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FORM 10-K
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• Acquired CCS, a leading direct marketer of skateboard equipment, apparel, footwear and accessories for $106million. This acquisition provides us with an opportunity to expand our product offerings while complementingour current offerings.
  
• Cash, cash equivalents and short-term investments as of January 31, 2009 were $408 million. Cash flow providedby operations was $383 million, an improvement of $100 million as compared with the prior year which represented the 53 weeks ended February 3, 2007. Income from continuing operations was $49 million or $0.32 per diluted share as compared with the corresponding prior-year period of $247 million or $1.58 per diluted share. Difficult industry trends as well as internal factors affected the 2007 results. Sales of low-profile and casual footwear significantly declined and sales of branded and licensed apparel were weak. Internal factors contributing to the decline included oversupplied inventory, due, in part, to the lack of a clear fashion trend in athletic footwear and apparel, which necessitated higher than normal markdowns.

       The following key factors affected the Company’s results in the current year and comparability with the prior year:

  • Comparable-store sales declined 6.3 percent.
    
  • Gross margin was negatively affected by higher markdowns primarily to liquidate slow-moving merchandiseand lower vendor allowances.
    
  • Included in 2007 were charges associated with the Company’s store closing program and non-cash impairmentcharges totaling $128 million, pre-tax, or $0.52 per diluted share. Impairment charges totaling $124 million wererecorded to write-down the value of long-lived assets of underperforming stores in the Company’s U.S. retailstore operations and for stores included in the store closing program. The Company closed 33 unproductivestores during 2007 as part of the announced store closing program. Included in 2006 was an impairment chargeof $17 million, or $0.08 per diluted share, to write-down long-lived assets of the European operations.year.

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  • Included in 2007 was a Canadian income tax valuation allowance adjustment that increased net income by$65 million, or $0.42 per diluted share.
    
  • The 53^rdweek of 2006 represented $95 million in sales and net income of $18 million, or $0.11 perdiluted share.

       Despite the difficult year experienced, the Company ended the year in a strong financial position. Key highlights of the year included:

  • Cash and cash equivalents as of February 2, 2008 were $488 million, reflecting cash flow provided by operationsof $283 million.
    
  • Merchandise inventories at January 31, 2009 were reduced by approximately 4 percent, excluding$1,120 million, which represents a reduction of $161 million.Excluding the effect of foreign currency fluctuations and the additional inventory associated with our recentfluctuations.acquisition, inventories declined by approximately 10 percent.
     
  • Repaid $2the remaining $88 million of itsour outstanding balance on the 5-year term loan, in advance of the regularly scheduled payment date of May 2008.loan.
     
  • Purchased and retired $5$6 million of the $200 million 8.50 percent debentures payable in 2022, bringing theoutstanding amount to $129$123 million as of February 2, 2008.January 31, 2009.
     
  • Dividends totaling $77$93 million were declared and paid.
    
  • $50 million of common stock was repurchased.

       Looking ahead to 2009, we are focused on ensuring our balance sheet and cash position remain strong; continuing to manage our cost structure and inventory levels aggressively; strengthening and enhancing our brands to ensure they are relevant; and positioning our Company for long-term success.

       The following table represents a summary of sales and operating results, reconciled to (loss) income from continuing operations before income taxes.

  		2007				2006				2005
  		(in millions)
  Sales
  Athletic Stores		$	5,071			$	5,370			$	5,272
  Direct-to-Customers			364				380				381
  Family Footwear			2				—				—
  		$	5,437			$	5,750			$	5,653
  Operating Results
  Athletic Stores		$	(27	)		$	405			$	419
  Direct-to-Customers			40				45				48
  Family Footwear (1)			(6	)			—				—
  Division profit			7				450				467
  Restructuring income (charge)(2)			2				(1	)			—
  Total division profit			9				449				467
  Corporate expense			(59	)			(68	)			(58	)
  Total operating (loss) profit			(50	)			381				409
  Other income			1				14				6
  Interest expense, net			1				3				10
  (Loss) income from continuing operations before income taxes		$	(50	)		$	392			$	405

  			2008				2007				2006
  			(in millions)
  	Sales
  	Athletic Stores		$	4,847			$	5,071			$	5,370
  	Direct-to-Customers			390				364				380
  	Family Footwear			—				2				—
  			$	5,237			$	5,437			$	5,750
  	Operating Results
  	Athletic Stores(1)		$	(59	)		$	(27	)		$	405
  	Direct-to-Customers			43				40				45
  	Family Footwear(2)			—				(6	)			—
  	Division (loss) profit			(16	)			7				450
  	Restructuring income (charge)(3)			—				2				(1	)
  	Total division (loss) profit			(16	)			9				449
  	Corporate expense			(87	)			(59	)			(68	)
  	Total operating (loss) profit			(103	)			(50	)			381
  	Other income			8				1				14
  	Interest expense, net			5				1				3
  	(Loss) income from continuing operations before income taxes		$	(100	)		$	(50	)		$	392

  ____________________
   
  

  (1)		The year ended January 31, 2009 includes a $241 million charge representing long-lived store asset impairment, goodwill and other intangibles impairment and store closing costs related to the Company’s U.S. operations. The year ended February 2, 2008 includes a $128 million charge representing impairment and store closing costs related to the Company’s U.S. operations. The year ended February 3, 2007 included a $17 million non-cash impairment charge related to the Company’s European operations.
  (2)		During the first quarter of 2007, the Company launched a new family footwear concept, Footquarters. The concept’s results did not meet the Company’s expectations and, therefore, the Company decided not to invest further invest in this business. These stores were converted to the Company’s other formats. Included in the operating loss of $6 million was approximately $2 million of costs associated with the removal of signage and the write-off of unusable fixtures.
  (2)(3)		During 2007, the Company adjusted its 1993 Repositioning and 1991 Restructuring reserve by $2 million primarily due to favorable lease terminations. During 2006, the Company recorded a restructuring charge of $1 million, which represented a revision to the original estimate of the lease liability associated with the guarantee of The San Francisco Music Box Company distribution center. These amounts are included in selling, general and administrative expenses in the Consolidated Statements of Operations.

       On March 11, 2008, we filed a Current Report on Form 8-K, which included a press release announcing our fourth quarter and full year 2007 financial results. In completing our final analysis, we determined that our income tax benefit was overstated by $2 million. While not material to understanding fourth quarter and full year 2007 financial results contained in the March 10, 2008, press release, the amount disclosed above has been recorded in our actual results for the fourth quarter and full year 2007. We believe noting this change is beneficial to understanding the actual results for the fourth quarter and full year 2007 contained in this financial report.  Accordingly, the full year 2007 income tax benefit was reduced from $101 million reported in the press release to a benefit of $99 million. Diluted earnings per share for the full year 2007 was changed from $0.34 to $0.33.

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  Sales

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

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       Sales decreased to $5,437$5,237 million, or by 5.43.7 percent as compared with 2007. Excluding the effect of foreign currency fluctuations, sales declined 4.0 percent as compared with 2007. Comparable-store sales decreased by 3.2 percent.

       Sales of $5,437 million in 2007 decreased by 5.4 percent from sales of $5,750 million in 2006. Excluding the effect of foreign currency fluctuations, sales declined 7.6 percent as compared with 2006. Comparable-store sales decreased by 6.3 percent.

  Sales of $5,750 million in 2006 increased by 1.7 percent from sales of $5,653 million in 2005. Excluding the effect of foreign currency fluctuations and the 53^rd week, sales declined 0.7 percent as compared with 2005. Comparable-store sales decreased by 1.2 percent, which was primarily a result of the decline in the European operations.

  Gross Margin

       Gross margin as a percentage of sales was 27.9 percent in 2008 increasing 180 basis points as compared with 2007. The increase in the gross margin represented an increase of 230 basis points in the merchandise margin rate reflecting lower markdowns. Lower sales in 2008 resulted in the occupancy rate increasing by 50 basis points, as a percentage of sales. The effect of reduced vendor allowances was not significant as compared with 2007.

       Gross margin as a percentage of sales was 26.1 percent in 2007 declining 410 basis points as compared with 2006. Gross margin, as a percentage of sales, was negatively affected primarily by incremental markdowns, of 180 basis points, taken to liquidate slow-moving and excess inventory and the effect of reduced vendor allowances, which negatively affected gross margin by approximately 60 basis points, as compared with 2006. Lower sales in 2007 resulted in the occupancy rate increasing by 160 basis points, as a percentage of sales, as compared with the prior-year period.

  Gross margin as a percentage of sales was 30.2 percent in 2006; excluding the effect of the 53^rd week, gross margin would have declined 20 basis points as compared with 2005. This reflected increased promotional activity, offset, in part, by the effect of increased vendor allowances. The effect of these vendor allowances was an improvement in gross margin in 2006, as a percentage of sales, of 20 basis points as compared with 2005. Additionally, gross margin was negatively affected by lower sales, which resulted in increased occupancy costs, as a percentage of sales.

  Selling, General and Administrative Expenses

       Selling, general and administrative (“SG&A”) expenses decreased by $2 million to $1,174 million in 2008, or by 0.2 percent, as compared with 2007. SG&A as a percentage of sales increased to 22.4 percent as compared with 21.6 percent in 2007. The increase in SG&A as a percentage of sales is due to the decline in sales. Excluding the effect of foreign currency fluctuations in 2008, SG&A decreased by $9 million. This decrease reflects lower divisional expenses reflecting fewer stores, offset, in part, by an increase in corporate expenses primarily related to increased incentive compensation.

       SG&A expenses increased by $13 million to $1,176 million in 2007, or by 1.1 percent, as compared with 2006. SG&A as a percentage of sales increased to 21.6 percent as compared with 20.2 percent in 2006. The increase in SG&A as a percentage of sales is due to the decline in sales. Excluding the effect of foreign currency fluctuations and the 53^rd53rd week in 2006, SG&A decreased by $2 million. This decrease primarily reflected savings associated with operating fewer stores, as well as controlling variable expenses as compared with the prior-year period.

  SG&A 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 53^rd week, SG&A would have increased by 1.4 percent. This increase was 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.

  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 increased by $28 million to $87 million in 2008 as compared with 2007. Depreciation and amortization included in corporate expense amounted to $13 million in 2008 and $14 million in 2007. Corporate expense for 2008 includes a $3 million other-than-temporary impairment charge related to a short-term investment and a $15 million impairment charge related to the Northern Group note receivable. During the first quarter of 2008, the principal owners of the Northern Group requested an extension on the repayment of the note, which was scheduled to be repaid on September 28, 2008. The Company determined, based on the Northern Group’s current financial condition and projected performance, that repayment of the note pursuant to the original terms of the purchase agreement was not likely. Excluding these charges, corporate expense increased by $10 million, which is primarily related to increased incentive compensation.

       Corporate expense decreased by $9 million to $59 million in 2007 as compared with 2006. Depreciation and amortization included in corporate expense amounted to $14 million in 2007 and $22 million in 2006, the decrease reflecting certain software assets, which were fully depreciated. Excluding the change in corporate expense related to depreciation and amortization, corporate expense declined primarily due to reduced incentive compensation expense.

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  The increase in corporate expense in 2006 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 53^rd week on corporate expense was not significant. Depreciation and amortization included in corporate expense amounted to $22 million in 2006 and $24 million in 2005.

  Depreciation and Amortization

       Depreciation and amortization of $130 million decreased by 21.7 percent in 2008 from $166 million in 2007. This decrease primarily reflects the effect of the 2007 impairment charges offset, in part, by increased depreciation and amortization related to the Company’s capital spending. The effect of foreign currency fluctuations was not significant. Due to the 2008 impairment charges, the Company expects that its 2009 depreciation and amortization expense will be approximately $15 million lower than 2008.

       Depreciation and amortization of $166 million decreased by 5.1 percent in 2007 from $175 million in 2006. This decrease primarily reflects reduced software amortization of $8 million as assets became fully depreciated and reduced depreciation and amortization associated with the third quarter 2007 impairment charge of $8 million.charge. These decreases were offset, in part, by the effect of foreign currency fluctuations, which increased depreciation and amortization expense by $3 million, and increased depreciation and amortization related to the Company’s capital spending.

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

  Interest Expense, Net

  		2007				2006				2005
  		(in millions)
  Interest expense		$	21			$	23			$	23
  Interest income			(20	)			(20	)			(13	)
  Interest expense, net		$	1			$	3			$	10
  Weighted-average interest rate (excluding facility fees):
  Short-term debt			—	%			—	%			—	%
  Long-term debt			6.8	%			7.8	%			6.2	%
  Total debt			6.8	%			7.8	%			6.2	%
  Short-term debt outstanding during the year:
  High		$	—			$	—			$	—
  Weighted-average		$	—			$	—			$	—

  			2008				2007				2006
  			(in millions)
  	Interest expense		$	16			$	21			$	23
  	Interest income			(11	)			(20	)			(20	)
  	Interest expense, net		$	5			$	1			$	3
  	Weighted-average interest rate (excluding facility fees):
  	Long-term debt			6.2	%			8.0	%			7.8	%

  
  

       Interest expense of $16 million decreased by 23.8 percent in 2008 compared to $21 million in 2007. The reduction in interest expense primarily relates to the repayment of the term loan in May 2008 and the purchases and retirements of $6 million and $5 million in 2008 and 2007, respectively, of the Company’s 8.50 percent debentures. The Company did not have any short-term borrowings for any of the periods presented. Interest rate swap agreements reduced interest expense in 2008 by approximately $2 million, while the cross currency swaps increased interest expense by $3 million. Interest income of $11 million declined from $20 million in 2007. Interest income is generated through the investment of cash equivalents and short-term investments. The decline in interest income reflects the lower interest income on cash, cash equivalents and short-term investments, which totaled $10 million in 2008 and $16 million in 2007. Additionally, the Company did not record accretion income related to the Northern Group note, which in the prior year totaled $2 million.

       Interest expense of $21 million decreased by 8.7 percent in 2007 as compared towith $23 million in 2006. The reduction in interest expense primarily relates to the purchases and retirements of $5 million and $38 million in 2007 and 2006, respectively, of the Company’s 8.50 percent debentures. Interest rate swap agreements did not significantly affect interest expense in 2007.

  Interest income of $20 million remained unchanged from 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 the effect of the Company’s cross currency swaps. Interest income related to cash, cash equivalents and short-term investments was $16 million in 2007 and $14 million in 2006. Interest income on the Northern Group note amounted to $2 million in both 2007 and 2006. TheIncome from the cross currency swaps income totaled $1 million in 2007 as compared with $3 million in 2006.

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

       The increase in interest income of $7 million in 2006 as compared with 2005 was primarily related to increased interest 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.

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  Other Income

       Other income of $8 million in 2008 includes a net gain of $4 million, which is comprised of the changes in fair value, realized gains and premiums paid on foreign currency contracts. The Company uses these derivatives to mitigate the effect of fluctuating foreign exchange rates on the reporting of foreign currency denominated earnings. Additionally, 2008 includes a $3 million gain on lease terminations related to two lease interests in Europe.

       In 2007, other income included a $1 million gain related to a final settlement with the Company’s insurance carriers of a claim related to a store damaged by a fire in 2006. Additionally, the Company sold two of its lease interests in Europe for a gain of $1 million. These gains were offset primarily by premiums paid for foreign currency option contracts. The 2006 amounts included a net gain of $4 million from the termination of two of the Company’s leases for approximately $5 million and insurance claims related to Hurricane Katrina that resulted in a gain of $8 million, which represented 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.

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  Income Taxes

       The effective tax rate for 2008 was a benefit of 20.8 percent as compared with a benefit of 187.0 percent in the prior year. The effective income tax rate changed primarily due to the effect of goodwill impairment, a portion of which is not deductible for tax purposes, the prior year valuation allowance adjustment, and to a lesser extent, the mix of U.S. and international profits.

       The effective tax rate for 2007 was a benefit of 198.0187.0 percent as compared with an expense of 36.9 percent in the prior year. The change in the rate is primarily due to the $65$62 million valuation allowance adjustment (net of deferred costs) relating to Canadian tax depreciation and tax loss carryforwards, the change in the mix of U.S. and international profits, and the impairment charges relating to the Company’s U.S. operations.

       The effective tax rate for 2006 was 36.9 percent as compared with 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.

  Segment Information

       The Company has seven reporting units, as defined under SFAS No. 142, “Goodwill and Other Intangible Assets.” A reporting unit is defined as an operating segment or one level below an operating segment. Although we have seven reporting units, they have been aggregated into two operating segments for segment reporting purposes, in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

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

  Athletic Stores

  		2007				2006				2005			2008				2007				2006
  		(in millions)											(in millions)
  Sales		$	5,071			$	5,370			$	5,272		$	4,847			$	5,071			$	5,370
  Division (loss) profit		$	(27	)		$	405			$	419		$	(59	)		$	(27	)		$	405
  Sales as a percentage of consolidated total			93	%			93	%			93	%
  Division (loss) profit margin			(0.5	)%			7.5	%			7.9	%		(1.2	)%			(0.5	)%			7.5	%
  Number of stores at year end			3,785				3,942				3,921			3,641				3,785				3,942
  Selling square footage (in millions)			8.50				8.74				8.71			8.09				8.50				8.74
  Gross square footage (in millions)			14.12				14.55				14.48			13.50				14.12				14.55

  
  

  2008 compared with 2007

       Athletic Stores sales of $4,847 million decreased 4.4 percent in 2008, as compared with $5,071 million in 2007. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from athletic store formats decreased by 4.8 percent in 2008. Comparable-store sales for the Athletic Stores segment declined 3.6 percent as compared with prior year. The decline in sales for the year ended January 31, 2009 was primarily related to the domestic operations as the result of a decline in mall traffic and consumer spending in general. Excluding the effect of foreign currency fluctuations, sales in Europe decreased low single digits in 2008 as compared with 2007. The sales of low profile styles negatively affected the first three quarters of 2008. However, during the fourth quarter of 2008 sales of higher-priced marquee footwear and apparel increased, which more than offset the sales decline related to the low profile footwear styles.

       Athletic Stores reported a loss of $59 million in 2008 as compared with a loss of $27 million in 2007 which was primarily attributable to the U.S. operations. Included in the results for 2008 and 2007 are impairment charges and store closing costs totaling $241 million and $128 million, respectively. Athletic Stores division loss for 2008 includes a $167 million goodwill impairment charge, a $67 million write-down of long-lived assets such as store fixtures and leasehold improvements for 868 stores at the Company’s U.S. store operations pursuant to SFAS No. 144, $5 million of exit costs related to the closure of underperforming stores comprising primarily lease terminations in accordance with SFAS No. 146, and $2 million in other intangible impairment charges related to its tradenames. The Company performs its annual impairment test as of the beginning of each year, however due to the macroeconomic conditions affecting retail and the significant decline in the Company’s common stock and market capitalization, plus a reasonable control premium, in relation to the book value, the Company determined that a triggering event had occurred and, therefore, performed an interim impairment test. The fair value of the four reporting units containing goodwill was determined under step 1 of the goodwill impairment test based on a weighting of a discounted cash flow analysis

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  using forward-looking projections of estimated future operating results and a guideline company methodology under the market approach. Based on this testing, the Company determined that the fair values, as determined under step 1 as described above, was less than the carrying values of the Foot Locker, Kids Foot Locker and Footaction reporting unit and the Champs Sports reporting unit. Accordingly, the Company performed a step 2 analysis to determine the extent of the goodwill impairment and concluded that the goodwill of these two reporting units was fully impaired, resulting in a non-cash impairment charge of $167 million. There were no goodwill impairment charges in 2007 or 2006. Excluding the impairment charges and store exit costs from both 2008 and 2007, division profit would have increased to $182 million in 2008 from $101 million in 2007. This increase in division profit primarily related to the domestic divisions as a result of lower promotional markdowns and reduced depreciation and amortization expense.

  2007 compared with 2006

       Athletic Stores sales of $5,071 million decreased 5.6 percent in 2007, as compared with $5,370 million in 2006. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from athletic store formats decreased by 7.8 percent in 2007. The decline in sales for the year ended February 2, 2008 was primarily related to the domestic operations. Sales in the U.S. were negatively affected by a continuing weakening in consumer spending, unseasonable warmer weather, and a lack of clear fashion trend in athletic footwear and apparel. Internationally, comparable-store sales declined mid-single digits. In Europe, sales of low-profile footwear styles declined, while the sales trend of higher priced technical footwear was higher than the prior year. Comparable-store sales for the Athletic Stores segment decreased by 6.6 percent in 2007.

       Athletic Stores reported a loss of $27 million in 2007 as compared with a profit of $405 million in 2006. The decrease in division profit was attributable to the U.SU.S. operations. The decline in the U.S. operations was offset, in part, by increases in most international formats. Included in the Athletic Stores division results for 2007 are non-cash impairment charges of $117 million to write-down long-lived assets such as store fixtures and leasehold improvements for 1,395 stores at the Company’s U.S. store operations pursuant to SFAS No. 144, consistent with the Company’s recoverability of long-lived assets policy. Additionally, in 2007, the Company identified unproductive stores for closure; accordingly,

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  the Company evaluated the recoverability of long-lived assets considering the revised estimated future cash flows. The Company recorded an additional non-cash impairment charge of $7 million as a result of this analysis. Exit costs related to 33 stores that closed during 2007, comprising primarily lease termination costs of $4 million, were recognized in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”146.

  2006Direct-to-Customers

  	2008				2007				2006
  	(in millions)
  Sales	$	390			$	364			$	380
  Division profit	$	43			$	40			$	45
  Division profit margin		11.0	%			11.0	%			11.8	%

  
  

  2008 compared with 20052007

       Athletic StoresDirect-to-Customers sales of $5,370increased 7.1 percent to $390 million increased 1.9 percent in 2006,2008, as compared with $5,272$364 million in 2005. Excluding the effect2007, reflecting a comparable-sales increase of foreign currency fluctuations, primarily related to the euro,1.0 percent and the effect of the 53^rd week,additional sales from athletic store formatsCCS, which was acquired during the fourth quarter of 2008. Internet sales increased by 12.2 percent to $322 million, as compared with 2007. Catalog sales decreased by 0.6 percent in 2006. Footaction and Champs Sports significantly increased sales, primarily from the sale of marquee basketball and running footwear. This was offset primarily by decreased sales in Foot Locker Europe. Foot Locker Europe’s sales declined due to the continued difficult athletic retail environment, particularly in France, the U.K. and Italy. Comparable-store sales for the Athletic Stores segment decreased by 1.1 percent in 2006.

       Division profit from Athletic Stores decreased by 3.311.7 percent to $405$68 million in 20062008 from $419$77 million in 2005.2007. Management believes that the decrease in catalog sales, which was substantially 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 Internet.

       The Direct-to-Customers business generated division profit of $43 million in 2008, as compared with $40 million in 2007. Division profit, as a percentage of sales, decreased to 7.5 percent.was 11.0 percent in 2008 and 2007. The decreaseincrease in division profit is primarily attributable toreflects the Foot Locker Europe division due toaccretive effect of the fashion shift from higher priced marquee footwear to lower priced low-profile footwear styles and a highly competitive retail environment, particularly for the saleacquisition 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. Excluding the impairment charge, Athletic Stores division profit increased by 0.7 percent as compared with the corresponding prior-year period. The decline in Foot Locker Europe were offset by increases in all other divisions.CCS.

  Direct-to-Customers

  		2007				2006				2005
  		(in millions)
  Sales		$	364			$	380			$	381
  Division profit		$	40			$	45			$	48
  Sales as a percentage of consolidated total			7	%			7	%			7	%
  Division profit margin			11.0	%			11.8	%			12.6	%

  
  

  2007 compared with 2006

       Direct-to-Customers sales decreased 4.2 percent to $364 million in 2007, as compared with $380 million in 2006. Internet sales increased by 6.3 percent to $287 million, as compared with 2006. Catalog sales decreased by 30.0 percent to $77 million in 2007 from $110 million in 2006. Management believes that the decrease in catalog sales, which was

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  substantially 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 Internet. Sales were negatively affected by reduced sales from third party arrangements, as well as weakened consumer spending for athletic footwear and apparel.

       The Direct-to-Customers business generated division profit of $40 million in 2007, as compared with $45 million in 2006. Division profit, as a percentage of sales, decreased to 11.0 percent in 2007 from 11.8 percent in 2006. The decline in division profit is a result of lower sales.

