UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_____________________

FORM 10-K
_____________________

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the fiscal year ended January 31, 2004February 3, 2007

Commission file number 1-10299

FOOT LOCKER, INC.

(Exact name of Registrant as specified in its charter)

New York
13-3513936
(State or other jurisdiction of
incorporation or organization)
13-3513936
(I.R.S. Employer Identification No.)
incorporation or organization) 
112 West 34thStreet, New York, New York
10120
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code:
(212)720-3700
Securities registered pursuant to Section 12(b) of the Act:
 
10120

(Zip Code)

Registrant’s telephone number, including area code:
(212) 720-3700

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesxNoo

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 12(g)13 or Section 15(d) of the Act:
NoneAct. YesoNox

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  xNo [  ]
o

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

Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerxAccelerated fileroNon-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Act. Yes [X]  oNo [  ]

x

See pages 6067 through 6370 for Index of Exhibits.

Number of shares of Common Stock outstanding at March 26, 2004:27, 2007:         144,761,434154,675,352
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 29, 2006, was approximately:$   $1,788,814,575*  3,676,901,508*

*For purposes of this calculation only (a) all directors plus one executive officer and owners of five percent or more of the Registrant are deemed to be affiliates of the Registrant and (b) shares deemed to be “held” by such persons at August 1, 2003,July 29, 2006 include only outstanding shares of the Registrant’s voting stock with respect to which such persons had, on such date, voting or investment power.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement (the “Proxy Statement”) to be filed in connection with the 2004 Annual Meeting of Shareholders:Shareholders to be held on May 30, 2007: Parts III and IV.


TABLE OF CONTENTS

PART I          
Item 1Business1 
Item 21BusinessProperties21
Item 31ARisk FactorsLegal Proceedings2
Item 1BUnresolved Staff Comments4
Item 2Properties4
Item 3Legal Proceedings4
Item 4Submission of Matters to a Vote of Security Holders52
 
PART II    
 
Item 5Market for the Company’s Common Equity and Related Stockholder Matters and Issuer6
 3Purchases of Equity Securities 
Item 6Selected Financial Data37
Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations37
Item 7AQuantitative and Qualitative Disclosures aboutAbout Market Risk1921
Item 8Consolidated Financial Statements and Supplementary Data2022
Item 9Changes inIn and Disagreements with Accountants on Accounting and Financial Disclosure63
Item 9A57Controls and Procedures63
Item 9BOther Information63
 
Item 9AControls and Procedures57
PART III    
Item 10Directors and Executive Officers of the Company57 
Item 1110Directors, Executive Officers and Corporate Goverance Executive Compensation5764
Item 11Executive Compensation64
Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder64
 57Matters 
Item 13Certain Relationships and Related Transactions, and Director Independence5864
Item 14Principal Accountant Fees and Services6458
 
PART IV    
 
Item 15Exhibits and Financial Statement Schedules and Reports on Form 8-K5865


PART I

Item 1. Business

General

Foot Locker, Inc., incorporated under the laws of the State of New York in 1989, is a leading global retailer of athletic footwear and apparel, operating as of January 31, 2004, 3,6103,942 primarily mall-based stores in North America,the United States, Canada, Europe, Australia, and Australia.New Zealand as of February 3, 2007, Foot Locker, Inc. and its subsidiaries hereafter are referred to as the “Registrant”“Registrant,” “Company” or “Company.“we.” Information regarding the business is contained under the “Business Overview” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company maintains a website on the Internet atwww.footlocker-inc.com. The Company’s filings with the Securities and Exchange Commission, including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through this website as soon as reasonably practicable after they are filed with or furnished to the SEC by clicking on the “SEC Filings” link. The Corporate Governance section of the Company’s corporate website atwww.footlocker-inc.comcontains the Company’s Corporate Governance Guidelines, Committee Charters, and the Company’s Code of Business Conduct for directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. Copies of these documents may also be obtained free of charge upon written request to the Company’s Corporate Secretary at 112 West 34thStreet, New York, NY 10120. The Company intends to disclose promptly amendments to the Code of Business Conduct and waivers of the Code for directors and executive officers on the corporate governance section of the Company’s corporate website.

     The Certification of the Chief Executive Officer required by Section 303A.12(a) of The New York Stock Exchange Listing Standards relating to the Company’s compliance with The New York Stock Exchange Corporate Governance Listing Standards was submitted to The New York Stock Exchange on June 2, 2006.

Information Regarding Business Segments and Geographic Areas

The financial information concerning business segments, divisions and geographic areas is contained under the “Business Overview” and “Segment Information” sections in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Information regarding sales, operating results and identifiable assets of the Company by business segment and by geographic area is contained under the “Segment Information” footnote in “Item 8. Consolidated Financial Statements and Supplementary Data.”

The service marks and trademarks appearing on this page and elsewhere in this report (except for NFL,ESPN, NBA, Nike, Amazon.com, Burger King, Popeye’s,Weekend Edition, The San Francisco Music Box Company, and USOC) are owned by Foot Locker, Inc. or its subsidiaries.

Employees

The Company and its consolidated subsidiaries had 15,78216,806 full-time and 24,51628,600 part-time employees at January 31, 2004.February 3, 2007. The Company considers employee relations to be satisfactory.

Competition

The financial     Financial information concerning competition is contained under the “Business Risk” section in the “Financial Instruments and Risk Management” footnote in “Item 8. Consolidated Financial Statements and Supplementary Data.”

Merchandise Purchases

The financial     Financial information concerning merchandise purchases is contained under the “Business Concentration”“Liquidity” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under the “Business Risk” section in the “Financial Instruments and Risk Management” footnote in “Item 8. Consolidated Financial Statements and Supplementary Data.”

1


Item 1A. Risk Factors

     The statements contained in this Annual Report on Form 10-K and incorporated by reference (“Annual Report”) that are not historical facts, including, but not limited to, statements regarding our expected financial position, business and financing plans found in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “believes,” “expects,” “plans,” “intends,” “anticipates” and similar expressions identify forward-looking statements. The actual results of the future events described in these forward-looking statements could differ materially from those stated in the forward-looking statements.

     Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report, including those discussed below. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance. Accordingly, readers of the Annual Report should consider these risks and uncertainties in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The industry in which we operate is dependent upon fashion trends, customer preferences and other fashion-related factors.

     The athletic footwear and apparel industry is subject to changing fashion trends and customer preferences. We cannot guarantee that our merchandise selection will accurately reflect customer preferences when it is offered for sale or that we will be able to identify and respond quickly to fashion changes, particularly given the long lead times for ordering much of our merchandise from vendors. For example, we order athletic footwear four to six months prior to delivery to our stores. If we fail to anticipate accurately either the market for the merchandise in our stores or our customers’ purchasing habits, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations.

     A substantial portion of our highest margin sales are to young males (ages 12–25), many of whom we believe purchase athletic footwear and licensed apparel as a fashion statement and are frequent purchasers of athletic footwear. Any shift in fashion trends that would make athletic footwear or licensed apparel less attractive to these customers could have a material adverse effect on our business, financial condition, and results of operations.

The businesses in which we operate are highly competitive.

     The retail athletic footwear and apparel business is highly competitive with relatively low barriers to entry. Our athletic footwear and apparel operations compete primarily with athletic footwear specialty stores, sporting goods stores and superstores, department stores, discount stores, traditional shoe stores, and mass merchandisers, many of which are units of national or regional chains that have significant financial and marketing resources. The principal competitive factors in our markets are price, quality, selection of merchandise, reputation, store location, advertising, and customer service. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our business, financial condition, and results of operations.

     Although we sell merchandise via the Internet, a significant shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internet could have a material adverse effect on our business results. In addition, some of our vendors distribute products directly through the Internet and others may follow. Some vendors operate retail stores and some have indicated that further retail stores will open. Should this continue to occur, and if our customers decide to purchase directly from our vendors, it could have a material adverse effect on our business, financial condition, and results of operations.

2

We depend on mall traffic and our ability to identify suitable store locations.

     Our sales, particularly in the United States and Canada, are dependent in part on a high volume of mall traffic. Our stores are located primarily in enclosed regional and neighborhood malls. Mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor department stores or changes in customer preferences or acts of terrorism. A decline in the popularity of mall shopping among our target customers could have a material adverse effect on us.

     To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations such as in regional and neighborhood malls anchored by major department stores. We cannot be certain that desirable mall locations will continue to be available.

The effects of natural disasters, terrorism, acts of war and retail industry conditions may adversely affect our business.

     Natural disasters, including hurricanes, floods, and tornados may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from vendors for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.

A change in the relationship with any of our key vendors or the unavailability of our key products at competitive prices could affect our financial health.

     Our business is dependent to a significant degree upon our ability to purchase brand-name merchandise at competitive prices, including the receipt of volume discounts, cooperative advertising, and markdown allowances from our vendors. The Company purchased approximately 78 percent of its merchandise in 2006 from its top five vendors and expects to continue to obtain a significant percentage of its athletic product from these vendors in future periods. Approximately 50 percent was purchased from one vendor — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike, they individually purchase 40 to 65 percent of their merchandise from Nike. We have no long-term supply contracts with any of our vendors. Our inability to obtain merchandise in a timely manner from major suppliers (particularly Nike) as a result of business decisions by our suppliers or any disruption in the supply chain could have a material adverse effect on our business, financial condition, and results of operations. Because of our strong dependence on Nike, any adverse development in Nike’s financial condition and results of operations or the inability of Nike to develop and manufacture products that appeal to our target customers could also have an adverse effect on our business, financial condition, and results of operations. We cannot be certain that we will be able to acquire merchandise at competitive prices or on competitive terms in the future.

     Merchandise that is high profile and in high demand is allocated by our vendors based upon their internal criteria. Although we have generally been able to purchase sufficient quantities of this merchandise in the past, we cannot be certain that our vendors will continue to allocate sufficient amounts of such merchandise to us in the future. In addition, our vendors provide support to us through cooperative advertising allowances and promotional events. We cannot be certain that such assistance from our vendors will continue in the future. These risks could have a material adverse effect on our business, financial condition, and results of operations.

We may experience fluctuations in and cyclicality of our comparable store sales results.

     Our comparable-store sales have fluctuated significantly in the past, on both an annual and a quarterly basis, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable-store sales results, including, among others, fashion trends, the highly competitive retail store sales environment, economic conditions, timing of promotional events, changes in our merchandise mix, calendar shifts of holiday periods, and weather conditions.

     Many of our products, particularly high-end athletic footwear and licensed apparel, represent discretionary purchases. Accordingly, customer demand for these products could decline in a recession or if our customers develop other priorities for their discretionary spending. These risks could have a material adverse effect on our business, financial condition, and results of operations.

3

Our operations may be adversely affected by economic or political conditions in other countries.

     Approximately 24 percent of our sales and a significant portion of our operating profits for 2006 were attributable to our sales in Europe, Canada, New Zealand, and Australia. As a result, our business is subject to the risks associated with doing business outside of the United States, such as foreign governmental regulations, foreign customer preferences, political unrest, disruptions or delays in shipments, and changes in economic conditions in countries in which we operate. Although we enter into forward foreign exchange contracts and option contracts to reduce the effect of foreign currency exchange rate fluctuations, our operations may be adversely affected by significant changes in the value of the U.S. dollar as it relates to certain foreign currencies.

     In addition, because we and our suppliers have a substantial amount of our products manufactured in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, and economic, labor, and other conditions in the countries from which our suppliers obtain their product.

     Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary athletic footwear, apparel, and related products, tend to decline during recessionary periods when disposable income is low and customers are hesitant to use available credit.

Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.

     We operate three distribution centers worldwide to support our athletic business. If complications arise with any facility or any facility is severely damaged or destroyed, the other distribution centers may not be able to support the resulting additional distribution demands. This may adversely affect our ability to deliver inventory on a timely basis. We depend upon UPS for shipment of a significant amount of merchandise. An interruption in service by UPS for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects.

     Our freight cost is affected by changes in fuel prices through surcharges. Increases in fuel prices and surcharges and other factors may increase freight costs and thereby increase our cost of sales.

A major failure of our information systems could harm our business.

     We depend on information systems to process transactions, manage inventory, operate our website, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. Any material disruption or slowdown of our systems could cause information to be lost or delayed which could have a negative effect on our business. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We cannot be assured that our systems will be adequate to support future growth.

Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties

The properties of the Company and its consolidated subsidiaries consist of land, leased and owned stores, and administrative and distribution facilities. TotalGross operating square footage and total selling area for the Athletic Stores segment at the end of 20032006 was approximately 7.9214.55 and 8.74 million square feet.feet, respectively. These properties are primarily located in the United States, Canada, various European countries, Australia, and Europe.
New Zealand.

The Company currently operates three distribution centers, of which one is owned and two are leased, occupying an aggregate of 1.882.12 million square feet. Two of the three distribution centers are located in the United States and one is in Europe. The Company also has one additional distribution center that is leased and sublet, occupying approximately 0.1 million square feet.

Item 3. Legal Proceedings

Legal     Information regarding the Company’s 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 occurredare contained 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.
“Legal Proceedings” footnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”

4

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of the year ended January 31, 2004.
February 3, 2007.

Executive Officers of the Company

Information with respect to Executive Officers of the Company, as of April 5, 2004,2, 2007, is set forth below:

Chairman of the Board, President and Chief Executive Officer    Matthew D. Serra
Executive Vice President and Chief Financial OfficerBruce L. Hartman
President and Chief Executive Officer - Foot Locker, Inc. — InternationalRonald J. Halls
President and Chief Executive Officer - Foot Locker, Inc. — U.S.A.Richard T. Mina
Senior Vice President, General Counsel and SecretaryGary M. Bahler
Senior Vice President — Real EstateJeffrey L. Berk
Senior Vice President, — Chief Information Officer and Investor RelationsPeter D. Brown
Senior Vice President and Chief Financial OfficerMarc D. KatzRobert W. McHugh
Senior Vice President — Strategic PlanningLauren B. Peters
Senior Vice President — Human ResourcesLaurie J. Petrucci
Vice President — Investor Relations and TreasurerPeter D. Brown
Vice President and Chief Accounting OfficerGiovanna Cipriano
Vice President and TreasurerRobert W. McHughJohn A. Maurer

Matthew D. Serra, age 59,62, has served as Chairman of the Board since February 1, 2004. He served as2004, President since April 12, 2000 and Chief Executive Officer since March 4, 2001. Mr. Serra served as Chief Operating Officer from February 2000 to March 3, 2001 and as President and Chief Executive Officer of Foot Locker Worldwide from September 1998 to February 2000.

Bruce L. Hartman,Ronald J. Halls, age 50, has served as Executive Vice President since April 18, 2002 and Chief Financial Officer since February 27, 1999. He served as Senior Vice President from February 1999 to April 2002. Mr. Hartman served as Vice President-Corporate Shared Services from August 1998 to February 1999.

Richard T. Mina, age 47,53, has served as President and Chief Executive Officer of Foot Locker, Inc. —Inc.- International since October 9, 2006. He served as President and Chief Executive Officer of Champs Sports, from February 2003 to October 8, 2006 and as Chief Operating Officer of Champs Sports from February 2000 to February 2003.

Richard T. Mina, age 50, has served as President and Chief Executive Officer of Foot Locker, Inc.- U.S.A. since February 2, 2003. He served as President and Chief Executive Officer of Champs Sports, an operating division of the Company, from April 1999 to February 1, 2003. He served as President of Foot Locker Europe from January 1996 to April 1999.

Gary M. Bahler, age 52,55, has served as Senior Vice President since August 1998, General Counsel since February 1993 and Secretary since February 1990.

2


Jeffrey L. Berk, age 48,51, has served as Senior Vice President — Real Estate since February 2000 and President of Foot Locker Realty, North America from January 1997 to February 2000.

MarcPeter D. Katz,Brown, age 39,52, has served as Senior Vice President, — Chief Information Officer and Investor Relations since May 12, 2003.September 2006. Mr. Katz served as Vice President and Chief Information Officer from July 2002 to May 11, 2003 and as Vice President and Controller from April 2002 to July 2002. During the period of 1997 to 2002, he served in the following capacities at the Financial Services Center of Foot Locker Corporate Services: Vice President and Controller from July 2001 to April 2002; Controller from December 1999 to July 2001; and Retail Controller from October 1997 to December 1999.

Lauren B. Peters, age 42, has served as Senior Vice President — Strategic Planning since April 18, 2002. Ms. Peters served as Vice President — Planning from January 2000 to April 17, 2002. She served as Vice President and Controller from August 1998 to January 2000.

Laurie J. Petrucci, age 45, has served as Senior Vice President — Human Resources since May 2001. Ms. Petrucci served as Senior Vice President — Human Resources of Foot Locker Worldwide from March 2000 to April 2001. She served as Vice President of Organizational Development and Training of Foot Locker Worldwide from February 1999 to March 2000 and as Vice President — Human Resources of Foot Locker Canada from February 1997 to February 1999.

Peter D. Brown age 49, has served as Vice President — Investor Relations and Treasurer sincefrom October 2001. Mr. Brown2001 to September 2006, served as Vice President — Investor Relations and Corporate Development from April 2001 to October 2001 and as Assistant Treasurer — Investor Relations and Corporate Development from August 2000 to April 2001.

Robert W. McHugh, age 48, has served as Senior Vice President and Chief Financial Officer since November 2005. He served as Vice President and Chief FinancialAccounting Officer from January 2000 to November 2005.

Lauren B. Peters, age 45, has served as Senior Vice President — Strategic Planning since April 2002. Ms. Peters served as Vice President — Planning from January 2000 to April 2002.

Laurie J. Petrucci, age 48, has served as Senior Vice President — Human Resources since May 2001. Ms. Petrucci served as Senior Vice President — Human Resources of Ladythe Foot Locker Worldwide division from October 1999March 2000 to August 2000, and as Director of the Company’s Profit Improvement Task Force from November 1998 to October 1999.May 2001.

Robert W. McHugh,Giovanna Cipriano, age 45,37, has served as Vice President and Chief Accounting Officer since January 2000. HeNovember 2005. She served as Divisional Vice President, Financial Controller from June 2002 to November 2005 and as Financial Controller from April 1999 to June 2002.

John Maurer, age 47, has served as Vice President — Taxationand Treasurer since September 12, 2006. Mr. Maurer served as Assistant Treasurer from November 1997April 2002 to January 2000.September 11, 2006.

There are no family relationships among the executive officers or directors of the Company.

5

PART II

Item 5. Market for the Company’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities

Information regarding the Company’s market for stock exchange listings, common equity, quarterly high and low prices, and dividend policy and stock exchange listings are contained in the “Shareholder Information and Market Prices” footnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”

     There were no purchases of common stock during the fourth quarter of 2006. On February 15, 2006, the Company announced that its Board of Directors authorized a $150 million, three-year share repurchase plan program. During 2006, the Company repurchased 334,200 of common stock at a cost of approximately $8 million. On March 7, 2007, the Company announced that its Board of Directors authorized a new $300 million, three-year share repurchase program replacing the earlier $150 million program.

Performance Graph

     The following graph compares the cumulative 5-year total return to shareholders on Foot Locker, Inc.’s common stock relative to the total returns of the Russell 2000 Index and a selected peer group, which represents its peers as retailers in the athletic footwear and apparel industry. The peer group comprises:

  • Dick’s Sporting Goods, Inc.
  • The Finish Line, Inc.
  • Hibbett Sporting Goods, Inc., and
  • Genesco, Inc., whose business includes operations outside of the athletic footwear and apparel retailing.

     In 2005, the peer group also included The Sports Authority, Inc. On January 23, 2006, The Sports Authority, Inc. announced it had agreed to go private through an acquisition by Leonard Green & Partners LP and certain members of its senior management and, therefore, it was not included in this year's performance graph.

Indexed Share Price Performance

6

Item 6. Selected Financial Data

Selected financial data is included as the “Five Year Summary of Selected Financial Data” footnote in “Item 8. Consolidated Financial Statements and Supplementary Data.”

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments — Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, and Champs Sports.Footaction (beginning May 2004). The Direct-to-Customers segment reflects Footlocker.com, Inc., which sells, through its affiliates, including Eastbay, Inc., to customers through catalogs and Internet websites.

3


The Foot Locker brand is one of the most widely recognized names in the market segments in which the Company operates, epitomizing high quality for the active lifestyle customer. This brand equity has aided the Company’s ability to successfully develop and increase its portfolio of complementary retail store formats, specifically Lady Foot Locker and Kids Foot Locker, as well as Footlocker.com, Inc., its direct-to-customers business. Through various marketing channels, including television campaigns and sponsorships of various sporting events, Foot Locker, Inc. reinforces its image with a consistent message; namely, that it is the destination store for athletic apparelfootwear and footwearapparel with a wide selection of merchandise in a full-service environment.

Athletic Stores

The Company operates 3,6103,942 stores in the Athletic Stores segment. The following is a brief description of the Athletic Stores segment’s operating businesses:

Foot Locker — Foot Locker is a leading athletic footwear and apparel retailer. Its stores offer the latest in athletic-inspired performance products, manufactured primarily by the leading athletic brands. Foot Locker offers products for a wide variety of activities including running, basketball, hiking, tennis, aerobics, fitness, baseball, football, and soccer. Its 2,0882,101 stores are located in 1620 countries including 1,4481,368 in the United States, Puerto Rico, the United StatesU. S. Virgin Islands, and Guam, 129132 in Canada, 427509 in Europe and a combined 8492 in Australia and New Zealand. The domestic stores have an average of 2,4002,100 selling square feet and the international stores have an average of 1,6001,500 selling square feet.

Lady Foot Locker — Lady Foot Locker is a leading U.S. retailer of athletic footwear, apparel and accessories for women. Its stores carry all major athletic footwear and apparel brands, as well as casual wear and an assortment of proprietary merchandise designed for a variety of activities, including running, basketball, walking and fitness. Its 584 stores are located in the United States and Puerto Rico and have an average of 1,200 selling square feet.

Kids Foot Locker — Kids Foot Locker is a national children’s athletic retailer that offers the largest selection of brand-name athletic footwear, apparel and accessories for infants, boys and girls, primarily on an exclusive basis. Its stores feature an entertaining environment geared to both parents and children. Its 357 stores are located in the United States and Puerto Rico and have an average of 1,400 selling square feet.

Champs Sports — Champs Sports is one of the largest mall-based specialty athletic footwear and apparel retailers in the United States. Its product categories include athletic footwear, apparel and accessories, and a focused assortment of equipment. This combination allows Champs Sports to differentiate itself from other mall-based stores by presenting complete product assortments in a select number of sporting activities. Its 581576 stores are located throughout the United States, Canada, and the U.S. Virgin Islands. The Champs Sports stores have an average of 3,700 selling square feet.

Footaction— Footaction is a national athletic footwear and apparel retailer. The primary customers are young urban males that seek street-inspired fashion styles. Its 373 stores are located throughout the United States and Canada.Puerto Rico and focus on marquee allocated footwear and branded apparel. The Champs SportsFootaction stores have an average of 3,9002,900 selling square feet.

Lady Foot Locker — Lady Foot Locker is a leading U.S. retailer of athletic footwear, apparel and accessories for women. Its stores carry major athletic footwear and apparel brands, as well as casual wear and an assortment of proprietary merchandise designed for a variety of activities, including running, basketball, walking, and fitness. Its 557 stores are located in the United States, Puerto Rico, the U. S. Virgin Islands, and Guam and have an average of 1,300 selling square feet.

Kids Foot Locker — Kids Foot Locker is a national children’s athletic retailer that offers the largest selection of brand-name athletic footwear, apparel and accessories for children. Its stores feature an environment geared to appeal to both parents and children. Its 335 stores are located in the United States, Puerto Rico, and the U.S. Virgin Islands and have an average of 1,400 selling square feet.

