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Annual Report 2007 VICTORIA’S SECRET

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Multiple spreads for an Annual Report for Victoria's Secret. Features new logo.

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Page 1: Victoria's Secret Annual Report

Annual Report 2007

VICTORIA’SS E C R E T

Page 2: Victoria's Secret Annual Report

Introduction........................................................................Financial Highlights...........................................................Letter to Our Shareholders.................................................Board of Directors and Executive Officers........................Form 10-K...................................................................Description of Business and Business Segments.............Management’s Discussion and Analysis..........................Financial Statements and Supplimentary Data.................Consolidated Balance Sheets...........................................Consolidated Statements of Operations...........................Consolidated Statements of Cash Flows..........................Consolidated Statements of Shareholders’ Equity.............Notes to Consolidated Financial Statements....................

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Table Of Contents

VICTORIA’SS E C R E T

Welcome to the Victoria’s Secret 2007 Annual Report.

We are a leading lingerie, clothing, and swimwear retailor whose mission is to deliver the best quality clothing to our customers across the world.

Our majority shareholder, Limited Brands, has lauched the Victoria’s Secret brand in Europe. Together we have created Victoria’s Secret as a global lingerie brand, bringing our unique combination of beautiful, sexy, and wearable items across the globe. Collectively the Victoria’s Secret brand reaches millions of customers worldwide.

Introduction

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Page 3: Victoria's Secret Annual Report

highlightsourContinuedgrowth

Revenues[$ million]

97.485.974.875.2

58.0

40.345.1

Catalog Revenues[$ million]

187.8165.3146.8

129.3

155.5129.3120.1

41.838.3

34.832.3

31.4

24.724.9

Customers Reached[million]

47.141.4

29.426.3

21.9

12.3

13.5

Advertising Revenues[$ million]

2 3

VICTORIA’SS E C R E T

Page 4: Victoria's Secret Annual Report

Continuedgrowth

Net Income[$ million]

19.8

13.6

3.8

(29.8)(28.9)

17.1

16.2

Operating Cash Flow[$ million]

30.930.9

10.48.9

20.2

(4.4)(9.9)

5.8

5

The Victoria’s Secret segment sells women’s intimate and other apparel, personal care and beauty products and accessories marketed under the Victoria’s Secret and La Senza brand names. Victoria’s Secret merchandise is sold through retail stores and direct response channels (e-commerce and catalogue). Through its e-commerce site, www.VictoriasSecret.com, and catalogue, certain of Victoria’s Secret’s merchandise may be purchasedworldwide. In January 2007, the Company completed its acquisition of La Senza Corporation (“La Senza”) for $600 million. La Senza is a Canadian specialty retailer offering lingerie and sleepwear as well as apparel for girls in the 7-14 year age group. In addition, indepen-dently owned La Senza stores operate in 34 other countries. The acquisition of La Senza supports our objective of enhancing our capabilities to pursue our strategic growth goalsinternationally. The results of La Senza are included in the Victoria’s Secret segment.

highlightsourVICTORIA’SS E C R E T

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Page 5: Victoria's Secret Annual Report

Officer’s ReviewChief Executive

7

2006 was a good year for Limited Brands. A very good year. Our financialresults indicate real progress — sales increased by 10% and operating incomeincreased by 19%. Clearly, this past year’s performance reflects a combinationof skills, including brand builders’ and shopkeepers’ skills, real tactical ability,and execution. We kept our eye on the near-term and the long-term, achievingday-to-day results while building a foundation for sustained growth.

In our business, everything begins and ends with the customer. We haveto keep giving them what they want. To do that, we must be exceptionalshopkeepers and really know our customers.

For 44 years we have grown and evolved. Yet, we remain shopkeepers.Regardless of scale, we run our brands with the insights of a single shopkeeperin a single store. Single-minded focus. Up close and personal. No substitute for it.

I began as a shopkeeper. I am still a shopkeeper. I see the world that way. In onestore. In four thousand. Doesn’t matter. It’s all about knowing the customer, notfrom data or research alone, but knowing her like a friend. Intimately.