  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 as compared with 2005. Catalog sales decreased by 20.3 percent to $110 million in 2006 from $138 million in 2005. Management believes that the decrease in catalog sales, which was substantially 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 Internet. Sales for the Direct-to-Customer business were negatively affected by the termination of a third party arrangement in the early part of 2006.

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  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 loss of revenue from the cancelled third party contract, such as expanding the ESPN offerings. However, these initiatives did not fully offset the loss in profit which resulted in a decline in division profit. The effect of the 53^rd week on this segment was not significant.

  Liquidity and Capital Resources

  Liquidity

       Generally, the Company’s primary source of cash has been from operations. The Company generally finances real estate with operating leases. The principal uses of cash have been to finance inventory requirements, capital expenditures related to store openings, store remodelings, and management information systems and other support facilities, and to fund general working capital requirements.

       Management believes its cash, cash equivalents and future operating cash flow from operations will be adequate to fund its working capital requirements, capital expenditures, pensionretirement plan contributions, for the Company’s retirement plans, anticipated quarterly dividend payments, scheduled debt repayments,interest payments, potential share repurchases, and other cash requirements to support the development of its short-term and long-term operating strategies. The Company may also from time to time seek to retire or purchase outstanding debt through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

       During 2008 the Company had $75 million of cash from its international operations invested in the Reserve International Liquidity Fund, Ltd., a money market fund (the “Fund”). This surplus cash was not required or used for daily operations. The Company requested a full redemption on September 16, 2008. At that time, the Company was informed by the Reserve Management Company, the Fund’s investment advisor, that the redemption trades would be honored at a $1.00 per share net asset value. Although the Company received a partial distribution of $49 million in the fourth quarter of 2008, the Company has not received information as to when the remaining amount of its redemption request will be paid. Litigation, to which the Company is not a party, exists that involves how the remaining assets of the Fund should be distributed. Therefore, there is a risk that the Company could receive less than the $1.00 per share net asset value. As a result, during the third quarter of 2008, the Company recognized an impairment loss of $3 million to reflect a decline in fair value that is other-than-temporary. Based on the maturities of the underlying investments in the Fund and the current status of the redemption process, the Company reclassified $23 million (net of the impairment charge of $3 million) from “Cash and cash equivalents” to “Short-term investments” in the Consolidated Balance Sheet as of January 31, 2009. We believe that we have adequate liquidity to meet our business needs through our existing cash balances, our ability to generate cash flows through operations, and the amounts available to borrow under our revolving credit facility.

       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 80 percent in 2008 and 77 percent in 2007 and 78 percent in 2006 of its merchandise 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 64 percent in 2008 and 56 percent in 2007 and 50 percent in 2006 was purchased from one vendor — Nike, Inc.

       Planned capital expenditures for 20082009 are approximately $158$100 million,of which $135$77 million relates to modernizations of existing stores and new store openings, and $23 million reflects the development of information systems and other support facilities. Additionally, the Company intends to spend an additional $2 million on key money related to Europe. The Company has the ability to revise and reschedule the anticipated capital expenditure program, should the Company’s financial position require it.

       The Company has contributed $8 million to its U.S. pension plan in February 2009. Due to the pension plan asset performance experienced for the year ended January 31, 2009, the Company may make additional contributions during 2009 to its U.S. qualified pension plan. The Company is in the process of evaluating the amount and timing of the contribution. The contribution amount will depend on the plan asset performance for the balance of the year and any statutory or regulatory changes that may occur.

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  Any materiallymaterial adverse change 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, the Company’s reliance on a few key vendors for a significant portion of its merchandise purchases, and 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 from continuing operations provided cash of $383 million in 2008 as compared with $283 million in 2007 as compared with $189 million in 2006.2007. These amounts reflect income from continuing operations adjusted for non-cash items and working capital changes. During 2008, the Company recorded non-cash impairment charges and store closing program costs of $259 million primarily related to its domestic operations. Merchandise inventories represented a $128 million source of cash in 2008 as inventory purchases were reduced to keep inventory levels in line with sales. Additionally, the Company contributed $6 million to its Canadian qualified pension plan.

       Operating activities from continuing operations provided cash of $283 million in 2007 as compared with $189 million in 2006. During 2007, the Company recorded non-cash impairment charges and store closing program costs of $124 million related to its domestic operations. Merchandise inventories represented a $55 million source of cash in 2007 as inventory purchases were reduced to keep inventory levels in line with sales. Additionally, the Company did not contribute to its pension plans in 2007, as no contributions were required, compared with $68 million contributed in 2006.

       OperatingNet cash used by investing activities fromof the Company’s continuing operations provided cash of $189was $272 million in 20062008 as compared with $349$117 million provided by investing activities in 2005. These amounts reflect income2007. The net cash used by investing activities for 2008 reflects the asset purchase from continuing operations adjusteddELiA*s, Inc. of CCS for non-cash items and working capital changes. During 2006, the Company recorded$106 million (including capitalized acquisition costs). Investing activities in 2008 also included a non-cash impairment charge of $17$3 million gain related to the operationssale of two lease interests in Europe. The declineCompany did not purchase or sell short-term investments during 2008. However, reflected in operatinginvesting activities is the reclassification of $23 million from cash flowsand cash equivalents to short-term investments representing the remaining money market investment. Capital expenditures of $160$146 million isin 2008 and $148 million in 2007 primarily due to a reduction of accounts payable at year-end reflecting an acceleration of inventory receipts earlier in the fourth quarter of 2006. In addition, due to the calendar shift related to the 53^rd week, approximately $47 million of the decline represents the timing of lease payments. Additionally, the Company contributed $68 million to its U.S.store remodeling and Canadian qualified pension plans in 2006, as compared with contributions of $26 million in 2005.new stores.

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       Net cash provided by investing activities of the Company’s continuing operations was $117 million in 2007 as compared with $108 million used in investing activities in 2006. During 2007, the Company liquidated most of its short-term investments, which represented auction rate securities, due to issues in the global credit and capital markets. Capital expenditures of $148 million in 2007 and $165 million in 2006 primarily related to store remodeling and new stores. During 2007, the Company received $21 million representing the maturity of an investment of $14 million and the repayment of a note of $7 million.

       Net cash used in investingfinancing activities of the Company’s continuing operations was $108$185 million in 20062008 as compared with $182$138 million in 2005.2007. During 2008, the Company reduced its long-term debt by repaying the balance of its term loan of $88 million. Additionally, the Company purchased and retired $6 million of its $200 million 8.50 percent debentures payable in 2022. The Company’s purchase of short-term investments, net of sales, decreased by $49Company declared and paid dividends totaling $93 million in 2006 as compared with an increase of $312008 and $77 million in 2005. Capital expenditures of $165 million in 20062007. During 2008 and $155 million in 2005 primarily related to store remodeling and new stores. During 2006,2007, the Company received net proceeds of $4 million as a result a lease termination. The Company also received $4 million of insurance proceeds from its insurance carriers related to the final settlementissuance of common stock and treasury stock in connection with the propertyemployee stock programs of $2 million and equipment claims for the 2005 hurricanes.$9 million, respectively.

       Net cash used in financing activities of continuing operations was $138 million in 2007 as compared with $142 million in 2006. During 2007, the Company repaid $2 million of its term loan, purchased and retired $5 million of its 8.50 percent debentures payable in 2022, and repaid and retired its $14 million Industrial Revenue Bond, which was accounted for as capital lease. As required by SFAS No. 123(R), theThe Company recorded an excess tax benefit related to stock-based compensation of $1 million as a financing activity. The Company declared and paid dividends totaling $77 million in 2007 and $61 million in 2006. During 2007 and 2006, the Company received proceeds from the issuance of common stock and treasury stock in connection with the employee stock programs of $9 million and $12 million, respectively. During 2007, the Company purchased 2,283,254 shares of its common stock for approximately $50 million. On February 20, 2008, the Board of Directors declared a quarterly cash dividend of $0.15 per share, which will be payable on May 2, 2008 to shareholders of record on April 18, 2008. This dividend represents a 20 percent increase over the previous quarterly per share amount and is equivalent to an annualized rate of $0.60 per share.

       Net cash used in financing activities of continuing operations was $142 million in 2006 as compared with $105 million in 2005. During 2006, the Company repaid $50 million of its term loan and purchased and retired $38 million of its 8.50 percent debentures payable in 2022 at a $2 million discount from face value. The Company recorded an excess tax benefit related to stock-based compensation of $2 million as a financing activity. The Company declared and paid dividends totaling $61 million in 2006 and $49 million in 2005. During 2006 and 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. During 2006, the Company purchased 334,200 shares of its common stock for approximately $8 million.18

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  Capital Structure

       During 2004,May 2008 Amended Credit Agreement

       On May 16, 2008, the Company obtained a 5-year, $175 million term loan to finance a portion of the purchase price of the Footaction stores. The Company has repaid $87 million of the term loan, in advance of the scheduled repayment dates, thereby reducing the term loan to $88 million as of February 2, 2008.

       In October 2007, the Companyentered into an amended its revolving credit agreement to providewith its banks, providing for a one-year extension of the$175 million revolving credit facility and extending the maturity date to May 19, 2010 and16, 2011 (the “Credit Agreement”). The Credit Agreement also provides an incremental facility of up to $100 million under certain circumstances. Simultaneously with entering into the Credit Agreement, the Company repaid the $88 million that was outstanding on its term loan with the banks, which was scheduled to mature in May 2009.

       The Credit Agreement provides that the Company comply with certain financial covenants, including (i) a reduction in the fixed charge coverage ratio to no less thanof 1.25:1 for the fourth quarter of 20072008 fiscal year, 1.50:1 for the 2009 fiscal year, and the first quarter of 2008, increasing to 2.0:1.75:1 by the first quarter of 2010. The amendment also permits the payment of dividends by the Company of up to $90 million in 2008 and up to $100 million for each year thereafter. On February 19, 2008,thereafter and (ii) a minimum liquidity/excess cash flow covenant, which provides that if at the Company further amended its revolving credit facility to increaseend of any fiscal quarter minimum liquidity, as defined in the Credit Agreement, is less than $350 million, the excess cash flow for the four consecutive fiscal quarters ended on such date must be at least $25 million. The amount permitted to be paid by the Company as dividends in 2008 to $95 million.any fiscal year is $105 million under the terms of the Credit Agreement. With regard to stock repurchases,purchases, the amendmentCredit Agreement provides that not more than $50 million in the aggregate may be expended after October 26, 2007 unless the fixed charge coverage ratio is at least 2.0:1 for the quarter immediately precedingperiod of four consecutive fiscal quarters most recently ended prior to any such repurchasestock repurchase. Additionally, the Credit Agreement provides for a security interest in certain of the Company’s intellectual property and the Company has delivered its annual audited financial statements with respect to 2007.certain other non-inventory assets. The agreement includes various restrictive financial covenants with which the Company was in compliance with all covenants on February 2, 2008.January 31, 2009.

       During 2006,2008, 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. During 2007, the Company purchased and retired $5$6 million of the $200 million 8.50 percent debentures payable in 2022, bringing the outstanding amount (excludingbalance to $123 million, excluding the fair value of the interest rate swap)swap, for the year ended January 31, 2009. The fair value of the interest rate swaps, included in other assets, was approximately $19 million and the carrying value of the 8.50 debentures was increased by the corresponding amount.

  March 2009 New Credit Agreement

       On March 20, 2009, the Company entered into a new credit agreement with its banks, providing for a $200 million revolving credit facility maturing on March 20, 2013 (the “New Credit Agreement”), which replaces the existing Credit Agreement. The New Credit Agreement also provides an incremental facility of up to $129$100 million asunder certain circumstances. The New Credit Agreement provides for a security interest in certain of February 2, 2008.the Company’s domestic assets, including certain inventory assets. However, no material covenants or payment restrictions exist until the Company is borrowing under the agreement and, in that event, the restrictions may vary depending upon the level of borrowings.

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  Credit Rating

       As of March 31, 2008,30, 2009, the Company’s corporate credit ratings from Standard & Poor’s and Moody’s Investors Service are BBBB- and Ba3, respectively. Additionally, as of March 31, 2008,30, 2009, Moody’s Investor Services has rated the Company’s senior unsecured notes B1.

  Debt Capitalization and Equity

       For purposes of calculating debt to total capitalization, the Company includes the present value of operating lease commitments in total net debt. Total net debt including the present value of operating leases is considered a non-GAAP financial measure. The present value of operating leases is discounted using various interest rates ranging from 4 percent to 13 percent, which represent the Company’s incremental borrowing rate at inception of the lease. Operating leases are the primary financing vehicle used to fund store expansion and, therefore, we believe that the inclusion of the present value of operating leaseleases in total debt is useful to our investors, credit constituencies, and rating agencies. The following table sets forth the components of the Company’s capitalization, both with and without the present value of operating leases:

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  		2007				2006			2008				2007
  		(in millions)							(in millions)
  Long-term debt and obligations under capital lease		$	221			$	234
  Long-term debt									$	142			$	221
  Present value of operating leases			2,126				2,069			1,952				2,126
  Total debt including the present value of operating leases			2,347				2,303			2,094				2,347
  Less:
  Cash and cash equivalents			488				221			385				488
  Short-term investments			5				249			23				5
  Total net debt including the present value of operating leases			1,854				1,833			1,686				1,854
  Shareholders’ equity			2,271				2,295			1,924				2,261
  Total capitalization		$	4,125			$	4,128		$	3,610			$	4,115
  Total net debt capitalization percent including the present value of
  operating leases			44.9	%			44.4	%		46.7	%			45.1	%
  Net debt capitalization percent			—	%			—	%		—	%			—	%

  
  

       The Company reduced debt by $94 million (this reduction was offset by a $15 million increase in the fair value of the interest rate swaps), and capital lease obligations by $13 million, and increaseddecreased cash, cash equivalents, and short-term investments by $23$85 million during 2007.2008. Additionally, the present value of the operating leases increaseddecreased by $57$174 million representing the net change of lease renewalsstore closures and the effect of foreign currency fluctuations primarily related to the euro. Including the present value of operating leases, the Company’s net debt capitalization percent increased 50160 basis points in 2007.2008. The decrease in shareholders’ equity of $24$337 million in 20072008 relates to the following: net incomeloss of $51$80 million, in 2007, $77$93 million in dividends paid, $21$12 million related to stock plans, and an increasea decrease of $60$83 million in the foreign exchange currency translation adjustment, primarily related to the value of the euro in relation to the U.S. dollar. Additionally, the Company repurchased 2,283,254 shares of common stock for approximately $50 million during the year. AsIn addition, as required by SFAS No. 158, during 20072008 the Company recognized, within accumulated other comprehensive loss, amortization of prior service costs and net actuarial gains and losses, as well as an additional charge representing the change in the funded status of the pension and postretirement plans, which totaled $29$91 million after-tax.

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  Contractual Obligations and Commitments

       The following tables represent the scheduled maturities of the Company’s contractual cash obligations and other commercial commitments as of February 2, 2008:January 31, 2009:

  						Payments Due by Period																			Payments Due by Period
  						Less than					2 – 3			3 – 5			After 5								Less than					2 – 3			3 – 5			After 5
  Contractual Cash Obligations			Total			1 Year					Years			Years			Years					Total			1 Year					Years			Years			Years
  			(in millions)																			(in millions)
  Long-term debt(1)	Long-term debt(1)		$	221			$	—			$	88		$	—			$	133		Long-term debt(1)	$	142			$	—			$	—		$	—		$	142
  Operating leases(2)	Operating leases(2)			2,793				487				832			651				823		Operating leases(2)		2,567				456				805			587			719
  Other long-term liabilities(3)	Other long-term liabilities(3)			—				—				—			—				—		Other long-term liabilities(3)		35				11				—			—			24
  Total contractual cash obligations	Total contractual cash obligations		$	3,014			$	487			$	920		$	651			$	956		Total contractual cash obligations	$	2,744			$	467			$	805		$	587		$	885

  ____________________
   
  

  (1)		The amounts presented above represent the contractual maturities of the Company’s long-term debt, excluding interest. Additional information is included in the “Long-Term Debt and Obligations under Capital Leases” footnoteDebt” note under “Item 8. Consolidated Financial Statements and Supplementary Data.”
  (2)		The amounts presented represent the future minimum lease payments under non-cancelable operating leases. In addition to minimum rent, certain of the Company’s leases require the payment of additional costs for insurance, maintenance, and other costs. These costs have historically represented approximately 25 to 30 percent of the minimum rent amount. These additional amounts are not included in the table of contractual commitments as the timing and/or amounts of such payments are unknown.
  (3)		The Company’s other liabilities in the Consolidated Balance Sheet as of February 2, 2008January 31, 2009 primarily comprise pension and postretirement benefits, deferred rent liability, income taxes, workers’ compensation and general liability reserves and various other accruals. TheseThe amounts presented in the table comprises the Company’s February 2009 pension plan contributions of $11 million and the liability related to the European net investment hedge of $24 million. Other than these liabilities, other amounts 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 theyare minimal and not useful to the presentation. Additional information is included in the “Other Liabilities” footnoteLiabilities,” “Financial Instruments and Risk Management,” and “Retirement Plans and Other Benefits” notes under “Item 8. Consolidated Financial Statements and Supplementary Data.”

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  			Total					Amount of Commitment Expiration by Period																Total					Amount of Commitment Expiration by Period
  			Amounts					Less than					2 – 3			3 – 5			After 5					Amounts					Less than					2 – 3			3 – 5			After 5
  Contractual Cash Obligations			Committed					1 Year					Years			Years			Years
  Other Commercial Commitments																								Committed					1 Year					Years			Years			Years
  			(in millions)																					(in millions)
  Line of credit	Line of credit			$	189				$	—			$	189		$	—			$	—		Line of credit		$	166				$	—			$	166		$	—			$	—
  Stand-by letters of credit					11					—				11			—				—
  Standby letters of credit																							Standby letters of credit			9					—				9			—				—
  Purchase commitments(4)	Purchase commitments(4)				1,453					1,450				3			—				—		Purchase commitments(4)			1,462					1,462				—			—				—
  Other(5)	Other(5)				57					19				33			5				—		Other(5)			69					26				34			9				—
  Total commercial commitments	Total commercial commitments			$	1,710				$	1,469			$	236		$	5			$	—		Total commercial commitments		$	1,706				$	1,488			$	209		$	9			$	—

  ____________________
   
  

  (4)		Represents open purchase orders, as well as minimum requiredother commitments for merchandise purchases, under merchandise contractual agreements, at February 2, 2008.January 31, 2009. 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.
  (5)		Represents payments required by non-merchandise purchase agreements and minimum royalty requirements.

       The Company does not have any off-balance sheet financing, other than operating leases entered into in the normal course of business as 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. The Company’s policy prohibits the use of derivatives for 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 U.S. generally accepted accounting principles (“GAAP”).principles. Included in the “Summary of Significant Accounting Policies” footnotenote in “Item 8. Consolidated Financial 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.

  Business Combinations

       The Company accounts for acquisitions of other businesses in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”). SFAS No. 141 requires that the Company record the net assets of acquired businesses at fair value, and make estimates and assumptions to determine the fair value of these acquired assets and liabilities. The Company allocates the purchase price of acquired businesses based, in part, upon internal estimates of cash flows and considering the report of a third-party valuation expert retained to assist the Company. Changes to the assumptions used to estimate the fair value could affect the recorded amounts of the assets acquired and the resultant goodwill.

  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”). The 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 cost of 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.

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       Significant 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 Reimbursements

       In the normal course of business, the Company receives allowances from its vendors for markdowns taken. Vendor allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. The effect of vendorVendor allowances negatively effectedcontributed 30 basis points to the 2008 gross margin in 2007, as a percentage of sales, of 60 basis points as compared with 2006.rate. 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 20072008 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. Cooperative 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 expenses are incurred. Reimbursements received that are in excess of specific, incremental and identifiable costs incurred to date are recognized as a reduction to the cost of merchandise and are reflected in cost of sales as the merchandise is sold. Cooperative reimbursements amounted to approximately 3338 percent of total advertising costs in 20072008 and approximately 1112 percent of catalog costs in 2007.2008.

  Impairment of Long-Lived Assets, Goodwill and Other Intangibles

       In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), 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 at the division level 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. TheIn the calculation of the fair value of long-lived assets, is based onthe Company compares the carrying amount of the asset with the estimated expected discounted

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  future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by store, whichcomparing the carrying amount of the asset with its estimated fair value. The estimation of fair value 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.

  During 2007,2008, the Company recorded non-cash impairment charges totaling $124$67 million primarily to write-down long-lived assets such as store fixtures and leasehold improvements for the Company’s U.S. store operations pursuant to SFAS No. 144.

       TheIn accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is required to perform an impairment review of its goodwill and intangible assets with indefinite lives if impairment indicators arise and, at leasta minimum, 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 exceeds its estimated fair value.

       The fair value of each of the Company’s reporting units exceeded its carrying value as of 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. The latterdetermination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. The market approach 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. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.

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       The Company assigned discount rates ranging from 12 to 14 percent for the four reporting units. The Company evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units, and concluded they are reasonable and are consistent with prior valuations.

       Owned trademarks and tradenames that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment in accordance with SFAS No. 142, as mentioned above. The fair values of purchased intangible assets are estimated and compared to their carrying values. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.

       We consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. In the last few months of 2008 and into 2009, the capital markets experienced substantial volatility and the Company’s stock price declined substantially, causing the Company’s book value to exceed its market capitalization. Accordingly, we concluded that a triggering event had occurred. During the third and fourth quartersquarter of 2007,2008, the Company performed reviewsan analysis of its U.S. Athletic stores’ goodwill and other intangibles.

       Based on the results of step one, the fair values of the Direct-to-Customers and Foot Locker Europe reporting units exceeded their carrying values, indicating that there was no impairment of goodwill at these reporting units. The discount rates would have to be increased to over 17 percent before the fair values of these reporting units would be less than their carrying values. The Company does not believe the resulting discount rates would be reasonable relative to the risks associated with the future cash flows of these reporting units. The results of both the income and market approaches indicated that the fair values were in excess of the carrying values. The Company has applied these approaches consistent with prior valuations.

       However, the fair values of the Foot Locker, Kids Foot Locker and Footaction reporting unit and the Champs Sports reporting unit indicated a potential impairment. The decline in the fair values of these reporting units reflected lower expected sales and cash flows as a result of the SFAS No. 144 recoverability analysis. These analyses did not resultmacroeconomic environment and uncertainty around future cash flows. The Company completed the second step where the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss should be recognized in an amount equal to that excess. Accordingly, the Company determined that the goodwill assigned to these reporting units were fully impaired. Additionally, the Company performed a reconciliation of its market capitalization to the total fair value. The principal reconciling item was ascribed to a control premium associated with the consolidated businesses that would not be reflected in public market trading prices.

       The Company’s review of goodwill and other intangibles resulted in impairment charge.charges totaling $169 million.

  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 103 to 155 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 12 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.

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       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.

  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, and 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 2007,2008, as disclosed in the “Retirement Plans and Other Benefits” note 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 pension plan assets is a component of pension expense. The rate is based on the plans’ weighted-average target asset allocation, 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 and to reduce future contributions by the Company. The Company’s common stock represented approximately 1one percent of the total pension plans’ assets at February 2, 2008.January 31, 2009.

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       The weighted-average long-term rate of return used to determine 20072008 pension expense was 8.858.17 percent. A decrease of 50 basis points in the weighted-average expected long-term rate of return would have increased 20072008 pension expense by approximately $3 million. The actual return on plan assets in a given year may differtypically differs from the expected long-term rate of return, and the resulting gain or loss is deferred and amortized into the plans’ expense over time.

       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 U.S. benefit obligations as of February 2, 2008January 31, 2009 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. The discount rate selected to measure the present value of the Company’s Canadian benefit obligations as of February 2, 2008January 31, 2009 was developed by using the plan’s bond portfolio indices, which match the benefit obligations.

       The weighted-average discount rates used to determine the 2008 benefit obligations related to the Company’s pension and postretirement plans were 6.22 percent and 6.20 percent, respectively. A decrease of 50 basis points in the weighted-average discount rate would have increased the accumulated benefit obligation as of February 2, 2008January 31, 2009 of the pension plans by approximately $27$24 million and the effect on the postretirement plan would not be significant. Such a decrease would not have significantly changed 20072008 pension expense or postretirement income.

       There is limited risk to the Company for increases in health care 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.

       The Company expects to record postretirement income of approximately $8$6 million and pension expense of approximately $5$18 million in 2008.2009.

