8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):

July 30, 2009

SAKS INCORPORATED

(Exact name of registrant as specified in its charter)

TENNESSEE	1-13113	62-0331040
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

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

Registrant’s telephone number, including area code: (212) 940-5305

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01 Other Events

Saks Incorporated and its subsidiaries (together the “Company”) is filing this Current Report on Form 8-K to reflect certain accounting adjustments described below with respect to the financial information contained in the Company’s Annual report on Form 10-K for the year ended January 31, 2009 or the “2008 Form 10-K”, which was filed with the United States Securities and Exchange Commission (the “SEC”), on March 23, 2009. This Current Report on Form 8-K shows the effects of the retrospective adoption on February 1, 2009 of the following:

• Financial Accounting Standards Board (“FASB”), Staff Position (“FSP”) Accounting Principles Board (“APB”) No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). The adoption of FSP APB 14-1 affects the accounting for our $230 million, 2.00% convertible notes due 2024 (the “Notes”). FSP APB 14-1 requires an allocation of convertible debt proceeds between the liability component and the embedded conversion option (i.e., the equity component). The liability component of the debt instrument is accreted to par using the effective interest method over the remaining life of the debt (the first put date in 2014). The accretion is reported as a component of interest expense. The equity component is not subsequently revalued as long as it continues to qualify for equity treatment. The retrospective adoption of FSP APB 14-1 affects the Company’s financial information for the fiscal years 2004 through 2008, as reflected in Exhibits 99.1, 99.2 and 99.3. Upon adoption of FSP APB 14-1, the Company estimated the fair value of the Notes, as of the date of issuance, assuming a 6.25% non-convertible borrowing rate to be $158.1 million. The difference between the fair value and the principal amount of the Notes was $71.9 million. This amount was retrospectively recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date of the Notes. The discount is being accreted to interest expense over the ten-year period to the first put date of the Notes in 2014. The accretion of the discount reduced income from continuing operations and net income by approximately $3.9 million, $3.6 million, $3.6 million, $4.2 million and $2.7 million for the years ended January 31, 2009, February 2, 2008, February 3, 2007, January 28, 2006 and January 29, 2005, respectively.

• FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”) addresses whether instruments granted in share-based payment awards are participating securities prior to vesting, and therefore, need to be included in the earnings allocation when computing earnings per share under the two-class method as described in Statement of Financial Accounting Standards (“SFAS” No. 128 “Earnings Per Share”). In accordance with FSP EITF 03-6-1, the unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The retrospective adoption of FSP EITF 03-6-1 did not have a material impact on the Company’s consolidated financial statements for the years ended January 31, 2009, February 2, 2008, February 3, 2007, January 28, 2006 and January 29, 2005.

In the 2008 Form 10-K, the Company’s charter (Exhibit 3(i)) was incorporated by reference to an incorrect filing and, upon further investigation, the Company determined that it had inadvertently filed an incorrect copy of its charter on April 3, 2007 (which had inadvertently deleted certain 80% voting provisions that continue to be applicable) as an exhibit to its SEC filings. Accordingly, filed herewith and incorporated herein is the charter of the Company as of July 30, 2009. Except for an amendment in 2007 changing the principal address of the Company, there have been no amendments to the Company’s charter since 1999.

The information in this Form 8-K does not reflect any event or development occurring after March 23, 2009, the date on which the Company filed its 2008 Form 10-K. Except as described above, the Company has not modified or updated any disclosures in the 2008 Form 10-K. This Current Report on Form 8-K should be read in conjunction with the Company’s 2008 Form 10-K. For a discussion of events and developments subsequent to the filing of the Company’s 2008 Form 10-K, please refer to the Company’s SEC filings since that date.

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Item 9.01 Financial Statements and Exhibits

Exhibit Number	Description
3(i)	Composite of Charter of the Company inclusive of all amendments through July 30, 2009
23.1	Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP)
99.1	Selected Company Financial Data as of and for the years ended January 31, 2009, February 2, 2008, February 3, 2007, January 28, 2006 and January 29, 2005
99.2	Management’s Discussion and Analysis of Financial Condition and Results of Operations as of January 31, 2009
99.3	Consolidated Financial Statements

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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 hereunto duly authorized.

	SAKS INCORPORATED
Date: July 30, 2009	/s/    Kevin G. Wills
	Kevin G. Wills
	Executive Vice President and Chief Financial Officer

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EX-3.(I)

Exhibit 3(i)

COMPOSITE CHARTER

OF

SAKS INCORPORATED

(As amended through July 30, 2009)

ARTICLE I

Name

The name of the Corporation is SAKS INCORPORATED.

ARTICLE II

Duration

The duration of the Corporation is perpetual.

ARTICLE III

Address

The address of the principal office of the Corporation is 12 East 49^th Street, New York, New York 10017.

ARTICLE IV

For Profit

The corporation is for profit.

ARTICLE V

Purpose

The purpose or purposes for which the Corporation are organized are:

(a) To purchase, rent, lease, construct or otherwise acquire adequate facilities and to operate therein general department stores and related services enterprises.

(b) To enter into partnerships and/or joint ventures with individuals, partnerships and/or corporations for the purpose of transacting and carrying out the business which the Corporation is authorized to conduct.

(c) To borrow or raise money for any of the purposes of the Corporation and to issue, make, and/or draw notes, drafts, warrants, bonds, debentures and/or other negotiable or non-negotiable instruments and to secure the payment thereof by mortgage, pledge, conveyance, deed of trust and/or other instrument upon any property of the Corporation.

(d) To perform such other acts and things as may be necessary and/or incident to any of the purposes aforesaid.

(e) To engage in any other lawful business permitted under the Tennessee General Corporation Act.

ARTICLE VI

Shares

The maximum number of shares of all classes of stock which the Corporation shall have the authority to issue is 510,000,000 shares consisting of (a) 10,000,000 shares of Series Preferred Stock, with a par value of $1.00 per share (herein called the “Series Preferred Stock”), and (b) 500,000,000 shares of Common Stock, with a par value of $.10 per share (herein called the “Common Stock”).

The following is a statement of the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect to each class of stock of the Corporation.

Section 1. Series Preferred Stock.

1A. Conditions of Issuance. Series Preferred Stock may be issued from time to time and in such amounts and for such consideration as may be determined by the Board of Directors of the Corporation (“Board”). The designation and relative rights and preferences of each series, except to the extent such designations and relative rights and preferences may be required by Tennessee law or this Charter, shall be such as are fixed by the Board and stated in a resolution or resolutions adopted by the Board authorizing such series (herein called the “Series Resolution”). A Series Resolution authorizing any series shall fix:

(i) The designation of the series which may be by distinguishing number, letter or title;

(ii) The number of shares of such series;

(iii) The dividend rate or rates of such shares, the date at which dividends, if declared, shall be payable, and whether or not such dividends are to be cumulative, in which case such Series Resolution shall state the date or dates from which dividends shall be cumulative;

(iv) The amounts payable on shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up;

(v) The redemption rights and price or prices, if any, for the shares of such series;

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(vi) The terms and amount of any sinking fund or analogous fund providing for the purchase or redemption of the shares of such series, if any;

(vii) The voting rights, if any, granted to the holders of the shares of such series in addition to those required by Tennessee law or this Charter;

(viii) Whether the shares of such series shall be convertible into shares of the Corporation’s Common Stock or any other class of the Corporation’s capital stock, and if convertible, the conversion price or prices, any adjustment thereof and any other terms and conditions upon which such conversion shall be made; and

(ix) Any other rights, preferences, restrictions or conditions relative to the shares of such series as may be permitted by Tennessee law or this Charter.

1B. Restrictions. In no event, so long as any Series Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, the Common Stock, other than a dividend or distribution payable in shares of such Common Stock, nor (without the written consent of such number of the holders of the outstanding Series Preferred Stock as shall have been specified in the Series Resolution authorizing the issuance of such outstanding Series Preferred Stock) shall any shares of Common Stock be purchased or redeemed by the Corporation, nor shall any monies be paid to or made available for a sinking fund for the purchase or redemption of any Common Stock, unless in each instance full dividends on all outstanding shares of the Series Preferred Stock for all past dividend periods shall have been paid and the full dividend on all outstanding shares of the Series Preferred Stock for the current dividend period shall have been paid or declared and sufficient funds for the payment thereof set apart and any arrears in the mandatory redemption of the Series Preferred Stock shall have been made good.

1C. Priority. Series Preferred Stock, with respect to both dividends and distribution of assets on liquidation, dissolution or winding up, shall rank prior to the Common Stock.

1D. Voting Rights. Holders of Series Preferred Stock shall have no right to vote for the election of directors of the Corporation or on any other matter unless a vote of such class is required by Tennessee law, this Charter or a Series Resolution.

1E. Filing of Amendments. The Board shall adopt amendments to this Charter fixing, with respect to each series of Series Preferred Stock, the matters described in Paragraph 1A of this Section 1.

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1F. Series C Junior Preferred Stock. A series of authorized preferred stock is hereby established having a par value of $1.00 per share, which series shall be designated as “Series C Junior Preferred Stock” (the “Series C Junior Preferred Stock”), shall consist of 2,500,000 shares and shall have the following voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof as follows:

(i) Dividends and Distributions.

(a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series C Junior Preferred Stock with respect to dividends, the holders of shares of Series C Junior Preferred Stock, in preference to the holders of Common Stock of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series C Junior Preferred Stock in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series C Junior Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series C Junior Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

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(b) The Corporation shall declare a dividend or distribution on the Series C Junior Preferred Stock as provided in paragraph (a) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series C Junior Preferred stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series C Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case, dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series C Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series C Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board may fix a record date for the determination of holders of shares of Series C Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than sixty (60) days prior to the date fixed for the payment thereof.

(ii) Voting Rights. The holders of shares of Series C Junior Preferred Stock shall have the following voting rights:

(a) Subject to the provision for adjustment hereinafter set forth, each share of Series C Junior Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series C Junior Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

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(b) Except as otherwise provided herein, in any other Articles of Amendment creating a series of Preferred Stock or any similar stock, or Bylaw, the holders of shares of Series C Junior Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.

(c) Except as set forth herein, or as otherwise provided by law, holders of Series C Junior Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

(iii) Certain Restrictions.

(a) Whenever quarterly dividends or other dividends or distributions payable on the Series C Junior Preferred Stock as provided in Section 1 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series C Junior Preferred Stock outstanding shall have been paid in full, the Corporation shall not:

(1) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Junior Preferred Stock;

(2) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Junior Preferred Stock, except dividends paid ratably on the Series C Junior Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(3) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation and winding up) to the Series C Junior Preferred Stock; or

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(4) redeem or purchase or otherwise acquire for consideration any shares of Series C Junior Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Junior Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to all holders of such shares upon such terms as the Board, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Corporation could, under paragraph (a) of this Section 1F(iii), purchase or otherwise acquire such shares at such time and in such manner.

(iv) Reacquired Shares. Any shares of Series C Junior Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Charter, or in any other Articles of Amendment creating a series of Preferred Stock or any similar stock or otherwise required by law.

(v) Liquidation Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Junior Preferred Stock unless, prior thereto, the holders of shares of Series C Junior Preferred Stock shall have received $1.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series C Junior Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Junior Preferred Stock except distributions made ratably on the Series C Junior Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall, at any time, declare or

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pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series C Junior Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(vi) Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series C Junior Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series C Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(vii) No Redemption. The shares of Series C Junior Preferred Stock shall not be redeemable.

(viii) Rank. The Series C Junior Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation’s Preferred Stock.

(ix) Amendment. The Charter of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series C Junior Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding shares of Series C Junior Preferred Stock, voting together as a single class.

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Section 2. Common Stock. All shares of Common Stock shall be identical and shall entitle the holders thereof to the same rights and privileges.

2A. Dividends. When and as dividends are declared upon the Common Stock, whether payable in cash, in property or in shares of stock of the Corporation, the holders of the Common Stock shall be entitled to share equally, share per share, in such dividends.

2B. Voting Rights. Except as otherwise provided by law or this Charter, the holders of Common Stock shall have equal voting rights on the basis of one vote per share.

2C. Issuance. Shares of Common Stock may be issued from time to time as the Board shall determine and on such terms and for such consideration as may be fixed by the Board.

Section 3. Preemptive Rights. No holder of shares of the Corporation of any class now or hereafter authorized shall, as such holder, have any preferential or preemptive right to subscribe for, purchase or receive any shares of the Corporation of any class, now or hereafter authorizing, or any options or warrants for such shares, or any rights to subscribe to or purchase such shares or any securities convertible into or exchangeable for such shares, which may at any time be issued, sold or offered for sale by the Corporation. The Board shall have the right to issue the authorized and treasury shares of the Corporation at such time and upon such terms and conditions and for such consideration as the Board shall determine.

ARTICLE VII

Commencement of Business

The Corporation will not commence business until consideration of an amount not less than $1,000.00 has been received for the issuance of shares.

ARTICLE VIII

Shareholders

Any action required or permitted to be taken by the shareholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Notwithstanding anything in this Charter to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all shares of the Corporation entitled to vote generally in the election of Directors, voting together as a class, shall be required to alter, amend, adopt any provisions inconsistent with or repeal this Article VIII.

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ARTICLE IX

Directors

The number of directors and the removal of directors shall be determined as follows:

Section 1. Number of Directors. The affairs of this Corporation shall be managed by a Board of up to eighteen (18) directors.

Effective as of the annual meeting of shareholders in 1997, the Board shall be divided into three classes, designated as Class I, Class II, and Class III, as nearly equal in number as possible. The initial term of office of Class I shall expire at the annual meeting of shareholders in 1998, that of Class II shall expire at the annual meeting in 1999, and that of Class III shall expire at the annual meeting in 2000, and in all cases as to each director until his or her successor shall be elected and shall qualify, or until his or her earlier resignation, removal from office, death, or incapacity.

Subject to the foregoing, at each annual meeting of shareholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting and until their successors shall be elected and qualified. Vacancies on the Board, for any reason, and newly created directorships resulting from any increase in the authorized number of directors may be filled by a vote of the majority of the directors then in office, although less than a quorum, or by a sole remaining director.

If the number of directors is changed, the Board shall determine the class or classes to which the increased or decreased number of directors shall be apportioned; provided that the directors in each class shall be as nearly equal in number as possible. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director.

Notwithstanding any other provisions of this Charter or the Bylaws of the Corporation (and notwithstanding that a lesser percentage may be specified by law, this Charter, or the Bylaws of the Corporation), the affirmative vote of the holders of 80% or more of the voting power of the shares of the then outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article IX, Section 1 of this Charter. ***

*** EXPLANATORY NOTE – NOT PART OF CHARTER - The Company believes that this 80% vote requirement is invalid under T.C.A. § 48-17-208 in that it was not originally adopted by the 80% vote required by that statute and that, therefore, an amendment to amend or repeal, or adopt any provisions inconsistent with, this Article IX, Section 1 of this Charter would require only that the votes in favor of such an amendment exceed the votes cast against such an amendment.

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Section 2. Removal of Directors. Directors may be removed by shareholders only for cause as defined in the Tennessee General Corporation Act.

ARTICLE X

Shareholder Approval

The holders of shares shall have the right to approve certain business combinations as follows:

Section 1. Vote Required for Certain Business Combinations.

1A. Higher Vote for Certain Business Combinations. In addition to any affirmative vote required by law or this Charter, and except as otherwise expressly provided in Section 2 of this Article X:

(i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or

(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value (as hereinafter defined) of $1,000,000 or more; or

(iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $1,000,000 or more; or

(iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or

(v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder; or

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(vi) any agreement, contract or other arrangement providing directly or indirectly for the foregoing;

shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the “Voting Stock”), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise.

1B. Definition of “Business Combination”. The term “Business Combination” as used in this Article X shall mean any transaction which is referred to in any one or more of clauses (i) through (vi) of paragraph 1A of this Section 1.

Section 2. When Higher Vote is Not Required. The provisions of this Article X shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Charter, if all of the conditions specified in either of the following paragraphs 2A or 2B are met:

2A. Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined).

2B. Price and Procedure Requirements. All of the following conditions shall have been met:

(i) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest of the following:

(a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the “Announcement Date”) or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; or

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(b) the Fair Market Value per Share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this Article X as the “Determination Date”), whichever is higher; or

(c) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to paragraph 2B(i)(b) above, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of Common Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of Common Stock.

(ii) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirement of this paragraph 2B(ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock).

(iii) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder had previously paid for shares of such class of Voting Stock. If the Interested Shareholder had previously paid for shares of such class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it.

(iv) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefore any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure to increase such annual rate is approved by a majority of the

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Continuing Directors; and (c) such Interested Shareholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder.

(v) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of, or in connection with, such Business Combination or otherwise.

(vi) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions).

Section 3. Certain Definitions. For the purposes of this Article X:

3A. A “person” shall mean any individual, firm, corporation or other entity.

3B. An “Interested Shareholder” shall mean any person (other than the Corporation, any Subsidiary, RBM Acquisition Company, the sole shareholder of the Corporation, or any Shareholder of RBM Acquisition Company) who or which:

(i) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or

(ii) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or

(iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933.

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For the purposes of determining whether a person is an Interested Shareholder pursuant to paragraph 3B of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph 3C of this Section 3, but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

3C. A person shall be a “beneficial owner” of any Voting Stock:

(i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or

(ii) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or

(iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock.

3D. “Affiliate” or “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 1, 1985.

3E. “Subsidiary” means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of an Interested Shareholder set forth in paragraph 3B of this Section 3, the term “Subsidiary” shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation.

3F. “Continuing Director” means any member of the Board who is unaffiliated with the Interested Shareholder and was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors who are then members of the Board.

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3G. “Fair Market Value” means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith.

3H. In the event of any Business Combination in which the Corporation survives, the phrase “consideration other than cash to be received” as used in subparagraphs 2B(i) and (ii) of Section 2 of this Article X shall include the share of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares.

Section 4. Power of Majority of Continuing Directors. A majority of the Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Article X, on the basis of information known to them after reasonable inquiry, (1) whether a person is an Interested Shareholder, (2) the number of shares of Voting Stock beneficially owned by any person, (3) whether a person is an Affiliate or Associate of another, (4) whether a class of Voting Stock is Institutional Voting Stock and (5) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more.

Section 5. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article X shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law.

Section 6. Amendment, Repeal, Etc. Notwithstanding any other provisions of this Charter or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Charter or the Bylaws of the Corporation), the affirmative vote of the holders of 80% or more of the voting power of the shares of the then outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, Article X of this Charter.

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ARTICLE XI

Repurchase of Shares

The holders of shares shall have the right to approve the repurchase of the Corporation’s shares by the Corporation from certain Interested Shareholders as follows:

Section 1. Vote of Shareholders Required for Certain Repurchases of Shares. The affirmative vote or consent of the holders or not less than a majority of the non-interested outstanding shares (as hereinafter defined) of stock of the Corporation entitled to vote in elections of directors (the “Voting Stock”), voting for the purposes of this Article XI as one class, shall be required to approve any direct or indirect purchase by the Corporation of any shares of stock at a purchase price known by the Corporation to be above the Fair Market Value (as hereinafter defined and as determined on the date on which any such purchase by the Corporation occurs or is to occur) of such stock from a person who is known by the Corporation to be an Interested Shareholder (as hereinafter defined), unless such purchase is made by the Corporation pursuant to:

(a) a tender offer or exchange offer by the Corporation for some or all of the outstanding shares of such stock made on the same terms to all holders of such shares, or

(b) an open market purchase program approved by a majority of the Continuing Directors.

Section 2. Certain Definitions. For purposes of this Article XI:

2A. “Person”, “Beneficial Owner”, “Affiliate”, “Associate”, and “Subsidiary” shall have the respective meanings ascribed to such terms in Section 3 of Article X above.

2B. “Interested Shareholder” shall have the same meaning ascribed to such term in Section 3 of Article X above, except that for purposes of this Article XI all references therein to 10% shall be to 5%.

2C. “Non-interested outstanding shares” are the shares of the Corporation entitled to vote in elections of directors (other than any shares beneficially owned by a person who is an Interested Shareholder) which are issued and outstanding on the record date for the determination of shareholders entitled to notice of, and to vote at, any meeting of shareholders.

2D. “Fair Market Value” shall mean the last sale price, on the last trading day immediately preceding the date upon which the purchase of a share of the Corporation’s stock by the Corporation occurs or is to occur, as such last sale price may be reported by the National Association of Securities Dealers, Inc. Automated Quotations National Market System or any system then in use, or if such stock is listed on a National Securities Exchange, the highest closing sale price on the day in question, of a share of such stock on such exchange, or if no such quotations are available, the fair market value on the day in question of a share of such stock as determined by the Board in good faith.

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Section 3. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article XI shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law.

Section 4. Determinations by the Board. The Board shall have the power and duty to determine, for purposes of this Article XI, on the basis of information known to such Board after reasonable inquiry:

(a) the number of shares of stock of the Corporation beneficially owned by any person;

(b) whether a person is an Interested Shareholder;

(c) the number of non-interested outstanding shares on the record date for any shareholders’ meeting;

(d) whether a person is an Affiliate or Associate of another;

(e) whether Section 1 of this Article XI is or has become applicable with respect to a proposed purchase of shares by the Corporation; and

(f) if so, the Fair Market Value of such shares and whether the purchase price thereof is above such Fair Market Value.

Any such determination made in good faith shall be conclusive and binding for all purposes of this Article XI. For the purposes of determining whether a person is an Interested Shareholder and determining the number of non-interested outstanding shares, the number of shares of stock of the Corporation deemed to be outstanding and entitled to vote in elections of Directors shall include shares deemed beneficially owned by such Interested Shareholder through application of clauses (i), (ii) or (iii) of paragraph 3B of Section 3 of Article X above but shall not include any other shares which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

Section 5. Amendment, Repeal, Etc. The provisions of this Article XI may not be amended, modified or repealed unless authorized and approved by the affirmative vote of the holders of not less than a majority of the non-interested outstanding shares of stock of the Corporation entitled to vote in elections of directors, voting as one class.

