UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: November 3, 2007 or

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

For the transition period from              to             

Commission File Number: 1-13113

SAKS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

TENNESSEE	62-0331040
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)

12 East 49th Street New York, New York	10017
(Address of principal executive offices)	(Zip Code)

212-940-5305

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 30, 2007, the number of shares of the Registrant’s Common Stock outstanding was 141,738,894.

TABLE OF CONTENTS

			Page No.
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets – November 3, 2007, February 3, 2007 and October 28, 2006	3
		Condensed Consolidated Statements of Income – Three and Nine Months Ended November 3, 2007 and October 28, 2006	4
		Condensed Consolidated Statements of Cash Flows – Nine Months Ended November 3, 2007 and October 28, 2006	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
	Item 4.	Controls and Procedures	43
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	44
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
	Item 5.	Other Information	45
	Item 6.	Exhibits	45
SIGNATURES			46

2

SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)

	November 3, 2007		February 3, 2007		October 28, 2006
ASSETS
Current Assets
Cash and cash equivalents	$	63,464	$	277,883	$	767,393
Merchandise inventories		976,880		785,302		823,699
Other current assets		102,172		146,893		159,363
Deferred income taxes, net		23,509		40,763		31,521
Total current assets		1,166,025		1,250,841		1,781,976
Property and Equipment, net		1,091,196		1,099,331		1,108,330
Goodwill and Intangibles, net		304		324		331
Deferred Income Taxes, net		144,224		152,754		158,370
Other Assets		35,862		41,053		34,798
TOTAL ASSETS	$	2,437,611	$	2,544,303	$	3,083,805
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable	$	264,450	$	231,038	$	283,972
Accrued expenses and other current liabilities		278,025		382,346		390,632
Dividend payable		2,653		12,729		564,987
Current portion of long-term debt		260,433		236,667		6,890
Total current liabilities		805,561		862,780		1,246,481
Long-Term Debt		338,554		450,010		681,670
Other Long-Term Liabilities		166,031		135,374		135,090
Total liabilities		1,310,146		1,448,164		2,063,241
Commitments and Contingencies		—		—		—
Shareholders’ Equity		1,127,465		1,096,139		1,020,564
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,437,611	$	2,544,303	$	3,083,805

See notes to condensed consolidated financial statements.

3

SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	November 3, 2007			October 28, 2006			November 3, 2007			October 28, 2006
NET SALES	$	796,063		$	697,041		$	2,282,916		$	1,985,003
Cost of sales (excluding depreciation and amortization)		462,001			404,610			1,373,808			1,211,210
Gross margin		334,062			292,431			909,108			773,793
Selling, general and administrative expenses		205,981			182,327			613,084			563,698
Other operating expenses:
Property and equipment rentals		28,086			29,963			83,635			85,106
Depreciation and amortization		33,555			30,617			100,081			93,089
Taxes other than income taxes		20,137			20,547			62,106			61,918
Store pre-opening costs		436			70			697			359
Impairments and dispositions		413			2,420			4,111			8,010
OPERATING INCOME (LOSS)		45,454			26,487			45,394			(38,387	)
Interest expense		(10,199	)		(12,108	)		(32,100	)		(37,751	)
Gain (Loss) on extinguishment of debt		—			—			(5,634	)		7
Other income, net		2,333			6,197			6,903			21,948
INCOME (LOSS) BEFORE INCOME TAXES		37,588			20,576			14,563			(54,183	)
Provision (benefit) for income taxes		15,998			8,098			6,562			(25,225	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		21,590			12,478			8,001			(28,958	)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations		—			(17,485	)		—			193,535
Provision (benefit) for income taxes		—			(11,185	)		—			132,356
INCOME (LOSS) FROM DISCONTINUED OPERATIONS		—			(6,300	)		—			61,179
NET INCOME	$	21,590		$	6,178		$	8,001		$	32,221
Per-Share amounts - Basic
Income (Loss) from continuing operations	$	0.15		$	0.09		$	0.06		$	(0.21	)
Income (Loss) from discontinued operations	$	—		$	(0.05	)	$	—		$	0.45
Net Income	$	0.15		$	0.05		$	0.06		$	0.24
Per-Share Amounts - Diluted
Income (Loss) from continuing operations	$	0.14		$	0.09		$	0.05		$	(0.21	)
Income (Loss) from discontinued operations	$	—		$	(0.05	)	$	—		$	0.45
Net Income	$	0.14		$	0.05		$	0.05		$	0.24
Weighted average common shares:
Basic		141,102			135,646			141,077			135,043
Diluted		153,049			137,131			153,853			135,043

See notes to condensed consolidated financial statements.

4

SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

	Nine Months Ended
	November 3, 2007			October 28, 2006
Operating Activities:
Net Income	$	8,001		$	32,221
Income from discontinued operations		—			61,179
Income (loss) from continuing operations		8,001			(28,958	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		100,081			93,089
Impairments and dispositions		4,111			7,466
Equity compensation		4,641			33,404
Deferred income taxes		7,425			121,147
Excess tax benefit from stock-based compensation		(8,747	)		(3,212	)
Loss (Gain) on extinguishment of debt		5,634			(7	)
Change in operating assets and liabilities, net		(156,397	)		(121,919	)
Net Cash (Used In) Provided By Operating Activities - Continuing Operations		(35,251	)		101,010
Net Cash Used In Operating Activities - Discontinued Operations		—			(120,494	)
Net Cash Used In Operating Activities		(35,251	)		(19,484	)
Investing Activities:
Purchases of property and equipment		(102,177	)		(78,515	)
Proceeds from the sale of property and equipment		7,806			171
Net Cash Used In Investing Activities - Continuing Operations		(94,371	)		(78,344	)
Net Cash Provided By Investing Activities - Discontinued Operations		—			1,307,230
Net Cash (Used In) Provided By Investing Activities		(94,371	)		1,228,886
Financing Activities:
Proceeds from revolving credit facility		25,000			—
Payments on long-term debt and capital lease obligations		(117,560	)		(5,430	)
Cash dividends paid		(7,421	)		(542,766	)
Excess tax benefit from stock-based compensation		8,747			3,212
Purchases and retirements of common stock		(27,464	)		(6,531	)
Proceeds from issuance of common stock		33,901			29,255
Net Cash Used In Financing Activities - Continuing Operations		(84,797	)		(522,260	)
Net Cash Used In Financing Activities - Discontinued Operations		—			(149	)
Net Cash Used In Financing Activities		(84,797	)		(522,409	)
Increase (Decrease) in Cash and Cash Equivalents		(214,419	)		686,993
Cash and cash equivalents at beginning of period		277,883			77,312
Plus: Cash and cash equivalents included in assets held for sale at beginning of year		—			3,088
Less: Cash and cash equivalents included in assets held for sale at end of year					—
Cash and cash equivalents at end of period	$	63,464		$	767,393

See notes to condensed consolidated financial statements.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

NOTE 1 – GENERAL

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Operating results for the three and nine months ended November 3, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 2008 (fiscal year 2007). The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the “Company”). All intercompany amounts and transactions have been eliminated.

The accompanying condensed consolidated balance sheet at February 3, 2007 has been derived from the audited financial statements at that date but does not include all disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s 2006 Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

ORGANIZATION

The Company’s operations consist of Saks Fifth Avenue (SFA), Off Fifth, and Club Libby Lu. Previously, the Company also operated Saks Department Store Group (“SDSG”), which consisted of Proffitt’s and McRae’s (“Proffitt’s”) (sold to Belk, Inc. (“Belk”) in July 2005), the Northern Department Store Group (“NDSG”) (operated under the nameplates of Bergner’s, Boston Store, Carson Pirie Scott, Herberger’s and Younkers and sold to The Bon-Ton Stores, Inc. (“Bon-Ton”) in March 2006), and Parisian (sold to Belk in October 2006). The sold businesses are presented as discontinued operations in the condensed consolidated statements of income, and the condensed consolidated statements of cash flows for the prior year periods and are discussed in Note 2 “Discontinued Operations.”

6

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Net Sales – Net sales include sales of merchandise (net of returns and exclusive of sales taxes), commissions from leased departments, shipping and handling revenues related to merchandise sold and breakage income from unredeemed gift cards. Commissions from leased departments were $5,983 and $5,143 for the three months ended November 3, 2007 and October 28, 2006, respectively. Leased department sales were $43,174 and $36,413 for the three months ended November 3, 2007 and October 28, 2006, respectively, and were excluded from net sales. Commissions from leased departments were $19,290 and $17,154 for the nine months ended November 3, 2007 and October 28, 2006, respectively. Leased department sales were $136,272 and $121,141 for the nine months ended November 3, 2007 and October 28, 2006, respectively, and were excluded from net sales.

Cash and Cash Equivalents – Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with banks, and investments with banks and financial institutions that have original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash equivalents totaled $50,337 and $754,715 at November 3, 2007 and October 28, 2006, respectively, primarily consisting of money market funds, demand and time deposits. Income earned on cash equivalents was $788 and $6,130 for the three-month periods ended November 3, 2007 and October 28, 2006, respectively, and is reflected in Other Income. For the nine-month periods ended November 3, 2007 and October 28, 2006, income earned on these cash equivalents was $5,234 and $21,599, respectively, which was reflected in Other Income.

Income Taxes – The effective income tax rate for the three and nine-month periods ended November 3, 2007 was 42.6% and 45.1%, respectively, as compared to 39.4% and 46.6% for continuing operations, for the three and nine-month periods ended October 28, 2006. The increase in the effective rate for the three-month period ended November 3, 2007 was primarily due to an adjustment resulting from a state audit issue. The decrease in the effective tax rate for the nine-month period ended November 3, 2007 was primarily the result of the settlement of certain state tax examinations as well as other state tax reserve adjustments recorded in the nine-month period ended October 28, 2006.

For discontinued operations, the effective income tax rate for the three and nine-month periods ended October 28, 2006 was 64.0% and 68.4%, respectively. This effective income tax rate was higher than the expected rate due to the write-off of non-deductible goodwill related to the sale of NDSG.

