BUSINESS OVERVIEW

Foot Locker, Inc., through its subsidiaries, operates in two reportable segments - Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports and Footaction. The Direct-to-Customers segment reflects Footlocker.com, Inc., which sells, through its affiliates, including Eastbay, Inc., to customers through catalogs and Internet websites. 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 of 2007, 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.

STORE COUNT

At November 1, 2008, the Company operated 3,714 stores as compared with 3,785 at February 2, 2008. During the thirty-nine weeks ended November 1, 2008, the Company opened 58 stores, and remodeled or relocated 194 stores and closed 129 stores.

In March of 2006, the Company entered into a ten-year area development agreement with the Alshaya Trading Co. W.L.L., in which the Company agreed to enter into separate license agreements for the operation of Foot Locker stores located within the Middle East. Additionally in March 2007, the Company entered into a ten-year agreement with another third party for the exclusive right to open and operate Foot Locker stores in the Republic of South Korea. A total of 16 franchised stores were operational at November 1, 2008. Revenue from the franchised stores was not significant for the thirteen and thirty-nine weeks ended November 1, 2008 or November 3, 2007. These stores are not included in the Company's operating store count above.

SALES AND OPERATING RESULTS

All references to comparable-store sales for a given period relate to sales of stores that are open at the period-end and that have been open for more than one year. Accordingly, stores opened and closed during the period are not included. Sales from the Direct-to-Customers segment are included in the calculation of comparable-store sales for all periods presented. Division profit
(loss) reflects income (loss) before income taxes, corporate expense, non-operating income and net interest expense. The following table summarizes sales and operating results by segment:

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                                     Sales

                             Thirteen weeks ended              Thirty-nine weeks ended
                         November 1,       November 3,      November 1,       November 3,
(in millions)               2008              2007              2008             2007
Athletic Stores         $       1,216     $       1,264     $      3,656     $       3,699
Direct-to-Customers                93                92              264               254
Family Footwear                     -                 -                -                 2
Total sales             $       1,309     $       1,356     $      3,920     $       3,955



                               Operating Results

                                                                        Thirteen weeks ended                    Thirty-nine weeks ended
                                                                  November 1,          November 3,         November 1,            November 3,
(in millions)                                                        2008                 2007                2008                   2007
Athletic Stores (1)                                              $          42        $         (53 )     $         121          $         (32 )
Direct-to-Customers                                                          8                    8                  26                     25
Family Footwear                                                              -                    -                   -                     (6 )
Division profit (loss)                                                      50                  (45 )               147                    (13 )
Restructuring income (2)                                                     -                    1                   -                      1
Corporate expense, net (3)                                                  17                   14                  70                     47
Operating profit (loss)                                                     33                  (58 )                77                    (59 )
Other (income) expense (4)                                                  (5 )                  -                  (7 )                    1
Interest expense, net                                                        1                    -                   4                      -
Income (loss) from continuing operations before income taxes     $          37        $         (58 )     $          80          $         (60 )


____________________

(1) The thirty-nine weeks ended November 1, 2008 includes $5 million of store closing costs, primarily lease termination costs. The thirteen and thirty-nine weeks ended November 3, 2007 includes a $105 million charge representing impairment and store closing costs related to the Company's U.S. operations.

(2) During the third quarter of 2007, the Company adjusted its 1993 Repositioning and 1991 Restructuring reserve by $1 million primarily due to favorable lease terminations. This amount is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

(3) Included in corporate expense for the thirteen weeks ended November 1, 2008 is a $3 million other-than-temporary impairment charge related to a short-term investment. Also included in the thirty-nine weeks ended November 1, 2008 is a $15 million impairment charge on the Northern Group note receivable.

(4) Other (income) expense for the thirteen and thirty-nine weeks ended November 1, 2008 is primarily comprised of the changes in fair value, realized gains and premiums paid on foreign currency option contracts. Included in the thirty-nine weeks ended November 1, 2008 is also a lease termination gain of $2 million related to sale of a leasehold interest in Europe. The amount included in the prior year represented premiums paid on foreign currency option contracts and the changes in fair value of those contracts.

Sales of $1,309 million for the third quarter of 2008 decreased 3.5 percent from sales of $1,356 million for the third quarter of 2007. For the thirty-nine weeks ended November 1, 2008, sales of $3,920 million decreased 0.9 percent from sales of $3,955 million for the thirty-nine week period ended November 3, 2007. Excluding the effect of foreign currency fluctuations, total sales for the thirteen week and thirty-nine week periods decreased 3.0 percent and 2.8 percent, respectively, as compared with the corresponding prior-year periods. Comparable-store sales decreased by 1.7 percent, for both the thirteen and thirty-nine weeks ended November 1, 2008.