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ARTICLE XII

Indemnification

The Corporation shall have the authority and right to indemnify and hold harmless its officers, directors, employees, and agents from and against any claim, liability, loss, or expense (including attorney’s fees) with respect to which such indemnification is permitted under the applicable provisions of the Tennessee General Corporation Act, the Bylaws of the Corporation, or any duly adopted resolution of the Board or shareholders; provided, however, that absent any limitation or modification set forth in the Bylaws or any resolution, this Article XII shall require the Corporation to indemnify and hold harmless its officers, directors, employees and agents to the fullest extent permitted under the applicable provisions of the Tennessee General Corporation Act. Such right of indemnification shall not be deemed exclusive of any other rights to which such director, officer or employee may be entitled apart from this provision.

ARTICLE XIII

Bylaws

The Board shall have power to make, alter, amend and repeal the Bylaws (except so far as the Bylaws adopted by the shareholders shall otherwise provide). Any Bylaws made by the directors under the powers conferred hereby may be altered, amended or repealed by the Board or by the shareholders. Notwithstanding the foregoing and anything contained in this Charter to the contrary, Article II of the Bylaws relating to action taken at annual and special meetings of shareholders, cannot be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of at least 80% of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Notwithstanding anything contained in this Charter to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, adopt any provision inconsistent with or repeal this Article XIII.

ARTICLE XIV

Special Meeting of Shareholders

No special meeting of shareholders shall be held upon the demand of shareholders of the Corporation unless the holders of at least twenty-five percent (25%) of all the votes entitled to be cast on each issue proposed to be considered at the special meeting shall have signed, dated, and delivered to the Corporation’s Secretary one or more written demands for the meeting describing the purpose of purposes for which it is to be held.

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EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-159952) of Saks Incorporated of our report dated March 23, 2009, except with respect to our opinion on the consolidated financial statements and financial statement schedule insofar as it relates to the effects of the change in accounting for certain convertible debt instruments as discussed in Note 2, as to which the date is July 30, 2009 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K dated July 30, 2009.

/s/ PricewaterhouseCoopers LLP

Birmingham, Alabama

July 30, 2009

EX-99.1

Exhibit 99.1

Note: As discussed in Note 2 to the consolidated financial statements, effective February 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”), Staff Position (“FSP”) Accounting Principles Board (“APB”) No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) and FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). These accounting pronouncements both required retrospective application.

Item 6. Selected Financial Data.

The selected financial data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements and notes thereto contained elsewhere in this Form 8-K.

	Year Ended
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)	January 31, 2009 (Revised)			February 2, 2008 (Revised)			February 3, 2007* (Revised)			January 28, 2006 (Revised)			January 29, 2005 (Revised)
CONSOLIDATED INCOME STATEMENT DATA:
Net sales	$	3,029,743		$	3,224,076		$	2,888,427		$	2,732,428		$	2,737,324
Cost of sales (excluding depreciation and amortization)		2,062,494			1,972,251			1,780,127			1,731,142			1,666,126
Gross margin		967,249			1,251,825			1,108,300			1,001,286			1,071,198
Selling, general and administrative expenses		770,815			827,624			799,292			813,321			785,568
Other operating expenses		320,683			317,046			312,486			317,760			311,967
Impairments and dispositions		11,139			4,279			11,775			(8,349	)		20,768
Operating income (loss)		(135,388	)		102,876			(15,253	)		(121,446	)		(47,105	)
Interest expense		(45,739	)		(48,303	)		(55,693	)		(82,539	)		(109,213	)
Gain (loss) on extinguishment of debt		—			(5,634	)		7			(29,375	)		—
Other income, net		5,600			24,912			28,407			7,705			4,061
Income (loss) from continuing operations before income taxes		(175,527	)		73,851			(42,532	)		(225,655	)		(152,257	)
Provision (benefit) for income taxes		(48,902	)		26,755			(34,947	)		(92,062	)		(71,590	)
Income (loss) from continuing operations		(126,625	)		47,096			(7,585	)		(133,593	)		(80,667	)
Discontinued operations:
Income (loss) from discontinued operations before income taxes		(52,727	)		(4,860	)		188,227			314,943			232,055
Provision (benefit) for income taxes		(20,548	)		(1,646	)		130,536			163,241			93,036
Income (loss) from discontinued operations		(32,179	)		(3,214	)		57,691			151,702			139,019
Net income (loss)	$	(158,804	)	$	43,882		$	50,106		$	18,109		$	58,352
Basic earnings per common share:
Income (loss) from continuing operations	$	(.92	)	$	.33		$	(.06	)	$	(.97	)	$	(.58	)
Income (loss) from discontinued operations	$	(.23	)	$	(.02	)	$	.43		$	1.10		$	1.00
Net Income (loss)	$	(1.15	)	$	.31		$	.37		$	.13		$	.42
Diluted earnings per common share:
Income (loss) from continuing operations	$	(.92	)	$	.31		$	(.06	)	$	(.97	)	$	(.58	)
Income (loss) from discontinued operations	$	(.23	)	$	(.02	)	$	.43		$	1.10		$	1.00
Net Income (loss)	$	(1.15	)	$	.29		$	.37		$	.13		$	.42
Weighted average common shares:
Basic		138,384			140,402			135,880			138,348			139,470
Diluted		138,384			153,530			135,880			138,348			139,470
CONSOLIDATED BALANCE SHEET DATA:
Working capital	$	503,952		$	345,097		$	388,061		$	799,601		$	1,115,460
Total assets	$	2,147,677		$	2,350,744		$	2,521,211		$	3,825,247		$	4,682,113
Long-term debt, less current portion	$	593,103		$	204,238		$	394,498		$	661,202		$	1,279,026
Shareholders’ equity	$	990,586		$	1,204,434		$	1,128,559		$	2,035,439		$	2,102,713
Cash dividends (per share)	$	—		$	—		$	8.00		$	—		$	2.00

* The year ended February 3, 2007 includes an extra week, creating a 53-week fiscal year that occurs every six years in the accounting cycle.

EX-99.2

Exhibit 99.2

Item 7. 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 of operating the business and is considered to have these major components:

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Critical Accounting Policies

MD&A should be read in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this Form 8-K.

OVERVIEW

GENERAL

The operations of Saks Incorporated, a Tennessee corporation first incorporated in 1919, and its subsidiaries (together the “Company”) consist of Saks Fifth Avenue (“SFA”), Saks Fifth Avenue OFF 5^th (“OFF 5^th”), and SFA’s e-commerce operations. 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), Parisian (sold to Belk in October 2006), and Club Libby Lu (“CLL”) (the operations of which were discontinued in January 2009). The sold businesses and discontinued operations are presented as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for the current and prior year periods and are discussed below in “Discontinued Operations.”

The Company is primarily a fashion retail organization offering a wide assortment of distinctive luxury fashion apparel, shoes, accessories, jewelry, cosmetics and gifts. SFA stores are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls. Customers may also purchase SFA products by catalog or online at www.saks.com. OFF 5^th is intended to be the premier luxury off-price retailer in the United States. OFF 5^th stores are primarily located in upscale mixed-use and off-price centers and offer luxury apparel, shoes, and accessories, targeting the value-conscious customer. As of January 31, 2009, the Company operated 53 SFA stores with a total of approximately 5.9 million square feet and 51 OFF 5^th stores with a total of approximately 1.4 million square feet.

As a result of the sale of the SDSG and NDSG businesses, the Company is primarily focused on the luxury retail sector. All of the goods that the Company sells are discretionary items. Consequently, a downturn in the economy or difficult economic conditions may result in fewer customers shopping in the Company’s stores or online. In response, the Company may have to increase the duration and/or frequency of promotional events and offer larger discounts in order to attract customers, which would reduce gross margin and adversely affect results of operations.

The Company continues to make targeted investments in key areas to improve customer service and enhance merchandise assortment and allocation effectiveness. In addition, strategic investments are being made to remodel and expand existing selling space with a heightened focus on return on investment. The Company believes that its long-term strategic plans can deliver additional operating margin expansion in future years.

The Company seeks to create value for its shareholders by improving returns on its invested capital. The Company attempts to generate improved operating margins by generating sales increases while improving merchandising margins and controlling expenses. The Company uses operating cash flows to reinvest in the business and to repurchase debt or equity. The Company actively manages its real estate portfolio by routinely evaluating opportunities to improve or close underproductive stores and open new stores.

DISCONTINUED OPERATIONS

On July 5, 2005, Belk acquired from the Company for approximately $622.7 million in cash substantially all of the assets directly involved in the Proffitt’s business operations, plus the assumption of approximately $1.0 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 $784.0 million. The Company realized a net gain of $155.5 million on the sale.

Upon the closing of the transaction, Belk entered into a Transition Services Agreement (“Proffitt’s TSA”) whereby the Company continued to provide certain back office services related to the Proffitt’s operations. Beginning with the second quarter of 2006, the back office services were substantially complete, and therefore, the Proffitt’s TSA no longer qualified as continuing involvement in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

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), the administrative/headquarters facilities in Milwaukee, Wisconsin and distribution centers located in Rockford, Illinois, Naperville, Illinois, Green Bay, Wisconsin, and Ankeny, Iowa. The Company realized a net gain of $204.7 million 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 consolidated statements of income and the consolidated statements of cash flows for fiscal year 2006.

On October 2, 2006, the Company sold to Belk of 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 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 $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 total 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, 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.

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 consolidated statements of income and the consolidated statements of cash flows for fiscal year 2006.

As of January 31, 2009, the Company discontinued the operations of its CLL business, which consisted of 98 leased, mall-based specialty stores, targeting girls aged 4-12 years old. Charges incurred during 2008 associated with the closing of the stores included inventory liquidation costs of approximately $7.0 million, asset impairment charges of $17.0 million, lease termination costs of $14.0 million, severance and personnel related costs of $5.1 million and other closing costs of $1.4

2

million. The amount payable relating to the disposition of the CLL business as of January 31, 2009 is $13.6 million and is expected to be paid during the year ending January 30, 2010. These amounts and the results of operations of CLL are included in discontinued operations in the consolidated statements of income for fiscal year 2008.

SAKS FIFTH AVENUE NEW ORLEANS STORE

In late August 2005, the SFA store in New Orleans suffered substantial water, fire, and other damage related to Hurricane Katrina. The Company reopened the store in the fourth fiscal quarter of 2006 after necessary repairs and renovations were made to the property.

The SFA New Orleans store was covered by both property damage and business interruption insurance. The property damage coverage paid to repair and/or replace the physical property damage and inventory loss, and the business interruption coverage reimbursed the Company for lost profits as well as continuing expenses related to loss mitigation, recovery, and reconstruction for the full duration of the reconstruction period plus three months. The Company recorded in 2005 both (i) a $14.7 million gain on the excess of the replacement insurance value over the recorded net book value of the lost and damaged assets and (ii) $2.6 million of expenses related to the insurance deductible. In 2006, the Company recorded an adjustment (credit) of $1.6 million related to the insurance deductible. In 2007, the Company recorded a pre-tax gain of $13.5 million associated with the proceeds from the business interruption claims.

FINANCIAL PERFORMANCE SUMMARY

On a consolidated basis, total net sales and comparable store sales for the year ended January 31, 2009 decreased 6.0% and 6.1%, respectively. The Company recorded a loss from continuing operations of $126.6 million, or $0.92 per share compared to income from continuing operations of $47.1 million, or $0.31 per share, for the years ended January 31, 2009 and February 2, 2008, respectively. After recognition of the Company’s after-tax loss from discontinued operations of $32.2 million, or $0.23 per share, net loss totaled $158.8 million, or $1.15 per share for the year ended January 31, 2009. After recognition of the Company’s after-tax loss from discontinued operations of $3.2 million, or $0.02 per share, net income totaled $43.9 million, or $0.29 per share for the year ended February 2, 2008.

The year ended January 31, 2009 included net after-tax charges totaling $26.2 million or $0.19 per share, primarily related to $7.0 million or $0.05 per share of asset impairment charges incurred in the normal course of business and approximately $6.7 million or $0.05 per share of severance costs related to the Company’s 2008 downsizing initiative and the Ft. Lauderdale store closing. The year ended January 31, 2009 also included a write-off and adjustment of $14.6 million or $0.11 per share of certain deferred tax assets primarily associated with Federal Net Operating Loss tax credits that expired at the end of fiscal 2008. These expenses were partially offset by a net gain of $2.1 million or $0.02 per share related to the sale of three unutilized properties.

The year ended February 2, 2008 included net after-tax charges totaling $16.0 million, or $0.10 per share, primarily related to $18.1 million, or $0.12 per share, for retention, severance, and transition costs related to the Company’s downsizing and consolidation following the disposition of its SDSG businesses. Additionally, legal and investigation costs totaled $3.7 million, or $.02 per share, associated with the previously disclosed investigation by the 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 year ended February 2, 2008 also included a loss on extinguishment of debt totaling $3.4 million or $.02 per share, related to the repurchase of $106.3 million of senior notes, $2.7 million, or $.02 per share, related to asset impairments and dispositions, and $0.8 million expense related to a state tax adjustment. These expenses were partially offset by an insurance adjustment (credit) of $8.1 million, or $0.05 per share, related to the New Orleans Store, as well as a gain of $1.6 million, or $.01 per share, related to an OFF 5th store closing and the sale of an unused support facility. Lastly, there was a $3.0 million, or $.02 per share, state income tax valuation adjustment (credit).

The year ended February 3, 2007 included net after-tax charges totaling $33.9 million, or $0.25 per share, primarily due to $22.3 million, or $0.16 per share, for retention and severance and a $21.0 million, or $0.15 per share, non-cash charge related to the accounting treatment under the Statement of Financial Accounting Standard (“SFAS”) No. 123R “Share-Based Payment,” (“SFAS No. 123R”) for the discretionary anti-dilution adjustment made to outstanding options in connection with the Company’s $4 per common share dividends paid in May and November 2006. Additionally, there was a charge of $7.4 million, or $0.06 per share, primarily related to asset impairments and dispositions, and expenses of $3.6 million, or $0.03 per share, related to legal and other costs associated with the previously disclosed investigations. This was partially offset by income of $16.8 million, or $0.12 per share, due to the favorable conclusion of certain tax examinations and the adjustment of certain tax valuation allowances, a gain of $2.6 million, or $0.02 per share, related to a one-time gain on the curtailment of the Company’s pension plan, and an insurance adjustment (credit) of $1.0 million, or $0.01 per share, related to the New Orleans store.

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The year ended February 3, 2007 included an extra week, creating a 53-week fiscal year that occurs every six years in the accounting cycle for many retailers. Management estimates that the 53^rd week added $0.06 per share to earnings per share for the year ended February 3, 2007.

The retail environment is challenging and competitive. Uncertain conditions make the forecasting of near-term results difficult. The Company believes that execution of key strategic initiatives provides the Company an opportunity and the resources to enhance shareholder value.

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.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected items from the Company’s consolidated statements of income, expressed as percentages of net sales (numbers may not total due to rounding):

	Year Ended
	January 31, 2009 (Revised)	February 2, 2008 (Revised)	February 3, 2007 (Revised)
Net sales	100%	100%	100%
Cost of sales (excluding depreciation and amortization)	68.1	61.2	61.6
Gross margin	31.9	38.8	38.4
Selling, general and administrative expenses	25.4	25.7	27.7
Other operating expenses	10.6	9.8	10.8
Impairments and dispositions	0.4	0.1	0.4
Operating income (loss)	(4.5)	3.2	(0.5)
Interest expense	(1.5)	(1.5)	(1.9)
Gain (loss) on extinguishment of debt	0.0	(0.2)	0.0
Other income, net	0.2	0.8	1.0
Income (loss) from continuing operations before income taxes	(5.8)	2.3	(1.5)
Provision (benefit) for income taxes	(1.6)	0.8	(1.2)
Income (loss) from continuing operations	(4.2)	1.5	(0.3)
Discontinued operations:
Income (loss) from discontinued operations	(1.7)	(0.2)	6.5
Provision (benefit) for income taxes	(0.7)	(0.1)	4.5
Income (loss) from discontinued operations	(1.1)	(0.1)	2.0
Net income (loss)	(5.2)%	1.4%	1.7%

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FISCAL YEAR ENDED JANUARY 31, 2009 (“2008”) COMPARED TO FISCAL YEAR ENDED

FEBRUARY 2, 2008 (“2007”)

DISCUSSION OF OPERATING INCOME (LOSS) – CONTINUING OPERATIONS

The following table shows the changes in operating income (loss) from 2007 to 2008:

(In Millions)	Total Company
2007 Operating Income - Continuing Operations	$	102.9
Store sales and margin		(284.6	)
Operating expenses		53.2
Impairments and dispositions		(6.9	)
Change		(238.3	)
2008 Operating Loss - Continuing Operations	$	(135.4	)

For the year ended January 31, 2009, the Company’s operating loss totaled $135.4 million, a 770 basis point decrease from operating income of $102.9 million in the same period last year. Operating loss was driven by a 6.1% decrease in comparable store sales and a gross margin rate decline of 690 basis points for the year ended January 31, 2009. The decline in gross margin dollars and the gross margin rate was principally due to aggressive markdowns taken in the fourth quarter of 2008 as the Company initiated promotional activities in an effort to stimulate consumer demand and reduce inventory levels.

NET SALES

For the year ended January 31, 2009, total sales decreased 6.0% to $3,029.7 million from $3,224.1 million for the year ended February 2, 2008. Consolidated comparable store sales decreased $197.3 million, or 6.1% from $3,211.7 million for the year ended February 2, 2008 to $3,014.4 million for the year ended January 31, 2009.

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, converted and re-branded stores are included in the comparable store sales comparison, except for the periods in which they are closed for remodeling and renovation.

GROSS MARGIN

For the year ended January 31, 2009, gross margin was $967.2 million, or 31.9% of net sales, compared to $1,251.8 million, or 38.8% of net sales, for the year ended February 2, 2008. The decline in gross margin dollars and gross margin rate was primarily driven by incremental markdowns as the Company reacted to the rapidly deteriorating economic conditions and aggressively worked to clear excess inventory.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the year ended January 31, 2009, SG&A was $770.8 million, or 25.4% of net sales, compared to $827.6 million, or 25.7% of net sales, for the year ended February 2, 2008. The decrease of $56.8 million in expenses was primarily driven by lower variable expenses associated with the year over year sales decrease of $194.4 million, general expense reduction and a decrease in severance, retention and transition costs of $19.6 million from the prior year. As a percentage of sales, SG&A decreased by 20 basis points over the prior year.

Amounts received from vendors in conjunction with compensation programs and cooperative advertising were consistent with the related gross compensation and cooperative advertising expenditures and therefore had no significant impact on SG&A expense, in dollars or as a percentage of net sales.

OTHER OPERATING EXPENSES

For the year ended January 31, 2009, other operating expenses were $320.7 million, or 10.6% of net sales, compared to $317.0 million, or 9.8% of net sales, for the year ended February 2, 2008. The increase of $3.7 million was principally driven by higher depreciation and amortization expense and property and equipment rentals of $3.0 million and $1.0 million, respectively and an increase in store pre-opening costs of $1.6 million. These increases were partially offset by a decrease in taxes other than income taxes of $1.9 million.

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IMPAIRMENTS AND DISPOSITIONS

For the year ended January 31, 2009, the Company recognized net charges from impairments and dispositions of $11.1 million compared to net charges of $4.3 million for the year ended February 2, 2008. The current and prior year net charges were primarily due to asset impairments in the normal course of business.

INTEREST EXPENSE

Interest expense decreased to $45.7 million in 2008 from $48.3 million in 2007 and, as a percentage of net sales, was 1.5% in 2008 and 2007. The decrease of $2.6 million was primarily due to lower interest rates due in part to utilizing the revolving credit facility to retire approximately $84.1 million in principal amount of senior notes which matured in November 2008. Interest expense includes non cash interest in accordance with FSP APB 14-1 of $6.8 million and $6.4 million for the years ended January 31, 2009 and February 2, 2008, respectively.

GAIN/(LOSS) ON EXTINGUISHMENT OF DEBT

During the year ended February 2, 2008, the Company repurchased a total of approximately $106.3 million of senior notes. The repurchase of these notes resulted in a loss on extinguishment of debt of $5.6 million. There were no such losses recorded during the year ended January 31, 2009.

OTHER INCOME, NET

Other income decreased to $5.6 million in 2008 from $24.9 million in 2007. Other income in 2008 included a $3.4 million gain on the sale of three unutilized properties. Other income in 2007 included approximately $13.5 million of business interruption insurance settlement proceeds received for the SFA New Orleans store, which was destroyed in the aftermath of Hurricane Katrina, $6.2 million of interest income and $2.7 million related to an OFF 5^th store closing and the sale of an unused support facility.

INCOME TAXES

For 2008 and 2007, the effective income tax rate for continuing operations differs from the federal statutory tax rate due to state income taxes and other items such as executive compensation, tax-exempt interest, change in state tax law, the change in the valuation allowance against state net operating loss carryforwards, the effect of concluding tax examinations and other tax reserve adjustments, and the write-off of an expired Federal NOL. Including the effect of these items, the Company’s effective income tax rate for continuing operations was 27.9% and 36.2% in 2008 and 2007, respectively.

2007 COMPARED TO FISCAL YEAR ENDED FEBRUARY 3, 2007 (“2006”)

DISCUSSION OF OPERATING INCOME (LOSS) – CONTINUING OPERATIONS

The following table shows the changes in operating income (loss) from 2006 to 2007:

(In Millions)	Total Company
2006 Operating Loss - Continuing Operations	$	(15.3	)
Store sales and margin		143.5
Operating expenses		(32.8	)
Impairments and dispositions		7.5
Change		118.2
2007 Operating Income - Continuing Operations	$	102.9

For the year ended February 2, 2008, the Company’s operating income totaled $102.9 million, a 370 basis point improvement from an operating loss of $15.3 million for the year ended February 3, 2007. Operating income was driven by an 11.9% increase in comparable store sales and expense management which resulted in a 300 basis point improvement in the expense rate as a percentage of sales. Additionally, the gross margin rate improved 40 basis points for the year ended February 2, 2008. 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 year ended February 2, 2008, total sales increased 11.6% to $3,224.1 million from $2,888.4 million for the year ended February 3, 2007. The fiscal year ended February 3, 2007 included an extra week, creating a 53-week fiscal year that occurs every six years in the accounting cycle for many retailers which accounted for an additional $42.7 million in sales. Consolidated comparable store sales increased $332.9 million, or 11.9% from $2,805.3 million for the 52-week period ended January 27, 2007 to $3,138.2 million at February 2, 2008. The previously mentioned 53^rd week has been excluded from the comparable store sales calculation.

