8		2.2		2.0		1.5
Other Data
Capital expenditures	$	144		150		116		94		152		$	156		144		150		116		94
Number of stores at year end		3,610		3,625		3,590		3,752		3,953			3,967		3,610		3,625		3,590		3,752
Total selling square footage at year end (in millions)		7.92		8.04		7.94		8.09		8.40			8.89		7.92		8.04		7.94		8.09
Total gross square footage at year end (in millions)		13.14		13.22		13.14		13.32		13.35			14.78		13.14		13.22		13.14		13.32

(1)

~~Includes~~Gross margin and depreciation expense include the effects of the reclassification of tenant allowances as deferred credits, which are amortized as a ~~restructuring charge~~reduction of ~~$11~~rent expense as a component of costs of sales. Gross margin was reduced by $5 million ~~related to inventory markdowns.~~in 2004 and 2003, $4 million in 2002 and 2001 and $3 million in 2000 and accordingly, depreciation expense was increased by the corresponding amount.

(2)

2003 relates to adoption of SFAS No. 143 “Accounting for Asset Retirement Obligations” (see note 1). 2000 reflects change in method of accounting for layaway sales. ~~1999 reflects change in method for calculating the market-related value of pension plan assets.~~

(3)

~~Represents total debt, net of cash and cash equivalents and excludes the effect of an interest rate swap of $1 million that reduced long-term debt at January 31, 2004.~~

~~(4)~~

As more fully described in note 2,16, applying the provisions of EITF 90-16, income from continuing operations for 2001 ~~2000~~ and ~~1999~~2000 would have been reclassified to include the results of the Northern Group. Accordingly, income from continuing operations would have been $91 million ~~$57 million~~ and ~~$17~~$57 million, respectively. As such basic earnings per share would have been $0.65 ~~$0.42~~ and ~~$0.13~~$0.42 for fiscal 2001 ~~2000~~ and ~~1999,~~2000, respectively. Diluted earnings per share would have been $0.64 ~~$0.41~~ and ~~$0.13~~$0.41 for fiscal 2001 ~~2000~~ and ~~1999,~~2000, respectively. However, upon achieving divestiture accounting in the fourth quarter of 2002, the results would have been reclassified to reflect the results as shown above and as originally reported by the Company.

(4)

Property and equipment, net and total assets include the reclassification of tenant allowances as deferred credits, which were previously recorded as a reduction to the cost of property and equipment, and are now classified as part of the deferred rent liability. Property and equipment, net and total assets were increased by $22 million in 2004, $24 million in 2003 and $28 million in each of 2002, 2001 and 2000.

(5)

Represents total debt, net of cash, cash equivalents and short-term investments and excludes the effect of interest rate swaps of $4 million that increased long-term debt at January 29, 2005 and $1 million that reduced long-term debt at January 31, 2004.

5655

~~Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure~~

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no disagreements between the Company and its independent ~~accountants~~registered public accounting firm on matters of accounting principles or practices.

Item 9A.

Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

~~Item 9A. Controls~~

The Company’s management performed an evaluation under the supervision and ~~Procedures~~

~~The~~with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer ~~have evaluated~~(“CFO”), and completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures ~~as such~~(as that term is defined in Rules ~~13a-14(c)~~13a-15(e) and ~~15d-14(c)~~15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of ~~the end of the period covered by this report.~~January 29, 2005. Based on that evaluation, the ~~Chief Executive Officer~~Company’s CEO and ~~the Chief Financial Officer~~CFO concluded that the Company’s disclosure controls and procedures ~~are~~were effective as of January 29, 2005 in ~~ensuring that~~alerting them in a timely manner to all material information required to be ~~included~~disclosed in this ~~annual report has been made known to them in a timely fashion.~~report.

(b)

Management’s Annual Report on Internal Control over Financial Reporting.