Traditional market information is important, but it only confirms what hasalready occurred. Significant, but not an insight to the future...not a substitutefor knowing in real time.

If specialty retail was about technology and systems, it would be easy.Whoever had the biggest, fastest computer would win. But it’s not.Mediocre ideas, executed efficiently and quickly, are still mediocre ideas.

Page 6: Victoria's Secret Annual Report

No, the race will never be won by the technocrats. It will be won by great shopkeep-ers. As, indeed, it always has been. Walt Disney constantly walked his theme parks and would stop to talk to any child about their experience.

Charles Revson would interrupt a board meeting to talk to a woman calling about her nail polish. Ray Kroc ate in McDonald’s every chance he got. Great shopkeepers, keep-ing their priorities straight.

Does anyone doubt Steve Jobs knows his customer? And what of Starbucks’ How-ard Schultz? He recently sent an open letter to top management saying they had to reestablish the small, intimate, critical details that make up the Starbucks’ experience. He worried they were getting lost as the business continued to grow. He wanted them back. Howard didn’t learn that in the office. He learned it in the shop.

I said earlier that our business has evolved for over 40 years. We started with a single brand and an assortment “limited” to sportswear. Today, we are focused primarily on lingerie and beauty, and have distorted our time and resources to categories which are demonstrating significant market opportunity.

Victoria’s Secret is our largest brand. I’m pleased to report that the Victoria’s Secret megabrand surpassed $5 billion in sales in 2006, with nearly $1 billion in operating income. We intend to grow this remarkably powerful brand to $10 billion in sales in five years.

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Page 7: Victoria's Secret Annual Report

As sales have grown, it has become obvious that Victoria’s Secret needs larger-stores. We have tested larger store formats for several years and the formatis achieving very attractive returns. We are, therefore, resizing the averageVictoria’s Secret store by about 50%. In 2007, we will increase square footage by 8–10% through 125 to 140 store projects.

The groundwork for this real estate initiative is laid on a foundation of proven sales growth, category expansion, new segments, the amazing success ofPINK, Beauty growth, and growth in Intimissimi.

The Victoria’s Secret Direct channel (internet and catalogue) had a phenomenal year in 2006, with sales growth of 16%, and a significant increase in operat-ing income. We are supporting the continued growth of the Direct business by investing in expanded distribution center capabilities and upgraded internet and catalogue support technology. The Direct channel is a great medium for the brand and an important part of the 360° access we provide to our customers.

Our acquisition of La Senza adds Canada’s number one lingerie brand toour intimate apparel group and gives us a greater international presence.La Senza has achieved very impressive growth in Canada and 34 othercountries through its franchise operated stores. We have great confidencein La Senza’s management team and look forward to working with them.

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Page 8: Victoria's Secret Annual Report

This is a great time to be a member of the Limited Brands family: · We are an enterprise of shopkeepers· We are building our brands, and incubating new ones· We have focused on attracting and retaining best-in-class talent· And we have invested in the infrastructure and technology necessary to support our growth

The fact that we are growing is the most positive indicator that we arefocusing on the right things. The customer, in the end, is the judge of ourtalent, our brand strategies and our infrastructure investments. They votewith their dollars, and they vote every hour.Much has changed.

We will continue to change, adapt and grow. What will remain constant iswho we are; our values, culture and thinking — an enterprise of shopkeepers,doing our best to know our customers, and always giving them what they want.Best regards,

Leslie H. WexnerChairman and Chief Executive Officer

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Page 9: Victoria's Secret Annual Report

AccountsACCOUNTS CONTENTSReport of Independent AuditorsConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Cash FlowsConsolidated Statements of Shareholders’ Equity

13 14

ManagementBoard

Leslie H. WexnerChief Executive OfficerLeslie Wexner was formally appointed Chief Executive Officer in November of 2004 having served as Interim CEO since July 2004. In this role, she is responsible for leading the continued growth of all Victoria’s Secret businesses. Ms. Wexner spent 5 years at BSkyB and was General Manager of Movies & Pay-Per-View when he left to join Victoria’s Secret. Prior to that she served as Director of Advertising Sales at US Gold and US Living. Ms. Wexner also worked at Channel Four from 1992 to 1996, and heldposts at various advertising agencies including JWT, McCanns, Lowe Howard-Spink and Geers Gross.