Components of the Company’s income tax expense for the three and nine-month periods ended November 3, 2007 and October 28, 2006 were as follows:

	Three Months Ended					Nine Months Ended
	November 3, 2007		October 28, 2006			November 3, 2007			October 28, 2006
Continuing Operations:
Expected federal income taxes at 35%		13,156		7,202			5,097			(18,953	)
State income taxes, net of federal benefit		1,767		1,488			936			(4,945	)
Effect of settling tax exams and other tax reserve adjustments		872		—			565			(2,450	)
Other items, net		203		(592	)		(36	)		1,123
Provision (benefit) for income taxes	$	15,998	$	8,098		$	6,562		$	(25,225	)
Discontinued Operations:
Expected federal income taxes at 35%		—		(6,120	)		—			67,726
State income taxes, net of federal benefit		—		(1,173	)		—			17,323
Non-deductible goodwill		—		—			—			51,192
Parisian stock basis benefit		—		(3,895	)		—			(3,895	)
Other items, net		—		3			—			10
Provision (benefit) for income taxes	$	—	$	(11,185	)	$	—		$	132,356

7

The Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48) effective as of the beginning of fiscal year 2007. As a result of this adoption, the Company recorded a $33,672 decrease in the liability for unrecognized tax benefits which was accounted for as an increase to beginning shareholder’s equity. As of February 4, 2007, the Company had total gross unrecognized tax benefits of $43,956. Of this total, $12,575 represents the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months as a result of settling uncertain tax positions. However, the Company does not anticipate this to result in any material change to the amount of unrecognized tax benefits.

As a result of the analysis of uncertain tax positions (due to the adoption of FIN 48), the net deferred tax asset related to the state net operating loss carryforwards increased. Therefore, the Company performed a valuation allowance analysis to determine the realization of this asset. This analysis resulted in an additional valuation allowance of $19,258 with the offset recorded to shareholders’ equity in accordance with Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” The Company is subject to the provisions of Statement of Position 90-7 for these net operating losses since these losses were acquired through the acquisition of a company that had previously filed bankruptcy.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company had approximately $2,443 in interest and penalties related to unrecognized tax benefits accrued as of February 4, 2007.

8

The Company files a consolidated U.S. Federal income tax return as well as state tax returns in multiple state jurisdictions. The Company has completed examinations by the Internal Revenue Service for taxable years through January 29, 2005 with no significant adjustments. With respect to the state and local jurisdictions, the Company has completed examinations in many jurisdictions through the same period and currently has examinations in progress for several jurisdictions.

NOTE 2 – DISCONTINUED OPERATIONS

On March 6, 2006, the Company sold to Bon-Ton all outstanding equity interests of certain of the Company’s subsidiaries that owned NDSG (operating under the nameplates of Bergner’s, Boston Store, Carson Pirie Scott, Herberger’s and Younkers), either directly or indirectly. The consideration received consisted of approximately $1,115,000 in cash (reduced as described below based on changes in working capital), plus the assumption by Bon-Ton of approximately $35,000 of unfunded benefits liabilities and approximately $35,000 of capital leases. A working capital adjustment based on working capital as of the effective time of the transaction reduced the amount of cash proceeds by approximately $75,000 resulting in net cash proceeds to the Company of approximately $1,040,000. The disposition included NDSG’s operations consisting of, among other things, the following: the real and personal property, operating leases and inventory associated with 142 NDSG units (31 Carson Pirie Scott stores, 14 Bergner’s stores, 10 Boston Store stores, 40 Herberger’s stores, and 47 Younkers stores), administrative/headquarters facilities in Milwaukee, Wisconsin, and distribution centers located in Rockford, Illinois, Naperville, Illinois, Green Bay, Wisconsin, and Ankeny, Iowa. NDSG stores generated fiscal year 2005 revenues of approximately $2,168,000. The Company realized a net gain of $204,729 on the sale.

Bon-Ton entered into a Transition Service Agreement with the Company (“NDSG TSA”), whereby the Company continued to provide, for varying transition periods, back office services related to the NDSG operations. The back-office services included certain information technology, telecommunications, credit, accounting and store planning services, among others. Bon-Ton compensated the Company for these services, as outlined in the NDSG TSA. The results of the NDSG operations are reflected as discontinued operations in the accompanying condensed consolidated statements of income and the condensed consolidated statements of cash flows for the prior year periods presented.

On October 2, 2006, the Company sold to Belk all of the outstanding equity interests of the Company’s subsidiaries that conducted the Parisian business. The consideration received consisted of approximately $285,000 in cash (increased in accordance with a working capital adjustment). A working capital adjustment based on working capital as of the effective time of the transaction increased the amount of cash proceeds by approximately $14,200. In addition, Belk reimbursed the Company at closing for approximately $6,700 in capital expenditures incurred in connection with the construction of four new Parisian stores. Belk also paid the Company a premium associated with the purchase of accounts and accounts receivable from Household Bank (SB), N.A. (now known as HSBC Bank Nevada, N.A., “HSBC”), in the amount of approximately $2,300. The foregoing resulted in total net cash proceeds to the Company of approximately $308,200.

9

The disposition included Parisian’s operations consisting of, among other things, the following: real and personal property, operating leases and inventory associated with 38 Parisian stores (which generated fiscal year 2005 revenues of approximately $740,000), a 125,000 square foot administrative/headquarters facility in Birmingham, Alabama and a 180,000 square foot distribution center located in Steele, Alabama. The Company realized a net loss of $12,811 on the sale.

In connection with the consummation of the Parisian transaction, the Company entered into a Transition Services Agreement with Belk (“Parisian TSA”). Pursuant to the Parisian TSA, the Company provided, for varying transition periods, back-office services related to the Company’s former Parisian specialty department store business. The back-office services included information technology, telecommunications, credit, accounting and store planning services, among others. The results of the Parisian operations are reflected as discontinued operations in the accompanying condensed consolidated statements of income and the condensed consolidated statements of cash flows for the prior year periods presented.

Net sales of the aforementioned businesses that are included within discontinued operations in the accompanying condensed consolidated statements of income for the three and nine months ended October 28, 2006 are $111,843 and $624,290, respectively.

NOTE 3 – EARNINGS PER COMMON SHARE

Calculations of earnings per common share (“EPS”) for the three and nine months ended November 3, 2007 and October 28, 2006 are as follows (income and shares in thousands):

	For the Three Months Ended November 3, 2007						For the Three Months Ended October 28, 2006
	Net Income		Weighted Average Shares	Per Share Amount			Net Income		Weighted Average Shares	Per Share Amount
Basic EPS	$	21,590	141,102	$	0.15		$	6,178	135,646	$	0.05
Effect of dilutive stock options and convertible debentures		—	11,947		(0.01	)		—	1,485		—
Diluted EPS	$	21,590	153,049	$	0.14		$	6,178	137,131	$	0.05
	For the Nine Months Ended November 3, 2007						For the Nine Months Ended October 28, 2006
	Net Income		Weighted Average Shares	Per Share Amount			Net Income		Weighted Average Shares	Per Share Amount
Basic EPS	$	8,001	141,077	$	0.06		$	32,221	135,043	$	0.24
Effect of dilutive stock options and convertible debentures		—	12,776		(0.01	)		—	—		—
Diluted EPS	$	8,001	153,853	$	0.05		$	32,221	135,043	$	0.24

10

The Company had 1,269 and 3,052 option and performance share awards of potentially dilutive common stock outstanding as of November 3, 2007 and October 28, 2006, respectively, that were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares for the period or the performance condition has not been met. There were also 19,219 and 15,413 of potentially exercisable shares under the convertible notes at November 3, 2007 and October 28, 2006, respectively, that were not included in the computation of diluted EPS due to the assumption of net share settlement as discussed below (See Note 4). Additionally, included in the computation of diluted EPS as of November 3, 2007 are 11,327 potentially dilutive shares associated with shares the Company would issue to settle the difference between the fair value and the par value of the convertible notes upon conversion and the shares to be issued upon the exercise of a call option the Company sold at the time of issuance of the convertible debentures.

The FASB is contemplating an amendment to SFAS No. 128, “Earnings Per Share,” that would require the Company to ignore the cash presumption of net share settlement and to assume share settlement for purposes of calculating diluted earnings per share. Although the Company is now required to ignore the contingent conversion provision on its convertible notes under the Emerging Issues Task Force (“EITF”) 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share”, it can still presume that it will satisfy the net share settlement of the par value upon conversion of the notes in cash, and thus exclude the effect of the conversion of the notes in its calculation of diluted earnings per share. If and when the FASB amends SFAS No. 128, the effect of the changes would require the Company to use the if-converted method in calculating diluted earnings per share except when the effect would be anti-dilutive. The effect of adopting the amendment to SFAS No. 128 would increase the number of shares in the Company’s diluted calculation by 19,219 shares.

NOTE 4 – DEBT AND SHARE ACTIVITY

At the Company’s request, due to the sale of NDSG, the revolving credit facility was reduced from $800,000 to $500,000 in March 2006. In September 2006, the maturity date of the revolving credit facility was extended to September 2011.

During June 2006, the Company repurchased a total of approximately $193 in principal amount of senior notes. The repurchase of these notes resulted in a gain on extinguishment of debt of $7.

On April 12, 2007, the Company announced final results of its modified “Dutch Auction” tender offer to purchase a portion of its 8.25% senior notes due November 15, 2008 for an aggregate purchase price not to exceed $100,000 (the “offer cap”). The offer expired on April 11, 2007. The aggregate principal amount of notes validly tendered at or above the clearing spread exceeded the offer cap, and the Company accepted $95,872 aggregate principal amount of the notes, resulting in an aggregate purchase price of $100,000 (plus an additional $3,230 in aggregate accrued interest on such notes). The Company accepted for purchase first, all notes tendered at spreads above the clearing spread, and thereafter, the notes validly tendered at the clearing spread on a prorated basis according to the principal amount of such notes. During the three months ended May 5, 2007, the Company recorded a loss on extinguishment of debt of approximately $5,222 related to the repurchase of the notes.

11

During June and July 2007, the Company repurchased an additional $10,420 in principal amount primarily relating to its 8.25% senior notes. The repurchase of these notes resulted in a loss on extinguishment of debt of approximately $412.