The Company’s ~~Chief Executive Officer~~management is responsible for establishing and ~~Chief Financial Officer also conducted an evaluation~~maintaining adequate internal control over financial reporting (as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). To evaluate the effectiveness of the Company’s internal control over financial reporting, ~~to determine whether any~~the Company uses the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Using the COSO Framework, the Company’s management, including the CEO and CFO, evaluated the Company’s internal control over financial reporting and concluded that the Company’s internal control over financial reporting was effective as of January 29, 2005. KPMG LLP, the independent registered public accounting firm that audits the Company’s consolidated financial statements included in this annual report, has issued an attestation report on the Company’s assessment of internal control over financial reporting, which is included herein under the caption “Management’s Report on Internal Control over Financial Reporting” in “Item 8. Consolidated Financial Statements and Supplementary Data.”

(c)

Attestation Report of the Independent Registered Public Accounting Firm.

(d)

Changes in Internal Control over Financial Reporting.

During the Company’s last fiscal quarter there were no changes ~~occurred during the period covered by this report~~in internal control over financial reporting that ~~have~~ materially affected, or ~~are~~is reasonably likely to materially affect, the Company’s internal control over financial reporting. There have been no material changes in the Company’s internal controls, or in the factors that could materially affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation.

PART III

~~Item 10. Directors and Executive Officers of the Company~~

Item 10.

Directors and Executive Officers of the Company

(a)

Directors of the Company

Information relative to directors of the Company is set forth under the section captioned “Election of Directors” in the Proxy Statement and is incorporated herein by reference.

(b)

Executive Officers of the Company

Information with respect to executive officers of the Company is set forth immediately following Item 4 in Part I.

(c)

Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.

(d)

Information on our audit committee ~~financials experts~~financial expert is contained in the Proxy Statement under the section captioned “Committees of the Board of Directors” and is incorporated herein by reference.

(e)

Information about the Code of Business Conduct governing our employees, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and the Board of Directors, is set forth under the heading “Code of Business Conduct” under the Corporate Governance section of the Proxy Statement and is incorporated herein by reference.

~~Item 11. Executive Compensation~~56

Item 11.

Executive Compensation

Information set forth in the Proxy Statement beginning with the section captioned “Directors Compensation and Benefits” through and including the section captioned “Compensation Committee Interlocks and Insider Participation” is incorporated herein by reference.

~~Item 12. Security Ownership of Certain Beneficial Owners and Management~~

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information set forth in the Proxy Statement under the sections captioned “Equity Compensation Plan Information” and “Beneficial Ownership of the Company’s Stock” is incorporated herein by reference.

57
Item 13. Certain Relationships and Related Transactions

~~Item 13. Certain Relationships and Related Transactions~~

Information set forth in the Proxy Statement under the section captioned “Transactions with Management and Others” is incorporated herein by reference.

~~Item 14. Principal Accountant Fees and Services~~

Item 14.

Principal Accountant Fees and Services

Information about the principal accountant fees and services is set forth under the section captioned “Audit and Non-Audit Fees” in the Proxy Statement and is incorporated herein by reference. Information about the Audit Committee’s pre-approval policies and procedures is set forth in the section captioned “Audit Committee Pre-Approval Policies and Procedures” in the Proxy Statement and is incorporated herein by reference.

PART IV

Item 15.    ~~Exhibits, Financial Statement Schedules and Reports on Form 8-K~~
~~(a)~~   ~~(1) (a)(2)~~Exhibits and Financial ~~Statements~~Statement Schedules

(a)(1)(a)(2) Financial Statements
The list of financial statements required by this item is set forth in Item 8. “Consolidated Financial Statements and Supplementary Data.“”
(a)(3) and (c) Exhibits
An index of the exhibits which are required by this item and which are included or incorporated herein by reference in this report appears on pages 6059 through 63. The exhibits filed with this report immediately follow the index.
~~(b) Reports on Form 8-K~~
~~The Company filed the following reports on Form 8-K during the fourth quarter of the year ended January 31, 2004:~~
~~Form 8-K, dated November 6, 2003, under Items 7 and 12, reporting the Company’s sales results for the third quarter of 2003.~~
~~Form 8-K, dated November 19, 2003, under Items 7 and 12, reporting operating results for the third quarter of 2003.~~
~~Form 8-K, dated November 19, 2003, under Items 5 and 7, reporting an amendment to the Rights Agreement between the Company and The Bank of New York.~~
~~Form 8-K, dated January 14, 2004, under Item 5, reporting that a Form 144 filed with the Securities and Exchange Commission by the Company’s President and Chief Executive Officer was filed in error.~~
5857

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOOT LOCKER, INC.