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Store Profile

      At               At
  January 28, 2006 Opened Closed February 3, 2007
Foot Locker2,121      57  77  2,101     
Champs Sports556      27  7  576      
Footaction363      17  7  373      
Lady Foot Locker554      22  19  557      
Kids Foot Locker327      23  15  335      
 
Total Athletic Stores3,921      146  125  3,942      


 		      At
February 1, 2003
    Opened
    Closed
    At
January 31, 2004
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  
 

4


Direct-to-Customers

Footlocker.com — Footlocker.com, Inc., sells, through its affiliates, directly to customers through catalogs and its Internet websites. Eastbay, Inc., one of its affiliates, is one of the largest direct marketers of athletic footwear, apparel, equipment, team licensed and licensed private-label merchandise in the United States and provides the Company’s seveneight full-service e-commerce sites access to an integrated fulfillment and distribution system. The Company has an agreement with the National Football League as its official catalog and e-commerce retailer, which includes managing the NFL catalog and e-commerce businesses. Footlocker.com designs, merchandises and fulfills the NFL’s official catalog (NFL Shop) and the e-commerce site linked towww.NFLshop.com. The Company has a strategic alliance to offer footwear and apparel on the Amazon.com website and the Foot Locker brands are featured in the Amazon.com specialty stores for apparel and accessories and sporting goods. During 2003, the Company entered into an arrangement with the NBA and Amazon.com whereby Foot Locker began to provide the fulfillment services for NBA licensed products sold over the Internet at NBAstore.com and the NBA store on Amazon.com. In addition, the Company also entered intohas a marketing agreement with the U.S. Olympic Committee (USOC) providing the Company with the exclusive rights to sell USOC licensed products through catalogs and via a newan e-commerce site. The Company has an agreement with ESPN for ESPN Shop — an ESPN-branded direct mail catalog and e-commerce site linked to

Saleswww.ESPNshop.com, where consumers can purchase athletic footwear, apparel and equipment which will be managed by SegmentFootlocker.com. Both the catalog and the e-commerce site feature a variety of ESPN-branded and non-ESPN-branded athletically inspired merchandise.

Franchise Operations

     In March of 2006, the Company entered into a ten-year area development agreement with the Alshaya Trading Co. W.L.L., in which the Company agreed to enter into separate license agreements for the operation of a minimum of 75 Foot Locker stores, subject to certain restrictions, located within the Middle East. Three of these franchised stores were operational at February 3, 2007. Revenue from the three franchised stores was not significant for the year-ended February 3, 2007. These stores are not included in the Company’s operating store count above.

Overview of Consolidated Results

     2006 was a challenging year for the Company due to the continued highly competitive retail environment both in the United States and abroad. The 2006 results represent the 53 weeks ended February 3, 2007 as compared with the 52 weeks in the 2005 and 2004 reporting years. Income from continuing operations in 2006, after-tax, was $247 million, or $1.58 per diluted share, as compared with $263 million or $1.67 per diluted share in 2005. The following were the financial highlights of 2006:

  • Contributed $68 million to its U.S. and Canadian qualified pension plans. The U.S. payment was made inadvance of ERISA requirements.
  • Repaid $50 million of its 5-year term loan, in advance of the regularly scheduled payment dates of May 2007and May 2008.
  • Purchased and retired $38 million of the $200 million 8.50 percent debentures payable in 2022 at a $2 milliondiscount from face value, bringing the outstanding amount to $134 million as of February 3, 2007.
  • Declared and paid dividends totaling $61 million. In the fourth quarter the Company increased its quarterlydividend per share by 39 percent.
  • Repurchased $8 million of common stock.

8

     Additionally, the following were the key factors affecting the Company’s performance during 2006:

  • The 53rdweek increased sales by $95 million and increased net income by $18 million or $0.11 per dilutedshare.
  • Included in 2006 is a non-cash impairment charge of $17 million ($12 million after-tax), or $0.08 per dilutedshare, recorded to write-down the value of long-lived assets of underperforming stores in the Company’sEuropean operations. This was necessitated by the continued declines in sales and division profit, principallyas the result of a fashion shift from higher priced marquee footwear to lower priced low-profile footwear and acontinued highly competitive environment, particularly for the sale of low-profile footwear styles.
  • During the first quarter of 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment.” The Companyhas recorded an incremental $6 million of share-based compensation in 2006. Additionally, the Companyrecorded a cumulative effect of a change in accounting of $1 million to reflect estimated forfeitures for priorperiods related to the Company’s nonvested restricted stock awards.

The following table summarizesrepresents a summary of sales by segment, after reclassification for businesses disposed. The disposition of all businesses previously held for disposal was completed by the end of 2001:


 		      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                  
Disposed(1)
                —           —           54                   
               $4,779        $4,509        $4,379                  
 

Division Profit

The Company evaluates performance based on several factors, of which, the primary financial measure is division results. Divisionand operating profit, reflects income from continuing operations before income taxes, corporate expense, non-operating income and net interest expense. The following table reconciles division profit by segmentreconciled to income from continuing operations before income taxes.operations.

      2006      2005      2004 
     (in millions)    
Sales        
Athletic Stores$5,370 $5,272 $4,989 
Direct-to-Customers 380   381  366 
 $5,750 $5,653 $5,355 
Operating Result      
Athletic Stores$405 $419 $420 
Direct-to-Customers 45    48  45 
Division profit 450  467  465 
Restructuring charges(1) (1)  —  (2)
    Total division profit 449  467  463 
Corporate expense (68)  (58) (74)
Total operating profit 381  409  389 
Other income 14  6  — 
Interest expense, net 3    10  15 
Income from continuing operations before income taxes$392 $405 $374 


 		      2003
    2002
    2001
    

 		      (in millions)
 		    
Athletic Stores              $363         $279         $283                   
Direct-to-Customers                53           40           24                   
Division profit from ongoing operations                416           319           307                   
Disposed(1)
                —           —           (12)                  
Restructuring income (charges)(2)
                (1)          2           (33)                  
Total division profit                415           321           262                   
Corporate expense(3)
                (73)          (52)          (65)                  
Total 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)     IncludesThe restructuring charge in 2006 represents a revision to the original estimate of the lease liability associated with the guarantee of The San Francisco Music Box distribution center. During 2004, the Company and Burger King and Popeye’s franchises.

(2)Restructuring charges of $1 million and $33 million in 2003 and 2001, respectively, andrecorded a restructuring incomecharge of $2 million in 2002 reflect the disposition of non-core businesses and an accelerated store-closing program.

(3)2001 includes a $1 million restructuring charge related to the 1999 closuredispositions of a distribution center.non-core businesses. These charges were classified within selling, general and administrative expenses in the Consolidated Statements of Operations.

5


Sales

All references to comparable-store sales for a given period relate to sales offrom stores that are open at the period-end, and that have been open for more than one year.year, and exclude the effect of foreign currency fluctuations. Accordingly, stores opened and closed during the period are not included. AllSales from the Direct-to-Customer segment are included in the calculation of comparable-store sales increases and decreases excludefor all periods presented. Sales from acquired businesses that include the impactpurchase of foreign currency fluctuations.
inventory are included in the computation of comparable-store sales after 15 months of operations. Accordingly, Footaction sales have been included in the computation of comparable-store sales since August 2005.

Sales of $4,779increased to $5,750 million, in 2003 increasedor by 6.01.7 percent from sales of $4,509 million in 2002.as compared with 2005. Excluding the effect of foreign currency fluctuations and the 53rd week, sales increased by 2.2declined 0.7 percent as compared with 2002,2005. Comparable-store sales decreased by 1.2 percent, which is primarily as a result of the Company’s continuation of the new store opening program. Comparable-store sales decreased by 0.5 percent.
decline in our European operations.

9

Sales of $4,509$5,653 million in 20022005 increased 3.0by 5.6 percent from sales of $4,379$5,355 million in 2001. Excluding sales from businesses disposed and the2004. The effect of foreign currency fluctuations 2002on sales was not significant. This increase was primarily related to increased by 3.1 percent as compared with 2001 primarily as a result ofsales in the new store opening program.Company’s Footaction and Champs Sports formats. Comparable-store sales increased by 0.12.7 percent.

Gross Margin

Gross margin as a percentage of sales was 30.2 percent in 2006; excluding the effect of 30.9 percent increased by 110the 53rd week, gross margin declined 20 basis points in 2003 from 29.8 percent in 2002, primarily reflecting a decrease in the cost of merchandise, as a percentage of sales. Increased vendor allowances improved gross margin, as a percentage of sales, by 28 basis points, year over year.

Gross margin, as a percentage of sales, of 29.8 percent declined by 10 basis points in 2002 as compared with 29.9 percent2005. This reflects increased promotional activity, offset, in 2001, primarily resulting frompart, by the increase in the costeffect of merchandise, as a percentageincreased vendor allowances. The effect of sales, due to increased markdown activity. The impact of thethese vendor allowances was an improvement in gross margin in 2002,2006, as a percentage of sales, of 3020 basis points as compared with 2001.

Segment Information

Athletic Stores


 		      2003
    2002
    2001
    

 		      (in millions)
 		    
Sales              $4,413        $4,160        $3,999                  
Division profit
                                                                        
Stores              $363         $279         $283                   
Restructuring income                —           1           —                   
Total division profit              $363         $280         $283                   
Sales as a percentage of consolidated total                92%          92%          92%                  
Number of stores at year end                3,610          3,625          3,590                  
Selling square footage (in millions)                7.92          8.04          7.94                  
Gross square footage (in millions)                13.14          13.22          13.14                  
 

Athletic Stores2005. Additionally, gross margin was negatively affected by lower sales, of $4,413 millionwhich resulted in increased 6.1 percent in 2003, as compared with $4,160 million in 2002. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from athletic store formats increased 1.9 percent in 2003, driven by the Company’s new store opening program, particularly in Foot Locker Europe and Foot Locker Australia. Foot Locker Europe and Foot Locker Australia also continued to generate solid comparable-store sales increases. Total Athletic Stores comparable-store sales decreased by 0.9 percent in 2003.

6


Footwear sales in the U.S. were led by the classic category. Consumer demand for “retro” fashioned athletic footwear was also a primary driver of sales throughout 2003. The Company also benefited from exclusive offerings from its primary suppliers, such as the Nike 20 pack line in the latter part of 2003. Sales of private label and licensed product also contributed to the increase in sales, as consumer interest began to show improvement with the strengthening of the economy.

Comparable-store sales at Kids Foot Locker continually improved since the realignment under the Foot Locker U.S. management team in 2002. Kids Foot Locker’s sales, significantly improved during the fourth quarter of 2003, nearly reaching double-digit comparable-store sales.

Lady Foot Locker sales remained essentially unchanged in 2003 versus the prior year as this business continued to modify its merchandising mix to better suit its target customers. The Company closed a number of underperforming stores, focused on remodeling and relocating numerous stores and changed its merchandise assortment.

Athletic Stores sales of $4,160 million increased 4.0 percent in 2002, as compared with $3,999 million in 2001. The increase was in part due to the euro strengthening against the U.S. dollar in 2002, particularly in the third and fourth quarters. Excluding the effect of foreign currency fluctuations, sales from athletic store formats increased 2.8 percent in 2002, which was driven by the Company’s new store opening program, particularly in Foot Locker Europe and Champs Sports. Foot Locker Europe and Foot Locker Australia generated impressive comparable-store sales increases. Champs Sports also contributed a comparable-store sales increase. Total Athletic Stores comparable-store sales decreased by 0.4 percent in 2002.

The Foot Locker business in the United States,occupancy costs, as a whole, showed disappointing sales during 2002. In the United States, both the basketball category as well as the trend in classic shoes led footwear sales across most formats, although certain higher-priced marquee footwear did not sell as well as anticipated in the first quarterpercentage of 2002. During the second quarter of 2002, the Company successfully moved its marquee footwear back in line with historical levels and re-focused its marquee footwear selection on products having a retail price of $90 to $120 per pair and made changes to the product assortment, which accommodated customer demands in the third quarter of 2002. Lower mall traffic resulted in disappointing sales during the fourth quarter of 2002. Sales, however, benefited from the apparel strategy led by merchandise in private label and licensed offerings.
sales.

Sales from the Lady Foot Locker and Kids Foot Locker formats were particularly disappointing in 2002. The Kids Foot Locker format, which had previously been managed in conjunction with Lady Foot Locker, was realigned and is currently being managed by the Foot Locker U.S. management team. Pursuant to SFAS No. 144, the Company performed an analysis of the recoverability of store long-lived assets for the Lady Foot Locker format during the third quarter of 2002 and for the Kids Foot Locker format during the fourth quarter of 2002 and recorded asset impairment charges of $1 million and $6 million, respectively.

Division profit from Athletic Stores increased by 30.1 percent to $363 million in 2003 from $279 million in 2002. Division profit,     Gross margin as a percentage of sales increased to 8.2was 30.2 percent in 2003 from 6.7 percent in 2002. The increase in 2003 was primarily driven2005, decreasing by the overall improvement in the gross margin rate, as a result of better merchandise purchasing, as well as, increased vendor allowances which contributed 30 basis points tofrom 30.5 percent in 2004. This decline was primarily the overall improvement. Additionally, during 2002result of increased markdowns recorded by the Company recorded $7 millionEuropean operation. The effect of impairment charges for the Kids Foot Locker and Lady Foot Locker formats. Operating performance improved in the U.S. Foot Locker, Kids Foot Locker and international formatsvendor allowances on gross margin, as compared with the prior year. Champs Sports and Lady Foot Locker remained relatively flat as compared with 2002. However, for the second halfa percentage of 2003 the operating results of the Lady Foot Locker format improved considerably,sales, as compared with the corresponding prior year period. Management expects this trend to continue.
period was not significant.

7


Division profit from athletic store formats decreased 1.4 percent to $279 million in 2002 from $283 million in 2001. Division profit, as a percentage of sales, decreased to 6.7 percent in 2002 from 7.1 percent in 2001 primarily due to the increased operating expenses associated with the new store-opening program. The impact of no longer amortizing goodwill as a result of the Company’s adoption of SFAS No. 142 was a reduction of amortization expense of $2 million in 2002. Operating performance improved internationally but was more than offset by the decline in performance in the United States from the Foot Locker, Lady Foot Locker and Kids Foot Locker formats. Division profit included asset impairment charges of $1 million and $2 million in 2002 and 2001, respectively, for the Lady Foot Locker format. An asset impairment charge of $6 million was also recorded in 2002 related to the Kids Foot Locker format.

Direct-to-Customers


 		      2003
    2002
    2001
    

 		      (in millions)
 		    
Sales              $366         $349         $326                   
Division profit              $53         $40         $24                   
Sales as a percentage of consolidated total                8%          8%          7%                  
 

Direct-to-Customers sales increased 4.9 percent in 2003 to $366 million as compared with $349 million in 2002. Division profit, as a percentage of sales, in this quickly expanding division, is more profitable than the store business. The growth of the Internet business continued to drive sales in 2003. Internet sales increased by 32.6 percent to $191 million from $144 million in 2002. Catalog sales decreased by 14.6 percent to $175 million in 2003 from $205 million in 2002. Management believes that the decrease in catalog sales is substantially offset by the increase in Internet sales as the trend has continued for customers to browse and select products through its catalogs and then to make their purchases via the Internet. The Company continues to implement new initiatives to grow this business, including new marketing arrangements and strategic alliances with well-known third parties. During 2003, the Company extended its agreement with the NFL, entered into new alliance agreements with the NBA and the USOC and expanded its services through on-line specialty stores with Amazon.com. These agreements generally provide for the Company to merchandise, fulfill and manage the websites of these strategic partners.

Direct-to-Customers sales increased by 7.1 percent to $349 million in 2002 from $326 million in 2001. The Internet business continued to drive the sales growth in 2002. Internet sales increased by $44 million, or 44.0 percent, to $144 million in 2002 compared with $100 million in 2001. Catalog sales decreased 9.3 percent to $205 million in 2002 from $226 million in 2001. During 2002, the Company implemented many new initiatives designed to increase market share within the Internet arena. A new catalog website was launched that offers value-based products. The Company began to offer product customization to further differentiate its products from those of competitors, expanded on the existing relationship with the National Football League and, prior to the end of 2002, entered into a strategic alliance to offer footwear and apparel on the Amazon.com website. Foot Locker is a featured brand in the Amazon.com specialty store for apparel and accessories.

The Direct-to-Customers business generated division profit of $53 million in 2003, as compared with $40 million in 2002. The increase in division profit was primarily due to increased sales. Division profit, as a percentage of sales, increased to 14.5 percent in 2003 from 11.5 percent in 2002. Management anticipates that the sales and earnings of the integrated Internet and catalog business will continue to grow.

The Direct-to-Customers business generated division profit of $40 million in 2002 as compared with $24 million in 2001. Division profit, as a percentage of sales, increased to 11.5 percent in 2002 from 7.4 percent in 2001. The increase was primarily due to the increase in gross margin, reduced marketing costs and $5 million related to the impact of no longer amortizing goodwill as a result of the Company’s adoption of SFAS No. 142 in 2002.

8


All Other Businesses

The “All Other” category included Afterthoughts, The San Francisco Music Box Company (“SFMB”), the Burger King and Popeye’s franchises, Randy River Canada, Weekend Edition and the Garden Centers. The disposition of these businesses was completed by the end of 2001.


 		      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%                  
 

In connection with the 1999 restructuring program, restructuring charges of $1 million and $33 million, were recorded in 2003 and 2001, respectively, related to the dispositions of the non-core businesses. The charge in 2003 was primarily related to the Company’s guarantee of the lease liabilities of the distribution center and certain stores of SFMB as a result of their filing for bankruptcy, while the restructuring charges of $33 million recorded in 2001 related to the disposition of SFMB and the Burger King and Popeye’s franchises. In 2002, a $1 million reduction was recorded due to actual amounts being better than anticipated.

The sale of SFMB was completed on November 13, 2001, for cash proceeds of approximately $14 million. In addition, on October 10, 2001, the Company completed the sale of assets related to its Burger King and Popeye’s franchises for cash proceeds of approximately $5 million.

Corporate Expense

Corporate expense consists of unallocated general and administrative expenses, as well as depreciation and amortization related to the Company’s corporate headquarters, centrally managed departments, unallocated insurance and benefit programs, certain foreign exchange transaction gains and losses and other items. Corporate expense included depreciation and amortization of $25 million in 2003, $26 million in 2002 and $28 million in 2001.

The increase in corporate expense in 20032006 as compared with 2005 of $10 million reflects the adoption of SFAS No. 123(R) that resulted in incremental compensation expense of $6 million and a charge of $4 million for anticipated settlements of certain legal matters. The effect of the 53rd week on corporate expense was not significant. Depreciation and amortization included in corporate expense amounted to $22 million in 2006, $24 million in 2005, and $23 million in 2004.

     The decrease in corporate expense in 2005 as compared with 2004 primarily included decreased incentive bonuses of $14 million; a $3 million decrease in costs associated with the Company’s loyalty program, as 2004 represented the initial costs to launch the program; and decreased restricted stock expense of $2 million. In addition, 2004 included $5 million for the integration of the Footaction stores. Included in 2005 was also a settlement of $3 million pursuant to a class action settlement with Visa and MasterCard related to past overcharges for certain debit card transactions. These decreases were offset, in part, by a charge of $4 million due to the potential insolvency of one of the Company’s insurance carriers and legal and settlement costs of $5 million.

Other Income

     During 2006, the Company terminated two of its leases for approximately $5 million, which resulted in a net gain of $4 million. In addition, the Company finalized its insurance claims related to Hurricane Katrina, which resulted in a gain of $8 million, which represents amounts in excess of losses. Also during 2006, the Company purchased and retired $38 million of long-term debt at a discount from face value of $2 million. The 2005 amounts represent $3 million related to the insurance recoveries associated with Hurricane Katrina, as well as $3 million of a net gain on foreign currency option contracts that were entered into by the Company to mitigate the effect of fluctuating foreign exchange rates on the reporting of euro-denominated earnings.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased by $34 million to $1,163 million in 2006, or by 3.0 percent, as compared with 2005. SG&A as a percentage of sales increased to 20.2 percent as compared with 20.0 percent in 2005. Excluding the effect of foreign currency fluctuations and the 53rd week, SG&A would have increased by 1.4 percent. This increase is primarily the result of incremental share-based compensation included in corporate expense, associated with the adoption of SFAS No. 123(R) of $6 million. Additionally, the net benefit cost for the Company’s pension and postretirement plans reflected a reduction of $5 million, primarily as a result of additional contributions and improved pension fund asset performance.

10

     SG&A increased by $41 million to $1,129 million in 2005, or by 3.8 percent, as compared with 2004. SG&A as a percentage of sales decreased to 20.0 percent as compared with 20.3 percent in 2004. The increase in SG&A is primarily related to an increase in payroll and related costs. The effect of including Footaction for the full fiscal year is an incremental $21 million, excluding the integration costs. During 2005, the Company donated 82,500 pairs of athletic footwear with a cost of $2 million to Save the Children Foundation. This donation benefited the tsunami victims in Banda Aceh, Indonesia, and Save the Children programs in the United States.

Depreciation and Amortization

     Depreciation and amortization of $175 million increased by 2.3 percent in 2006 from $171 million in 2005. This increase primarily reflects additional depreciation and amortization for the Athletic Stores segment due to capital spending and the effect of foreign currency fluctuations of approximately $1 million.

     Depreciation and amortization of $171 million increased by 11.0 percent in 2005 from $154 million in 2004. This increase primarily reflects additional depreciation and amortization for the Athletic Stores segment due to capital spending and adjustments to depreciable lives of certain fixed assets. Additionally, depreciation and amortization for the Footaction format increased by $6 million as compared with 2004, primarily due to increased capital expenditures related to store improvements and point-of-sale equipment.

Interest Expense, Net

  2006     2005     2004
     (in millions)   
Interest expense    $23 $23 $22 
Interest income  (20)   (13) (7)
    Interest expense, net$3  $10 $15 
Weighted-average interest rate (excluding facility fees):      
    Short-term debt —% —% —% 
    Long-term debt 7.8% 6.2% 5.2%
    Total debt 7.8% 6.2% 5.2%
Short-term debt outstanding during the year:      
    High$—  $— $— 
    Weighted-average$—  $— $— 

     Interest expense of $23 million remained unchanged from 2005. Interest rate swap agreements did not significantly affect interest expense in 2006.

     Interest income is generated through the investment of cash equivalents, short-term investments, the accretion of the Northern Group note to its face value and accrual of interest on the outstanding principal, as well as interest on income tax refunds. The increase in interest income of $7 million in 2006 was primarily related to increased compensation costs for incentive bonusesinterest income earned on cash, cash equivalents, and short-term investments. Interest income related to cash, cash equivalents and short-term investments was $14 million in 2006 and $11 million in 2005. Interest income on the Northern Group note amounted to $2 million in both 2006 and 2005. Also included in interest income is the effect of the Company’s cross currency swaps, which totaled $3 million in 2006 and was not significant in 2005.

     Interest expense of $23 million increased by 4.5 percent in 2005 from $22 million in 2004 primarily attributable to higher interest rates. Interest rate swap agreements reduced interest expense by approximately $1 million and $3 million in 2005 and 2004, respectively.

     The increase in interest income of $6 million in 2005 as compared with 2004 was primarily related to increased interest income earned on short-term investments due to higher interest rates and increased restricted stock expenseshort-term investment balances. Interest income related to additional grants.

Corporate expense in 2002 declined compared with 2001 primarily reflecting decreased payroll expenses related to reductions in headcount. Corporate expense in 2002cash equivalents and short-term investments was also reduced by a net foreign exchange gain of $4 million related to intercompany foreign currency denominated firm commitments.

9


Results of Operations

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) increased by $59 million to $987$11 million in 2003, or by 6.42005 and $5 million in 2004. Additionally, interest income on the Northern Group note amounted to $2 million in both 2005 and 2004.

11

Income Taxes

     The effective tax rate for 2006 was 36.9 percent as compared with 2002.35.0 percent in the prior year. The increase in the rate is primarily due to the change in the mix of U.S. and international profits and the $17 million impairment charge relating to the Company’s European operations, as well as a $6 million valuation allowance adjustment recorded in 2005.

     The effective tax rate for 2005 was 35.0 percent as compared with 31.7 percent in 2004. The increase was attributable to less benefit from non-recurring items than in 2004 and a higher percentage of the Company’s income earned in the United States, rather than from lower-taxed international operations. During 2005, the Company restructured its Canadian continuing business, which resulted in a $6 million reduction to its income tax valuation allowance related to Canadian tax loss carry-forwards and unclaimed tax depreciation. Additionally, the Company recorded an income tax benefit of $3 million in discontinued operations related to its former Canadian operations. During 2004, the Company settled foreign and domestic income tax examinations and reviews that resulted in reductions of its income tax provision for continuing operations by $14 million and discontinued operations by $37 million.

Segment Information

     The Company evaluates performance based on several factors, the primary financial measure of which is division profit. Division profit reflects income from continuing operations before income taxes, corporate expense, non-operating income, and net interest expense.