On October 3, 2007, the Company gave notice that holders of its $230,000 2.0% convertible senior unsecured notes due March 15, 2024 were entitled to convert the convertible notes into shares of the Company’s common stock due to the closing price of the Company’s common stock exceeding 120% of the convertible senior notes’ conversion price for at least 20 out of the last 30 consecutive trading days in the third calendar quarter of 2007. The holders of the convertible notes have until December 31, 2007 to convert their notes into shares of the Company’s common stock in accordance with, and subject to, the terms of the convertible notes indenture. Since the holders of the convertible notes have the ability to exercise their conversion rights, the convertible notes were classified within “current portion of long-term debt” on the Company’s November 3, 2007 balance sheet. As of December 4, 2007, no note holders had converted their notes into the Company’s common stock.

During the three months ended November 3, 2007, the Company repurchased 1,722 shares of its common stock at a cost of approximately $27,464. At November 3, 2007, there were 35,658 shares remaining available for repurchase under the Company’s existing share repurchase program.

NOTE 5 – EMPLOYEE BENEFIT PLANS

The Company sponsors a defined benefit cash balance pension plan for many employees of the Company. In conjunction with the sale of NDSG, the Company sold to Bon-Ton the assets, and Bon-Ton assumed the liabilities, of the Carson Pirie Scott cash balance pension plan. The Company generally funds pension costs currently, subject to regulatory funding requirements. The components of net periodic pension expense related to the Company’s remaining pension plan for the three and nine months ended November 3, 2007 and October 28, 2006 were as follows:

	Three Months Ended						Nine Months Ended
	November 3, 2007			October 28, 2006			November 3, 2007			October 28, 2006
Service cost	$	331		$	1,200		$	993		$	3,906
Interest cost		1,838			2,095			5,514			7,568
Expected return on plan assets		(2,782	)		(2,324	)		(8,346	)		(8,243	)
Net amortization of losses and prior service costs		813			935			2,439			3,515
Net periodic pension expense	$	200		$	1,906		$	600		$	6,746

The Company expects minimal or no funding requirements in 2007 and 2008.

12

NOTE 6 – SHAREHOLDERS’ EQUITY

On March 6, 2006, the Company’s Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $547,500, and the Company reduced shareholders’ equity by that amount. Approximately $539,000 of the dividend was paid on May 1, 2006 to shareholders of record as of April 14, 2006. The remaining portion of the dividend payable will be paid prospectively as, and to the extent, awards of restricted stock and performance shares vest.

On October 3, 2006, the Company’s Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $558,600, and the Company reduced shareholders’ equity by that amount. Approximately $552,000 of the dividend was paid on November 30, 2006 to shareholders of record as of November 15, 2006. The remaining portion of the dividend payable will be paid prospectively as, and to the extent, awards of restricted stock and performance shares vest.

The following table summarizes the changes in shareholders’ equity for the nine months ended November 3, 2007:

	Common Stock Shares		Common Stock Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at February 3, 2007	140,440		$	14,048		$	1,097,817		$	12,620		$	(28,346	)	$	1,096,139
Adoption of FIN 48							36,528			(2,856	)					33,672
Increase valuation allowance							(19,258	)								(19,258	)
Net income										8,001						8,001
Dividend adjustment - cancelled restricted shares							2,655									2,655
Issuance of common stock	2,897			290			33,611									33,901
Income tax benefit related to employee stock plans							8,278									8,278
Net activity under stock compensation plans	664			66			294									360
Restricted shares withheld for taxes	(594	)		(62	)		(13,398	)								(13,460	)
Stock-based compensation							4,641									4,641
Repurchase of common stock	(1,722	)		(172	)		(27,292	)								(27,464	)
Balance at November 3, 2007	141,685		$	14,170		$	1,123,876		$	17,765		$	(28,346	)	$	1,127,465

NOTE 7 – STOCK-BASED COMPENSATION

The Company maintains an equity stock plan for the granting of options, stock appreciation rights, performance shares, restricted stock, and other forms of equity awards to employees and directors. Options granted generally vest over a four-year period after grant and have an exercise life of seven to ten years from the grant date. Restricted stock and performance shares generally vest one to three years after the grant date, although applicable plans permit accelerated vesting in certain circumstances at the discretion of the Human Resources and Compensation Committee of the Board of Directors.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.123 (revised 2004), “Share-Based Payments.”

13

This statement, referred to as “SFAS No. 123R,” revised SFAS No. 123, and requires companies to expense the value of employee stock options and similar awards. Effective January 29, 2006, the Company adopted SFAS No. 123R. The adoption of this standard had an immaterial effect on the Company’s fiscal year 2006 consolidated financial statements. Total stock-based compensation expense, net of related tax effects, for the three and nine months ended November 3, 2007 was $983 and $2,784, respectively, and total stock-based compensation expense for the three and nine months ended October 28, 2006 was $2,319 and $20,377, respectively.

As of November 3, 2007, the Company had unearned compensation amounts related to restricted stock of $16,972 included in Additional Paid-In Capital, which will be recognized over a weighted average period of less than three years.

NOTE 8 – CONTINGENCIES

LEGAL CONTINGENCIES

Investigations

At management’s request, the Audit Committee of the Company’s Board of Directors conducted an internal investigation in 2004 and 2005. In 2004, the Company informed the SEC of the Audit Committee’s internal investigation. Thereafter, the Company was informed by the SEC that it issued a formal order of private investigation. Thereafter, the Company was informed that the Office of the United States Attorney for the Southern District of New York had instituted an inquiry. On September 5, 2007, the SEC filed a complaint in United States District Court for the Southern District of New York related to improper collections of vendor markdown allowances in one of six Saks Fifth Avenue merchandising divisions prior to 2004 and a 2002 internal investigation into these collections, the improper timing of the recording of inventory markdowns at Saks Fifth Avenue in 1999 and 2001 and related accounting and disclosure issues. The Company consented to the entry of a final judgment by the Court without admitting or denying the allegations of the complaint filed by the SEC. The final judgment permanently enjoins the Company and its officers and employees from violating the federal securities laws related to the Company’s reporting, record-keeping and internal controls. No fines or other monetary sanctions were levied against the Company. The Company fully cooperated with the SEC during the course of the SEC’s investigation.

Vendor Litigations

On May 17, 2005, International Design Concepts, LLC (“IDC”) commenced litigation against the Company in the United States District Court for the Southern District of New York raising various claims, including breach of contract, fraud and unjust enrichment. The suit alleges that from 1996 to 2003 the Company improperly took chargebacks and deductions for vendor markdowns, which resulted in IDC going out of business.

14

The suit seeks damages in the amount of the unauthorized chargebacks and deductions. IDC filed a second amended complaint on June 14, 2005 asserting an additional claim for damages under the Uniform Commercial Code for vendor compliance chargebacks. On November 2, 2007 the Company and the plaintiff settled all of the claims, which were dismissed with prejudice by the court.

On October 25, 2005 the Chapter 7 trustee for the bankruptcy estate of Kleinert’s Inc. filed a complaint against the Company and several of its subsidiaries in the United States Bankruptcy Court for the Southern District of New York. In its initial complaint the plaintiff, as assignee, alleged breach of contract, fraud, and unjust enrichment, among other causes of action, and seeks compensatory and punitive damages due to the Company’s assessment of alleged improper chargebacks against Kleinert’s Inc. totaling approximately $4 million which wrongful acts the plaintiff alleges caused the insolvency and bankruptcy of Kleinert’s Inc. On August 15, 2006 the plaintiff, as assignee, filed an amended complaint in which it asserted several claims including, but not limited to, the Company’s allegedly unauthorized chargebacks. The Company and plaintiff entered into a settlement agreement, which was approved by the Bankruptcy Court on November 14, 2007, and all of the claims were dismissed with prejudice.

On December 8, 2005 Adamson Apparel, Inc. filed a purported class action lawsuit against the Company in the United States District Court for the Northern District of Alabama. In its complaint the plaintiff asserts breach of contract claims and alleges that the Company improperly assessed chargebacks, timely payment discounts, and deductions for merchandise returns against members of the plaintiff class. The lawsuit seeks compensatory and incidental damages and restitution.

Other

The Company is involved in legal proceedings arising from its normal business activities and has accruals for losses where appropriate. Management believes that none of these legal proceedings will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

NOTE 9 – NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FIN 48, an interpretation of SFAS No. 109, “Accounting for Income Taxes.” This interpretation clarifies the application of Statement 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. For a benefit to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The benefit to be recognized for a tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. FIN 48 also provides guidance on derecognition, classification of interest and penalties, accounting in interim periods, and disclosure. The Company adopted FIN 48 as of February 4, 2007.

15

During September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or a liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this Statement.

On September 29, 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). The Company adopted SFAS No. 158 prospectively on February 3, 2007. SFAS No. 158 requires an employer that sponsors one or more defined benefit pension plans or other postretirement plans to 1) recognize the funded status of a plan, measured as the difference between plan assets at fair value and the benefit obligation, in the balance sheet; 2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; 3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end balance sheet; and 4) disclose in the notes to the financial statements additional information about the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations. The adoption of SFAS No. 158 did not have a material effect on the Company’s results of operations or financial position for the fiscal year ended February 3, 2007. Additionally, SFAS No. 158 will require the Company to change the measurement date for the assets and liabilities of its employee benefit plans from November 1 to the Company’s fiscal year end beginning with the fiscal year ending January 31, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that currently are not required to be measured at fair value. This Statement is effective no later than fiscal years beginning on or after November 15, 2007. The Company is currently evaluating the impact this standard may have on its financial statements.

The FASB is contemplating an amendment to SFAS No. 128, “Earnings Per Share,” that would require the Company to ignore the cash presumption of net share settlement and to assume share settlement for purposes of calculating diluted earnings per share. Although the Company is now required to ignore the contingent conversion provision on its convertible notes under EITF 04-08, it can still presume that it will satisfy the net share settlement of the par value upon conversion of the notes in cash, and thus exclude the effect of the conversion of the notes in its calculation of diluted earnings per share. If and when the FASB amends SFAS No. 128, the effect of the changes would require the Company to use the if-converted method in calculating diluted earnings per share except when the effect would be anti-dilutive. The effect of adopting the amendment to SFAS No. 128 would increase the number of shares in the Company’s diluted calculation by 19,219 shares.