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  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 20072008 would have resulted in a $8$10 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.

       The Company expects its 20082009 effective tax rate to be approximately 35.5range from 36 to 37 percent. The actual rate will primarily depend upon the percentage of the Company’s income earned in the United States as compared with international operations.

  Discontinued, RepositioningRecent Accounting Pronouncements

       In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations,” (“SFAS No. 141(R)”). This standard will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and Restructuring Reserves

  liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company exited four business segmentsdoes not expect the adoption of SFAS No. 141(R) to have an affect on its Consolidated Financial Statements.

       In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No. 160”), which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as partequity in the consolidated financial statements and separate from the parent’s equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This standard does not currently affect the Company.

       In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 amends SFAS No. 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about the fair values of derivative instruments and their gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect that the adoption of this standard will have a significant effect on its discontinuation and restructuring programs. The final discontinued segment and dispositionfinancial statement disclosures.

       In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the restructured businesses were completedUseful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in 2001.developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not expect that the adoption of FSP 142-3 will have a significant effect on its financial statements.

       In order to identify and calculateMay 2008, the associated costs to exit these businesses, management made assumptions regarding estimatesFASB issued SFAS No. 162, “The Hierarchy of future liabilities for operating leases and other contractual agreements,Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the net realizable valuesources of assets held for sale or disposalaccounting principles and the fair valueframework for selecting the principles used in the preparation of non-cash consideration received.financial statements that are presented in conformity with generally accepted accounting principles in the United States. The Company has settledadopted SFAS No. 162 on the majorityeffective date of these liabilitiesNovember 13, 2008 and it did not have any impact on the remaining activity relatesCompany’s Consolidated Financial Statements.

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       In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the dispositiontwo-class method. The FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the residual lease liabilities.

       As a resultprovisions of achieving divestiture accounting in the fourth quarter of 2002, the Northern Group note was recorded at its fair value.FSP EITF 03-6-1. The Company is required to reviewcurrently assessing the collectibilitypotential effect of FSP EITF 03-6-1 on its reporting of earnings per share.

  In December 2008, the note based upon various criteria such asFASB issued FASB Staff Position (“FSP”) FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS No. 132(R)-1”), which amends SFAS No. 132(R) “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an Amendment of FASB Statements No. 87, 88, and 106” (“SFAS No. 132(R)”). FSP FAS No. 132(R)-1 requires more detailed disclosures about the credit-worthinessassets of the issuer a defined benefit pensionor 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

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  other postretirement plan and Disclosure Regarding Discontinued Operations,” which requires changesis effective for fiscal years ending after December 15, 2009. The Company is in the carrying valueprocess of assets received as consideration from the disposal ofevaluating FSP FAS No. 132(R)-1 and does not expect it will have a discontinued operation to be classified within continuing operations. The purchaser has made all payments required under the terms of the note; however, the business has sustained unexpected operating losses during the past fiscal year. The Company has evaluated the projected performance of the business and will continue to monitorsignificant impact on its results during the coming year. At February 2, 2008, CAD$15.5 million remains outstanding on the note, the fair value of which is US$14 million.Consolidated Financial Statements.

       The remaining discontinued reserve balances at February 2, 2008 totaled $23 million of which $14 million is expected to be utilized within the next twelve months. The remaining repositioning and restructuring reserves totaled $2 million at February 2, 2008.

  Disclosure Regarding Forward-Looking Statements

       This report 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 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), unseasonable weather, further deterioration of global financial markets, 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, 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 political instability, changes in import regulations, and disruptions to transportation services and distribution. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to 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” footnotenote under “Item 8. Consolidated Financial Statements and Supplementary Data.”

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  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 U.S. generally accepted accounting 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 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 comprises solely 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 registered 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
  March 31, 2008

  
  

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  MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

       The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

       Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of February 2, 2008. 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 2, 2008.

  MATTHEW D. SERRA,	ROBERT W. MCHUGH,
  Chairman of the Board,	Senior Vice President and
  President and Chief Executive Officer	Chief Financial Officer
  March 31, 2008

  
  

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  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

  We have audited the accompanying consolidated balance sheets of Foot Locker, Inc. and subsidiaries as of January 31, 2009 and February 2, 2008, and February 3, 2007, 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 2, 2008.January 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foot Locker, Inc. and subsidiaries as of January 31, 2009 and February 2, 2008, and February 3, 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended February 2, 2008January 31, 2009, in conformity with U.S. generally accepted accounting principles.

  As discussed in the Notes to the Consolidated Financial Statements, effective February 4, 2007, the Company adopted Statementthe provisions of Financial Accounting StandardsFASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” Effective February 3, 2007,In addition, the Company adopted Statementthe provisions of Financial Accounting Standards (“SFAS”) No 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans – An Amendment of FASB Statements No. 87, 88, 106, and 132(R).” In addition, effective January 29, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” and SFAS No. 151, “Inventory Costs – An Amendment of ARB No. 43, Chapter 4,157, “Fair Value Measurements,” as well as changed their methodof February 3, 2008, for quantifying errors basedthe fair value measurements of all financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”a recurring basis.

  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 2, 2008,January 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO), and our report dated March 31, 200830, 2009 expressed an unqualified opinion on the effectiveness of internal control over financial reporting.

  
  New York, New York
  March 31, 2008

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  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 Foot Locker, Inc.’s internal control over financial reporting as of February 2, 2008, 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, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express anadverse opinion on the Company’s internal control over financial reporting based on our audit.reporting.

  
  

  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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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, Foot Locker, Inc. maintained, in all material respects, effective internal control over financial reporting as of February 2, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

  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 2, 2008 and February 3, 2007, 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 2, 2008, and our report dated March 31, 2008 expressed an unqualified opinion on those consolidated financial statements.

  
  New York, New York
  March 31, 200830, 2009

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  CONSOLIDATED STATEMENTS OF OPERATIONS

  		2007				2006				2005				2008				2007				2006
  		(in millions, except per share amounts)												(in millions, except per share amounts)
  Sales		$	5,437			$	5,750			$	5,653			$	5,237			$	5,437			$	5,750
  Costs and expenses
  Cost of sales			4,017				4,014				3,944				3,777				4,017				4,014
  Selling, general and administrative expenses			1,176				1,163				1,129				1,174				1,176				1,163
  Depreciation and amortization			166				175				171				130				166				175
  Impairment charges and store closing program costs			128				17				—				259				128				17
  Interest expense, net			1				3				10				5				1				3
  			5,488				5,372				5,254				5,345				5,488				5,372
  Other income			(1	)			(14	)			(6	)			(8	)			(1	)			(14	)
  			5,487				5,358				5,248				5,337				5,487				5,358
  (Loss) Income from continuing operations before income taxes			(50	)			392				405
  (Loss) income from continuing operations before income taxes															(100	)			(50	)			392
  Income tax (benefit) expense			(99	)			145				142				(21	)			(93	)			145
  Income from continuing operations			49				247				263
  (Loss) income from continuing operations															(79	)			43				247
  Income on disposal of discontinued operations,
  net of income tax expense (benefit) of $1, $1, and $(3), respectively			2				3				1
  (Loss) income on disposal of discontinued operations,
  net of income tax expense (benefit) of $—, $1, and $1, respectively															(1	)			2				3
  Cumulative effect of accounting change,
  net of income tax benefit of $ —			—				1				—
  Net income		$	51			$	251			$	264
  net of income tax benefit of $—															—				—				1
  Net (loss) income														$	(80	)		$	45			$	251
  Basic earnings per share:
  Income from continuing operations		$	0.32			$	1.59			$	1.70
  (Loss) income from continuing operations														$	(0.52	)		$	0.29			$	1.59
  Income from discontinued operations			0.01				0.02				0.01				—				0.01				0.02
  Cumulative effect of accounting change			—				0.01				—				—				—				0.01
  Net income		$	0.33			$	1.62			$	1.71
  Net (loss) income														$	(0.52	)		$	0.30			$	1.62
  Diluted earnings per share:
  Income from continuing operations		$	0.32			$	1.58			$	1.67
  (Loss) income from continuing operations														$	(0.52	)		$	0.28			$	1.58
  Income from discontinued operations			0.01				0.02				0.01				—				0.01				0.02
  Cumulative effect of accounting change			—				—				—				—				—				—
  Net income		$	0.33			$	1.60			$	1.68
  Net (loss) income														$	(0.52	)		$	0.29			$	1.60

  
  

  See Accompanying Notes to Consolidated Financial Statements.

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  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

  		2007				2006			2005
  		(in millions)
  Net income		$	51			$	251		$	264
  Other comprehensive income, net of tax
  Foreign currency translation adjustment:
  Translation adjustment arising during the period, net of tax			60				27			(25	)
  Cash flow hedges:
  Change in fair value of derivatives, net of income tax			1				—			2
  Reclassification adjustments, net of income tax			—				—			(1	)
  Net change in cash flow hedges:			1				—			1
  Minimum pension liability adjustment:
  Minimum pension liability adjustment, net of deferred tax expense
  of $-, $120 and $10 million, respectively			—				181			15
  Pension and postretirement plan adjustments, net of income tax
  benefit of $11 million			(20	)			—			—
  Unrealized loss on available-for-sale securities			(2	)			—			—
  Comprehensive income		$	90			$	459		$	255

  
  

  See Accompanying Notes to Consolidated Financial Statements.

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  CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE (LOSS) INCOME

  		2007			2006
  		(in millions)
  ASSETS
  Current assets
  Cash and cash equivalents		$	488		$	221
  Short-term investments			5			249
  Merchandise inventories			1,281			1,303
  Other current assets			290			261
  			2,064			2,034
  Property and equipment, net			521			654
  Deferred taxes			243			109
  Goodwill			266			264
  Intangible assets, net			96			105
  Other assets			58			83
  		$	3,248		$	3,249
  LIABILITIES AND SHAREHOLDERS’ EQUITY
  Current liabilities
  Accounts payable		$	233		$	256
  Accrued and other liabilities			268			246
  Current portion of long-term debt and obligations under capital leases			—			14
  			501			516
  Long-term debt and obligations under capital leases			221			220
  Other liabilities			255			218
  Total liabilities			977			954
  Shareholders’ equity			2,271			2,295
  		$	3,248		$	3,249

  		2008				2007				2006
  		(in millions)
  Net (loss) income		$	(80	)		$	45			$	251
  Other comprehensive (loss) income, net of tax
  Foreign currency translation adjustment:
  Translation adjustment arising during the period, net of tax			(83	)			56				27
  Cash flow hedges:
  Change in fair value of derivatives, net of income tax			1				1				—
  Minimum pension liability adjustment:
  Minimum pension liability adjustment, net of deferred tax expense
  of $—, $— and $120 million, respectively			—				—				181
  Pension and postretirement plan adjustments, net of income tax
  benefit of $62, $11, and $— million, respectively			(99	)			(20	)			—
  Unrealized loss on available-for-sale securities			(3	)			(2	)			—
  Comprehensive (loss) income		$	(264	)		$	80			$	459

  
  

  See Accompanying Notes to Consolidated Financial Statements.

  29

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  CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYBALANCE SHEETS

  		2007							2006							2005
  		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		157,810			$	653			157,280			$	635			156,155			$	608
  Restricted stock issued under stock option and award plans		513				—			—				(3	)		225				—
  Forfeitures of restricted stock		—				—			—				—			—				2
  Share-based compensation expense		—				10			—				10			—				6
  Issued under director and employee stock plans, net of tax		674				13			530				11			900				19
  Issued at end of year		158,997				676			157,810				653			157,280				635
  Common stock in treasury at beginning of year		(2,107	)			(47	)		(1,776	)			(38	)		(64	)			(2	)
  Reissued under employee stock plans		—				—			122				3			90				2
  Restricted stock issued under stock option and award plans		—				—			157				3			—				—
  Forfeitures/cancellations of restricted stock		(25	)			—			(30	)			(1	)		(135	)			(2	)
  Shares of common stock used to satisfy tax
  withholding obligations		(95	)			(2	)		(241	)			(6	)		(49	)			(1	)
  Stock repurchases		(2,283	)			(50	)		(334	)			(8	)		(1,590	)			(35	)
  Exchange of options		(13	)			—			(5	)			—			(28	)			—
  Common stock in treasury at end of year		(4,523	)			(99	)		(2,107	)			(47	)		(1,776	)			(38	)
  		154,474				577			155,703				606			155,504				597
  Retained Earnings
  Balance at beginning of year						1,785							1,601							1,386
  Cumulative effect of adjustments resulting from
  the adoption of SAB 108, net of tax (see note 3)						—							(6	)						—
  Cumulative effect of adjustments resulting from
  the adoption of FIN 48, net of tax (see note 1)						1							—							—
  Adjusted balance at beginning of year						1,786							1,595							1,386
  Net income						51							251							264
  Cash dividends declared on common stock
  $0.50, $0.40 and $0.32 per share, respectively						(77	)						(61	)						(49	)
  Balance at end of year						1,760							1,785							1,601
  Accumulated Other Comprehensive Loss
  Foreign Currency Translation Adjustment
  Balance at beginning of year						37							10							35
  Translation adjustment arising during the period, net of tax						60							27							(25	)
  Balance at end of year						97							37							10
  Cash Flow Hedges
  Balance at beginning of year						—							—							(1	)
  Change during year, net of tax						1							—							1
  Balance at end of year						1							—							—
  Minimum Pension Liability Adjustment
  Balance at beginning of year						—							(181	)						(196	)
  Change during year, net of tax						—							181							15
  Balance at end of year						—							—							(181	)
  Pension Adjustments
  Balance at beginning of year						(133	)						—							—
  Adoption of SFAS No. 158						—							(133	)						—
  Change during year, net of tax						(29	)						—							—
  Balance at end of year						(162	)						(133	)						—
  Unrealized loss on available-for-sale securities						(2	)						—							—
  Total Accumulated Other Comprehensive Loss						(66	)						(96	)						(171	)
  Total Shareholders’ Equity					$	2,271						$	2,295						$	2,027

  		2008			2007
  		(in millions)
  ASSETS
  Current assets
  Cash and cash equivalents		$	385		$	488
  Short-term investments			23			5
  Merchandise inventories			1,120			1,281
  Other current assets			236			289
  			1,764			2,063
  Property and equipment, net			432			521
  Deferred taxes			358			239
  Goodwill			144			266
  Other intangible assets, net			113			96
  Other assets			66			58
  		$	2,877		$	3,243
  LIABILITIES AND SHAREHOLDERS’ EQUITY
  Current liabilities
  Accounts payable		$	187		$	233
  Accrued and other liabilities			231			278
  			418			511
  Long-term debt			142			221
  Other liabilities			393			250
  Total liabilities			953			982
  Shareholders’ equity			1,924			2,261
  		$	2,877		$	3,243

  
  

  See Accompanying Notes to Consolidated Financial Statements.

  30

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  CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY

  		2007				2006				2005
  		(in millions)
  From Operating Activities
  Net income		$	51			$	251			$	264
  Adjustments to reconcile net income to net cash provided by operating
  activities of continuing operations:
  Income on disposal of discontinued operations, net of tax			(2	)			(3	)			(1	)
  Non-cash impairment charges and store closing program costs			124				17				—
  Cumulative effect of accounting change, net of tax			—				(1	)			—
  Depreciation and amortization			166				175				171
  Share-based compensation expense			10				10				6
  Deferred income taxes			(129	)			21				24
  Change in assets and liabilities:
  Merchandise inventories			55				(38	)			(111	)
  Accounts payable and other accruals			(36	)			(103	)			14
  Qualified pension plan contributions			—				(68	)			(26	)
  Income taxes			—				(3	)			(8	)
  Other, net			44				(69	)			16
  Net cash provided by operating activities of continuing operations			283				189				349
  From Investing Activities
  Acquisitions			—				—				1
  Gain from lease termination			1				4				—
  Gain from insurance recoveries			1				4				3
  Purchases of short-term investments			(1,378	)			(1,992	)			(2,798	)
  Sales of short-term investments			1,620				2,041				2,767
  Capital expenditures			(148	)			(165	)			(155	)
  Proceeds from investment and note			21				—				—
  Net cash provided by (used in) investing activities of continuing operations			117				(108	)			(182	)
  From Financing Activities
  Reduction in long-term debt			(7	)			(86	)			(35	)
  Repayment of capital lease			(14	)			(1	)			—
  Dividends paid on common stock			(77	)			(61	)			(49	)
  Issuance of common stock			9				9				12
  Treasury stock reissued under employee stock plans			—				3				2
  Purchase of treasury shares			(50	)			(8	)			(35	)
  Tax benefit on stock compensation			1				2				—
  Net cash used in financing activities of continuing operations			(138	)			(142	)			(105	)
  Net Cash Used In operating activities of Discontinued Operations			—				(8	)			—
  Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents			5				1				2
  Net Change in Cash and Cash Equivalents			267				(68	)			64
  Cash and Cash Equivalents at Beginning of Year			221				289				225
  Cash and Cash Equivalents at End of Year		$	488			$	221			$	289
  Cash Paid During the Year:
  Interest		$	18			$	20			$	21
  Income taxes		$	52			$	133			$	93

  		2008							2007							2006
  		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		158,997			$	676			157,810			$	653			157,280			$	635
  Restricted stock issued under stock option and award plans		245				—			513				—			—				(3	)
  Forfeitures of restricted stock		—				2			—				—			—				—
  Share-based compensation expense		—				9			—				10			—				10
  Issued under director and employee stock plans, net of tax		357				4			674				13			530				11
  Issued at end of year		159,599				691			158,997				676			157,810				653
  Common stock in treasury at beginning of year		(4,523	)			(99	)		(2,107	)			(47	)		(1,776	)			(38	)
  Reissued under employee stock plans		—				—			—				—			122				3
  Restricted stock issued under stock option and award plans		—				—			—				—			157				3
  Forfeitures/cancellations of restricted stock		(90	)			(2	)		(25	)			—			(30	)			(1	)
  Shares of common stock used to satisfy tax
  withholding obligations		(65	)			(1	)		(95	)			(2	)		(241	)			(6	)
  Stock repurchases		—				—			(2,283	)			(50	)		(334	)			(8	)
  Exchange of options		(3	)			—			(13	)			—			(5	)			—
  Common stock in treasury at end of year		(4,681	)			(102	)		(4,523	)			(99	)		(2,107	)			(47	)
  		154,918				589			154,474				577			155,703				606
  Retained Earnings
  Balance at beginning of year						1,754							1,785							1,601
  Cumulative effect of adjustments resulting from
  the adoption of SAB 108						—							—							(6	)
  Cumulative effect of adjustments resulting from
  the adoption of FIN 48, net of tax (see note 1)						—							1							—
  Adjusted balance at beginning of year						1,754							1,786							1,595
  Net (loss) income						(80	)						45							251
  Cash dividends declared on common stock
  $0.60, $0.50 and $0.40 per share, respectively						(93	)						(77	)						(61	)
  Balance at end of year						1,581							1,754							1,785
  Accumulated Other Comprehensive Loss
  Foreign Currency Translation Adjustment
  Balance at beginning of year						93							37							10
  Translation adjustment arising during the period, net of tax						(83	)						56							27
  Balance at end of year						10							93							37
  Cash Flow Hedges
  Balance at beginning of year						1							—							—
  Change during year, net of tax						1							1							—
  Balance at end of year						2							1							—
  Minimum Pension Liability Adjustment
  Balance at beginning of year						—							—							(181	)
  Change during year, net of tax						—							—							181
  Balance at end of year						—							—							—
  Pension Adjustments
  Balance at beginning of year						(162	)						(133	)						—
  Adoption of SFAS No. 158						—							—							(133	)
  Change during year, net of tax						(91	)						(29	)						—
  Balance at end of year						(253	)						(162	)						(133	)
  Available-for-Sale Securities
  Balance at beginning of year						(2	)						—							—
  Change during the year, without tax benefit						(3	)						(2	)						—
  Balance at end of year						(5	)						(2	)						—
  Total Accumulated Other Comprehensive Loss						(246	)						(70	)						(96	)
  Total Shareholders’ Equity					$	1,924						$	2,261						$	2,295

  
  

  See Accompanying Notes to Consolidated Financial Statements.

  31

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  CONSOLIDATED STATEMENTS OF CASH FLOWS

  		2008				2007				2006
  		(in millions)
  From Operating Activities
  Net (loss) income		$	(80	)		$	45			$	251
  Adjustments to reconcile net (loss) income to net cash provided by
  operating activities of continuing operations:
  Discontinued operations, net of tax			(1	)			(2	)			(3	)
  Non-cash impairment charges and store closing program costs			259				124				17
  Cumulative effect of accounting change, net of tax			—				—				(1	)
  Depreciation and amortization			130				166				175
  Share-based compensation expense			9				10				10
  Deferred income taxes			(44	)			(129	)			21
  Change in assets and liabilities:
  Merchandise inventories			128				55				(38	)
  Accounts payable and other accruals			(43	)			(36	)			(103	)
  Qualified pension plan contributions			(6	)			—				(68	)
  Income taxes			(7	)			14				(3	)
  Other, net			36				36				(69	)
  Net cash provided by operating activities of continuing operations			383				283				189
  From Investing Activities
  Business acquisition			(106	)			—				—
  Gain from lease termination			3				1				4
  Gain from insurance recoveries			—				1				4
  Reclassification of cash equivalents to short-term investments			(23	)			—				—
  Purchases of short-term investments			—				(1,378	)			(1,992	)
  Sales of short-term investments			—				1,620				2,041
  Capital expenditures			(146	)			(148	)			(165	)
  Proceeds from investment and note			—				21				—
  Net cash (used in) provided by investing activities of continuing operations			(272	)			117				(108	)
  From Financing Activities
  Reduction in long-term debt			(94	)			(7	)			(86	)
  Repayment of capital lease			—				(14	)			(1	)
  Dividends paid on common stock			(93	)			(77	)			(61	)
  Issuance of common stock			2				9				9
  Treasury stock reissued under employee stock plans			—				—				3
  Purchase of treasury shares			—				(50	)			(8	)
  Tax benefit on stock compensation			—				1				2
  Net cash used in financing activities of continuing operations			(185	)			(138	)			(142	)
  Net Cash Used In operating activities of Discontinued Operations			—				—				(8	)
  Effect of Exchange Rate Fluctuations on Cash and Cash Equivalents			(29	)			5				1
  Net Change in Cash and Cash Equivalents			(103	)			267				(68	)
  Cash and Cash Equivalents at Beginning of Year			488				221				289
  Cash and Cash Equivalents at End of Year		$	385			$	488			$	221
  Cash Paid During the Year:
  Interest		$	11			$	18			$	20
  Income taxes		$	64			$	52			$	133

  
  

  See Accompanying Notes to Consolidated Financial Statements.

  32

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  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. All significant intercompany amounts have been eliminated. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

  Reporting Year

       The reporting period for the Company is the Saturday closest to the last day in January. Fiscal 2008 represents the 52 weeks ending January 31, 2009. Fiscal year 2007 represents the 52 weeks endingended February 2, 2008. Fiscal year 2006 represented the 53 weeks ended February 3, 2007. Fiscal year 2005 represented the 52 weeks ended January 28, 2006. References to years in this annual report relate to fiscal years rather than calendar years.

  Revenue Recognition

       Revenue from retail stores is recognized at the point of sale when the product is delivered to customers. Internet 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 as permitted by 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).” 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 (“SAB”) No. 101, “Revenue Recognition in Financial 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 gift card sales is recorded when the gift cards are redeemed or when the likelihood of the gift card being redeemed by the customer is remote and there is no legal obligation to remit 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 administrative expenses and totaled $5 million in 2008, $4 million in 2007, and $7 million in 2006, and $2 million in 2005.2006. Unredeemed gift cards are recorded as a current liability.

  Statement of Cash Flows

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

  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 reimbursements earned for the launch and promotion of certain products is agreed upon with vendors and is recorded in the same period as the associated expense

  3233

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  is incurred. In accordance with EITF Issue No. 02-16, “Accounting by a Reseller for Cash Consideration from a Vendor,” the Company accounts for reimbursements received in excess of expenses incurred related to specific, incremental, identifiable advertising, as a reduction to the cost of merchandise and is reflected in cost of sales as the merchandise is sold.