By:

~~Matthew D. Serra~~
~~Chairman of the Board, President and~~
~~Chief Executive Officer~~

Matthew D. Serra
Chairman of the Board, President and
Chief Executive Officer
Date: March 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on ~~April 5, 2004,~~March 28, 2005, by the following persons on behalf of the Company and in the capacities indicated.

Matthew D. Serra
Chairman of the Board,
President and
Chief Executive Officer


Bruce L. Hartman
Executive Vice President and
Chief Financial Officer


/s/ ROBERT W.W. MCCHUGHH~~UGH~~
Robert W. McHugh
Vice President and
Chief Accounting Officer

/s/ J. CARTER BACOT
J. Carter Bacot
Lead Director
/s/ PURDY CRAWFORD
Purdy Crawford
Director

/s/ JAMES E. PRESTON
James E. Preston
Director


/s/ PN~~URDY~~ICHOLAS CD~~RAWFORD~~IPAOLO
~~Purdy Crawford~~Nicholas DiPaolo
Director

/s/ DAVID Y. SCHWARTZ
David Y. Schwartz
Director


/s/ NA~~ICHOLAS~~LAN D~~IPAOLO~~.
FELDMAN
~~Nicholas DiPaolo~~Alan D. Feldman
Director

/s/ CHRISTOPHER A. SINCLAIR
Christopher A. Sinclair
Director


/s/ PHILIP H. GEIER JR.
Philip H. Geier Jr.
Director

/s/ CHERYL N.IDO TURPIN
Cheryl N.Nido Turpin
Director


/s/ JAROBIN GILBERT JR.
Jarobin Gilbert Jr.
Director

/s/ DONA D. YOUNG
Dona D. Young
Director


5958

FOOT LOCKER, ~~INC~~INC.
INDEX OF EXHIBITS REQUIRED
BY ITEM 15 OF FORM 10-K
AND FURNISHED IN ACCORDANCE
WITH ITEM 601 OF REGULATION S-K
Exhibit No.
in Item 601 of
Regulation S-K
     Description
3(i)(a)                Certificate of Incorporation of the Registrant, as filed by the Department of State of the State of New York on April 7, 1989 (incorporated herein by reference to Exhibit 3(i)(a) to the Quarterly Report on Form 10-Q for the quarterly period ended July 26, 1997, filed by the Registrant with the SEC on September 4, 1997 (the “July 26, 1997 Form 10-Q”)).
3(i)(b)                Certificates of Amendment of the Certificate of Incorporation of the Registrant, as filed by the Department of State of the State of New York on (a) July 20, 1989, (b) July 24, 1990, (c) July 9, 1997 (incorporated herein by reference to Exhibit 3(i)(b) to the July 26, 1997 Form 10-Q), (d) June 11, 1998 (incorporated herein by reference to Exhibit 4.2(a) of the Registration Statement on Form S-8 (Registration No. 333-62425), and (e) November 1, 2001 (incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-8 (Registration No. 333-74688) previously filed by the Registrant with the SEC).
3(ii)                By-laws of the Registrant, as amended (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended May 5, 2001 (the “May 5, 2001 Form 10-Q”), filed by the Registrant with the SEC on June 13, 2001).
4.1                The rights of holders of the Registrant’s equity securities are defined in the Registrant’s Certificate of Incorporation, as amended (incorporated herein by reference to (a) Exhibits 3(i)(a) and 3(i)(b) to the July 26, 1997 Form 10-Q, Exhibit 4.2(a) to the Registration Statement on Form S-8 (Registration No. 333-62425) previously filed by the Registrant with the SEC, and Exhibit 4.2 to the Registration Statement on Form S-8 (Registration No. 333-74688) previously filed by the Registrant with the SEC).
4.2 ~~Amendment No. 4 to the Rights Agreement dated as of November 19, 2003 (incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed by the Registrant with the SEC on November 20, 2003).~~
~~4.3~~                Indenture dated as of October 10, 1991 (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-3 (Registration No. 33-43334) previously filed by the Registrant with the SEC).
~~4.4~~4.3                Form of 8 1/2% Debentures due 2022 (incorporated herein by reference to Exhibit 4 to the Registrant’s Form 8-K dated January 16, 1992).
~~4.5~~    Indenture dated as of June 8, 2001 (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-3 (Registration No. 333-64930) previously filed by the Registrant with the SEC).
~~4.6~~ Form of 5.50% Convertible Subordinated Note (incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-3 (Registration No. 333-64930) previously filed by the Registrant with the SEC).
~~4.7~~ Registration Rights Agreement dated as of June 8, 2001 (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-3 (Registration No. 333-64930) previously filed by the Registrant with the SEC).
60