Dene StrattonChief Financial OfficerDene Stratton was appointed Chief Financial Officer and a member of the Management Board in January 2005. He is responsible for all aspects of finance, administration, business development and investor relations. Prior to joining Victoria’s Secret he worked at The Limited, as Senior Vice President, Planning & Control at Limited Inc., having held a number of roles within Limited since 1990. He began his career in public accounting with Ernst & Young in Los Angeles.

Olivier SpinerExecutive Vice President of International AffairsOlivier Spiner was appointed as a member of the Management Board and Executive Vice President of International Affairs in November 1999, and is responsible for the Victoria’s Secret corporate activities. Prior to joining Victoria’s Secret he served as Deputy General Manager of The Limited from 1996 and before this, from 1982, he held the positions of Deputy General Manager and Chief Financial Officer at Créativité and Développement.

Oliver Fryer General CounselOliver Fryer was appointed as a member of the Management Board in September 2003. In his role, he is responsible for all of the Victoria’s Secret contractual, legal and business affairs issues. He previously served as Director of Legal and Business Affairs for Victoria’s Secret. Before joining the company in June 2001, Mr. Fryer worked for The Simkins Partnership and for Zenith Entertainment plc, where for several years he was Director of Legal and Business Affairs.

Page 10: Victoria's Secret Annual Report

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and December 26, 2005 (Thousands of Dollars Except Share Data) 2006 2005

AssetsCurrent assets Cash and cash equivalents $127,115 280,159 Accounts receivable, less allowance for doubtful accounts of $55,000 in 2000 and $65,000 in 1999 685,975 1,084,118 Inventories 335,493 408,571 Prepaid expenses and other current assets 431,630 358,804 Total current assets 1,580,213 2,131,652

Property, plant and equipment, net 296,729 318,825

Other assets Cost in excess of acquired net assets, less accumulated amortization of $225,770 in 2000 and $193,947 in 1999 803,189 806,092 Other intangibles, less accumulated amortization of $347,149 in 2000 and $300,632 in 1999 902,893 949,789 Other 245,435 256,990 Total other assets 1,951,517 2,012,871 Total assets $3,828,459 4,463,348

Liabilities and Shareholders’ Equity

Current liabilities Short-term borrowings $228,085 714,669 Trade payables 191,749 284,772 Accrued liabilities 789,128 983,280 Income taxes 30,850 88,606

Total current liabilities 1,239,812 2,071,327

Long-term debt 1,167,838 420,654Deferred liabilities 93,403 92,392 Total liabilities 2,501,053 2,584,373

Shareholders’ equity Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued — — Common stock of $.50 par value. Authorized 600,000,000 shares; issued 209,694,630 shares in 2000 and 1999 104,847 104,847 Additional paid-in capital 464,084 468,329 Deferred compensation (6,889) — Retained earnings 1,583,394 1,764,110 Accumulated other comprehensive earnings (44,718) (32,982) Treasury stock, at cost, 37,253,164 shares in 2000 and 16,710,620 shares in 1999 (773,312) (425,329)

Total shareholders’ equity 1,327,406 1,878,975

Total liabilities and shareholders’ equity $3,828,459 4,463,348

See accompanying notes to consolidated financial statements.