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

  		2007				2006				2005				2008				2007				2006
  		(in millions)												(in millions)
  Advertising expenses		$	105.9			$	92.5			$	99.0			$	106.8			$	105.9			$	92.5
  Cooperative advertising reimbursements			(34.8	)			(23.0	)			(21.2	)			(40.2	)			(34.8	)			(23.0	)
  Net advertising expense		$	71.1			$	69.5			$	77.8			$	66.6			$	71.1			$	69.5

  
  

  Catalog Costs

       Catalog costs, which primarily comprise paper, printing, and postage, are capitalized and amortized over the expected customer response period related to each catalog, which is generally 90 days. Cooperative reimbursements earned for the promotion of certain products isare agreed upon with vendors and is recorded in the same period as the associated catalog expenses are amortized. Prepaid catalog costs totaled $3.1 million and $4.0 million at January 31, 2009 and $3.9 million at February 2, 2008, and February 3, 2007, respectively.

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

  		2007				2006				2005				2008				2007				2006
  		(in millions)												(in millions)
  Catalog costs		$	45.6			$	47.0			$	48.2			$	48.0			$	45.6			$	47.0
  Cooperative reimbursements			(3.8	)			(3.5	)			(3.0	)			(4.1	)			(3.8	)			(3.5	)
  Net catalog expense		$	41.8			$	43.5			$	45.2			$	43.9			$	41.8			$	43.5

  
  

  Earnings Per Share

       Basic earnings per share is computed using the weighted-average number of common shares outstanding for the period. Diluted earnings per share uses the weighted-average number of common shares outstanding during the period plus dilutive common stock equivalents, such as stock options and awards. The computation of earnings per share is as follows:

  		2007			2006			2005			2008				2007			2006
  		(in millions)									(in millions)
  Net income from continuing operations		$	49		$	247		$	263
  Net income (loss) from continuing operations											$	(79	)		$	43		$	247
  Weighted-average common shares outstanding			154.0			155.0			155.1			154.0				154.0			155.0
  Effect of Dilution:
  Basic Earnings per share											$	(0.52	)		$	0.29		$	1.59
  Weighted-average common shares outstanding												154.0				154.0			155.0
  Stock options and awards			1.6			1.8			2.5			—				1.6			1.8
  Weighted-average common shares outstanding							��
  assuming dilution			155.6			156.8			157.6			154.0				155.6			156.8
  Diluted earnings per share											$	(0.52	)		$	0.28		$	1.58

  
  

       Options to purchase 4.8 million, 3.4 million, 2.8 million, and 2.22.8 million shares of common stock as of January 31, 2009, February 2, 2008, and February 3, 2007, and January 28, 2006, 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. Additionally, due to a loss reported for the year ended January 31, 2009, options and awards of 1.2 million shares of common stock were excluded from the calculation of diluted earnings per share as the effect would be antidilutive.

  3334

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  Share-Based Compensation

       Effective January 29, 2006, the Company adopted 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 using the modified prospective transition method and, therefore, the Company did not restate its prior period results. SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”), and revises guidance in SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).compensation. Among 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.

       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 for employee stock options was recorded, as all stock options granted under the stock option plans had an exercise price that was not less than the quoted market price at the date of grant. Compensation expense was also not recorded for employee purchases of stock under the employee stock purchase plans as it was considered non-compensatory under APB No. 25. Prior to the Company’s adoption of SFAS No. 123(R), as required under the disclosure provisions of SFAS No. 123, as amended, the Company provided pro forma net income and earnings per common share for each period as if it had applied the fair value method to measure stock-based compensation expense.

  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 Company’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 23note 25 for information on the assumptions the Company 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 cost to be reported as a financing cash flow rather than as an operating cash flow as previously required. For 2007 and 2006, the Company recorded an excess tax benefit of $1 million and $2 million, respectively, 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 treasury. The Company may make repurchases of its common stock from time to time, subject to legal and contractual restrictions, market conditions and other factors.

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       The following table illustrates the effect 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 SFAS No. 123:

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

  
  

  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 January 31, 2009 and February 2, 2008 and February 3, 2007 were $472$331 million and $208$472 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 2, 2008, the Company’s auction rate security was classified as available-for-sale, and accordingly is reported at fair value. 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. As of February 2, 2008, the carrying value ofJanuary 31, 2009, the Company’s short-term investment was $23 million, which represents the fair value of $7 million was reduced by $2 million. The unrealized loss of $2 million was recorded to accumulated comprehensive loss without tax benefit. There were no unrealized gains or losses recognizedits investment in 2006 and 2005. Realized losses recognized in 2007 were not significant.the Reserve International Liquidity Fund, Ltd., a money market fund. See note 4 for further discussion on this investment.

  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. The retail inventory method 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 cost of ending inventory on a department basis. The Company provides reserves based on current selling prices when the inventory has not been marked down to market. Merchandise inventories of the Direct-to-Customers business are valued at 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 adoptedaccordance with SFAS No. 151, “Inventory Costs- An Amendment of ARB 43, Chapter 4.4,” This standard amends the guidance to clarify that abnormal amount 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 capitalizedexpenses, in the period incurred, the freight associated with transfers between its store locations. The Company maintains an accrual for shrinkage based on historical rates.

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

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  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: maximum of 50 years for buildings and 3 to 10 years for furniture, fixtures and equipment. Property and equipment under capital leases and improvements to leased premises are generally amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the remaining lease term. Capitalized software reflects certain costs related to software developed for internal use that are capitalized and amortized. After substantial completion of the project, the costs are amortized on a straight-line basis over a 2 to 7 year period. Capitalized software, net of accumulated amortization, is included in property and equipment and was $23 million at January 31, 2009 and $22 million at February 2, 2008 and $29 million at February 3, 2007.2008.

  Recoverability of Long-Lived Assets

       In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“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. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at the division level, as well as qualitative measures. The Company considers historical performance and future estimated results, which are predominately identified from the Company’s three-year strategic plans, in its evaluation of potential store-level 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 the 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 measured by discounting expected future cash flows at the Company’s weighted-average cost of capital. The Company estimates fair value based on the best information available using estimates, judgments and projections as considered necessary.

  Goodwill and Other Intangible Assets

       The Company accounts for goodwill and other intangibles in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and other intangible assets with indefinite lives be 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 is determined using a combination of market and discounted cash flow approaches. During the third and fourth quarters of 2007, the Company performed reviews of its U.S. Athletic stores’ goodwill, as a result of the SFAS No. 144 recoverability analysis. These analyses did not result in an impairment charge. Separable intangible assets that are deemed to have finite lives will continue to be amortized over their estimated useful 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, other comprehensive 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. The effective portion of the gain or loss on the hedging derivative instrument is reported as a component of other comprehensive 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.

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       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 changes in the fair value of the Company’s 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, and other current receivables and payables, approximates fair value due to the short-term nature of these assets and liabilities.

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       Quoted market prices of the same or similar instruments are used to determine fair value of long-term debt and forward foreign exchange contracts. Discounted cash flows are used to determine the fair value of long-term investments and notes receivable if quoted market prices on these instruments are unavailable.

  Income Taxes

       On February 4, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Interpretation No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Upon the adoption of FIN 48, the Company recognized a $1 million increase to retained earnings to reflect the change of its liability for the unrecognized income tax benefits as required. At February 4, 2007, the total amount of gross unrecognized tax benefits was $33 million. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

       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 credits and net operating loss carryforwards, reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

       A taxing authority may challenge positions that the Company 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 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 U.S. benefit obligations as of February 2, 2008January 31, 2009 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. The discount rate selected to measure the present value of the Company’s Canadian benefit obligations as of February 2, 2008January 31, 2009 was developed by using the plan’s bond portfolio indices, which match the benefit obligations.

  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 $16 million and $17 million at January 31, 2009 and $16 million at February 2, 2008, and February 3, 2007.respectively. The Company discounts its workers’ compensation and general liability using a risk-free interest rate. Imputed interest expense related to these liabilities was not significant for the year ended January 31, 2009 and was $1 million in each ofboth 2007 2006 and 2005.2006.

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  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 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.

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  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.

  Recent Accounting Pronouncements Not Previously Discussed Herein

       In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. However, the FASB issued FASB Staff Positions (“FSP”) 157-1 and 157-2. FSP 157-1 amends SFAS No. 157 to exclude FASB No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions, while FSP-2 delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. 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.

       In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations,” (“SFAS No. 141(R)”). This standard will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-dateacquisition date fair value with limited exceptions. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS No. 141(R) to have an affect on its Consolidated Financial Statements.

       In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS No. 160”), which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This standard does not currently affect the Company.

       In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 amends SFAS No. 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about the fair values of derivative instruments and their gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect that the adoption of this standard will have a significant effect on its financial statement disclosures.

       In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not expect that the adoption of FSP 142-3 will have a significant effect on its financial statements.

       In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. The Company adopted SFAS No. 162 on the effective date of November 13, 2008 and it did not have any impact on the Company’s Consolidated Financial Statements.

       In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is currently assessing the potential effect of FSP EITF 03-6-1 on its reporting of earnings per share.

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       In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS No. 132(R)-1”), which amends SFAS No. 132(R) “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an Amendment of FASB Statements No. 87, 88, and 106” (“SFAS No. 132(R)”). FSP FAS No. 132(R)-1 requires more detailed disclosures about the assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009. The Company is in the process of evaluating FSP FAS No. 132(R)-1 and does not expect it will have a significant impact on its Consolidated Financial Statements.

  2. Immaterial Revision of Previously Issued Financial Statements

       The 2007 results as presented in this Annual Report have been corrected to reflect an immaterial revision to its fourth quarter and full year 2007 results in accordance with Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The income tax benefit of $99 million related to continuing operations, as reported for the full year of 2007 within the Form 10-K, was overstated by $6 million. This overstatement comprises primarily five items. First, the Company understated its income taxes payable by $9 million due to incorrectly accounting for foreign dividend withholding taxes. Second, the Company noted that certain foreign currency fluctuations related to the tax assets and liabilities, totaling $5 million, should have been reflected as part of the foreign currency translation adjustment within accumulated other comprehensive loss. The Company had incorrectly reflected these foreign exchange movements within the income tax provision, thereby increasing the income tax provision erroneously. Third, the Company overstated the value of a portion of its Canadian deferred tax assets by $3 million as a result of using incorrect tax rates. Fourth, the Company understated a deferred tax liability of $2 million related to goodwill. Finally, various state and international depreciation corrections totaling $3 million were overstated in the income tax provision.

       The table below reflects these adjustments on each financial statement line item and per-share amounts affected:

  		Year ended February 2, 2008
  		As
  		Originally
  (in millions)		Reported				Revision				As Adjusted
  Other current assets		$	290			$	(1	)		$	289
  Deferred taxes			243				(4	)			239
  Total assets			3,248				(5	)			3,243
  Accrued expenses and other current liabilities			268				10				278
  Other liabilities			255				(5	)			250
  Retained earnings			1,760				(6	)			1,754
  Accumulated other comprehensive loss			(66	)			(4	)			(70	)
  Total shareholders’ equity			2,271				(10	)			2,261
  Total liabilities and shareholders’ equity		$	3,248			$	(5	)		$	3,243
  		Year ended February 2, 2008
  		As
  		Originally
  (in millions)		Reported				Revision				As Adjusted
  Loss from continuing operations before
  income taxes		$	(50	)		$	—			$	(50	)
  Income tax benefit			(99	)			6				(93	)
  Income from continuing operations		$	49			$	(6	)		$	43
  Basic earnings per share:
  Income from continuing operations		$	0.32			$	(0.03	)		$	0.29
  Diluted earnings per share:
  Income from continuing operations		$	0.32			$	(0.04	)		$	0.28

  
  

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  3. Acquisition

       The Company consummated its purchase of CCS from dELiA*s, Inc. on November 5, 2008. CCS is the leading direct-to-consumer retailer in the United States that sells skateboard and snowboard equipment, apparel, footwear and accessories through catalogs and the Internet. The Company’s consolidated results of operations include those of CCS beginning with the date that the acquisition was consummated. The Company believes that this acquisition will provide the Company with a unique growth opportunity, which supplements its current direct-to-customers operations.

       The Company integrated the CCS business into the Direct-to-Customers segment. The purchase price was $106 million and consisted of $103 million in cash consideration and $3 million of direct transaction costs. Direct costs include investment banking, legal and accounting fees, and other costs. The Company has allocated the purchase price based, in part, upon internal estimates of cash flows and considering the report of a third-party valuation expert retained to assist the Company, with the remainder allocated to tax deductible goodwill. The purchase price allocation may be revised as more definitive facts and evidence become available. Pro forma effects of the acquisition have not been presented, as their effects were not significant to the consolidated results of operations. The allocation of the purchase price is detailed below:

  		(in millions)
  Inventory			$	13
  Intangible assets
  Tradenames – non-amortizing				25
  Customer relationship – amortizing				21
  Goodwill				47
  Total purchase price			$	106

  
  

  4. Impairment Charges and Store Closing Program

  Northern Group Note Impairment

       On January 23, 2001, the Company announced that it was exiting its Northern Group segment. During the second quarter of 2001, the Company completed the liquidation of the 324 stores in the United States. On September 28, 2001, the Company completed the stock transfer of the 370 Northern Group stores in Canada through one of its wholly owned subsidiaries for approximately CAD$59 million, which was paid in the form of a note. Over the last several years, the note has been amended and payments have been received; however, the interest and payment terms remained unchanged. The CAD$15.5 million note was required to be repaid upon the occurrence of “payment events,” as defined in the purchase agreement, but no later than September 28, 2008. During the first quarter of 2008, the principal owners of the Northern Group requested an extension on the repayment of the note. The Company determined, based on the Northern Group’s current financial condition and projected performance, that repayment of the note pursuant to the original terms of the purchase agreement was not likely. Accordingly, a non-cash impairment charge of $15 million was recorded during the first quarter of 2008 in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of Long-Liveda Loan.” This charge has been recorded with no tax benefit. The tax benefit is a capital loss that can only be used to offset capital gains. The Company does not anticipate recognizing sufficient capital gains to utilize these losses. Therefore, the Company determined that a full valuation allowance was required.

       Another wholly owned subsidiary of the Company was the assignor of the store leases involved in the Northern Group transaction and, therefore, retains potential liability for such leases. As the assignor of the Northern Canada leases, the Company remained secondarily liable under these leases. As of January 31, 2009, the Company estimates that its gross contingent lease liability is CAD$2 million. The Company currently estimates the expected value of the lease liability to be insignificant. The Company believes that, because it is secondarily liable on the leases, it is unlikely that it would be required to make such contingent payments.

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  Money Market Impairment

       On September 16, 2008, the Company requested redemption of its shares in the Reserve International Liquidity Fund, Ltd., a money market fund (the “Fund”), totaling $75 million. At the time the redemption request was made, the Company was informed by the Reserve Management Company, the Fund’s investment advisor, that the Company’s redemption trades would be honored at a $1.00 per share net asset value. Although the Company received a partial distribution of $49 million in the fourth quarter of 2008, the Company has not received information as to when the remaining amount of its redemption request will be paid. Litigation, to which the Company is not a party, exists that involves how the remaining assets of the Fund should be distributed. Therefore, there is a risk that the Company could receive less than the $1.00 per share net asset value. As a result during the third quarter of 2008, the Company recognized an impairment loss of $3 million to reflect a decline in fair value that is other-than-temporary. This charge was recorded with no tax benefit. This impairment is primarily related to the underlying securities of Lehman Brothers Holdings Inc. held in the Fund. Based on the maturities of the underlying investments in the Fund and the current status of the redemption process, the Company has reclassified $23 million (net of the impairment charge of $3 million) from “Cash and cash equivalents” to “Short-term investments” in the Consolidated Balance Sheet as of January 31, 2009.

  Impairment of Goodwill and Other Intangible Assets

       The Company has seven reporting units, as defined under SFAS No. 142, “Goodwill and Other Intangible Assets.” A reporting unit is defined as an operating segment or one level below an operating segment. Only four of the reporting units contain goodwill, $118 million was allocated to the Foot Locker, Kids Foot Locker and Footaction reporting unit, $49 million was allocated to the Champs Sports reporting unit, $17 million was allocated to the Foot Locker Europe reporting unit, and $127 million was allocated to the Direct-to-Customers reporting unit. Although we have seven reporting units, they have been aggregated into two operating segments for segment reporting purposes, in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

       The Company performs its annual impairment test as of the beginning of each year; however, due to the significant decline in the Company’s common stock and market capitalization, in relation to the book value during the fourth quarter of 2008, the Company determined that a triggering event had occurred and performed an interim impairment test. The first step in this process compares the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss should be recognized in an amount equal to that excess. The fair value of the four reporting units containing goodwill was determined under step 1 of the goodwill impairment test based on an equal weighting of a discounted cash flow analysis using forward-looking projections of estimated future operating results and a guideline company methodology under the market approach. Based on this testing, the Company determined that the fair values, as determined under step 1 as described above, was less than the carrying values of the Foot Locker, Kids Foot Locker and Footaction reporting unit and the Champs Sports reporting unit. Accordingly, the Company performed a step 2 analysis to determine the extent of the goodwill impairment and concluded that the carrying value of these two reporting units was fully impaired, resulting in a non-cash impairment charge of $167 million. There were no goodwill impairment charges in 2007 or 2006.

       Intangible assets that are determined to have finite lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate that the carrying value may be impaired. Intangible assets with indefinite lives are tested for impairment if impairment indicators arise and, at a minimum, annually. As a result of the impairment review related to long-lived assets and goodwill, the Company performed a review of its other intangible assets and recorded impairment charges in 2008 totaling $2 million related to trademarks of Footaction in the U.S. and Foot Locker in the Republic of Ireland, reflecting decreases in projected revenues.

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  Impairment of Assets and Store Closing Program

       In connection with the review of goodwill and other intangibles, the Company performed a store long-lived impairment test pursuant to SFAS No. 144 for its Foot Locker, Kids Foot Locker, and Footaction divisions. Additionally, in accordance with the Company’s store long-lived assets policy, the Company determined that triggering events had occurred during the fourth quarter of 2008 at its Lady Foot Locker and Champs Sports divisions. Accordingly, the Company evaluated the long-lived assets of those operations for impairment and recorded non-cash impairment charges of $67 million primarily to write-down long-lived assets such as store fixtures and leasehold improvements for 868 stores at the Company’s U.S. store operations.

       During the year ended January 31, 2009, the Company closed 21 unproductive stores as part of the store closing program announced in 2007. Exit costs of $5 million for the year ended January 31, 2009, comprising primarily lease termination costs, were recognized in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

       During 2007, the Company concluded that triggering events had occurred at its U.S. retail store divisions, comprising Foot Locker, Lady Foot Locker, Kids Foot Locker, Footaction, and Champs Sports. Accordingly, the Company evaluated the long-lived assets of those operations for impairment and recorded non-cash impairment charges of $117 million primarily to write-down long-lived assets such as store fixtures and leasehold improvements for 1,395 stores at the Company’s U.S. store operations pursuant to SFAS No. 144.

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       Additionally, in the third quarter of 2007, the Company identified 66 unproductive stores for closure. Accordingly, the Company evaluated the recoverability of long-lived assets considering the revised estimated future cash flows. The Company recorded an additional non-cash impairment charge of $7 million in 2007 as a result of this analysis. Of the totaldecision to close 66 unproductive stores identified for closure in the third quarteras part of 2007, 13 will remain in operation as the Company was able to negotiate more favorable lease terms.a store closing program. Exit costs related to 33 stores, which closed during 2007, comprising primarily lease termination costs of $4 million, were recognized in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” During 2008, the Company currently expects to close the remaining 20 unproductive stores prior to normal lease expiration, depending on the Company’s success in negotiating agreements with its landlords. The lease exit costs associated with these remaining closures is expected to total $5 million to $10 million. These charges will be recorded during 2008 in accordance with SFAS No. 146. The cash impact of the 2008 store closings is expected to be minimal, as the related cash lease costs are expected to be offset by associated inventory reductions.

       Under SFAS No. 144, store closings may constitute discontinued operations if migration of customers and cash flows are not expected. The Company has concluded that no store closings have met the criteria for discontinued operations treatment.

       Included in the Athletic Stores division profit for 2006 is an impairment charge of $17 million related to the Company’s European operations to write-down long-lived assets in 69 stores to their estimated fair value. During 2006, division profit declined primarily 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. The charge was comprised primarily of stores located in the U.K. and France.

  3. 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 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 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 taxes				4.1
  	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.

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  4.5. Segment Information

       The Company has determined that its reportable segments are those that are based on its method of internal reporting. As of February 2, 2008,January 31, 2009, the Company has two reportable segments, Athletic Stores and Direct-to-Customers. The Company acquired CCS during the fourth quarter of 2008, the operations are presented within the Direct-to-Customers segment. The Company also operated the Family Footwear segment, which included the retail format under the Footquarters brand name through the second quarter of 2007. During the third quarter, the Company converted the Footquarters stores, which were the only stores reported under the Family Footwear segment, to Foot Locker and Champs Sports outlet stores. The Company has concluded that the Footquarters store closings are not discontinued operations pursuant to SFAS No. 144.

       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 (loss) profit reflects (loss) income from continuing operations before income taxes, corporate expense, non-operating income, and net interest expense.

  Sales

  		2007			2006			2005			2008			2007			2006
  		(in millions)									(in millions)
  Athletic Stores		$	5,071		$	5,370		$	5,272		$	4,847		$	5,071		$	5,370
  Direct-to-Customers			364			380			381			390			364			380
  Family Footwear			2			—			—			—			2			—
  Total sales		$	5,437		$	5,750		$	5,653		$	5,237		$	5,437		$	5,750

  
  

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  Operating Results

  		2007				2006				2005				2008				2007				2006
  		(in millions)												(in millions)
  Athletic Stores(1)		$	(27	)		$	405			$	419			$	(59	)		$	(27	)		$	405
  Direct-to-Customers			40				45				48				43				40				45
  Family Footwear(2)			(6	)			—				—				—				(6	)			—
  			7				450				467				(16	)			7				450
  Restructuring income (charge)(2)(3)			2				(1	)			—				—				2				(1	)
  Division profit			9				449				467
  Division (loss) profit															(16	)			9				449
  Corporate expense(4)			(59	)			(68	)			(58	)			(87	)			(59	)			(68	)
  Operating (loss) profit			(50	)			381				409				(103	)			(50	)			381
  Other income(3)(5)			1				14				6				8				1				14
  Interest expense, net			1				3				10				5				1				3
  (Loss) income from continuing operations before income taxes		$	(50	)		$	392			$	405			$	(100	)		$	(50	)		$	392

  ____________________
  
  

  (1)		The fiscalyear ended January 31, 2009 includes a $241 million charge representing long-lived store asset impairment, goodwill and other intangibles impairment and store closing costs related to the Company’s U.S. operations. The year ended February 2, 2008 includes a $128 million charge representing impairment and store closing costs related to the Company’s U.S. operations. The fiscal year ended February 3, 2007 included a $17 million non-cash impairment charge related to the Company’s European operations.
  (2)		During the first quarter of 2007, the Company launched a new family footwear concept, Footquarters. The concept’s results did not meet the Company’s expectations and, therefore, the Company decided not to invest further in this business. These stores were converted to the Company’s other formats. Included in the operating loss of $6 million was approximately $2 million of costs associated with the removal of signage and the write-off of unusable fixtures.
  (3)		During 2007, the Company adjusted its 1993 Repositioning and 1991 Restructuring reserve by $2 million primarily due to favorable lease terminations. During 2006, the Company recorded a restructuring charge of $1 million, which represented a revision to the original estimate of the lease liability associated with the guarantee of The San Francisco Music Box Company distribution center. These amounts are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
  (3)(4)		Corporate expense for the year ended January 31, 2009 includes a $3 million other-than-temporary impairment charge related to a short-term investment and a $15 million impairment charge related to the Northern Group note receivable.
  (5)		Other income in 2008 primarily reflects a $4 million net gain related to the Company’s foreign currency options contracts and $3 million gain on lease terminations related to two lease interests in Europe.
  		2007 includes a $1 million gain related to a final settlement with the Company’s insurance carriers of a claim related to a store damaged by fire in 2006 and a $1 million gain on the sale of two of its lease interests in Europe. These gains were offset primarily by premiums paid for foreign currency option contracts.
  		2006 includes a $4 million gain on lease terminations;terminations, a $8 million of insurance proceeds related to the 2005 hurricane;hurricane, and a $2 million gain on debt repurchase.
  		2005 includes a $3 million gain from insurance recoveries associated with Hurricane Katrina. Additionally, $3 million represented 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.repurchases.