16

NOTE 10 – STORE DISPOSITIONS AND OTHER ACTIVITIES

The Company continuously evaluates its real estate portfolio and closes underproductive stores in the normal course of business as leases expire or as other circumstances indicate. The Company also performs an asset impairment analysis at each fiscal year end. During the three and nine months ended November 3, 2007, the Company incurred net charges of $413 and $4,111, respectively, primarily related to asset impairments in the normal course of business. During the three and nine months ended October 28, 2006, the Company incurred net charges of $2,420 and $8,010, respectively, primarily related to asset impairments. Asset impairments are included in Impairments and Dispositions in the accompanying Condensed Consolidated Statements of Income.

During the three and nine months ended November 3, 2007, the Company incurred expenses of approximately $882 and $26,843, respectively, for severance, retention and transition costs in connection with the Company downsizing following the disposition of its SDSG businesses (discussed in Note 2). Expenses for severance, retention and transition costs for the three and nine months ended October 28, 2006 were $8,085 and $20,327, respectively. Severance, retention and transition costs are included in Selling, General & Administrative Expenses in the accompanying Condensed Consolidated Statements of Income. There was a $15,115 payable related to these charges at November 3, 2007.

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following tables present condensed consolidating financial information for: (1) Saks Incorporated and (2) on a combined basis, the guarantors of Saks Incorporated’s senior notes (which are all of the wholly owned subsidiaries of Saks Incorporated).

The condensed consolidating financial statements presented as of and for the three and nine-month periods ended November 3, 2007 and October 28, 2006 and as of February 3, 2007 reflect the legal entity compositions at the respective dates.

Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally, fully and unconditionally liable under the guarantees. Borrowings and the related interest expense under the Company’s revolving credit agreement are allocated to Saks Incorporated and the guarantor subsidiaries under an intercompany revolving credit arrangement. There are also management and royalty fee arrangements among Saks Incorporated and the subsidiaries. At November 3, 2007, Saks Incorporated was the sole obligor for a majority of the Company’s long-term debt and maintained a small group of corporate employees.

17

SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT NOVEMBER 3, 2007

(Dollar Amounts In Thousands)

	Saks Incorporated		Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	50,337	$	13,127				$	63,464
Merchandise inventories				976,880					976,880
Other current assets				102,172					102,172
Deferred income taxes, net				23,509					23,509
Total Current Assets		50,337		1,115,688		—			1,166,025
Property and Equipment, net				1,091,196					1,091,196
Goodwill and Intangibles, net				304					304
Deferred Income Taxes, net				144,224					144,224
Other Assets		8,658		27,204					35,862
Investment in and Advances to Subsidiaries		1,606,269			($	1,606,269	)
Total Assets	$	1,665,264	$	2,378,616	($	1,606,269	)	$	2,437,611
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable			$	264,450				$	264,450
Accrued expenses and other current liabilities	$	3,772		274,253					278,025
Dividend payable		2,653							2,653
Current portion of long-term debt		255,000		5,433					260,433
Total Current Liabilities		261,425		544,136		—			805,561
Long-Term Debt		276,374		62,180					338,554
Other Long-Term Liabilities				166,031					166,031
Investment by and Advances from Parent				1,606,269	($	1,606,269	)
Shareholders’ Equity		1,127,465							1,127,465
Total Liabilities and Shareholders’ Equity	$	1,665,264	$	2,378,616	($	1,606,269	)	$	2,437,611

18

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED NOVEMBER 3, 2007

(Dollar Amounts In Thousands)

	Saks Incorporated			Guarantor Subsidiaries			Eliminations			Consolidated
Net sales				$	796,063					$	796,063
Costs and expenses
Cost of sales					462,001						462,001
Selling, general and administrative expenses	$	698			205,283						205,981
Other operating expenses		12			81,766						81,778
Store pre-opening costs					436						436
Impairments and dispositions					413						413
Operating Income (loss)		(710	)		46,164			—			45,454
Other income (expense)
Equity in earnings of subsidiaries		26,359					($	26,359	)
Interest expense		(7,966	)		(2,233	)					(10,199	)
Other income, net		2,333									2,333
Income before provision (benefit) for income taxes		20,016			43,931			(26,359	)		37,588
Provision (benefit) for income taxes		(1,574	)		17,572						15,998
Net Income	$	21,590		$	26,359		($	26,359	)	$	21,590

19

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED NOVEMBER 3, 2007

(Dollar Amounts In Thousands)

	Saks Incorporated			Guarantor Subsidiaries			Eliminations			Consolidated
Net sales				$	2,282,916					$	2,282,916
Costs and expenses
Cost of sales					1,373,808						1,373,808
Selling, general and administrative expenses	$	3,296			609,788						613,084
Other operating expenses		63			245,759						245,822
Store pre-opening costs					697						697
Impairments and dispositions					4,111						4,111
Operating Income (Loss)		(3,359	)		48,753			—			45,394
Other income (expense)
Equity in earnings of subsidiaries		25,198					($	25,198	)
Interest expense		(25,343	)		(6,757	)					(32,100	)
Loss on extinguishment of debt		(5,634	)								(5,634	)
Other income, net		6,903									6,903
Income (loss) before benefit for income taxes		(2,235	)		41,996			(25,198	)		14,563
Provision (Benefit) for income taxes		(10,236	)		16,798						6,562
Net Income	$	8,001		$	25,198		($	25,198	)	$	8,001

20

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED NOVEMBER 3, 2007

(Dollar Amounts In Thousands)

	Saks Incorporated			Guarantor Subsidiaries			Eliminations			Consolidated
OPERATING ACTIVITIES
Net Income	$	8,001		$	25,198		($	25,198	)	$	8,001
Adjustments to reconcile net income to net cash used in operating activities:
Equity in earnings of subsidiaries		(25,198	)					25,198			—
Excess tax benefit from exercise of stock options		(8,747	)								(8,747	)
Depreciation and amortization					100,081						100,081
Provision for employee stock compensation		4,641									4,641
Deferred income taxes					7,425						7,425
Impairments and dispositions					4,111						4,111
Loss on extinguishment of debt		5,634									5,634
Changes in operating assets and liabilities, net		6,994			(163,391	)					(156,397	)
Net Cash Used In Operating Activities		(8,675	)		(26,576	)		—			(35,251	)
INVESTING ACTIVITIES
Purchases of property and equipment					(102,177	)					(102,177	)
Proceeds from the sale of assets					7,806						7,806
Net Cash Used In Investing Activities		—			(94,371	)		—			(94,371	)
FINANCING ACTIVITIES
Intercompany borrowings, contributions and distributions		(128,427	)		128,427						—
Payments on long-term debt and capital lease obligations		(110,832	)		(6,728	)					(117,560	)
Borrowings under credit/receivables facility		25,000									25,000
Payment of dividend		(7,421	)								(7,421	)
Excess tax benefit from exercise of stock options		8,747									8,747
Repurchase and retirement of common stock		(27,464	)								(27,464	)
Proceeds from issuance of common stock		33,901									33,901
Net Cash Provided By (Used In) Financing Activities		(206,496	)		121,699			—			(84,797	)
Increase (Decrease) In Cash and Cash Equivalents		(215,171	)		752			—			(214,419	)
Cash and Cash Equivalents at beginning of period		265,508			12,375						277,883
Cash and Cash Equivalents at end of period	$	50,337		$	13,127			—		$	63,464

21

SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT OCTOBER 28, 2006

(Dollar Amounts In Thousands)

	Saks Incorporated		Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	754,715	$	12,678				$	767,393
Merchandise inventories				823,699					823,699
Other current assets				159,363					159,363
Deferred income taxes, net				31,521					31,521
Total Current Assets		754,715		1,027,261		—			1,781,976
Property and Equipment, net				1,108,330					1,108,330
Goodwill and Intangibles, net				331					331
Deferred Income Taxes, net				158,370					158,370
Other Assets		11,905		22,893					34,798
Investment in and Advances to Subsidiaries		1,442,163			($	1,442,163	)
Total Assets	$	2,208,783	$	2,317,185	($	1,442,163	)	$	3,083,805
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable			$	283,972				$	283,972
Accrued expenses and other current liabilities	$	10,471		380,161					390,632
Dividend payable		564,987							564,987
Current portion of long-term debt				6,890					6,890
Total Current Liabilities		575,458		671,023		—			1,246,481
Long-Term Debt		612,278		69,392					681,670
Other Long-Term Liabilities		483		134,607					135,090
Investment by and Advances from Parent				1,442,163	($	1,442,163	)
Shareholders’ Equity		1,020,564							1,020,564
Total Liabilities and Shareholders’ Equity	$	2,208,783	$	2,317,185	($	1,442,163	)	$	3,083,805

22

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED OCTOBER 28, 2006

(Dollar Amounts In Thousands)

	Saks Incorporated			Guarantor Subsidiaries			Eliminations			Consolidated
Net sales				$	697,041					$	697,041
Costs and expenses
Cost of sales					404,610						404,610
Selling, general and administrative expenses	$	1,843			180,484						182,327
Other operating expenses		21			81,106						81,127
Store pre-opening costs					70						70
Impairments and dispositions					2,420						2,420
Operating Income (loss)		(1,864	)		28,351			—			26,487
Other income (expense)
Equity in earnings of subsidiaries		15,947					($	15,947	)
Interest expense		(10,072	)		(2,036	)					(12,108	)
Other income, net		6,197									6,197
Income from continuing operations before provision (benefit) for income taxes		10,208			26,315			(15,947	)		20,576
Provision (benefit) for income taxes		(2,270	)		10,368						8,098
Income from continuing operations		12,478			15,947			(15,947	)		12,478
Discontinued operations:
Equity in earnings of subsidiaries - discontinued operations (net of tax)		(6,300	)					6,300
Loss from discontinued operations					(17,485	)					(17,485	)
Benefit for income taxes					(11,185	)					(11,185	)
Loss from discontinued operations		(6,300	)		(6,300	)		6,300			(6,300	)
Net income	$	6,178		$	9,647		($	9,647	)	$	6,178

23

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED OCTOBER 28, 2006

(Dollar Amounts In Thousands)