~~Exhibit No.~~
~~in Item 601 of~~
~~Regulation S-K~~
~~Description~~
4.8                Distribution Agreement dated July 13, 1995 and Forms of Fixed Rate and Floating Rate Notes (incorporated herein by reference to Exhibits 1, 4.1 and 4.2, respectively, to the Registrant’s Form 8-K dated July 13, 1995).
10.1                1986 Foot Locker Stock Option Plan (incorporated herein by reference to Exhibit 10(b) to the Registrant’s Annual Report on Form 10-K for the year ended January 28, 1995, filed by the Registrant with the SEC on April 24, 1995 (the “1994 Form 10-K”)).
10.2                Amendment to the 1986 Foot Locker Stock Option Plan (incorporated herein by reference to Exhibit 10(a) to the Registrant’s Annual Report on Form 10-K for the year ended January 27, 1996, filed by the Registrant with the SEC on April 26, 1996 (the “1995 Form 10-K”)).
10.3                Foot Locker 1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10(p) to the 1994 Form 10-K).
10.4                Foot Locker 1998 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 1998, filed by the Registrant with the SEC on April 21, 1998 (the “1997 Form 10-K”)).
59

Exhibit No.
in Item 601 of
Regulation S-K
Description
10.5                Amendment to the Foot Locker 1998 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended July 29, 2000, filed by the Registrant with the SEC on September 7, 2000 (the “July 29, 2000 Form 10-Q”)).
10.6                Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d) to the Registration Statement on Form 8-B filed by the Registrant with the SEC on August 7, 1989 (Registration No. 1-10299) (the “8-B Registration Statement”)).
10.7                Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(c)(i) to the 1994 Form 10-K ).
10.8                Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d)(ii) to the 1995 Form 10-K).
10.9                Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10(e) to the 1995 Form 10-K).
10.10                Long-Term Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit 10(f) to the 1995 Form 10-K).
10.11                Annual Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2003 filed by the Registrant with the SEC on September 15, 2003 (the ~~August~~“August 2, 2003 Form 10-Q”))).
61