Athletic Stores

  2006       2005       2004 
  (in millions)
Sales $5,370 $5,272 $4,989 
Division profit $405 $419 $420 
Sales as a percentage of consolidated total 93% 93% 93%
Division profit margin 7.5% 7.9% 8.4%
Number of stores at year end 3,942 3,921 3,967 
Selling square footage (in millions) 8.74 8.71 8.89 
Gross square footage (in millions) 14.55 14.48 14.78 

2006 compared with 2005

Athletic Stores sales of $5,370 million increased 1.9 percent in 2006, as compared with $5,272 million in 2005. Excluding the effect of foreign currency fluctuations, primarily related to the euro, SG&Aand the effect of the 53rd week, sales from athletic store formats decreased by 0.6 percent in 2006. Footaction and Champs Sports significantly increased sales, primarily from the sales of marquee basketball and running footwear. This was offset primarily by 2.7 percent. The increases were related to additional payroll costs of $16 milliondecreased sales in Europe, primarily as a result of new store openings and $12 million related to compensation costs for incentive bonusesFoot Locker Europe. Foot Locker Europe’s sales declined due to the Company’s performance. Additionally, pension expense increasedcontinued difficult athletic retail environment, particularly in France, the U.K and Italy. Comparable-store sales decreased by $81.1 percent in 2006.

     Division profit from Athletic Stores decreased by 3.3 percent to $405 million due to the decline in plan asset values experienced2006 from $419 million in prior years, partially offset by a $4 million increase in the recognition of postretirement income and foreign exchange gain recorded in 2002. During 2002, the Company recorded asset impairment charges of $6 million and $1 million related to the Kids Foot Locker and Lady Foot Locker formats, respectively. SG&A2005. Division profit as a percentage of sales remained relatively flatdecreased to 7.5 percent. The decrease in division profit is primarily attributable to the Foot Locker Europe division due to the fashion shift from higher priced marquee footwear to lower priced low-profile footwear styles and a highly competitive retail environment, particularly for the sale of low-profile footwear styles. Included in the Athletic Stores division profit for 2006 is an impairment charge of $17 million related to the Company’s European operations, consistent with the Company’s recoverability of long-lived assets policy. The charge was comprised primarily of stores located in the U.K. and France. As previously disclosed in 2005, the Company was monitoring the progress of the European operations and the possible analysis of recoverability of store long-lived assets pursuant to SFAS No. 144. Excluding the impairment charge, Athletic Stores division profit increased by 0.7 percent as compared with the corresponding prior yearprior-year period.

The decline in Foot Locker Europe were offset by increases in all other divisions.

SG&A12

2005 compared with 2004

     Athletic Stores sales of $5,272 million increased by $55.7 percent in 2005, as compared with $4,989 million in 2002 to $928 million. The increase included $13 million related to new store openings, $11 million related to2004. Excluding the impacteffect of foreign currency fluctuations, primarily related to the euro, and $10 million related tosales from athletic store formats increased pension costs. The increase5.5 percent in pension costs resulted from the decline2005. Comparable-store sales increased by 2.6 percent in the retirement plans’ asset values experienced in prior years and the expected long-term rate of return used to determine the expense.2005. These increases were partially offsetprimarily driven by $29 million in the reduction in SG&A expensessales related to the dispositionsFootaction division, which was acquired in May 2004. Approximately $126 million of SFMB and the Burger King and Popeye’s franchises during the third quarter of 2001, and a $3 million increase in income related toFootaction represented the postretirement plan. Theinclusion of their operations for the full year in 2005. Champs Sports experienced a strong increase in postretirement incomesales during 2005, as this format benefited from higher quantities of $3marquee athletic footwear and private-label apparel. Foot Locker Canada also experienced increased sales. Excluding the effect of foreign currency fluctuations, Foot Locker Europe’s sales were essentially flat as compared with the corresponding prior-year period.

     Division profit from Athletic Stores decreased by 0.2 percent to $419 million resultedin 2005 from the amortization of the associated gains. SG&A,$420 million in 2004. Division profit as a percentage of sales decreased to 20.67.9 percent in 20022005 from 21.18.4 percent in 2001. During 2002,2004. This decline is primarily a result of the Company recorded asset impairment charges of $6 milliondecreased profit from the European operations as compared with the prior year. The continued weak economy, the increased competitive environment and $1 million relateda fashion shift from higher priced marquee footwear to the Kidslower priced low-profile footwear negatively affected Europe’s operating results. In addition during 2005, Foot Locker and Lady Foot Locker formats, respectively, compared with $2 million in 2001 for the Lady Foot Locker format. SG&A in 2002 was reduced by a net foreign exchange gain of $4 million related to intercompany foreign currency denominated firm commitments.

Depreciation and Amortization

Depreciation and amortization of $147 million decreased by 1.3 percent in 2003 from $149 million in 2002. Excluding the impact of foreign currency fluctuations, depreciation and amortization declined by $5 million. The decrease relates primarily to assets becoming fully depreciated for the U.S. Athletic stores, offset in part by an increase related to the European new stores.

Depreciation and amortization of $149 million decreased by 3.2 percent in 2002 from $154 million in 2001. The impact of no longer amortizing goodwill, as required by SFAS No. 142, which was adopted by the Company effective February 3, 2002, was $7 million and was partially offset by increased depreciation of $2 million associated with the new store opening program, primarily in Europe.

Interest Expense, Net


 		      2003
    2002
    2001
    

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

10


Interest expense of $26 million declined by 21.2 percent in 2003 from $33 million in 2002. Interest expense primarily related to the facility fees and amortization of the issuance costs for the credit facility, remained flat at $3 million. Interest expense related to long-term debt declined by $6 million primarilyEurope recorded significantly higher markdowns as a result of the $100 million of interest rate swaps that were outstanding during 2003. These interest rate swaps were entered intocontinued promotional environment, particularly in orderthe U.K. and France, and to convertclear excess inventory. Despite these factors, in 2005 Foot Locker Europe achieved a double-digit division profit margin. The decline in Europe was partially offset by the 8.50 percent fixed-rate debentures, which are dueimproved results at the Footaction, Champs Sports and Canadian divisions. The increase in 2022 toFootaction is primarily a lower variable rate. The Company entered into an interest rate swap agreement in December 2002 to convert $50 millionresult of the 8.50inclusion of its results for the full year as compared with a partial year during 2004.

Direct-to-Customers

  2006       2005       2004 
  (in millions)
Sales$380  $381 $366 
Division profit$45 $48 $45 
Sales as a percentage of consolidated total7%  7%  7% 
Division profit margin11.8%  12.6%  12.3% 

2006 compared with 2005

     Direct-to-Customers sales decreased to $380 million in 2006, as compared with $381 million in 2005. Internet sales increased to $270 million, increasing by 11.1 percent debenturesas compared with 2005. Catalog sales decreased by 20.3 percent to variable rate debt and subsequently entered into two additional swaps during 2003, totaling $50$110 million in 2006 from $138 million in 2005. Management believes that the decrease in catalog sales, which allowedwas substantially offset by the Company to lower the net amount of interest expense being paid at each interest payment date. The swaps reduced interest expense by approximately $4 million. The remaining decreaseincrease in Internet sales, is a result of customers browsing and selecting products through its catalogs and then making their purchases via the lower debt balanceInternet. Sales for the Direct-to-Customer business were negatively affected by the termination of a third party arrangement in the early part of 2006.

The Direct-to-Customers business generated division profit of $45 million in 2006, as compared with $48 million in 2005. Division profit, as a percentage of sales, decreased to 11.8 percent in 2006 from 12.6 percent in 2005. Several initiatives were implemented to mitigate the Company repurchased $19 millionloss of revenue from the cancelled third party contract, such as expanding the ESPN offerings. However, these iniatitives did not fully offset the loss in profit which resulted in a decline in division profit. The effect of the 8.5053rd week on this segment was not significant.

2005 compared with 2004

     Direct-to-Customers sales increased 4.1 percent debentures in 2003 and $9to $381 million in 2005, as compared with $366 million 2004. The growth of the latter part of 2002. Interest expenseInternet business continued to drive sales in 2005. Internet sales increased by 14.6 percent to $243 million from $212 million in 2004. Catalog sales decreased by 10.4 percent to $138 million in 2005 from $154 million in 2004. Management believes that the decrease in catalog sales, which was further reduced assubstantially offset by the increase in Internet sales, is a result of customers browsing and selecting products through its catalogs and then making their purchases via the repaymentInternet.

     The Direct-to-Customers business generated division profit of the remaining $32 million of the $40 million 7.00 percent medium-term notes that matured in October 2002.

Interest expense of $33 million declined by 5.7 percent in 2002 from $35$48 million in 2001. Interest expense related to the revolving credit facility decreased by $1 million primarily as a result of the amortization of deferred financing costs over the amended agreement term. Interest expense related to long-term debt also declined by $1 million. There was an increase of $3 million in interest expense in 2002 resulting from the issuance of the $150 million 5.50 percent convertible notes in June 2001. This increase was more than offset by the reduction in interest expense that resulted from the repayment of the remaining $32 million of the $40 million 7.00 percent medium-term notes in October 2002 and the interest expense in 2001 associated with the $50 million 6.98 percent medium-term notes that were repaid in October 2001.

Interest income related to cash and cash equivalents and other short-term investments amounted to $5 million in both 2003 and 2002. Additional interest income in 2003 of $2 million was generated through accretion of the Northern Group note to its present value and accrued interest income on the note, which was recorded during the fourth quarter of 2002. Interest income of $1 million and $2 million was related to tax refunds and settlements in 2003 and 2002, respectively.

Interest income related to cash and cash equivalents and other short-term investments amounted to $5 million in 2002 and $4 million in 2001. Interest income in both 2002 and 2001 included $2 million of interest income related to tax refunds and settlements. Also included was intercompany interest of $5 million in 2001 related to the Northern Group segment. The offsetting interest expense for the Northern Group was charged to the reserve for discontinued operations.

Income Taxes

The effective rate for 2003 was 35.5 percent,2005, as compared with 34.2$45 million in 2004. Division profit, as a percentage of sales, increased to 12.6 percent in 2005 from 12.3 percent in 2004. This reflects the prior year. The increased tax rate was primarily due toCompany’s alliances with third parties, such as the Company recording tax benefits of $5 million in 2003 as compared to $9 million in 2002. In addition the rate increased due to a shift in taxable income by jurisdiction. During 2003, the Company recorded a $1 million tax benefit related to state tax law changes, a $2 million tax benefit related to a reduction in the valuation allowance for deferred tax assets related to a multi-state tax planning strategy, a $1 million tax benefit related to a reduction in the valuation allowance for foreign tax loss carryforwardsUSOC and a tax benefit of $1 million related to the settlement of tax examinations.
ESPN.

The effective rate for 2002 was 34.2 percent. The Company recorded a tax benefit during 2002 of $5 million related to a multi-state tax planning strategy, a $1 million tax benefit related to settlement of tax examinations, a $2 million benefit related to the reduction in the valuation allowance for deferred tax assets related to foreign tax credits and a $1 million benefit related to international tax planning strategies. The combined effect of these items, in addition to higher earnings in lower tax jurisdictions and the utilization of tax loss carryforwards reduced the effective tax rate.

In 2001, the effective tax rate was 36.6 percent. The Company recorded a tax benefit during 2001 of $7 million related to state and local income tax settlements, partially offset by a $2 million charge from the impact of Canadian tax rate reductions on existing deferred tax assets. The combined effect of these items, in addition to higher earnings in lower tax jurisdictions and the utilization of tax loss carryforwards were offset, in part, by the impact of non-deductible goodwill which reduced the effective tax rate.

11
13


Liquidity and Capital Resources

Cash Flow and Liquidity

Generally, the Company’s primary source of cash has been from operations. The Company has a revolving credit facility, which was amended on July 30, 2003. As a result of the amendment, the credit facility was increased by $10 million to $200 million 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. Other than $24 million utilized for stand-by letter of credit requirements, this revolving credit facility was not used during 2003. In 2001, the Company raised $150 million in cash through the issuance of subordinated convertible notes. The Company may redeem all or a portion of the notes at any time on or after June 4, 2004. If the Company were to exercise its option, the Company anticipates that the holders of the notes would convert to common stock, provided that the Company’s common stock price at that time exceeds the conversion price of $15.806; however, the holders of the notes may elect to receive cash at the then applicable conversion premium. The Company generallyusually finances real estate with operating leases. The principal uses of cash have been to financefund inventory requirements, capital expenditures related to store openings, store remodelings, and management information systems and to fundother support facilities, and other general working capital requirements.

Management believes operating cash flows and current credit facilities will be adequate to financefund its working capital requirements, to make scheduled pension contributions for the Company’s retirement plans, to fundscheduled debt repayments, anticipated quarterly dividend payments, potential share repurchases, and to support the development of its short-term and long-term operating strategies. The Company contributed an additional $44 million and $6 million to its U.S. and Canadian qualified pension plans, respectively, in February 2004. The U.S. contribution was made in advance of ERISA requirements.

     Planned capital expenditures for 20042007 are $141approximately $170 million, of which $97$144 million relates to new store openings and modernizations of existing stores, and $44$26 million reflects the development of information systems and other support facilities. In addition, planned lease acquisition costs are $24 million and primarily relate to the Company’s operations in Europe. The Company has the ability to revise and reschedule the anticipated capital expenditure program, should the Company’s financial position require it.

     Maintaining access to merchandise that the Company considers appropriate for its business may be subject to the policies and practices of its key vendors. Therefore, the Company believes that it is critical to continue to maintain satisfactory relationships with its key vendors. The Company purchased approximately 78 percent in 2006 and 75 percent in 2005 of its merchandise from its top five vendors, in each respective year, and expects to continue to obtain a significant percentage of its athletic product from these vendors in future periods. Approximately 50 percent in 2006 and 49 percent in 2005 was purchased from one vendor — Nike, Inc. During 2006, two of our key vendors merged, the Company’s purchases from this vendor totaled 14 percent.

Any materially adverse reaction tochange in customer demand, fashion trends, competitive market forces or customer acceptance of the Company’s merchandise mix and retail locations, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases, (and on one key vendor for approximately 40 percent of its merchandise purchases), risks associated with foreign global sourcing or economic conditions worldwide could affect the ability of the Company to continue to fund its needs from business operations.

Cash Flow

Operating activities offrom continuing operations provided cash of $264$189 million in 20032006 as compared with $347$349 million in 2002.2005. These amounts reflect income from continuing operations adjusted for non-cash items and working capital changes. The decrease was primarily the result of a $50 million pension contribution and working capital usage, partially offset by increased income from continuing operations. Income from continuing operations increased by $54 million in 2003. Working capital usage included higher net cash outflow for merchandise inventories in 2003 as compared with 2002 andDuring 2006, the Company increased itsrecorded a non-cash impairment charge of $17 million related to the operations in Europe. The decline in operating cash flows of $160 million is primarily due to a reduction of accounts payable at year-end reflecting an acceleration of inventory position to accommodate anticipated salesreceipts earlier in 2004. The decrease in income taxes payable was attributable to increased payments made during 2003. The Company received a refund of tax and interest of $13 million during the fourth quarter of 2003.

2006. In addition, due to the calendar shift related to the 53rd week, approximately $47 million of the decline represents the timing of lease payments. Additionally, the Company contributed $68 million to its U.S. and Canadian qualified pension plans in 2006, as compared with contributions of $26 million in 2005.

Operating activities offrom continuing operations provided cash of $347$349 million in 20022005 as compared with $204$272 million in 2001.2004. The net increase in cashflow from operationsoperating cash flows of $143$77 million in 2002 wasis primarily due to improved operating performance and was alsochanges in working capital primarily related to working capital changes primarily related toin merchandise inventories, offset by the related payables and income taxes payable. During the third quarterlower pension contributions of 2002, the Company recorded a current receivable of approximately $45 million related to a Federal income tax refund and subsequently received the cash during the fourth quarter. Payments charged to the repositioning and restructuring reserves were $3$26 million in 20022005 as compared with $62$106 million in 2001.
2004.

12


Net cash used in investing activities of the Company’s continuing operations was $159$108 million in 20032006 as compared with $162$182 million in 2002.2005. The Company’s purchase of short-term investments, net of sales, decreased by $49 million in 2006 as compared with an increase of $31 million in 2005. Capital expenditures of $144$165 million in 20032006 and $150$155 million in 20022005 primarily related to store remodelingsremodeling and new stores. Lease acquisition costs, primarilyDuring 2006, the Company received net proceeds of $4 million as a result of a lease termination. The Company also received $4 million of insurance proceeds from its insurance carriers related to the processfinal settlement of securingthe property and extending prime lease locationsequipment claims for real estate in Europe, were $15 million and $18 million in 2003 and 2002, respectively. Proceeds from the disposal of real estate of $6 million in 2002 primarily related to the condemnation of a part-owned and part-leased property. This real estate transaction resulted in a gain of $3 million, which was recorded in other income.
2005 hurricane.

Net cash used in investing activities of the Company’s continuing operations was $162$182 million in 20022005 as compared with $116$407 million in 2001.2004. During 2004, the Company paid $226 million for the purchase of 349 Footaction stores from Footstar, Inc. and paid €13 million (approximately $16 million) for the purchase of 11 stores in the Republic of Ireland.

14

During 2005, the Company received $1 million from an escrow account upon the resolution of a Footaction lease matter relating to the 2004 acquisition. The change was due to a $34Company’s purchase of short-term investments, net of sales, increased by $31 million in 2005 as compared with an increase of $9 million in capital2004. Capital expenditures of $155 million in 20022005 and $156 million in 2004 primarily related to store remodelingsremodeling and new stores. Lease acquisition costs were $18 million and $20 million in 2002 and 2001, respectively. Proceeds from sales of real estate and other assets and investments were $6 million in 2002 compared with $20 million in 2001. Proceeds from the condemnation of the Company’s part-owned and part-leased property contributed $6The Company also received $3 million of cash receivedinsurance proceeds related to the hurricanes in 2002. Proceeds from2005, representing the salesportion of The San Francisco Music Box Company and the Burger King and Popeye’s franchises contributed $14 million and $5 millioninsurance recoveries in cash, respectively, in 2001.

excess of losses recorded.

Net cash used in financing activities of continuing operations was $13$142 million in 20032006 as compared with $36$105 million in 2002. The2005. During 2006, the Company repurchased $19repaid $50 million of its term loan and purchased and retired $38 million of its 8.50 percent debentures that are duepayable in 2022 during 2003. During 2002,at a $2 million discount from face value. As required by SFAS No. 123(R), the Company repaid the remaining $32recorded an excess tax benefit related to stock-based compensation of $2 million of the $40 million 7.00 percent medium-term notes due in October 2002 and retired approximately $9 million of its 8.50 percent debentures.as a financing activity. The Company declared and paid a $0.03 per share dividenddividends totaling $61 million in each of the first three quarters2006 and a $0.06 per share dividend$49 million in the fourth quarter of 2003, totaling $21 million for the year.2005. During 2002, the Company declared2006 and paid a dividend during the fourth quarter of $0.03 per share totaling $4 million. During 2003 and 2002,2005, the Company received proceeds from the issuance of common stock and treasury stock in connection with the employee stock programs of $12 million and $14 million, respectively. On February 15, 2006, the Company announced that its Board of Directors authorized a $150 million, three-year share repurchase program. This program was subsequently terminated on March 7, 2007, upon the Board of Directors authorization of a new $300 million, three-year share repurchase program. Under the share repurchase program, subject to legal and contractual restrictions, the Company may make purchases of its common stock, from time to time, depending on market conditions, availability of other investment opportunities and other factors. During 2006, the Company purchased 334,200 shares of its common stock for approximately $8 million.

     Net cash used in financing activities of continuing operations was $105 million in 2005 as compared with net cash provided of $167 million in 2004. The Company repaid $35 million of its 5-year, $175 million term loan during 2005 and declared and paid dividends totaling $49 million in 2005 and $39 million in 2004. During 2005 and 2004, the Company received proceeds from the issuance of common and treasury stock in connection with employee stock programs of $27$14 million and $10$33 million, respectively.

Net cash used in financing activities of the Company’s continuing operations was $36 million in 2002 as compared with $89 million of cash provided by financing activities of continuing operations in 2001. The change in 2002 compared with 2001 was primarily due to the issuance of $150 million of convertible notes on June 8, 2001, which was partially offset by the repayment As part of the $50 million 6.98 percent medium-term notes that maturedstock repurchase program in October 2001 andeffect in 2005, the repurchase and retirementCompany purchased 1.6 million shares of $8its common stock during 2005 for approximately $35 million.

Capital Structure

     During 2004, the Company obtained a 5-year, $175 million term loan to finance a portion of the $40 million 7.00 percent medium-term notes. During 2002,purchase price of the Footaction stores. Concurrent with the financing of a portion of the Footaction acquisition, the Company repaid the balance of the $40 million 7.00 percent medium-term notes that were due in October 2002 and $9 million of the $200 million of debentures due in 2022. There were no outstanding borrowings under the Company’samended its revolving credit agreement, as of February 1, 2003 and February 2, 2002. During 2002,thereby extending the Company declared and paid a $0.03 per share dividend during the fourth quarter of $4 million.

Net cash provided by and used in discontinued operations includes the lossmaturity date to May 2009 from discontinued operations, the change in assets and liabilities of the discontinued segments and disposition activity related to the reserves. In 2003, net cash provided by discontinued operations was $7 million and primarily related to an income tax benefit of $21 million offset by payments against the reserves of $13 million. In 2002 and 2001, discontinued operations utilized cash of $10 million and $75 million, respectively, which consisted of payments for the Northern Group’s operations and disposition activity related to the other discontinued segments.

Capital Structure

As of January 31, 2004, the Company increased cash, net of debt and capital lease obligations, to $112 million. In 2003, the Company repurchased $19 million of the 8.50 percent debentures due in 2022. The Company declared and paid dividends totaling $21 million during 2003. The Company’s revolving credit facility was amended in 2003 to increase the available line of credit by $10 million to $200 million and lengthened the term to July 2006. The amended agreement includes various restrictive financial covenants with which the Company was in compliance on January 31, 2004. TheFebruary 3, 2007. During 2005, the Company made a $50prepaid the first and second principal payments totaling $35 million, contribution to its U.S. qualified retirement planwhich would have been due in February 2003, in advance of ERISA requirements.

13


The Company reduced debtMay 2005 and capital lease obligations, net of cash and cash equivalents, to zero at February 1, 2003, from $184 million at February 2, 2002. In 2002,May 2006. During 2006, the Company repaid the remaining $32an additional $50 million of the $40 million 7.00 percent medium-term notes that were payable in October 2002 and repurchasedterm loan, thereby reducing the loan to $90 million.

     During 2006, the Company purchased and retired $9$38 million of the $200 million 8.50 percent notes duedebentures payable in 2022 contributingat a $2 million discount from face value bringing the outstanding amount to the reduction$134 million as of debt and capital lease obligations. During the fourth quarter of 2002, the Board of Directors initiated the Company’s dividend program and declared and paid a dividend of $0.03 per share.

February 3, 2007.

During 2001,     In 2004, the Company issuedredeemed its entire $150 million of subordinated convertible notes due in 2008 and simultaneously amended its $300 million revolving credit agreement to a reduced $190 million three-year facility. The subordinated convertible notes bear interest at 5.50 percent convertible subordinated notes. All of the convertible subordinated notes were cancelled and are convertible intoapproximately 9.5 million new shares of the Company’s common stock atwere issued. The Company reclassified the optionremaining $3 million of unamortized deferred costs related to the original issuance of the holder, atconvertible debt to equity as a conversion price of $15.806 per share. The net proceedsresult of the offering are being used for working capital and general corporate purposes and to reduce reliance on bank financing.
conversion.

Credit Rating

The Company’s corporate credit ratingratings from Standard & Poor’s is BB+. On February 26, 2004,and Moody’s Investors Service’s increased the Company’s credit rating toService are BB+ and Ba1, citing that “the upgrade was based on the Company’s considerable progress in improving profit margins, free cash flowrespectively.

Debt Capitalization and credit metrics despite shifts in consumer preferences and a challenging retail environment.” The Company is working toward attaining an investment grade rating from both agencies.