	Saks Incorporated			Guarantor Subsidiaries			Eliminations			Consolidated
Net sales				$	1,985,003					$	1,985,003
Costs and expenses
Cost of sales					1,211,210						1,211,210
Selling, general and administrative expenses	$	5,171			558,527						563,698
Other operating expenses		102			240,011						240,113
Store pre-opening costs					359						359
Impairments and dispositions					8,010						8,010
Operating loss		(5,273	)		(33,114	)		—			(38,387	)
Other income (expense)
Equity in earnings of subsidiaries - continuing operations		(21,607	)				$	21,607
Interest expense		(30,403	)		(7,348	)					(37,751	)
Gain on extinguishment of debt		7									7
Other income, net		21,948									21,948
Loss from continuing operations before
Benefit for income taxes		(35,328	)		(40,462	)		21,607			(54,183	)
Benefit for income taxes		(6,370	)		(18,855	)					(25,225	)
Loss from continuing operations		(28,958	)		(21,607	)		21,607			(28,958	)
Discontinued operations:
Equity in earnings of subsidiaries - discontinued operations (net of tax)		61,179						(61,179	)
Income from discontinued operations (including gain on disposal of $192,076)					193,535						193,535
Provision for income taxes					132,356						132,356
Income from discontinued operations		61,179			61,179			(61,179	)		61,179
Net income	$	32,221		$	39,572		($	39,572	)	$	32,221

24

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 28, 2006

(Dollar Amounts In Thousands)

	Saks Incorporated			Guarantor Subsidiaries			Eliminations			Consolidated
OPERATING ACTIVITIES
Net income	$	32,221		$	39,572		($	39,572	)	$	32,221
Income from discontinued operations		61,179			61,179			(61,179	)		61,179
Loss from continuing operations		(28,958	)		(21,607	)		21,607			(28,958	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries - continuing operations		21,607						(21,607	)		—
Excess tax benefit from exercise of stock options		(3,212	)								(3,212	)
Depreciation and amortization					93,089						93,089
Equity compensation		33,404									33,404
Deferred income taxes					121,147						121,147
Impairments and dispositions					7,466						7,466
Loss on extinguishment of debt		(7	)								(7	)
Changes in operating assets and liabilities, net		4,191			(126,110	)					(121,919	)
Net Cash Provided by Operating Activities - Continuing Operations		27,025			73,985			—			101,010
Net Cash Used In Operating Activities - Discontinued Operations					(120,494	)					(120,494	)
Net Cash Provided By (Used In) Operating Activities		27,025			(46,509	)		—			(19,484	)
INVESTING ACTIVITIES
Purchases of property and equipment					(78,515	)					(78,515	)
Proceeds from the sale of assets					171						171
Net Cash Used In Investing Activities - Continuing Operations		—			(78,344	)		—			(78,344	)
Net Cash Provided by Investing Activities - Discontinued Operations					1,307,230						1,307,230
Net Cash Provided By Investing Activities		—			1,228,886			—			1,228,886
FINANCING ACTIVITIES
Intercompany borrowings, contributions and distributions		1,198,783			(1,198,783	)
Payments on long-term debt and capital lease obligations		(263	)		(5,167	)					(5,430	)
Payment of Dividend		(542,766	)								(542,766	)
Purchases and retirements of common stock		(6,531	)								(6,531	)
Proceeds from issuance of common stock		29,255									29,255
Excess tax benefit from exercise of stock options		3,212									3,212
Net Cash Provided by (Used) In Financing Activities - Continuing Operations		681,690			(1,203,950	)		—			(522,260	)
Net Cash Used In Financing Activities - Discontinued Operations					(149	)					(149	)
Net Cash Provided By (Used In) Financing Activities		681,690			(1,204,099	)		—			(522,409	)
Increase In Cash and Cash Equivalents		708,715			(21,722	)					686,993
Cash and Cash Equivalents at beginning of period		46,000			31,312						77,312
Plus: Cash and Cash Equivalents included in assets held for sale at beginning of year					3,088						3,088
Less: Cash and Cash Equivalents included in assets held for sale at end of year
Cash and Cash Equivalents at end of period	$	754,715		$	12,678			—		$	767,393

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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT FEBRUARY 3, 2007

(Dollar Amounts In Thousands)

	Saks Incorporated		Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	265,508	$	12,375				$	277,883
Merchandise inventories				785,302					785,302
Other current assets				146,893					146,893
Deferred income taxes, net				40,763					40,763
Total Current Assets		265,508		985,333		—			1,250,841
Property and Equipment, net				1,099,331					1,099,331
Goodwill and Intangibles, net				324					324
Deferred Income Taxes, net				152,754					152,754
Other Assets		11,126		29,927					41,053
Investment in and Advances to Subsidiaries		1,454,660			($	1,454,660	)
Total Assets	$	1,731,294	$	2,267,669	($	1,454,660	)	$	2,544,303
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable			$	231,038				$	231,038
Accrued expenses and other current liabilities	$	22,552		372,523					395,075
Current portion of long-term debt		230,000		6,667					236,667
Total Current Liabilities		252,552		610,228		—			862,780
Long-Term Debt		382,336		67,674					450,010
Other Long-Term Liabilities		267		135,107					135,374
Investment by and Advances from Parent				1,454,660	($	1,454,660	)
Shareholders’ Equity		1,096,139							1,096,139
Total Liabilities and Shareholders’ Equity	$	1,731,294	$	2,267,669	($	1,454,660	)	$	2,544,303

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis (“MD&A”) is intended to provide an analytical view of the business from management’s perspective and has four major components:

• Management’s Overview

• Results of Operations

• Liquidity and Capital Resources

• Critical Accounting Policies

MD&A should be read in conjunction with the condensed consolidated financial statements and related notes thereto contained elsewhere in this report.

MANAGEMENT’S OVERVIEW

GENERAL

The operations of Saks Incorporated and its subsidiaries (together the “Company”) consist of Saks Fifth Avenue (“SFA”), Off Fifth, and Club Libby Lu (“CLL”). Previously, the Company also operated Saks Department Store Group (“SDSG”), which consisted of Proffitt’s and McRae’s (“Proffitt’s”) (sold to Belk, Inc. (“Belk”) in July 2005), the Northern Department Store Group (“NDSG”) (operated under the nameplates of Bergner’s, Boston Store, Carson Pirie Scott, Herberger’s and Younkers and sold to The Bon-Ton Stores, Inc. (“Bon-Ton”) in March 2006), and Parisian (sold to Belk in October 2006). The sold businesses are presented as discontinued operations in the condensed consolidated statements of income and the condensed consolidated statements of cash flows for the prior year periods and are discussed below at “Discontinued Operations.”

SFA stores are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls, and the stores typically offer a wide assortment of distinctive luxury fashion apparel, shoes, accessories, jewelry, cosmetics and gifts. Customers may also purchase SFA products offered in catalogs or online at www.saks.com. Off Fifth is intended to be the premier luxury off-price retailer in the United States and also provides an outlet for the sale of end-of-season clearance merchandise. Off Fifth stores are primarily located in upscale mixed-use and off-price centers and offer luxury apparel, shoes, accessories, cosmetics and decorative home furnishings, targeting the value-conscious customer. CLL consists of mall-based specialty stores, targeting girls aged 4-12 years old. As of November 3, 2007, Saks operated 54 SFA stores with 6.0 million square feet, 49 Off 5th units with 1.4 million square feet, and 93 CLL specialty stores, which includes 73 standalone stores and 20 store-in-stores in the former SDSG businesses, with 0.1 million square feet.

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DISCONTINUED OPERATIONS

On July 5, 2005, Belk acquired from the Company for $622.7 million in cash substantially all of the assets directly involved in the Company’s Proffitt’s business operations, plus the assumption of approximately $1 million in capitalized lease obligations and the assumption of certain other ordinary course liabilities associated with the acquired assets. The assets sold included the real and personal property and inventory associated with 22 Proffitt’s stores and 25 McRae’s stores that generated fiscal 2004 revenues of approximately $784 million. The Company realized a net gain of $155.5 million on the sale.

On March 6, 2006, the Company sold to Bon-Ton all outstanding equity interests of certain of the Company’s subsidiaries that owned NDSG, either directly or indirectly. The consideration received consisted of approximately $1.12 billion in cash (reduced as described below based on changes in working capital), plus the assumption by Bon-Ton of approximately $35 million of unfunded benefit liabilities and approximately $35 million of capital leases. A working capital adjustment based on working capital as of the effective time of the transaction reduced the amount of cash proceeds by approximately $75 million resulting in net cash proceeds to the Company of approximately $1.04 billion. The disposition included NDSG’s operations consisting of, among other things, the following: the real and personal property, operating leases and inventory associated with 142 NDSG units (31 Carson Pirie Scott stores, 14 Bergner’s stores, 10 Boston Store stores, 40 Herberger’s stores, and 47 Younkers stores), administrative/headquarters facilities in Milwaukee, Wisconsin, and distribution centers located in Rockford, Illinois, Naperville, Illinois, Green Bay, Wisconsin, and Ankeny, Iowa. NDSG generated fiscal year 2005 revenues of approximately $2.2 billion. The Company realized a net gain of $204.7 million on the sale.

On October 2, 2006, the Company sold to Belk all of the outstanding equity interests of the Company’s subsidiaries that conducted the Parisian specialty department store business (“Parisian”). The consideration received consisted of $285.0 million in cash (increased in accordance with a working capital adjustment described below). In addition, Belk reimbursed the Company at closing for $6.7 million in capital expenditures incurred in connection with the construction of four new Parisian stores. Belk also paid the Company an additional amount associated with the purchase of accounts and accounts receivable from Household Bank (SB), N.A. (now known as HSBC Bank Nevada, N.A., “HSBC”), in the amount of $2.3 million. A working capital adjustment based on working capital as of the effective time of the transaction increased the amount of cash proceeds by $14.2 million resulting in net cash proceeds of $308.2 million. The disposition included Parisian’s operations consisting of, among other things, the following: real and personal property, operating leases and inventory associated with 38 Parisian stores (which generated fiscal 2005 revenues of approximately $740 million), an administrative/headquarters facility in Birmingham, Alabama and a distribution center located in Steele, Alabama. The Company realized a net loss of $12.8 million on the sale.