Gross margin, as a percentage of sales, decreased to 27.1 percent for the thirteen weeks ended November 1, 2008 as compared with 28.1 percent in the corresponding prior-year period. Gross margin, as a percentage of sales, increased to 27.6 percent for the thirty-nine weeks ended November 1, 2008 as compared with 26.4 percent in the corresponding prior-year period. For both the thirteen and thirty-nine weeks ended November 1, 2008, the occupancy and buyers' salary expense rate increased by 50 basis points, respectively, as a percentage of sales. The merchandise rate for the thirteen weeks ended November 1, 2008 decreased by 50 basis points, whereas for the thirty-nine weeks ended November 1, 2008 it improved by 170 basis points. The effect of vendor allowances, as a percentage of sales, improved gross margin by approximately 10 basis points for the thirteen week period ended November 1, 2008, as compared with the corresponding prior-year period. However, the effect of vendor allowances, as a percentage of sales, negatively affected gross margin by approximately 30 basis points for the thirty-nine weeks ended November 1, 2008, as compared with the corresponding prior-year period.

Athletic Stores

Athletic Stores sales decreased by 3.8 percent and 1.2 percent for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with the corresponding prior-year periods. Excluding the effect of foreign currency fluctuations, primarily related to the euro, sales from athletic store formats decreased 3.4 percent and 3.3 percent for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with the corresponding prior-year periods. The decline in sales for the thirteen and thirty-nine weeks ended November 1, 2008 was related to the domestic operations, primarily as a result of operating 182 fewer stores. Additionally, domestic footwear sales increased slightly while apparel sales declined significantly for both the thirteen and thirty-nine week periods ended November 1, 2008 as compared with the corresponding prior-year periods. Excluding the effect of foreign currency fluctuations, sales in Europe were essentially flat for the thirteen weeks ended November 1, 2008 and decreased low single digits for the thirty-nine weeks ended November 1, 2008, as compared with the corresponding prior-year periods. While Foot Locker Europe's footwear sales were lower than the corresponding prior-year period, sales of marquee footwear continued to increase, in particular running footwear. The declines in Foot Locker Europe's footwear sales were offset by improved apparel sales. Athletic stores comparable-store sales decreased by 2.0 percent and 2.1 percent, for the thirteen and thirty-nine weeks ended November 1, 2008, respectively.

Athletic Stores division profit for the thirteen weeks ended November 1, 2008 increased to $42 million, or 3.5 percent, as a percentage of sales, from a division loss of $53 million for the thirteen weeks ended November 3, 2007. Athletic Stores division profit for the thirty-nine weeks ended November 1, 2008 increased to $121 million, or 3.3 percent, as a percentage of sales, from a division loss of $32 million for the thirty-nine weeks ended November 3, 2007. Included in division profit for the thirty-nine weeks ended November 1, 2008 are $5 million in costs associated with the closure of underproductive stores, primarily lease termination costs. Included in the thirteen and thirty-nine weeks ended November 3, 2007 are impairment charges totaling $102 million and store closing costs of $3 million. Excluding these charges and costs, division profit declined by $10 million and increased by $53 million for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with the corresponding prior-year periods. The decline for the third quarter related to the domestic operations, which had lower sales and gross margin rate. The increase in division profit for the thirty-nine weeks ended November 1, 2008 related to increased domestic division profit as a result of lower promotional markdowns and reduced depreciation and amortization expense, offset, in part, by a decrease in Foot Locker Europe's results. While Foot Locker Europe remains profitable, with division operating profit margins for both the third quarter and year-to-date periods of 2008 in the high single digits, results for the thirty-nine weeks ended November 1, 2008 were considerably lower than the corresponding prior-year period. Additionally, management will monitor the results of the domestic operations, in particular Lady Foot Locker and Champs Sports, due to the difficult retail environment. Management will assess the impact of various initiatives on the projected performance of these divisions and, if necessary, may perform an analysis of recoverability of store long-lived assets pursuant to SFAS No. 144.

