The customer lists are being amortized over their estimated useful life of the Fingerhut core catalog operations including $9 million of severance costs during the 13 and 39 weeks ended October 28, 2000.7 years.

The extraordinary item for the 13 and 39 weeks ended November 3, 2001 represents costs of $16 million, net of income tax benefit of $6 million, associated with the repurchasefollowing is an illustration of the $350 million 6.125% Term Enhanced ReMarketable Securities.impact on income from continuing operations and net income, including discontinued operations, as if the new accounting standard was effective beginning February 4, 2001:

In connection with the Stern's restructuring, income tax expense for 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Company's investment in Stern's Department Stores, Inc. upon disposition.

Accounts receivable consists of $1,246 million of Fingerhut accounts receivable, net of $443 million of allowance for doubtful accounts and $2,146 million of other Federated accounts receivable, net of $76 million of allowance for doubtful accounts as of November 3, 2001; $1,637 million of Fingerhut accounts receivable, net of $584 million of allowance for doubtful accounts and $2,435 million of other Federated accounts receivable, net of $71 million of allowance for doubtful accounts as of February 3, 2001; and $1,618 million of Fingerhut accounts receivable, net of $571 million of allowance for doubtful accounts and $2,208 million of other Federated accounts receivable, net of $59 million of allowance for doubtful accounts as of October 28, 2000.

The Company reports its business operations through two segments, department stores and Fingerhut. The department store segment, through store locations and related mail catalog and electronic commerce businesses, sells a wide range of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods. Fingerhut sells a broad range of products and services directly to consumers via catalogs, direct marketing and the Internet. "Corporate and other" consists of the income or expense associated with the corporate office and certain items managed on a company-wide basis (e.g., intangibles, financial instruments, investments, retirement benefits and properties held for sale or disposition).

The financial information for each segment is reported on the basis used internally by the Company to evaluate performance and allocate resources. At the beginning of Fiscal 2001, the Company reorganized its business segments for making operating decisions and assessing performance. Certain reclassifications were made to prior period amounts to conform with the classifications of such amounts for the most recent period.

The operating income (loss) data presented above includes asset impairment and restructuring charges associated with the closure of the Stern's department store division, the integration of Liberty House into Macy's West and the Fingerhut write-down and downsizing (see Note 3).

In addition to the warrants and stock options reflected in the foregoing tables for the 13 and 39 weeks ended November 3, 2001,table, stock options to purchase 16.814.1 million and 4.6 million shares of common stock at prices ranging from $33.13$41.88 to $79.44 per share were outstanding at November 3,May 4, 2002 and May 5, 2001, respectively, but were not included in the computation of diluted earnings per share because the exercise price thereof exceeded the average market price and their inclusion would have been antidilutive.

For the 13 and 39 weeks ended October 28, 2000, warrants and stock options to purchase 34.2 million shares of common stock at prices ranging from $11.63 to $79.44 per share were outstanding at October 28, 2000, but were not included in the computation of diluted earnings per share because, as a result of the Company's net loss during these periods, their inclusion would have been antidilutive.

For purposes of the following discussion, all references to "third"first quarter of 2001"2002" and "third"first quarter of 2000"2001" are to the Company's 13-week fiscal periods ended November 3,May 4, 2002 and May 5, 2001, and October 28, 2000, respectively, and all references to "2001" and "2000" are to the Company's 39-week fiscal periods ended November 3, 2001 and October 28, 2000, respectively.

Results of Operations

Net sales for the thirdfirst quarter of 20012002 totaled $3,775$3,453 million, compared to net sales of $4,195$3,556 million for the thirdfirst quarter of 2000,2001, a decrease of 10.0%2.9%. The overall sales decrease reflectstrend in the difficult economic climate, the events of September 11^th and resulting further economic weakness, the strategic downsizing of Fingerhut and the closing of Stern's. Net sales for department stores for the thirdfirst quarter of 20012002 was negatively impacted by weakness in career women's apparel and dresses and men's sportswear. However, sales were $3,475 million, compared to net sales of $3,782 million for the third quarter of 2000, a decrease of 8.1%.relatively strong in private brands, young men's, kids, jewelry and furniture. On a comparable store basis (sales from stores in operation throughout 2000the first quarter of 2001 and 2001)the first quarter of 2002), net sales for department stores for the thirdfirst quarter of 20012002 decreased 8.6%2.9% compared to the thirdfirst quarter of 2000. Net sales for Fingerhut totaled $300 million for the third quarter of 2001 compared to $413 million for the third quarter of 2000, reflecting the strategic downsizing of that business.

On October 18, 2001, the Company lowered its comparable store sales projections for the fourth quarter to minus 7-10 percent as a result of the September 11^th terrorist attacks and subsequent economic downturn. The Company, noting the difficulties of forecasting performance for the remainder of the year in the current climate of uncertainty, lowered earnings expectations for fiscal 2001 to between $2.85 and $3.00 a share, excluding the extraordinary item and restructuring charges.2001.