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  		Depreciation and																											Depreciation and
  		Amortization									Capital Expenditures									Total Assets									Amortization									Capital Expenditures									Total Assets
  		2007			2006			2005			2007			2006			2005			2007			2006			2005			2008			2007			2006			2008			2007			2006			2008			2007			2006
  		(in millions)																											(in millions)
  Athletic Stores		$	146		$	147		$	141		$	125		$	135		$	137		$	2,298		$	2,374		$	2,322		$	111		$	146		$	147		$	122		$	125		$	135		$	1,889		$	2,300		$	2,374
  Direct-to-Customers			6			6			6			7			4			6			197			195			196			6			6			6			6			7			4			297			197			195
  			152			153			147			132			139			143			2,495			2,569			2,518			117			152			153			128			132			139			2,186			2,497			2,569
  Corporate			14			22			24			16			26			12			753			680			794			13			14			22			18			16			26			691			746			680
  Total Company		$	166		$	175		$	171		$	148		$	165		$	155		$	3,248		$	3,249		$	3,312		$	130		$	166		$	175		$	146		$	148		$	165		$	2,877		$	3,243		$	3,249

       Sales and long-lived asset information by geographic area as of and for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007 and January 28, 2006 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, Canada, and France represent approximately 21,22, 18, and 14 percent, respectively, of the International category’s sales for the period ended February 2, 2008.January 31, 2009. No other individual country included in the International category is significant.

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  Sales

  		2007			2006			2005			2008			2007			2006
  		(in millions)									(in millions)
  United States		$	3,991		$	4,356		$	4,257		$	3,768		$	3,991		$	4,356
  International			1,446			1,394			1,396			1,469			1,446			1,394
  Total sales		$	5,437		$	5,750		$	5,653		$	5,237		$	5,437		$	5,750

  
  

  Long-Lived Assets

  		2007			2006			2005			2008			2007			2006
  		(in millions)									(in millions)
  United States		$	368		$	504		$	523		$	311		$	368		$	504
  International			153			150			152			121			153			150
  Total long-lived assets		$	521		$	654		$	675		$	432		$	521		$	654

  5.6. Other Income

       Other income was $8 million, $1 million and $14 million for 2008, 2007 and $6 million for 2007, 2006, and 2005, respectively. Included in other income are non-operating items, such as the effect of foreign currency option contracts, sales of lease interests and insurance proceeds. Other income in 2008 primarily reflects a $4 million net gain related to the Company’s foreign currency options contracts and a $3 million gain on lease terminations related to two lease interests in Europe.

       In 2007, other income includes a $1 million gain related to a final settlement with the Company’s insurance carriers of a claim related to a store damaged by fire in 2006. Additionally, the Company sold two of its lease interests in Europe for a gain of $1 million. These gains were offset primarily by premiums paid for foreign currency option contracts.

       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, income of $2 million related to the purchase and retirement of debt and lease termination income of $4 million. The Company purchased and retired $38 million of its $200 million 8.50 percent debentures payable in 2022, at a $2 million discount from face value. 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. Additionally, the Company recorded a gain of $3 million of insurance recoveries in excess of losses associated with Hurricane Katrina.

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  6.7. Short-Term Investments

  		2008			2007
  		(in millions)
  Money market investment		$	23		$	—
  Auction rate security			—			5
  		$	23		$	5

  
  

       The Company’s auction rate security investments are accounted forCompany has classified its remaining investment in the Reserve International Liquidity Fund as available-for-sale securities.a short-term investment as of January 31, 2009. The following representsdetermination to classify the compositioninvestment as short-term was based upon a review of the Company’s auction rate securities by underlying investment.

  		2007			2006
  		(in millions)
  Tax exempt municipal bonds		$	—		$	44
  Equity securities			5			205
  		$	5		$	249

  
  

  assets and maturities of the Fund. With the liquidity issues experienced in the global credit and capital markets, the Company’s preferred stock auction rate security, having a face value of $7 million, has experienced failed auctions. TheFor the years ended January 31, 2009 and February 2, 2008, the Company determined that a temporary impairment has occurred and therefore has recorded a chargecharges of $3 million and $2 million, respectively, with no tax benefit, to accumulated other comprehensive lossloss. In the second quarter of 2008, the Company determined that due to the illiquid nature of this investment it should be classified as a non-current asset. Accordingly, the fair value of $2 million is recorded within other assets as of February 2, 2008. This security will continue to accrue interest at the contractual rate and will be auctioned every 90 days until the auction succeeds.January 31, 2009.

       Based on the relatively small size of this investmentthese investments and the Company’sits ability to access cash and other short-term investments, and expected operating cash flows, we dothe Company does not anticipate the lack of liquidity on this investmentthese investments will affect ourits ability to operate ourits business as usual.

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  7.8. Merchandise Inventories

  		2007			2006			2008			2007
  		(in millions)							(in millions)
  LIFO inventories		$	907		$	967		$	788		$	907
  FIFO inventories			374			336			332			374
  Total merchandise inventories		$	1,281		$	1,303		$	1,120		$	1,281

  
  

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

  8.9. Other Current Assets

  		2007			2006			2008			2007
  		(in millions)						(in millions)
  Net receivables		$	50		$	59		$	53		$	50
  Prepaid expenses and other current assets			34			36			33			34
  Prepaid rent			65			62			62			65
  Prepaid income taxes			70			67			47			69
  Deferred taxes			53			21			29			53
  Investments			—			14
  Northern Group note receivable			14			1			—			14
  Current tax asset			1			—			—			1
  Income tax receivable									7			—
  Fair value of derivative contracts			3			1			5			3
  		$	290		$	261		$	236		$	289

  
  

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  9.10. Property and Equipment, Net

  		2007				2006				2008				2007
  		(in millions)								(in millions)
  Land		$	3			$	3			$	3			$	3
  Buildings:
  Owned			30				30				31				30
  Furniture, fixtures and equipment:
  Owned			1,117				1,139				1,018				1,117
  Leased			—				14
  			1,150				1,186				1,052				1,150
  Less: accumulated depreciation			(903	)			(870	)			(829	)			(903	)
  			247				316				223				247
  Alterations to leased and owned buildings,
  net of accumulated amortization			274				338
  		$	521			$	654
  Alterations to leased and owned buildings
  Cost											724				799
  Less: accumulated amortization											(515	)			(525	)
  											209				274
  										$	432			$	521

  
  

  10.11. Goodwill

  		2007			2006			2008			2007
  		(in millions)						(in millions)
  Athletic Stores		$	186		$	184		$	17		$	186
  Direct-to-Customers			80			80			127			80
  		$	266		$	264		$	144		$	266

  
  

       Goodwill for the Direct-to-Customers segment increased by $47 million due to the Company’s purchase of CCS from dELiA*s, Inc. during the fourth quarter of 2008. The effect of foreign exchange fluctuations for the fiscal year ended February 2, 2008 increasedJanuary 31, 2009 decreased goodwill by $2 million, resulting from the strengthening of the euroU.S. dollar in relation to the U.S. dollar.euro. During the third and fourth quartersquarter of 2007,2008, the Company performed reviewsrecorded impairment charges of its U.S. Athletic stores’ goodwill,$167 million, as a result of the SFAS No. 144 recoverability analysis. These analyses did not resultmore fully described in an impairment charge.note 4.

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  11.12. Other Intangible Assets, net

  																									January 31, 2009													February 2, 2008
  		February 2, 2008													February 3, 2007																				Wtd. Avg.
  									Net			Wtd. Avg.										Net										Net			Useful										Net
  		Gross			Accum.				Value			Useful Life			Gross			Accum.				Value			Gross			Accum.				Value			Life in			Gross			Accum.				Value
  (in millions)		value			amort.				(1)			in Years			value			amort.				(1)			value			amort.				(1)			Years (2)			value			amort.				(1)
  Finite life intangible assets
  Finite life intangible assets:
  Lease acquisition costs		$	198		$	(125	)		$	73		11.9			$	178		$	(98	)		$	80		$	173		$	(124	)		$	49		12.1			$	198		$	(125	)		$	73
  Trademark			21			(4	)			17		20.0				21			(3	)			18			20			(5	)			15		20.0				21			(4	)			17
  Loyalty program			1			(1	)			—		2.0				1			(1	)			—			1			(1	)			—		—				1			(1	)			—
  Favorable leases			10			(7	)			3		3.7				9			(5	)			4			9			(7	)			2		3.7				10			(7	)			3
  CCS customer relationships																										21			(1	)			20		5.0				—			—				—
  Total finite life intangible assets			230			(137	)			93		12.3				209			(107	)			102			224			(138	)			86		11.9				230			(137	)			93
  Intangible assets not subject to
  amortization			3			—				3						3			—				3
  Total intangible assets		$	233		$	(137	)		$	96					$	212		$	(107	)		$	105
  Intangible assets not subject to amortization:
  Republic of Ireland trademark																										2			—				2						3			—				3
  CCS tradename																										25			—				25						—			—				—
  Total finite life intangible assets																										27			—				27						3			—				3
  Total other intangible assets																									$	251		$	(138	)		$	113					$	233		$	(137	)		$	96

  ____________________
  
  

  (1)		Includes the effect of foreign currency translation, which represents a reduction of $8 million in 2008 and an increase of $10 million in 2007 $5 million in 2006 and $8 million in 2005 primarily related to the strengtheningmovements of the euro in relation to the U.S. dollar. Additionally, the net value at January 31, 2009 includes a $2 million impairment charge related to the Footaction trademark and the Republic of Ireland trademark, described more fully in note 4.
  (2)		The weighted-average useful life disclosed excludes those assets that are fully amortized.

       Intangible assets not subject to amortization at February 2, 2008 and February 3, 2007, include $3 million related to the trademark of the 11 stores acquired in the Republic of Ireland.

       Lease acquisition costs represent amounts that are required to secure prime lease locations and other lease rights, primarily in Europe. Included in finite life intangibles as a resultare the customer relationship intangible associated with the purchase of the Footaction and Republic of Ireland purchases, are theCCS, trademark for the Footaction name, amounts paid for leased locationsfavorable leases associated with rents below their fair value for both acquisitions and amounts paid to obtain names of members of the Footaction loyalty program. The CCS customer relationship intangible will be amortized on a straight-line basis over 5 years, which represents the pattern in which the economic benefits are expected to be realized.

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       Amortization expense for the intangibles subject to amortization was approximately $18 million for 2008, and $19 million for both 2007 and 2006, and $18 for 2005.2006. Annual estimated amortization expense for finite life intangible assets is expected to approximate $18$20 million for 2008,2009, $17 million for 2009,2010, $15 million for 2010,2011, $12 million for 20112012 and $9$8 million for 2012.2013.

  12.13. Other Assets

  		2007			2006			2008			2007
  		(in millions)						(in millions)
  Deferred tax costs		$	9		$	21		$	7		$	9
  Prepaid income taxes			6			—			6			6
  Income tax asset			2			—			2			2
  Investments and note receivable			—			7
  Northern Group note receivable, net of current portion			—			10
  Long-term investment in auction rate security									2			—
  Fair value of derivative contracts			4			—			19			4
  Pension benefits			—			8
  Other			37			37			30			37
  		$	58		$	83		$	66		$	58

  
  

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  13.14. Accrued and Other Liabilities

  		2007			2006
  		(in millions)
  Pension and postretirement benefits		$	4		$	4
  Incentive bonuses			5			12
  Other payroll and payroll related costs, excluding taxes			52			46
  Taxes other than income taxes			44			46
  Property and equipment			23			24
  Customer deposits(1)			34			33
  Income taxes payable			7			2
  Fair value of derivative contracts			—			2
  Current deferred tax liabilities			13			4
  Sales return reserve			4			4
  Current portion of repositioning and restructuring reserves			—			1
  Current portion of reserve for discontinued operations			14			3
  Other operating costs			68			65
  		$	268		$	246

  			2008			2007
  			(in millions)
  	Pension and postretirement benefits		$	4		$	4
  	Incentive bonuses			23			5
  	Other payroll and payroll related costs, excluding taxes			50			52
  	Taxes other than income taxes			36			44
  	Property and equipment			13			23
  	Customer deposits(1)			32			34
  	Income taxes payable			4			17
  	Current deferred tax liabilities			10			13
  	Sales return reserve			4			4
  	Current portion of reserve for discontinued operations			2			14
  	Other operating costs			53			68
  			$	231		$	278

  ____________________
  
  

  (1)

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

  14.15. Revolving Credit Facility

       On May 16, 2008, the Company entered into an amended credit agreement with its banks, providing for a $175 million revolving credit facility and extending the maturity date to May 16, 2011 (the “Credit Agreement”). The Credit Agreement also provides an incremental facility of up to $100 million under certain circumstances. The Credit Agreement provides that the Company comply with certain financial covenants, including (i) a fixed charge coverage ratio of 1.25:1 for the 2008 fiscal year, 1.50:1 for the 2009 fiscal year, and 1.75:1 for each year thereafter and (ii) a minimum liquidity/excess cash flow covenant, as defined in the Credit Agreement, which provides that if at the end of any fiscal quarter minimum liquidity is less than $350 million, the excess cash flow for the four consecutive fiscal quarters ended on such date must be at least $25 million. The amount permitted to be paid by the Company as dividends in any fiscal year is $105 million under the terms of the Credit Agreement. With regard to stock purchases, the Credit Agreement provides that not more than $50 million in the aggregate may be expended unless the fixed charge coverage ratio is at least 2.0:1 for the period of four consecutive fiscal quarters most recently ended prior to any stock repurchase. Additionally, the Credit Agreement provides for a security interest in certain of the Company’s intellectual property and certain other non-inventory assets.

  At February 2, 2008,January 31, 2009, the Company had unused domestic lines of credit of $189$166 million, pursuant to a $200its $175 million unsecured revolving credit agreement. $11$9 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. In October 2007, the Company amended its revolving credit agreement to provide for a one-year extension of the revolving credit facility to May 19, 2010 and a reduction in the fixed charge coverage ratio to no less than 1.25:1 for the fourth quarter of 2007 and the first quarter of 2008, increasing to 2.0:1 by the first quarter of 2010. The amendment also permits the payment of dividends by the Company of up to $90 million in 2008 and up to $100 million for each year thereafter. With regard to stock repurchases, the amendment provides that not more than $50 million in the aggregate may be expended after October 26, 2007 unless the fixed charge coverage ratio is at least 2.0:1 for the quarter immediately preceding any such repurchase and the Company has delivered its annual audited financial statements with respect to 2007.

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       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 2, 2008January 31, 2009 is approximately $1.4$2.6 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 0.8751.50 percent to LIBOR plus 1.6252.50 percent. The quarterly facility fees paid on the unused portion, during 2007 and 2006, which are also based onin the Company’s fixed charge coverage ratio, ranged from 0.1250 percent to 0.8750 and ranged from 0.175 percent to 0.500 percent.percent for 2008 and 2007 respectively. There were no short-term borrowings during 20072008 or 2006.

  2007. Interest expense, including facility fees, related to the revolving credit facility was $2 million in 2008, 2007, 2006, and 2005.

  15. Long-Term Debt and Obligations under Capital Leases2006.

       In May 2004,On March 20, 2009, the Company obtainedentered into a 5-year, $175new credit agreement with its banks, providing for a $200 million amortizing term loan from the bank group participating in its existing revolving credit facility maturing on March 20, 2013 (the “New Credit Agreement”), which replaces the existing Credit Agreement. The New Credit Agreement also provides an incremental facility of up to finance$100 million under certain circumstances. The New Credit Agreement provides for a portionsecurity interest in certain of the purchase priceCompany’s domestic assets, including certain inventory assets. However, no material covenants or payment restrictions exist until the Company is borrowing under the agreement and, in that event, the restrictions may vary depending upon the level of borrowings.

  47

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  16. Long-Term Debt

       During 2008, simultaneously with entering the Footaction stores. The interest rate on the LIBOR-based, floating-rate loan was 5.4 percent on February 2, 2008 and 6.5 percent on February 3, 2007. The loan requires minimum principal payments each May, equal to a percentage of the original principal amount of 10 percent in 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 2007, 2006 and 2005Credit Agreement, the Company repaid $2 million, $50 million, and $35 million, respectively, with the outstanding amount of $88 million duebalance that was outstanding on its term loan, which was scheduled to mature in May 2009.

       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 during 2006.     During 2007, the Company purchased and retired $5 million of its 8.50 percent debentures payable in 2022. During 2008, the Company purchased and retired an additional $5$6 million, bringing the outstanding amount to $129$123 million as of February 2, 2008.January 31, 2009. The Company has various interest rate swap agreements, which effectively 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 January 31, 2009 and February 2, 2008 was an asset of $19 million and $4 million, respectively, which was included in other assets, theassets. The carrying value of the 8.50 percent debentures was increased by the corresponding amount. 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.

       During 2007, the Company’s $14 million Industrial Revenue Bond, which was accounted for as a capital lease matured. Accordingly, the Company repaid this amount.amounts.

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

  		2007			2006
  		(in millions)
  8.50% debentures payable 2022		$	133		$	130
  $175 million term loan			88			90
  Total long-term debt			221			220
  Obligations under capital leases			—			14
  			221			234
  Less: Current portion			—			14
  		$	221		$	220

  			2008			2007
  			(in millions)
  	8.50% debentures payable 2022		$	142		$	133
  	$175 million term loan			—			88
  	Total long-term debt			142			221
  	Less: Current portion			—			—
  			$	142		$	221

  
  

       Maturities of long-term debt in future periods are:

  		Long-Term
  		Debt
  		(in millions)
  2008			$	—
  2009				88
  2010 -2012				—
  Thereafter				133
  Less: Current portion				—
  			$	221

  
  

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       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 $9 million in 2008, $18 million in 2007 and $20 million in both 2006 and 2005.2006. The effect of the interest rate swaps for the year ended January 31, 2009 was a benefit of $2 million and was not significant for the years ended February 2, 2008 and February 3, 2007. The effect of the interest rate swaps resulted in a combined reduction in interest expense of $1 million in 2005.

  16.17. 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, 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 insurance, maintenance, and other costs as required by some of the Company’s leases.

       Rent expense consists of the following:

  		2007				2006				2005
  		(in millions)
  Minimum rent		$	521			$	496			$	489
  Other occupancy expenses			151				145				141
  Contingent rent based on sales			17				21				13
  Sublease income			(1	)			(1	)			(1	)
  Total rent expense		$	688			$	661			$	642

  			2008				2007				2006
  			(in millions)
  	Minimum rent		$	527			$	521			$	496
  	Other occupancy expenses			147				151				145
  	Contingent rent based on sales			14				17				21
  	Sublease income			(2	)			(1	)			(1	)
  	Total rent expense		$	686			$	688			$	661

  
  

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

  		(in millions)
  2008			$	487
  2009				434
  2010				398
  2011				354
  2012				297
  Thereafter				823
  Total operating lease commitments			$	2,793

  			(in millions)
  	2009			$	456
  	2010				424
  	2011				381
  	2012				325
  	2013				262
  	Thereafter				719
  	Total operating lease commitments			$	2,567

  
  

  17. Other Liabilities

  		2007			2006
  		(in millions)
  Pension benefits		$	35		$	21
  Postretirement benefits			9			11
  Straight-line rent liability			99			91
  Income taxes			29			24
  Deferred taxes			15			21
  Workers’ compensation / general liability reserves			13			12
  Reserve for discontinued operations			9			12
  Repositioning and restructuring reserves			2			3
  Fair value of derivatives			32			12
  Unfavorable leases			2			2
  Other			10			9
  		$	255		$	218

  
  

  4648

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  18. Other Liabilities

  			2008			2007
  			(in millions)
  	Pension benefits		$	183		$	35
  	Postretirement benefits			11			9
  	Straight-line rent liability			98			99
  	Income taxes			30			29
  	Deferred taxes			12			10
  	Workers’ compensation and general liability reserves			13			13
  	Reserve for discontinued operations			10			9
  	Repositioning and restructuring reserves			1			2
  	Fair value of derivatives			24			32
  	Other			11			12
  			$	393		$	250

  
  

  19. Discontinued Operations

       On January 23, 2001,In 1997, the Company announced that it was exitingexited its 694-store Northern GroupDomestic General Merchandise segment. During the second quarter of 2001, the Company completed the liquidation of the 324 stores in the United States. On September 28, 2001, the Company completed the stock transfer of the 370 Northern Group stores in Canada, through one of its wholly owned subsidiaries for approximately CAD$59 million, which was paid in the form of a note. Over the last several years, the note has been amended and payments have been received, however the interest and payment terms remained unchanged. The note is required to be repaid upon the occurrence of “payment events,” as defined in the purchase agreement, but no later than September 28, 2008. As of February 2, 2008, CAD$15.5 million remains outstanding on the note. The fair value of the note at February 2, 2008 is $14 million which is classified as a current receivable. At February 3, 2007, $1 million was classified as a current receivable with the remainder classified as long-term within other assets in the accompanying Consolidated Balance 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.

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

       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 assignor of the Northern Canada leases, the Company remained secondarily liable under these leases. As of February 2, 2008, the Company estimates that its gross contingent lease liability is CAD$5 million (approximately US$5 million). The Company currently estimates the expected value of the lease liability to be insignificant. The Company believes that, because it is secondarily liable on the leases, it is unlikely that it would be required to make such contingent payments.

  In 1998, the Company exited both its International General Merchandise and Specialty Footwear segments. In 1997,2001, the Company exiteddiscontinued its Northern Group segment.

       During 2008, the Company adjusted its Northern Group reserve by $1 million and recorded a charge of $2 million related to the Domestic General Merchandise segment.reserve representing revisions to the lease liability. During 2007, the Company adjusted the International General Merchandise reserve by $3 million, reflecting favorable lease terminations and to revise estimates on its lease liability. During 2006, the Company adjusted its Northern Group and International General Merchandise reserve by $2$4 million, primarily reflecting favorable lease terminations. During 2005, the Company recorded a charge of $2 million to revise estimates on its lease liability for one store in the International General Merchandise segment.

       The major components of the pre-tax losses (gains) on disposal and disposition activity related to the reserves are presented below. The remaining reserve balances as of February 2, 2008January 31, 2009 primarily represent lease obligations; $14$2 million is expected to be utilized within twelve months and the remaining $9$10 million thereafter.

  	2004					2005															2006															2007															2005					2006															2007															2008
  						Charge/					Net										Charge/					Net										Charge/					Net															Charge/					Net										Charge/					Net										Charge/					Net
  	Balance					(Income)					Usage(1)					Balance					(Income)					Usage(1)					Balance					(Income)					Usage(1)					Balance					Balance					(Income)					Usage(1)					Balance					(Income)					Usage(1)					Balance					(Income)					Usage(1)					Balance
  		(in millions)																																																	(in millions)
  Northern Group		$	3				$	—				$	2				$	5				$	(2	)			$	(1	)			$	2				$	—				$	10				$	12				$	5				$	(2	)			$	(1	)			$	2				$	—				$	10				$	12				$	(1	)			$	(11	)			$	—
  International General Merchandise			5					2					1					8					(2	)				—					6					(3	)				1					4					8					(2	)				—					6					(3	)				1					4					—					(1	)				3
  Specialty Footwear			2					—					(1	)				1					—					—					1					—					(1	)				—					1					—					—					1					—					(1	)				—					—					—					—
  Domestic General Merchandise			8					—					—					8					—					(2	)				6					—					1					7					8					—					(2	)				6					—					1					7					2					—					9
  Total		$	18				$	2				$	2				$	22				$	(4	)			$	(3	)			$	15				$	(3	)			$	11				$	23				$	22				$	(4	)			$	(3	)			$	15				$	(3	)			$	11				$	23				$	1				$	(12	)			$	12

  ____________________
  

  (1)       Net usage includes effect of foreign exchange translation adjustments.

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  (1)

  Net usage includes the effect of foreign exchange translation adjustments.

  19.20. Repositioning and Restructuring Reserves

  1999 Restructuring

       The Company recorded restructuring charges in 1999 for programs to sell or liquidate eight non-core businesses. The restructuring plan also included an accelerated store-closing program in North America and Asia, corporate headcount reduction and a distribution center shutdown. The dispositions of Randy River Canada, Foot Locker Outlets, Colorado, Going to the Game!, Weekend Edition and the store-closing program were essentially completed in 2000. In 2001, the Company completed the sales of The San Francisco Music Box Company and the assets related to its Burger King and Popeye’s franchises. The termination of the Maumelle distribution center lease was completed in 2002. As of February 2, 2008 and February 3, 2007 the reserve balance is $1 million.