~~Exhibit No.~~
~~in Item 601 of~~
~~Regulation S-K~~
~~Description~~
10.12                Form of indemnification agreement, as amended (incorporated herein by reference to Exhibit 10(g) to the 8-B Registration Statement).
10.13                Amendment to form of indemnification agreement (incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarterly period ended May 5, 2001 filed by the Registrant with the SEC on June 13, 2001 (the “May 5, 2001 Form 10-Q”)).
10.14                Foot Locker Voluntary Deferred Compensation Plan (incorporated herein by reference to Exhibit 10(i) to the 1995 Form 10-K).
10.15                Foot Locker Directors Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the July 29, 2000 Form 10-Q).
10.16                Trust Agreement dated as of November 12, 1987 (“Trust Agreement”), between F.W. Woolworth Co. and The Bank of New York, as amended and assumed by the Registrant (incorporated herein by reference to Exhibit 10(j) to the 8-B Registration Statement).
10.17                Amendment to Trust Agreement made as of April 11, 2001 (incorporated herein by reference to Exhibit 10.4 to May 5, 2001 Form 10-Q).
10.18                Foot Locker Directors’ Retirement Plan, as amended (incorporated herein by reference to Exhibit 10(k) to the 8-B Registration Statement).
10.19                Amendments to the Foot Locker Directors’ Retirement Plan (incorporated herein by reference to Exhibit 10(c) to the Registrant’s Quarterly Report on Form 10-Q for the period ended October 28, 1995, filed by the Registrant with the SEC on December 11, 1995 (the “October 28, 1995 Form 10-Q”)).
10.20                Employment Agreement with Matthew D. Serra dated as of ~~January 21, 2003~~February 9, 2005 (incorporated herein by reference to Exhibit ~~10.20~~10.1 to the ~~Annual~~Current Report on Form ~~10-K for the year ended~~8-K dated February ~~1, 2003~~9, 2005 filed by the Registrant with the SEC on ~~May 19, 2003~~February 11, 2005 (the ~~“2002~~“February 9, 2005 Form ~~10-K”~~8-K”)).
60

Exhibit No.
in Item 601 of
Regulation S-K
Description
10.21 ~~Restricted Stock Agreement with Matthew D. Serra dated as of March 4, 2001 (incorporated herein by reference to Exhibit 10.3 to the May 5, 2001 Form 10-Q).~~
~~10.22~~                Restricted Stock Agreement with Matthew D. Serra dated as of February 2, 2003 ~~(incorporated~~
(incorporated herein by reference to Exhibit 10.22 to the 2002 Form 10-K).
~~10.23~~10.22                Restricted Stock Agreement with Matthew D. Serra dated as of September 11, 2003 (incorporated herein by reference to Exhibit 10 to the Quarterly Report on Form 10-Q for the period ended November 1, 2003 filed by the Registrant with the SEC on December 15, 2003).
10.23 Restricted Stock Agreement with Matthew D. Serra dated as of February 18, 2004 (incorporated herein by reference to Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the period ended May 1, 2004, filed by the Registrant with the SEC on June 8, 2004).
10.24 Restricted Stock Agreement with Matthew D. Serra dated as of February 9, 2005 (incorporated herein by reference to Exhibit 10.2 to the February 9, 2005 Form 8-K).
10.25                Foot Locker Executive Severance Pay Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended October 31, 1998 (the “October 31, 1998 Form 10-Q”)).
~~10.25~~10.26           Form of Senior Executive Employment Agreement (incorporated herein by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form ~~of Senior Executive Employment Agreement (incorporated herein~~10-K for the year ended January 29, 2000 filed by ~~reference to Exhibit 10.23 to~~ the ~~Registrant’s Annual Report~~Registrant with the SEC on April 21, 2000 (the “1999 Form ~~10-K for the year ended January 29, 2000 filed by the Registrant with the SEC on April 21, 2000 (the “1999 Form~~ 10-K”))).
62