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FINANCIAL PERFORMANCE SUMMARY

The Company recorded net income of $21.6 million, or $0.14 per share for the three months ended November 3, 2007. For the three months ended October 28, 2006, the Company recorded income from continuing operations of $12.5 million or $0.09 per share. After recognition of the Company’s after-tax loss from discontinued operations of $6.3 million, or $0.05 per share, related to the sale of Parisian, net income totaled $6.2 million, or $0.05 per share, for the third quarter ended October 28, 2006.

The three-month period ended November 3, 2007 included legal and investigation costs of approximately $2.7 million (net of taxes), or $.02 per share, associated with the previously disclosed investigation by the Securities and Exchange Commission (“SEC”) (which has been concluded) and the investigation by the Office of the United States Attorney for the Southern District of New York as well as the settlement of two related vendor lawsuits. The current year third quarter also included after tax charges of approximately $0.5 million related to retention, severance and transition costs due to the Company downsizing and consolidation following the disposition of the SDSG businesses, $0.3 million due to asset impairment and dispositions and $0.8 million, or $.01 per share, resulting from an increase in income tax reserves related to certain tax examinations.

The three-month period ended October 28, 2006 included after tax expenses of approximately $4.9 million, or $.04 per share, for retention, severance and transition costs, $0.4 million related to the aforementioned investigations and $1.5 million, or $.01 per share, due to asset impairments and dispositions. The latter expenses were partially offset by a one-time gain of approximately $2.6 million (net of taxes), or $.02 per share, related to modifications made to the SFA pension plan.

The Company believes that an understanding of its reported financial condition and results of operations is not complete without considering the effect of all other components of MD&A included herein.

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RESULTS OF OPERATIONS

The following table shows, for the periods indicated, items from the Company’s Condensed Consolidated Statements of Income expressed as percentages of net sales. (numbers may not total due to rounding)

	Three Months Ended				Nine Months Ended
	November 3, 2007		October 28, 2006		November 3, 2007		October 28, 2006
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of sales (excluding depreciation and amortization)	58.0	%	58.0	%	60.2	%	61.0	%
Selling, general & administrative expenses	25.9	%	26.2	%	26.9	%	28.4	%
Other operating expenses	10.3	%	11.6	%	10.8	%	12.1	%
Store pre-opening costs	0.1	%	0.0	%	0.0	%	0.0	%
Impairments and dispositions	0.1	%	0.3	%	0.2	%	0.4	%
Operating Income (loss)	5.7	%	3.8	%	2.0	%	-1.9	%
Other income (expense):
Interest expense	-1.3	%	-1.7	%	-1.4	%	-1.9	%
Loss on extinguishment of debt	0.0	%	0.0	%	-0.2	%	0.0	%
Other income, net	0.3	%	0.9	%	0.3	%	1.1	%
Income (loss) before income taxes	4.7	%	3.0	%	0.6	%	-2.7	%
Provision (benefit) for income taxes	2.0	%	1.2	%	0.3	%	-1.3	%
Income (loss) from continuing operations	2.7	%	1.8	%	0.4	%	-1.5	%
Discontinued operations:
Income from discontinued operations (including gain on disposal)	0.0	%	-2.5	%	0.0	%	9.7	%
Provision (benefit) for income taxes	0.0	%	-1.6	%	0.0	%	6.7	%
Income (loss) from discontinued operations	0.0	%	-0.9	%	0.0	%	3.1	%
Net income	2.7	%	0.9	%	0.4	%	1.6	%

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THREE MONTHS ENDED NOVEMBER 3, 2007 COMPARED TO THREE MONTHS ENDED OCTOBER 28, 2006

DISCUSSION OF OPERATING INCOME

The following table shows the changes in operating income from the three-month period ended October 28, 2006 to the three-month period ended November 3, 2007:

(In Millions)	Total Company
For the three months ended October 28, 2006	$	26.5
Store sales and margin		41.6
Operating expenses		(24.7	)
Impairments and dispositions		2.0
Increase		18.9
For the three months ended November 3, 2007	$	45.4

For the three-month period ended November 3, 2007, operating income improved to $45.4 million, a 71.6% improvement from operating income of $26.5 million for the same period last year. The improvement in operating income for the quarter was driven by an 11.4% increase in comparable store sales and expense management which resulted in a 160 basis point improvement in the expense rate as a percent of sales. The Company achieved approximately 30 basis points of improvement in the third quarter SG&A expense rate as a percentage of sales. The Company also reduced Other Operating Expenses (rents, depreciation, taxes other than income taxes and store pre-opening costs) by 130 basis points in the quarter. Gross margin remained flat year-over-year as a result of modest downward pressure on merchandise margins which was offset by revenue from unredeemed gift cards.

NET SALES

For the three months ended November 3, 2007, total sales increased 14.2% to $796.1 million from $697.0 million for the three months ended October 28, 2006. Similarly, consolidated comparable store sales increased 11.4% year-over-year. The net effect of sales from new and closed stores resulted in a $.7 million increase and the effect of the reopening of the New Orleans store resulted in a $12 million increase.

Comparable store sales are calculated on a rolling 13-month basis. Thus, to be included in the comparison, a store must be open for 13 months. The additional month is used to transition the first month impact of a new store opening. Correspondingly, closed stores are removed from the comparable store sales comparison when they begin liquidating merchandise. Expanded, remodeled and converted stores are included in the comparable store sales comparison, except for the periods in which they are closed for remodeling and renovation.

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GROSS MARGIN

For the three months ended November 3, 2007, gross margin was $334.1 million, or 42.0% of net sales, compared to $292.4 million, or 42.0% of net sales, for the three months ended October 28, 2006. The flat year-over-year gross margin was the result of modest downward pressure on merchandise margins which was offset by revenue from unredeemed gift cards.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (“SG&A”)

For the three months ended November 3, 2007, SG&A was $206.0 million, or 25.9% of net sales, compared to $182.3 million, or 26.2% of net sales, for the three months ended October 28, 2006. The $23.7 million increase was principally related to higher variable expenses associated with the $99 million sales increase, an increase in legal and investigation costs and legal settlements of approximately $3.8 million and an increase due to a one-time gain of approximately $4.3 million related to modifications made to SFA’s pension plan during the third quarter ending October 28, 2006. This was partially offset by a decrease in severance, retention, and transition costs of approximately $7.2 million. As a percentage of sales, SG&A decreased by 30 basis points over the prior year.

OTHER OPERATING EXPENSES

For the three months ended November 3, 2007, other operating expenses, including store pre-opening costs, were $82.2 million, or 10.3% of net sales, compared to $81.2 million, or 11.6% of net sales, for the three months ended October 28, 2006. This increase of $1.0 million was driven primarily by higher depreciation. As a percent of sales, other operating expenses decreased 130 basis points in 2007, reflecting the ability to leverage primarily fixed costs on the increased sales.

IMPAIRMENTS AND DISPOSITIONS

For the three months ended November 3, 2007, the Company realized losses from impairments and dispositions of $0.4 million, or 0.1% of net sales, compared to a loss of $2.4 million, or 0.3% of net sales, for the three months ended October 28, 2006. The current and prior quarter net charges were primarily due to asset impairments in the normal course of business.

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INTEREST EXPENSE

For the three months ended November 3, 2007, interest expense was $10.2 million, or 1.3% of net sales, compared to $12.1 million, or 1.7% of net sales, for the three months ended October 28, 2006. The improvement of $1.9 million was primarily due to the reduction in debt resulting from the repurchase of $106.3 million of senior notes during the nine months ending November 3, 2007.

INCOME TAXES

For continuing operations, the effective income tax rates for the three-month periods ended November 3, 2007 and October 28, 2006 was 42.6% and 39.4%, respectively. The increase in the effective rate for the three-month period ended November 3, 2007 was primarily due to an adjustment resulting from a state audit issue. The effective income tax rate for discontinued operations for the three-month period ended October 28, 2006 was 64.0%. The effective income tax rate was higher than the expected rate due to the write-off of non-deductible goodwill related to the sale of NDSG.

NINE MONTHS ENDED NOVEMBER 3, 2007 COMPARED TO NINE MONTHS ENDED OCTOBER 28, 2006

DISCUSSION OF OPERATING INCOME

The following table shows the changes in operating income from the nine-month period ended October 28, 2006 to the nine-month period ended November 3, 2007:

(In Millions)	Total Company
For the nine months ended October 28, 2006	$	(38.4	)
Store sales and margin		135.3
Operating expenses		(55.4	)
Impairments and dispositions		3.9
Increase		83.8
For the nine months ended November 3, 2007	$	45.4

For the nine-month period ended November 3, 2007, operating income improved to $45.4 million from an operating loss of $38.4 million for the nine-month period ended October 28, 2006. The improvement in operating income for the nine months ended November 3, 2007 was driven by a 13.0% increase in comparable store sales and expense management which resulted in a 290 basis point improvement in the expense rate as a percentage of sales. Additionally, the gross margin rate improved 80 basis points for the nine months ended November 3, 2007. The improvement in gross margin dollars and the gross margin rate was principally attributable to the higher sales driven by the strengthening of merchandise assortments by store and enhancements to the merchandise planning and allocation process.

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NET SALES

For the nine months ended November 3, 2007, total sales increased 15.0% to $2,282.9 million from $1,985.0 million for the nine months ended October 28, 2006. Similarly, consolidated comparable store sales increased 13.0% year-over-year. The net effect of sales from new and closed stores resulted in a $1.0 million reduction, while the net effect of the reopening of the New Orleans store resulted in a $37.8 million increase.

GROSS MARGIN

For the nine months ended November 3, 2007, gross margin was $909.1 million, or 39.8% of net sales, compared to $773.8 million, or 39.0% of net sales, for the nine months ended October 28, 2006. The improvement in gross margin dollars and the gross margin rate was principally attributable to the higher sales driven by the strengthening of merchandise assortments by store and enhancements to the merchandise planning and allocation process.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (“SG&A”)

For the nine months ended November 3, 2007, SG&A was $613.1 million, or 26.9% of net sales, compared to $563.7 million, or 28.4% of net sales, for the nine months ended October 28, 2006. The net increase of $49.4 million in expenses was primarily driven by higher variable expenses associated with the year over year sales increase of $297.9 million and an increase of $6.5 million of severance, retention and transition costs due to the Company downsizing and consolidation following the disposition of its SDSG businesses. This is partially offset by a decrease in SG&A as the prior year period included a $19.6 million charge associated with the anti-dilution adjustment made to outstanding options related to the Company’s $4 per share dividend paid on May 1, 2006. As a percentage of sales, SG&A decreased by 150 basis points over the prior year; however, excluding the anti-dilution adjustment noted above, SG&A expenses would have declined approximately 50 basis points over the prior year.