  1993 Repositioning and 1991 Restructuring

       The Company recorded charges in 1993 and in 1991 to reflect the anticipated costs to sell or close under-performing specialty and general merchandise stores in the United States and Canada. During 2007, the Company adjusted the reserve by $2 million primarily due to favorable lease terminations. AsThe Company recorded restructuring charges in 1999 for programs to sell or liquidate eight non-core businesses. The restructuring plan also included an accelerated store-closing program in North America and Asia, corporate headcount reduction, and a distribution center shutdown. For both reserves the balance was $1 million as of January 31, 2009 and $2 million as of February 2, 2008, and February 3, 2007, the reserve balance was $1 million and $3 million, respectively.classified as a non current liability.

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  20.21. Income Taxes

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

  	2007				2006			2005
  	(in millions)
  Domestic	$	(131	)		$	320		$	309
  International		81				72			96
  Total pre-tax (loss) income	$	(50	)		$	392		$	405
  The income tax (benefit) provision consists of the following:
  	2007				2006			2005
  	(in millions)
  Current:
  Federal	$	(4	)		$	93		$	72
  State and local		(4	)			14			11
  International		38				17			35
  Total current tax provision		30				124			118
  Deferred:
  Federal		(58	)			10			22
  State and local		—				6			7
  International		(71	)			5			(5	)
  Total deferred tax (benefit) provision		(129	)			21			24
  Total income tax (benefit) provision	$	(99	)		$	145		$	142

  			2008				2007				2006
  			(in millions)
  	Domestic		$	(174	)		$	(131	)		$	320
  	International			74				81				72
  	Total pre-tax (loss) income		$	(100	)		$	(50	)		$	392

       The 2007 income tax provision presented below has been restated to reflect an immaterial correction, see note 2.The income tax (benefit) provision consists of the following:

  			2008				2007				2006
  			(in millions)
  	Current:
  	Federal		$	2			$	(3	)		$	93
  	State and local			3				(4	)			14
  	International			18				43				17
  	Total current tax provision			23				36				124
  	Deferred:
  	Federal			(42	)			(52	)			10
  	State and local			(6	)			1				6
  	International			4				(78	)			5
  	Total deferred tax (benefit) provision			(44	)			(129	)			21
  	Total income tax (benefit) provision		$	(21	)		$	(93	)		$	145

  
  

       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 $511 million and $476 million at January 31, 2009, and $427 million at February 2, 2008, and February 3, 2007, respectively.

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

  	2007			2006			2005
  Federal statutory income tax rate	(35.0	)%		35.0	%		35.0	%
  State and local income taxes, net of federal tax benefit	(13.8	)		3.3			2.8
  International income taxed at varying rates	8.3			(0.9	)		0.8
  Foreign tax credit utilization	(53.1	)		(1.2	)		(3.1	)
  (Decrease) increase in valuation allowance	(125.7	)		0.1			(1.5	)
  Federal/foreign tax settlements	—			(0.1	)		0.4
  Tax exempt obligations	(3.7	)		(0.5	)		(0.4	)
  Federal tax credits	(1.6	)		(0.2	)		(0.2	)
  Foreign dividends and gross-up	25.4			—			—
  Other, net	1.2			1.4			1.2
  Effective income tax rate	(198.0	)%		36.9	%		35.0	%

  			2008			2007			2006
  	Federal statutory income tax rate		(35.0	)%		(35.0	)%		35.0	%
  	State and local income taxes, net of federal tax benefit		(6.6	)		(11.0	)		3.3
  	International income taxed at varying rates		(1.7	)		7.5			(0.9	)
  	Foreign tax credit utilization		(5.3	)		(53.1	)		(1.2	)
  	(Decrease) increase in valuation allowance		0.2			(120.0	)		0.1
  	Federal/foreign tax settlements		(2.2	)		—			(0.1	)
  	Tax exempt obligations		—			(3.7	)		(0.5	)
  	Federal tax credits		(1.2	)		(1.6	)		(0.2	)
  	Foreign dividends and gross-up		—			25.4			—
  	Non-deductible impairment charges		26.9			—			—
  	Other, net		4.1			4.5			1.4
  	Effective income tax rate		(20.8	)%		(187.0	)%		36.9	%

  
  

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

  	2007				2006
  	(in millions)
  Deferred tax assets:
  Tax loss/credit carryforwards	$	68			$	56
  Employee benefits		33				26
  Reserve for discontinued operations		5				6
  Repositioning and restructuring reserves		1				2
  Property and equipment		165				116
  Allowance for returns and doubtful accounts		3				4
  Straight-line rent		25				24
  Other		17				21
  Total deferred tax assets		317				255
  Valuation allowance		(14	)			(105	)
  Total deferred tax assets, net	$	303			$	150
  Deferred tax liabilities:
  Inventories	$	19			$	24
  Goodwill		11				13
  Other		5				8
  Total deferred tax liabilities	$	35			$	45
  Net deferred tax asset	$	268			$	105
  Balance Sheet caption reported in:
  Deferred taxes	$	243			$	109
  Other current assets		53				21
  Other current liabilities		(13	)			(4	)
  Other liabilities		(15	)			(21	)
  	$	268			$	105

  			2008				2007
  			(in millions)
  	Deferred tax assets:
  	Tax loss/credit carryforwards and capital loss		$	37			$	64
  	Employee benefits			102				33
  	Reserve for discontinued operations			5				5
  	Repositioning and restructuring reserves			1				1
  	Property and equipment			184				167
  	Allowance for returns and doubtful accounts			1				3
  	Straight-line rent			25				24
  	Goodwill			25				—
  	Other			28				16
  	Total deferred tax assets			408				313
  	Valuation allowance			(13	)			(14	)
  	Total deferred tax assets, net		$	395			$	299
  	Deferred tax liabilities:
  	Inventories		$	22			$	13
  	Goodwill			—				13
  	Other			8				4
  	Total deferred tax liabilities		$	30			$	30
  	Net deferred tax asset		$	365			$	269
  	Balance Sheet caption reported in:
  	Deferred taxes		$	358			$	239
  	Other current assets			29				53
  	Other current liabilities			(10	)			(13	)
  	Other liabilities			(12	)			(10	)
  			$	365			$	269

  
  

       The Company operates in multiple taxing jurisdictions and is subject to audit. Audits can involve complex issues andthat 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.

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       The Company’s U.S. Federal income tax filings have been examined by the Internal Revenue Service (the “IRS”) through 2006.2007. The Company is participating in the IRS’s Compliance Assurance Process (“CAP”) for 2007,2008, which is expected to conclude during 2008.2009. The Company has started the CAP for 2008.2009. Due to the recent utilization of net operating loss carryforwards, the Company is subject to state and local tax examinations effectively including years from 19931996 to the present. The Company is currently under examination in the Netherlands for tax years 2002-2005. To date, no adjustments have been proposed in any audits that will have a material effect on the Company’s financial position or results of operations.

       As of February 2, 2008,January 31, 2009, the Company has a valuation allowance of $14$13 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 a capital loss associated with the impairment of the Northern Group note receivable, state tax loss carryforwards, and state tax credits. A full valuation allowance was established for the capital loss because the Company does not anticipate recognizing sufficient capital gains to utilize this loss. The valuation allowance for state tax loss carryforwards increased,decreased, principally due to changes in taxable income projections offset by anticipated expirations of those losses. Valuation allowances for Canadian tax loss carryforwards and tax depreciation totaling $79 million were released as a result of the simplification of the structure of our Canadian operations offset by $3 million relating to Canadian rate changes. As a consequence of this simplification, we were also required to write-off $11 million of deferred costs related to the former Canadian structure.

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       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 February 2, 2008.January 31, 2009. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.

       At February 2, 2008,January 31, 2009, the Company’s tax loss/credit carryforwards include international operating loss carryforwards with a potential tax benefit of $12 million. Those$2 million, expiring between 20082009 and 2017 total $92017. The Company has a $5 million and thosecapital loss arising from a note receivable that do not expire total $3 million.expires 5 years from recognition. The Company also has state net operating loss carryforwards with a potential tax benefit of $21$15 million, which principally relate to the 1615 states where the Company does not file combined or consolidated returns. These loss carryforwards expire between 20082009 and 2028.2029. The Company has state and Canadian provincial credit carryforwards ofthat total approximately $2$3 million, that expireexpiring between 2010 and 2013.2018. The Company also has:has federal foreign tax credits totaling $28$16 million, $4 million of which can be carried back to 2006 and $24$12 million of which can be carried forward, for 10 years, expiring in 2018; a federal net operating loss of $4 million, all of which can be carried back to 2006; and general business credits of $1 million, which also can be carried back to 2006.2017.

       The Company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes” effective February 4, 2007, that resulted in the recognition of an additional $1 million of previously unrecognized tax benefits, which was reflected as an adjustment to opening retained earnings. The Company had $33$71 million of gross unrecognized tax benefits, $30$68 million of net unrecognized tax benefits, as of February 4, 2007.3, 2008. The Company has classified certain income tax liabilities as current or noncurrent based on management’s estimate of when these liabilities will be settled. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. During the year ended February 2, 2008,January 31, 2009, the Company recognized $1 million of interest expense. The total amount of accrued interest and penalties was $5 million and $4 million ofin 2008 and accrued interest and no penalties in 2007 and 2006, respectively.was $5 million.

       The following table summarizes the activity related to unrecognized tax benefits:

  	( in millions)
  	Balance as of February 4, 2007		$	33
  	Increases related to current year tax positions			4
  	Increases related to prior period tax positions			35
  	Decreases related to prior period tax positions			—
  	Settlements			—
  	Lapse of statute of limitations			(1	)
  	Balance as of February 2, 2008		$	71

  	(in millions)
  	Balance as of February 3, 2008		$	71
  	Increases related to current year tax positions			4
  	Increases related to prior period tax positions			1
  	Decreases related to prior period tax positions			(15	)
  	Settlements			(2	)
  	Lapse of statute of limitations			(1	)
  	Balance as of January 31, 2009		$	58

  
  

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       Of the unrecognized tax benefits, $68$55 million would, if recognized, affect the Company’s annual effective tax rate. It is reasonably possible that the liability associated with the Company’s unrecognized tax benefits will increase or decrease within the next twelve months. These changes may be the result of foreign currency fluctuations, ongoing audits or the expiration of statutes of limitations. Settlements could increase earnings in an amount ranging from $0 to $10 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although management believes that adequate provision has been made for such issues, the ultimate resolution of suchthese issues could have an adverse effect on the earnings of the Company. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, generating a positive effect on earnings. Due to the uncertainty of amounts and in accordance with its accounting policies, the Company has not recorded any potential impact of these settlements.

  21.22. 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 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

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  transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings immediately. No such gains or losses were recognized in earnings during 2007.2008. 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, which management evaluates periodically.

       The primary currencies to which the Company is exposed are the euro, the British Pound, and the Canadian Dollar. 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. The amount classified to cost of sales related to such contracts was not significant in 2007.2008. The ineffective portion of gains and losses related to cash flow hedges recorded to earnings in 20072008 was not significant. When using a forward contract as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. At each year-end, the Company had not hedged forecasted transactions for 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 third quarter of 2008, the Company entered into an offset to its European net investment hedge, fixing the amount recorded within the foreign currency translation adjustment at $24 million, or $15 million after-tax. During the term of thisthe amended 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.rates. 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 termfourth quarter of this transaction,2008, the Company will remit toterminated this hedge 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.received approximately $3 million.

       The Company hashad designated these hedging instruments as hedges of the net investments in foreign subsidiaries, and will useused 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 bewere 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 decreased shareholders’ equity

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  by $15 million, $20 million and $5 million net of tax at January 31, 2009, February 2, 2008 and February 3, 2007. At January 28, 2006, the amount recorded to foreign currency translation was not significant.2007, respectively. The effect on the Consolidated Statements of Operations related to the net investments hedges was income$3 million of expense for 2008, $1 million of income for 2007, and $3 million of income for 2006.

  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. Changes in the fair value of these foreign currency option contracts, which are designated as non-hedges, are recorded in earnings immediately. The realized gains, premiums paid and changes in the fair market value recorded in the Consolidated StatementStatements of Operations werewas $4 million of income for the year ended January 31, 2009 and was not significant for the years ended February 2, 2008 and February 3, 2007, respectively.2007.

       The Company also enters into forward foreign exchange contracts to hedge foreign-currency denominated merchandise purchases and intercompany transactions. Net changes in the fair value of foreign exchange derivative financial instruments designated as non-hedges were substantially offset by the changes in value of the underlying transactions, which were recorded in selling, general and administrative expenses. The amount recorded during 2006for all the periods presented was not significant.

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       During 2008, the Company entered into a series of monthly diesel fuel forward contracts to mitigate a portion of the Company’s freight expense due to the variability caused by fuel surcharges imposed by our third-party freight carriers. The notional value of the contracts outstanding as of January 31, 2009 was $2 million and these contracts extend through November 2009. Changes in the fair value of these contracts are recorded in earnings immediately. The effect was not significant for the year ended January 31, 2009.

  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 February 2, 2008.January 31, 2009.

  	Fair Value				Contract Value				Weighted-Average			Fair Value					Contract Value					Weighted-Average
  	(US in millions)				(US in millions)				Exchange Rate			(U.S. in millions)					(U.S. in millions)					Exchange Rate
  Inventory
  Buy €/Sell British £	$	2			$	48				.7239			$	3				$	33				0.8296
  Earnings
  Buy CAD$/Sell $US	$	—			$	7				1.0000
  Buy €/Sell $US		—				34				1.4200
  Buy US/Sell €														—					9				0.7424
  Intercompany
  Buy US/Sell €	$	—			$	—				.6808			$	—				$	4				0.7092
  Buy €/ Sell British £		1				16				.6918
  Buy €/Sell British £														1					17				0.8311
  Buy €/Sell SEK		—				1				9.4712				—					1				10.6350
  Buy AUD/Sell NZD		—				2				.8883
  Buy US/Sell CAD$		—				6				.9861				—					4				1.2161
  Buy CAD$/Sell US		—				6				.9971

  
  

  Interest Rate Risk Management

       The Company has employed various interest rate swaps to minimize its exposure to interest rate fluctuations. These swaps which mature in 2022, have been designated as a fair value hedge of the changes in fair value of $100 million of the Company’s 8.50 percent debentures payable in 2022 attributable to changes in interest rates and effectively convertconverted the interest rate on the debentures from 8.50 percent to a 1-month variable rate of LIBOR plus 3.45 percent. On March 20, 2009, the Company terminated its interest rate swaps for a gain of approximately $20 million. This gain will be amortized as part of interest expense over the remaining term of the debt using the effective-yield method.

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

  	2007				2006				2005
  	(in millions)
  Interest Rate Swaps:
  Fixed to Variable ($US) — notional amount	$	100			$	100			$	100
  Average pay rate		6.22	%			8.53	%			8.00	%
  Average receive rate		8.50	%			8.50	%			8.50	%
  Variable to variable ($US) — notional amount	$	100			$	100			$	100
  Average pay rate		3.39	%			5.57	%			4.82	%
  Average receive rate		3.02	%			5.32	%			4.79	%

  
  

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  Fair Value

       The following represents the fair valuederivatives outstanding as of each of the Company’s derivative holdings:respective years:

  	2007			2006
  	(in millions)
  Current assets	$	3		$	1
  Non-current assets		4			—
  Current liabilities		—			2
  Non-current liabilities		32			12

  	2008				2007				2006
  	(in millions)
  Interest Rate Swaps:
  Fixed to Variable ($US) — notional amount	$	100			$	100			$	100
  Average pay rate		4.87	%			6.22	%			8.53	%
  Average receive rate		8.50	%			8.50	%			8.50	%
  Variable to variable ($US) — notional amount	$	100			$	100			$	100
  Average pay rate		0.67	%			3.39	%			5.57	%
  Average receive rate		1.66	%			3.02	%			5.32	%

  
  

  Interest Rates

       The Company’s major exposure to marketinterest rate risk isrelates to changes in short-term investment interest rates, primarilyboth in the United States.

  States and Europe. The table below presents the fair value of principal cash flows and related weighted-average interest rates by maturity dates, including the effect of the interest rate swaps outstanding at February 2, 2008, of the Company’s long-term debt obligations.8.50 percent debentures are payable in 2022.

  																				Feb. 2,			Feb. 3
  																				2008			2007
  	2008				2009			2010			2011			2012			Thereafter			Total			Total
  	($ in millions)
  Long-term debt	$	—			88			—			—			—			128			$	216		$	222
  Weighted-average interest rate		6.8	%		6.8	%		7.0	%		7.0	%		7.0	%		7.0	%

  
  

  Fair Value of Financial Instruments

       The carrying value and estimated fair value of long-term debt was $142 million and $120 million, respectively, at January 31, 2009 and $221 million and $216 million, respectively, at February 2, 2008 and $220 million and $222 million, respectively, at February 3, 2007. The carrying value and estimated fair value of long-term investments and notes receivable was $14 million, respectively, at February 2, 2008 and $18 million and $19 million, respectively, at February 3, 2007.2008. The carrying value and estimated fair value of the short-term investmentNorthern Group note was $14 million and $15 million, respectively, at February 3, 2007.2, 2008. The Northern Group note was fully impaired during 2008. The carrying values of cash and cash equivalents, other short-term investments and other current receivables and payables approximate their fair value.

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  Business Risk

       The retailing business is highly competitive. Price, quality, selection of merchandise, reputation, store location, advertising and customer service are important competitive factors in the Company’s business. The Company operates in 21 countries and purchased approximately 7780 percent of its merchandise in 20072008 from its top 5 vendors. In 2007,2008, the Company purchased approximately 5664 percent of its athletic merchandise from one major vendor and approximately 129 percent from another major vendor. Each of our operating divisions is highly dependent on Nike; they individually purchase 4344 to 7478 percent of their merchandise from Nike. The Company generally considers all vendor relations to be satisfactory.

       Included in the Company’s Consolidated Balance Sheet as of February 2, 2008,January 31, 2009, are the net assets of the Company’s European operations, totaling $573which total $545 million and which are located in 17 countries, 11 of which have adopted the euro as their functional currency.

  22.23. Fair Value Measurements

       On February 3, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No.157”). SFAS No. 157 provides a single definition of fair value and a common framework for measuring fair value as well as new disclosure requirements for fair value measurements used in financial statements. Under SFAS No. 157, fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. SFAS No. 157 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.

       In February 2008, the FASB issued FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”). FSP FAS 157-1 amended SFAS No. 157 to exclude from its scope SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions. Also in February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 amended SFAS No. 157 to defer the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually until fiscal years beginning after November 15, 2008. The Company is currently assessing the impact of SFAS No. 157 on its non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis.

  In accordance with SFAS No. 157, fair value measurements are classified under the following hierarchy:

  Level 1 – Quoted prices for identical instruments in active markets.

  Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

  Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

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       The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis as of January 31, 2009:

  	(in millions)		Level 1					Level 2				��	Level 3
  	Assets
  	Cash equivalents			$	307				$	—				$	—
  	Short-term investment				—					—					23
  	Auction rate security				—					2					—
  	Forward foreign exchange contracts				—					5					—
  	Interest rate swaps				—					19					—
  	Total Assets			$	307				$	26				$	23
  	Liabilities
  	Forward foreign exchange contracts			$	—				$	1				$	—
  	European net investment hedge				—					24					—
  	Total Liabilities			$	—				$	25				$	—

  
  

       As of January 31, 2009, the Company had $385 million of cash and cash equivalents. Cash equivalents, excluding amounts due from third-party credit card processors, total $307 million and their carrying values approximates their fair value due to their short-term nature. At January 31, 2009, the Company’s auction rate security was classified as available-for-sale, and accordingly is reported at fair value. The fair value of the security is determined by review of the underlying security at each reporting period. The Company’s derivative financial instruments are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility.

       The following table is a reconciliation of financial assets and liabilities measured at fair value on a recurring basis classified as Level 3, for the year ended January 31, 2009:

  	(in millions)		Level 3
  	Balance at February 3, 2008			$	15
  	Total balance of Reserve International Liquidity Fund reclassified
  	from Level 1 to Level 3, net of redemptions received				26
  	Total impairment charges included in the statements of operations				(18	)
  	Balance at January 31, 2009			$	23

  
  

       The Company has determined that its note receivable from the Northern Group should be classified within Level 3 of the fair value hierarchy. During the first quarter of 2008, the Company determined that the value of the Northern Group note receivable was impaired; accordingly, a charge of $15 million was recorded reducing the fair value to zero. This assessment was based upon management’s review of Northern Group’s financial condition.

       Additionally, the Company’s Level 3 assets include an investment in a money market fund, which is classified in short-term investments. The Company assessed the fair value of its investment in the Reserve International Liquidity Fund, Ltd. (the “Fund”) and their underlying securities. Based on this assessment, the Company recorded an impairment charge of $3 million, incorporating the valuation at zero for debt securities of Lehman Brothers. The Company has reclassified its investment in shares of the Fund from Level 1 to Level 3 of the fair value hierarchy due to the inherent subjectivity and significant judgment related to the fair value of the shares of the Fund and their underlying securities. Changes in market conditions and the method and timing of the liquidation process of the Fund could result in further adjustments to the fair value and classifications of this investment.

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  24. 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.

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       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 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 accumulated comprehensive 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 Sheets, measured at January 31, 2009 and February 2, 2008 and February 3, 2007:2008:

  									Postretirement															Postretirement
  	Pension Benefits								Benefits							Pension Benefits								Benefits
  	2007				2006				2007				2006			2008				2007				2008				2007
  	(in millions)															(in millions)
  Change in benefit obligation
  Benefit obligation at beginning of year	$	662			$	689			$	13			$	17		$	649			$	662			$	10			$	13
  Service cost		10				10				—				—			10				10				—				—
  Interest cost		36				36				—				1			36				36				1				—
  Plan participants’ contributions		—				—				4				5			—				—				4				4
  Actuarial gain		(13	)			(12	)			(2	)			(3	)		(15	)			(13	)			(2	)			(2	)
  Foreign currency translation adjustments		15				(2	)			—				—			(18	)			15				—				—
  Plan amendment		—				1				—				—			—				—				3				—
  Benefits paid		(61	)			(60	)			(5	)			(7	)		(58	)			(61	)			(4	)			(5	)
  Benefit obligation at end of year	$	649			$	662			$	10			$	13		$	604			$	649			$	12			$	10
  Change in plan assets
  Fair value of plan assets at beginning of year	$	647			$	579										$	611			$	647
  Actual return on plan assets		11				60											(127	)			9
  Employer contribution		—				70											8				2
  Foreign currency translation adjustments		14				(2	)										(16	)			14
  Benefits paid		(61	)			(60	)										(58	)			(61	)
  Fair value of plan assets at end of year	$	611			$	647										$	418			$	611
  Funded status	$	(38	)		$	(15	)		$	(10	)		$	(13	)	$	(186	)		$	(38	)		$	(12	)		$	(10	)
  Balance Sheet caption reported in:
  Other assets		$ —			$	8			$	—			$	—
  Accrued and other liabilities		(3	)			(2	)			(1	)			(2	)		(3	)			(3	)			(1	)			(1	)
  Other liabilities		(35	)			(21	)			(9	)			(11	)		(183	)			(35	)			(11	)			(9	)
  	$	(38	)		$	(15	)		$	(10	)		$	(13	)	$	(186	)		$	(38	)		$	(12	)		$	(10	)

  
  

       At January 31, 2009 and February 2, 2008, the aggregate amount of accumulated benefit obligations, which exceed plan assets, totaled $603 million and $648 million, respectively, representing both the qualified and non qualified pension plans. At February 3, 2007, the accumulated benefit obligations which exceed plan assets totaled $23 million representing the Company’s non qualified pension plans. The Company’s qualified pension plans were fully funded as of February 3, 2007.