Equity

Debt Capitalization

For purposes of calculating debt to total capitalization, the Company includes the present value of operating lease commitments. These commitments are the primary financing vehicle used to fund store expansion.for the Company. The following table sets forth the components of the Company’s capitalization, both with and without the present value of operating leases, and excludes the effect of an interest rate swap of $1 million that reduced long-term debt at January 31, 2004:
leases:

15


  2006            2005 
  (in millions)
Cash, cash equivalents and short-term investments, net of debt and     
       capital lease obligations $236 $261 
Present value of operating leases  2,069  1,934 
       Total net debt 1,833 1,673 
Shareholders’ equity  2,295  2,027 
Total capitalization $4,128 $3,700 
Net debt capitalization percent 44.4% 45.2%
Net debt capitalization percent without operating leases —% —% 


 		      2003
    2002

 		      (in millions)
 		    
Cash and cash equivalents, net of debt and capital lease obligations              $112         $—   
Present value of operating leases                1,683          1,571  
Total net debt                1,571          1,571  
Shareholders’ equity                1,375          1,110  
Total capitalization              $2,946        $2,681  
Net debt capitalization percent                53.3%          58.6%  
Net debt capitalization percent without operating leases                —%        —%
 

Excluding the present value of operating leases, the Company increasedCompany’s cash, and cash equivalents, and short-term investments, net of debt and capital lease obligations, decreased to $112$236 million at February 3, 2007 from $261 million at January 31, 2004 from zero at February 1, 2003.28, 2006. The Company reduced debt and capital lease obligations by $21$92 million, while increasingand decreased cash, and cash equivalents, and short-term investments by $91$117 million. These improvements were offset by an increase of $112 million inAdditionally, the present value of the operating leases for additional leases entered into orincreased by $135 million representing the net change of lease renewals during 2003, resulting in no changeand the effect of foreign currency fluctuations primarily related to total net debt.

the euro. Including the present value of operating leases, the Company’s net debt capitalization percent improved 5.3 percentagedecreased 80 basis points in 2003. Total capitalization improved by $265 million in 2003, which was attributable to an increase in shareholders’ equity.2006. The increase in shareholders’ equity relates primarily to net income of $207$251 million in 2003,2006, $17 million related to stock plans, an increase of $31$27 million in the foreign exchange currency translation adjustment, primarily related to the increasevalue of the euro in relation to the U.S. dollar and a decrease of $6 million resulting from the adoption of SAB 108. The Company recorded a reduction to shareholders’ equity as permitted by SAB 108 to correct for previous misstatements. The Company declared and paid dividends totaling $61 million during 2006. The Company repurchased 334,200 million shares for approximately $8 million during the year. During 2006, the Company adopted SFAS No. 158 which resulted in the euro,elimination of the additional minimum liability adjustment of $181 million. SFAS No.158 requires that unamortized prior service cost and unamortized gains or losses for both the pension and postretirement plans, which totaled $133 million, be recognized as a reductioncomponent of $16other comprehensive income. The Company contributed $51 million and $17 million to the minimum liability for the Company’s pension plans. The reduction in the minimum liability was a result of an improvement in the plans’ asset performance coupled with a $50 million contribution made in February 2003, offset by a 60 basis point decrease in the discount rate used to value the benefit obligations. The Company contributed an additional $44 million and $6 million to its U.S. and Canadian qualified pension plans, respectively, in February 2004.2006.

     Excluding the present value of operating leases, the Company’s cash, cash equivalents and short-term investments, net of debt and capital lease obligations, increased to $261 million at January 28, 2006 from $127 million at January 29, 2005. The Company reduced debt and capital lease obligations by $39 million, while increasing cash, cash equivalents and short-term investments by $95 million. Additionally, the present value of the operating leases decreased by $55 million representing the net change of lease renewals, the effect of foreign currency fluctuations primarily related to the euro and the result of the closure of 25 stores due to the hurricanes. Including the present value of operating leases, the Company’s net debt capitalization percent decreased 520 basis points in 2005. The increase in shareholders’ equity relates to net income of $264 million in 2005, $26 million related to stock plans, and a decrease of $25 million in the foreign exchange currency translation adjustment, primarily related to the value of the euro in relation to the U.S. contribution was madedollar. The Company declared and paid dividends totaling $49 million during 2005.The Company repurchased approximately 1.6 million shares for $35 million during the year. During 2005, the Company reduced its minimum liability for the Company’s pension plans by $15 million, primarily as a result of the plans’ asset performance. The Company contributed $19 million and $7 million to the Company’s U.S. and Canadian qualified pension plans, respectively, in advance of ERISA requirements.

2005.

14
16


Contractual Obligations and Commitments

The following tables represent the scheduled maturities of the Company’s contractual cash obligations and other commercial commitments as of January 31, 2004:February 3, 2007:

             Payments Due by Period 
   Less than            2 –3            3 –5            After 5 
Contractual Cash Obligations   Total  1Year  Years   Years  Years 
    (in millions)    
Long-term debt(1) $220 $— $90 $—$130
Operating leases2,739486803 621829
Capital lease obligations1414

—

 

—

 —
Other long-term liabilities(2)  — —  —  — —
Total contractual cash obligations$2,973$500 $893 $621$959
____________________



 		      
 		    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   
 

(1)     The Company raised $150 million in cash throughamounts presented above represent the issuance of subordinated convertible notes in 2001. The Company may redeem all or a portioncontractual maturities of the notes at any time on or after June 4, 2004. IfCompany’s long-term debt, excluding interest. Additional information is included in the Company exercises its option, the Company anticipates that the holders of the notes will convert to common stock, provided that the Company’s common stock price at that time exceeds the conversion price of $15.806; however, holders may elect to receive cash at the then applicable conversion premium.“Long-Term Debt and Obligations under Capital Leases” footnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”

(2)The Company’s other liabilities in the Consolidated Balance Sheet as of January 31, 2004February 3, 2007 primarily includecomprise pension and postretirement benefits, deferred rent liability, income taxes, workers’ compensation and general liability reserves and various other sundry accruals. These liabilities have been excluded from the above table as the timing and/or amount of any cash payment is uncertain. The timing of the remaining amounts that are known have not been included as they are minimal and not useful to the presentation. Additional information on the balance sheet caption is included in the “Other Liabilities” footnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”
  Total            Amount of Commitment Expiration by Period 
  Amounts  Less than            2 –3            3 –5            After 5 
Other Commercial Commitments   Committed  1Year  Years   Years  Years 
  (in millions) 
Line of credit$186 $— $186 $—$ —
Stand-by letters of credit14—14  — —
Purchase commitments(3) 1,6761,6705  1 —
Other(4)  53  25  21  7 —
Total commercial commitments$1,929 $1,695 $226 $8$ —
____________________

(3)     Represents open purchase orders, as well as minimum required purchases under merchandise contractual agreements, at January 31, 2004.February 3, 2007. The Company is obligated under the terms of purchase orders; however, the Company is generally able to renegotiate the timing and quantity of these orders with certain vendors in response to shifts in consumer preferences. Commitments associated with non-inventory services are not significant and have also been excluded.

(4)Represents minimum payments required by merchandisingnon-merchandise purchase agreements and sales agreements.minimum royalty requirements.

The Company does not have any off-balance sheet financing, (otherother than operating leases entered into in the normal course of business andas disclosed above)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. The Company’s policy prohibits the use of leveraged derivatives or derivatives for trading purposes.
which there is no underlying exposure.

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 significantly affect 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 leases will be executed.

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Critical Accounting Policies

Management’s responsibility for integrity and objectivity in the preparation and presentation of the Company’s financial statements requires diligent application of appropriate accounting policies. Generally, the Company’s accounting policies and methods are those specifically required by accounting principlesU.S. generally accepted in the United States of Americaaccounting principles (“GAAP”). Included in the “Summary of Significant Accounting Policies” footnote in Item“Item 8. “ConsolidatedConsolidated Financial

17

Statements and Supplementary Data” is a summary of the Company’s most significant accounting policies. In some cases, management is required to calculate amounts based on estimates for matters that are inherently uncertain. The Company believes the following to be the most critical of those accounting policies that necessitate subjective judgments.

Merchandise Inventories

Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail inventory method. The retail inventory method (“RIM”) is commonly used by retail companies to value inventories at cost and calculate gross margins due to its practicality. Under the retail method, cost is determined by applying a cost-to-retail percentage across groupings of similar items, known as departments. The cost-to-retail percentage is applied to ending inventory at its current owned retail valuation to determine the retail valuecost of inventories.ending inventory on a department basis. The RIM is a system of averages that requires management’s estimates and assumptions regarding markups, markdowns and shrink, among others, and as such, could result in distortions of inventory amounts. JudgmentSignificant judgment is required for these estimates and assumptions, as well as to differentiate between promotional and other markdowns that may be required to correctly reflect merchandise inventories at the lower of cost or market. The Company provides reserves based on current selling prices when the inventory has not been marked down to market. The failure to take permanent markdowns on a timely basis may result in an overstatement of cost under the retail inventory method. The decision to take permanent markdowns includes many factors, including the current environment, inventory levels and the age of the item. Management believes this method and its related assumptions, which have been consistently applied, to be reasonable.

Vendor AllowancesReimbursements

In the normal course of business, the Company receives allowances from its vendors for markdowns previously taken. Vendor allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. The effect of vendor allowances was an improvement in gross margin in 2006, as a percentage of sales, of 20 basis points as compared with 2005. The Company also has volume-related agreements with certain vendors, under which it receives rebates based on fixed percentages of cost purchases. These volume-related rebates are recorded in cost of sales when the product is sold and they contributed 10 basis points to the 20032006 gross margin rate.

The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors for specific advertising campaigns and catalogs. Such cooperativeCooperative income, to the extent that it reimburses specific, incremental and identifiable costs incurred to date, is recorded in SG&A in the same period as the associated expense isexpenses are incurred. IncomeReimbursements received that isare in excess of specific, incremental and identifiable costs incurred to date isare recognized as a reduction to the cost of merchandise and are reflected in cost of sales as the merchandise is sold. Cooperative incomereimbursements amounted to approximately 2427 percent of total advertising costs in 2006 and approximately 89 percent of catalog costs in 2003.
2006.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, which the Company adopted in 2002, the Company recognizes an impairment loss when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the Company’s three-year strategic plans, in determining the impairment amount. The calculation of fair value of long-lived assets is based on estimated expected discounted future cash flows by store, which is generally measured by discounting the expected future cash flows at the Company’s weighted-average cost of capital. Management believes its policy is reasonable and is consistently applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly different results. Long-lived tangible assets and intangible assets with finite lives primarily include property and equipment and intangible lease acquisition costs.

16


The Company is required to perform an impairment review of its goodwill at least annually. The Company has chosen to perform this review at the beginning of each fiscal year, and it is done in a two-step approach. The initial step requires that the carrying value of each reporting unit be compared with its estimated fair value. The second step — to evaluate goodwill of a reporting unit for impairment — is only required if the carrying value of that reporting unit

18

exceeds its estimated fair value. The fair value of each of the Company’s reporting units exceeded its carrying value as of February 2, 2003.the beginning of the year. The Company used a combination of a discounted cash flow approach and market-based approach to determine the fair value of a reporting unit, whichunit. The latter requires judgment and uses one or more methods to compare the reporting unit with similar businesses, business ownership interests or securities that have been sold.

     During 2006, the Company recorded an impairment charge of $17 million ($12 million after-tax) to write-down long-lived assets such as store fixtures and leasehold improvements in 69 stores in the European operations to their estimated fair value.

Share-Based Compensation

     The Company estimates the fair value of options granted using the Black-Scholes option pricing model. The Company estimates the expected term of options granted using its historical exercise and post-vesting employment termination patterns, which the Company believes are representative of future behavior. Changing the expected term by one year changes the fair value by 10 to 15 percent depending if the change was an increase or decrease to the expected term. The Company estimates the expected volatility of its common stock at the grant date using a weighted-average of the Company’s historical volatility and implied volatility from traded options on the Company’s common stock. A 50 basis point change in volatility would have a 1 percent change to the fair value. The risk-free interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The expected dividend yield is derived from the Company’s historical experience. A 50 basis point change to the dividend yield would change the fair value by approximately 5 percent. The Company records stock-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting forfeiture data, which it believes are representative of future behavior, and periodically will revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

     The Black-Scholes option valuation model requires the use of subjective assumptions. Changes in these assumptions can materially affect the fair value of the options. The Company may elect to use different assumptions under the Black-Scholes option pricing model in the future if there is a difference between the assumptions used in determining stock-based compensation cost and the actual factors that become known over time.

     The guidance in SFAS No. 123(R) is relatively new and best practices are not well established. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models and there is a possibility that the Company will adopt different valuation models and assumptions in the future. This may result in both a lack of comparability with other companies that use different models, methods, and assumptions, and in a lack of consistency in future periods.

Pension and Postretirement Liabilities

The Company determines its obligations for pension and postretirement liabilities based upon assumptions related to discount rates, expected long-term rates of return on invested plan assets, salary increases, age, mortality and health care cost trends,mortality among others. Management reviews all assumptions annually with its independent actuaries, taking into consideration existing and future economic conditions and the Company’s intentions with regard to the plans. Management believes that its estimates for 2003,2006, as disclosed in “Item 8. Consolidated Financial Statements and Supplementary Data,” to be reasonable.

     Long-Term Rate of Return Assumption - The expected long-term rate of return on invested plan assets is a component of pension expense and the rate is based on the plans’ weighted-average target asset allocation of 64 percent equity securities and 36 percent fixed income investments, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments based on the timing of settlements and to reduce future contributions by the Company. The Company’s common stock represented approximately two1 percent of the total pension plans’ assets at January 31, 2004.February 3, 2007. A decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased 20032006 pension expense by approximately $2.5$3 million. The actual return on plan assets in a given year may differ from the expected long-term rate of return and the resulting gain or loss is deferred and amortized into the plans’ performance over time.

19

     Discount Rate - An assumed discount rate is used to measure the present value of future cash flow obligations of the plans and the interest cost component of pension expense and postretirement income. The discount rate selected to measure the present value of the Company’s benefit obligations as of February 3, 2007 was derived using a cash flow matching method whereby the Company compares the plans’ projected payment obligations by year with the corresponding yield on the Citibank Pension Discount Curve. The cash flows are then discounted to their present value and an overall discount rate is selected with reference to the long-term corporate bond yield.determined. A decrease of 50 basis points in the weighted-average discount rate would have increased the accumulated benefit obligation as of January 31, 2004February 3, 2007 of the pension and postretirement plansplan by approximately $30$28 million and approximately $0.6 million, respectively.the effect on the postretirement plan would not be significant. Such a decrease would not have significantly changed 20032006 pension expense or postretirement income.

     There is limited risk to the Company for increases in healthcare costs related to the postretirement plan as, beginning in 2001, new retirees have assumed the full expected costs and then existing retirees and future retirees have assumed all increases in such costs since the beginning of fiscal year 2001. The additional minimum liability included in shareholders’ equity at January 31, 2004 for the pension plans represented the amount by which the accumulated benefit obligation exceeded the fair market value of the plan assets. The Company was able to reduce the additional minimum liability by $16 million during 2003 to reflect the better performance of the plans’ assets as well as a $50 million contribution made in February 2003.

costs.

The Company expects to record postretirement income of approximately $13$8 million and pension expense of approximately $18$6 million in 2004. Pension2007.

Income Taxes

     In accordance with GAAP, deferred tax assets are recognized for tax credit 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. Management is required to estimate taxable income for future years by taxing jurisdiction and to use its judgment to determine whether or not to record a valuation allowance for part or all of a deferred tax asset. A one percent change in the Company’s overall statutory tax rate for 2006 would have resulted in a $3 million change in the carrying value of the net deferred tax asset and a corresponding charge or credit to income tax expense woulddepending on whether such tax rate change was a decrease or increase.

     The Company has operations in multiple taxing jurisdictions and is subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. Accruals of tax contingencies require management to make estimates and judgments with respect to the ultimate outcome of tax audits. Actual results could vary from these estimates.

     The Company expects its 2007 effective tax rate to be $22 millionapproximately 37.5 percent. The actual rate will primarily depend upon the percentage of the Company’s income earned in 2004 had the Company not made the $44 million contribution to its U.S. qualified retirement plan and the $6 million required contribution to its Canadian qualified retirement plan.

United States as compared with international operations.

Discontinued, Repositioning and Restructuring Reserves

The Company exited four business segments as part of its discontinuation and restructuring programs. The final discontinued segment and disposition of the restructured businesses were completed in 2001. In order to identify and calculate the associated costs to exit these businesses, management made assumptions regarding estimates of future liabilities for operating leases and other contractual agreements, the net realizable value of assets held for sale or disposal and the fair value of non-cash consideration received. The Company has settled the majority of these liabilities and the remaining activity relates to the disposition of the residual lease liabilities.

17


As a result of achieving divestiture accounting in the fourth quarter of 2002, the Northern Group note was recorded at its fair value. The Company is required to review the collectibility of the note based upon various criteria such as the credit-worthiness of the issuer or a delay in payment of the principal or interest. 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.
The Company has evaluated the projected performance of the business and will continue to monitor its results during the coming year. At February 3, 2007, CAD$15.5 million remains outstanding on the note, the fair value of which is US$11 million.

The remaining discontinued reserve balances at January 31, 2004February 3, 2007 totaled $19$15 million of which $8$3 million is expected to be utilized within the next twelve months. The remaining repositioning and restructuring reserves totaled $3$4 million at January 31, 2004,February 3, 2007, whereby $1 million is expected to be utilized within the next twelve months.

Income Taxes

In accordance with GAAP, deferred tax assets are recognized for tax credit 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. Management is required to estimate taxable income for future years by taxing jurisdiction and to use its judgment to determine whether or not to record a valuation allowance for part or all of a deferred tax asset. A one percent change in the Company’s overall statutory tax rate for 2003 would have resulted in a $6 million change in the carrying value of the net deferred tax asset and a corresponding charge or credit to income tax expense depending on whether such tax rate change was a decrease or increase.

The Company has operations in multiple taxing jurisdictions and is subject to audit in these jurisdictions. Tax audits by their nature are often complex and can require several years to resolve. Accruals of tax contingencies require management to make estimates and judgments with respect to the ultimate outcome of tax audits. Actual results could vary from these estimates.

Business Concentration

In 2003, the Company purchased approximately 73 percent of its merchandise from five vendors and expects to continue to obtain a significant percentage of its athletic product from these vendors in future periods. Of that amount, approximately 40 percent was purchased from one vendor — Nike, Inc. (“Nike”) — and 14 percent from another. During 2003, Nike purchases were lower than historical levels, however, in the latter part of 2003, the Company increased its purchases and anticipates that by the end of 2004, the percentage of Nike purchases will have returned to historical levels. While the Company generally considers its relationships with its vendors to be satisfactory, given the significant concentration of its purchases from a few key vendors, its access to merchandise that it considers appropriate for its stores, catalogs, and on-line retail sites may be subject to the policies and practices of key vendors.

18
20


Disclosure Regarding Forward-Looking Statements

This report including the Shareholders’ Letter, contains forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues and earnings, and other such matters are forward-looking statements. These forward-looking statements are based on many assumptions and factors detailed in the Company’s filings with the Securities and Exchange Commission, including but not limited to, the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor for approximately 40 percent of its merchandise purchases)vendor), unseasonable weather, risks associated with foreign global sourcing, including political instability, changes in import regulations, disruptions to transportation services and distribution, the presence of severe acute respiratory syndrome, economic conditions worldwide, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, and the ability of the Company to execute its business plans effectively with regard to each of its business units, risks associated with foreign global sourcing, including its plans for marqueepolitical instability, changes in import regulations, and launch footwear component of its business.disruptions to transportation services and distribution. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information regarding interest rate risk management and foreign exchange risk management is included in the “Financial Instruments and Risk Management” footnote under “Item 8. Consolidated Financial Statements and Supplementary Data.”

19
21


Item 8. Consolidated Financial Statements and Supplementary Data

MANAGEMENT’S REPORT

The integrity and objectivity of the financial statements and other financial information presented in this annual report are the responsibility of the management of the Company. The financial statements have been prepared in conformity with accounting principlesU.S. generally accepted in the United States of Americaaccounting principles and include, when necessary, amounts based on the best estimates and judgments of management.

The Company maintains a system of internal controls designed to provide reasonable assurance, at appropriate cost, that assets are safeguarded, transactions are executed in accordance with management’s authorization and the accounting records provide a reliable basis for the preparation of the financial statements. The system of internal accounting controls is continually reviewed by management and improved and modified as necessary in response to changing business conditions. The Company also maintains an internal audit function to assist management in evaluating and formally reporting on the adequacy and effectiveness of internal accounting controls, policies and procedures.

The Company’s financial statements have been audited by KPMG LLP, the Company’s independent auditors,registered public accounting firm, whose report expresses their opinion with respect to the fairness of the presentation of these financial statements.

The Audit Committee of the Board of Directors, which is comprisedcomprises solely of independent non-management directors who are not officers or employees of the Company, meets regularly with the Company’s management, internal auditors, legal counsel and KPMG LLP to review the activities of each group and to satisfy itself that each is properly discharging its responsibility. In addition, the Audit Committee meets on a periodic basis with KPMG LLP, without management’s presence, to discuss the audit of the financial statements as well as other auditing and financial reporting matters. The Company’s internal auditors and independent auditorsregistered public accounting firm have direct access to the Audit Committee.


 MATTHEW D. SERRA, ROBERT W. MCHUGH,
 Chairman of the Board, Senior Vice President and
 President and Chief Executive Officer Chief Financial Officer

April 2, 2007

22




MATTHEW D. SERRA,
 ChairmanMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     The management of the Board,
        PresidentCompany is responsible for establishing and
Chief Executive Officer

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 February 3, 2007. 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 February 3, 2007.



     BRUCE L. HARTMAN,
Executive Vice President and
      ChiefThe 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 this Annual Report on Form 10-K under the heading,Report of Independent Registered Public Accounting Firm on Internal Control Over Financial OfficerReporting

.

 MATTHEW D. SERRA, ROBERT W. MCHUGH,
 Chairman of the Board, Senior Vice President and
 President and Chief Executive Officer Chief Financial Officer

April 1, 20042, 2007

20
23


REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRM


To theThe 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 February 3, 2007 and January 31, 2004 and February 1, 2003,28, 2006, 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.February 3, 2007. These consolidated financial statements are the responsibility of Foot Locker, Inc.’sthe 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 auditingthe standards generally accepted inof 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 February 3, 2007 and January 31, 2004 and February 1, 2003,28, 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2004February 3, 2007, in conformity with accounting principlesU.S. generally accepted in the United States of America.
accounting principles.

As discussed in note 1the notes to the consolidated financial statements, in 2002effective January 29, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” and SFAS No. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4,” as well as changed itstheir method for quantifying errors based on SEC Staff Accounting Bulletin No. 108, “Considering the Effects of accountingPrior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” Also as discussed in the notes to the consolidated financial statements, effective February 3, 2007, the Company adopted SFAS No. 158, “Employers’ Accounting for goodwillDefined Benefit Pension and certain other intangible assets.
Other Post Retirement Plans – An Amendment of FASB Statements No. 87, 88, 106, and 132(R).”




We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Foot Locker. Inc.’s internal control over financial reporting as of February 3, 2007, 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 April 2, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP
New York, New York
MarchApril 2, 20042007

21
24

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 February 3, 2007, 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 generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, management’s assessment that Foot Locker, Inc. maintained effective internal control over financial reporting as of February 3, 2007, 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 February 3, 2007, 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 February 3, 2007 and January 28, 2006, 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 February 3, 2007, and our report dated April 2, 2007 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
New York, New York
April 2, 2007

25

CONSOLIDATED STATEMENTS OF OPERATIONS


 		      2003
    2002
    2001

 		      (in millions, except per
share amounts)
 		    
Sales
              $4,779        $4,509        $4,379  
Costs and expenses                                                        
Cost of sales                3,302          3,165          3,071  
Selling, general and administrative expenses                987           928           923   
Depreciation and amortization                147           149           154   
Restructuring charges (income)                1           (2)          34   
Interest expense, net                18           26           24   
                 4,455          4,266          4,206  
Other income                —           (3)          (2)  
                 4,455          4,263          4,204  
Income from continuing operations before income taxes                324           246           175   
Income tax expense                115           84           64   
Income from continuing operations
                209           162           111   
 
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)          —           —   
 
Net income
              $207         $153         $92   
 
Basic earnings per share:
                                                        
Income from continuing operations              $1.47        $1.15        $0.79  
Loss from discontinued operations                (0.01)          (0.06)          (0.13)  
Cumulative effect of accounting change                —           —           —   
Net income              $1.46        $1.09        $0.66  
 
Diluted earnings per share:
                                                        
Income from continuing operations              $1.40        $1.10        $0.77  
Loss from discontinued operations                (0.01)          (0.05)          (0.13)  
Cumulative effect of accounting change                —           —           —   
Net income              $1.39        $1.05        $0.64  
 
 2006             2005            2004
 (in millions, except per share amounts)
Sales$5,750  $ 5,653 $ 5,355
Costs and expenses
Cost of sales4,0143,9443,722
Selling, general and administrative expenses1,1631,1291,090
Depreciation and amortization175171154
Impairment charge17——
Interest expense, net 3 10 15
5,3725,2544,981
Other income (14) (6) —
 5,358 5,248 4,981
Income from continuing operations before income taxes392405374
Income tax expense 145 142 119
Income from continuing operations 247 263 255
Income on disposal of discontinued operations,
       net of income tax benefit of $1, $3, and $37, respectively3138
Cumulative effect of accounting change,
       net of income tax benefit of $ — 1 — —
Net income$251$264$293
Basic earnings per share:
       Income from continuing operations$ 1.59$1.70$1.69
       Income from discontinued operations0.020.010.25
       Cumulative effect of accounting change 0.01 — —
       Net income$1.62$1.71$1.94
Diluted earnings per share:
       Income from continuing operations$ 1.58$1.67$1.64
       Income from discontinued operations0.020.010.24
       Cumulative effect of accounting change — — —
       Net income$1.60$1.68$ 1.88

See Accompanying Notes to Consolidated Financial Statements.