~~Exhibit No.~~
~~in Item 601 of~~
~~Regulation S-K~~
~~Description~~
~~10.26~~10.27                Form of Executive Employment Agreement (incorporated herein by reference to Exhibit 10.24 to the 1999 Form 10-K).
~~10.27~~10.28                Foot Locker, Inc. Directors’ Stock Plan (incorporated herein by reference to Exhibit 10(b) to the Registrant’s October 28, 1995 Form 10-Q).
~~10.28~~10.29                Foot Locker, Inc. Excess Cash Balance Plan (incorporated herein by reference to Exhibit 10(c) to the 1995 Form 10-K).
~~10.29~~10.30                Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.30 to the 1998 Form 10-K).
~~10.30~~10.31                ~~Fourth~~Fifth Amended and Restated Credit Agreement dated as of April 9, 1997, amended and restated as of ~~July 30, 2003~~May 19, 2004 (incorporated herein by reference to Exhibit 10.1 to the ~~August 2, 2003~~Quarterly Report on Form ~~10-Q)~~10-Q for the period ended July 31, 2004, filed by the Registrant with the SEC on September 8, 2004 (the “July 31, 2004 Form 10-Q”)).
~~10.31~~10.32                Letter of Credit Agreement dated as of March 19, 1999 (incorporated herein by reference to Exhibit 10.35 to the 1998 10-K).
~~10.32~~10.33                Foot Locker 2002 Directors Stock Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the ~~Quarterly~~Current Report on Form ~~10-Q for the quarterly period ended August 3, 2002~~8-K dated February 18, 2005, filed by the Registrant with the SEC on ~~September 12, 2002 (the “August 3, 2002 Form 10-Q”))~~February 18, 2005).
~~10.33~~10.34                Foot Locker 2003 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 to the August 2, 2003 Form 10-Q).
10.35 Summary of Changes to Non-Employee Directors’ Compensation (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended October 30, 2004, filed by the Registrant with the SEC on December 7, 2004).
10.36 Automobile Expense Reimbursement Program for Senior Executives
10.37 Executive Medical Expense Allowance Program for Senior Executives
10.38 Financial Planning Allowance Program for Senior Executives
10.39 Form of Nonstatutory Stock Option Award Agreement for Executive Officers
61

Exhibit No.
in Item 601 of
Regulation S-K
Description
10.40 Form of Incentive Stock Option Award Agreement for Executive Officers
10.41 Form of Nonstatutory Stock Option Award Agreement for Non-employee Directors (incorporated herein by reference to Exhibit 10.2 to the July 31, 2004 Form 10-Q).
10.42 Long-term Disability Program for Senior Executives
12                Computation of Ratio of Earnings to Fixed Charges.
18                Letter on Change in Accounting Principle (incorporated herein by reference to Exhibit 18 to the 1999 Form 10-K).
21                Subsidiaries of the Registrant.
23                Consent of Independent ~~Auditors.~~Registered Public Accounting Firm.
31.1                Certification of Chief Executive Officer Pursuant to ~~13a-14(a) or 15d-14(a), as adopted pursuant to~~ Section 302 of the Sarbanes-Oxley Act of 2002.
31.2                Certification of Chief Financial Officer Pursuant to ~~13a-14(a) or 15d-14(a), as adopted pursuant to~~ Section 302 of the Sarbanes-Oxley Act of 2002.
32                Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the ~~Sarbanes- Oxley~~Sarbanes-Oxley Act of 2002.

62

Exhibits filed with this Form 10-K:
Exhibit No.
in Item 601 of
Regulation S-K
Description
10.1 Form of Nonstatutory Stock Option Award Agreement for Executive Officers.
10.2 Form of Incentive Stock Option Award Agreement for Executive Officers.
10.3 Automobile Expense Reimbursement Program for Senior Executives.
10.4 Executive Medical Expense Allowance Program for Senior Executives.
10.5 Financial Planning Allowance Program for Senior Executives.
10.6 Long-term Disability Program for Senior Executives
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of the Registrant.
23 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 Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

63

	Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01		~~New York Stock Exchange~~
~~Preferred Stock Purchase Rights~~		New York Stock Exchange

Number of shares of Common Stock outstanding at March ~~26, 2004:~~18, 2005:		~~144,761,434~~156,355,058

The aggregate market value of voting stock held by non-affiliates of the Registrant computed by reference to the closing price as of the last business day of the Registrant’s most recently completed second fiscal quarter, ~~August 1, 2003,~~July 31, 2004, was approximately:	$	~~1,788,814,575~~2,600,112,397	*