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       The following tables set forth the changes in accumulated other comprehensive loss (pre-tax) at February 2, 2008:January 31, 2009:

  		Pension					Postretirement
  		Benefits					Benefits
  		(in millions)
  	Net actuarial loss (gain) at beginning of year		$	274				$	(53	)
  	Amortization of net (loss) gain			(11	)				8
  	Loss (gain) arising during the year			35					(2	)
  	Translation loss			7	��				—
  	Net actuarial loss (gain) at end of year		$	305				$	(47	)
  	Net prior service cost (benefit) at beginning of year		$	4				$	(7	)
  	Amortization of prior service (cost) benefit			(1	)				1
  	Net prior service cost (benefit) at end of year		$	3				$	(6	)
  	Total amount recognized		$	308				$	(53	)

  
  

  		Pension				Postretirement
  		Benefits				Benefits
  		(in millions)
  	Net actuarial loss (gain) at beginning of year	$	305				$	(47	)
  	Amortization of net (loss) gain		(11	)				8
  	Loss (gain) arising during the year		164					(2	)
  	Translation loss		(10	)				—
  	Net actuarial loss (gain) at end of year	$	448				$	(41	)
  	Net prior service cost (benefit) at beginning of year	$	3				$	(6	)
  	Amortization of prior service (cost) benefit		(1	)				3
  	Net prior service cost (benefit) at end of year	$	2				$	(3	)
  	Total amount recognized	$	450				$	(44	)

       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:

  					Postretirement
  	Pension				Benefits					Total
  	(in millions)
  Amortization of prior service cost (benefit)	$	1				$	(1	)		$	—
  Amortization of net loss (gain)	$	12				$	(7	)		$	5

  
  

       The following represents the change to the Consolidated Balance Sheet as of February 3, 2007 as a result of the adoption of SFAS No. 158:

  	Prior to
  	AML and								Effect of				Post AML and
  	Statement								Adoption				Statement
  	No. 158				AML				Statement				No. 158
  	Adjustments				Adjustment				No. 158				Adjustments
  	(in millions)
  Current assets	$	2,034			$	—			$	—			$	2,034
  Deferred taxes		144				(120	)			85				109
  Intangible assets		106				(1	)			—				105
  Other assets		75				—				8				83
  Total assets		3,277				(121	)			93				3,249
  Accrued liabilities		246				—				—				246
  Total current liabilities		516				—				—				516
  Other liabilities		300				(308	)			226				218
  Other comprehensive loss		(150	)			187				(133	)			(96	)
  Total shareholders’ equity		2,323				(121	)			93				2,295
  Total liabilities and shareholders’ equity	$	3,277			$	(121	)		$	93			$	3,249

  								Postretirement
  			Pension					Benefits					Total
  			(in millions)
  	Amortization of prior service cost (benefit)			$	1				$	—			$	1
  	Amortization of net loss (gain)			$	13				$	(7	)		$	6

  
  

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

  							Postretirement
  	Pension Benefits						Benefits
  	2007			2006			2007			2006
  Discount rate	5.84	%		5.68	%		6.10	%		5.80	%
  Rate of compensation increase	3.72	%		3.76	%

  						Postretirement
  		Pension Benefits				Benefits
  		2008		2007		2008		2007
  	Discount rate	6.22%		5.84%		6.20%		6.10%
  	Rate of compensation increase	3.72%		3.72%

  
  

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       The components of net benefit expense (income) are:

  	Pension Benefits												Postretirement Benefits
  	2007				2006				2005				2007				2006				2005
  										(in millions)
  Service cost	$	10			$	10			$	9			$	—			$	—			$	—
  Interest cost		36				36				36				—				1				1
  Expected return on plan assets		(56	)			(56	)			(49	)			—				—				—
  Amortization of prior service cost (benefit)		1				1				1				(1	)			(1	)			(1	)
  Amortization of net loss (gain)		11				12				13				(8	)			(10	)			(12	)
  Net benefit expense (income)	$	2			$	3			$	10			$	(9	)		$	(10	)		$	(12	)

  		Pension Benefits												Postretirement Benefits
  		2008				2007				2006				2008		2007				2006
  		(in millions)
  	Service cost	$	10			$	10			$	10			$		$	—			$	—
  	Interest cost		36				36				36						—				1
  	Expected return on plan assets		(53	)			(56	)			(56	)					—				—
  	Amortization of prior service cost (benefit)		1				1				1						(1	)			(1	)
  	Amortization of net loss (gain)		11				11				12						(8	)			(10	)
  	Net benefit expense (income)	$	5			$	2			$	3			$		$	(9	)		$	(10	)

  
  

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

  	Pension Benefits									Postretirement Benefits
  	2007			2006			2005			2007			2006			2005
  Discount rate	5.66	%		5.44	%		5.50	%		5.80	%		5.50	%		5.50	%
  Rate of compensation increase	3.75	%		3.76	%		3.77	%
  Expected long-term rate of return on assets	8.85	%		8.87	%		8.88	%

  		Pension Benefits						Postretirement Benefits
  		2008		2007		2006		2008		2007		2006
  	Discount rate	5.88%		5.66%		5.44%		6.10%		5.80%		5.50%
  	Rate of compensation increase	3.72%		3.75%		3.76%
  	Expected long-term rate of return on assets	8.17%		8.85%		8.87%

  
  

       Beginning with 2001, new retirees were charged the expected full cost of the medical plan and existingthen-existing retirees will incur 100 percent of the expected future increaseincreases in medical plan costs. Any changes in the health care cost trend rates assumed would not affect the accumulated benefit obligation or net benefit income, since retirees will incur 100 percent of such expected future increases.

       In August 2006, the Pension Protection Act of 2006 was signed into law. The major provisions of the statute have taken 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 of 2006 will have on funding requirements. The effect on net periodic benefit cost is not expected to be significant.58

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       The Company’s pension plan weighted-average asset allocations at January 31, 2009 and February 2, 2008 and February 3, 2007 by asset category are as follows:

  	2007			2006
  Asset Category
  Equity securities	55	%		64	%
  Foot Locker, Inc. common stock	1	%		1	%
  Debt securities	42	%		33	%
  Real estate	1	%		1	%
  Other	1	%		1	%
  Total	100	%		100	%

  		2008			2007
  	Asset Category
  	Equity securities	46	%		55	%
  	Foot Locker, Inc. common stock	1	%		1	%
  	Debt securities	51	%		42	%
  	Real estate	2	%		1	%
  	Other	—	%		1	%
  	Total	100	%		100	%

  
  

       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.

       The U.S. defined benefit plan held 396,000 shares of Foot Locker, Inc. common stock as of January 31, 2009 and February 2, 2008 and February 3, 2007.2008. Currently, the target composition of the U.S. plan assets is 65 percent equity and 35 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 plan. Due to market conditions and other factors, actual asset allocations may vary from the target allocation outlined above. 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 effect that the return of any single investment may have on the entire portfolio. The Company has contributed $8 million to its U.S. plan in February 2009. Due to the pension plan asset performance experienced for the year ended January 31, 2009, the Company may make additional contributions during 2009 to its U.S. qualified pension plan. The Company is in the process of evaluating the amount and timing of the contribution. The contribution amount will depend on the plan asset performance for the balance of the year and any statutory or regulatory changes that may occur.

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       In late January 2008, the Company modified the actual asset allocations for its Canadian pension plan. Effective with the beginning of 2008, the target allocation for the Canadian plan is 95 percent debt securities and 5 percent equity. The bond portfolio is comprised of government and corporate bonds chosen to match the pension plan’s benefit payment obligations. This change will reduce future volatility with regard to the funded status of the plan. This change will, however, result in higher pension expense due to the lower long-term rate of return associated with debt securities. In 2008, the Company is required to make a contribution of approximatelycontributed $6 million to its Canadian qualified pension plan. The amount contributed to the Canadian plan in February 2009 was approximately $3 million.

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

  		Pension				Postretirement
  		Benefits				Benefits
  		(in millions)
  2008		$	64			$ 2
  2009			64			2
  2010			60			2
  2011			58			1
  2012			57			1
  2013–2017			255			4

  			Pension			Postretirement
  			Benefits			Benefits
  			(in millions)
  	2009		$	64		$	1
  	2010			60			2
  	2011			58			1
  	2012			57			1
  	2013			55			1
  	2014–2018			251			4

  
  

       In February 2007, 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 New York. The Complaint alleged that the 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 is defending the action vigorously.

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  Savings Plans

       The Company has two qualified savings plans, a 401(k) Plan that is available to employees whose primary place of employment is the U.S., and an 1165 (e) Plan, which began during 2004 that is available to employees whose primary place of employment is in Puerto Rico. Both plans require that the employees have attained at least the age of twenty-one and have completed one year of service consisting of at least 1,000 hours. The savings plans allow eligible employees to contribute up to 2540 percent and 10 percent,$9,000 as of January 1, 2009, for the U.S. and Puerto Rico plans, respectively, of their compensation on a pre-tax basis. The Company matches 25 percent of the first 4 percent of the employees’ contributions with Company stock and such matching Company contributions are vested incrementally over 5 years for both plans. The charge to operations for the Company’s matching contribution was $2.2 million, $1.8 million, and $1.9 million in 2008, 2007, and $1.6 million in 2007, 2006, and 2005, respectively.

  23.25. Share-Based Compensation

  Stock Options

       On May 30, 2007, the Company’s shareholders approved the Company’s 2007 Stock Incentive Plan (the “2007 Stock Plan”). Upon approval of the 2007 Stock Plan, the Company stated it would no longer make stock awards under the 2003 Stock Option and Award Plan (the “2003 Stock Option Plan”), the 1998 Stock Option and Award Plan (the “1998 Plan”), and the 2002 Foot Locker Directors’ Stock Plan (the “2002 Directors’ Plan”), although awards previously made under those plans and outstanding on May 30, 2007 continue in effect governed by the provisions of those plans.

       Under the 2007 Stock Plan, stock options, restricted stock, stock appreciation rights (SARs), or other stock-based awards may be granted to officers and other employees of the Company, including our subsidiaries and operating divisions worldwide. Nonemployee directors are also eligible to receive awards under this plan. Options for employees become exercisable in substantially equal annual installments over a three-year period, beginning with the first anniversary of the date of grant of the option, unless a shorter or longer duration is established at the time of the option grant. Options for nonemployee directors become exercisable one year from the date of grant. The maximum number of shares of stock reserved for all awards under the 2007 Stock Plan is 6,000,000. The number of shares reserved for issuance as restricted stock and other stock-based awards cannot exceed 1,500,000 shares. The options terminate up to ten years from the date of grant.

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       Under the Company’s 2003 Stock Option Plan and the 1998 Plan, options to purchase shares of common stock were granted to officers and other employees at not less than the market price on the date of grant. Under these plans, the Company was authorized to grant to officers and other employees, including those at the subsidiary level, stock options, SARs, restricted stock or other stock-based awards. 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.

       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. 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.

       In addition, options to purchase shares of common stock remain outstanding under the Company’s 1995 Stock Option and Award Plan (the “1995 Plan”). The 1995 Plan is substantially the same as the 1998 Plan. As of March 8, 2005 no further awards may be made under the 1995 Plan.

  Employee Stock Purchase Plan

       Under the Company’s 2003 Employees Stock Purchase Plan (the “2003 Employee Stock Purchase Plan”), participating employees are able to contribute up to 10 percent of their annual compensation through payroll deductions to acquire shares of the Company’s 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 3,000,000 shares of common stock authorized for purchase under this plan, 587 participating employees purchased 96,800 shares in 2008, and 723 participating employees purchased 98,449 shares in 2007, and 806 participating employees purchased 105,123 shares in 2006.2007. To date, a total of 440,925537,725 shares have been purchased under this plan.

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  Valuation Model and Assumptions

       The Company uses a Black-Scholes option-pricing model to estimate the fair value of share-based awards under 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.

       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 based on the length of each purchase period as measured at the beginning of the offering period, which is one year. 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. The Company believes that the combination of historical volatility and implied volatility provides a better estimate of future stock price volatility. 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.

  Additionally, SFAS No. 123(R) requires the Company to estimate pre-vesting option forfeitures at the time of 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,

       Compensation expense related to the Company accountedCompany’s stock option and stock purchase plans was $3.6 million, $4.5 million and $6.3 million for forfeitures as they occurred under the pro forma disclosure provisions of SFAS No. 123 for periods prior to 2006.

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  2008, 2007, and 2006, respectively. The following table shows the Company’s assumptions used to compute the stock-based compensation expense and pro forma information:expense:

  		Stock Option Plans									Stock Purchase Plan
  		2007			2006			2005			2007			2006			2005
  Weighted-average risk free rate
  of interest		4.43	%		4.68	%		3.99	%		5.00	%		4.39	%		4.19	%
  Expected volatility		28	%		30	%		28	%		22	%		22	%		25	%
  Weighted-average expected
  award life		4.2 years			4.0 years			3.8 years			1.0 year			1.0 years			.7 years
  Dividend yield		2.3	%		1.5	%		1.1	%		2.0	%		1.4	%		—
  Weighted-average fair value		$5.28			$6.36			$6.69			$4.96			$4.71			$5.54

  			Stock Option Plans									Stock Purchase Plan
  			2008			2007			2006			2008			2007			2006
  	Weighted-average risk free rate
  	of interest		2.43	%		4.43	%		4.68	%		4.16	%		5.00	%		4.39	%
  	Expected volatility		37	%		28	%		30	%		27	%		22	%		22	%
  	Weighted-average expected
  	award life		4.6 years			4.2 years			4.0 years			1.0 year			1.0 year			1.0 year
  	Dividend yield		5.1	%		2.3	%		1.5	%		2.8	%		2.0	%		1.4	%
  	Weighted-average fair value		$2.49			$5.28			$6.36			$7.80			$4.96			$4.71

  
  

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

  	2007						2006							2005
  				Weighted-						Weighted-							Weighted-
  	Number			Average			Number			Average				Number			Average
  	of			Exercise			of			Exercise				of			Exercise
  	Shares			Price			Shares			Price				Shares			Price
  	(in thousands, except prices per share)
  Options outstanding at beginning
  of year	6,048			$	19.15		5,962			$	18.45			5,909			$	16.69
  Granted	778			$	22.38		858			$	23.98			1,014			$	27.42
  Exercised	(474	)		$	15.29		(459	)		$	15.12			(682	)		$	15.03
  Expired or cancelled	(375	)		$	23.99		(313	)		$	24.83			(279	)		$	22.11
  Options outstanding at end of year	5,977			$	19.57		6,048			$	19.15			5,962			$	18.45
  Options exercisable at end of year	4,530			$	18.27		4,455			$	16.94			4,042			$	16.00
  Options available for future grant at end
  of year	5,804						4,931							5,768

  			2008								2007					2006
  						Weighted-								Weighted-					Weighted-
  			Number			Average					Number			Average		Number			Average
  			of			Exercise					of			Exercise		of			Exercise
  			Shares			Price					Shares			Price		Shares			Price
  			(in thousands, except prices per share)
  	Options outstanding at beginning
  	of year		5,977				$	19.57			6,048			$19.15		5,962			$18.45
  	Granted		588				$	11.73			778			$22.38		858			$23.98
  	Exercised		(81	)			$	9.76			(474	)		$15.29		(459	)		$15.12
  	Expired or cancelled		(404	)			$	24.12			(375	)		$23.99		(313	)		$24.83
  	Options outstanding at end of year		6,080				$	18.64			5,977			$19.57		6,048			$19.15
  	Options exercisable at end of year		4,812				$	18.89			4,530			$18.27		4,455			$16.94
  	Options available for future grant at end
  	of year		4,890								5,804					4,931

  
  

       The total intrinsic value of options exercised forin 2008 was not significant and in 2007 and 2006 was $2.7 million and $4.0 million, respectively.million. The aggregate intrinsic value for stock options outstanding and for stock options exercisable as of February 2, 2008January 31, 2009 was $4.8 million.not significant. 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 $6.9$0.8 million and $6.8$6.9 million in cash from option exercises for 20072008 and 2006,2007, respectively. The tax benefit realized by the Company on the stock option exercises for 20072008 was approximately $1 million.not significant.

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       The following table summarizes information about stock options outstanding and exercisable at February 2, 2008:January 31, 2009:

  			Options Outstanding										Options Exercisable
  						Weighted-
  						Average			Weighted-								Weighted-
  						Remaining			Average								Average
  		Number				Contractual			Exercise				Number				Exercise
  Range of Exercise Prices		Outstanding				Life			Price				Exercisable				Price
  			(in thousands, except prices per share)
  $4.53 to $11.91			1,397			3.71			$	10.72				1,397			$	10.72
  $12.31 to $16.19			1,258			4.27			$	15.07				1,193			$	15.12
  $16.20 to $23.92			1,453			8.48			$	23.34				325			$	23.13
  $24.04 to $27.01			1,309			5.16			$	25.53				1,224			$	25.54
  $27.10 to $28.50			560			6.97			$	28.09				391			$	28.06
  $4.53 to $28.50			5,977			5.61			$	19.57				4,530			$	18.27

  
  

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  			Options Outstanding								Options Exercisable
  							Weighted-
  							Average		Weighted-						Weighted-
  							Remaining		Average						Average
  			Number				Contractual		Exercise		Number				Exercise
  	Range of Exercise Prices		Outstanding				Life		Price		Exercisable				Price
  			(in thousands, except prices per share)
  	$4.53 to $11.91			1,871			4.54		$11.05			1,314			$10.81
  	$12.30 to $23.42			2,019			4.98		$17.99			1,536			$16.81
  	$23.59 to $26.87			1,529			5.73		$24.79			1,301			$24.92
  	$27.01 to $28.50			661			5.62		$27.90			661			$27.90
  	$4.53 to $28.50			6,080			5.10		$18.64			4,812			$18.89

       Changes in the Company’s nonvested options at February 2, 2008January 31, 2009 are summarized as follows:

  					Weighted-
  					Average Grant -
  	Number of				Date Fair Value
  	Shares				per Share
  	(in thousands)
  Nonvested at February 4, 2007		1,593			$	25.33
  Granted		778				22.38
  Vested		(549	)			26.51
  Expired or Cancelled		(375	)			23.99
  Nonvested at February 2, 2008		1,447				23.65

  								Weighted-
  								Average Grant -
  			Number of					Date Fair Value
  			Shares					per Share
  			(in thousands)
  	Nonvested at February 3, 2008			1,447					$	23.65
  	Granted			588						11.73
  	Vested			(363	)					24.57
  	Expired or Cancelled			(404	)					24.12
  	Nonvested at January 31, 2009			1,268						17.71

  
  

       As of February 2, 2008,January 31, 2009, there was $2.6$1.3 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of approximately 1 year.

  Restricted Shares and Units

       Restricted shares of the Company’s common stock may be awarded to officers and key employees of the Company. For executives outside of the United States, the Company issues restricted stock units. Each restricted stock unit represents the right to receive one share of the Company’s common stock, provided that the vesting conditions are satisfied. In 2008, 2007 2006 and 2005,2006, there were 87,500, 90,000 20,000 and 50,87020,000 restricted stock units outstanding, respectively. Compensation expense is recognized using the fair market value at the date of grant and is amortized over the vesting period, provided the recipient continues to be employed by the Company. These awards fully vest after the passage of time, generally three years. Restricted stock is considered outstanding at the time of grant, as the holders of restricted stock are entitled to receive dividends and have voting rights.

       Restricted shares and units activity for the years-endedyears ended January 31, 2009, February 2, 2008, and February 3, 2007 and January 28, 2006 is summarized as follows:

  	Number of Shares and Units
  	2007				2006				2005
  	(in thousands)
  Outstanding at beginning of the year		537				1,041				1,177
  Granted		583				157				245
  Vested		(285	)			(600	)			(205	)
  Cancelled or forfeited		(25	)			(61	)			(176	)
  Outstanding at end of year		810				537				1,041
  Aggregate value (in millions)	$	19.0			$	13.6			$	18.0
  Weighted average remaining contractual life	1.77 years				0.93 years				0.69 years

  			Number of Shares and Units
  			2008				2007				2006
  			(in thousands)
  	Outstanding at beginning of the year			810				537				1,041
  	Granted			243				583				157
  	Vested			(109	)			(285	)			(600	)
  	Cancelled or forfeited			(100	)			(25	)			(61	)
  	Outstanding at end of year			844				810				537
  	Aggregate value (in millions)		$	16.7			$	19.0			$	13.6
  	Weighted average remaining contractual life		1.28 years				1.77 years				0.93 years

  
  

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       The weighted average grant-date fair value per share was $11.79, $22.95, and $24.08 for 2008, 2007, and $26.55 for 2007, 2006, and 2005, respectively. The total value of awards for which restrictions lapsed during the year-ended January 31, 2009, February 2, 2008, and February 3, 2007 and January 28, 2006 was $2.7 million, $7.3 million $6.7 million and $4.0$6.7 million, respectively. As of February 2, 2008,January 31, 2009, there was $9.8$6.5 million of total unrecognized compensation cost, related to nonvested restricted stock awards. The Company recorded compensation expense related to restricted shares, net of forfeitures, of $5.0 million in 2008, $5.6 million in 2007 and $4.0 million in 2006 and $6.1 million in 2005.2006.

  24.26. Legal Proceedings

       Legal proceedings pending against the Company or its consolidated subsidiaries consist of ordinary, routine litigation, including administrative proceedings, incidental to the business of the Company, as well as litigation incidental to the sale and disposition of businesses that have occurred in past years. 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

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  nonexempt, unpaid overtime, meal and rest breaks, and uniforms. Management does not believe that the outcome of such proceedings would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole.

  25.27. Commitments

       In connection with the sale of various businesses and assets, the Company may be obligated for certain lease commitments transferred to third parties and pursuant to certain normal representations, warranties, or indemnifications entered into with the purchasers of such businesses or assets. Although the maximum potential amounts for such obligations cannot be readily determined, management believes that the resolution of such contingencies will not have a material effect on the Company’s consolidated financial position, liquidity, or results of operations. The Company is also operating certain stores 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.

  26.28. Shareholder Information and Market Prices (Unaudited)

       Foot Locker, Inc. common stock is listed on The New York Stock Exchange as well as on the böerse-stuttgart stock exchange in Germany and the Elektronische Börse Schweiz (EBS) stock exchange in Switzerland. In addition, the stock is traded on the Cincinnati stock exchange.

       As of February 2, 2008,January 31, 2009, the Company had 22,78121,749 shareholders of record owning 154,474,274154,917,700 common shares.

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

  	2007				2006
  	High		Low		High			Low
  Common Stock
  Quarter
  1stQ	$24.78		$21.28		$	24.39		$	22.26
  2ndQ	24.15		17.00			28.00			21.50
  3rdQ	17.60		13.70			27.80			22.34
  4thQ	15.14		9.05			24.92			21.10

  
  

  During 2008 and 2007, the Company declared quarterly dividends of $0.15 and $0.125 per share during each of the quarters. During 2006,quarters, respectively.