22
26


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


 		      2003
    2002
    2001

 		      (in millions)
 		    
Net income
              $207         $153         $92   
Other comprehensive income (loss), net of tax
                                                        
 
Foreign currency translation adjustment:
                                                        
Translation adjustment arising during the period                31           38           (12)  
 
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                —           —           —   
Reclassification adjustments, net of income tax benefit of $1                (1)          —           (1)  
Net change in cash flow hedges
                (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)  
 
 2006            2005            2004
(in millions)
Net income$251 $ 264$ 293
Other comprehensive income, net of tax 
Foreign currency translation adjustment: 
Translation adjustment arising during the period, net of tax27(25)19
Cash flow hedges:
Change in fair value of derivatives, net of income tax —2(1)
Reclassification adjustments, net of income tax — (1) 1
Net change in cash flow hedges—1—
Minimum pension liability adjustment:
Minimum pension liability adjustment, net of deferred tax expense
       (benefit) of $120, $10 and $(9) million, respectively18115(14)
Comprehensive income$459$255$298 

See Accompanying Notes to Consolidated Financial Statements.

23
27


CONSOLIDATED BALANCE SHEETS


 		      2003
    2002

 		      (in millions)
 		    
ASSETS
                                        
 
Current assets
                                        
Cash and cash equivalents              $448         $357   
Merchandise inventories                920           835   
Assets of discontinued operations                2           2   
Other current assets                149           90   
                 1,519          1,284  
 
Property and equipment, net
                644           636   
Deferred taxes
                194           240   
Goodwill
                136           136   
Intangible assets, net
                96           80   
Other assets
                100           110   
               $2,689        $2,486  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                        
 
Current liabilities
                                        
Accounts payable              $234         $251   
Accrued liabilities                300           296   
Liabilities of discontinued operations                2           3   
Current portion of repositioning and restructuring reserves                1           3   
Current portion of reserve for discontinued operations                8           18   
Current portion of long-term debt and obligations under capital leases                —           1   
                 545           572   
 
Long-term debt and obligations under capital leases
                335           356   
Other liabilities
                434           448   
Total liabilities
                1,314          1,376  
 
Shareholders’ equity
                1,375          1,110  
               $2,689        $2,486  
 
 2006           2005
(in millions)
ASSETS
 
Current assets
       Cash and cash equivalents$ 221$ 289
       Short-term investments 249 298
       Total cash, cash equivalents and short-term investments470587
       Merchandise inventories1,3031,254
       Other current assets 261 173
2,0342,014
Property and equipment, net654675
Deferred taxes109147
Goodwill264263
Intangible assets, net105117
Other assets 83 96
$3,249$3,312
LIABILITIES AND SHAREHOLDERS’ EQUITY 
 
Current liabilities
       Accounts payable$256$361
       Accrued and other liabilities246305
       Current portion of long-term debt and obligations under capital leases 14 51
516717
Long-term debt and obligations under capital leases220275
Other liabilities 218 293
Total liabilities9541,285
Shareholders’ equity 2,295 2,027
$3,249$3,312

See Accompanying Notes to Consolidated Financial Statements.

24
28


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


 		      2003
    2002
    2001
    

 		      Shares
    Amount
    Shares
    Amount
    Shares
    Amount

 		      (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   
Restricted stock issued under stock option and award plans                845           —           60           —           210           (2)  
Forfeitures of restricted stock                —           1           —           1           —           1   
Amortization of stock issued under
restricted stock option plans		                —           4           —           2           —           2   
Issued under director and employee stock plans, net of tax                1,984          28           1,139          12           1,080          11   
Issued at end of year                144,009          411           141,180          378           139,981          363   
Common stock in treasury at beginning
of year		                (105)          (1)          (70)          —           (200)          (2)  
Reissued under employee stock plans                152           1           —           —           192           1   
Restricted stock issued under stock option and award plans                —           —           30           —           210           2   
Forfeitures of restricted stock                (80)          (1)          (60)          (1)          (270)          (1)  
Exchange of options                (24)          —           (5)          —           (2)          —   
Common stock in treasury at end of year                (57)          (1)          (105)          (1)          (70)          —   
                 143,952          410           141,075          377           139,911          363   
Retained Earnings
                                                                                                        
Balance at beginning of year                            946                       797                       705   
Net income                            207                       153                       92   
Cash dividends declared on common stock $0.15, $0.03 and $— per share, respectively                            (21)                      (4)                      —   
Balance at end of year                            1,132                      946                       797   
Accumulated Other Comprehensive Loss
                                                                                                        
Foreign Currency Translation Adjustment
                                                                                                        
Balance at beginning of year                            (15)                      (53)                      (41)  
Translation adjustment arising during
the period		                            31                       38                       (12)  
Balance at end of year                            16                       (15)                      (53)  
Cash Flow Hedges
                                                                                                        
Balance at beginning of year                            —                       —                       —   
Change during year, net of tax                            (1)                      —                       —   
Balance at end of year                            (1)                      —                       —   
Minimum Pension Liability Adjustment
                                                                                                        
Balance at beginning of year                            (198)                      (115)                      —   
Change during year, net of tax                            16                       (83)                      (115)  
Balance at end of year                            (182)                      (198)                      (115)  
Total Accumulated Other
Comprehensive Loss
                            (167)                      (213)                      (168)  
Total Shareholders’ Equity
                          $1,375                    $1,110                    $992   
 
 2006     2005     2004
 Shares     Amount  Shares     Amount  Shares      Amount 
 (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 year157,280$635156,155$608144,009$411 
Restricted stock issued under stock option and award plans—(3)225—400—
Forfeitures of restricted stock———2—2
Share-based compensation expense—10—6—8
Conversion of convertible debt————9,490150
Reclassification of convertible debt issuance costs—————(3)
Issued under director and employee stock plans, net of tax530 11900 192,256 40
Issued at end of year157,810 653157,280 635156,155 608
Common stock in treasury at beginning of year(1,776)(38)(64)(2)(57)(1)
Reissued under employee stock plans12239022605
Restricted stock issued under stock option and award plans1573————
Forfeitures/cancellations of restricted stock (30)(1)(135)(2)(100)(2)
Shares of common stock used to satisfy tax
       withholding obligations(241)(6)(49)(1)(137)(3)
Stock repurchases(334)(8)(1,590)(35)——
Exchange of options(5)  —(28) —(30) (1)
Common stock in treasury at end of year(2,107) (47)(1,776) (38)(64) (2)
155,703 606155,504 597156,091 606
Retained Earnings
Balance at beginning of year1,6011,3861,132
Cumulative effect of adjustments resulting from
       the adoption of SAB 108, net of tax (see note 2)  (6)  — —
Adjusted balance at beginning of year1,5951,3861,132
Net income251264293
Cash dividends declared on common stock
       $0.40, $0.32 and $0.26 per share, respectively  (61) (49) (39)
Balance at end of year 1,785 1,601 1,386
Accumulated Other Comprehensive Loss
Foreign Currency Translation Adjustment 
Balance at beginning of year103516
Translation adjustment arising during the period, net of tax 27 (25) 19
Balance at end of year 37 10 35
Cash Flow Hedges
Balance at beginning of year—(1)(1)
Change during year, net of tax — 1 —
Balance at end of year — — (1)
Minimum Pension Liability Adjustment
Balance at beginning of year(181)(196)(182)
Change during year, net of tax 181 15 (14)
Balance at end of year — (181) (196)
Adjustment related to initial application of
       SFAS No. 158, net of tax (see note 21)  (133) — —
Total Accumulated Other Comprehensive Loss  (96) (171) (162)
Total Shareholders’ Equity$2,295$2,027$1,830

See Accompanying Notes to Consolidated Financial Statements.

25
29


CONSOLIDATED STATEMENTS OF CASH FLOWS


 		      2003
    2002
    2001

 		      (in millions)
 		    
From Operating Activities
                                                        
Net income              $207         $153         $92   
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   
Restructuring charges (income)                1           (2)          34   
Cumulative effect of accounting change, net of tax                1           —           —   
Depreciation and amortization                147           149           154   
Impairment of long-lived assets                —           7           2   
Restricted stock compensation expense                4           2           2   
Tax benefit on stock compensation                2           2           2   
Gains on sales of real estate and assets                —           (3)          (2)  
Deferred income taxes                (5)          38           38   
Change in assets and liabilities, net of dispositions:
                                                        
Merchandise inventories                (63)          (22)          (69)  
Accounts payable and other accruals                (17)          (22)          9   
Repositioning and restructuring reserves                (1)          (3)          (62)  
Pension contribution                (50)          —           —   
Income taxes                9           42           (45)  
Other, net                28           (3)          30   
Net cash provided by operating activities of continuing operations                264           347           204   
From Investing Activities
                                                        
Proceeds from sales of real estate and assets                —           6           20   
Lease acquisition costs                (15)          (18)          (20)  
Capital expenditures                (144)          (150)          (116)  
Net cash used in investing activities of continuing operations                (159)          (162)          (116)  
From Financing Activities
                                                        
Issuance of convertible long-term debt                —           —           150   
Debt issuance costs                —           —           (8)  
Reduction in long-term debt                (19)          (41)          (58)  
Reduction in capital lease obligations                —           (1)          (4)  
Dividends paid on common stock                (21)          (4)          —   
Issuance of common stock                27           10           9   
Net cash (used in) provided by financing activities of continuing operations                (13)          (36)          89   
Net Cash Provided by (Used in) Discontinued Operations
                7           (10)          (75)  
Effect of Exchange Rate Fluctuations on Cash
and Cash Equivalents
                (8)          3           4   
Net Change in Cash and Cash Equivalents
                91           142           106   
Cash and Cash Equivalents at Beginning of Year
                357           215           109   
Cash and Cash Equivalents at End of Year
              $448         $357         $215   
Cash Paid During the Year:
                                                        
Interest              $25         $27         $36   
Income taxes              $77         $39         $35   
 
 2006      2005      2004
 (in millions)
From Operating Activities 
Net income$251$264$293
Adjustments to reconcile net income to net cash provided by operating
       activities of continuing operations:
       Income on disposal of discontinued operations, net of tax(3)(1)(38)
       Impairment charge17——
       Cumulative effect of accounting change, net of tax(1)——
       Depreciation and amortization175171154
       Share-based compensation expense1068
       Deferred income taxes212450
       Change in assets and liabilities:
               Merchandise inventories(38)(111)(183)
               Accounts payable and other accruals(103)14157
               Qualified pension plan contributions(68)(26)(106)
               Income taxes(3)(8)—
               Other, net (69) 16 (63)
Net cash provided by operating activities of continuing operations 189 349 272
From Investing Activities
Acquisitions—1(242)
Gain from lease termination4——
Gain from insurance recoveries43—
Purchases of short-term investments(1,992)(2,798)(2,884)
Sales of short-term investments2,0412,7672,875
Capital expenditures (165) (155) (156)
Net cash used in investing activities of continuing operations (108) (182) (407)
From Financing Activities
Debt issuance costs——(2)
(Reduction) increase in long-term debt(86)(35)175
Repayment of capital lease(1)——
Dividends paid on common stock(61)(49)(39)
Issuance of common stock91228
Treasury stock reissued under employee stock plans325
Purchase of treasury shares(8)(35)—
Tax benefit on stock compensation 2 — —
Net cash (used in) provided by financing activities of continuing operations (142) (105) 167
Net Cash (Used In) Provided by operating activities of Discontinued Operations (8) — 1
Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents 1 2 2
Net Change in Cash and Cash Equivalents(68)6435
Cash and Cash Equivalents at Beginning of Year 289 225 190
Cash and Cash Equivalents at End of Year$221$289$225
Cash Paid During the Year:
       Interest$20$21$23
       Income taxes$133$93$121
Non-cash Financing Activities:
       Common stock issued upon conversion of convertible debt$—$—$150
       Debt issuance costs reclassified to equity upon conversion of convertible debt$—$—$3 

See Accompanying Notes to Consolidated Financial Statements.

26
30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1     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 principlesU.S. generally accepted in the United States of Americaaccounting 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 period2006 fiscal year end for the Company is the Saturday closest to the last day in January. Fiscal years 2003, 2002year 2006 represents the 53 weeks ending February 3, 2007. Fiscal year 2005 and 20012004 represented the 52 weeks ended January 31, 2004, February 1, 200328, 2006 and February 2, 2002,January 29, 2005, respectively. References to years in this annual report relate to fiscal years rather than calendar years.

Revenue Recognition

Revenue from retail store salesstores is recognized at the point of sale when the product is delivered to customers. RetailInternet and catalog sales revenue is recognized upon estimated receipt by the customer. Sales include shipping and handling fees for all periods presented. Sales include merchandise, net of returns and exclude all taxes. The Company provides for estimated returns based on return history and sales levels. The Company recognizes revenue, including gift card sales and 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.

Gift Cards

     The Company sells gift cards to its customers; the cards do not have expiration dates. Revenue from Internet and cataloggift card sales is recognizedrecorded when the productgift cards are redeemed or when the likelihood of the gift card being redeemed by the customer is shippedremote and there is no legal obligation to customers. Sales include shippingremit the value of unredeemed gift cards to the relevant jurisdictions. The Company has determined its gift card breakage rate based upon historical redemption patterns. Historical experience indicates that after 12 months the likelihood of redemption is deemed to be remote. Gift card breakage income is included in selling, general and handling feesadministrative expenses and totaled $7 million in 2006 and $2 million, for both 2005 and 2004. Unredeemed gift cards are recorded as a current liability.

Statement of Cash Flows

     The Company has selected to present the operations of the discontinued business as one line in the Consolidated Statements of Cash Flows. For all the periods presented.

presented this caption includes only operating activities.

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 and Sales Promotion

Advertising and sales promotion costs are expensed at the time the advertising or promotion takes place, net of reimbursements for cooperative advertising. Cooperative advertising incomereimbursements earned for the launch and promotion of certain products is agreed upon with vendors and is recorded in the same period as the associated

31

expense is incurred. Advertising costs asIn 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 ofReseller 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 recognizedreceived 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 wasis sold.

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

 2006          2005          2004
 (in millions)
Advertising expenses$92.5 $99.0$ 102.5
Cooperative advertising reimbursements (23.0) (21.2) (24.8)
Net advertising expense$69.5$77.8$77.7 

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 incomereimbursements 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 $3.9 million and $3.0 million at February 3, 2007 and January 28, 2006, 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:

 2006          2005          2004
 (in millions)
Catalog costs$ 47.0 $ 48.2$ 50.3
Cooperative reimbursements (3.5) (3.0) (2.9)
Net catalog expense$43.5$45.2$47.4 

27


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-basedshare-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.

 2006          2005          2004
 (in millions)
Income from continuing operations$247$263 $255
Effect of Dilution:
Convertible debt(1) — — 2
Income from continuing operations assuming dilution$247$263$257
Weighted-average common shares outstanding155.0155.1150.9
Effect of Dilution:
Stock options and awards1.82.53.0
Convertible debt(1) — — 3.2
Weighted-average common shares outstanding
       assuming dilution 156.8 157.6 157.1
____________________

(1)In 2001, the Company issued $150 million of subordinated convertible notes due 2008. 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.

32


 		      2003
    2002
    2001

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

Options to purchase 3.62.8 million, 6.82.2 million and 3.11.5 million shares of common stock for the years endedas of February 3, 2007, January 31, 2004, February 1, 2003,28, 2006, and February 2, 2002,January 29, 2005, 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-BasedShare-Based Compensation

The     Effective January 29, 2006, the Company accountsadopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” and related interpretations, (“SFAS No. 123(R)”) to account for stock-based compensation by applying APBusing the modified prospective transition method and, therefore, will not restate its prior period results. SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”Employees,” (“APB No. 25”), as permitted byand revises guidance in SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). InAmong other things, SFAS No. 123(R) requires that compensation expense be recognized in the financial statements for share-based awards based on the grant date fair value of those awards. The modified prospective transition method applies to unvested stock options, restricted shares and stock appreciation rights and issuances under the employee stock purchase plan outstanding as of January 29, 2006 based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, and any new share-based awards granted subsequent to January 29, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Additionally, stock-based compensation expense includes an estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards over the vesting term.

     Prior to January 29, 2006, the Company accounted for these stock-based compensation plans in accordance with APB No. 25 and related interpretations. This method did not result in compensation cost for stock options and shares purchased under employee stock purchase plans. No compensation expense is notfor employee stock options was recorded, foras all stock options granted ifunder the stock option plans had an exercise price isthat was not less than the quoted market price at the date of grant. Compensation expense iswas also not recorded for employee purchases of stock under the 1994 Stock Purchase Plan. The plan, which is compensatoryemployee stock purchase plans as defined in SFAS No. 123, isit was considered 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 stock-based compensation is applied for companies electing to continue to account for stock-based plans under APB No. 25. Accounting forPrior to the Company’s stock-based compensation duringadoption of SFAS No. 123(R), as required under the three-year period ended January 31, 2004, in accordance with the fair value methoddisclosure provisions of SFAS No. 123, would have resulted inas amended, the following:


 		      2003
    2002
    2001

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

28


SFAS No. 148, “AccountingCompany provided pro forma net income and earnings per common share for Stock-Based Compensation — Transition and Disclosure an amendment of FASB Statement No. 123,” which was issued in December 2002, provides alternative methods of transition for an entity that changes toeach period as if it had applied the fair value based method of accounting forto measure stock-based compensation and requires more prominent disclosureexpense.

     The Company has recorded an additional $6 million of stock-based compensation expense, net of estimated forfeitures, during 2006 as a result of its adoption of SFAS No. 123(R). During 2006, the Company recorded a cumulative effect of a change in accounting of $1 million to reflect estimated forfeitures for prior periods related to the Company’s nonvested restricted stock awards. Prior to the adoption of SFAS No. 123(R), the Company recognized compensation cost of restricted stock awards over the vesting term based upon the fair value of the pro forma impactCompany’s common stock at the date of grant. Forfeitures were recorded as they occurred, however under SFAS No. 123(R) an estimate of forfeitures is required to be included over the vesting term. Under SFAS No. 123(R), the Company will continue to recognize compensation expense over the vesting term, net of estimated forfeitures. See Note 22 for information on earnings per share. The disclosure portion of the statement was adopted in 2002. On April 22, 2003,assumptions the FASB determined thatCompany used to calculate the fair value of stock-based compensation.

     SFAS No. 123(R) requires the benefits associated with tax deductions in excess of recognized compensation shouldcost to be recognizedreported as a costfinancing cash flow rather than as an operating cash flow as previously required. For 2006, the Company recorded an excess tax benefit of $2 million as a financing cash flow as required by the standard.

     Upon exercise of stock options, issuance of restricted stock or issuance of shares under the employee stock purchase plan, the Company will issue authorized but unissued common stock or use common stock held in the financial statements. On March 31, 2004, the FASB issued an exposure draft that provides for a comment period, which ends 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.treasury. The Company has not yet determinedmay make repurchases of its common stock from time to time, subject to legal and contractual restrictions, market conditions and other factors.

33

     The following table illustrates the impacteffect on net income and earnings per common share as if the Company had applied the fair value method to measure stock-based compensation, as required under the disclosure provisions of this statement on its consolidated financial position, results of operations or cash flows.SFAS No. 123:

  2005           2004 
Net income:    
       As reported $264 $293 
       Compensation expense included in reported net income,    
               net of income tax benefit  4 5 
       Total compensation expense under fair value method for    
               all awards, net of income tax benefit   (9) (13)
       Pro forma $259 $285 
Basic earnings per share:    
       As reported $1.71 $1.94 
       Pro forma $1.67 $1.89 
Diluted earnings per share:    
       As reported $1.68 $1.88 
       Pro forma $1.64 $1.83 


Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less, including commercial paper and money market funds, to be cash equivalents. Amounts due from third party credit card processors for the settlement of debit and credit cards transactions are included as cash equivalents as they are generally collected within three business days. Cash equivalents at February 3, 2007 and January 31, 2004 and February 1, 200328, 2006 were $388$208 million and $297$237 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 February 3, 2007, 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.
In 2006, the Company adopted SFAS No. 151, “Inventory Costs- An Amendment of ARB 43, Chapter 4.” This standard 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. With the adoption of this standard the Company no longer capitalized the freight associated with transfers between its store locations.

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 incomereimbursements received in excess of specific, incremental advertising expenses.
Occupancy reflects the amortization of amounts received from landlords for tenant improvements.

34

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 45maximum 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 87 year period. Capitalized software, net of accumulated amortization, is included in property and equipment and was $55.4$29 million at February 3, 2007 and $39 million at January 31, 2004 and $63.0 million at February 1, 2003.
28, 2006.

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.

29


Recoverability of Long-Lived Assets

Effective as of the beginning of 2002, the Company adopted     In accordance with 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.

     During 2006, the Company recorded an impairment charge of $17 million ($12 million after-tax) to write-down long-lived assets such as store fixtures and leasehold improvements in 69 stores in the European operations to their estimated fair value.

Goodwill and Intangible Assets

In 2002, the     The Company adoptedaccounts 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 wasis 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),gain or loss or as a basis adjustment to the underlying hedged item, 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)income/loss or as a basis adjustment to the underlying hedged item and reclassified to earnings in the period in which the hedged item affects earnings.

35

     The effective portion of the gain or loss on hedges of foreign net investments is generally not reclassified to earnings unless the net investment is disposed of. 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 adoptionchanges in the fair value 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.

hedges of net investments in various foreign subsidiaries is computed using the spot method.

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 approximateapproximates fair value due to the short-term maturitiesnature 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.

30


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 creditcredits 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.
differences when considered necessary.

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.

Pension and Postretirement Obligations

     The discount rate selected to measure the present value of the Company’s benefit obligations as of February 3, 2007 was derived using a cash flow matching method whereby the Company compares the plans’ projected payment obligations by year with the corresponding yield on the Citibank Pension Discount Curve. The cash flows are then discounted to their present value and an overall discount rate is determined.

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$16 million at February 3, 2007 and January 31, 2004 and February 1, 2003, respectively.28, 2006. 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 2003each of 2006, 2005 and $2 million in both 20022004.

Accounting for Leases

     The Company recognizes rent expense for operating leases as of the 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.

36

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.

Recent Accounting Pronouncements Not Previously Discussed Herein

     In March 2006, the EITF reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)” that entities may adopt a policy of presenting taxes in the income statement on either a gross or net basis. Gross or net presentation may be elected for each different type of tax, but similar taxes should be presented consistently. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. EITF 06-3 will not impact the method for recording these sales taxes in the Company’s consolidated financial statements as the Company has historically presented sales excluding all taxes.

     In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure requirements for uncertainty in tax positions. This Interpretation requires financial statement recognition of the impact of a tax position if that position is more likely than not of being sustained on audit based on the technical merits of the position. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, accounting in interim periods, and disclosure requirements for uncertain tax positions. The provisions of FIN 48 will be effective as of the beginning of 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company is currently evaluating the effect of FIN 48. However, the Company does not expect the adoption of this interpretation will significantly affect the Company’s financial position or results of operations.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. The Company does not believe that this standard will significantly affect the Company’s financial position or results of operations.

     In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115." This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company does not believe that this standard will significantly affect the Company's financial position or results of operations.

2     Staff Accounting Bulletin No. 108

     In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” that provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. There are two widely recognized methods for quantifying the effects of financial statement misstatements: the “rollover” or income statement method and the “iron curtain” or balance sheet method. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income

37

statement approach (“dual method”) and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The Company had historically evaluated uncorrected misstatements using the “rollover” method. SAB 108 permits companies to apply its provisions initially by either (i) restating prior financial statements as if the provisions had always been applied or (ii) recording the cumulative effect of initially applying SAB 108 as adjustments to the carrying value of assets and liabilities as of the beginning of 2006 with an offsetting adjustment recorded to the opening balance of shareholders’ equity.

     The Company believes its prior period assessments of uncorrected misstatements and the conclusions reached regarding its quantitative and qualitative assessments of materiality of such items, both individually and in the aggregate, were appropriate. These items did not significantly affect 2005 or 2004 as these items originated in earlier periods. In accordance with SAB 108, the Company has adjusted its opening retained earnings for 2006 for the items described below.