GROSS MARGIN

For the year ended February 2, 2008, gross margin was $1,251.8 million, or 38.8% of net sales, compared to $1,108.3 million, or 38.4% of net sales, for the year ended February 3, 2007. The improvement in gross margin dollars and 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

For the year ended February 2, 2008, SG&A was $827.6 million, or 25.7% of net sales, compared to $799.3 million, or 27.7% of net sales, for the year ended February 3, 2007. The net increase of $28.3 million in expenses was primarily driven by higher variable expenses associated with the year over year sales increase of $335.6 million. The fiscal 2006 period included a $33.4 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 and the $4 per share dividend paid on November 30, 2006. As a percentage of sales, SG&A decreased by 200 basis points from the year ended February 3, 2007; however, excluding the anti-dilution adjustment noted above, SG&A expense as a percentage of sales declined 80 basis points over the same period.

Amounts received from vendors in conjunction with compensation programs and cooperative advertising were consistent with the related gross compensation and cooperative advertising expenditures and therefore had no impact on SG&A expense, in dollars or as a percentage of net sales.

OTHER OPERATING EXPENSES

For the year ended February 2, 2008, other operating expenses were $317.0 million, or 9.8% of net sales, compared to $312.5 million, or 10.8% of net sales, for the year ended February 3, 2007. The increase of $4.5 million was principally driven by higher depreciation and amortization expense of $5.9 million and an increase in taxes other than income taxes of $5.9 million. This is partially offset by a decrease in property and equipment rentals of $7.5 million for the year ended February 2, 2008. As a percentage of sales, other operating expenses decreased slightly, reflecting the ability to leverage expenses as store sales increased.

IMPAIRMENTS AND DISPOSITIONS

For the year ended February 2, 2008, the Company recognized net charges from impairments and dispositions of $4.3 million compared to net charges of $11.8 million for the year ended February 3, 2007. The current and prior year net charges were primarily due to asset impairments in the normal course of business.

INTEREST EXPENSE

Interest expense declined to $48.3 million in 2007 from $55.7 million in 2006 and, as a percentage of net sales, decreased to 1.5% in 2007 from 1.9% in 2006. The decrease of $7.4 million was primarily due to the reduction in debt resulting from the repurchase of approximately $106.3 million of senior notes during the year ended February 2, 2008. Interest expense includes non cash interest in accordance with FSP APB 14-1 of $6.4 million and $6.0 million for the years ended February 2, 2008 and February 3, 2007, respectively.

GAIN/(LOSS) ON EXTINGUISHMENT OF DEBT

During the year ended February 2, 2008, the Company repurchased a total of approximately $106.3 million of senior notes. The repurchase of these notes resulted in a loss on extinguishment of debt of $5.6 million. For the year ended February 3, 2007, the Company repurchased a total of approximately $0.2 million in principal amount of senior notes. The repurchase of these notes resulted in a gain on extinguishment of debt of $7 thousand.

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OTHER INCOME, NET

Other income decreased to $24.9 million in 2007 from $28.4 million in 2006 primarily due to the decrease in interest income of $18.6 million as the Company invested the cash proceeds from the NDSG and Parisian dispositions prior to the payment of the May and November $4 per common share dividends in 2006. This is partially offset by an increase to other income of approximately $13.5 million due to the business interruption insurance settlement proceeds received for the SFA New Orleans store, which was destroyed in the aftermath of Hurricane Katrina. Other income in 2007 also included $2.7 million related to an OFF 5^th store closing and the sale of an unused support facility.

INCOME TAXES

For 2007 and 2006 the effective income tax rate differs from the federal statutory tax rate due to state income taxes and other items such as executive compensation, tax-exempt interest, the change in valuation allowance against state net operating loss carryforwards, and the effect of concluding tax examinations and other tax reserve adjustments. Including the effect of these items, the Company’s effective income tax rate for continuing operations was 36.2% and 82.2% in 2007 and 2006, respectively. The effective income tax rate for 2006 was impacted by a favorable settlement of certain tax examinations as well as the effect of the allocation of state taxes to discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

The primary needs for cash are to fund operations, acquire or construct new stores, renovate and expand existing stores, provide working capital for new and existing stores, invest in technology and distribution centers and service debt. The Company anticipates that cash on hand, cash generated from operating activities and borrowings under its revolving credit facility will be sufficient to sustain its current level of operations.

Cash provided by operating activities from continuing operations was $17.2 million in 2008, $67.4 million in 2007 and $153.8 million in 2006. The accompanying consolidated statements of cash flows identify major differences between net income and net cash provided by operating activities for each of those years. Cash provided by operating activities principally represents income before depreciation and non-cash charges and after changes in working capital. Working capital is significantly impacted by changes in inventory and accounts payable. Inventory levels typically increase or decrease to support expected sales levels and accounts payable fluctuations are generally determined by the timing of merchandise purchases and payments. The $50.2 million decrease in cash flows from continuing operations in 2008 from 2007 was primarily driven by the loss from continuing operations of $126.6 million in 2008 compared to income from continuing operations of $47.1 million in 2007 and a year over year decrease in accounts payable and accrued liabilities of approximately $114.6 million. This was partially offset by an inflow of cash resulting from a decrease in inventory of approximately $118.5 million. The decrease in inventory and accounts payable is due to the Company’s effort to more closely align inventories with current consumption trends. The $86.4 million decrease in cash flows from continuing operations in 2007 from 2006 was primarily due to a decrease in accounts payable and accrued liabilities and increased inventory levels, partially offset by higher net income.

Cash used in investing activities from continuing operations was $123.0 million in 2008, $124.4 million in 2007 and $121.2 million in 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 $1.4 million decrease in cash used in 2008 is primarily related to a decrease in capital expenditures of approximately $9.4 million, partially off-set by a decrease in proceeds from the sale of property and equipment of approximately $8.0 million. The $3.2 million increase in cash used in 2007 is primarily related to an increase in capital expenditures of approximately $15.4 million, partially offset by the increase in proceeds from the sale of SFA property of approximately $12.2 million.

Cash provided by financing activities from continuing operations was $35.5 million in 2008. Cash used in financing activities from continuing operations was $119.6 million in 2007 and $1,041.2 million in 2006. The 2008 cash provided by financing activities relates to proceeds of $156.7 million from the revolving credit facility and $4.1 million in proceeds from the issuance of common stock associated with stock option exercises partially off-set by the repayments of long-term debt and capital lease obligations of approximately $89.2 million and $34.9 million of common stock repurchases. The 2007 use relates to the repurchase of approximately $106.3 million in principal amount of senior notes and $27.5 million of common stock repurchases partially off-set by $34.3 million in proceeds from the issuance of common stock associated with stock option exercises. The 2006 use primarily relates to the payment of cash dividends totaling $1,095.0 million and $6.5 million of common stock repurchases partially off-set by $51.7 million of proceeds from the issuance of common stock associated with stock option exercises.

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On March 6, 2006, the Company’s Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $547.5 million, and the Company reduced shareholders’ equity by that amount. Approximately $539.0 million 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 vest.

On October 3, 2006, the Company’s Board of Directors declared a cash dividend of $4.00 per common share totaling approximately $558.6 million, and the Company reduced shareholders’ equity by that amount. Approximately $552.0 million 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 vest.

During the year ended February 3, 2007, the Company repurchased approximately 0.5 million shares of its common stock at an average price of $14.51 and a total cost of approximately $6.5 million.

During the year ended February 2, 2008, the Company repurchased approximately 1.7 million shares of its common stock at an average price of $15.95 and a total cost of approximately $27.5 million.

During the year ended January 31, 2009, the Company repurchased approximately 2.9 million shares of its common stock at an average price of $11.83 per share and a total cost of approximately $34.9 million. At January 31, 2009, there were 32.7 million shares remaining available for repurchase under the Company’s existing shares repurchase program.

CASH BALANCES AND LIQUIDITY

The Company’s primary sources of short-term liquidity comprises 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 January 31, 2009 and February 2, 2008, the Company maintained cash and cash equivalent balances of $10.3 million and $101.2 million, respectively. Exclusive of approximately $10.0 million and $15.7 million of store operating cash at January 31, 2009 and February 2, 2008, respectively, cash was invested principally in various money market funds. There was no restricted cash at January 31, 2009 and February 2, 2008.

At January 31, 2009, the Company had $156.7 million of direct borrowings under its revolving credit facility, and had $21.5 million in unfunded letters of credit. The Company had maximum unfunded letters of credit of $34.3 million on its revolving credit facility during 2008, which reduces the amount of borrowings under the facility. Borrowings are limited to a prescribed percentage of eligible inventories and receivables. There are no debt ratings-based provisions in the revolving credit 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 Company had unutilized availability under the facility of $261.8 million after factoring in the outstanding borrowings and outstanding letters of credit at year end and excluding the last $60 million of availability due to the fixed charge ratio falling below the required 1 to 1 coverage. 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 is very focused on cash management and capital preservation and has implemented a number of actions in an effort to be free cash flow positive in 2009. The planned actions include an approximate 50% reduction in year over year capital expenditures, an approximate 20% reduction in year over year inventory purchases, an approximate 9% reduction in force that was implemented in January 2009, and general operating expense reductions throughout the Company. Based on these actions and the fact that the Company has no maturities of debt until late 2010, the Company expects to have sufficient liquidity to fund operations in 2009.

CAPITAL STRUCTURE

The Company continuously evaluates its debt-to-capitalization ratio in light of economic trends, business trends, levels of interest rates, and terms, conditions and availability of capital in the capital markets. At January 31, 2009, 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. At January 31, 2009, total debt was $640.1 million (including the unamortized discount on the convertible senior notes), representing an increase of $67.5 million from the balance of $572.6

9

million at February 2, 2008. This increase in debt was primarily the result of $156.7 million in new borrowings under the revolving credit agreement partially off-set by the $84.1 million maturity of senior notes in 2008. Additionally, the debt-to-capitalization ratio increased to 39.9% in 2008, from 32.8% in 2007, primarily as a result of the increase in debt in 2008.

At January 31, 2009, the Company maintained a 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 revolving credit 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. At January 31, 2009, the Company’s fixed charge coverage was below the 1 to 1 requirement; however, the Company is not subject to the fixed charge coverage ratio as its availability under the facility exceeds $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 January 31, 2009, the Company had $156.7 million in borrowings under the revolving credit facility. The senior revolving credit facility has a maximum capacity of $500 million. The Company plans to reduce its inventory levels in 2009, and consequently, the maximum availability is expected to be below $500 million in certain periods during 2009.

At January 31, 2009, the Company had $192.3 million of senior notes outstanding, excluding the convertible notes, comprising four separate series having maturities ranging from 2010 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 will have 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 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 approximately $412 thousand. The remainder of the 8.25% notes were retired upon maturity on November 15, 2008.

The Company had $230 million of convertible senior notes, at January 31, 2009, 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 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 is greater than 120% of the applicable conversion price 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 convertible notes are within the scope of FSP APB 14-1 which was adopted as of February 1, 2009 with retrospective application.

FSP APB 14-1 clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.

Upon adoption of FSP APB 14-1, the Company estimated the fair value, as of the date of issuance, of its 2.0% convertible senior notes assuming a 6.25% non-convertible borrowing rate to be $158.1 million. The difference between the fair value and the principal amount of the notes was $71.9 million. This amount was retrospectively recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being accreted to interest expense over the ten-year period to the first put date of the notes in 2014 resulting in an increase in non-cash interest expense in prior and future periods.

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The Company used approximately $25 million of the proceeds from the issuances of the convertible notes 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 will have 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.

At January 31, 2009, the conversion criteria with respect to the credit rating requirements were met, however the share price was significantly below the conversion price. Due to the share price being significantly below the conversion price, the Company has classified the convertible notes in “long-term debt” on the Company’s balance sheet as of January 31, 2009. At February 2, 2008, the holders of the convertible notes had the ability to exercise their conversion rights as a result of the Company’s share price exceeding 120% of the applicable conversion price for the trading period. Therefore, the convertible notes were classified within “current portion of long-term debt” on the Company’s balance sheet as of February 2, 2008.

At January 31, 2009, the Company had $61.1 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 $4 million and $6 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 funding requirements of up to $1.0 million in 2009. As part of the sale of NDSG to Bon-Ton, the NDSG pension assets and liabilities were acquired by Bon-Ton. Additionally, the Company amended the SFA Pension Plan during 2006, freezing benefit accruals for all participants except those who have attained age 55 and completed 10 years of credited service as of January 1, 2007, who are considered to be non-highly compensated employees. In January 2009, the Company suspended future benefit accruals for all remaining participants in the plan, effective March 13, 2009.

CONTRACTUAL OBLIGATIONS

The contractual cash obligations at January 31, 2009 associated with the Company’s capital structure, as well as other contractual obligations are illustrated in the following table:

	Payments Due by Period
(Dollars in Millions)	Within 1 year		Years 2-3		Years 4-5		After Year 5		Total
Long-Term Debt, including interest	$	27	$	388	$	13	$	279	$	707
Capital Lease Obligations, including interest		12		23		21		55		111
Operating Leases		67		126		95		189		477
Purchase Obligations		378		31		20		—		429
Total Contractual Cash Obligations	$	484	$	568	$	149	$	523	$	1,724

The Company’s purchase obligations principally consist of purchase orders for merchandise, store construction contract commitments, maintenance contracts, and services agreements and amounts due under employment agreements. Amounts committed under open purchase orders for merchandise inventory represent approximately $329.3 million of the purchase obligations within one year, a substantial portion of which are cancelable without penalty prior to a date that precedes the vendor’s scheduled shipment date.

On March 6, 2006, the Company’s Board of Directors declared a cash dividend of $4.00 per common share, and the Company reduced shareholders’ equity for the $547.5 million dividend. Approximately $539.0 million of the dividend was paid on May 1, 2006 to shareholders of record as of April 14, 2006. On October 3, 2006 the Company’s Board of Directors declared another cash dividend of $4.00 per common share, and the Company reduced shareholders’ equity for the $558.6 million dividend. Approximately $552.0 million of the dividend was paid on November 30, 2006 to shareholders of record as of November 15, 2006. The remaining portion of the dividends will be paid prospectively as, and to the extent, certain awards of restricted stock vest.

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Each outstanding share of the Company’s common stock has one preferred stock purchase right attached. The rights generally become exercisable ten days after an outside party acquires, or makes an offer for, 20% or more of the common stock. Each right entitles its holder to purchase 1/100 share of Series C Junior Preferred Stock for $50 once the rights become exercisable. The rights expire in November 2018. Once exercisable, if the Company is involved in a merger or other business combination or an outside party acquires 20% or more of the common stock, each right will be modified to entitle its holder (other than the acquirer) to purchase common stock of the acquiring company or, in certain circumstances, common stock having a market value of twice the exercise price of the right.

Additionally, at January 31, 2009 and February 2, 2008, the Company had accrued approximately $13.9 million and $4.0 million, respectively, related to severance compensation. Substantially all amounts accrued at January 31, 2009 are expected to be paid during the year ending January 30, 2010.

Other long-term liabilities excluded from the above table include deferred compensation obligations of $10.3 million. The timing of payments for this obligation is subject to employee elections and other employment factors. Other long-term liabilities also include non-cash obligations for deferred rent and deferred property incentives. Other unrecorded obligations that have been excluded from the contractual obligations table include contingent rent payments, amounts that might come due under change-in-control provisions of employment agreements, and common area maintenance costs. The Company expects funding requirements for its pension plan of up to $1.0 million in 2009.

Due to the uncertainty with respect to the timing of future cash flows associated with the Company’s unrecognized tax benefits at January 31, 2009, the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $45.0 million of unrecognized tax benefits have been excluded from the contractual obligations table above.

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; and obligations under material variable interests.

From time to time the Company has issued guarantees to landlords under leases of stores operated by its subsidiaries. Certain of these stores were sold in connection with the SDSG and NDSG transactions. If the purchasers fail to perform certain obligations under the leases guaranteed by the Company, the Company could have obligations to landlords under such guarantees. Based on the information currently available, management does not believe that its potential obligations under these lease guarantees would be material.

CREDIT CARDS

Prior to April 15, 2003, the Company’s proprietary credit cards were issued by National Bank of the Great Lakes (“NBGL”), a wholly owned subsidiary of the Company. On April 15, 2003, the Company sold its proprietary credit card portfolio, consisting of the proprietary credit card accounts owned by NBGL and the Company’s ownership interest in the assets of a trust, to HSBC, a third party financial institution.

As part of the transaction, for a term of ten years expiring in 2013 and pursuant to a program agreement, HSBC established and owns proprietary credit card accounts for customers of the Company’s operating subsidiaries, retains the benefits and risks associated with the ownership of the accounts, receives the finance charge income and incurs the bad debts associated with those accounts. During the ten-year term, pursuant to a servicing agreement, the Company continues to provide key customer service functions, including new account opening, transaction authorization, billing adjustments and customer inquiries, and receives compensation from HSBC for these services.

At the end of the ten-year term expiring in 2013, the agreement can be renewed for two two-year terms. At the end of the agreement, the Company has the right to repurchase, at fair value, all of the accounts and outstanding accounts receivable, negotiate a new agreement with HSBC or begin issuing private label credit cards itself or through others. The agreement allows the Company to terminate the agreement early following the occurrence of certain events, the most significant of which would be HSBC’s failure to pay owed amounts, bankruptcy, a change in control or a material adverse change in HSBC’s ability to perform under the agreement. The agreement also allows for HSBC to terminate the agreement if the Company fails to pay owed amounts or enters bankruptcy. Should either the Company or HSBC choose to terminate the agreement early, the Company has the right, but not the requirement, to repurchase the credit card accounts and associated accounts receivable from HSBC at their fair value. The Company is contingently liable to pay monies to HSBC in the event of an early termination or a significant disposition of stores. The contingent payment is based upon a declining portion of an amount established at the beginning of the ten-year agreement and on a prorated portion of significant store closings. The maximum contingent payment had the agreement been terminated early at January 31, 2009 would have been approximately $21.8 million. Management believes the risk of incurring a contingent payment is remote.

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In September of 2006 the Company entered into agreements with HSBC and MasterCard International Incorporated to issue a co-branded MasterCard card to new and existing proprietary credit card customers. Under this program, qualifying customers are issued a SFA and MasterCard-branded credit card that functions as a traditional proprietary credit card when used at any SFA or OFF 5^th store and at Saks Direct or as a MasterCard card when used at any unaffiliated location that accepts MasterCard cards. HSBC establishes and owns the co-brand accounts, retains the benefits and sales associated with the ownership of the accounts, receives the finance charge and other income from the accounts, and incurs the bad-debts associated with the accounts.

CAPITAL NEEDS

The Company estimates capital expenditures for 2009 will be approximately $60 million, net of any proceeds, primarily for store expansions and renovations, enhancements to management information systems, maintenance capital and replacement capital expenditures.

The Company anticipates that working capital requirements related to existing stores, store expansions, store renovations and capital expenditures will be funded through cash on hand, cash provided by operations and the revolving credit facility. Maximum availability under the revolving credit facility is $500 million and there is no debt rating trigger. During periods in which availability under the facility exceeds $60 million, the Company is not subject to financial covenants. If availability under the facility were to decrease to less than $60 million, the Company would be subject to a minimum fixed charge coverage ratio of 1 to 1. During 2008, weighted average letters of credit issued under this credit facility were $28.6 million and letters of credit reduce the amount available to borrow. The highest amount of letters of credit outstanding under the facility during 2008 was $34.3 million. The Company expects that its cash flows from operating activities combined with borrowings under its revolving credit facility will be sufficient to sustain its current level of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s critical accounting policies and estimates are discussed in the notes to the consolidated financial statements. Certain judgments and estimates utilized in implementing these accounting policies are likewise discussed in each of the notes to the consolidated financial statements. The following discussion aggregates the judgments and uncertainties affecting the application of these policies and estimates and the likelihood that materially different amounts would be reported under varying conditions and assumptions.

REVENUE RECOGNITION

Sales and the related gross margin are recorded at the time customers provide a satisfactory form of payment and take ownership of the merchandise. Revenue associated with gift cards is recognized upon redemption of the card. There are minimal accounting judgments and uncertainties affecting the application of this policy. The Company estimates the amount of goods that will be returned for a refund based on historical trends and reduces sales and gross margin by that amount. However, given that approximately 25% of merchandise sold is later returned and that the vast majority of merchandise returns occur within a short time after the selling transaction, the risk of the Company realizing a materially different amount for sales and gross margin than reported in the consolidated financial statements is minimal.

COST OF SALES AND INVENTORY VALUATION, EXCLUDING DEPRECIATION AND AMORTIZATION

Merchandise inventories are stated at the lower of cost or market using the retail method. On February 3, 2008, the Company elected to change its method of costing its inventories to the retail “first-in, first-out” (FIFO) method, whereas in all prior periods inventory was costed using the retail “last-in, first-out” (LIFO) method. The new method of accounting had no impact on the fiscal years ending January 31, 2009, February 2, 2008, and February 3, 2007 as the LIFO value exceeded the FIFO market value and inventory had been adjusted to reflect FIFO market value in all periods. Under the retail method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. The cost of the inventory reflected on the consolidated balance sheet is decreased with a charge to cost of sales contemporaneous with the lowering of the retail value of the inventory on the sales floor through the use of markdowns. Hence, earnings are negatively impacted as the merchandise is being devalued with markdowns prior to the sale of the merchandise. The areas requiring significant management judgment include (1) setting the original retail value for the merchandise held for sale, (2) recognizing merchandise for which the customer’s perception of value has declined and appropriately marking the retail value of the merchandise down to the perceived value, and (3) estimating the shrinkage that has occurred through theft during the period between physical inventory counts. These judgments and estimates, coupled with the averaging processes within the retail method, can, under certain circumstances, produce varying financial results. Factors that can lead to different financial results include setting original retail prices for merchandise held for sale too high, failure to identify a decline in perceived value of inventories and process the appropriate retail value markdowns and overly optimistic or overly conservative shrinkage estimates. The Company believes it has the appropriate merchandise valuation and pricing controls in place to minimize the risk that its inventory values would be materially under or overvalued.