Chairman of the Board, President and Chief Executive Officer				Matthew D. Serra
Executive Vice President and Chief Financial Officer				Bruce L. Hartman
President and Chief Executive Officer, Foot Locker, Inc. — U.S.A.				Richard T. Mina
Senior Vice President, General Counsel and Secretary				Gary M. Bahler
Senior Vice President — Real Estate				Jeffrey L. Berk
Senior Vice President — Chief Information Officer				Marc D. Katz
Senior Vice President — Strategic Planning				Lauren B. Peters
Senior Vice President — Human Resources				Laurie J. Petrucci
Vice President — Investor Relations and Treasurer				Peter D. Brown
Vice President and Chief Accounting Officer				Robert W. McHugh

		Average Price Paid per Share⁽¹⁾
Oct. 31, 2004 through Nov. 27, 2004	—	$	—	—	$50,000,000
Nov. 28, 2004 through Jan. 1, 2005	6,670		26.28	—	50,000,000
Jan. 2, 2005 through Jan. 29, 2005	—		—	—	50,000,000
Total	6,670	$	26.28	—

PART I

Item 1	Business	1
Item 2	Properties	2
Item 3	Legal Proceedings	2
Item 4	Submission of Matters to a Vote of Security Holders	2

PART II

Item 5	Market for the Company’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	3
Item 6	Selected Financial Data	3
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	1917
Item 8	Consolidated Financial Statements and Supplementary Data	2018
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	5756
Item 9A	Controls and Procedures	5756

PART III

Item 10	Directors and Executive Officers of the Company	5756
Item 11	Executive Compensation	57
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	57
Item 13	Certain Relationships and Related Transactions	5857
Item 14	Principal Accountant Fees and Services	5857

PART IV

Item 15	Exhibits and Financial Statement Schedules ~~and Reports on Form 8-K~~	5857


Foot Locker	2,060	94	66	2,088
Lady Foot Locker	606	2	24	584
Kids Foot Locker	377	—	20	357
Champs Sports	582	17	18	581
Total Athletic Stores	3,625	113	128	3,610


Foot Locker		2,088	11	84	48	2,135
Champs Sports		581	—	5	16	570
Footaction		—	349	4	4	349
Lady Foot Locker		584	—	2	19	567
Kids Foot Locker	��	357	—	1	12	346

Total Athletic Stores		3,610	360	96	99	3,967

	2004			2003				2002
	(in millions)
Athletic Stores	$	420		$	363		$279
Direct-to-Customers		45			53		40
Division profit		465			416		319
Restructuring (charges) income⁽¹⁾		(2	)		(1	)	2
Total division profit		463			415		321
Corporate expense		(74	)		(73	)		(52	)
Total operating profit		389			342		269
Non-operating income⁽²⁾		—			—		3
Interest expense, net		(15	)		(18	)	(26)
Income from continuing operations before income taxes	$	374		$	324		$ 246

	2003			2002			2001
	(in millions)
Sales	$	—		$	—		$	54
Division profit (loss)
Disposed	$	—		$	—		$	(12	)
Restructuring income (charges)		(1	)		1			(33	)
Total division profit (loss)	$	(1	)	$	1		$	(45	)
Sales as a percentage of consolidated total		—	%		—	%		1	%

	2003			2002			2001			2004		2003			2002
	(in millions)									(in millions)
Interest expense	$	26		$	33		$	35			$	22		$	26		$	33
Interest income		(8	)		(7	)		(11	)			(7	)		(8	)		(7	)
Interest expense, net	$	18		$	26		$	24			$	15		$	18		$	26
Weighted-average interest rate (excluding facility fees):
Short-term debt		—	%		—	%		6.0	%			—	%		—	%		—	%
Long-term debt		6.1	%		7.2	%		7.4	%			5.2	%		6.1	%		7.2	%
Total debt		6.1	%		7.2	%		7.4	%			5.2	%		6.1	%		7.2	%
Short-term debt outstanding during the year:
High	$	—		$	—		$	11			$	—		$	—		$	—
Weighted-average	$	—		$	—		$	—			$	—		$	—		$	—