Cost of sales was 60.8%60.2% of net sales for the thirdfirst quarter of 2002, compared to 61.2% for the first quarter of 2001. Cost of sales for the first quarter of 2001, and 2000. Cost of sales as a percent of net sales for department stores, excluding the $9$19 million Stern's and Liberty HouseSterns inventory valuation adjustments, was 61.4%60.7%. The cost of sales rate in the thirdfirst quarter of 2001, an increase of 0.7 percentage points compared to the same period a year ago, reflecting higher2002 benefited from lower markdowns taken in the third quarter of 2001 which were needed, given the large decline in sales, to reduce inventories to more appropriate levels. Cost of sales as a percent of net sales for Fingerhut was 51.2% in the third quarter of 2001, a decrease of 1.9 percentage pointsresulting from the same period a year ago, excludinglower inventory levels throughout the 2000 inventory valuation adjustments, primarily due to a shift in the 2001 sales mix to higher margin product categories.quarter. The valuation of department store merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.

Selling, general and administrative ("SG&A") expenses were 35.3%33.4% of net sales for the thirdfirst quarter of 20012002 compared to 35.2%33.0% for the thirdfirst quarter of 2000. Department store2001. SG&A expenses decreased 2.0%1.8% in actual dollars compared to the thirdfirst quarter of 2000,2001, however, due to the lower sales level, department store SG&A expenses increased 2.10.4 percentage points to 33.5% as a percent of department store net sales. Fingerhut's SG&A expenses as a percent of net sales were 42.9%, a decreasesales. SG&A expenses in the first quarter of 15.3 percentage points, primarily2002 benefited from lower goodwill and intangible amortization as a result of the higher bad debtadoption of SFAS No. 142, "Goodwill and Other Intangible Assets." Effective February 3, 2002, the Company ceased amortizing goodwill and indefinite lived intangible assets. SG&A expenses recorded in the same period a year ago.

The Company recorded $32$45 million of restructuring chargescosts during the thirdfirst quarter of 2001 primarily related to the closure of the Stern's department store division and thesubsequent integration into its Macy's West integration of Liberty House,and Bloomingdale's operations, including $9$19 million of inventory valuation adjustments as a part of cost of sales. The remaining $23$26 million of restructuring charges includes $6costs included $8 million of costs associated with converting the Stern's stores to Macy's (including advertising, credit card issuance and promotion and other name change expenses), $2 million of costs to close and sell certain Stern's stores, $2 million of Liberty House duplicate central office costs, $1 million for Liberty House data processing conversion costs and $9 million related to the disposition of a Fingerhut Warehouse. As previously communicated, the Company anticipates incurring approximately $40 - $50 million of additional restructuring charges related to the closure of Stern's and the Macy's West integration of Liberty House during the remainder of 20 01.

During the third quarter of 2000, the Company recorded asset impairment and restructuring charges related to its Fingerhut businesses. The Company recorded asset write-downs of $673 million for goodwill and credit file intangibles, $18 million for fixed assets and $60 million for certain Internet-related investments. The Company also recorded $9$8 million of severance costs related to the downsizingand $4 million of the Fingerhut core catalog operations.advertising costs.

Net interest expense was $100$74 million for the thirdfirst quarter of 2001,2002, compared to $111$78 million for the thirdfirst quarter of 2000, benefiting from lower interest rates and the lower levels of borrowings.2001.

The Company's effective income tax rate of 48.8%39.7% for the third quarter of 2001 differs from the federal income statutory rate of 35.0% principally because of the effect of state and local income taxes and permanent differences arising from the amortization of intangible assets.

The extraordinary item for the third quarter of 2001 represents the after-tax expenses associated with the repurchase of the $350 million 6.125% Term Enhanced ReMarketable Securities.

Net sales for 2001 totaled $11,329 million, compared to net sales of $12,292 million for 2000, a decrease of 7.8%. The sales decrease reflects the difficult economic climate, the events of September 11^th and resulting further economic weakness, the strategic downsizing of Fingerhut and the closing of Stern's. Net sales for department stores for 2001 were $10,519 million, compared to net sales of $11,034 million for 2000, a decrease of 4.7%. On a comparable store basis (sales from stores in operation throughout 2000 and 2001, including Stern's stores in operation throughout the first quarter of 2000 and 2001), net sales for department stores for 2001 decreased 5.0% compared to 2000. Net sales for Fingerhut totaled $810 million for 2001 compared to $1,258 million for 2000, reflecting the strategic downsizing of that business.

Cost of sales was 60.6% of net sales for 2001, compared to 59.6% for 2000. Cost of sales as a percent of net sales for department stores, excluding the $35 million Stern's and Liberty House inventory valuation adjustments, was 61.0% in 2001, an increase of 1.0 percentage point compared to the same period a year ago, reflecting higher markdowns taken in 2001 which were needed, given the large decline in sales, to reduce inventories to more appropriate levels. Cost of sales as a percent of net sales for Fingerhut was 50.1% in 2001, a decrease of 3.0 percentage points from the same period a year ago, excluding the 2000 inventory valuation adjustments, primarily due to a shift in the 2001 sales mix to higher margin product categories. The valuation of department store merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.