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The Company receives vendor provided support in different forms. When the vendor provides support for inventory markdowns, the Company records the support as a reduction to cost of sales. Such support is recorded in the period that the corresponding markdowns are taken. When the Company receives inventory-related support that is not designated for markdowns, the Company includes this support as a reduction in cost purchases.

SELF-INSURANCE RESERVES

The Company self-insures a substantial portion of the exposure for costs related primarily to employee medical, workers’ compensation and general liability. Expenses are recorded based on estimates for reported and incurred but not reported claims considering a number of factors, including historical claims experience, severity factors, litigation costs, inflation and other assumptions. Although the Company does not expect the amount it will ultimately pay to differ significantly from its estimates, self-insurance reserves could be affected if future claims experience differs significantly from the historical trends and assumptions.

DEPRECIATION AND RECOVERABILITY OF CAPITAL ASSETS

Over forty percent of the Company’s assets at January 31, 2009 are represented by investments in property and equipment. Determining appropriate depreciable lives and reasonable assumptions for use in evaluating the carrying value of capital assets requires judgments and estimates.

• The Company principally utilizes the straight-line depreciation method and a variety of depreciable lives. Land is not depreciated. Buildings and improvements are depreciated over 20 to 40 years. Store fixtures are depreciated over 10 years. Equipment utilized in stores (e.g., escalators) and in support areas (e.g., distribution centers, technology) and fixtures in support areas are depreciated over 3 to 15 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or their related lease terms, generally ranging from 10 to 20 years. Internally generated computer software is amortized over 3 to 10 years. Generally, no estimated salvage value at the end of the useful life of the assets is considered.

• When constructing stores, the Company receives allowances from landlords. If the landlord is determined to be the primary beneficiary of the property, then the portion of those allowances attributable to the property owned by the landlord is considered to be a deferred rent liability, whereas the corresponding capital expenditures related to that store are considered to be prepaid rent. Allowances in excess of the amounts attributable to the property owned by the landlord are considered improvement allowances and are recorded as deferred rent liabilities that are amortized over the life of the lease. Capital expenditures are also reduced when the Company receives cash and allowances from merchandise vendors to fund the construction of vendor shops.

• To the extent the Company remodels or otherwise replaces or disposes of property and equipment prior to the end of their assigned depreciable lives, the Company could realize a loss or gain on the disposition. To the extent assets continue to be used beyond their assigned depreciable lives, no depreciation expense is being realized. The Company reassesses the depreciable lives in an effort to reduce the risk of significant losses or gains at disposition and utilization of assets with no depreciation charges. The reassessment of depreciable lives involves utilizing historical remodel and disposition activity and forward-looking capital expenditure plans.

• Recoverability of the carrying value of store assets is assessed upon the occurrence of certain events (e.g., opening a new store near an existing store or announcing plans for a store closing) and, absent certain triggering events, annually during the fourth quarter. The recoverability assessment requires judgment and estimates for future store generated cash flows. The underlying estimates for cash flows include estimates for future sales, gross margin rates, inflation and store expenses. During the years ended January 31, 2009, February 2, 2008 and February 3, 2007, the Company incurred charges of $11.1 million, $4.3 million, and $7.2 million, respectively, related to asset impairments and other costs in the normal course of business.

LEASES

The Company leases stores, distribution centers, and administrative facilities under operating leases. Store lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for a percentage of sales in excess of specified levels. Most of the Company’s lease agreements include renewal periods at the Company’s option. The Company recognizes rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased space and includes such rent expense in Store Pre-Opening Costs. The Company records tenant improvement allowances and rent holidays as deferred rent liabilities on the consolidated balance

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sheets and amortizes the deferred rent over the terms of the lease to rent expense in the consolidated statements of income. The Company records rent liabilities on the consolidated balance sheets for contingent percentage of sales lease provisions when the Company determines that it is probable that the specified levels will be reached during the fiscal year.

INCOME AND OTHER TAXES

The majority of the Company’s deferred tax assets at January 31, 2009 consist of federal and state net operating loss carryforwards that will expire between 2009 and 2028. During 2008, the valuation allowance against net operating loss carryforwards was increased based on projections of future profitability. At January 31, 2009 the Company believes that it will be sufficiently profitable during the periods from 2009 to 2028 to utilize all of its federal NOLs and a portion of its state NOLs. To the extent management’s estimates of future taxable income by jurisdiction are greater than or less than management’s current estimates, future increases or decreases in the income tax benefit for net operating losses could occur.

The Company is routinely under audit by federal, state and local authorities in the areas of income taxes and the remittance of sales and use taxes. Audit authorities may question the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state and local tax laws. In evaluating the exposure associated with various tax filing positions, the Company often accrues for exposures related to uncertain tax positions.

During 2008, an additional reserve of $.5 million was established for issues raised in current state tax examinations and previously filed federal tax returns relating to prior periods. During 2007, an additional reserve of $1.8 million was established for issues raised in current state tax examinations and previously filed federal tax returns relating to prior periods. During 2006, the Company concluded a federal income tax examination for the 2003 and 2004 tax years and concluded a number of state income tax examinations as well which resulted in a decrease in the amount previously accrued for exposures related to uncertain tax positions of $10.2 million. At January 31, 2009, the Company believes it has appropriately accrued for future exposures related to uncertain tax positions. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, the Company’s effective tax rate in a given financial statement period may be materially impacted.

The Company adopted the provisions of the Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109” (“FIN No. 48”) effective as of the beginning of fiscal year 2007. As a result of the implementation of FIN No. 48, 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. Including the cumulative effect of the decrease, at the beginning and end of 2008 the Company had approximately $44.6 million and $45.3 million (net of federal and state benefits) of total unrecognized tax benefits, respectively. Of these totals, $13.3 million and $14.0 million (net of federal and state benefits) represents the amounts of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in any future periods. 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 changes to the amount of unrecognized tax benefits.

As a result of the analysis of uncertain tax positions upon the adoption of FIN No. 48, the net deferred tax asset related to 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 shareholders’ equity in accordance with Statement of Position (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). The Company is subject to the provisions of SOP 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 beyond and currently has examinations in progress for several jurisdictions.

PENSION PLANS

Pension expense is based on actuarial models used to estimate the total benefits ultimately payable to participants and is allocated to the respective service periods. The actuarial assumptions used to calculate pension costs are reviewed annually. The Company’s funding policy provides that contributions to the pension trusts shall be at least equal to the minimum funding requirement of the Employee Retirement Income Security Act of 1974. The Company may provide additional contributions from time to time, generally not to exceed the maximum tax-deductible limitation. Beginning in fiscal year 2008, the pension plans are valued annually as of the Company’s fiscal year-end balance sheet date. In prior years, the pension plans were valued annually on November 1^st. The projected unit credit method is utilized in recognizing the pension liabilities.

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In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). This Statement requires employers to (i) recognize the funded status of their defined benefit pension and other postretirement plans on the consolidated balance sheet, (ii) 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 and (iii) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position. The Company adopted the recognition and disclosure requirements of SFAS No. 158 prospectively on February 3, 2007. Effective January 31, 2009, in accordance with SFAS No. 158, the Company adopted the measurement date requirements of SFAS No. 158 and changed the measurement date from November 1 to the date of the Company’s fiscal year end.

Upon adoption of the recognition and disclosure requirements of SFAS No. 158, the Company recorded a pension asset of $4.6 million and eliminated the prepaid pension asset of $47.7 million. Based on the funded status of the defined benefit pension and postretirement benefit plans as of February 3, 2007, the Company also recorded a net decrease in Accumulated Other Comprehensive Income (“AOCI”) of $26.0 million. The adoption of SFAS No. 158 on February 3, 2007 had no impact on the Company’s earnings. Upon adoption of the measurement date requirements of SFAS No. 158, the Company recorded a $0.3 million decrease to 2008 ending retained earnings.

Pension assumptions are based upon management’s best estimates as of the annual measurement date.

• The assumed discount rate utilized is based upon pension discount curves and bond portfolio curves over a duration similar to the plan’s liabilities as of the measurement date. The discount rate is utilized principally in calculating the Company’s pension obligation, which is represented by the Accumulated Benefit Obligation (“ABO”) and the Projected Benefit Obligation (“PBO”) and in calculating net pension expense. At January 31, 2009, the discount rate was 6.5%. To the extent the discount rate increases or decreases, the Company’s ABO is decreased or increased, respectively. The estimated effect of a 0.25% change in the discount rate is approximately $2.0 million on the ABO and approximately $8 thousand on annual pension expense. To the extent the ABO increases, the after-tax effect of such increase serves to reduce Other Comprehensive Income and Shareholders’ Equity.

• The assumed expected long-term rate of return on assets is the weighted average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the PBO. It is the Company’s policy to invest approximately 65% of the pension fund assets in equities, 30% in fixed income securities and 5% in real estate. The Company’s estimate of the expected long-term rate of return considers the historical returns on plan assets, as well as the future expectations of returns on classes of assets within the target asset allocation of the plan asset portfolio. This rate is utilized principally in calculating the expected return on plan assets component of the annual pension expense. To the extent the actual rate of return on assets realized is greater than the assumed rate, that year’s annual pension expense is not affected. Rather, this gain reduces future pension expense over a period of approximately 10 years. To the extent the actual rate of return on assets is less than the assumed rate, that year’s annual pension expense is likewise not affected. Rather, this loss increases pension expense over approximately 10 years. The Company’s expected long-term rate of return on assets was 8.0% in 2008 and 2007.

• The assumed average rate of compensation increase is the average annual compensation increase expected over the remaining employment periods for the participating employees. This rate is estimated to be 4% for the periods following January 31, 2009 and is utilized principally in calculating the PBO and annual pension expense. The estimated effect of a 0.25% change in the assumed rate of compensation increases would not be material to the PBO or annual pension expense.

NEW ACCOUNTING PRONOUNCEMENTS

On February 3, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), 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. In February 2008, the FASB amended SFAS No. 157 to exclude FASB Statement No. 13 “Accounting For Leases” and its related interpretive accounting pronouncements that address leasing transactions. The FASB also issued a final Staff Position to allow a one-year deferral of adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. The Company is in the process of evaluating the impact of applying SFAS No. 157 to

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nonfinancial assets and liabilities measured on a non-recurring basis. The impact of applying SFAS No. 157 to financial assets and liabilities did not have a material impact on the consolidated financial statements for the 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 No. 159”). SFAS No. 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 elected to continue to record long-term debt at its amortized cost. Accordingly, this standard has no impact on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and non-controlling interests in business combinations. SFAS No. 141(R) also establishes expanded disclosure requirements for business combinations. SFAS No. 141(R) will become effective as of the beginning of the 2009 fiscal year. The effect of adopting SFAS No. 141(R) will depend on the circumstances of any potential future acquisitions made by the Company.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). This standard outlines the accounting and reporting for ownership interest in a subsidiary held by parties other than the parent. SFAS No. 160 is effective as of the beginning of the 2009 fiscal year. The adoption of this standard will not have a material impact on the consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). This Statement amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), to require an entity to provide an enhanced understanding of its use of derivative instruments, how they are accounted for under SFAS No. 133 and their effect on the entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective as of the beginning of the 2009 fiscal year. The adoption of this standard will not have a material impact on the consolidated financial statements.

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”), which provides additional guidance on employers’ disclosures about the plan assets of defined benefit pension or other postretirement plans. The disclosures required by FSP FAS 132(R)-1 include a description of how investment allocation decisions are made, major categories of plan assets, valuation techniques used to measure the fair value of plan assets, the impact of measurements using significant unobservable inputs and concentrations of risk within plan assets. The disclosures about plan assets required by this FSP must be provided for fiscal years ending after December 15, 2009. For the Company, FSP FAS 132(R)-1 will be effective for the fiscal year ending January 30, 2010 and will result in additional disclosures related to the assets of defined benefit pension plans in notes to the Company’s consolidated financial statements.

RELATED PARTY TRANSACTIONS

See Item 13, Certain Relationships and Related Transactions, in the Company’s 2008 Form 10-K, which was filed with the SEC on March 23, 2009.

FORWARD-LOOKING INFORMATION

The information contained in this Form 8-K 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 luxury apparel and other merchandise carried by the Company and its ability to respond quickly to consumer trends; macroeconomic conditions and their effect on consumer spending; the Company’s ability to secure adequate financing; 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

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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; the performance of the financial markets; changes in interest rates; and fluctuations in foreign currency. For additional information regarding these and other risk factors, please refer to Item 1A of Part I in the Company’s 2008 Form 10-K, which was filed with the SEC on March 23, 2009.

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 8. Financial Statements and Supplementary Data

Information called for by this item is set forth in the Company’s Consolidated Financial Statements and Supplementary data contained in Exhibit 99.3 to this report.

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EX-99.3

Exhibit 99.3

Item 15. Exhibits and Financial Statement Schedules

(a) Documents filed as a part of this report:
1. Financial Statements
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Statements of Income for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007	F-2
Consolidated Balance Sheets at January 31, 2009 and February 2, 2008	F-3
Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007	F-4
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007	F-5
Notes to Consolidated Financial Statements	F-6
2. Financial Statement Schedule
Schedule II – Valuation and Qualifying Accounts	F-42

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

Report of Independent Registered Public Accounting Firm

To Board of Directors and Shareholders of Saks Incorporated:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Saks Incorporated and its subsidiaries at January 31, 2009 and February 2, 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report On Internal Control Over Financial Reporting (not presented herein) included under Item 9A of Saks Incorporated’s 2008 Annual Report on Form 10-K. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 5 to the consolidated financial statements, effective February 4, 2007, the Company adopted the recognition and measurement provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. As discussed in Note 8 to the consolidated financial statements, effective January 31, 2009, the Company changed the measurement date for defined benefit plan assets and liabilities to coincide with its fiscal year end to conform to Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158), and effective February 3, 2007, the Company began to recognize the funded status of its defined benefit plans in its consolidated balance sheets to conform to SFAS No. 158. As discussed in Note 2 to the consolidated financial statements, effective February 1, 2009, the Company changed the manner in which it accounts for certain convertible debt instruments to conform with FASB Staff Position (FSP) Accounting Principles Board (APB) No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement).

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

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

/s/    PricewaterhouseCoopers LLP

Birmingham, Alabama

March 23, 2009, except with respect to our opinion on the consolidated financial statements and financial statement schedule insofar as it relates to the effects of the change in accounting for certain convertible debt instruments discussed in Note 2, as to which the date is July 30, 2009

F-1

SAKS INCORPORATED & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, except per share amounts)	Year Ended
	January 31, 2009 (Revised)			February 2, 2008 (Revised)			February 3, 2007 (Revised)
NET SALES	$	3,029,743		$	3,224,076		$	2,888,427
Cost of sales (excluding depreciation and amortization)		2,062,494			1,972,251			1,780,127
Gross margin		967,249			1,251,825			1,108,300
Selling, general and administrative expenses		770,815			827,624			799,292
Other operating expenses
Property and equipment rentals		101,063			100,106			107,645
Depreciation and amortization		134,694			131,737			125,849
Taxes other than income taxes		82,598			84,496			78,584
Store pre-opening costs		2,328			707			408
Impairments and dispositions		11,139			4,279			11,775
OPERATING INCOME (LOSS)		(135,388	)		102,876			(15,253	)
Interest expense		(45,739	)		(48,303	)		(55,693	)
Gain (loss) on extinguishment of debt		—			(5,634	)		7
Other income, net		5,600			24,912			28,407
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(175,527	)		73,851			(42,532	)
Provision (benefit) for income taxes		(48,902	)		26,755			(34,947	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		(126,625	)		47,096			(7,585	)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations (including gain on disposal of $0, $0, and $191,918, respectively)		(52,727	)		(4,860	)		188,227
Provision (benefit) for income taxes		(20,548	)		(1,646	)		130,536
INCOME (LOSS) FROM DISCONTINUED OPERATIONS		(32,179	)		(3,214	)		57,691
NET INCOME (LOSS)	$	(158,804	)	$	43,882		$	50,106
Per share amounts - Basic
Income (loss) from continuing operations	$	(0.92	)	$	0.33		$	(0.06	)
Income (loss) from discontinued operations	$	(0.23	)	$	(0.02	)	$	0.43
Net income (loss)	$	(1.15	)	$	0.31		$	0.37
Per share amounts - Diluted
Income (loss) from continuing operations	$	(0.92	)	$	0.31		$	(0.06	)
Income (loss) from discontinued operations	$	(0.23	)	$	(0.02	)	$	0.43
Net income (loss)	$	(1.15	)	$	0.29		$	0.37
Weighted average common shares:
Basic		138,384			140,402			135,880
Diluted		138,384			153,530			135,880

F-2

SAKS INCORPORATED & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, except per share amounts)	January 31, 2009 (Revised)			February 2, 2008 (Revised)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	10,273		$	101,162
Merchandise inventories		728,841			857,173
Other current assets		105,350			124,973
Deferred income taxes, net		29,916			42,827
TOTAL CURRENT ASSETS		874,380			1,126,135
PROPERTY AND EQUIPMENT, NET OF DEPRECIATION		1,058,393			1,092,761
DEFERRED INCOME TAXES, NET		194,956			77,660
OTHER ASSETS		19,948			54,188
TOTAL ASSETS	$	2,147,677		$	2,350,744
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	90,208		$	176,844
Accrued expenses		233,504			233,739
Accrued compensation and related items		42,043			51,213
Current portion of long-term debt		4,673			319,242
TOTAL CURRENT LIABILITIES		370,428			781,038
LONG-TERM DEBT		593,103			204,238
OTHER LONG-TERM LIABILITIES		193,560			161,034
COMMITMENTS AND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY
Preferred stock - $1.00 par value; Authorized - 10,000 shares; Issued and outstanding - none		—			—
Common stock - $0.10 par value; Authorized - 500,000 shares; Issued and outstanding - 142,170 shares and 141,784 shares		14,218			14,180
Additional paid-in capital		1,148,227			1,162,220
Accumulated other comprehensive loss		(56,436	)		(15,002	)
Retained earnings (accumulated deficit)		(115,423	)		43,036
TOTAL SHAREHOLDERS' EQUITY		990,586			1,204,434
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,147,677		$	2,350,744

F-3

SAKS INCORPORATED & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In Thousands)	Common Stock Shares		Common Stock Amount			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
Balance at January 28, 2006, as reported	136,005		$	13,601		$	1,994,979		$	63,270		$	(72,467	)	$	1,999,383
Adoption of FSP APB 14-1 (Note 2)	—			—			43,028			(6,972	)		—			36,056
Balance at January 28, 2006, revised	136,005			13,601			2,038,007			56,298			(72,467	)		2,035,439
Net income, revised										50,106						50,106
Change in minimum pension liability, net of tax													39,380			39,380
Elimination of NDSG minimum pension liability													30,757			30,757
Comprehensive income																120,243
Adoption of SFAS No. 158													(26,016	)		(26,016	)
Issuance of common stock	5,031			503			51,227									51,730
Dividends Paid							(1,001,733	)		(104,392	)					(1,106,125	)
Income tax benefit related to employee stock plans							13,470									13,470
Activity under stock compensation plans	(146	)		(11	)		(5,712	)								(5,723	)
Stock-based compensation							18,722									18,722
Stock-based compensation - SFAS No. 123R dividend adjustment							33,350									33,350
Repurchase of common stock	(450	)		(45	)		(6,486	)								(6,531	)
Balance at February 3, 2007, revised	140,440		$	14,048		$	1,140,845		$	2,012		$	(28,346	)	$	1,128,559
Net income, revised										43,882						43,882
Change in minimum pension liability, net of tax													13,344			13,344
Comprehensive income																57,226
Adoption of FIN 48							36,528			(2,858	)					33,670
Issuance of common stock	2,930			293			34,014									34,307
Income tax provision adjustment related to employee stock plans							(454	)								(454	)
Increase in tax valuation allowance							(19,258	)								(19,258	)
Activity under stock compensation plans	136			11			(9,887	)								(9,876	)
Stock-based compensation							7,724									7,724
Repurchase of common stock	(1,722	)		(172	)		(27,292	)								(27,464	)
Balance at February 2, 2008, revised	141,784		$	14,180		$	1,162,220		$	43,036		$	(15,002	)	$	1,204,434
Net loss, revised										(158,804	)					(158,804	)
Change in minimum pension liability, net of tax													(41,434	)		(41,434	)
Comprehensive loss																(200,238	)
SFAS No. 158 measurement date change										345						345
Issuance of common stock	636			64			4,025									4,089
Income tax provision adjustment related to employee stock plans							1,352									1,352
Activity under stock compensation plans	2,699			269			(1,130	)								(861	)
Stock-based compensation							16,354									16,354
Repurchase of common stock	(2,949	)		(295	)		(34,594	)								(34,889	)
Balance at January 31, 2009, revised	142,170		$	14,218		$	1,148,227		$	(115,423	)	$	(56,436	)	$	990,586

F-4

SAKS INCORPORATED & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)	Year Ended
	January 31, 2009 (Revised)			February 2, 2008 (Revised)			February 3, 2007 (Revised)
OPERATING ACTIVITIES
Net income (loss)	$	(158,804	)	$	43,882		$	50,106
Income (loss) from discontinued operations		(32,179	)		(3,214	)		57,691
Income (loss) from continuing operations		(126,625	)		47,096			(7,585	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss (gain) on extinguishment of debt		—			5,634			(7	)
Depreciation and amortization		134,694			131,737			125,849
Equity compensation		16,395			7,724			52,072
Amortization of discount on convertible senior notes		6,811			6,404			6,022
Deferred income taxes		(49,780	)		23,788			91,704
Impairments and dispositions		11,139			4,279			11,775
Excess tax benefit from stock-based compensation		—			—			(16,027	)
Gain on lease termination		—			(1,669	)		—
Gain on sale of property		(3,400	)		(1,069	)		—
Changes in operating assets and liabilities:
Merchandise inventories		118,539			(71,032	)		(143,349	)
Other current assets		20,990			12,495			(9,930	)
Accounts payable and accrued liabilities		(114,577	)		(119,846	)		52,111
Other operating assets and liabilities		2,984			21,858			(8,846	)
Net Cash Provided By Operating Activities - Continuing Operations		17,170			67,399			153,789
Net Cash Provided By (Used In) Operating Activities - Discontinued Operations		(18,667	)		4,080			(98,504	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(1,497	)		71,479			55,285
INVESTING ACTIVITIES
Purchases of property and equipment		(127,305	)		(136,726	)		(121,355	)
Proceeds from sale of property and equipment		4,338			12,352			171
Net Cash Used In Investing Activities - Continuing Operations		(122,967	)		(124,374	)		(121,184	)
Net Cash Provided By (Used In) Investing Activities - Discontinued Operations		(1,875	)		(4,259	)		1,304,701
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(124,842	)		(128,633	)		1,183,517
FINANCING ACTIVITIES
Proceeds from revolving credit facility		156,675			—			—
Payments on long-term debt and capital lease obligations		(89,242	)		(118,980	)		(7,371	)
Excess tax benefit from stock-based compensation		—			—			16,027
Cash dividends paid		(1,183	)		(7,430	)		(1,095,025	)
Purchases of common stock		(34,889	)		(27,464	)		(6,531	)
Proceeds from issuance of common stock		4,089			34,307			51,730
Net Cash Provided By (Used In) Financing Activities - Continuing Operations		35,450			(119,567	)		(1,041,170	)
Net Cash Used In Financing Activities - Discontinued Operations		—			—			(149	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		35,450			(119,567	)		(1,041,319	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(90,889	)		(176,721	)		197,483
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		101,162			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 YEAR	$	10,273		$	101,162		$	277,883

Non-cash investing and financing activities are further described in the accompanying notes.