	2003			2002			2004			2003
	(in millions)							(in millions)
Cash and cash equivalents, net of debt and capital lease obligations	$	112		$	—
Cash, cash equivalents and short-term investments, net of debt
and capital lease obligations							$	131		$	112
Present value of operating leases		1,683			1,571			1,989			1,683
Total net debt		1,571			1,571			1,858			1,571
Shareholders’ equity		1,375			1,110			1,830			1,375
Total capitalization	$	2,946		$	2,681		$	3,688		$	2,946
Net debt capitalization percent		53.3	%		58.6	%		50.4	%		53.3	%
Net debt capitalization percent without operating leases		—	%		—	%		—	%		—	%

			Payments Due by Period
Contractual Cash Obligations	Total		Less than 1 Year		2 – 3 Years		4 – 5 Years		After 5 Years
	(in millions)
Long-term debt⁽¹⁾	$	321	$	—	$	—	$	150	$	171
Operating leases		2,366		387		693		533		753
Capital lease obligations		14		—		—		14		—
Other long-term liabilities⁽²⁾		—		—		—		—		—
Total contractual cash obligations	$	2,701	$	387	$	693	$	697	$	924

			Amount of Commitment Expiration by Period
Other Commercial Commitments	Total Amounts Committed		Less than 1 Year		2 – 3 Years		4 – 5 Years		After 5 Years
	(in millions)
Line of credit	$	176	$	—	$	176	$	—	$	—
Stand-by letters of credit		24		—		24		—		—
Purchase commitments⁽³⁾		1,377		1,377		—		—		—
Other⁽⁴⁾		56		6		19		27		4
Total commercial commitments	$	1,633	$	1,383	$	219	$	27	$	4

	Northern Group			Specialty Footwear		Domestic General Merchandise		Total
	(in millions)
2003
Assets	$	—		$	—	$	2	$	2
Liabilities		1			—		1		2
	$	(1	)	$	—	$	1	$	—
2002
Assets	$	—		$	—	$	2	$	2
Liabilities		1			—		2		3
	$	(1	)	$	—	$	—	$	(1	)

	2003			2002
	(in millions)
Land	$	3		$	3
Buildings:
Owned		32			32
Leased		—			1
Furniture, fixtures and equipment:
Owned		1,015			994
Leased		14			18
		1,064			1,048
Less: accumulated depreciation		(706	)		(675	)
		358			373
Alterations to leased and owned buildings, net of accumulated amortization		286			263
	$	644		$	636

	2003		2002
	(in millions)
8.50% debentures payable 2022	$	171	$	192
5.50% convertible notes payable 2008		150		150
Total long-term debt		321		342
Obligations under capital leases		14		15
		335		357
Less: Current portion		—		1
	$	335	$	356

	Fair Value (US in millions)			Contract Value (US in millions)
Inventory
Buy euro/ Sell British pound	$	(1	)	$	41		0.7028
Buy $US/Sell euro		—			2		1.2631
	$	(1	)	$	43	��
Intercompany
Buy $US/Sell euro	$	—		$	78		1.2331
Buy $US/Sell CAD$		—			6		0.7588
Buy euro/Sell British pound		(1	)		27		0.7086
	$	(1	)	$	111

	2004													Jan. 31, 2004 Total		Feb. 1, 2003 Total
	(in millions)
Long-term debt	$	—		—		—		—		239		196		$	435	$	341
Fixed rate
weighted-average interest rate		5.9	%	5.9	%	5.9	%	5.9	%	6.1	%	6.3	%

New York
~~(State or other jurisdiction of~~
~~incorporation or organization)~~

13-3513936

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

112 West 34^th Street, New York, New York
~~(Address of principal executive offices)~~

(Address of principal executive offices)

(Zip Code)