Adjustment
at Jan. 29,
(in millions)2006
Accrued liabilities(1) $3.4
Revenue recognition(2)2.8
Inventory valuation(3)4.2
10.4
Provision for income taxes4.1
Decrease to shareholders’ equity $6.3
____________________

(1)Accrued liabilities – The Company understated its accrued liabilities for certain items, such as telecommunications, utilities and property taxes in years prior to 2003. These items originated when the Company was accruing for these items on a calendar year rather than a fiscal year basis.
(2)Revenue recognition – The Company had historically recorded revenue from its catalog and Internet operations when the product was shipped to the customer, rather than upon the actual receipt of the product by the customer.
(3)Inventory valuation – The Company did not properly recognize the permanent reduction of the retail value of its inventory upon the transfer to clearance stores. The Company provided a reserve for the value of this inventory that had not been marked down to current selling prices.

     In addition, the Company had historically included its lease acquisition costs of $8 million in 2005 and $17 million in 2004 within the investing section of the Statement of Cash Flows. In 2005, the Company classified the premiums paid and proceeds received ($3 million, net) associated with its option currency contracts as an investing activity. The Company has determined that these activities would be more appropriately classified as an operating activity. Accordingly, the Company reclassified $5 million and $17 million for 2005 and 2004, respectively, to operating activities.

3     Segment Information

     The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of February 3, 2007, 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
   2006          2005          2004
   (in millions)
Athletic Stores $5,370 $5,272$4,989
Direct-to-Customers  380 381 366
     Total sales $5,750$5,653$5,355

38


Operating Results
 
  2006           2005           2004 
  (in millions)
Athletic Stores$405 $419 $420
Direct-to-Customers 45  48  45
 450 467 465
Restructuring charges(1)  (1

) 

 —  (2

) 

Division profit449 467 463
Corporate expense(2)  (68)  (58)    (74

) 

Operating profit381 409 389
Other income(3) 14 6—
Interest expense, net 3  10  15
Income from continuing operations before income taxes$  392 $  405 $  374
____________________

(1)The restructuring charge in 2006 represents a revision to the original estimate of the lease liability associated with the guarantee of The San Francisco Music Box distribution center. During 2004, the Company recorded a restructuring charge of $2 million related to the dispositions of non-core businesses. These charges were classified within selling, general and administrative expenses in the Consolidated Statements of Operations.
(2)2004 includes integration costs of $5 million related to the acquisitions of Footaction and the 11 stores in the Republic of Ireland.
(3)2006 includes $4 million gain on lease terminations; $8 million of insurance proceeds related to the 2005 hurricane; and $2 million gain on debt repurchase.
2005 includes a $3 million gain from insurance recoveries associated with Hurricane Katrina. Additionally, $3 million represents a net gain on foreign currency option contracts that were entered into by the Company to mitigate the effect of fluctuating foreign exchange rates on the reporting of euro dominated earnings.
  Depreciation and          
   AmortizationCapital Expenditures  Total Assets
  2006        2005        2004        2006        2005        2004        2006        2005        2004 
  (in millions)
Athletic Stores$147 $141 $126 $135 $137 $139 $2,374 $2,322$2,335
Direct-to-Customers 6 6 5 4 6 8 195 196  190
 1531471311391431472,5692,5182,525
Corporate22242326129680794711
Discontinued operations — — — — — — — — 1
Total Company$ 175$ 171$ 154$ 165$ 155$ 156$ 3,249$ 3,312$ 3,237

     Sales and long-lived asset information by geographic area as of and for the fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005 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. The Company’s sales in Italy and France represent approximately 36, 39 and 40 percent of the International category’s sales for the three-year period ended February 3, 2007. No other individual country included in the International category is significant.

Sales
 
   2006       2005       2004 
     (in millions)   
United States $4,356$4,257 $3,982
International  1,394 1,396 1,373
Total sales $ 5,750$ 5,653$ 5,355

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 Long-Lived Assets
 
   2006       2005       2004 
   (in millions)
United States $504 $523 $547
International  150 152 168
Total long-lived assets $ 654$ 675$ 715

4     Other Income

     In 2006, other income includes a gain of $8 million related to a final settlement with the Company’s insurance carriers of claims related to Hurricane Katrina. In 2005, the Company recorded a gain of $3 million of insurance recoveries in excess of losses associated with Hurricane Katrina.

     During 2006, the Company purchased and retired $38 million of the $200 million 8.50 percent debentures payable in 2022, at a $2 million discount from face value. Also during 2006, the Company terminated two of its leases and recorded a net gain of $4 million.

     In 2005, the Company recorded a net gain of $3 million related to foreign currency option contracts that were entered into by the Company to mitigate the effect of fluctuating foreign exchange rates on the reporting of euro denominated earnings.

5     Short-Term Investments

     The Company’s 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. The following represents the composition of the Company’s auction rate securities by underlying investment.

  2006       2005 
  (in millions)
Tax exempt municipal bonds $44 $41
Equity securities 205 257
 $ 249$ 298

     Contractual maturities of the bonds outstanding at February 3, 2007 range from 2026 to 2042.

6     Merchandise Inventories

  2006      2005
  (in millions)
LIFO inventories$967 $939
FIFO inventories  336 315
Total merchandise inventories$ 1,303$ 1,254

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

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7     Other Current Assets     
        
  2006         2005 
  (in millions)
Net receivables$  59 $  49
Prepaid expenses and other current assets 3631
Prepaid rent6215
Prepaid income taxes6749
Deferred taxes 21 28
Investments14—
Current portion of Northern Group note receivable11 
Fair value of derivative contracts 1—
 $261 $173
  
 

8     Property and Equipment, net

 
  2006        2005 
  (in millions)
Land $ 3 $3 
Buildings:     
       Owned 30 31 
Furniture, fixtures and equipment:     
       Owned 1,139 1,087 
       Leased 14  15 
  1,186 1,136 
       Less: accumulated depreciation (870)  (800) 
  316 336 
Alterations to leased and owned buildings,    
       net of accumulated amortization  338  339 
 $ 654 $675 
 
 
9     Goodwill
 
   2006         2005 
  (in millions)
Athletic Stores$184 $183 
Direct-to-Customers 80 80
  $264 $263

     The effect of foreign exchange fluctuations for the fiscal year ended February 3, 2007 increased goodwill by $1 million, resulting from the strengthening of the euro in relation to the U.S. dollar.

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10     Intangible Assets, net

  February 3, 2007  January 28, 2006
    Net  Wtd. Avg.    Net 
  Gross  Accum.  Value  Useful Life  Gross  Accum. Value 
(in millions)   value      amort.      (1)      in Years      value      amort.     (1) 
Finite life intangible assets      
Lease acquisition costs$178$(98)  $80 11.9 $165$(77) $88
Trademark 21  (3) 1820.021(2) 19
Loyalty program1(1) —2.01(1) —
Favorable leases 9 (5)  43.9 10  (4)  6
Total finite life intangible assets 209 (107)  10212.3 197 (84)  113
Intangible assets not subject to      
       amortization  3 —  3  4  —  4
Total intangible assets $212$(107) $105 $201 $(84) $117
____________________

(1)Includes effect of foreign currency translation of $5 million in 2006 and $8 million in 2005 primarily related to the strengthening of the euro in relation to the U.S. dollar.

     Intangible assets not subject to amortization at February 3, 2007, includes $3 million related to the trademark of the 11 stores acquired in the Republic of Ireland. The additional minimum liability at January 28, 2006, 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. The adoption of SFAS No. 144158 in 2002, which also supersedes2006 has eliminated the accountingintangible asset.

     Lease acquisition costs represent amounts that are required to secure prime lease locations and reporting requirementsother lease rights, primarily in Europe. Included in finite life intangibles, as a result of APB No. 30, “Reporting the ResultsFootaction and Republic of Operations — ReportingIreland purchases, are the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events,” required balance sheet reclassificationstrademark for the presentationFootaction name, amounts paid for leased locations with rents below their fair value for both acquisitions and amounts paid to obtain names of discontinued operationsmembers of the Footaction loyalty program.

     Amortization expense for the intangibles subject to amortization was approximately $19 million, $18 million and other long-lived$17 million for 2006, 2005 and 2004, respectively. Annual estimated amortization expense for finite life intangible assets heldis expected to approximate $19 million for disposal.

2007, $16 million for 2008, $14 million for 2009, $12 million for 2010 and $10 million for 2011.

Recent Accounting Pronouncements11     Other Assets

  2006          2005 
  (in millions)
Deferred tax costs$21$24
Investments and note receivable722
Northern Group note receivable, net of current portion109
Fair value of derivative contracts—1
Pension benefits8—
Other37 40
 $83$96

42

12     Accrued and Other Liabilities

  2006             2005 
 (in millions) 
Pension and postretirement benefits$4$72
Incentive bonuses1220
Other payroll and payroll related costs, excluding taxes4652
Taxes other than income taxes4643
Property and equipment2416
Customer deposits1  3331
Income taxes payable2 3
Fair value of derivative contracts21
Current deferred tax liabilities43
Sales return reserve44
Liabilities of discontinued operations— 2
Current portion of repositioning and restructuring reserves11
Current portion of reserve for discontinued operations38
Other operating costs 65 49
 $246$305
____________________

1Customer deposits include unredeemed gift cards and certificates, merchandise credits and, deferred revenue related to undelivered merchandise, including layaway sales.

13     Revolving Credit Facility

Several recent accounting pronouncements not previously discussed herein became effective     At February 3, 2007, the Company had unused domestic lines of credit of $186 million, pursuant to a $200 million unsecured revolving credit agreement. $14 million of the line of credit was committed to support standby letters of credit. These letters of credit are primarily used for insurance programs.

     In May 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 February 3, 2007. Deferred financing fees are amortized over the life of the facility on a straight-line basis, which is comparable to the interest method. The unamortized balance at February 3, 2007 is approximately $1.9 million. 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 0.875 percent to LIBOR plus 1.625 percent. The quarterly facility fees paid on the unused portion during 2003. The adoption of these pronouncements did not have a material impact2006 and 2005, which are also based on the Company’s consolidated financial position, resultsfixed charge coverage ratio, ranged from 0.175 percent to 0.25 percent. There were no short-term borrowings during 2006 or 2005.

     Interest expense, including facility fees, related to the revolving credit facility was $2 million in 2006, 2005 and 2004.

14     Long-Term Debt and Obligations under Capital Leases

     In May 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 operationsthe purchase price of the Footaction stores. The interest rate on the LIBOR-based, floating-rate loan was 6.5 percent on February 3, 2007 and 5.568 percent on January 28, 2006. The loan requires minimum principal payments each May, equal to a percentage of the original principal amount of 10 percent in 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 determined by the principal repayment schedule. During 2005, the Company repaid $35 million of its 5-year term loan. This payment was in advance of the originally scheduled payment dates of May 19, 2005 and May 19, 2006 as permitted by the agreement. During 2006, the Company repaid an additional $50 million of its 5-year term loan. This payment was in advance of the originally scheduled payment dates of May 19, 2007 and May 19, 2008.

43

     During 2006, the Company purchased and retired $38 million of the $200 million 8.50 percent debentures payable in 2022 at a $2 million discount from face value bringing the outstanding amount to $134 million as of February 3, 2007. The Company has various interest rate swap agreements, which convert $100 million of the 8.50 percent debentures from a fixed interest rate to a variable interest rate, which are collectively classified as a fair value hedge. The net fair value of the interest rate swaps at February 3, 2007 was a liability of $4 million, which was included in other liabilities, the carrying value of the 8.50 percent debentures was decreased by the corresponding amount. The net fair value of the interest rate swaps at January 28, 2006 was a liability $1 million, of which $1 million was included in other assets and $2 million was included in other liabilities. Accordingly, the fair value of the interest rate swaps decreased the carrying value of the 8.50 percent debentures at January 28, 2006 by $1 million.

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

  2006              2005 
  (in millions)
8.50% debentures payable 2022$130 $171
$175 million term loan 90 140
       Total long-term debt220311
Obligations under capital leases 14 15
 234326
       Less: Current portion 14 51
 $220$275

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

  Long-Term Capital 
  DebtLeasesTotal
  (in millions)
2007$—$14$14
20082—2
200988—88
2010 ———
2011— ——
Thereafter 130   —   130
 22014234
Less: Current portion —  14  14
 $220 $— $220

     Interest expense related to long-term debt and capital lease obligations, including the effect of the interest rate swaps and the amortization of the associated debt issuance costs was $20 million in both 2006 and 2005, and $19 million in 2004. The effect of the interest rate swaps was not significant for the year ended February 3, 2007. The effect of the interest rate swaps resulted in a combined reduction in interest expense of $1 million in 2005, and $3 million in 2004.

15     Leases

     The Company is obligated under operating leases for almost all of its store properties. Some of the store leases contain renewal options with varying terms and conditions. Management expects that in the normal course of business, expiring leases will generally be renewed or, cash flows.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 adopted pronouncements were as follows:

present value of operating leases is discounted using various interest rates ranging from 4 percent to 13 percent.

•  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”

31
44


Rent expense consists of the following:      
 
  2006 2005 2004
  (in millions)    
Minimum rent$496 $489 $470 
Other occupancy expenses 145141135
Contingent rent based on sales21 13  11 
Sublease income (1)  (1)  (1) 
Total rent expense$661  $642 $615 

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

  (in millions)
2007    $486 
2008432
2009371
2010332 
2011289
Thereafter 829 
Total operating lease commitments$2,739 
Present value of operating lease commitments$2,069 

16     Other Liabilities

  2006                2005 
 (in millions) 
Pension benefits$21$42
Postretirement benefits1184
Straight-line rent liability9183
Income taxes 45 35
Workers’ compensation / general liability reserves1212
Reserve for discontinued operations1214
Repositioning and restructuring reserves33
Fair value of derivatives122
Unfavorable leases23
Other 9 15
 $218$293

17     Discontinued Operations

On January 23, 2001, the Company announced that it was exiting its 694 store694-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-ownedwholly owned subsidiaries for approximately CAD$59 million, (approximately US$38 million), which was paid in the form of a note. Over the last several years, the note (the “Note”). The purchaser agreed to obtain a revolving line of credit with a lending institution, satisfactory tohas been amended and payments have been received, however the Company, in an amount not less than CAD$25 million (approximately US$17 million). Another 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). 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 is 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 an agreement in principle to receive CAD$5 million (approximately US$3 million) cash consideration in partial prepayment of the Note and accrued interest and 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.payment terms remained unchanged. 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, during the fourth quarter of 2002 circumstances had changed sufficiently such that it became appropriate to recognize the transaction as an accounting divestiture.

32


During the fourth quarter of 2002, as a result of the accounting divestiture, 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 representing principal and interest through the date of the amendment. After taking into account this payment, 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 payment of CAD$1 million was due and received on January 15, 2004, further reducing the principal balance on the note. Under the terms of the amended Note, an accelerated principal payment of CAD$1 million may be due if certain events occur. The remaining amount of the Notenote is required to be repaid upon the occurrence of “payment events,” as defined in the purchase agreement, but no later than September 28, 2008. InterestAs of February 3, 2007, CAD$15.5 million remains outstanding on the note. The fair value of the note at February 3, 2007 and January 28, 2006, is payable semiannually 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$11 million and US$4$1 million respectively, areis classified as a current receivable, with the remainder classified as long term within other assets in the accompanying Condensed Consolidated Balance Sheet.
Sheets. All scheduled principal and interest payments have been received in accordance with the terms of the note. During 2006, the Company revised its estimates related to the U.S. Northern store reserve resulting in a reduction of $2 million.

45

Future adjustments, if any, to the carrying value of the Notenote 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 Notenote 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.

note. The purchaser has made all payments required under the terms of the note. The Company has evaluated the projected performance of the business and will continue to monitor its results during the coming year.

     Another 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. As the stock transfer on September 28, 2001 was accounted for in accordance with SAB Topic 5:E, a disposal was not achieved pursuant to APB No. 30. If the Company had applied 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, the results of operationsassignor 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 February 3, 2007, the Company estimates that its gross contingent lease liability is CAD$11 million (approximately US$9 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 ofto be approximately US$1 million. The Company believes that, because it is secondarily liable on 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 businessleases, it is unlikely that it would be accounted for pursuantrequired 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 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.

33


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

In 1997, the Company announced that it was exitingexited its Domestic General Merchandise segment. InDuring 2006, the second quarter of 2002,Company adjusted its International General Merchandise reserve by $2 million, reflecting favorable lease terminations. During 2005, the Company recorded a charge of $4 million before-tax, or $2 million after-tax,to revise estimates on its lease liability for legal actions related to this segment, which have since been settled. In addition, the successor-assignee of the leases of a former business includedone store in the DomesticInternational 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 actions pending against this subsidiary by former landlords for the lease obligations. In the fourth quarter of 2002,segment. During 2004, the Company recorded a chargeincome of $1 million, after-tax, related to certain actions. In eacha refund of the second and fourth quarters of 2003, the Company recorded an additional after-tax charge of $1 million,Canadian customs duties related to certain actions. The Company estimatesof the gross contingent lease liability related tobusinesses that comprised the remaining actions as approximately $6 million. The Company believes that it may have valid defenses; however, the outcome of these actions cannot be predicted with any degree of certainty.
Specialty Footwear segment.

The remaining reserve balances for these three discontinued segments totaled $17 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 the reserves are presented below:
below. The remaining reserve balances as of February 3, 2007 primarily represent lease obligations; $3 million is expected to be utilized within twelve months and the remaining $12 million thereafter.

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   
 
  2003 2004 2005 2006
   Charge/  Net  Charge/  Net   Charge/ Net   
  Balance      (Income)      Usage*      Balance      (Income)      Usage*      Balance     (Income)     Usage*     Balance
 

 (in millions)

Northern Group$2$— $1 $3  $—  $2  $5  $(2)  $(1) $2 
International General Merchandise5  —  — 52 1 8(2) — 6
Specialty Footwear  2 (1)  1  2—  (1) 1— — 1
Domestic General Merchandise 10  —   (2)  8  —   —   8  —   (2)  6 
Total$19 $(1) $— $18 $2  $ 2  $22 $(4) $(3) $15 
____________________

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 adjustmentsadjustments.

34


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 of the assets and liabilities of discontinued operations at 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 the Specialty Footwear and Domestic General Merchandise segments consist primarily of fixed assets and accrued liabilities.


 		      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)  
 

35


318     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 programprograms 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 thefranchises. The termination of itsthe 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 lease. During 2006 and five store locations. In May 2003, SFMB filed a voluntary petition under Chapter 112004, the Company recorded charges of $1 million and $2 million, respectively, primarily related to the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. During July and August 2003, SFMB rejected five of the leases and assumed one of the store leases in the bankruptcy proceedings.distribution center lease. The lease for the distribution center expires January 31, 2010, while the remaining store leases expired on January 31, 2004.2010. As of January 31, 2004,February 3, 2007, the Company estimates its gross contingent lease liability for the distribution center lease to be approximately $4 million. During$2 million, offset in part by the second quarter of 2003, the Company recorded a chargeestimated sublease income of $1 million, primarily related to thismillion. The Company entered into a sublease on November 15, 2004 for a significant portion of the distribution center that will expire concurrent with the Company’s lease representingterm. Accordingly, at February 3, 2007 the expected cost to exit this lease.

The remaining reserve balance related to the above businesses ofis $1 million at January 31, 2004 is expected to be utilized within twelve months.
million.

46

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. UnderAs of February 3, 2007 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 $2 million at January 31, 2004, of which, $1 million is expected to be utilized within the next twelve months and the remaining $1 million thereafter.
$3 million.

36


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
    

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

 		      (in millions)
 		    
Real estate              $4         $—         $(3)        $1         $—         $—         $1         $1         $(1)        $1   
Asset impairment                —           30           (30)          —           —           —           —           —           —           —   
Severance & personnel                2           —           (2)          —           —           —           —           —           —           —   
Other disposition costs                3           3           (3)          3           (2)          (1)          —           —           —           —   
Total              $9         $33         $(38)        $4         $(2)        $(1)        $1         $1         $(1)        $1   
 

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   
 

37


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 of $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 net 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.

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


 		      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  
 

38


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   
 

39


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   
 

40


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 expense 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   
 

41


14    Revolving Credit Facility

At January 31, 2004, 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 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 $3 million in 2003, $3 million in 2002 and $4 million in 2001.

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   
 

42


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  
 

43


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   
 

1819     Income Taxes

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

  2006  2005  2004 
   (in millions)
Domestic$320 $309 $222
International 72 96 152
Total pre-tax income$392$405$374


 		      2003
    2002
    2001

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

The income tax provision consists of the following:

  2006             2005            2004
  (in millions)    
Current:    
       Federal$93 $72 $11 
       State and local14 11 6 
       International 17 35  52 
       Total current tax provision 124 118  69 
Deferred:     
       Federal1022 43 
       State and local67 8 
       International 5 (5)   (1) 
Total deferred tax provision 21 24  50 
Total income tax provision$145$142 $119 


 		      2003
    2002
    2001

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

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 $239$426 million and $388 million at February 3, 2007, and January 31, 2004.
28, 2006, respectively.

44


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:

  2006         2005         2004
 
Federal statutory income tax rate   35.0%     35.0%     35.0% 
State and local income taxes, net of federal tax benefit3.3 2.8 2.3 
International income taxed at varying rates(0.9) 0.8 (0.6) 
Foreign tax credit utilization(1.2) (3.1) (2.5) 
Increase (decrease) in valuation allowance0.1 (1.5) 0.1 
Federal/foreign tax settlements(0.1) 0.4 (3.3) 
Tax exempt obligations(0.5) (0.4) (0.2) 
Federal tax credits(0.2) (0.2) (0.2) 
Other, net1.4 1.2 1.1 
Effective income tax rate36.9% 35.0% 31.7% 


 		      2003
    2002
    2001
Federal statutory income tax rate                35.0%          35.0%          35.0%  
State and local income taxes, net of federal tax benefit                2.4          2.0          3.5  
International income taxed at varying rates                0.5          1.0          (1.0)  
Foreign tax credit utilization                (1.0)          (1.2)          (0.8)  
Increase (decrease) in valuation allowance                (1.5)          (2.0)          —   
Change in Canadian tax rates                —           —           1.1  
State and local tax settlements                (0.2)          (0.3)          (4.1)  
Goodwill amortization                —           —           1.5  
Tax exempt obligations                (0.2)          (0.1)          —   
Work opportunity tax credit                (0.1)          (0.3)          (0.5)  
Other, net                0.6          0.1          1.9  
Effective income tax rate                35.5%          34.2%          36.6%  
 

47

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

  2006          2005
  (in millions)  
Deferred tax assets:      
       Tax loss/credit carryforwards $56 $ 71 
       Employee benefits  26  75 
       Reserve for discontinued operations  6  8 
       Repositioning and restructuring reserves  2  3 
       Property and equipment  116  108 
       Allowance for returns and doubtful accounts  4  4 
       Straight-line rent  24  22 
       Other  21  19 
Total deferred tax assets  255  310 
       Valuation allowance  (105)  (123) 
              Total deferred tax assets, net $ 150 $ 187 

  2006          2005
  (in millions)
Deferred tax liabilities:   
       Inventories $24 $18 
       Goodwill 13 12 
       Other  8  10 
Total deferred tax liabilities  45  40 
Net deferred tax asset $105 $147 
Balance Sheet caption reported in:   
       Deferred taxes $109 $147 
       Other current assets 21 28 
       Other current liabilities (4) (3) 
       Other liabilities  (21)  (25) 
 $105 $147 

     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 positions 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 2005. The Company participated in the IRS’ Compliance Assurance Process (“CAP”) for 2006, which is expected to conclude during 2007. The Company has started the CAP for 2007.


 		      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   
 

45


As of January 31, 2004,February 3, 2007, the Company hadhas a valuation allowance of $122$105 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, wasstate tax loss carryforwards decreased, principally due to current utilization and future benefit relating to state and foreign net operating losses for which aanticipated expirations of those losses. The valuation allowance is no longer necessary,for Canadian tax loss carryforwards and the expirationtax depreciation decreased as a result of certain state net operating losses for which there was a full valuation allowance, offset by an increase in the Canadian valuation allowance relating to a current year increase in deferred tax assets for which the Company does not expect to receive future benefit.
currency fluctuations and other adjustments.