The accompanying notes are an integral part of these consolidated financial statements.

F-5

SAKS INCORPORATED & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 1 – GENERAL

ORGANIZATION

The Company’s operations consist of Saks Fifth Avenue (“SFA”), Saks Fifth Avenue OFF 5^th (“OFF 5^th”), and SFA’s e-commerce operations. 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), Parisian (sold to Belk in October 2006), and Club Libby Lu (“CLL”) (the operations of which were discontinued in January 2009). The sold businesses and discontinued operations are presented as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for the current and prior year periods and are discussed below at “Discontinued Operations.”

DISCONTINUED OPERATIONS

On July 5, 2005, Belk acquired from the Company for approximately $623,000 in cash substantially all of the assets directly involved in the Proffitt’s business operations, plus the assumption of approximately $1,000 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 $784,000. The Company realized a net gain of $155,525 on the sale.

Upon the closing of the transaction, Belk entered into a Transition Services Agreement (“Proffitt’s TSA”) whereby the Company continued to provide certain back office services related to the Proffitt’s operations. Beginning with the second quarter of 2006, the back office services were substantially complete, and therefore, the Proffitt’s TSA no longer qualified as continuing involvement in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).

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 $1,115,000 in cash (reduced as described below based on changes in working capital), plus the assumption by Bon-Ton of approximately $35,000 of unfunded benefit 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), the administrative/headquarters facilities in Milwaukee, Wisconsin and distribution centers located in Rockford, Illinois, Naperville, Illinois, Green Bay, Wisconsin, and Ankeny, Iowa. 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 consolidated statement of income and the consolidated statement of cash flows for fiscal year 2006.

On October 2, 2006, the Company sold to Belk of 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 $285,000 in cash (increased in accordance with a working capital adjustment described below). In addition, Belk reimbursed the Company at closing for $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 $2,300. A working capital adjustment based on working capital as of the effective time of the transaction increased the amount of cash proceeds by $14,200 resulting in total net cash proceeds of $308,200.

F-6

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 $740,000), 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 consolidated statements of income and the consolidated statements of cash flows for fiscal year 2006.

As of January 31, 2009, the Company discontinued the operations of its CLL business, which consisted of 98 leased, mall-based specialty stores, targeting girls aged 4-12 years old. Charges incurred during 2008 associated with the closing of the stores included inventory liquidation costs of approximately $6,965, asset impairments charges of $16,993, lease termination costs of $14,045, severance and personnel related costs of $5,074 and other closing costs of $1,444. These amounts and the results of operations of CLL are included in discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for fiscal years 2008, 2007, and 2006.

Net sales of the aforementioned businesses that are included within discontinued operations in the accompanying Consolidated Statements of Income are $52,231, $58,564, and $675,866 for 2008, 2007, and 2006, respectively.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal year 2008 contained 52 weeks and ended on January 31, 2009, while fiscal year 2007 contained 52 weeks and ended on February 2, 2008. Fiscal year 2006 contained 53 weeks and ended on February 3, 2007.

Certain 2007 and 2006 amounts in the accompanying consolidated statements of income and consolidated statements of cash flows have been revised to reflect the CLL results of operations and cash flows as discontinued operations.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

Effective February 1, 2009, the Company retrospectively adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Accounting Principles Board (“APB”) No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1”). In March 2004, the Company issued $230,000 of 2.00% convertible senior notes that mature in 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes are within the scope of FSP APB 14-1, which requires an allocation of convertible debt proceeds between the liability component and the embedded conversion option (i.e., the equity component). The liability component of the debt instrument is accreted to par value using the effective interest method over the remaining life of the debt (the first put date in 2014). The accretion is reported as a component of interest expense. The equity component is not subsequently revalued as long as it continues to qualify for equity treatment.

Upon adoption of FSP APB 14-1, the Company estimated the fair value, as of the date of issuance, of the Convertible Senior Notes assuming a 6.25% non-convertible borrowing rate to be $158,148. The difference between the fair value and the principal amount of the Convertible Senior Notes was $71,852. This amount was retrospectively recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being accreted to interest expense over the ten-year period to the first put date of the notes in 2014 resulting in an increase in non-cash interest expense in prior and future periods.

F-7

The following tables set forth the effect of the retrospective application of FSP APB 14-1 on certain previously reported items.

Condensed Consolidated Statement of Income:

	Year Ended
	January 31, 2009						February 2, 2008						February 3, 2007
	As Reported (1)			As Revised			As Reported (1)			As Revised			As Reported (1)			As Revised
Interest expense	$	(39,306	)	$	(45,739	)	$	(42,314	)	$	(48,303	)	$	(50,136	)	$	(55,693	)
Income (loss) from continuing operations before income taxes	$	(169,094	)	$	(175,527	)	$	79,840		$	73,851		$	(36,975	)	$	(42,532	)
Provision (benefit) for income taxes for continuing operations	$	(46,332	)	$	(48,902	)	$	29,153		$	26,755		$	(33,026	)	$	(34,947	)
Income (loss) from continuing operations	$	(122,762	)	$	(126,625	)	$	50,687		$	47,096		$	(3,949	)	$	(7,585	)
Net income (loss)	$	(154,941	)	$	(158,804	)	$	47,473		$	43,882		$	53,742		$	50,106
Per share amounts - Basic
Income (loss) from continuing operations	$	(0.89	)	$	(0.92	)	$	0.36		$	0.33		$	(0.03	)	$	(0.06	)
Net income (loss)	$	(1.12	)	$	(1.15	)	$	0.34		$	0.31		$	0.40		$	0.37
Per share amounts - Diluted
Income (loss) from continuing operations	$	(0.89	)	$	(0.92	)	$	0.33		$	0.31		$	(0.03	)	$	(0.06	)
Net income (loss)	$	(1.12	)	$	(1.15	)	$	0.31		$	0.29		$	0.40		$	0.37

(1) As revised for discontinued operations.

Condensed Consolidated Balance Sheets:

	January 31, 2009						February 2, 2008
	As Reported			As Revised			As Reported		As Revised
Property and equipment, net	$	1,057,417		$	1,058,393		$	1,092,004	$	1,092,761
Other assets	$	21,378		$	19,948		$	55,777	$	54,188
Deferred income taxes, net	$	211,833		$	194,956		$	97,108	$	77,660
Long-term debt	$	635,400		$	593,103		$	253,346	$	204,238
Additional paid-in capital	$	1,105,199		$	1,148,227		$	1,119,192	$	1,162,220
Retained earnings (accumulated deficit)	$	(97,361	)	$	(115,423	)	$	57,236	$	43,036

The following tables provide additional information about the Company's convertible senior notes that are subject to FSP APB 14-1.

	January 31, 2009		February 2, 2008
Carrying amount of the equity component (additional paid-in capital)	$	71,852	$	71,852
Principal amount of the convertible senior notes	$	230,000	$	230,000
Unamortized discount of the liability component	$	42,297	$	49,108
Net carrying amount of liability component	$	187,703	$	180,892

	Year Ended
	January 31, 2009			February 2, 2008			February 3, 2007
Effective interest rate on liability component		6.2	%		6.2	%		6.2	%
Cash interest expense recognized	$	4,600		$	4,600		$	4,600
Non-cash interest expense recognized	$	6,811		$	6,404		$	6,022

F-8

The remaining period over which the unamortized discount will be recognized is 5.1 years. As of January 31, 2009, the if-converted value of the notes did not exceed its principal amount.

February 1, 2009, the Company retrospectively adopted FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”), which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting, and therefore, need to be included in the earnings allocation when computing earnings per share under the two-class method as described in Statement of Financial Accounting Standards (“SFAS” No. 128 “Earnings Per Share”. In accordance with FSP EITF 03-6-1, the unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The retrospective adoption of FSP EITF 03-6-1 did not have a material impact on the Company’s consolidated financial statements for the years ended January 31, 2009, February 2, 2008, February 3, 2007, January 28, 2006 and January 29, 2005.

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. Net sales are recognized at the time customers provide a satisfactory form of payment and take ownership of the merchandise or direct its shipment. Revenue associated with gift cards is recognized upon redemption of the card.

The Company estimates the amount of goods that will be returned for a refund and reduces sales and gross margin by that amount.

Commissions from leased departments included in net sales were $28,083, $30,189, $26,558 in 2008, 2007, and 2006, respectively. Leased department sales were $210,284, $217,636, and $180,639 in 2008, 2007, and 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 $236 and $85,492 at January 31, 2009 and February 2, 2008, respectively, primarily consisting of money market funds, demand and time deposits. Income earned on cash equivalents was $1,958, $6,190, and $27,963 for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007, respectively, and was reflected in Other Income in the accompanying consolidated statements of income. There were no balances of restricted cash at January 31, 2009 and February 2, 2008.

On March 6, 2006, the Company’s Board of Directors declared a cash dividend of $4.00 per common share to shareholders of record as of April 14, 2006, and the Company reduced shareholders’ equity for the $547,537 dividend. On October 3, 2006 the Company’s Board of Directors declared another cash dividend of $4.00 per common share to shareholders of record as of November 15, 2006, and the Company reduced shareholders’ equity for the $558,587 dividend. For the year ended February 3, 2007, the Company made dividend cash payments totaling $1,095,025, primarily relating to the aggregate $8.00 per common share dividends. The remaining portion of the dividends will be paid prospectively as, and to the extent, awards of restricted stock vest.

MERCHANDISE INVENTORIES AND COST OF SALES (excluding depreciation and amortization)

Merchandise inventories are stated at the lower of cost or market and include freight, buying and distribution costs. The Company takes markdowns related to slow moving inventory, ensuring the appropriate inventory valuation. On February 3, 2008, the Company elected to change its method of costing its inventories to the retail “first-in, first-out” (FIFO) method, whereas in all prior periods inventory was costed using the retail “last-in, first-out” (LIFO) method. The new method of accounting had no impact on the fiscal years ending January 31, 2009, February 2, 2008, and February 3, 2007 as the LIFO value exceeded the FIFO market value and inventory had been adjusted to reflect FIFO market value in all periods.

Consignment merchandise on hand of $138,762 and $150,527 at January 31, 2009 and February 2, 2008, respectively, is not reflected in the consolidated balance sheets.

The Company receives vendor provided support in different forms. When the vendor provides support for inventory markdowns, the Company records the support as a reduction to cost of sales. Such support is recorded in the period that the corresponding markdowns are taken. When the Company receives inventory-related support that is not designated for markdowns, the Company includes this support as a reduction in the cost of purchases.

F-9

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses (“SG&A”) are comprised principally of the costs related to employee compensation and benefits in the selling and administrative support areas, exclusive of payroll taxes; advertising; store and headquarters occupancy, operating and maintenance costs exclusive of rent, depreciation, and property taxes; proprietary credit card promotion, issuance and servicing costs; insurance programs; telecommunications; and other operating expenses not specifically categorized elsewhere in the consolidated statements of income. Advertising and sales promotion costs are generally expensed in the period in which the advertising event takes place. The Company receives allowances and expense reimbursements from merchandise vendors and from the owner of the proprietary credit card portfolio which are netted against the related expense:

• Allowances received from merchandise vendors in conjunction with incentive compensation programs for employees who sell the vendors’ merchandise and netted against the related compensation expense were $54,653, $57,348, and $55,007 in 2008, 2007, and 2006, respectively.

• Allowances received from merchandise vendors in conjunction with jointly produced and distributed print and television media and netted against the gross expenditures for such advertising were $45,813, $48,896, and $42,584 in 2008, 2007, and 2006, respectively. Net advertising expenses were $39,358, $42,058, and $43,875 in 2008, 2007, and 2006, respectively.

• Expense reimbursements received from the owner of the Company’s proprietary credit card portfolio are discussed at Note 3 to these financial statements.

STORE PRE-OPENING COSTS

Store pre-opening costs primarily consist of rent expense incurred during the construction of new stores and payroll and related media costs incurred in connection with new store openings and are expensed when incurred. Rent expense is generally incurred for six to twelve months prior to a store’s opening date.

PROPERTY AND EQUIPMENT

Property and equipment are stated at historical cost less accumulated depreciation. For financial reporting purposes, depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over 20 to 40 years while fixtures and equipment are primarily depreciated over 3 to 15 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or their related lease terms, generally ranging from 10 to 20 years. Terms of leases used in the determination of estimated useful lives may include renewal periods at the Company’s option if exercise of the option is determined to be reasonably assured at the inception of the lease. Costs incurred for the development of internal computer software are capitalized and amortized using the straight-line method over 3 to 10 years. Costs incurred in the discovery and post-implementation stages of internally created computer software are generally expensed as incurred.

When constructing stores, the Company receives allowances from landlords. If the landlord is determined to be the primary beneficiary of the property, then the portion of those allowances attributable to the property owned by the landlord is considered to be a deferred rent liability, whereas the corresponding capital expenditures related to that store are considered to be prepaid rent. Allowances in excess of the amounts attributable to the property owned by the landlord are considered leasehold improvement allowances and are recorded as deferred rent liabilities that are amortized over the life of the lease. Capital expenditures are reduced when the Company receives cash and allowances from merchandise vendors to fund the construction of vendor shops.

On a yearly basis and as changes in circumstances arise, the Company evaluates the recoverability of its property and equipment based upon the utilization of the assets and expected future cash flows, in accordance with SFAS No. 144. Write-downs associated with the evaluation are reflected in Impairments and Dispositions in the accompanying consolidated statements of income.

IMPAIRMENTS & DISPOSITIONS

The Company continuously evaluates its real estate portfolio and closes individual 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 year ended January 31, 2009, February 2, 2008 and February 3, 2007, the Company incurred charges of $11,139, $4,279 and $5,676, respectively, related to asset impairments and other costs in the normal course of business.

F-10

OPERATING LEASES

The Company leases stores, distribution centers, and administrative facilities under operating leases. Store lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in excess of specified levels. Most of the Company’s lease agreements include renewal periods at the Company’s option. The Company recognizes rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased space and includes such rent expense in Store Pre-Opening Costs. The Company records tenant improvement allowances and rent holidays as deferred rent liabilities on the consolidated balance sheets and amortizes the deferred rent on a straight–line basis over the life of the lease to rent expense in the consolidated statements of income. The Company records rent liabilities on the consolidated balance sheets for contingent percentage of sales lease provisions when the Company determines that it is probable that the specified levels will be reached during the fiscal year.

SELF-INSURANCE RESERVES

The Company self-insures a substantial portion of its exposure for costs related primarily to employee medical, workers’ compensation and general liability. Expenses are recorded based on estimates for reported and incurred but not reported claims considering a number of factors, including historical claims experience, severity factors, litigation costs, inflation and other assumptions. Although the Company does not expect the amount it will ultimately pay to differ significantly from its estimates, self-insurance reserves could be affected if future claims experience differs significantly from the historical trends and assumptions.

DERIVATIVES

The Company uses financial derivatives to manage its costs and risks in conjunction with specific business transactions. All derivative instruments are recognized on the balance sheet at fair value. The Company cancelled all of its interest rate swap agreements during 2004 resulting in $3,100 of net losses. The Company had total unamortized net gains (losses) of $53, $0, and ($350) at January 31, 2009, February 2, 2008, and February 3, 2007, respectively, that are being amortized as a component of interest expense through 2010.

The Company issued $230,000 of convertible senior unsecured notes during 2004 that bear interest of 2.0% and mature in 2024. The Company used approximately $25,000 of the proceeds from the issuance of the notes to enter into a convertible note hedge and written call options on its common stock to reduce the Company’s exposure to dilution from the conversion of the notes.

STOCK-BASED COMPENSATION PLANS

The Company maintains an equity incentive 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 term of seven to ten years from the grant date. Restricted stock and performance shares generally vest in three years after the grant date, although the plan permits accelerated vesting in certain circumstances at the discretion of the Human Resources and Compensation Committee of the Board of Directors.

Compensation cost for restricted stock and performance shares that cliff vest is expensed on a straight line basis over the requisite service period. Restricted stock and performance shares with graded vesting features are treated as multiple awards based upon the vesting date. The Company records compensation costs for these awards on a straight line basis over the requisite service period for each separately vesting portion of the award. Compensation cost for stock option awards with graded vesting are expensed on a straight line basis over the requisite service period.

Effective January 29, 2006, the Company adopted SFAS No.123 (revised 2004) “Share-Based Payment” (“SFAS No. 123R”) under the modified prospective method. The Company adopted the alternative transition method, as permitted by FASB Staff Position (“FSP”) No. FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (“FSP FAS 123R-3”) to calculate the tax effects of stock-based compensation pursuant to SFAS No. 123R for these awards that were outstanding upon adoption of SFAS No. 123R. The alternative transition method allows the use of simplified methods to calculate the beginning capital-in-excess-of-par pool for the consolidated statements of cash flows. Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits resulting from the exercise of stock options as operating cash inflows in the consolidated statements of cash flows, in accordance with the provisions of Emerging Issues Task Force (“EITF”) No. 00-15, “Classification in the Statements of Cash Flows of the Income Tax Benefit Received by a Company

F-11

upon Exercise of a Nonqualified Employee Stock Option.” SFAS No. 123R requires the benefits of tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. This amount is shown as “Excess tax benefit from stock based compensation” in the accompanying consolidated statements of cash flows.

In December 2007, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 110, “Year-End Help For Expensing Employee Stock Options” (“SAB 110”), which was effective for the Company beginning in the first quarter of 2008. SAB 110 amends the SEC’s views discussed in Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”) regarding the use of the simplified method in developing estimates of the expected lives of share options in accordance with SFAS No. 123R. The amendment, in part, allowed the continued use, subject to specific criteria, of the simplified method in estimating the expected lives of share options granted after December 31, 2007. The Company will continue to use the simplified method until it has the historical data necessary to provide reasonable estimates of expected lives in accordance with SAB 107, as amended by SAB 110.

EARNINGS PER SHARE

Basic earnings per share (“EPS”) have been computed based on the weighted average number of common shares outstanding.

	2008 (Revised)							2007 (Revised)						2006 (Revised)
	Net Loss			Shares	Per Share Amount			Net Income		Shares	Per Share Amount			Net Income		Shares	Per Share Amount
Basic EPS	$	(158,804	)	138,384	$	(1.15	)	$	43,882	140,402	$	0.31		$	50,106	135,880	$	0.37
Effect of dilutive stock options and convertible debentures		—		—		—			—	13,128		(.02	)		—	—		—
Diluted EPS	$	(158,804	)	138,384	$	(1.15	)	$	43,882	153,530	$	0.29		$	50,106	135,880	$	0.37

For the years ended January 31, 2009 and February 3, 2007, the Company generated net losses from continuing operations, and therefore the inclusion of potential common shares would have had an anti-dilutive effect on the Company’s calculation of the diluted loss per share. Accordingly, the Company’s diluted loss per share equals basic loss per share for both of these periods.

The following table presents additional potentially dilutive common shares excluded from diluted earnings (loss) per share because the effect of including these potential shares would have been anti-dilutive:

	2008	2007	2006
Stock Options and Employee Stock Purchase Plan Shares	346	—	1,266
Unvested Restricted Stock Awards and Performance Shares	1,889	—	1,161
Total	2,235	—	2,427
Securities excluded from the diluted earnings (loss) per share calculation because the exercise prices was greater than the average market price
Stock Options (1)	1,811	688	1,722
Securities excluded from the diluted earnings (loss) per share calculation because the performance criteria were not met:
Performance Shares	845	—	—

(1) These options represent the number outstanding at the end of the respective year. At the point that the exercise price is less than the average market price, these options have the potential to be dilutive and application of the treasury method would reduce this amount.

F-12

There were also 19,219 potentially exercisable shares under the convertible notes that were not included in the computation of diluted EPS for the year ended January 31, 2009 because inclusion of the potential common shares would have been anti-dilutive as the Company generated a net loss for the period. Included in the computation of diluted EPS for the year ended February 2, 2008 are 11,190 potentially dilutive shares associated with shares the Company would issue to settle the difference between 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. There were also 19,219 potentially exercisable shares under the convertible notes that were not included in the computation of diluted EPS due to the assumption of net share settlement as discussed below.