SG&A expenses were 34.0% of net sales for 2001 compared to 35.2% for 2000. Department store SG&A expenses increased 1.5 percentage points to 32.4% as a percent of department store net sales in 2001, reflecting relatively flat operating expenses on the decreased sales level. Fingerhut's SG&A expenses as a percent of net sales were 43.2%, a decrease of 21.0 percentage points, primarily as a result of the higher bad debt expenses recorded in 2000.

The Company recorded $113 million of restructuring charges during 2001 primarily related to the closure of the Stern's department store division and the Macy's West integration of Liberty House, including $35 million of inventory valuation adjustments as a part of cost of sales. The remaining $78 million of restructuring charges includes $21 million of costs associated with converting the Stern's stores to Macy's (including advertising, credit card issuance and promotion and other name change expenses), $11 million of costs to close and sell certain Stern's stores, $9 million of Stern's duplicate central office costs, $16 million of severance costs related to the Stern's closure, $3 million of Liberty House duplicate central office costs, $1 million for Liberty House data processing conversion costs and $9 million related to the disposition of a Fingerhut Warehouse.

During 2000, the Company recorded asset impairment and restructuring charges related to its Fingerhut businesses. The Company recorded asset write-downs of $673 million for goodwill and credit file intangibles, $18 million for fixed assets and $60 million for certain Internet-related investments. The Company also recorded $9 million of severance costs related to the downsizing of the Fingerhut core catalog operations.

Net interest expense was $297 million for 2001, compared to $318 million for 2000, benefiting from lower interest rates and the lower levels of borrowings.

The Company's effective income tax rate for 20012002 differs from the federal income tax statutory rate of 35.0% principally because of the effect of the disposition of a subsidiary, state and local income taxestaxes.

The Company and certain members of its senior management have been named defendants in five substantially identical purported class actionsaction complaints filed on behalf of persons who purchased shares of the Company between February 23, 2000 and July 20, 2000. Originally filed in August, September and October 2000, in the United States District Court for the Southern District of New York, the actions have been consolidated into a single case and a consolidated amended complaint (the "Complaint") has been filed. The Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, on the basis that the Company, among other things, made false and misleading statements regarding its financial condition and results of operations and failed to disclose material information relating to the credit delinquency problem at Fingerhut. The plaintiffs are seeking unspecified amounts of compensatory damages and costs, including legal fees. Management believes thatt hat the al legationsallegations contained in the Complaint are without merit and intends to defend vigorously against those allegations. A motion to dismiss the Complaint is pending. Discovery has not commenced.

On February 14 and February 26, 2002, two essentially identical shareholder derivative lawsuits were filed in a Minnesota state court, purportedly on behalf of the Company, naming as defendants the Company's directors, its Fingerhut subsidiary and certain officers of Fingerhut. The defendants have removed these lawsuits to the United States District Court for the District of Minnesota. The complaints allege that the defendants have breached their fiduciary duties to the Company in connection with the disposition of Fingerhut and seek an injunction to prevent the liquidation of Fingerhut or a sale of Fingerhut's assets other than as a going concern. The defendants and the Company have filed motions to dismiss the complaints. On April 5, 2002, the federal court denied a motion for a temporary restraining order to prevent Fingerhut from laying off approximately 3,300 employees. One of these lawsuits was voluntarily dismissed withoutprejudice in May 2002.

The Annual Meeting of the Company's stockholders was held on May 17, 2002. The Company's stockholders voted on the following items at such meeting:

This report and other reports, statements and information previously or subsequently filed by the Company with the Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words "may," "will," "could," "should," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "think," "estimate" or "continue" or the negative or other variations thereof, and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are s ubjectsubject to various risks and uncertainties, including (a) risks and uncertainties relating to the possible invalidity of the underlying beliefsbeli efs and assumptions, (b) possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions, (c) actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials, and (d) attacks or threats of attacks by terrorists or acts of war. Furthermore, future results of the operations of the Company could differ materially from historical results or current expectations because of a variety of factors that affect the Company, including transaction costs associated with the renovation, conversion and transitioning of retail stores in regional markets; the outcome and timing of sales and leasing in conjunction with the disposition of retail store properties; the retention, reinteg rationreintegration and transitioning of displaced employees; and competitive pressures from department and specialty stores, general merchandise stores, manufacturers'manufa cturers' outlets, off-price and discount stores, and all other retail channels; and general consumer-spending levels, including the impact of the availability and level of consumer debt, and the effects of the weather. In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as "Forward-Looking Statements," "Risk Factors" and "Special Considerations" in reports, statements and information filed by the Company with the SEC from time to time constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those reflected in such forward-looking statements.