48

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.February 3, 2007. 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,February 3, 2007, the Company’s tax loss/credit carryforwards includedincludes international operating loss carryforwards with a potential tax benefit of $31$26 million. Those expiring between 20042007 and 2011 are $302013 total $23 million and those that do not expire are $1total $3 million. The Company also hadhas state net operating loss carryforwards with a potential tax benefit of $30$18 million, which principally relatedrelate to the 16 states where the Company does not file a combined return.or consolidated returns. These loss carryforwards expire between 20042007 and 2022 as well as foreign tax2025. The Company has state credits totaling $4carryforwards of approximately $1 million whichthat expire between 20082010 and 2009. The Company had U.S. Federal alternative minimum tax credits2013 and Canadian capital loss carryforwards of approximately $24$11 million and $10 million, respectively, whichthat 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.

1920     Financial Instruments and Risk Management

Foreign Exchange Risk Management — Derivative Holdings Designated as Hedges

The Company operates internationally and utilizes certain derivative financial instruments to mitigate its foreign currency exposures, primarily related to third-partythird party and intercompany forecasted transactions.

     For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature of the hedged items and the relationships between the hedging instruments and the 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 willwould 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 20032006 or 2002.2005. 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.

46


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 option and forward foreign exchange contracts designated as cash flow hedges of the purchase 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 reclassifiedThe amount classified to cost of sales related to such contracts were approximatelywas not significant in 2006 and was a gain of $2 million and $1 million, respectively. The Company enters into other forward contracts to hedge intercompany foreign currency royalty cash flows. 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 were not 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.

For 2003, 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 was 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.2005. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings in 2003 and 20022006 was not material. Thesignificant and was approximately $1 million in 2005. When using a forward contract as a hedging instrument, the Company is hedgingexcludes the time value from the assessment of effectiveness. At each year-end, the Company had not hedged 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 Company has numerous investments in foreign subsidiaries, and the net assets of those subsidiaries are exposed to foreign exchange-rate volatility. In 2005, the Company hedged a portion of its net investment in its European subsidiaries. The Company entered into a 10-year cross currency swap, effectively creating a €100 million long-term liability and a $122 million long-term asset. During the term of this transaction, the Company will remit to and receive from its counterparty interest payments based on rates that are reset monthly equal to one-month EURIBOR and one-month U.S. LIBOR rates, respectively. In 2006, the Company hedged a portion of its net investment in its Canadian subsidiaries. The Company entered into a 10-year cross currency swap, creating a CAD $40 million liability and a $35 million long-term asset. During the term of this transaction, the Company will remit to and receive from its counterparty interest payments based on rates that are reset monthly equal to one-month CAD B.A. and one-month U.S. LIBOR rates, respectively.

49

     The Company has designated these hedging instruments as hedges of the net investments in foreign subsidiaries, and will use the spot rate method of accounting to value changes of the hedging instrument attributable to currency rate fluctuations. As such, adjustments in the fair market value of the hedging instrument due to changes in the spot rate will be recorded in other comprehensive income and are expected to offset changes in the euro-denominated net investment. Amounts recorded to foreign currency translation within accumulated other comprehensive loss will remain there until the net investment is disposed of. The amount recorded within the foreign currency translation adjustment included in accumulated other comprehensive loss on the Consolidated Balance Sheet at February 3, 2007 decreased shareholders’ equity by $5 million, net of tax. At January 28, 2006, the amount recorded to foreign currency translation was not significant. The effect on the Consolidated Statements of Operations related to the net investments hedges was income of $3 million for 2006 and was not significant for 2005.

Foreign Exchange Risk Management — Derivative Holdings Designated as Non-Hedges

     The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings by entering into a variety of derivative instruments including option currency contracts. These contracts are not designated as hedges and as a result, the changes in the fair value of these financial instruments are charged to the statement of operations immediately. The changes in fair valuevalues recorded in the Consolidated Statement of forward contractsOperations for the year ended February 3, 2007 was not significant and optionwas a net gain of approximately $3 million for contracts that do not qualify as hedges are recordedsettled in earnings. In 2002, the second quarter of 2005.

     The Company enteredalso enters into certain forward foreign exchange contracts to hedge intercompany foreign-currency denominated firm commitments andtransactions. In 2005, the Company recorded lossesgains of approximately $9$3 million in selling, general and administrative expenses to reflect their fair value. These losses were more than offset by foreign exchange gains of approximately $13 million related to the underlying commitments, which were expected to be settled in 2003 and 2004.

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 wasthese contracts. These gains were offset by athe foreign exchange loss related tolosses on the revaluation of the underlying transactions. These amounts were primarily related to the intercompany foreign-currency denominated firm commitments as the gains on the other forward contractsassets or liabilities. The amount recorded during 2006 was not significant.

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 and option contracts outstanding at January 31, 2004.February 3, 2007.

  Fair Value Contract Value Weighted-Average 
  (US in millions)     (US in millions)      Exchange Rate 
Inventory    
Buy €/Sell British £    $(1)     $63 .6799 
Buy $US/Sell € — 4         1.3108
Buy $US/Sell CAD$— 2.9088
 
Earnings    
Sell €/Buy $US$— $291.2962
Sell CAD$/ Buy $US— 7.8739
 
Intercompany    
Buy €/ Sell British £$— $25.6762
Buy British £/Sell €— 25.6668
Buy SEK/Sell €— 1.7456
Buy €/Sell $US— 11.3078
Buy US/Sell NZD— 2.5985
Buy US/Sell AUD— 2.7456
Buy US/Sell CAD— 1.8727


 		      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                   
 

47
50


Interest Rate Risk Management

The Company has employed various 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 rate of LIBOR plus 3.1 percent. The swap,These swaps, which maturesmature in 2022, hadhave been designated as a fair value hedge of the changes in fair value of $50$100 million of the Company’s 8.50 percent debentures payable in 2022 attributable to changes in interest rates. During 2003,rates and effectively convert the Company entered into two additional swaps to convert an additional $50 million ofinterest rate on the debentures from 8.50 percent debentures to a 1-month variable rate debt. The variable rates on the portfolio of swaps range from LIBOR plus 3.1 percent to LIBOR plus 3.333.45 percent.

     The following table presents the Company’s outstanding interest rate swaps during 2003 totaling $100 million reduced interest expense by approximately $4 million. As of January 31, 2004, swaps totaling $100 million were outstanding.derivatives:

2006       2005       2004
(in millions)
Interest Rate Swaps: 
     Fixed to Variable ($US) — notional amount$100$100$100
          Average pay rate

 8.53

%8.00%6.46%
          Average receive rate 8.50%8.50% 8.50%
     Variable to variable ($US) — notional amount$100$100$100
          Average pay rate

 5.57

%4.82%2.73%
          Average receive rate

 5.32

%4.79%3.25%

Fair Value

The following represents the fair value of the swaps, included as an addition to other liabilities, was approximately $1 million at January 31, 2004foreign exchange derivative contracts 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.interest rate swaps:

2006       2005
(in millions)
Current assets$  1$ —
Non-current assets— 1
Current liabilities21
Non-current liabilities122


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 31, 2004 or February 1, 2003.

The table below presents the fair value of principal cash flows and related weighted-average interest rates by maturity dates, including the impacteffect of the interest rate swapswaps outstanding at January 31, 2004,February 3, 2007, 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%              
 
Feb. 3,Jan. 28,
20072006
2007    2008    2009    2010    2011    Thereafter    Total    Total
($ in millions)
Long-term debt$ —288 ——132  $222 $330
Weighted-average interest rate7.8%7.8% 7.8% 8.7% 8.7% 8.7% 

Fair Value of Financial Instruments

The carrying value and estimated fair value of long-term debt was $321$220 million and $435$222 million, respectively, at February 3, 2007 and $311 million and $330 million, respectively, at January 31, 2004 and $342 million and $341 million, respectively, at February 1, 2003.28, 2006. The carrying value and estimated fair value of long-term investments and notes receivable was $31$18 million and $19 million, respectively, at February 3, 2007 and $33 million and $33 million, respectively, at January 31, 2004,28, 2006. The carrying value and $33estimated fair value of short-term investment was $14 million and $32$15 million, respectively, at February 1, 2003.3, 2007. The carrying values of cash and cash equivalents, other short-term investments and other current receivables and payables approximate their fair value.

51

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 1620 countries and purchasespurchased approximately 78 percent of its merchandise in 2006 from hundreds of vendors worldwide.its top 5 vendors. In 2003,2006, the Company purchased approximately 4050 percent of its athletic merchandise from one major vendor and approximately 14 percent from another major vendor. Each of our operating divisions are highly dependent on Nike, they individually purchase 40 to 65 percent of their merchandise from Nike. The Company generally considers all vendor relations to be satisfactory.
satisfactory.

Included in the Company’s Consolidated Balance Sheet as of January 31, 2004,February 3, 2007, are the net assets of the Company’s European operations totaling $303$478 million, which are located in 1216 countries, 911 of which have adopted the euro as their functional currency.

48


2021    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 the fiscal year.

     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans- An Amendment of FASB Statements No. 87, 88, 106, and 132(R),” (“SFAS No. 158”). This new standard requires an employer to: recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income/loss. The initial effect of the standard, due to unrecognized prior service cost and net actuarial gains or losses, as well as subsequent changes in the funded status, is recognized as a component of accumulated comprehensive income/loss within shareholders’ equity. Additional minimum pension liabilities (“AML”) and related intangible assets are derecognized upon the adoption of SFAS No. 158. The Company adopted this standard as of February 3, 2007.

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 February 3, 2007 and January 31, 2004 and28, 2006:

Postretirement
Pension BenefitsBenefits
       2006       2005       2006       2005
 (in millions)
Change in benefit obligation
     Benefit obligation at beginning of year $ 689 $ 703$ 17 $ 24
     Service cost109——
     Interest cost363611
     Plan participants’ contributions——55
     Actuarial gain(12) —(3)(5)
     Foreign currency translation adjustments(2)7——
     Plan amendment 1—  ——
     Benefits paid(60)(66)(7)(8)
     Benefit obligation at end of year$ 662 $ 689$ 13 $ 17

52


 Postretirement
Pension BenefitsBenefits
       2006       2005       2006       2005
(in millions)
Change in plan assets
     Fair value of plan assets at beginning of year$579$551
     Actual return on plan assets6060
     Employer contribution7029
     Foreign currency translation adjustments(2)5
     Benefits paid (60) (66)
     Fair value of plan assets at end of year$647$579
Funded status
     Funded status$(15)$(110)$(13)$(17)
     Unrecognized prior service cost (benefit)3(9)
     Unrecognized net (gain) loss 303 (60)
     Prepaid asset (accrued liability)$196$(86)
Balance Sheet caption reported in: 
     Intangible assets$—$1$ —$ —
     Other assets8 ———
     Accrued and other liabilities(2)(70)(2)(2)
     Other liabilities(21)(42)(11) (84)
     Accumulated other comprehensive loss, pre-tax — 307 — —
 $(15)$196 $(13)$(86)

     At February 1, 2003:

3, 2007, the aggregate amount of accumulated benefit obligations which exceed plan assets totaled $23 million representing the Company’s nonqualified pension plans. The Company's qualified pension plans were fully funded at February 3, 2007. At January 28, 2006, the accumulated benefit obligations of $688 million exceeded plan assets of $579 million for all pension plans.


 		      Pension Benefits
    Postretirement
Benefits
    

 		      2003
    2002
    2003
    2002

 		      (in millions)
 		    
Change in benefit obligation
                                                                        
Benefit obligation at beginning of year              $685         $655         $30         $37   
Service cost                8           8           —           —   
Interest cost                43           44           1           2   
Plan participants’ contributions                —           —           5           5   
Actuarial (gain) loss                18           43           1           (3)  
Foreign currency translation adjustments                11           3           —           —   
Benefits paid                (68)          (68)          (10)          (11)  
Benefit obligation at end of year              $697           685         $27           30   
Change in plan assets
                                                                        
Fair value of plan assets at beginning of year              $380         $500                                   
Actual return on plan assets                101           (57)                                  
Employer contribution                54           2                                   
Foreign currency translation adjustments                7           3                                   
Benefits paid                (68)          (68)                                  
Fair value of plan assets at end of year              $474         $380                                   
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)  
 

The change     Amounts recognized in the additional minimum liability in 2003 and 2002 was a decrease of $16 million after-tax and an increase of $83 million after-tax, respectively to accumulated other comprehensive loss.loss (pre-tax) at February 3, 2007 consists of:

 Pension             Postretirement
 Benefits  Benefits
Prior service cost (benefit) $ 4 $ (7)
Net actuarial (gain) loss   274   (53)
Total amount recognized $ 278 $ (60)

As     The following represents the change to the Consolidated Balance Sheet as of January 31, 2004 and February 1, 2003,3, 2007 as a result of the accumulated benefit obligation for all pension plans, totaling $696 million and $664 million, respectively, exceeded plan assets.
adoption of SFAS No. 158:

 Prior to
AML andEffect ofPost AML and
StatementAdoptionStatement
No. 158AMLStatementNo. 158
       Adjustments       Adjustment       No. 158       Adjustments
(in millions)
Current assets2,034—— 2,034
Deferred taxes144(120)85109
Intangible assets106 (1)—105
Other assets75— 883
Total assets$ 3,277(121)93$ 3,249

49
53


 Prior to
AML andEffect ofPost AML and
StatementAdoptionStatement
No. 158AMLStatementNo. 158
       Adjustments       Adjustment       No. 158       Adjustments
(in millions)
Accrued and other liabilities246——246
Total current liabilities516—— 516
Other liabilities300 (308)226218
Other comprehensive loss(150)187(133)(96)
Total shareholders’ equity 2,323(121)932,295
Total liabilities and shareholders’ equity$ 3,277(121)93$ 3,249

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

Pension BenefitsPostretirement Benefits
2006       2005       2006       2005
Discount rate5.68% 5.43% 5.80% 5.50%
Rate of compensation increase3.76% 3.77% 


 		      Pension Benefits
    Postretirement
Benefits
    

 		      2003
    2002
    2003
    2002
Discount rate                5.90%          6.50%          5.90%          6.50%  
Rate of compensation increase                3.72%          3.65%                                  
 

The components of net benefit expense (income) are:


 		      Pension Benefits
    Postretirement Benefits
    

 		      2003
    2002
    2001
    2003
    2002
    2001

 		      (in millions)
 		    
Service cost              $8         $8         $8         $—         $—         $—   
Interest cost                43           44           45           2           2           3   
Expected return on plan assets                (46)          (50)          (58)          —           —           —   
Amortization of prior service cost                —           1           1           (1)          (1)          (2)  
Amortization of net (gain) loss                9           3           —           (16)          (12)          (9)  
Net benefit expense (income)              $14         $6         $(4)        $(15)        $(11)        $(8)  
 
Pension BenefitsPostretirement Benefits
       2006       2005       2004       2006       2005       2004
(in millions)
Service cost$10$9$9$—$—$—
Interest cost36 3639111
Expected return on plan assets (56)(49) (48)———
Amortization of prior service cost (benefit)111 (1)(1)(1)
Amortization of net (gain) loss 12  13  11 (10)  (12) (13)
Net benefit expense (income)$3$10$12 $(10)$(12) $(13)

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


 		      Pension Benefits
    Postretirement Benefits
    

 		      2003
    2002
    2001
    2003
    2002
    2001

 		      (in millions)
 		    
Discount rate                6.50%          7.00%          7.44%          6.50%          7.00%          7.50%  
Rate of compensation increase                3.72%          3.53%          4.96%                                                  
Expected long-term rate of return on assets                8.88%          8.87%          9.93%                                                  
 
 Pension BenefitsPostretirement Benefits
       2006       2005       2004       2006       2005       2004
Discount rate5.44% 5.50% 5.90% 5.50% 5.50% 5.90%
Rate of compensation increase3.76% 3.77% 3.79% 
Expected long-term rate of return on assets8.87% 8.88% 8.89% 

     The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (income) during the next year are as follows:

       Pension       Postretirement Benefits       Total
(in millions)
Amortization of prior service cost (benefit)$1  $(1)$—
Amortization of net loss (gain) $11   $(8) $3

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.

54

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 impactaffect 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. The Company has determined that it will qualify for the subsidy, however the effect of the subsidy was not significant to either the benefit obligation or net benefit income.

In January 2004,August 2006, the FASB issued FASB Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and ModernizationPension Protection Act of 2003,” (“FSP 106-1”). As permitted by FSP 106-1, the Company has elected to defer accounting for the effects2006 was signed into law. The major provisions of the statute will take effect January 1, 2008. Among other things, the statute is designed to ensure timely and adequate funding of pension plans by shortening the time period within which employers must fully fund pension benefits. The Company is currently evaluating the effect, if any, that the Pension Protection 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 andof 2006 will have on funding requirements. The effect on net periodic benefit cost doesis not reflect the effects of the Act.

expected to be significant.

50


The Company’s pension plan weighted-average asset allocations at February 3, 2007 and January 31, 2004 and February 1, 2003,28, 2006, by asset category are as follows:

2006               2005
Asset Category
Equity securities64%62%
Foot Locker, Inc. common stock1%2%
Debt securities33%34%
Real estate1% 1%
Other1%1%
Total100%100%


 		      Plan Assets as of
    

 		      2003
    2002
Asset Category
                                        
Equity securities                63%          61%  
Foot Locker, Inc. common stock                2%          1%  
Debt securities                33%          36%  
Real estate                1%          1%  
Other                1%          1%  
Total
                100%          100%  
 

     The U.S. defined benefit plan held 396,000 shares of Foot Locker, Inc. common stock as of February 3, 2007 and January 28, 2006. 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 impacteffect that the return of any single investment may have on the entire portfolio.

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

PensionPostretirement
Benefits       Benefits
 (in millions)
2007$64 $2
2008 62  2
200961 2
201058 2
201156 1
2012–2015259 5

     In the fourth quarter of 2006, the Company and its U.S. pension plan, the Foot Locker Retirement Plan, were named as defendants in a class action in federal court in Illinois. The Complaint alleged that the Company’s pension plan violated the Employee Retirement Income Security Act of 1974 as a result of the Company’s conversion of its defined benefit plan to a defined benefit pension plan with a cash balance feature in 1996. In March 2007, the class action was dismissed without prejudice. In February 2007, the same plaintiff filed a class action in federal court in New York against the Company and its U.S. pension plan, the Foot Locker Retirement Plan. The Complaint alleged that the

55

Company’s pension plan violated the Employee Retirement Income Security Act of 1974, including, without limitation, its age discrimination and notice provisions, as a result of the Company’s conversion of its defined benefit plan to a defined benefit pension plan with a cash balance feature in 1996. The Company currently expectsplans to contribute $50 million to its pension plans during 2004 todefend 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.

action vigorously.

401(k) PlanSavings Plans

The Company has two qualified savings plans, a qualified 401(k) savings planPlan 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, thisThe savings plan allowsplans 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. Suchstock 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 $1.6$1.9 million, $1.4$1.6 million, and $1.3 million in 2003, 20022006, 2005 and 2001,2004, respectively.

21    22     Share-Based Compensation

Stock PlansOptions

In 2003, the Company adopted     Under 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, including those at the subsidiary levels, 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 termsoptions terminate up to 10 years from the date of the 2003 Stock Purchase Plan are substantially the same as the 1994 Employees Stock Purchase Plan (the “1994 Stock Purchase Plan”), which expires in June 2004. Under this plan, 3,000,000 shares of common stock are available for purchase beginning June 2005.
grant.

Under 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 keyother employees at not less than the market price on the date of grant. Under the plan, the Company may grant to 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.

51


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”). 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 towas 1,500,000 shares. As of March 8, 2005 no further awards may be made under the 1995 Plan. Options granted under the 1986 Stock Option Plan (the “1986 Plan”) generally becomebecame exercisable in two equal installments on the first and the second anniversaries of the date of grant. Nogrant, no further options may be granted under the 1986this Plan.

The 2002 Foot Locker Directors’ Stock Plan (the “2002 Directors 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.Directors 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.

Employee Stock Purchase Plan

The Company’s 2003 Employees Stock Purchase Plan (the “2003 Employee Stock Purchase Plan”) terms are substantially the same as the 1994 Employees Stock Purchase Plan (the “1994 Employee Stock Purchase Plan”), which expired in June 2004. Under the Company’s 19942003 Employee Stock Purchase Plan participating employees mayare able to contribute up to 10 percent of their annual compensation through payroll deductions to acquire shares of the Company’s 

56

common stock at 85 percent of the lower market price on one of two specified dates in each plan year. Under the 2003 Employee Stock Purchase Plan, 3,000,000 shares of common stock are authorized for purchase beginning June 2005. Of the 8,000,0003,000,000 shares of common stock authorized for purchase under this plan, 572806 participating employees purchased 120,208105,123 shares in 2003. To date,2006 and 1,191 participating employees purchased 237,353 shares in 2005.

Valuation Model and Assumptions

     The Company uses a totalBlack-Scholes option-pricing model to estimate the fair value of 1,628,176 shares have been purchasedshare-based awards under this plan.

SFAS No. 123(R), which is the same valuation technique it previously used for pro forma disclosures under SFAS No. 123. The Black-Scholes option-pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility.

When common     The Company estimates the expected term of share-based awards granted using the Company’s historical exercise and post-vesting employment termination patterns, which it believes are representative of future behavior. The expected term for the Company’s employee stock purchase plan valuation is issued under these plans,based on the proceeds from options exercised or shares purchased are credited to common stock tolength of each purchase period as measured at the extentbeginning of the par valueoffering period, which is one year. The Company estimates the expected volatility of the shares issued and the excess is credited to additional paid-in capital. When treasuryits 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 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  
 

The Black-Scholes option valuation model was developed for estimatingweighted-average of the fair value ofCompany’s historical volatility and implied volatility from traded options on the Company’s common stock. The Company believes that have no vesting restrictionsthe combination of historical volatility and are fully transferable. Because option valuation models requireimplied volatility provides a better estimate of future stock price volatility. The risk-free interest rate assumption is determined using the use of subjective assumptions, changes in these assumptions can materially affect the fair valueFederal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the options, and becauseexpected term of the award being valued. The expected dividend yield is derived from the Company’s options do not havehistorical experience.

     Additionally, SFAS No. 123(R) requires the characteristicsCompany to estimate pre-vesting option forfeitures at the time of traded options,grant and periodically revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company records stock-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on its historical pre-vesting forfeiture data. Previously, the option valuation models do not necessarily provide a reliable measureCompany accounted for forfeitures as they occurred under the pro forma disclosure provisions of SFAS No. 123 for periods prior to 2006.

     The following table shows the fair value of its options.Company’s assumptions used to compute the stock-based compensation expense and pro forma information:

Stock Option PlansStock Purchase Plan
     2006     2005     2004     2006     2005     2004
Weighted-average risk free rate
     of interest4.68%3.99%2.57%4.39%4.19%1.33%
Expected volatility30%28%33%22%25%32%
Weighted-average expected
     award life 4.0 years 3.8 years 3.7 years 1.0 years .7 years.7 years
Dividend yield1.5%1.1%1.1% 1.4%— —
Weighted-average fair value$6.36 $6.69$6.51$4.71$5.54$11.44

52
57


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

200620052004
Weighted-Weighted-Weighted-
NumberAverageNumberAverageNumberAverage
ofExerciseofExerciseofExercise
     Shares     Price     Shares     Price     Shares     Price
(in thousands, except prices per share)
Options outstanding at beginning
     of year5,962$ 18.455,909$ 16.696,886$ 14.73
Granted858$ 23.981,014$ 27.421,183 $ 25.20
Exercised(459) $ 15.12(682)$ 15.03(1,853)$ 14.43
Expired or cancelled(313)$ 24.83 (279)$ 22.11(307)$ 19.13
Options outstanding at end of year6,048 $ 19.155,962  $ 18.455,909$ 16.69
Options exercisable at end of year4,455$ 16.944,042$ 16.00 3,441$ 15.34
Options available for future grant at end 
     of year4,9315,7687,464


     The total intrinsic value of options exercised for 2006 and 2005 was $4.0 million and $7.6 million, respectively. The aggregate intrinsic value for stock options outstanding and for stock options exercisable as of February 3, 2007 was $30 million. The intrinsic value for stock options outstanding and exercisable is calculated as the difference between the fair market value as the end of the period and the exercise price of the shares. The Company received $6.8 million and $9.5 million in cash from option exercises for 2006 and 2005, respectively. The tax benefit realized by the Company on the stock option exercises for 2006 was approximately $1 million.