OTHER OPERATING EXPENSES

For the nine months ended November 3, 2007, other operating expenses, including store pre-opening costs, were $246.5 million, or 10.8% of net sales, compared to $240.5 million, or 12.1% of net sales, for the nine months ended October 28, 2006. The increase of $6.0 million was principally driven by higher depreciation and amortization expense of $7.0 million. The depreciation and amortization increase was offset in part by a decrease in property and equipment rentals of $1.5M for the nine months ended November 3, 2007.

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IMPAIRMENTS AND DISPOSITIONS

For the nine months ended November 3, 2007, the Company realized losses from impairments and dispositions of $4.1 million, or 0.2% of net sales, compared to a loss of $8.0 million, or 0.4% of net sales, for the nine months ended October 28, 2006. The current and prior quarter net charges were primarily due to asset impairments in the normal course of business.

INTEREST EXPENSE

For the nine months ended November 3, 2007, interest expense was $32.1 million, or 1.4% of net sales, compared to $37.8 million, or 1.9% of net sales, for the nine months ended October 28, 2006. The decrease of $5.7 million was primarily due to the reduction in debt resulting from the repurchase of $106.3 million of senior notes during the nine months ended November 3, 2007.

INCOME TAXES

For continuing operations, the effective income tax rates for the nine-month periods ended November 3, 2007 and October 28, 2006 was 45.1% and 46.6%, respectively. The decrease in the effective rate for the nine-month period ended November 3, 2007 was primarily the result of the settlement of certain state tax examinations as well as other state tax benefits during the nine-month period ended October 28, 2006. The effective income tax rate for discontinued operations for the nine-month period ended October 28, 2006 was 68.4%. The effective income tax rate was higher than the expected rate due to the write-off of non-deductible goodwill related to the sale of NDSG.

The Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) effective as of the beginning of fiscal year 2007. As a result of the implementation the Company recorded a $33.7 million decrease in the liability for unrecognized tax benefits which was accounted for as an increase to the beginning shareholder’s equity. As of February 4, 2007 the Company had total gross unrecognized tax benefits of $44.0 million. Of this total, $12.6 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months as a result of settling uncertain tax positions. However, the Company does not anticipate this to result in any material change to the amount of unrecognized tax benefits.

As a result of the analysis of uncertain tax positions (due to the adoption of FIN 48), the net deferred tax asset related to the state net operating loss carryforwards increased. Therefore, the Company performed a valuation allowance analysis to determine the realization of this asset. This analysis resulted in an additional valuation allowance of $19.3 million with the offset recorded to shareholder’s equity in accordance with Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.”

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The Company is under the provisions of Statement of Position 90-7 for these net operating losses since these losses were acquired through the acquisition of a company that had previously filed bankruptcy.

The Company files a consolidated U.S. Federal income tax return as well as state tax returns in multiple state jurisdictions. The Company has completed examinations by the Internal Revenue Service for taxable years through January 29, 2005 with no significant adjustments. With respect to the state and local jurisdictions, the Company has completed examinations in many jurisdictions through the same period and currently has examinations in progress for several jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

The primary needs for cash are to acquire or construct new stores, renovate and expand existing stores, provide working capital for new and existing stores and service debt. The Company anticipates that available cash, cash generated from operating activities and borrowings under its revolving credit agreement will be sufficient to meet its financial commitments and provide opportunities for future growth.

Cash (used in) provided by operating activities from continuing operations was $(35.3) million for the nine months ended November 3, 2007 and $101.0 million for the nine months ended October 28, 2006. Cash (used in) provided by operating activities principally represents income (loss) before depreciation and non-cash charges and after changes in working capital. The $136.3 million decrease in 2007 from 2006 was largely due to the non-cash changes in deferred income taxes and equity compensation.

Inventory, accounts payable and debt balances fluctuate throughout the year due to the seasonal nature of the Company’s business. Merchandise inventory balances at November 3, 2007 increased from October 28, 2006 due to planned increased inventories at SFA. Consolidated comparable inventories increased approximately 17% over last year, attributable to the Company’s ongoing initiative of a targeted inventory reinvestment strategy.

Cash used in investing activities from continuing operations was $94.4 million for the nine months ended November 3, 2007 and $78.3 million for the nine months ended October 28, 2006. Cash used in investing activities principally consists of construction of new stores and renovation and expansion of existing stores and investments in support areas (e.g., technology and distribution centers). The $16.1 million increase in cash used is primarily due to an increase in capital expenditures of approximately $23.7 million, partially offset by the increase in proceeds from the sale of SFA property of approximately $7.6 million.

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Property and equipment amounts at November 3, 2007 decreased from October 28, 2006 amounts primarily due to depreciation on existing assets during the last twelve months, sale of SFA property, and store closings and impairments, partially offset by capital expenditures related to new store additions, expansions, replacements and the remodeling of existing stores. Intangibles at November 3, 2007 also decreased from October 28, 2006 due to amortization expense during the last twelve months.

Cash used in financing activities from continuing operations was $84.8 million for the nine months ended November 3, 2007 and $522.3 million for the nine months ended October 28, 2006. The current period use primarily relates to the repurchase of approximately $106.3 million in principal amount of senior notes, which was partially offset by $25.0 million of proceeds from the revolving credit facility, while the prior period use primarily relates to the payment of cash dividends totaling $542.8 million.

CASH BALANCES AND LIQUIDITY

The Company’s primary sources of short-term liquidity are cash on hand and availability under its revolving credit facility. At the Company’s request, due to the sale of NDSG, the revolving credit facility was reduced from $800 million to $500 million in March 2006. In September 2006, the maturity date of the revolving credit facility was extended to September 2011. At November 3, 2007 and October 28, 2006, the Company maintained cash and cash equivalent balances of $63.5 million and $767.4 million, respectively. Exclusive of approximately $13.1 million and $12.7 million of store operating cash at November 3, 2007 and October 28, 2006, respectively, cash was invested principally in various money market funds at November 3, 2007 and October 28, 2006, respectively. There was no restricted cash as of November 3, 2007 and October 28, 2006.

On March 6, 2006, the Company’s Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $547,500, and the Company reduced shareholders’ equity by that amount. Approximately $539,000 of the dividend was paid on May 1, 2006 to shareholders of record as of April 14, 2006. The remaining portion of the dividend payable will be paid prospectively as, and to the extent, awards of restricted stock and performance shares vest.

On August 30, 2006, the Company repurchased 450 thousand shares of Saks’ common stock at a cost of approximately $6.5 million.

On October 3, 2006 the Company’s Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $558,600, and the Company reduced shareholders’ equity by that amount. Approximately $552,000 of the dividend was paid on November 30, 2006 to shareholders of record as of November 15, 2006. The remaining portion of the dividend payable will be paid prospectively as, and to the extent, awards of restricted stock and performance shares vest.

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During the three months ended November 3, 2007, the Company repurchased 1.7 million shares of its common stock at a cost of approximately $27.5 million. At November 3, 2007, there were 35.7 million shares remaining available for repurchase under the Company’s existing share repurchase program.

At November 3, 2007, the Company had borrowings of $25.0 million under its $500 million revolving credit facility, and had $39.9 million in unfunded letters of credit, leaving unutilized availability under that facility of $435.1 million. The amount of cash on hand and borrowings under the facility are influenced by a number of factors, including sales, inventory levels, vendor terms, the level of capital expenditures, cash requirements related to financing instruments, and the Company’s tax payment obligations, among others.

The Company believes it has sufficient cash on hand, availability under its revolving credit facility, and access to various capital markets to repay all of the Company’s senior notes at maturity.

CAPITAL STRUCTURE

The Company continuously evaluates its debt-to-capitalization ratio in light of the economic trends, business trends, levels of interest rates, and terms, conditions and availability of capital in the capital markets. At November 3, 2007, the Company’s capital and financing structure was comprised of a revolving credit agreement, senior unsecured notes, convertible senior unsecured notes, and capital and operating leases. On November 3, 2007, total debt was $599.0 million, representing a decrease of $89.6 million from the balance of $688.6 million at October 28, 2006. This decrease in debt was primarily the result of the $106.3 million repurchase of senior notes, which was offset by the $25.0 million revolver borrowings. Additionally, the debt-to-capitalization ratio decreased to 34.7% from 40.3% in the prior year, as a result of the decrease in debt in the current year.

At November 3, 2007, the Company maintained a $500 million senior revolving credit facility maturing in 2011, which is secured by inventory and certain third party credit card accounts receivable. Borrowings are limited to a prescribed percentage of eligible inventories and receivables. There are no debt ratings-based provisions in the facility. The facility includes a fixed-charge coverage ratio requirement of 1 to 1 that the Company is subject to only if availability under the facility becomes less than $60 million. The facility contains default provisions that are typical for this type of financing, including a provision that would trigger a default of the facility if a default were to occur in another debt instrument resulting in the acceleration of principal of more than $20 million in that other instrument. At November 3, 2007, the Company had borrowings of $25.0 million under the revolving credit facility.

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At November 3, 2007, the Company had $276.4 million of senior notes outstanding, excluding the convertible notes, comprised of five separate series having maturities ranging from 2008 to 2019 and interest rates ranging from 7.00% to 9.88%. The terms of each senior note call for all principal to be repaid at maturity. The senior notes have substantially identical terms except for the maturity dates and interest rates payable to investors. Each senior note contains limitations on the amount of secured indebtedness the Company may incur. The Company believes it has sufficient cash on hand, availability under its revolving credit facility and access to various capital markets to repay these notes at maturity.

On April 12, 2007, the Company announced the results of its modified “Dutch Auction” tender offer to purchase a portion of its 8.25% senior notes due November 15, 2008 for an aggregate purchase price not to exceed $100 million (the “offer cap”). The offer expired on April 11, 2007. The aggregate principal amount of notes validly tendered at or above the clearing spread exceeded the offer cap and the Company accepted $95.9 million aggregate principal amount of the notes, resulting in an aggregate purchase price of $100 million (plus an additional $3.2 million in aggregate accrued interest on such notes). The Company accepted for purchase first, all notes tendered at spreads above the clearing spread, and thereafter, the notes validly tendered at the clearing spread on a prorated basis according to the principal amount of such notes. During the three months ended May 5, 2007, the Company recorded a loss on extinguishment of debt of approximately $5.2 million related to the repurchase of the notes.