       The following table sets forth, for the Company declared quarterly dividends of $0.09 per share duringperiod indicated, the first, second,intra-day high and third quarters. The Company increasedlow sales prices for the quarterly dividend per share to $0.125, beginning in the fourth quarter of 2006.Company’s common stock:

  			2008						2007
  			High			Low			High			Low
  	Common Stock
  	Quarter
  	1stQ		$	13.90		$	10.39		$	24.78		$	21.28
  	2ndQ			15.43			11.40			24.15			17.00
  	3rdQ			18.19			10.12			17.60			13.70
  	4thQ			14.79			3.65			15.14			9.05

  6163

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  27.29. Quarterly Results (Unaudited)

  	1stQ			2ndQ			3rdQ			4thQ			Year			1st Q				2nd Q			3rd Q			4th Q(a)				Year(a)
  	(in millions, except per share amounts)															(in millions, except per share amounts)
  Sales
  2008																$	1,309			1,302			1,309			1,317				5,237
  2007	$	1,316		1,283			1,356			1,482			5,437				1,316			1,283			1,356			1,482				5,437
  2006(a)		1,365		1,303			1,430			1,652			5,750
  Gross margin(b)
  2008																$	366			361			355			378				1,460
  2007	$	360		302			381			377			1,420				360			302			381			377				1,420
  2006(a)		419		361			422			534			1,736
  Operating profit (loss)(c)
  2008																$	16			28			33			(180	)	(d)		(103	)
  2007	$	27		(28	)		(58	)		9	(d)		(50	)			27			(28	)		(58	)		9		(d)		(50	)
  2006(a)		93		27			94			167			381
  Income (loss) from continuing operations
  2008																$	3			18			24			(124	)			(79	)
  2007	$	17		(18	)		(34	)		84	(e)		49				17			(18	)		(34	)		78		(e)		43
  2006(a)		58		14			65			110			247
  Net income (loss)
  2008																$	3			18			24			(125	)			(80	)
  2007	$	17		(18	)		(33	)		85			51				17			(18	)		(33	)		79				45
  2006(a)		59		14			65			113			251
  Basic earnings (loss) per share:
  2008
  Income (loss) from continuing operations																$	0.02			0.11			0.16			(0.81	)			(0.52	)
  Income from discontinued operations																	—			—			—			—				—
  Net income (loss)																	0.02			0.11			0.16			(0.81	)			(0.52	)
  2007
  Income (loss) from continuing operations	$	0.11		(0.12	)		(0.22	)		0.54			0.32			$	0.11			(0.12	)		(0.22	)		0.51				0.29
  Income from discontinued operations		—		—			—			0.01			0.01				—			—			—			0.01				0.01
  Net income (loss)		0.11		(0.12	)		(0.22	)		0.55			0.33				0.11			(0.12	)		(0.22	)		0.52				0.30
  2006(a)
  Income from continuing operations	$	0.37		0.09			0.42			0.71			1.59
  Diluted earnings (loss) per share:
  2008
  Income (loss) from continuing operations																$	0.02			0.11			0.16			(0.81	)			(0.52	)
  Income from discontinued operations		—		—			—			0.02			0.02				—			—			—			—				—
  Cumulative effect of accounting change		0.01		—			—			—			0.01
  Net income		0.38		0.09			0.42			0.73			1.62
  Diluted earnings (loss) per share:
  Net income (loss)																	0.02			0.11			0.16			(0.81	)			(0.52	)
  2007
  Income (loss) from continuing operations	$	0.11		(0.12	)		(0.22	)		0.54			0.32			$	0.11			(0.12	)		(0.22	)		0.50				0.28
  Income from discontinued operations		—		—			—			0.01			0.01				—			—			—			0.01				0.01
  Net income (loss)		0.11		(0.12	)		(0.22	)		0.55			0.33				0.11			(0.12	)		(0.22	)		0.51				0.29
  2006(a)
  Income from continuing operations	$	0.37		0.09			0.42			0.70			1.58
  Income from discontinued operations		—		—			—			0.02			0.02
  Cumulative effect of accounting change		0.01		—			—			—			—
  Net income		0.38		0.09			0.42			0.72			1.60

  ____________________
  
  

  (a)		The 2007 results have been corrected to reflect an immaterial revision to its fourth quarter and full year 2007 results in accordance with Staff Accounting Bulletin 108, “Considering the Effects of 2006 represents the 14 weeks ended February 3, 2007.Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” See note 2.
  (b)		Gross margin represents sales less cost of sales.
  (c)		Operating profit (loss) represents income (loss) from continuing operations before income taxes, interest expense, net and non-operating income.
  (d)		During the fourth quarter of 2008, the Company recorded $236 million in impairment charges representing $67 million of store long-lived assets and $169 million of goodwill and other intangibles. During the fourth quarter of 2007, the Company recognized an additional impairment charge of $22 million reflecting the continued downturn of the U.S. formats. The projected cash flows used in the third quarter impairment analysis were significantly reduced reflecting the poor performance during the fourth quarter and the expected continued difficult retail environment.
  (e)		Net income includes an income tax benefit of $65$62 million representing a reduction of a Canadian income tax valuation allowance primarily related to income tax deductions that the Company now expects will be utilized.

  6264

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  FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

       The selected financial data below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and other information contained elsewhere in this report.

  		2007				2006(1)			2005			2004		2003			2008				2007(1)			2006(2)			2005			2004
  ($ in millions, except per share amounts)																($ in millions, except per share amounts)
  Summary of Continuing Operations
  Sales		$	5,437			5,750			5,653			5,355		4,779			$	5,237			5,437			5,750			5,653			5,355
  Gross margin(2)(3)			1,420			1,736			1,709			1,633		1,482				1,460			1,420			1,736			1,709			1,633
  Selling, general and administrative expenses			1,176			1,163			1,129			1,090		988				1,174			1,176			1,163			1,129			1,090
  Impairment charges and store closing program costs			128			17			—			—		—				259			128			17			—			—
  Depreciation and amortization(2)(3)			166			175			171			154		152				130			166			175			171			154
  Interest expense, net			1			3			10			15		18				5			1			3			10			15
  Other income			(1	)		(14	)		(6	)		—		—				(8	)		(1	)		(14	)		(6	)		—
  Income from continuing operations			49			247			263			255		209
  Income (loss) from continuing operations																		(79	)		43			247			263			255
  Cumulative effect of accounting change(3)(4)			—			1			—			—		(1	)			—			—			1			—			—
  Basic earnings per share from continuing operations			0.32			1.59			1.70			1.69		1.47				(0.52	)		0.29			1.59			1.70			1.69
  Basic earnings per share from cumulative effect of accounting change			—			0.01			—			—		—
  Basic earnings per share from cumulative
  effect of accounting change																		—			—			0.01			—			—
  Diluted earnings per share from continuing operations			0.32			1.58			1.67			1.64		1.40				(0.52	)		0.28			1.58			1.67			1.64
  Diluted earnings per share from cumulative effect of accounting change			—			—			—			—		—
  Diluted earnings per share from cumulative
  effect of accounting change																		—			—			—			—			—
  Common stock dividends declared per share			0.50			0.40			0.32			0.26		0.15				0.60			0.50			0.40			0.32			0.26
  Weighted-average common shares outstanding (in millions)			154.0			155.0			155.1			150.9		141.6				154.0			154.0			155.0			155.1			150.9
  Weighted-average common shares outstanding assuming dilution (in millions)			155.6			156.8			157.6			157.1		152.9
  Weighted-average common shares outstanding
  assuming dilution (in millions)																		154.0			155.6			156.8			157.6			157.1
  Financial Condition
  Cash, cash equivalents and short-term investments		$	493			470			587			492		448			$	408			493			470			587			492
  Merchandise inventories			1,281			1,303			1,254			1,151		920				1,120			1,281			1,303			1,254			1,151
  Property and equipment, net(4)			521			654			675			715		668
  Total assets(4)			3,248			3,249			3,312			3,237		2,713
  Property and equipment, net(5)																		432			521			654			675			715
  Total assets(5)																		2,877			3,243			3,249			3,312			3,237
  Short-term debt			—			—			—			—		—				—			—			—			—			—
  Long-term debt and obligations under capital leases			221			234			326			365		335				142			221			234			326			365
  Total shareholders’ equity			2,271			2,295			2,027			1,830		1,375				1,924			2,261			2,295			2,027			1,830
  Financial Ratios
  Return on equity (ROE)			2.1	%		11.5			13.6			15.9		16.8				(3.8	)%		1.6			11.5			13.6			15.9
  Operating (loss) profit margin			(0.9	)%		6.6			7.2			7.3		7.2				(2.0	)%		(0.9	)		6.6			7.2			7.3
  Income from continuing operations as a percentage of sales			0.9	%		4.3			4.7			4.8		4.4
  Net debt capitalization percent(5)			44.9	%		44.4			45.2			50.4		53.3
  Net debt capitalization percent (without present value of operating leases)(5)			—			—			—			—		—
  Income (loss) from continuing operations as a percentage of sales																		(1.5	)%		0.8			4.3			4.7			4.8
  Net debt capitalization percent(6)																		46.7	%		45.1			44.4			45.2			50.4
  Net debt capitalization percent (without present
  value of operating leases)(6)																		—			—			—			—			—
  Current ratio			4.1			3.9			2.8			2.7		2.8				4.2			4.0			3.9			2.8			2.7
  Other Data
  Capital expenditures		$	148			165			155			156		144			$	146			148			165			155			156
  Number of stores at year end			3,785			3,942			3,921			3,967		3,610				3,641			3,785			3,942			3,921			3,967
  Total selling square footage at year end (in millions)			8.50			8.74			8.71			8.89		7.92				8.09			8.50			8.74			8.71			8.89
  Total gross square footage at year end (in millions)			14.12			14.55			14.48			14.78		13.14				13.50			14.12			14.55			14.48			14.78

  ____________________
   
  

  (1)		The 2007 results have been corrected to reflect an immaterial revision to its fourth quarter and full year 2007 results in accordance with Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” See note 2.
  (2)		2006 represents the 53 weeks ended February 3, 2007.
  (2)(3)		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 accordingly, depreciation expense was increased by the corresponding amount.
  (3)(4)		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.”
  (4)(5)		Property and equipment, net and total assets include the reclassification of tenant allowances as deferred credits, which were previously recorded as a reduction to the cost of property and equipment, and are now classified as part of the deferred rent liability. Property and equipment, net and total assets were increased by $22 million in 2004 and $24 million in 2003.2004.
  (5)(6)		Represents total debt, net of cash, cash equivalents and short-term investments and includes the effect of interest rate swaps. The effect of interest rate swaps increased/ (decreased) debt by $19 million, $4 million, $(4) million, $(1) million, and $4 million, and $(1) million at January 31, 2009, February 2, 2008, February 3, 2007, January 28, 2006, and January 29, 2005, and January 31, 2004, respectively.

  6365

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

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

  Item 9A. Controls and Procedures

  	(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 as of February 2, 2008 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 January 31, 2009. Based on that evaluation, the Company’s CEO and CFO concluded that, due to a material weakness in internal control over financial reporting described below in Management’s Annual Report on Internal Control over Financial Reporting, the Company’s disclosure controls and procedures were not effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and form, and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
  			In light of this material weakness, in preparing the consolidated financial statements as of and for the fiscal year ended January 31, 2009, the Company performed additional reconciliations and analyses and other post-closing procedures designed to ensure that our consolidated financial statements included in this Annual Report for the fiscal year ended January 31, 2009 have been prepared in accordance with generally accepted accounting principles. The Company’s CEO and CFO have certified that, based on their knowledge, the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for each of the periods presented 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. During this evaluation, management identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, andsuch that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the following material weakness, management has concluded that the Company’sour internal control over financial reporting was not effective as of February 2, 2008. January 31, 2009 based upon the COSO Framework.

  66

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  			The Company’s processes, procedures and controls related to financial reporting were not effective to ensure that amounts related to current taxes payable, certain deferred tax assets and liabilities, the current and deferred income tax expense were recorded in accordance with generally accepted accounting principles. Specifically, the Company did not maintain effective controls over the preparation and review of the calculations and related supporting documentation for the tax accounts noted above. As a result, there were errors in the aforementioned tax accounts in the preliminary consolidated financial statements that were corrected prior to issuance of the Company’s consolidated financial statements.
  			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 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.”Item 9A(e).
  	(c)		Attestation Report of the Independent Registered Public Accounting Firm.
  			KPMG’s attestation report on 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.
  	(d)		Remediation Plan for Material Weakness in Internal Control Over Financial Reporting.
  			In response to the identified material weaknesses, management has identified several enhancements to the Company’s internal control over financial reporting to remediate the material weakness described above. These ongoing efforts include the following:
  			Enhancing procedures for quality review and analysis of the provision for income tax. Accelerating certain year end tax analysis and reporting activities to periods earlier in the yearin order to provide additional analysis and reconciliation time. Identifying opportunities to automate the tax provision process including software tools thatwould reduce the number of manual spreadsheets that are used to calculate the income taxprovision on a quarterly and annual basis. Evaluating the need for additional resources in the preparation and review of the provision ofincome taxes.

  			We anticipate the actions described above and resulting improvements in controls will strengthen our internal control over financial reporting and will, over time, address the related material weakness that we identified as of January 31, 2009. However, because the remedial actions relate to the training of personnel and many of the controls in our system of internal controls rely extensively on manual review and approval, the successful operations of these controls, for at least several quarters, may be required prior to management being able to conclude that the material weakness has been remediated.
  	(e)		Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

  67

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

  We have audited Foot Locker, Inc.’s internal control over financial reporting as of January 31, 2009, 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, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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.

  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to income taxes has been identified and included in management’s assessment.

  We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), consolidated balance sheets of Foot locker, Inc. and subsidiaries as of January 31, 2009 and February 2, 2008, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three year period ended January 31, 2009. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended January 31, 2009, and this report does not affect our report dated March 30, 2009, which expressed an unqualified opinion on these consolidated financial statements.

  In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

  
  

  New York, New York
  March 30, 2009

  68

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  Item 9B. Other Information

       None.

  64

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  PART III

  Item 10. Directors, Executive Officers and Corporate Governance

  	(a)		Directors of the Company
  				Information relative to directors of the Company is set forth under the section captioned “Proposal 1- Election1-Election of Directors” in the Proxy Statement and is incorporated herein by reference.
  	(b)		Executive Officers of the Company
  				Information with respect to executive officers of the Company is set forth immediately following Item 4 in Part I.
  	(c)		Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.
  	(d)		Information on our audit committee and 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)		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 “Pension Benefits” is incorporated herein by reference, and information set forth in the Proxy Statement under the heading “Compensation Committee 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.

  Item 13. Certain Relationships and Related Transactions, and Director Independence

       Information set forth in the Proxy Statement under the section captioned “Related Person Transactions” and under the section captioned “Directors’ 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.

  6569

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  PART IV

  Item 15. Exhibits and Financial Statement Schedules

  	(a)(1)(a)(2) Financial Statements
  		The list of financial statements required by this item is set forth in Item 8. “Consolidated Financial Statements and Supplementary Data.”
  	(a)(3) and (c) Exhibits
  		An index of the exhibits which are required by this item and which are included or incorporated herein by reference in this report appears on pages 68 through 71. The exhibits filed with this report immediately follow the index.

  
  

  66     (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 72 through 74. The exhibits filed with this report immediately follow the index.

  70

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  SIGNATURES

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

  	FOOT LOCKER, INC.
  	By:
  Matthew D. Serra
  Chairman of the Board, President and
  Chief Executive Officer
  	Date: March 31, 2008 30, 2009

  
  

       Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 31, 2008,30, 2009, by the following persons on behalf of the Company and in the capacities indicated.

  
  
  

  Matthew D. Serra		Robert W. McHugh
  Chairman of the Board,		Senior Vice President and
  President and		Chief Financial Officer
  Chief Executive Officer
  /s/ GIOVANNA CIPRIANO		/s/ JAMES E. PRESTON
  Giovanna Cipriano		James E. Preston
  Vice President and Chief Accounting Officer		Director
  /s/ NICHOLAS DIPAOLO		/s/ DAVID Y. SCHWARTZ
  Nicholas DiPaolo		David Y. Schwartz
  Director		Director
  /s/ ALAN D. FELDMAN		/s/ CHRISTOPHER A. SINCLAIRCHERYL NIDO TURPIN
  Alan D. Feldman		Christopher A. SinclairCheryl Nido Turpin
  Director		Director
  /s/ JAROBIN GILBERT JR.		/s/ CHERYL NIDO TURPINDONA D. YOUNG
  Jarobin Gilbert Jr.		Cheryl Nido TurpinDona D. Young
  Director		Director
  /s/ MATTHEW M. MCKENNA		/s/ DONA D. YOUNG
  Matthew M. McKenna		Dona D. Young
  Director		Director

  
  

  6771

  
  
  

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  FOOT LOCKER, INC.
  INDEX OF EXHIBITS REQUIRED
  
  BY ITEM 15 OF FORM 10-K
  AND FURNISHED IN ACCORDANCE
  
  WITH ITEM 601 OF REGULATION S-K

  Exhibit No.
  in Item 601 of
  Regulation S-K		Description
  3(i)(a)		Certificate of Incorporation of the Registrant, as filed by the Department of State of the State of New York on April 7, 1989 (incorporated herein by reference to Exhibit 3(i)(a) to the Quarterly Report on Form 10-Q for the quarterly period ended July 26, 1997, filed by the Registrant with the SEC on September 4, 1997 (the “July 26, 1997 Form 10-Q”)).
  3(i)(b)		Certificates of Amendment of the Certificate of Incorporation of the Registrant, as filed by the Department of State of the State of New York on (a) July 20, 1989, (b) July 24, 1990, (c) July 9, 1997 (incorporated herein by reference to Exhibit 3(i)(b) to the July 26, 1997 Form 10-Q), (d) June 11, 1998 (incorporated herein by reference to Exhibit 4.2(a) of the Registration Statement on Form S-8 (Registration No. 333-62425), and (e) November 1, 2001 (incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-8 (Registration No. 333-74688) previously filed by the Registrant with the SEC).
  3(ii)		By-laws of the Registrant, as amended (incorporated herein by reference to Exhibit 10.13.1 to the Registrant’s Current Report on Form 8-K dated August 13, 2007November 19, 2008 filed by the Registrant with the SEC on August 17, 2007 (the “August 13, 2007 Form 8-K”))November 25, 2008).
  4.1		The rights of holders of the Registrant’s equity securities are defined in the Registrant’s Certificate of Incorporation, as amended (incorporated herein by reference to (a) Exhibits 3(i)(a) and 3(i)(b) to the July 26, 1997 Form 10-Q, Exhibit 4.2(a) to the Registration Statement on Form S-8 (Registration No. 333-62425) previously filed by the Registrant with the SEC, and Exhibit 4.2 to the Registration Statement on Form S-8 (Registration No. 333-74688) previously filed by the Registrant with the SEC).
  4.2		Indenture dated as of October 10, 1991 (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-3 (Registration No. 33-43334) previously filed by the Registrant with the SEC).
  4.3		Form of 8-1/2% Debentures due 2022 (incorporated herein by reference to Exhibit 4 to the Registrant’s Form 8-K dated January 16, 1992).
  10.1		Foot Locker 1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10(p) 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 on April 24, 1995 (the “1994 Form 10-K”)).
  10.2		Foot Locker 1998 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 1998, filed by the Registrant with the SEC on April 21, 1998).
  10.3		Amendment to the Foot Locker 1998 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended July 29, 2000, filed by the Registrant with the SEC on September 7, 2000 (the “July 29, 2000 Form 10-Q”)).
  10.4		Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d) to the Registration Statement on Form 8-B filed by the Registrant with the SEC on August 7, 1989 (Registration No. 1-10299) (the “8-B Registration Statement”)).
  10.5		Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(c)(i) to the 1994 Form 10-K ).10-K).

  
  

  6872

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  Exhibit No.
  in Item 601 of
  Regulation S-K		Description
  10.6		Amendment to the Executive Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10(d)(ii) to the 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”)).
  10.7		Supplemental Executive Retirement Plan, as Amended and Restated (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated August 13, 2007 filed by the Registrant with the SEC on August 17, 2007).
  10.8		Long-Term Incentive Compensation Plan, as amended and restated.*
  10.9		Annual Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit 10(f)10.1 to the Registrant’s 1995 Form 10-K).
  10.9		Annual Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.3 to the QuarterlyCurrent Report on Form 10-Q for the quarterly period ended August 2, 20038-K dated March 26, 2008 filed by the Registrant with the SEC on September 15, 2003 (the “August 2, 2003 Form 10-Q”))April 1, 2008).
  10.10		Form of indemnification agreement, as amended (incorporated herein by reference to Exhibit 10(g) to the 8-B Registration Statement).
  10.11		Amendment to form of indemnification agreement (incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarterly period ended May 5, 2001 filed by the Registrant with the SEC on June 13, 2001 (the “May 5, 2001 Form 10-Q”)).
  10.12		Foot Locker Voluntary Deferred Compensation Plan (incorporated herein by reference to Exhibit 10(i) to the 1995 Form 10-K).
  10.13		Foot Locker Directors Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the July 29, 2000 Form 10-Q).
  10.1410.13		Trust Agreement dated as of November 12, 1987 (“Trust Agreement”), between F.W. Woolworth Co. and The Bank of New York, as amended and assumed by the Registrant (incorporated herein by reference to Exhibit 10(j) to the 8-B Registration Statement).
  10.1510.14		Amendment to Trust Agreement made as of April 11, 2001 (incorporated herein by reference to Exhibit 10.4 to May 5, 2001 Form 10-Q).
  10.1610.15		Foot Locker Directors’ Retirement Plan, as amended (incorporated herein by reference to Exhibit 10(k) to the 8-B Registration Statement).
  10.1710.16		Amendments to the Foot Locker Directors’ Retirement Plan (incorporated herein by reference to Exhibit 10(c) to the Registrant’s Quarterly Report on Form 10-Q for the period ended October 28, 1995, filed by the Registrant with the SEC on December 11, 1995).
  10.1810.17		Employment Agreement with Matthew D. Serra dated as of October 5, 2006December 12, 2008 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated October 5, 2006December 12, 2008 filed by the Registrant with the SEC on October 10, 2006December 18, 2008 (the “October 10, 2006“December 12, 2008 Form 8-K”)).
  10.1910.18		Amendment of Restricted Stock Agreement for Matthew D. Serra dated October 6, 2006 (incorporated herein by reference to Exhibit 10.2 to the October 10, 2006 Form 8-K).
  10.2010.19		Amendments 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).
  10.21		Restricted Stock Agreement with Matthew D. Serra dated as of February 9, 2005 (incorporated herein by reference to Exhibit 10.2 to the February 9, 2005 Form 8-K).
  10.2210.20		Form of Senior Executive Employment Agreement (incorporated herein by reference to Exhibit 10.2310.2 to the Registrant’s Annual Report onDecember 12, 2008 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”))8-K).

  
  

  69

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  Exhibit No.
  in Item 601 of10.21
  Regulation S-K		Description
  10.23		Form of Executive Employment Agreement (incorporated herein by reference to Exhibit 10.24 to the 1999 Form 10-K).Agreement.*
  10.2410.22		Foot Locker, Inc. Excess Cash Balance Plan (incorporated herein by reference to Exhibit 10(c) to the 1995 Form 10-K).Plan.*
  10.2510.23		Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year ended January 30, 1999 filed by the Registrant on April 30, 1999 (the “1998 Form 10-K”)).

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  Exhibit No.
  10.26in Item 601 of
  Regulation S-K		Fifth Amended and Restated Credit Agreement dated as of April 9, 1997, amended and restated as of May 19, 2004 (“Credit Agreement”) (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended July 31, 2004, filed by the Registrant with the SEC on September 8, 2004). Description
  10.2710.24		Amendment No. 1 to the Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed dated May 17, 2005 on May 18, 2005).
  10.28		Letter of Credit Agreement dated as of March 19, 1999 (incorporated herein by reference to Exhibit 10.35 to the 1998 Form 10-K).
  10.29		Foot Locker 2002 Directors Stock Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K dated February 16, 2005, filed by the Registrant with the SEC on February 18, 2005).amended.*
  10.3010.25		Foot Locker 2003 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2003 Form 10-Q)filed by the Registrant with the SEC on September 15, 2003).
  10.3110.26		Automobile 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”).Executives.*
  10.3210.27		Executive Medical Expense Allowance Program for Senior Executives (incorporated herein by reference to Exhibit 10.37 to the 2004 Form 10-K).Executives.*
  10.3310.28		Financial Planning Allowance Program for Senior Executives (incorporated herein by reference to Exhibit 10.38 to the 2004 Form 10-K).Executives.*
  10.3410.29		Form 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”)).
  10.510.30		Form of Incentive Stock Option Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.41 to the 2005 Form 10-K).
  10.3610.31		Form of Nonstatutory Stock Option Award Agreement for Non-employee Directors (incorporated herein by reference to Exhibit 10.2 to the July 31, 2004 Form 10-Q).
  10.3710.32		Long-term Disability Program for Senior Executives (incorporated herein by reference to Exhibit 10.42 to the 2004 Form 10-K).Executives.*
  10.38		Amendment to the Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated October 26, 2007 filed by the Registrant with the SEC on October 31, 2007).
  10.39		Amendment to the Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 19, 2008 filed by the Registrant with the SEC on February 21, 2008).
  10.4010.33		Foot Locker 2007 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 30, 2007 filed by the Registrant with the SEC on June 5, 2007).

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  Exhibit No.
  in Item 60110.34		Credit Agreement dated as of		March 20, 2009 (incorporated herein by reference to Exhibit 10.1 to the Registrant Current Report on Form 8-K dated March 20, 2009 filed by the Registrant with the SEC on March 24, 2009 (the “March 20, 2009 Form 8-K”)).
  Regulation S-K
  10.35		Guaranty dated as of March 20, 2009 (incorporated herein by reference to Exhibit 10.2 to the March 20, 2009 Form 8-K).
  Description10.36		Security Agreement dated as of March 20, 2009 (incorporated herein by reference to Exhibit 10.3 to the March 20, 2009 Form 8-K).
  12		Computation of Ratio of Earnings to Fixed Charges.*
  21		Subsidiaries of the Registrant.*
  23		Consent of Independent Registered Public Accounting Firm.*
  31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
  31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
  32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

  ____________________
  
  

  *

  Exhibits filed with this Form 10-K

  
  

  7174

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