Direct-to-Customers

Direct-to-Customers sales increased by 1.1 percent to $93 million for the thirteen weeks ended November 1, 2008 and increased by 3.9 percent to $264 million for the thirty-nine weeks ended November 1, 2008, as compared with the corresponding prior-year periods. Internet sales increased to $77 million and $217 million for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with $70 million and $197 million for the thirteen and thirty-nine weeks ended November 3, 2007, respectively. Increases in Internet sales were offset by a decline in catalog sales, reflecting the continuing trend of the Company's customers to browse and select products through its catalogs, and then make their purchases via the Internet. The increase in sales primarily represented footwear, in particular in the running and lifestyles categories.

Direct-to-Customers division profit for the thirteen weeks ended November 1, 2008 remained unchanged, as compared with the corresponding prior-year period. For the thirty-nine weeks ended November 1, 2008, division profit increased by $1 million to $26 million, as compared with the corresponding prior-year period. Division profit, as a percentage of sales, decreased to 8.6 percent for the thirteen ended November 1, 2008, as compared with 8.7 percent for the corresponding prior-year period. Division profit, as a percentage of sales, for the thirty-nine weeks ended November 1, 2008 was 9.8 percent, unchanged as compared with the corresponding prior-year period.

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 for the thirteen weeks ended November 1, 2008 increased by $3 million to $17 million from the same period in the prior year. Corporate expense for the thirty-nine weeks ended November 1, 2008 increased by $23 million to $70 million from the same period in the prior year. Included in the thirteen and thirty-nine weeks ended November 1, 2008 is an impairment charge of $3 million, which was recorded to reduce the fair value of a short-term investment. Additionally, included in the thirty-nine weeks ended November 1, 2008 is the impairment charge of $15 million associated with a note receivable due from the purchaser of the Company's former Northern Group operation in Canada. The remaining increase for the thirty-nine weeks ended November 1, 2008 represents primarily increased incentive compensation.

Selling, General and Administrative

Selling, general and administrative expenses ("SG&A") of $287 million decreased by $2 million, or 0.7 percent, in the third quarter of 2008 as compared with the corresponding prior-year period. SG&A of $885 million increased by $20 million, or 2.3 percent, for the thirty-nine weeks ended November 1, 2008 as compared with the corresponding prior-year period. SG&A, as a percentage of sales, increased to 21.9 percent for the thirteen weeks ended November 1, 2008, as compared with 21.3 percent in the corresponding prior-year period. SG&A, as a percentage of sales, increased to 22.6 percent for the thirty-nine weeks ended November 1, 2008 as compared with 21.9 percent in the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, SG&A decreased $1 million and increased by $1 million for the thirteen and thirty-nine weeks ended November 1, 2008, respectively, as compared with the corresponding prior-year periods.

Depreciation and Amortization

   Depreciation and amortization decreased by $13 million in the third quarter
of 2008 to $32 million, as compared with $45 million for the third quarter of
2007. Depreciation and amortization decreased by $35 million for the thirty-nine
weeks ending November 1, 2008 to $97 million as compared with $132 million for
the thirty-nine weeks ending November 3, 2007. The decrease primarily reflects
reduced depreciation and amortization associated with the impairment charges
recorded during the third and fourth quarters of 2007.

Interest Expense

                                  Thirteen weeks ended                        Thirty-nine weeks ended
                           November 1,             November 3,         November 1,               November 3,
(in millions)                 2008                    2007                2008                      2007
Interest expense          $           4           $           5       $          13             $          15
Interest income                      (3 )                    (5 )                (9 )                     (15 )
Interest expense, net     $           1           $           -       $           4             $           -

Interest expense decreased primarily as a result of lower debt balances. The decrease in interest income was primarily the result of lower interest rates on cash, cash equivalents and short-term investments. The decrease in interest income for the thirty-nine weeks ended November 1, 2008 also reflects approximately $1 million lower income associated with the Northern Group note as compared with the corresponding prior-year periods.

Other (Income)/Expense

Other income of $5 million and $7 million for the thirteen and thirty-nine week periods ended November 1, 2008 is primarily 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. Also included in the thirty-nine weeks ended November 1, 2008 is a lease termination gain related to sale of a leasehold interest in Europe. Other expense of $1 million for the thirty-nine weeks ended November 3, 2007 primarily represented foreign currency option contract premiums.

Income Taxes

The Company's effective tax rate for the thirteen and thirty-nine weeks ended November 1, 2008 was 35.1 percent and 43.7 percent as compared with 41.3 percent and 42.2 percent for the corresponding prior-year periods. The effective rate for the thirteen weeks ended November 1, 2008 primarily reflects favorable settlement of audits, offset by the money market impairment charge, which was recorded without a tax benefit. The effective rate for the thirty-nine weeks ended November 1, 2008 reflects the items recorded during the third quarter and the establishment in the first quarter of a valuation allowance related to the tax benefit associated with the impairment of the Northern Group note receivable. The Company expects its effective rate to approximate 35.5 percent for the full year of 2008, excluding the effect of the Northern Group note valuation allowance. The actual rate will depend in significant part on the proportion of the Company's worldwide income that is earned in the U.S.