During June and July 2007, the Company repurchased an additional $10.4 million in principal amount primarily relating to its 8.25% senior notes. The repurchase of these notes resulted in a loss on extinguishment of debt of approximately $412 thousand.

At November 3, 2007, the Company had $230 million of convertible senior notes that bear interest of 2.0% and mature in 2024. The provisions of the convertible notes allow the holder to convert the notes to shares of the Company’s common stock at a conversion rate of 83.5609 shares per one thousand dollars in principal amount of notes. The most significant terms and conditions of the senior notes include: the Company can settle a conversion of the par value with shares and/or cash; the holder may put the debt back to the Company in 2014 or 2019; the holder cannot convert until the Company’s share price exceeds the conversion price by 20% for a certain trading period; the Company can call the debt on or after March 11, 2011; the conversion rate is subject to a dilution adjustment; and the holder can convert upon a significant credit rating decline and upon a call. The Company used approximately $25 million of the proceeds from the issuances to enter into a convertible note hedge and written call options on its common stock to reduce the exposure to dilution from the conversion of the notes. The Company believes it has sufficient cash on hand, availability under its revolving credit facility and access to various capital markets to repay both the senior notes and convertible notes at maturity.

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During the quarter ended November 3, 2007, the aforementioned conversion criterion was met. The closing price of the Company’s common stock exceeded 120% of the convertible senior notes’ conversion price for at least 20 out of the last 30 consecutive trading days in the third calendar quarter of 2007. On October 3, 2007, the Company gave notice that holders of the convertible notes could convert them into shares of the Company’s common stock until December 31, 2007 in accordance with, and subject to, the terms of the convertible notes indenture. Since the holders of the convertible notes had the ability to exercise their conversion rights, the convertible notes were classified within the “current portion of long-term debt” on the Company’s November 3, 2007 balance sheet. As of December 4, 2007, no note holders had converted their notes into shares of the Company’s common stock.

At November 3, 2007 the Company had $67.6 million in capital leases covering various properties and pieces of equipment. The terms of the capital leases provide the lessor with a security interest in the asset being leased and require the Company to make periodic lease payments, aggregating between $5 million and $7 million per year.

The Company is obligated to fund a cash balance pension plan. The Company’s current policy is to maintain at least the minimum funding requirements specified by the Employee Retirement Income Security Act of 1974. The Company expects minimal or no funding requirements in 2007. As part of the sale of NDSG to Bon-Ton, the NDSG pension assets and liabilities were acquired by Bon-Ton. Additionally, the Company curtailed its SFA pension plan during 2006 which froze benefit accruals for all participants except those who have attained age 55 and completed 10 years of service as of January 1, 2007 and who continue to be highly compensated employees.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into any off-balance sheet arrangements which would be reasonably likely to have a current or future material effect, such as obligations under certain guarantees or contracts, retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements, obligations under certain derivative arrangements, or obligations under material variable interests.

There were no material changes in the Company’s contractual obligations specified in Item 303(a)(5) of Regulation S-K during the three and nine months ended November 3, 2007. For additional information regarding the Company’s contractual obligations as of February 3, 2007, see the Management’s Discussion and Analysis section of the 2006 Form 10-K.

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CRITICAL ACCOUNTING POLICIES

A summary of the Company’s critical accounting policies is included in the Management Discussion and Analysis section of the Company’s Form 10-K for the year ended February 3, 2007 filed with the Securities and Exchange Commission.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FIN 48, an interpretation of SFAS No. 109, “Accounting for Income Taxes.” This interpretation clarifies the application of Statement 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. For a benefit to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The benefit to be recognized for a tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. FIN 48 also provides guidance on derecognition, classification of interest and penalties, accounting in interim periods, and disclosure. The Company adopted FIN 48 as of February 4, 2007.

During September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or a liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this Statement.

On September 29, 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). The Company adopted SFAS No. 158 prospectively on February 3, 2007. SFAS No. 158 requires an employer that sponsors one or more defined benefit pension plans or other postretirement plans to 1) recognize the funded status of a plan, measured as the difference between plan assets at fair value and the benefit obligation, in the balance sheet; 2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; 3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end balance sheet; and 4) disclose in the notes to the financial statements additional information about the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations. The adoption of SFAS No. 158 did not have a material effect on the Company’s results of operations or financial position for the fiscal year ended February 3, 2007. Additionally, SFAS No. 158 will require the Company to change the measurement date for the assets and liabilities of its employee benefit plans from November 1 to the Company’s fiscal year end beginning with the fiscal year ending January 31, 2009.

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that currently are not required to be measured at fair value. This Statement is effective no later than fiscal years beginning on or after November 15, 2007. The Company is currently evaluating the impact this standard may have on its financial statements.

The FASB is contemplating an amendment to SFAS No. 128, “Earnings Per Share,” that would require the Company to ignore the cash presumption of net share settlement and to assume share settlement for purposes of calculating diluted earnings per share. Although the Company is now required to ignore the contingent conversion provision on its convertible notes under EITF 04-08, it can still presume that it will satisfy the net share settlement of the par value upon conversion of the notes in cash, and thus exclude the effect of the conversion of the notes in its calculation of diluted earnings per share. If and when the FASB amends SFAS No. 128, the effect of the changes would require the Company to use the if-converted method in calculating diluted earnings per share except when the effect would be anti-dilutive. The effect of adopting the amendment to SFAS No. 128 would increase the number of shares in the Company’s diluted calculation by 19,219 shares.

FORWARD-LOOKING INFORMATION

The information contained in this Form 10-Q that addresses future results or expectations is considered “forward-looking” information within the definition of the Federal securities laws. Forward-looking information in this document can be identified through the use of words such as “may,” “will,” “intend,” “plan,” “project,” “expect,” “anticipate,” “should,” “would,” “believe,” “estimate,” “contemplate,” “possible,” and “point.” The forward-looking information is premised on many factors, some of which are outlined below. Actual consolidated results might differ materially from projected forward-looking information if there are any material changes in management’s assumptions.

The forward-looking information and statements are or may be based on a series of projections and estimates and involve risks and uncertainties. These risks and uncertainties include such factors as: the level of consumer spending for apparel and other merchandise carried by the Company and its ability to respond quickly to consumer trends; adequate and stable sources of merchandise; the competitive pricing environment within the retail sector; the effectiveness of planned advertising, marketing, and promotional campaigns; favorable customer response to relationship marketing efforts of proprietary credit card loyalty programs; appropriate inventory management; effective expense control; successful operation of the Company’s proprietary credit card strategic alliance with HSBC Bank Nevada, N.A.; geo-political risks; and changes in interest rates. For additional information regarding these and other risk factors, please refer to the Company’s Form 10-K for the fiscal year ended February 3, 2007 filed with the SEC, which may be accessed via EDGAR through the Internet at www.sec.gov.

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Management undertakes no obligation to correct or update any forward-looking statements, whether as a result of new information, future events, or otherwise. Persons are advised, however, to consult any further disclosures management makes on related subjects in its reports filed with the SEC and in its press releases.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s exposure to market risk primarily arises from changes in interest rates and the U.S. equity and bond markets. The effects of changes in interest rates on earnings generally have been small relative to other factors that also affect earnings, such as sales and operating margins. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities, and if appropriate, through the use of derivative financial instruments. Such derivative instruments can be used as part of an overall risk management program in order to manage the costs and risks associated with various financial exposures. The Company does not enter into derivative instruments for trading purposes, as clearly defined in its risk management policies. The Company is exposed to interest rate risk primarily through its borrowings, and derivative financial instrument activities.

Based on the Company’s market risk sensitive instruments (including variable rate debt) outstanding at November 3, 2007, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations, or cash flows as of such date.

Item 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such 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 the end of the period covered by this report. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosures.

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended November 3, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

The information in “Part I – Financial Information, Note 8 – Contingencies- Legal Contingencies,” is incorporated into this Item by reference.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended November 3, 2007, the Company did not sell any equity securities which were not registered under the Securities Act.

The Company has a share repurchase program that authorizes it to purchase shares of the Company’s common stock in order to both distribute cash to stockholders and manage dilution resulting from shares issued under the Company’s equity compensation plans. At November 3, 2007, 35.7 million shares remained available for repurchase under the Company’s 70.0 million share repurchase authorization. The following are details of repurchases under this program for the third quarter of fiscal 2007:

(in thousands except average price paid per share)
Period	Total Number of Shares Repurchased	Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet Be Repurchased Under the Plans (a)
Repurchases from August 5, 2007 through September 1, 2007	884	$	16.03	884	36,496
Repurchases from September 2, 2007 through October 6, 2007	838	$	15.86	838	35,658
Repurchases from October 7, 2007 through November 3, 2007	—	$	—	—	35,658
Total	1,722	$	15.95	1,722

(a) As of November 3, 2007, the Company’s Board of Directors had previously authorized 70,025 total shares, of which 35,000 were authorized on December 8, 2005. The Company has repurchased 34,367 of these shares to date. There is no expiration date for the repurchase plans.

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Item 5. OTHER INFORMATION

On September 24, 2007, the Human Resources and Compensation Committee of the Company approved a standard form of employment agreement for the Company’s senior executives (the “Employment Agreement”), which is included as Exhibit 10.1 to this Report. The following executive officers of the Company have entered into an Employment Agreement with the Company: Christine Morena, Michael Brizel, Michael Rodgers, Carolyn Biggs, Robert Wallstrom, Denise Incandela, Marc Metrick, Terron Schaefer and Thomas Matthews.

Item 6. EXHIBITS

10.1	Form of Employment Agreement for Executive Officers
10.2	Saks Incorporated Severance Plan
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
32.1	Certification of Chief Executive Officer, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
32.2	Certification of Chief Financial Officer, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SAKS INCORPORATED
	Registrant
Date December 6, 2007	/s/ Kevin G. Wills
	Kevin G. Wills
	On behalf of registrant and as Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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