 		      2003
    2002
    2001
    

 		      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)
 		    
Options outstanding at beginning of year                7,676        $15.18          7,557        $14.63          7,696        $14.49  
Granted                1,439        $10.81          1,640        $15.72          2,324        $12.81  
Exercised                1,830        $12.50          783         $6.67          995         $7.28  
Expired or canceled                399         $19.55          738         $19.80          1,468        $15.98  
Options outstanding at end of year                6,886        $14.73          7,676        $15.18          7,557        $14.63  
Options exercisable at end of year                4,075        $15.99          4,481        $15.94          4,371        $16.83  
Options available for future grant at
end of year		                8,780                      6,739                      7,389                  
 


The following table summarizes information about stock options outstanding and exercisable at January 31, 2004:February 3, 2007:

Options OutstandingOptions Exercisable
Weighted-
AverageWeighted-Weighted-
RemainingAverageAverage
ContractualExerciseExercise
Range of Exercise Prices        Shares        Life        Price       Shares        Price
(in thousands, except prices per share)
$ 4.53 to $11.911,5404.8  $ 10.64 1,540  $ 10.64 
$12.31 to $16.02 1,3064.614.90  1,30614.90 
$16.19 to $25.191,2417.422.80 39920.52 
$25.28 to $26.661,211 5.325.42 92025.39 
$26.87 to $28.507507.927.86 29027.80 
$ 4.53 to $28.506,0485.8$ 19.15 4,455$ 16.94 


 		      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  
 

22         Changes in the Company’s nonvested options at February 3, 2007 are summarized as follows:

Weighted-
average grant
Number ofdate fair value
sharesper share
(in thousands)            
Nonvested at January 29, 20061,920 $ 23.59
Granted85823.98
Vested(872)20.35
Cancelled(313)24.83
Nonvested at February 3, 20071,59325.33

58

     As of February 3, 2007 there was $3.3 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of 0.86 years.

Restricted Stock

Restricted shares of the Company’s common stock may be awarded to certain officers and key employees of the Company. There were 845,000, 90,000 and 420,000For executives outside of the United States the Company issues restricted sharesstock units. Each restricted stock unit represents the right to receive one share of the Company’s common stock granted in 2003, 2002provided that the vesting conditions are satisfied. In 2005 and 2001,2004, 20,000 and 72,005 restricted stock units were awarded, respectively. TheCompensation expense is recognized using the fair market values of the sharesvalue at the date of grant amounted to $9.8 million in 2003, $1.3 million in 2002 and $5.4 million in 2001. The market values are recorded within shareholders’ equity and areis amortized as compensation expense over the related vesting periods.period. These awards fully vest after the passage of a restriction period,time, generally three to five years, except for a 2003 grant of 200,000 shares which vests 50 percent one year fromyears. Restricted stock is considered outstanding at the datetime of grant, as the holders of restricted stock are entitled to receive dividends and 50 percent two years fromhave voting rights.

     Restricted shares and units activity for the dateyear-ended February 3, 2007, January 28, 2006 and January 29, 2005 is summarized as follows:

       2006       2005       2004
(in thousands)
Outstanding at beginning of the year1,0411,1771,150
Granted157245402
Vested(600)(205) (345)
Cancelled or forfeited(61)(176)(30)
Outstanding at end of year 537 1,0411,177
Aggregate value (in millions) $  13.6 $  18.0 $  18.8
Weighted average remaining contractual life0.930.691.25


The weighted average grant-date fair value per share was $24.08, $26.55 and $25.34 for 2006, 2005 and 2004, respectively. The total value of grant. During 2003, 2002awards for which restrictions lapsed during the year-ended February 3, 2007, January 28, 2006 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,January 29, 2005 was $7.1$6.7 million, $2.4$4.0 million and $3.9$3.0 million, asrespectively. As of January 31, 2004, February 1, 2003 and February 2, 2002, respectively.3, 2007, there was $4.0 million of total unrecognized compensation cost, related to nonvested restricted stock awards. The Company recorded compensation expense related to restricted shares, net of $4.1forfeitures, of $4.0 million in 2003, $1.92006, $6.1 million in 20022005 and $1.6$8.0 million in 2001.

23    Shareholder Rights Plan2004.

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


2423    Legal Proceedings

Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidentincidental to the businessesbusiness of the Company, as well as litigation incidentincidental 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 willwould have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.
operations, taken as a whole.

     These legal proceedings include commercial, intellectual property, customer, and labor-and-employment-related claims. Certain of the Company’s subsidiaries are defendants in a number of lawsuits filed in state and federal courts containing various class action allegations under state wage and hour laws, including allegations concerning classification of employees as exempt or nonexempt, unpaid overtime, meal and rest breaks, and uniforms.

2524    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

59

is also operating certain stores and making rental payments 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.

     The Company does not have any off-balance sheet financing, other than operating leases entered into in the normal course of business and 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.

2625    Shareholder Information and Market Prices (Unaudited)

Foot Locker, Inc. common stock is listed on theThe New York stock exchangeStock Exchange as well as on the boerse-stuttgartböerse-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.”

At January 31, 2004,     As of February 3, 2007, the Company had 28,48023,709 shareholders of record owning 143,952,080155,702,670 common shares.

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

20062005
       High       Low       High       Low
Common Stock
     Quarter
1stQ $ 24.39 $ 22.26$ 29.95$ 25.88
2ndQ 28.0021.50 27.65 24.31
3rdQ27.8022.3425.3718.75
4thQ24.9221.1024.0718.74


 		      2003
    2002
    

 		      High
    Low
    High
    Low
Common Stock
Quarter
                                                                        
1st Q
              $11.40        $9.28        $17.95        $14.35  
2nd Q
                15.20          10.10          16.00          9.02  
3rd Q
                18.20          13.85          11.19          8.20  
4th Q
                25.97          18.01          13.73          9.75  
 

During 2003,2006, the Company’s dividend policy was to pay aCompany declared quarterly dividenddividends of $0.03$0.09 per share.share during the first, second and third quarters. On November 19, 2003,15, 2006, the Company doubledincreased the quarterly dividend per share by 39 percent to $0.06,$0.125, beginning in the fourth quarter of 2003.
2006.

54
     During 2005, the Company declared quarterly dividends of $0.075 per share during the first, second and third quarters. On November 16, 2005, the Company increased the quarterly dividend per share by 20 percent to $0.09, beginning in the fourth quarter of 2005.

60


2726     Quarterly Results (Unaudited)

       1stQ       2ndQ       3rdQ       4thQ       Year
(in millions, except per share amounts)
Sales
     2006(a)   $ 1,3651,3031,4301,652  5,750
     20051,3771,3041,4081,5645,653
Gross margin(b)
     2006(a)   $419 3614225341,736
     2005418377430 484(d)1,709
Operating profit(c)
     2006(a)   $932794167381
     20059471104140409
Income from continuing operations 
     2006(a)   $581465110247
     20055844 6596263
Net income
     2006(a)   $591465113251
     200558446696264
Basic earnings per share:
     2006(a)   
          Income from continuing operations$0.370.090.420.711.59
          Income from discontinued operations———0.020.02
          Cumulative effect of accounting change0.01———0.01
          Net income0.380.090.420.731.62
     2005
          Income from continuing operations$0.370.290.420.621.70
          Income from discontinued operations——0.01—0.01
          Net income0.370.290.430.621.71
Diluted earnings per share:
     2006(a)   
          Income from continuing operations$0.370.090.420.701.58
          Income from discontinued operations———0.020.02
          Cumulative effect of accounting change0.01————
   ��      Net income0.380.090.420.721.60
     2005
          Income from continuing operations$0.370.280.410.611.67
          Income from discontinued operations——0.01—0.01
          Net income 0.370.280.420.611.68

____________________


 		      1st Q
    2nd Q
    3rd Q
    4th Q
    Year

 		      (in millions, except per share amounts)
 		    
Sales
                                                                                        
2003              $1,128          1,123          1,194          1,334          4,779  
2002                1,090          1,085          1,120          1,214          4,509  
Gross margin(a)
                                                                                        
2003              $345           331           389           412          1,477  
2002                320           312           343           369           1,344  
Operating profit(b)
                                                                                        
2003              $67           59           102           114           342   
2002                64           55           72(c)          78(d)          269   
Income from continuing operations
                                                                                        
2003              $39           37           62           71           209   
2002      ��         38(e)          33           43(e)          48           162(e)  
Net income
                                                                                        
2003              $38           36           62           71           207   
2002                20(e)          31           45(e)          57           153(e)  
Basic earnings per share:
                                                                                        
2003
                                                                                        
Income from continuing operations              $0.28          0.26          0.43          0.50          1.47  
Loss from discontinued operations                —           (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)  
Net income                0.14(e)          0.22          0.32(e)          0.41          1.09(e)  
Diluted earnings per share:
                                                                                        
2003
                                                                                        
Income from continuing operations              $0.27          0.25          0.41          0.47          1.40  
Loss from discontinued operations                —           (0.01)          —           —           (0.01)  
Cumulative effect of accounting change(f)
                (0.01)          —           —           —           —   
Net income                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)The fourth quarter of 2006 represents the 14 weeks ended February 3, 2007.
(b)Gross margin represents sales less cost of sales.

(b)
(c)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 theThe 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.2005 includes permanent markdowns of $7 million.

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

55
61


FIVE YEARFIVE-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.

      2006(1)      2005      2004      2003      2002 
($ in millions, except per share amounts)            
Summary of Continuing Operations
Sales$5,7505,6535,3554,7794,509
Gross margin(2)1,7361,7091,6331,4821,348
Selling, general and administrative expenses1,1631,1291,090988926
Impairment charge 17————
Depreciation and amortization(2)175171154152153
Interest expense, net310151826
Other income(14)(6)——(3)
Income from continuing operations247263255209162
Cumulative effect of accounting change(3)1——(1)—
Basic earnings per share from continuing operations1.591.701.691.471.15
Basic earnings per share from cumulative effect of accounting change0.01————
Diluted earnings per share from continuing operations1.581.671.641.401.10
Diluted earnings per share from cumulative effect of accounting change—————
Common stock dividends declared0.400.320.260.150.03
Weighted-average common shares outstanding (in millions)155.0155.1150.9141.6140.7
Weighted-average common shares outstanding assuming dilution (in millions)  156.8 157.6 157.1  152.9 150.8 
Financial Condition
Cash, cash equivalents and short-term investments$470587492448357
Merchandise inventories1,3031,2541,151920835
Property and equipment, net(4)654675715668664
Total assets(4)3,2493,312 3,2372,713 2,514
Short-term debt—————
Long-term debt and obligations under capital leases234326365335357
Total shareholders’ equity  2,295 2,027 1,830 1,375 1,110 
Financial Ratios
Return on equity (ROE)11.5%13.615.916.815.4
Operating profit margin6.8%7.27.37.26.0
Income from continuing operations as a percentage of sales4.3%4.74.84.43.6
Net debt capitalization percent(5)44.4%45.250.453.358.6
Net debt capitalization percent (without present value of operating leases)(5)—————
Current ratio  3.9 2.8 2.7 2.8 2.2 
Other Data
Capital expenditures$165155156144150
Number of stores at year end3,9423,9213,9673,6103,625
Total selling square footage at year end (in millions)8.748.718.897.928.04
Total gross square footage at year end (in millions)14.5514.4814.7813.1413.22


 		      2003
    2002
    2001
    2000
    1999
   
($ in millions, except per share amounts)
   
Summary of Continuing Operations
                                                                                        
Sales              $4,779          4,509          4,379          4,356          4,263  
Gross margin                1,477          1,344          1,308          1,309          1,164(1)  
Selling, general and administrative expenses                987           928           923           975           985   
Restructuring charges (income)                1           (2)          34           1           85   
Depreciation and amortization                147           149           154           151           169   
Interest expense, net                18           26           24           22           51   
Other income                —           (3)          (2)          (16)          (223)  
Income from continuing operations                209           162           111(4)          107(4)          59(4)  
Cumulative effect of accounting change(2)
                (1)          —           —           (1)          8   
Basic earnings per share from continuing operations                1.47          1.15          0.79(4)          0.78(4)          0.43(4)  
Basic earnings per share from cumulative effect of
accounting change		                —           —           —           (0.01)          0.06  
Diluted earnings per share from continuing operations                1.40          1.10          0.77(4)          0.77(4)          0.43(4)  
Diluted earnings per share from cumulative effect of
accounting change		                —           —           —           (0.01)          0.06  
Common stock dividends declared                0.15          0.03          —           —           —   
Weighted-average common shares outstanding (in millions)                141.6          140.7          139.4          137.9          137.2  
Weighted-average common shares outstanding
assuming dilution (in millions)		                152.9          150.8          146.9          139.1          138.2  
Financial Condition
                                                                                        
Cash and cash equivalents              $448           357           215           109           162   
Merchandise inventories                920           835           793           730           697   
Property and equipment, net                644           636           637           684           754   
Total assets                2,689          2,486          2,300          2,278          2,525  
Short-term debt                —           —           —           —           71   
Long-term debt and obligations
under capital leases		                335           357           399           313           418   
Total shareholders’ equity                1,375          1,110          992           1,013          1,139  
Financial Ratios
                                                                                        
Return on equity (ROE)                16.8%          15.4          11.1          10.0          5.4  
Operating profit margin                7.2%          6.0          4.5          4.2          (1.8)  
Income from continuing operations as a percentage of sales                4.4%          3.6          2.5(4)          2.5(4)          1.4(4)  
Net debt capitalization percent(3)
                53.3%          58.6          61.1          60.9          61.2  
Net debt capitalization percent (without present value of operating leases)(3)
                —           —           15.6          16.8          22.3  
Current ratio                2.8          2.2          2.0          1.5          1.5  
Other Data
                                                                                        
Capital expenditures              $144           150           116           94           152   
Number of stores at year end                3,610          3,625          3,590          3,752          3,953  
Total selling square footage at year end (in millions)                7.92          8.04          7.94          8.09          8.40  
Total gross square footage at year end (in millions)                13.14          13.22          13.14          13.32          13.35  
 

____________________

(1)2006 represents the 53 weeks ended February 3, 2007.
 Includes a restructuring charge of $11 million related to inventory markdowns.

(2)Gross margin and depreciation expense include 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. Gross margin was reduced by $5 million in 2004 and 2003 and $4 million in 2002 and accordingly, depreciation expense was increased by the corresponding amount.
(3)2006 relates to the adoption of SFAS No. 123(R), “Share-Based Payment.” 2003 relates to adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations” (see note 1). 2000 reflects changeObligations.”
(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 method of accounting for layaway sales. 1999 reflects change2004, $24 million in method for calculating the market-related value of pension plan assets.2003 and $28 million in 2002.

(3)
(5)    Represents total debt, net of cash, and cash equivalents and excludesshort-term investments and includes the effect of an interest rate swapswaps of $4 million and $1 million that decreased long-term debt at February 3, 2007 and January 28, 2006, respectively, $4 million that increased long-term debt at January 29, 2005 and $1 million that reduced long-term debt at January 31, 2004.

(4)As more fully described in note 2, applying the provisions of EITF 90-16, income from continuing operations for 2001, 2000 and 1999 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 million, respectively. As such basic earnings per share would have been $0.65, $0.42 and $0.13 for fiscal 2001, 2000 and 1999, respectively. Diluted earnings per share would have been $0.64, $0.41 and $0.13 for fiscal 2001, 2000 and 1999, 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.

56
62


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

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

Item 9A. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be included in this annual report has been made known to them in a timely fashion.
     (a)    Evaluation of Disclosure Controls and Procedures.
The Company’s management performed an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), and completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of February 3, 2007. Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of February 3, 2007 in alerting them in a timely manner to all material information required to be disclosed in this report.
     (b)Management’s Annual Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as 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, 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 February 3, 2007. 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 and effectiveness 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.
KPMG's attestation report on management's assessment and the effectiveness of our internal control over financial reporting is included in "Item 8. Consolidated Financial Statements and Supplementary Data."
     (d)Changes in Internal Control over Financial Reporting.

During the Company’s last fiscal quarter there were no changes in internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s Chief Executive Officer and Chief Financial Officer also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to 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.

Item 9B. Other Information

     None.

63

PART III

Item 10.10 Directors, and Executive Officers of the Companyand Corporate Governance

(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)
         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 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)
     (d)Information on our audit committee financials expertsand the audit committee 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)
     (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 Information section of the Proxy Statement and is incorporated herein by reference.

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”“Pension Benefits” is incorporated herein by reference, and information set forth in the Proxy Statement under the heading "Compensation Comittee Interlocks and Insider Participation" is incorporated herein by reference.

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, and Director Independence

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

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.

64

PART IV

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

    (a)(1)(a)(2) Financial Statements

(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 6067 through 63.70. 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.

58
65


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.

FOOT LOCKER, INC.
By: 
 

Matthew D. Serra
Chairman of the Board, President and
Chief Executive Officer
Date: April 2, 2007 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 5, 2004,2, 2007, 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		 Robert W. McHugh
Senior Vice President and
Chief Financial Officer
 /s/ GIOVANNA  CIPRIANO  
/
Bruce L. Hartman
Executive Vice President and
Chief Financial Officers
/ MATTHEW M. MCKENNA 
/s/ ROBERT W. MCHUGH Giovanna Cipriano
Robert W. McHugh
Vice President and
Chief Accounting Officer
 Matthew M. McKenna
Director
 /s/ PURDY CRAWFORD  /s/ JAMES  E. PRESTON
 Purdy Crawford
Director
/s/ J. CARTER BACOT
J. Carter Bacot
Lead Director
/s/ JAMES E. PRESTON
James E. Preston
Director
 
 /s/ NICHOLAS DIPAOLO
/s/ PURDY CRAWFORD
Purdy Crawford
Director
 /s/ DAVID Y. SCHWARTZ
 Nicholas DiPaolo
Director
/s/ DAVID Y. SCHWARTZ
David Y. Schwartz
Director
 
 /s/ ALAN D. FELDMAN
/s/ NICHOLAS DIPAOLO
Nicholas DiPaolo
Director
 /s/ CHRISTOPHER A. SINCLAIR
 Alan D. Feldman
Director
/s/ CHRISTOPHER A. SINCLAIR
Christopher A. Sinclair
Director
 
 /s/ PHILIP H. GEIER JR. /s/ CHERYL NIDO TURPIN
/s/ PHILIP H. GEIER JR.
Philip H. Geier Jr.
Director
 Cheryl Nido Turpin
Director
 
/s/ CHERYL N. TURPIN
Cheryl N. Turpin
Director
 
 /s/ JAROBIN GILBERT JR. /s/ DONA D. YOUNG
/s/ JAROBIN GILBERT JR.
Jarobin Gilbert Jr.
Director
/s/ DONA D. YOUNG
Dona D. Young
Director

59
66


FOOT LOCKER, INCINC.
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 
4.1The 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).
4.34.2Indenture 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 
4.3Form of 8 1/8-1/2% 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).
4.6Form 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).
4.7Registration 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
4.8Distribution 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).
10.11986 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 
10.2Amendment 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 
10.3Foot Locker 1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10(p) to the 1994 Form 10-K).
10.4 
10.4Foot 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”))1998).
10.5Amendment 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 
10.6Executive 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”)).

67


Exhibit No.
in Item 601 of
Regulation S-K		Description
10.7Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(c)(i) to the 1994 Form 10-K ).
10.8 
10.8Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d)(ii) to the 1995 Form 10-K).
10.9 
10.9Supplemental Executive Retirement Plan, as amended (incorporated herein by reference to Exhibit 10(e)10.1 to the 1995Current Report on Form 10-K)8-K dated August 21, 2006 filed by the Registrant with the SEC on August 25, 2006).
10.10Long-Term Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit 10(f) to the 1995 Form 10-K).
10.11 
10.11Annual 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
10.12Form of indemnification agreement, as amended (incorporated herein by reference to Exhibit 10(g) to the 8-B Registration Statement).
10.13 
10.13Amendment 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 
10.14Foot Locker Voluntary Deferred Compensation Plan (incorporated herein by reference to Exhibit 10(i) to the 1995 Form 10-K).
10.15 
10.15Foot Locker Directors Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the July 29, 2000 Form 10-Q).
10.16 
10.16Trust 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 
10.17Amendment 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 
10.18Foot Locker Directors’ Retirement Plan, as amended (incorporated herein by reference to Exhibit 10(k) to the 8-B Registration Statement).
10.19 
10.19Amendments 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”))1995).
10.20Employment Agreement with Matthew D. Serra dated as of January 21, 2003October 5, 2006 (incorporated herein by reference to Exhibit 10.2010.1 to the AnnualCurrent Report on Form 10-K for the year ended February 1, 20038-K dated October 5, 2006 filed by the Registrant with the SEC on May 19, 2003October 10, 2006 (the “2002“October 10, 2006 Form 10-K”8-K”)).
10.21 
10.21Amendment of Restricted Stock Agreement withfor Matthew D. Serra dated as of March 4, 2001October 6, 2006 (incorporated herein by reference to Exhibit 10.310.2 to the May 5, 2001October 10, 2006 Form 10-Q)8-K).
10.22Amendments to the Credit Agreement (incorporated herein by reference to Exhibits 10.1 to the Current Reports on Form 8-K dated (i) November 13, 2006 filed by the Registrant with the SEC on November 17, 2006, and (ii) March 7, 2007 filed by the Registrant with the SEC on March 12, 2007).

68


Exhibit No.
in Item 601 of
Regulation S-K		     Description
10.23Restricted Stock Agreement with Matthew D. Serra dated as of February 2, 20039, 2005 (incorporated herein by reference to Exhibit 10.2210.2 to the 2002February 9, 2005 Form 10-K)8-K).
10.23 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).
10.24Foot 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”))1998).
10.25Form of Senior Executive Employment Agreement (incorporated herein by reference to Exhibit 10.23 to the Registrant’s Annual Report on 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
10.26Form of Executive Employment Agreement (incorporated herein by reference to Exhibit 10.24 to the 1999 Form 10-K).
10.27 Foot Locker, Inc. Directors’ Stock Plan (incorporated herein by reference to Exhibit 10(b) to the Registrant’s October 28, 1995 Form 10-Q).
10.2810.27Foot Locker, Inc. Excess Cash Balance Plan (incorporated herein by reference to Exhibit 10(c) to the 1995 Form 10-K).
10.29 
10.28Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.30 to the 1998Registrant’s Annual Report on Form 10-K)10-K for the year ended January 30, 1999 filed by the Registrant on April 30, 1999 (the “1998 Form 10-K”)).
10.30
10.29FourthFifth Amended and Restated Credit Agreement dated as of April 9, 1997, amended and restated as of July 30, 2003May 19, 2004 (“Credit Agreement”) (incorporated herein by reference to Exhibit 10.1 to the August 2, 2003Quarterly 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).
10.30Amendment No. 1 to the Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on May 18, 2005).
10.31Letter of Credit Agreement dated as of March 19, 1999 (incorporated herein by reference to Exhibit 10.35 to the 1998 Form 10-K).
10.32Foot Locker 2002 Directors Stock Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the QuarterlyCurrent Report on Form 10-Q for the quarterly period ended August 3, 20028-K dated February 16, 2005, filed by the Registrant with the SEC on September 12, 2002 (the “August 3, 2002 Form 10-Q”))February 18, 2005).
10.33Foot Locker 2003 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 to the August 2, 2003 Form 10-Q).
12
10.34Automobile Expense Reimbursement Program for Senior Executives (incorporated herein by reference to Exhibit 10.36 to the Annual Report on Form 10-K for the year ended January 29, 2005 filed by the Registrant on March 29, 2005 (the “2004 Form 10-K”).
10.35Executive Medical Expense Allowance Program for Senior Executives (incorporated herein by reference to Exhibit 10.37 to the 2004 Form 10-K).
10.36Financial Planning Allowance Program for Senior Executives (incorporated herein by reference to Exhibit 10.38 to the 2004 Form 10-K).
10.37Form of Nonstatutory Stock Option Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.40 to the Annual Report on Form 10-K for the year ended January 28, 2006 filed by the Registrant with the SEC on March 27, 2006 (the “2005 Form 10-K”)). 
10.38Form of Incentive Stock Option Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.41 to the 2005 Form 10-K). 
10.39Form 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).
10.40Long-term Disability Program for Senior Executives (incorporated herein by reference to Exhibit 10.42 to the 2004 Form 10-K).

69


Exhibit No.
in Item 601 of
Regulation S-K		     Description 
12Computation of Ratio of Earnings to Fixed Charges.
18Letter on Change in Accounting Principle (incorporated herein by reference to Exhibit 18 to the 1999 Form 10-K).
21 
21Subsidiaries of the Registrant.
23Consent of Independent Auditors.Registered Public Accounting Firm.
31.1Certification 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.
31.2Certification 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.
32Certification 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- OxleySarbanes-Oxley Act of 2002.

6370

Exhibits filed with this Form 10-K:

Exhibit No.
in Item 601 of
Regulation S-K		Description
12Computation of Ratio of Earnings to Fixed Charges.
21Subsidiaries of the Registrant.
23Consent of Independent Registered Public Accounting Firm.
31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32Certification 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.

71