In 2007, if the holders of the convertible notes exercised their conversion rights, the Company intended to pay cash equal to 100 percent of the principal amount of the convertible notes. In the event that the cash conversion price exceeded 100 percent of the principal amount of the 2% convertible notes, the Company’s intention was to issue common stock for the difference between the par value and fair value at the time of conversion. The Company had $101,162 of cash available as well as availability under the senior revolving credit facility as of February 2, 2008. The cash on hand as well as the availability of borrowings under the senior credit facility provided an adequate source of liquidity to pay 100% of the principal amount of the notes if the holders had elected to exercise their conversion rights.

For the year ended February 3, 2007, there were also 19,219 potentially exercisable shares under the convertible notes that were not included in the computation of diluted EPS due to the assumption of net share settlement.

The FASB is contemplating an amendment to SFAS No. 128 “Earnings Per Share” (“SFAS No. 128”) 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 04-8 “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 as of January 31, 2009 would not change the diluted share count as the effect would be anti-dilutive due to the loss from continuing operations for the year.

PENSION PLANS

Pension expense is based on actuarial models used to estimate the total benefits ultimately payable to participants and is allocated to the respective service periods. The Company’s funding policy provides that contributions to the pension trusts shall be at least equal to the minimum funding requirement of the Employee Retirement Income Security Act of 1974. The Company may provide additional contributions from time to time, generally not to exceed the maximum tax-deductible limitation.

Beginning in fiscal 2008, the Company’s pension plans are valued annually as of the fiscal year-end balance sheet date in accordance with SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” (“SFAS No. 158”). In prior years, the pension plans were valued annually on November 1^st. The projected unit credit method is utilized in recognizing the Company’s pension liabilities.

GIFT CARDS

The Company sells gift cards with no expiration dates. At the time gift cards are sold, no revenue is recognized; rather a liability is established for the value of the card. The liability is relieved and revenue is recognized when the gift cards are redeemed by the customer for merchandise. The liability for unredeemed gift cards aggregated $33,315 and $33,844 at January 31, 2009, and February 2, 2008, respectively.

Outstanding gift cards may be subject to state escheatment laws. The Company periodically evaluates unredeemed gift cards and if a determination is made that it is remote that the gift card will be redeemed and if it is determined that the gift card is not subject to escheatment, then the Company will reverse the unredeemed liability. The total reversal reflected in net sales for the years ended January 31, 2009 and February 2, 2008 was $5,397 and $11,701, respectively. There was no such reversal for gift card breakage reflected in net sales in fiscal 2006.

F-13

INCOME TAXES

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

SEGMENT REPORTING

The Company derives all of its revenue from the sale of luxury merchandise. Accordingly, the Company has identified the operation of its retail stores and e-commerce business as the Company’s one reportable segment.

NEW ACCOUNTING PRONOUNCEMENTS

On February 3, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), 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. In February 2008, the FASB amended SFAS No. 157 to exclude FASB Statement No. 13 “Accounting for Leases” and its related interpretive accounting pronouncements that address leasing transactions. The FASB also issued a final Staff Position to allow a one-year deferral of adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. The Company is in the process of evaluating the impact of applying SFAS No. 157 to nonfinancial assets and liabilities measured on a non-recurring basis. The impact of applying SFAS No. 157 to financial assets and liabilities did not have a material impact on the consolidated financial statements for the 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 No. 159”). SFAS No. 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 elected to continue to record long-term debt at its amortized cost. Accordingly, this standard has no impact on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”), which addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and non-controlling interests in business combinations. SFAS No. 141R also establishes expanded disclosure requirements for business combinations. SFAS No. 141R will become effective as of the beginning of the 2009 fiscal year. Generally, the effect of SFAS No. 141R will depend on the circumstances of any potential future acquisitions.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). This standard outlines the accounting and reporting for ownership interest in a subsidiary held by parties other than the parent. SFAS No. 160 is effective as of the beginning of the 2009 fiscal year. The adoption of this standard will not have a material impact on the consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). This Statement amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), to require an entity to provide an enhanced understanding of its use of derivative instruments, how they are accounted for under SFAS No. 133 and their effect on the entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective as of the beginning of the 2009 fiscal year. The adoption of this standard will not have a material impact on the consolidated financial statements.

In December 2008, the FASB issued FSP FAS 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132R-1”), which provides additional guidance on employers’ disclosures about the plan assets of defined benefit pension or other postretirement plans. The disclosures required by FSP FAS 132R-1 include a description of how investment allocation decisions are made, major categories of plan assets, valuation techniques used to measure the fair value of plan assets, the impact of measurements using significant unobservable inputs and concentrations of risk within plan assets. The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009. For the Company, FSP FAS 132R-1 will be effective for fiscal year end 2009 and will result in additional disclosures related to the assets of defined benefit pension plans in notes to the Company’s consolidated financial statements.

F-14

NOTE 3 – PROPRIETARY CREDIT CARDS

On April 15, 2003, the Company sold its proprietary credit card portfolio, consisting of the proprietary credit card accounts owned by the National Bank of the Great Lakes and the Company’s ownership interest in the assets of the trust, to HSBC, a third party financial institution.

HSBC, an affiliate of HSBC Holdings PLC, offers proprietary credit card accounts to the Company’s customers. Pursuant to a program agreement with a term of ten years expiring in 2013, HSBC establishes and owns proprietary credit card accounts for the Company’s customers, retains the benefits and risks associated with the ownership of the accounts, receives the finance charge income and incurs the bad debts associated with those accounts. During the ten-year term, pursuant to a servicing agreement, the Company continues to provide key customer service functions, including new account opening, transaction authorization, billing adjustments and customer inquiries, and receives compensation from HSBC for these services.

At the end of the ten-year term expiring in 2013, the agreement can be renewed for two two-year terms. At the end of the agreement, the Company has the right to repurchase, at fair value, all of the accounts and outstanding accounts receivable, negotiate a new agreement with HSBC or begin issuing private label credit cards itself or through others. The agreement allows the Company to terminate the agreement early following the occurrence of certain events, the most significant of which would be HSBC’s failure to pay owed amounts, bankruptcy, a change in control or a material adverse change in HSBC’s ability to perform under the agreement. The agreement also allows for HSBC to terminate the agreement if the Company fails to pay owed amounts or enters bankruptcy. Should either the Company or HSBC choose to terminate the agreement early, the Company has the right, but not the requirement, to repurchase the credit card accounts and associated accounts receivable from HSBC at their fair value. The Company is contingently liable to pay monies to HSBC in the event of an early termination or a significant disposition of stores. The contingent payment is based upon a declining portion of an amount established at the beginning of the ten-year agreement and on a prorated portion of significant store closings. The maximum contingent payment had the agreement been terminated early at January 31, 2009 would have been approximately $21,787. Management believes the risk of incurring a contingent payment is remote.

In September of 2006 the Company entered into agreements with HSBC and MasterCard International Incorporated to issue a co-branded MasterCard card to new and existing proprietary credit card customers. Under this program, qualifying customers are issued a SFA and MasterCard branded credit card that functions as a traditional proprietary credit card when used at any SFA or OFF 5th store and at Saks Direct or as a MasterCard card when used at any unaffiliated location that accepts MasterCard cards. HSBC establishes and owns the co-brand accounts, retains the benefits and sales associated with the ownership of the accounts, receives the finance charge and other income from the accounts, and incurs the bad-debts associated with the accounts.

With the exception of depreciation expense, all components of the credit card operations are included in SG&A. The credit contribution comprises program compensation and servicing compensation. For 2008, 2007, and 2006, the components of the credit contribution included in SG&A were $29,899, $28,754 and $58,038, respectively

F-15

NOTE 4 – PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

	January 31, 2009 (Revised)			February 2, 2008 (Revised)
Land and land improvements	$	177,069		$	177,040
Buildings		594,578			593,635
Leasehold improvements		341,319			349,898
Fixtures and equipment		811,642			797,366
Construction in progress		24,968			24,540
		1,949,576			1,942,479
Accumulated depreciation		(891,183	)		(849,718	)
	$	1,058,393		$	1,092,761

Depreciation expense was $134,669, $131,710, and $125,822 in 2008, 2007, and 2006, respectively.

NOTE 5 – INCOME TAXES

The components of income tax expense (benefit) from continuing operations were as follows:

	2008 (Revised)			2007 (Revised)			2006 (Revised)
Current:
Federal	$	1,717		$	826		$	(100,085	)
State		(839	)		2,141			(26,566	)
		878			2,967			(126,651	)
Deferred:
Federal		(51,177	)		25,593			83,893
State		1,397			(1,805	)		7,811
		(49,780	)		23,788			91,704
Total expense (benefit) from continuing operations	$	(48,902	)	$	26,755		$	(34,947	)

F-16

Components of the net deferred tax asset or liability recognized in the consolidated balance sheets were as follows:

	January 31, 2009 (Revised)			February 2, 2008 (Revised)
Current:
Deferred tax assets:
Accrued expenses	$	28,099		$	27,543
NOL carryforwards		1,029			23,828
Valuation allowance		(2,322	)		(10,609	)
Deferred tax liabilities:
Inventory		3,110			2,065
Net current deferred tax asset	$	29,916		$	42,827
Non-current:
Deferred tax assets:
Capital leases	$	23,968		$	26,018
Rent Adjustments		18,433			—
Pension		15,993			—
Other long-term liabilities		29,036			33,230
AMT Credit		24,269			24,269
NOL carryforwards		134,557			66,611
Valuation allowance		(39,868	)		(53,228	)
Deferred tax liabilities:
Property and equipment		(11,446	)		(19,259	)
Other assets		14			19
Net non-current deferred tax asset	$	194,956		$	77,660

At January 31, 2009, the Company had deferred tax assets of $78,905 related to U.S. Federal Net Operating Loss (NOL) carryforwards of $225,444. The total Federal NOL carryforwards are $251,956 which includes $26,512 of excess tax deductions associated with our stock option plans which have yet to reduce taxes payable. Upon the utilization of these carryforwards, the associated tax benefits of $9,279 will be recorded to Additional Paid-in-Capital. This amount considers the fact that the carryforwards are restricted under federal income tax change-in-ownership rules. The federal and state NOL carryforwards will expire between 2009 and 2028. The Company believes it is more likely than not that it will be sufficiently profitable during the periods from 2009 to 2028 to utilize all of its federal NOLs and a portion of its existing state NOLs. A valuation allowance has been established against that portion of the existing state NOLs that the Company does not anticipate being able to utilize based on current projections.

During 2008, the valuation allowance was evaluated on a jurisdiction-by-jurisdiction basis which resulted in a net increase to the overall valuation allowance of $6,110 based on projections of future profitability. A similar analysis was performed in 2007, which resulted in a net reduction to the overall valuation allowance of $2,957.

The Company adopted the provisions of FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No.109” (“FIN No. 48”) as of February 4, 2007. As a result of the analysis of uncertain tax positions upon the adoption of FIN No. 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 (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). The Company is subject to the provisions of SOP 90-7 for these net operating losses since these losses were acquired through the acquisition of a company that had previously filed bankruptcy.

F-17

Income tax (benefit) expense from continuing operations varies from the amounts computed by applying the statutory federal income tax rate to income before taxes. The reasons for these differences were as follows:

	2008 (Revised)			2007 (Revised)			2006 (Revised)
Expected federal income taxes at 35%	$	(61,434	)	$	25,848		$	(14,886	)
State income taxes, net of federal benefit		(6,777	)		3,095			(10,691	)
State NOL valuation allowance adjustment		6,110			(2,957	)		(1,465	)
Effect of settling tax exams and other tax reserve adjustments		624			690			(10,150	)
Executive Compensation		318			367			2,439
Tax-Exempt Interest		—			(662	)		(1,761	)
Change in State Tax Law		(414	)		—			—
Write-off of Expired Federal NOL		10,980			—			—
Other items, net		1,691			374			1,567
Provision (benefit) for income taxes from continuing operations	$	(48,902	)	$	26,755		$	(34,947	)

During 2008, an additional reserve of $505 was established for issues raised in current state tax examinations and previously filed federal tax returns related to prior periods. In addition, the Company favorably concluded certain tax examinations which resulted in an income tax benefit of $189. During 2007, an additional reserve of $1,793 was established for issues raised in current state tax examinations and previously filed federal tax returns related to prior periods. During 2006, the Company favorably concluded certain tax examinations which resulted in an income tax benefit of $10,150. The Company analyzed its positions related to the reserve for tax exposures and determined that the amount was adequate. The Company will continue to analyze its positions related to the reserve for tax exposures on an ongoing basis.

The Company made income tax payments, net of refunds received of $(10,214), $(17,492) and, $34,222 during 2008, 2007, and 2006, respectively.

As a result of the implementation of FIN No. 48, the Company recorded a $33,671 decrease in the liability for unrecognized tax benefits which was accounted for as an increase to the beginning shareholder’s equity. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits follows:

	January 31, 2009			February 2, 2008
Unrecognized tax benefits at beginning of year	$	47,648		$	46,278
Gross amount of increases for tax positions of prior years		505			1,793
Gross amount of decreases for tax positions of prior years		(761	)		—
Gross amount of decreases due to statute expirations		(1,256	)		(423	)
Gross amount of decreases due to tax settlements		(105	)		—
Balance at end of year	$	46,031		$	47,648

Including the cumulative effect decrease, at the beginning and ending of 2008 the Company had $44,646 and $45,339 (net of federal and state benefits) of total unrecognized tax benefits, respectively. Of these totals, $13,264 and $13,958 (net of federal and state benefits) represents the amounts of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in future periods. 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 changes to the amount of unrecognized tax benefits.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. During the years ended January 31, 2009 and February 2, 2008, the Company recognized $1,688 and $377, respectively in interest and penalties. The Company had $4,918 and $3,230 for the payment of interest and penalties accrued as of January 31, 2009 and February 2, 2008, respectively.

F-18

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 beyond and currently has examinations in progress for several jurisdictions.

NOTE 6 – DEBT

A summary of long-term debt and capital lease obligations is as follows:

	January 31, 2009			February 2, 2008
Notes 8.25%, maturing fiscal year 2008	$	—		$	84,132
Notes 7.50%, maturing fiscal year 2010		45,872			45,872
Notes 9.875%, maturing fiscal year 2011		141,557			141,557
Notes 7.00%, maturing fiscal year 2013		2,922			2,922
Notes 7.375%, maturing fiscal year 2019		1,911			1,911
Convertible Notes 2.00%, maturing fiscal year 2024		230,000			230,000
Less: Unamortized discount (1)		(42,297	)		(49,108	)
Carrying amount of Convertible Notes		187,703			180,892
Revolving credit facility		156,675			—
Terminated interest rate swap agreements, net		53			—
Capital lease obligations		61,083			66,194
		597,776			523,480
Current portion		(4,673	)		(319,242	)
	$	593,103		$	204,238

(1) Recorded upon adoption of FSP APB 14-1.

REVOLVING CREDIT AGREEMENT

The Company has a $500,000 revolving credit facility, subject to a borrowing base equal to a specified percentage of eligible inventory and certain credit card receivables. The facility matures in September 2011. The obligations under the facility are guaranteed by certain of Company’s existing and future domestic subsidiaries, and the obligations are secured by the Company’s and the guarantors’ merchandise inventories and certain third party accounts receivable. Borrowings under the facility bear interest at a per annum rate of either LIBOR plus a percentage ranging from 1.00% to 1.50% or at the higher of the prime rate and federal funds rate. Letters of credit are charged a per annum fee equal to the then applicable LIBOR borrowing spread (for standby letters of credit) or fifty percent of the LIBOR borrowing spread (for documentary or commercial letters of credit). The Company also pays an unused line fee of 0.25% per annum on the average daily unused revolver.

During periods in which availability under the agreement is $60,000 or more, the Company is not subject to financial covenants. If and when availability under the agreement decreases to less than $60,000, the Company will be subject to a minimum fixed charge coverage ratio of 1 to 1. There is no debt rating trigger.

The revolving credit agreement restricts additional debt to specific categories including the following (each category being subject to limitations as described in the revolving credit agreement): debt arising from permitted sale and leaseback transactions; debt to finance purchases of machinery, equipment, real estate and other fixed assets; debt in connection with permitted acquisitions; and unsecured debt. The revolving credit agreement also places certain restrictions on, among other things, asset sales, the ability to make acquisitions and investments, and to pay dividends.

The Company routinely issues stand-by and documentary letters of credit principally related to the funding of insurance reserves. Outstanding letters of credit reduce availability under the revolving line of credit. During 2008, weighted average letters of credit issued under the credit agreement were $28,594. The highest amount of letters of credit outstanding under the agreement during 2008 was $34,326. At January 31, 2009, the Company had $156,675 of direct outstanding borrowings and had letters of credit outstanding of $21,459. The credit agreement contains default provisions that are typical for this type of financing, including a provision that would trigger a default under the credit agreement if a default were to occur in another debt instrument resulting in the acceleration of principal of more than $20,000 under that other instrument.

F-19

SENIOR NOTES

At January 31, 2009, the Company had $192,262 of unsecured senior notes outstanding, excluding the convertible notes, comprised of four separate series having maturities ranging from 2010 to 2019 and interest rates ranging from 7.00% to 9.88%. The senior notes are guaranteed by all of the subsidiaries that guarantee the Company’s credit facility and have substantially identical terms except for the maturity dates and interest rates payable to investors. Subject to certain exceptions, the notes restrict the Company from incurring secured debt or entering into sale/leaseback transactions that are, in the aggregate greater than 15% (17.5% in the case of the notes due in 2013) of consolidated net tangible assets of the Company. The notes permit certain sale/leaseback transactions but place certain restrictions around the use of proceeds generated from a sale/leaseback transaction. The terms of each senior note require all principal to be repaid at maturity. There are no financial covenants associated with these notes, and there are no debt-rating triggers.

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 $95,872 aggregate principal amount of the notes, resulting in an aggregate purchase price of approximately $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.

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.

CONVERTIBLE NOTES

The Company had $230,000 of convertible senior unsecured notes outstanding at January 31, 2009. The notes bear interest at a rate of 2.0% per annum and mature in 2024. Interest is payable on the convertible notes on March 15 and September 15 of each year. The convertible notes are guaranteed by all of the subsidiaries that guarantee the Company’s revolving credit facility.

In certain circumstances, 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 (subject to an anti-dilution adjustment). The Company can settle a conversion of the notes with shares and/or cash. The holders may convert the notes at the following times, among others: if the Company’s share price is greater than 120% of the applicable conversion price for a certain trading period; if the credit ratings of the notes are below a certain threshold; or upon the occurrence of certain consolidations, mergers or share exchange transactions involving the Company.

The convertible notes are also subject to repurchase at the option of the holders in the event of a change of control or a termination of trading of the Company’s common stock, and the holders may put the notes back to the Company in 2014 or 2019. The Company can call the notes for redemption on or after March 21, 2011.

Subject to certain exceptions, the convertible notes restrict the Company from incurring secured debt or entering into sale and leaseback transactions that are, in the aggregate, greater than 17.5% of consolidated net tangible assets of the Company.

At January 31, 2009, the conversion criteria with respect to the credit rating requirements were met, however the share price was significantly below the conversion price. Due to the share price being significantly below the conversion price, the Company has classified the convertible notes in “long-term debt” on the Company’s balance sheet as of January 31, 2009. At February 2, 2008, the holders of the convertible notes had the ability to exercise their conversion rights as a result of the Company’s share price exceeding 120% of the applicable conversion price for the trading period. Therefore, the convertible notes were classified within “current portion of long-term debt” on the Company’s balance sheet as of February 2, 2008.

The Company used approximately $25,000 of the proceeds from the issuances of the convertible notes 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 terms and conditions of the note hedge include: the strike price is $11.97; the contract is indexed to 19,219 shares of the Company’s common stock; the maturity dates of the hedge instruments range from March 24, 2011 to April 20,

F-20

2011. The fair value of the bond hedge is approximately $4,382 at January 31, 2009. The sensitivity of the fair value to a $1 increase in the price of the underlying common stock would be to increase the value of the hedge by approximately $5,151. The sensitivity of the fair value to a $1 decrease in the price of the underlying common stock would be to decrease the value of the hedge by approximately $3,190.

The terms of the written call options include: the strike price is $13.81; the contract is indexed to 19,219 shares of the Company’s common stock; the maturity date of the written call option instruments is August 2, 2011. The fair value of the call option is approximately $4,382 at January 31, 2009. The sensitivity of the fair value to a $1 increase in the price of the underlying common stock would be to increase the value of the call option by approximately $5,151. The sensitivity of the fair value to a $1 decrease in the price of the underlying common stock would be to decrease the value of the call option by approximately $3,190.

These transactions were accounted for as a net reduction of stockholders’ equity of approximately $25,000 in 2004.

The convertible notes are within the scope of FSP APB 14-1 which was adopted as of February 1, 2009 with retrospective application. See Note 2 for further discussion of the effects of the adoption.

MATURITIES

At January 31, 2009, maturities of long-term debt and capital lease obligations for the next five years and thereafter are as follows:

Year	Maturities
2009	$	4,673
2010		50,924
2011		303,500
2012		5,308
2013		8,746
Thereafter		266,922
Subtotal		640,073
Unamortized discount		(42,297	)
Total	$	597,776

The Company made interest payments of $31,741, $34,982, and $50,409, of which $1,308, $1,830, and $3,807 was capitalized into property and equipment during 2008, 2007, and 2006, respectively.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

OPERATING LEASES AND OTHER PURCHASE COMMITMENTS

The Company leases certain property and equipment under various non-cancelable capital and operating leases. The leases provide for monthly fixed amount rentals or contingent rentals based upon sales in excess of stated amounts and normally require the Company to pay real estate taxes, insurance, common area maintenance costs and other occupancy costs. Generally, the leases have primary terms ranging from 20 to 30 years and include renewal options ranging from 5 to 20 years.

F-21

At January 31, 2009, future minimum rental commitments under capital leases and non-cancelable operating leases consisted of the following:

	Operating Leases		Capital Leases
2009	$	66,857	$	11,562
2010		65,356		11,454
2011		60,537		11,234
2012		50,184		10,771
2013		45,329		10,746
Thereafter		188,609		54,908
	$	476,872		110,675
Amounts representing interest				(49,592	)
Capital lease obligations			$	61,083

Total rental expense for operating leases was $101,063, $100,106, and $107,645 during 2008, 2007, and 2006, respectively, including contingent rent of $17,381, $19,612, and $17,897, respectively, and common area maintenance costs of $12,702, $10,297, and $8,236, respectively. The gross amount of assets recorded under capital leases as of January 31, 2009 and February 2, 2008 was $130,946 and 134,825 respectively.