Net Income (Loss)

The Company reported net income of $24 million, or $0.16 per share, for the third quarter ended November 1, 2008 compared with a net loss of $33 million, or $0.22 per share, for the third quarter ended November 3, 2007. Net income for the thirty-nine weeks ended November 1, 2008 was $45 million, or $0.29 per share. This compares to a net loss of $34 million, or $0.22 per share, for the thirty-nine weeks ended November 3, 2007. Included in the thirty-nine weeks ended November 1, 2008 are charges totaling $21 million (after-tax), or $0.14 per share, representing an impairment charge of $3 million related to the write-down of the value of a short-term investment, an impairment charge of $15 million related to the Northern Group note receivable, and expenses of $3 million related to the store closing program. Included in the thirty-nine weeks ended November 3, 2007 are charges totaling $66 million (after-tax), or $0.43 per share, representing impairment charges totaling $64 million and store closing costs of $2 million.

LIQUIDITY AND CAPITAL RESOURCES

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 remodeling, and management information systems, and to fund general working capital requirements.

Management believes operating cash flows and the Company's current credit facility will be adequate to fund its working capital requirements, pension contributions for the Company's retirement plans, anticipated quarterly dividend payments, potential share repurchases, and to support the development of its short-term and long-term operating strategies.

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. 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.

During the three months ended November 1, 2008 the Company had $75 million of international cash 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 ("Manager"), that the redemption trades would be honored at a $1.00 per share net asset value; however, distribution has not yet been made to the Company. In addition, 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, 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 proceeds of the assets of the Fund may not be fully distributed until 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.

Any materially 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, as well as other factors listed under the heading "Disclosure Regarding Forward-Looking Statements," could affect the ability of the Company to continue to fund its needs from business operations.

Net cash provided by operating activities of continuing operations was $210 million and $63 million for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively. During the thirty-nine weeks ended November 1, 2008, the Company recorded a non-cash impairment charge of $15 million related to the Northern Group note receivable and $3 million related to the write-down of a short-term investment. The increase in operating cash flows primarily relates to the reduction in inventory purchases, net of accounts payable. The reduction in inventory purchases reflects a strategic priority designed to increase inventory turnover. Additionally, during the thirty-nine weeks ended November 1, 2008 the Company contributed $6 million to its Canadian qualified pension plan. No contributions to the U.S. or Canadian pension plans were made during the thirty-nine weeks ended November 3, 2007. Due to the pension asset performance experienced year-to-date, the Company may make a contribution 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 outcome of the Company's elections under the Pension Protection Act, as well as the plan asset performance for the balance of the year and any statutory or regulatory changes that may occur. The amount expected to be contributed to the Canadian plan during 2009 is approximately $3 million.

Net cash used in investing activities was $188 million for the thirty-nine weeks ended November 1, 2008. Net cash provided by investing activities was $6 million for the thirty-nine weeks ended November 3, 2007. During the thirty-nine weeks ended November 1, 2008, the Company did not purchase or sell short-term investments. However, reflected in investing activities is the reclassification of $75 million from cash and cash equivalents to short-term investments representing the Reserve International Liquidity money market fund. This compares with net sales of $123 million in the corresponding prior-year period. Capital expenditures for the thirty-nine weeks ended November 1, 2008 were $116 million, as compared with $117 million in the corresponding prior-year period. Capital expenditures forecasted for the full-year of 2008 are approximately $147 million, of which $121 million relates to modernizations of existing stores and new store openings, and $26 million reflects the development of information systems and other support facilities. The Company has the ability to revise and reschedule the anticipated capital expenditure program should the Company's financial position require it.

Net cash used in financing activities for the Company's operations was $162 million and $100 million for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively. During the thirty-nine weeks ended November 1, 2008 and November 3, 2007, the Company made payments of $88 million and $2 million, respectively, related to term loan. During the thirty-nine weeks ended November 1, 2008, the Company purchased and retired $6 million of the $200 million 8.50 percent debentures payable in 2022. The Company recorded an excess tax benefit related to stock-based compensation of $1 million for the thirty-nine weeks ended November 3, 2007. The Company declared and paid . . .