As of January 31, 2009, the Company had two potential commitments tied to the value of its common stock. First, the Company may be required to deliver shares and/or cash to holders of the convertible notes described in Note 6 prior to the stated maturity date of said notes based on the value of the Company’s common stock. Second, in connection with the issuance of the convertible notes, the Company bought and sold call options to limit the potential dilution from conversion of the notes. The Company may be required to deliver shares and/or cash to the holders of the call options based on the value of the Company’s common stock.

In the normal course of business, the Company purchases merchandise under purchase commitments; enters into contractual commitments with real estate developers and construction companies for new store construction and store remodeling; and maintains contracts for various information technology, telecommunications, maintenance and other services. Commitments for purchasing merchandise generally do not extend beyond six months and may be cancelable several weeks prior to the vendor shipping the merchandise. Contractual commitments for the construction and remodeling of stores are typically lump sum or cost plus construction contracts. Contracts to purchase various services are generally less than one to two year commitments and are cancelable within several weeks notice.

From time to time the Company has issued guarantees to landlords under leases of stores operated by its subsidiaries. Certain of these stores were sold in connection with the SDSG and NDSG transactions. If the purchasers fail to perform certain obligations under the leases guaranteed by the Company, the Company could have obligations to landlords under such guarantees. Based on the information currently available, management does not believe that its potential obligations under these lease guarantees would be material.

LEGAL CONTINGENCIES

Vendor Litigation

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 asserted breach of contract claims and alleged that the Company improperly assessed chargebacks, timely payment discounts, and deductions for merchandise returns against members of the plaintiff class. The lawsuit sought compensatory and incidental damages and restitution. On June 8, 2008, the parties entered into a settlement agreement which was approved by the United States Bankruptcy Court for the Central District of California on July 30, 2008. Pursuant to the settlement, on August 18, 2008 the Company paid the plaintiff $370 in settlement of the claims (of which the Company was reimbursed approximately $118 from an unrelated third party), at which time the lawsuit was formally dismissed.

F-22

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.

INCOME TAXES

The Company is routinely under audit by federal, state or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the timing and amount of deductions and the allocation of income among various tax jurisdictions. Based on annual evaluations of tax filing positions, the Company believes it has adequately accrued for its income tax exposures. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of the current reserves, the Company’s effective tax rate in a given financial statement period may be materially impacted. At January 31, 2009 certain state examinations were ongoing.

NOTE 8 – EMPLOYEE BENEFIT PLANS

DEFERRED COMPENSATION PLAN

The Company sponsors a non-qualified deferred compensation plan wherein eligible employees can defer a portion of their compensation or unvested restricted stock and allocate the deferrals to a choice of investments options. The liability for compensation deferred under this plan was $10,267 and $19,417 for the years ended January 31, 2009 and February 2, 2008, respectively. The Company manages the risk of changes in the fair value of the liability for deferred compensation by electing to match its liability under the plan with investment vehicles that offset a substantial portion of its exposure. The cash value of the investment vehicles was $9,701 and $18,886 for the years ended January 31, 2009 and February 2, 2008, respectively, and is included in Other Assets in the accompanying consolidated balance sheets.

EMPLOYEE SAVINGS PLANS

The Company sponsors various qualified savings plans that cover substantially all full-time employees. Company contributions charged to expense under these plans for 2008, 2007, and 2006 were $7,805, $8,403, and $7,282, respectively. The Company’s contributions to the plan have been suspended for the 2009 calendar year. At January 31, 2009, total assets invested by participants related to the employee savings plans was $340,678, of which approximately 1% was invested in the Company’s stock at the discretion of the participating employees.

DEFINED 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 cash balance pension plan. The Company generally funds pension costs, currently subject to regulatory funding requirements. The Company expects funding requirements of up to $1,000 in 2009.

In September 2006, the FASB issued SFAS No. 158, which requires employers to (i) recognize the funded status of their defined benefit pension and other postretirement plans on the consolidated balance sheet, (ii) 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 and (iii) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position. The Company adopted the recognition and disclosure requirements of SFAS No. 158 prospectively on February 3, 2007. Effective January 31, 2009, in accordance with SFAS No. 158, the Company changed its measurement date from November 1 to the date of its fiscal year end. The Company elected to adopt the change in measurement date using the alternative transition method. In accordance with the alternative transition method, the actuarial valuation provided a 15-month projection of net periodic benefit cost to January 31, 2009 that resulted in a $344 decrease to 2008 ending retained earnings.

Additionally, the Company amended the SFA Pension Plan during 2006, freezing benefit accruals for all participants except those who have attained age 55 and completed 10 years of credited service as of January 1, 2007, who are considered to be non-highly compensated employees. In January 2009, the Company suspended future benefit accruals for all remaining participants in the plan effective on March 13, 2009. This curtailment resulted in a gain of approximately $616 for the year ended January 31, 2009.

F-23

The components of net periodic pension expense related to the Company’s pension plan were as follows:

	2008			2007			2006
Net periodic pension expense:
Service cost	$	846		$	1,323		$	4,841
Interest cost		10,613			8,199			8,516
Expected return on plan assets		(15,184	)		(11,058	)		(9,592	)
Recognized actuarial loss		1,005			3,338			4,202
Amortization of prior service costs		(87	)		(70	)		(395	)
Net pension expense		(2,807	)		1,732			7,572
FAS 88 charge		—			—			443
Total pension expense (income)	$	(2,807	)	$	1,732		$	8,015
Gain recognized due to curtailment	$	(616	)	$	—		$	(4,303	)

F-24

	2008			2007
Change in benefit obligation:
Benefit obligation at beginning of period	$	156,109		$	163,915
Service cost		846			1,323
Interest cost		10,613			8,199
Actuarial loss		(3,818	)		(3,148	)
Benefits paid		(15,079	)		(14,180	)(1)
Benefit obligation at end of period	$	148,671		$	156,109
Change in plan assets:
Fair value of plan assets at beginning of period	$	165,878		$	151,159
Actual return on plan assets		(55,071	)		27,850
Employer contributions		1,309			1,038
Benefits paid		(15,079	)		(12,835	)
Administrative expenses		(1,764	)		(1,334	)
Fair value of plan assets at end of period	$	95,273		$	165,878
Pension plans’ funding status:
Accumulated benefit obligation	$	(148,658	)	$	(156,101	)
Effect of projected salary increases		(13	)		(8	)
Projected benefit obligation		(148,671	)		(156,109	)
Fair value of plan assets		95,273			165,878
Funded status		(53,398	)		9,769
Unrecognized actuarial loss		—			—
Unrecognized prior service cost		—			—
Contributions subsequent to measurement date		—			258
Prepaid (accrued) pension cost classified in other assets (liabilities) at balance sheet date	$	(53,398	)	$	10,027
Amounts recognized in the consolidated balance sheet:
Noncurrent asset	$	—		$	25,309
Current liabilities		(1,179	)		(1,056	)
Noncurrent liabilities		(52,219	)		(14,226	)
Net amount recognized at balance sheet date	$	(53,398	)	$	10,027
Assumptions:
Discount rate, at end of period		6.50	%		6.00	%
Expected long-term rate of return on assets, for periods ended January 31, 2009 and February 2, 2008		8.00	%		8.00	%
Average assumed rate of compensation increase		4.00	%		4.00	%
Measurement date		1/31/0	9		11/1/0	7

(1) The benefits paid in 2007 include the final payment of $1,345 from the Carson Supplemental Executive Retirement Plan which was retained by the Company in conjunction with the sale of NDSG.

Pension assumptions are based upon management’s best estimates as of the annual measurement date. The assumed discount rate utilized is based upon pension discount curves and bond portfolio curves over a duration similar to the plan’s liabilities as of the measurement date. The discount rate is utilized principally in calculating the Company’s pension obligation, which is represented by the Accumulated Benefit Obligation (ABO) and the Projected Benefit Obligation (PBO) and in calculating net pension expense. At January 31, 2009 and February 2, 2008, the discount rate was 6.5% and 6% respectively.

F-25

The assumed expected long-term rate of return on assets is the weighted average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the PBO. The Company’s estimate of the expected long-term rate of return considers the historical returns on plan assets, as well as the future expectations of returns on classes of assets within the target asset allocation of the plan asset portfolio. This rate is utilized principally in calculating the expected return on plan assets component of the Company’s annual pension expense. The Company’s expected long-term rate of return on assets was 8.0% in 2008 and 2007.

The assumed average rate of compensation increase is the average annual compensation increase expected over the remaining employment periods for the participating employees. This rate is estimated to be 4% for the periods following January 31, 2009 and is utilized principally in calculating the PBO and annual pension expense.

In 2009, the estimated Accumulated Other Comprehensive Income (“AOCI”) amortization of prior service credit and amortization of net loss is $0 and $10,061, respectively, for the pension plan. No refunds are expected from the benefit plan during 2009.

Amounts not yet reflected in net periodic benefit costs and included in AOCI as of January 31, 2009 and February 2, 2008 are as follows:

	2008		2007
Prior service credit	$	—	$	(704	)
Accumulated loss		92,519		25,324
Accumulated other comprehensive loss		92,519		24,620

Plan weighted-average asset investment allocations at January 31, 2009 and November 1, 2007, by asset category were as follows:

	January 31, 2009		November 1, 2007
Equity	55.7	%	65.6	%
Debt	36.1	%	29.1	%
Real estate	8.2	%	5.3	%
Total	100.0	%	100.0	%

The Company’s pension plan investment strategy is to maintain a diversified portfolio of asset classes with the primary goal to ensure that funds are available to meet the plan’s benefit obligations when they become due. The plan’s target allocation is determined taking into consideration the amounts and timing of projected liabilities, the Company’s funding policies and expected returns on various asset categories. For the years ended January 31, 2009 and February 2, 2008, the plan’s target asset allocation was approximately 65% equity, 30% fixed income and 5% real estate.

F-26

At January 31, 2009, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

Year	Benefit Payments
2009	$	18,354
2010		16,911
2011		16,095
2012		15,121
2013		14,945
2014 - 2018		51,486
	$	132,912

NOTE 9 – SHAREHOLDERS’ EQUITY

On October 3, 2006 the Company’s Board of Directors declared a cash dividend of $4.00 per common share totaling $558,587, 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 vest.

As a result of the November 30, 2006 $4.00 per common share dividend payment, the Human Resources and Compensation Committee of the Company’s Board of Directors exercised its discretion under anti-dilution provisions of the Company’s long-term incentive plan to adjust the exercise price and number of stock options to reflect the change in the share price on the December 1, 2006 ex-dividend date. In accordance with the provisions of SFAS No. 123R, the discretionary nature of the anti-dilution provisions resulted in a modification of the options. Accordingly, the measurement of the fair value of the options both before and after the ex-dividend date was required resulting in a pre-tax non-cash charge of $13,729.

The effect of this anti-dilution adjustment is presented below:

	As of the ex-dividend date
	Prior to Adjustment		After Adjustment
Options outstanding		4,547		5,645
Options exercisable		4,489		5,573
Weighted average exercise price:
Options outstanding	$	14.49	$	11.67
Options exercisable	$	14.57	$	11.74

On March 6, 2006, the Company’s Board of Directors declared a cash dividend of $4.00 per common share totaling $547,537, and the Company reduced shareholders’ equity by that amount. $538,964 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 vest.

As a result of the May 1, 2006 $4.00 per common share dividend payment, the Human Resources and Compensation Committee of the Company’s Board of Directors exercised its discretion under anti-dilution provisions of the Company’s long-term incentive plan to adjust the exercise price and number of stock options to reflect the change in the share price on the May 2, 2006 ex-dividend date. In accordance with the provisions of SFAS No. 123R, the discretionary nature of the anti-dilution provisions resulted in a modification of the options. Accordingly, the measurement of the fair value of the options before and after the ex-dividend date was required resulting in a pre-tax non-cash charge of $19,600.

F-27

The effect of this anti-dilution adjustment is presented below:

	As of the ex-dividend date
	Prior to Adjustment		After Adjustment
Options outstanding		7,148		8,845
Options exercisable		6,870		8,501
Weighted average exercise price:
Options outstanding	$	16.58	$	13.40
Options exercisable	$	16.82	$	13.59

On December 8, 2005, the Company announced that in anticipation of the closing of the NDSG transaction, its Board of Directors had approved a 35,000 share increase in its common share repurchase authorization, bringing the total number of authorized shares to 70,025. During 2008, 2007 and 2006, the Company repurchased 2,949, 1,722, and 450 shares for an aggregate amount of $34,899, $27,464, and $6,531, respectively. There were 32,709 shares available for repurchase under the share repurchase program at January 31, 2009.

Each outstanding share of the Company’s common stock has one preferred stock purchase right attached. The rights generally become exercisable ten days after an outside party acquires, or makes an offer for, 20% or more of the common stock. Each right entitles its holder to purchase 1/100 share of Series C Junior Preferred Stock for $50 once the rights become exercisable. The rights expire in November 2018. Once exercisable, if the Company is involved in a merger or other business combination or an outside party acquires 20% or more of the common stock, each right will be modified to entitle its holder (other than the acquirer) to purchase common stock of the acquiring company or, in certain circumstances, common stock having a market value of twice the exercise price of the right.

NOTE 10 – EMPLOYEE STOCK PLANS

The Company maintains an equity incentive plan for the granting of options, stock appreciation rights, performance shares, restricted stock and other forms of equity awards to employees and directors. At January 31, 2009 and February 2, 2008, the Company had available for grant 16,061 and 16,549 shares of common stock, respectively. Options granted generally vest over a four-year period after grant and have an exercise term 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 the plan permits accelerated vesting in certain circumstances at the discretion of the Human Resources and Compensation Committee of the Board of Directors.

In December 2004, the FASB issued SFAS No.123R, which 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 2006 consolidated financial statements. Total pre-tax stock-based compensation expense for the years ended January 31, 2009, February 2, 2008, and February 3, 2007 was $16,395, $7,724, and $52,072, respectively. The related tax benefit for the years ended January 31, 2009, February 2, 2008, and February 3, 2007 was $6,558, $3,090, and $20,829, respectively.

STOCK OPTIONS

The Company expenses the fair value of all stock-based option grants over the requisite service period on a prospective basis utilizing the Black-Scholes option pricing model. The Black-Scholes model estimates the expected value employees will receive from the options based on a number of assumptions, such as interest rates, employee exercises, the Company’s stock price and dividend yield. The Company did not grant any stock options in 2006. The weighted-average Black-Scholes fair value assumptions are as follows:

	2008		2007
Expected life	5 years		5 years
Risk free interest rate	2.5	%	4.6	%
Expected volatility	36	%	35	%
Expected dividend yield	0	%	0	%

F-28

The expected life is a significant assumption as it determines the period for which the risk free interest rate, volatility and dividend yield must be applied. The expected life is the period over which employee groups are expected to hold options. The expected life is calculated using the simplified method in accordance with SAB 107, as amended by SAB 110. The risk free interest rate is based on the expected U.S. Treasury rate over the expected life. Volatility reflects movements in the Company’s stock price over the most recent historical period equivalent to the expected life. The dividend yield is zero as the Company does not anticipate declaring dividends in the foreseeable future.

The Company recognizes compensation expense for stock option awards with graded vesting on a straight line basis over the requisite service period. The Company has not granted stock options with performance or market conditions.

A summary of the stock options for 2008, 2007, and 2006 is presented below:

	2008						2007						2006
	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at beginning of year	2,421		$	13.06			4,861		$	11.56			8,400		$	15.84
Dividend Adjustments	—			0.00			—			0.00			2,795			3.92
Granted	940			13.04			616			19.79			—			0.00
Exercised	(386	)		8.18			(2,930	)		11.72			(5,486	)		11.00
Forfeited	(488	)		15.99			(126	)		19.27			(848	)		20.21
Outstanding at end of year	2,487		$	13.26	$	—	2,421		$	13.06	$	14,004	4,861		$	11.56	$	38,305
Options exercisable at year end	1,194		$	11.17	$	—	1,837		$	10.92	$	14,004	4,814		$	11.61	$	37,694
Weighted average fair value of options granted during the year					$	4.65					$	7.61					$	—

The total intrinsic value of stock options exercised during 2008, 2007, and 2006 was $1,951, $25,915, and $43,365, respectively.

The following table summarizes information about stock options outstanding at January 31, 2009:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at January 31, 2009	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable at January 31, 2009	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$5.15 to $8.66	635	1.5	$	6.72	635	1.5	$	6.72
$8.67 to $13.04	941	5.9	$	12.87	58	2.3	$	10.29
$13.05 to $19.68	345	0.4	$	15.62	342	0.3	$	15.59
$19.69 to $20.31	566	5.1	$	19.80	159	5.1	$	19.79
	2,487	3.8	$	13.26	1,194	1.7	$	11.17

In 2006, due to the two $4 cash dividends paid, the Company recorded non-cash charges of $33,329 for the re-measurement of the fair value of the options.

RESTRICTED STOCK AND PERFORMANCE SHARES

The Company granted restricted stock awards of 2,184, 406, and 372 shares to certain employees in 2008, 2007, and 2006, respectively. The fair value of the restricted stock is based on the market value of the Company’s common stock on the date of grant. The fair value of these shares on the dates of grants was $27,934, $8,843, and $7,285 for 2008, 2007, and 2006, respectively. During 2008, 2007, and 2006, compensation cost, net of related tax effects, of $6,511, $2,162, and $2,846, respectively, was recognized in connection with the Company’s restricted stock grants.

F-29

Compensation cost for the restricted stock awards that cliff vest is expensed on a straight line basis over the requisite service period. Restricted stock with graded vesting features are treated as multiple awards based upon the vesting date. The Company records compensation cost for these awards on a straight line basis over the requisite service period for each separately vesting portion of the award.

A summary of restricted stock awards for the year ended January 31, 2009 is presented below:

	Shares		Weighted Average Grant Price
Nonvested at February 2, 2008	944		$	18.83
Granted	2,184			12.79
Vested	(129	)		15.99
Canceled	(280	)		15.74
Nonvested at January 31, 2009	2,719		$	14.43

The Company granted performance shares under its long-term incentive plan. The fair value of the performance shares is based on the market value of the Company’s common stock on the date of grant. The actual number of performance shares earned is based on the level of performance achieved relative to established operating (non-market condition) goals for the one-year performance period beginning February 3, 2008 and range from 0% to 150% of the target number of performance shares granted. In addition, once earned, performance shares are not payable unless the grantee remains employed by the Company for an additional two years. Compensation cost for the performance shares that cliff vest is expensed on a straight line basis over the requisite service period. Performance shares with graded vesting features are treated as multiple awards based upon the vesting date. The Company records compensation cost for these awards on a straight line basis over the requisite service period for each separately vesting portion of the award.

The Company granted performance shares of 816, 570, and 568 to certain employees in 2008, 2007, and 2006, respectively. The fair value of these shares on the dates of grants was $10,632, $11,282, and $11,026 for 2008, 2007, and 2006, respectively. The performance measure was not met for the 2008 performance shares and therefore no shares were earned. Accordingly, no compensation cost was recognized for these shares. During 2008, 2007 and 2006, compensation cost recognized for performance shares earned in prior years, net of related tax effects, was $1,735, $1,605 and $8,279, respectively.

A summary of performance share awards for the year ended January 31, 2009 is presented below:

	Shares		Weighted Average Grant Price
Nonvested at February 2, 2008	679		$	19.73
Granted	816			13.04
Vested	(142	)		18.56
Canceled	(30	)		13.75
Nonvested at January 31, 2009	1,323		$	15.87

At January 31, 2009 and February 2, 2008, the Company had unearned compensation amounts related to non-vested restricted stock and performance shares of $29,986 and $15,562, respectively, which will be recognized over a weighted average period of approximately 2.5 years.

F-30

STOCK PURCHASE PLAN

The Company’s employee stock purchase plan provides for an aggregate of 1,450 shares of the Company’s common stock to be purchased by eligible employees through payroll deductions at a 15% discount to market value. Under the plan, 250, 37, and 40 shares of the Company’s common stock were purchased by employees in 2008, 2007, and 2006, respectively. During 2008, 2007, and 2006, compensation cost, net of related tax effects, of $189, $60, and $61, respectively, was recognized in connection with the shares issued. At January 31, 2009, the plan had 148 shares available for future offerings.

On December 3, 2008, the Human Resources and the Compensation Committee of the Board of Directors suspended the employee stock purchase plan for the 2009 calendar year.

NOTE 11 – FAIR VALUE MEASUREMENTS

Effective February 3, 2008, the Company partially adopted SFAS No. 157. The partial adoption is in accordance with FSP No. FAS 157-2, which allows for the delay of the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are not measured at fair value on a regular basis.

SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of these three levels:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions

The Company may also be required, from time to time, to measure certain other financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.

As of January 31, 2009, the Company had no material financial assets or liabilities measured on a recurring basis that required adjustments or write-downs.

NOTE 12 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of the Company’s cash and cash equivalents and accounts payable approximate their carrying amounts reported in the consolidated balance sheets, due to the immediate or short-term maturity of these instruments. For variable rate notes that reprice frequently, such as the Company’s revolving credit agreement, fair value approximates carrying value.

F-31

The fair values of the Company’s financial instruments other than the instruments considered short-term in nature at January 31, 2009 and February 2, 2008 were as follows:

	Carrying Amount			Estimated Fair Value
January 31, 2009
7.50% senior notes	$	45,872		$	36,698
9.875% senior notes	$	141,557		$	99,090
7.00% senior notes	$	2,922		$	1,753
7.375% senior notes	$	1,911		$	993
2.00% convertible notes	$	187,703	(1)	$	89,125
February 2, 2008
8.25% senior notes	$	84,132		$	84,868
7.50% senior notes	$	45,872		$	45,241
9.875% senior notes	$	141,557		$	144,211
7.00% senior notes	$	2,922		$	2,922
7.375% senior notes	$	1,911		$	1,911
2.00% convertible notes	$	180,892	(1)	$	367,425

(1) Amount represents the $230,000 convertible notes, net of the unamortized discount of $42,297 and $49,108 as of January 31, 2009 and February 2, 2008, respectively recorded upon adoption of FSP APB 14-1.

The fair values of the long-term debt were estimated based on quotes obtained from financial institutions for those or similar instruments or on the basis of quoted market prices. The estimated fair value of the convertible note hedge and written call option was $0 and $11,339 at January 31, 2009 and February 2, 2008, respectively.

NOTE 13 – STORE DISPOSITIONS, INTEGRATION AND OTHER CHARGES

In October 2004, the Company announced its intention to close 12 SFA stores. The net pre-tax charges resulting from the closing of these stores are principally related to asset impairments, lease terminations, inventory write-downs and severance costs, partially offset by gains on the dispositions of one or more stores. As it relates to these closings, the Company incurred charges of $6,353 for lease termination costs at closed stores and $268 for severance charges during the fiscal year ended February 3, 2007. Severance costs represent the portion of accrued benefits for employees that will exist when the stores are closed which were paid in the year incurred. Lease termination costs are included in Impairments and Dispositions, markdown charges are included in Gross Margin, and severance costs are included in Selling, General, and Administrative expense in the accompanying consolidated statements of income. There were no amounts payable related to these charges as of January 31, 2009.

During the fourth quarter of 2008, the Company discontinued the operations of its CLL specialty store business which consisted of 98 leased, mall-based stores. Along with the previous disposition of the SDSG businesses, CLL was no longer determined to be a strategic fit for the Company. CLL generated revenues of approximately $52,231 million for 2008 and was not profitable. The Company incurred charges of $44,521 in 2008 associated with the CLL store closings which are included in discontinued operations in the consolidated statements of income.

The following table summarizes costs incurred and amounts payable for severance, lease termination and other closing costs related to the discontinuation of the CLL business during the year ended January 31, 2009:

	Severance and Personel Related Costs			Lease Termination Costs			Other Closing Costs			Total
Balance at February 3, 2008	$	—		$	—		$	—		$	—
2008 expenses		5,074			17,746			¹1,444			24,264
Paid in 2008		(1,423	)		(7,966	)		(1,272	)		(10,661	)
Balance at January 31, 2009	$	3,651		$	9,780		$	172		$	13,603

¹ Excludes a non-cash deferred rent benefit of $3,701

The amounts payable relating to the disposition of the CLL business as of January 31, 2009 are expected to be paid during the year ending January 30, 2010. In addition to the amounts in the table above, the Company incurred charges of approximately $6,965 for inventory liquidation costs and $16,993 for asset impairments in 2008. The Company expects to incur nominal charges and complete its restructuring plan relating to CLL in 2009.

F-32

NOTE 14 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly financial information for 2008 and 2007 is as follows:

	First Quarter (Revised)		Second Quarter (Revised)			Third Quarter (Revised)			Fourth Quarter (Revised)
Fiscal year ended January 31, 2009:
Total sales	$	850,041	$	656,968		$	687,229		$	835,505
Gross margin		322,843		227,407			243,261			173,738
Operating income (loss)		42,614		(41,566	)		(14,369	)		(122,067	)
Income (loss) from continuing operations		18,971		(30,906	)		(30,793	)		(83,897	)
Net income (loss)		17,336		(32,667	)		(43,729	)		(99,744	)
Basic earnings (loss) per common share	$	0.12	$	(0.24	)	$	(0.32	)	$	(0.72	)
Diluted earnings (loss) per common share	$	0.12	$	(0.24	)	$	(0.32	)	$	(0.72	)
	First Quarter (Revised)		Second Quarter (Revised)			Third Quarter (Revised)			Fourth Quarter (Revised)
Fiscal year ended February 2, 2008:
Total sales	$	779,932	$	679,958		$	782,469		$	981,717
Gross margin		321,221		239,080			327,000			364,524
Operating income (loss)		33,922		(31,271	)		47,657			52,568
Income (loss) from continuing operations		11,040		(24,663	)		22,139			38,580
Net income (loss)		10,139		(25,525	)		20,693			38,575
Basic earnings (loss) per common share	$	0.07	$	(0.18	)	$	0.15		$	0.28
Diluted earnings (loss) per common share	$	0.06	$	(0.18	)	$	0.14		$	0.25

NOTE 15 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following tables present condensed consolidating financial information for 2008, 2007 and 2006 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 years ended January 31, 2009, February 2, 2008, and February 3, 2007 reflect the legal entity compositions at the respective dates. Certain 2007 and 2006 amounts in the following tables have been revised to reflect the allocation of deferred income taxes between Saks Incorporated and the guarantors of Saks Incorporated’s senior notes.

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 its subsidiaries. At January 31, 2009, Saks Incorporated was the sole obligor for the majority of the Company’s long-term debt and maintained a small group of corporate employees.

F-33

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED JANUARY 31, 2009

(In Thousands)	SAKS INCORPORATED (Revised)			GUARANTOR SUBSIDIARIES (Revised)			ELIMINATIONS (Revised)		CONSOLIDATED (Revised)
NET SALES				$	3,029,743				$	3,029,743
Cost of sales					2,062,494					2,062,494
GROSS MARGIN					967,249					967,249
Selling, general and administrative expenses	$	13			770,802					770,815
Other operating expenses		947			317,408					318,355
Store pre-opening costs					2,328					2,328
Impairments and dispositions					11,139					11,139
OPERATING LOSS		(960	)		(134,428	)		—		(135,388	)
OTHER INCOME (EXPENSE)
Equity in earnings of subsidiaries - continuing operations		(106,819	)				$	106,819
Interest expense		(36,685	)		(9,054	)				(45,739	)
Other income, net		5,600								5,600
LOSS FROM CONTINUING OPERATIONS BEFORE BENEFIT FOR INCOME TAXES		(138,864	)		(143,482	)		106,819		(175,527	)
Benefit for income taxes		(12,239	)		(36,663	)				(48,902	)
LOSS FROM CONTINUING OPERATIONS		(126,625	)		(106,819	)		106,819		(126,625	)
DISCONTINUED OPERATIONS:
Equity in earnings of subsidiaries - discontinued operations (net of tax)		(32,179	)					32,179
Loss from discontinued operations before Benefit for income taxes					(52,727	)				(52,727	)
Benefit for income taxes					(20,548	)				(20,548	)
LOSS FROM DISCONTINUED OPERATIONS		(32,179	)		(32,179	)		32,179		(32,179	)
NET LOSS	$	(158,804	)	$	(138,998	)	$	138,998	$	(158,804	)

F-34

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF JANUARY 31, 2009

(In Thousands)	SAKS INCORPORATED (Revised)		GUARANTOR SUBSIDIARIES (Revised)			ELIMINATIONS (Revised)			CONSOLIDATED (Revised)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	236	$	10,037					$	10,273
Merchandise inventories				728,841						728,841
Other current assets				105,350						105,350
Deferred income taxes, net				29,916						29,916
TOTAL CURRENT ASSETS		236		874,144			—			874,380
PROPERTY AND EQUIPMENT, NET				1,058,393						1,058,393
DEFERRED INCOME TAXES, NET		60,861		134,095						194,956
OTHER ASSETS		3,614		16,334						19,948
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES		1,554,935				$	(1,554,935	)
	$	1,619,646	$	2,082,966		$	(1,554,935	)	$	2,147,677
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable			$	90,208					$	90,208
Accrued expenses and other current liabilities	$	8,235		267,312						275,547
Current portion of long-term debt		84,132		(79,459	)					4,673
TOTAL CURRENT LIABILITIES		92,367		278,061			—			370,428
LONG-TERM DEBT		536,693		56,410						593,103
OTHER LONG-TERM LIABILITIES				193,560						193,560
INVESTMENT BY AND ADVANCES FROM PARENT				1,554,935		$	(1,554,935	)
SHAREHOLDERS’ EQUITY		990,586								990,586
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,619,646	$	2,082,966		$	(1,554,935	)	$	2,147,677

F-35

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 31, 2009

(In Thousands)	SAKS INCORPORATED (Revised)			GUARANTOR SUBSIDIARIES (Revised)			ELIMINATIONS (Revised)			CONSOLIDATED (Revised)
OPERATING ACTIVITIES
Net loss	$	(158,804	)	$	(138,998	)	$	138,998		$	(158,804	)
Loss from discontinued operations		(32,179	)		(32,179	)		32,179			(32,179	)
Loss from continuing operations		(126,625	)		(106,819	)		106,819			(126,625	)
Adjustments to reconcile net income to net
Cash (used in) provided by operating activities:
Equity in earnings of subsidiaries		106,819						(106,819	)
Depreciation and amortization					134,694						134,694
Equity compensation		16,395									16,395
Amortization of discount on convertible senior notes		6,811									6,811
Gain on sale of building					(3,400	)					(3,400	)
Deferred income taxes		1,841			(51,621	)					(49,780	)
Impairments and dispositions					11,139						11,139
Changes in operating assets and liabilities, net		(109,289	)		137,225						27,936
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES - CONTINUING OPERATIONS		(104,048	)		121,218			—			17,170
NET CASH USED IN OPERATING ACTIVITIES - DISCONTINUED OPERATIONS					(18,667	)					(18,667	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(104,048	)		102,551			—			(1,497	)
INVESTING ACTIVITIES
Purchases of property and equipment					(127,305	)					(127,305	)
Proceeds from sale of property and equipment					4,338						4,338
NET CASH USED IN INVESTING ACTIVITIES - CONTINUING OPERATIONS		—			(122,967	)		—			(122,967	)
NET CASH USED IN INVESTING ACTIVITIES - DISCONTINUED OPERATIONS					(1,875	)					(1,875	)
NET CASH USED IN INVESTING ACTIVITIES		—			(124,842	)		—			(124,842	)
FINANCING ACTIVITIES
Intercompany borrowings		(105,900	)		105,900
Payments on long-term debt and capital lease obligations		—			(89,242	)					(89,242	)
Proceeds from revolving credit facility		156,675									156,675
Cash dividends paid		(1,183	)								(1,183	)
Purchase of common stock		(34,889	)								(34,889	)
Proceeds from issuance of common stock		4,089									4,089
NET CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING OPERATIONS		18,792			16,658			—			35,450
NET CASH PROVIDED BY FINANCING ACTIVITIES - DISCONTINUED OPERATIONS		—			—			—			—
NET CASH PROVIDED BY FINANCING ACTIVITIES		18,792			16,658			—			35,450
DECREASE IN CASH AND CASH EQUIVALENTS		(85,256	)		(5,633	)		—			(90,889	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		85,492			15,670			—			101,162
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	236		$	10,037		$	—		$	10,273

F-36

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED FEBRUARY 2, 2008

(In Thousands)	SAKS INCORPORATED (Revised)			GUARANTOR SUBSIDIARIES (Revised)			ELIMINATIONS (Revised)			CONSOLIDATED (Revised)
NET SALES				$	3,224,076					$	3,224,076
Cost of sales					1,972,251						1,972,251
GROSS MARGIN					1,251,825						1,251,825
Selling, general and administrative expenses	$	3,910			823,714						827,624
Other operating expenses		86			316,253						316,339
Store pre-opening costs					707						707
Impairments and dispositions					4,279						4,279
OPERATING INCOME (LOSS)		(3,996	)		106,872			—			102,876
OTHER INCOME (EXPENSE)
Equity in earnings of subsidiaries - continuing operations		61,474					$	(61,474	)
Interest expense		(38,951	)		(9,352	)					(48,303	)
Loss on extinguishment of debt		(5,634	)								(5,634	)
Other income, net		24,908			4						24,912
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		37,801			97,524			(61,474	)		73,851
Provision (benefit) for income taxes		(9,295	)		36,050						26,755
INCOME FROM CONTINUING OPERATIONS		47,096			61,474			(61,474	)		47,096
DISCONTINUED OPERATIONS:
Equity in earnings of subsidiaries - discontinued operations (net of tax)		(3,214	)					3,214			—
Loss from discontinued operations					(4,860	)					(4,860	)
Benefit for income taxes					(1,646	)					(1,646	)
LOSS FROM DISCONTINUED OPERATIONS		(3,214	)		(3,214	)		3,214			(3,214	)
NET INCOME	$	43,882		$	58,260		$	(58,260	)	$	43,882

F-37

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF FEBRUARY 2, 2008

(In Thousands)	SAKS INCORPORATED (Revised)		GUARANTOR SUBSIDIARIES (Revised)		ELIMINATIONS (Revised)			CONSOLIDATED (Revised)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	85,492	$	15,670				$	101,162
Merchandise inventories				857,173					857,173
Other current assets				124,973					124,973
Deferred income taxes, net				42,827					42,827
TOTAL CURRENT ASSETS		85,492		1,040,643					1,126,135
PROPERTY AND EQUIPMENT, NET				1,092,761					1,092,761
DEFERRED INCOME TAXES, NET		48,621		29,039					77,660
OTHER ASSETS		6,373		47,815					54,188
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES		1,531,979			$	(1,531,979	)
	$	1,672,465	$	2,210,258	$	(1,531,979	)	$	2,350,744
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable			$	176,844				$	176,844
Accrued expenses and other current liabilities	$	10,744		274,208					284,952
Current portion of long-term debt		314,132		5,110					319,242
TOTAL CURRENT LIABILITIES		324,876		456,162					781,038
LONG-TERM DEBT		143,155		61,083					204,238
OTHER LONG-TERM LIABILITIES		—		161,034					161,034
INVESTMENT BY AND ADVANCES FROM PARENT				1,531,979	$	(1,531,979	)
SHAREHOLDERS’ EQUITY		1,204,434							1,204,434
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,672,465	$	2,210,258	$	(1,531,979	)	$	2,350,744

F-38

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED FEBRUARY 2, 2008

(In Thousands)	SAKS INCORPORATED (Revised)			GUARANTOR SUBSIDIARIES (Revised)			ELIMINATIONS (Revised)			CONSOLIDATED (Revised)
OPERATING ACTIVITIES
Net income	$	43,882		$	58,260		$	(58,260	)	$	43,882
Loss from discontinued operations		(3,214	)		(3,214	)		3,214			(3,214	)
Income from continuing operations		47,096			61,474			(61,474	)		47,096
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in earnings of subsidiaries		(61,474	)		—			61,474			—
Depreciation and amortization					131,737						131,737
Equity Compensation		7,724									7,724
Amortization of discount on convertible senior notes		6,404									6,404
Gain on lease termination					(1,669	)					(1,669	)
Gain on sale of building					(1,069	)					(1,069	)
Deferred income taxes		1,568			22,220						23,788
Loss on extinguishment of debt		5,634									5,634
Impairments and dispositions					4,279						4,279
liabilities, net		50,201			(206,726	)					(156,525	)
NET CASH PROVIDED BY OPERATING ACTIVITIES - CONTINUING OPERATIONS		57,153			10,246			—			67,399
NET CASH PROVIDED BY OPERATING ACTIVITIES - DISCONTINUED OPERATIONS					4,080						4,080
NET CASH PROVIDED BY OPERATING ACTIVITIES		57,153			14,326			—			71,479
INVESTING ACTIVITIES
Purchases of property and equipment					(136,726	)					(136,726	)
Proceeds from sale of assets					12,352						12,352
NET CASH USED IN INVESTING ACTIVITIES - CONTINUING OPERATIONS		—			(124,374	)		—			(124,374	)
NET CASH USED IN INVESTING ACTIVITIES - DISCONTINUED OPERATIONS					(4,259	)					(4,259	)
NET CASH USED IN INVESTING ACTIVITIES		—			(128,633	)		—			(128,633	)
FINANCING ACTIVITIES
Intercompany borrowings		(236,319	)		236,319
Payments on long-term debt and capital lease obligations		(263	)		(118,717	)					(118,980	)
Payment of dividend		(7,430	)								(7,430	)
Purchase of common stock		(27,464	)								(27,464	)
Proceeds from issuance of stock		34,307									34,307
Purchases and retirements of common stock		—									—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - CONTINUING OPERATIONS		(237,169	)		117,602			—			(119,567	)
NET CASH USED IN FINANCING ACTIVITIES - DISCONTINUED OPERATIONS					—						—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(237,169	)		117,602			—			(119,567	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(180,016	)		3,295			—			(176,721	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		265,508			12,375						277,883
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	85,492		$	15,670		$	—		$	101,162

F-39

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED FEBRUARY 3, 2007

(In Thousands)	SAKS INCORPORATED (Revised)			GUARANTOR SUBSIDIARIES (Revised)			ELIMINATIONS (Revised)			CONSOLIDATED (Revised)
NET SALES				$	2,888,427					$	2,888,427
Cost of sales					1,780,127						1,780,127
GROSS MARGIN					1,108,300						1,108,300
Selling, general and administrative expenses	$	6,601			792,691						799,292
Other operating expenses		128			311,950						312,078
Store pre-opening costs					408						408
Impairments and dispositions					11,775						11,775
OPERATING LOSS		(6,729	)		(8,524	)		—			(15,253	)
OTHER INCOME (EXPENSE)
Equity in earnings of subsidiaries - continuing operations		7,493					$	(7,493	)
Interest expense		(45,999	)		(9,694	)					(55,693	)
Gain on extinguishment of debt		7									7
Other income, net		28,407									28,407
LOSS FROM CONTINUING OPERATIONS BEFORE BENEFIT FOR INCOME TAXES		(16,821	)		(18,218	)		(7,493	)		(42,532	)
Benefit for income taxes		(9,236	)		(25,711	)					(34,947	)
LOSS FROM CONTINUING OPERATIONS		(7,585	)		7,493			(7,493	)		(7,585	)
DISCONTINUED OPERATIONS:
Equity in earnings of subsidiaries - discontinued operations (net of tax)		57,691						(57,691	)		—
Income from discontinued operations (including gain on disposal of $191,918)		—			188,227						188,227
Provision for income taxes		—			130,536						130,536
INCOME FROM DISCONTINUED OPERATIONS		57,691			57,691			(57,691	)		57,691
NET INCOME	$	50,106		$	65,184		$	(65,184	)	$	50,106

F-40

SAKS INCORPORATED & SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED FEBRUARY 3, 2007

(In Thousands)	SAKS INCORPORATED (Revised)			GUARANTOR SUBSIDIARIES (Revised)			ELIMINATIONS (Revised)			CONSOLIDATED (Revised)
OPERATING ACTIVITIES
Net income	$	50,106		$	65,184		$	(65,184	)	$	50,106
Income from discontinued operations		57,691			57,691			(57,691	)		57,691
Loss from continuing operations		(7,585	)		7,493			(7,493	)		(7,585	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries - continuing operations		(7,493	)					7,493
Depreciation and amortization					125,849						125,849
Equity compensation		52,072									52,072
Amortization of discount on convertible senior notes		6,022									6,022
Excess tax benefit from stock-based compensation		(16,027	)								(16,027	)
Deferred income taxes		2,320			89,384						91,704
Gain on extinguishment of debt		(7	)								(7	)
Impairments and dispositions					11,775						11,775
Changes in operating assets and liabilities, net		10,330			(120,344	)					(110,014	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES - CONTINUING OPERATIONS		39,632			114,157			—			153,789
NET CASH USED IN OPERATING ACTIVITIES - DISCONTINUED OPERATIONS					(98,504	)					(98,504	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		39,632			15,653			—			55,285
INVESTING ACTIVITIES
Purchases of property and equipment					(121,355	)					(121,355	)
Proceeds from sale of assets					171						171
NET CASH USED IN INVESTING ACTIVITIES - CONTINUING OPERATIONS		—			(121,184	)		—			(121,184	)
NET CASH PROVIDED BY INVESTING ACTIVITIES - DISCONTINUED OPERATIONS					1,304,701						1,304,701
NET CASH PROVIDED BY INVESTING ACTIVITIES		—			1,183,517			—			1,183,517
FINANCING ACTIVITIES
Intercompany borrowings		1,195,647			(1,195,647	)					—
Payments on long-term debt		(263	)		(7,108	)					(7,371	)
Excess tax benefit from stock based compensation		16,027									16,027
Payments on long-term debt											—
Cash dividends paid		(1,095,025	)								(1,095,025	)
Proceeds from issuance of common stock		(6,531	)								(6,531	)
Purchases and retirements of common stock		51,730									51,730
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - CONTINUING OPERATIONS		161,585			(1,202,755	)		—			(1,041,170	)
NET CASH USED IN FINANCING ACTIVITIES -DISCONTINUED OPERATIONS					(149	)					(149	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		161,585			(1,202,904	)		—			(1,041,319	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		201,217			(3,734	)		—			197,483
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		46,000			31,312						77,312
LESS: CASH AND CASH EQUIVALENTS INCLUDED IN ASSETS HELD FOR SALE AT END OF YEAR					3,088						3,088
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	247,217		$	30,666		$	—		$	277,883

F-41

SAKS INCORPORATED & SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(Dollars In Thousands)	Year Ended
	January 31, 2009			February 2, 2008			February 3, 2007
Allowance for sales returns, net:
Balance at Beginning of Year	$	7,255		$	6,848		$	8,645
Charged to Costs and Expenses		946,230			961,593			1,003,822
Reserve related to sold Proffitt’s and Parisian businesses		—			—			(1,155	)
Reserve related to sold NDSG business		—			—			(2,335	)
Deductions (A)		(949,247	)		(961,186	)		(1,002,129	)
Balance at End of Year	$	4,238		$	7,255		$	6,848

(A) Deductions consist of actual returns net of related costs and commissions

(Dollars In Thousands)	Year Ended
	January 31, 2009			February 2, 2008			February 3, 2007
Valuation Allowance in Deferred Tax Assets
Balance at Beginning of Year	$	63,837		$	47,592		$	47,104
Charged (Credited) to Income		6,110			(2,957	)		(1,465	)
Charged (Credited) to Shareholders’ Equity		—			19,258			—
Increase (Decrease) to Reserve		(27,757	)		(56	)		1,953
Balance at End of Year	$	42,190		$	63,837		$	47,592

F-42