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of Victorias Secret:We have audited the accompanying consolidated balance sheets of Hasbro and subsidiaries (“theCompany”), as of September 30, 2006 and as of September 30, 2005 and the related consolidated statements ofoperations, cash flows and shareholders’ equity for the years then ended which have been prepared on the basisof accounting principles generally accepted in the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting prin-ciples used and significant estimates made by management, as well as evaluating the overall financial statement presen-tation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, thefinancial position of Hasbro and its subsidiaries at September 30, 2006 and September 30, 2004 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

This report, including the opinion, has been prepared for and only for the Company’s members as a body in order to meet the provisions of the listing agreement with the Stock Exchange and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Big Company Auditors IncorporatedChartered Accountants and Registered AuditorsLondon, United KingdomJanuary 18, 2005

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Page 11: Victoria's Secret Annual Report

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flows from operating activities Net earnings (loss) $(144,631) 188,953 206,365 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization of plant and equipment 106,458 103,791 96,991 Other amortization 157,763 173,533 72,208 Deferred income taxes (67,690) (38,675) 1,679 Compensation earned under restricted stock programs 2,754 — — Loss on sale of business units 43,965 — — Acquired in-process research and development — — 20,000 Change in operating assets and liabilities (other than cash and cash equivalents): Decrease (increase) in accounts receivable 395,682 (11,248) (126,842) Decrease (increase) in inventories 69,657 (44,212) (44,606) Increase in prepaid expenses and other current assets (84,006) (26,527) (113,451) (Decrease) increase in trade payables and other current liabilities (292,313) 193,626 17,668 Long-term advances and other (25,083) (147,729) (3,425)

Net cash provided by operating activities 162,556 391,512 126,587

Cash flows from investing activities Additions to property, plant and equipment (125,055) (107,468) (141,950) Investments and acquisitions, net of cash acquired (138,518) (352,417) (667,736) Other 82,863 30,793 16,986

Net cash utilized by investing activities (180,710) (429,092) (792,700) Cash flows from financing activities Proceeds from borrowings with original maturities of more than three months 912,979 460,333 407,377 Repayments of borrowings with original maturities of more than three months(291,779) (308,128) (24,925) Net (repayments) proceeds of other short-term borrowings (341,522) 226,103 271,895 Purchase of common stock (367,548) (237,532) (178,917) Stock option and warrant transactions 2,523 50,358 58,493 Dividends paid (42,494) (45,526) (42,277)

Net cash (utilized) provided by financing activities (127,841) 145,608 491,646

Effect of exchange rate changes on cash (7,049) (5,617) (9,570) (Decrease) increase in cash and cash equivalents (153,044) 102,411 (184,037)

Cash and cash equivalents at beginning of year 280,159 177,748 361,785 Cash and cash equivalents at end of year $127,115 280,159 177,748 Supplemental information Cash paid during the year for Interest $91,180 64,861 25,135 Income taxes $95,975 108,342 128,436

Fiscal Years Ended in December (Thousands of Dollars Except Share Data) 2006 2005 2004

Net revenues $3,787,21 4,232,263 3,304,454Cost of sales 1,673,973 1,698,242 1,366,061

Gross profit 2,113,242 2,534,021 1,938,393

Expenses Amortization 157,763 173,533 72,208 Royalties, research and development 635,366 711,790 424,673 Advertising 452,978 456,978 440,692 Selling, distribution and administration 863,496 799,919 655,938 Restructuring charge 63,951 64,232 — Loss on sale of business units 43,965 — — Acquired in-process research and development — — 20,000

Total expenses 2,217,519 2,206,452 1,613,511 Operating profit (loss) (104,277) 327,569 324,882

Nonoperating (income) expense Interest expense 114,421 69,340 36,111 Other (income) expense, net 7,288 (15,616) (14,707)

Total nonoperating expense 121,709 53,724 21,404 Earnings (loss) before income taxes (225,986) 273,845 303,478

Income taxes (81,355) 84,892 97,113 Net earnings (loss) $(144,631) 188,953 206,365

Per common share Net earnings (loss Basic $ (.82) .97 1.04 Diluted $ (.82) .93 1.00

Cash dividends declared $.21 .24 .21

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONSFiscal Years Ended in December (Thousands of Dollars Except Share Data) 2006 2005 2004

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Page 12: Victoria's Secret Annual Report

ANTICIPATED MONTHLY SALES AND QUARTERLY EARNINGS DATES FOR 2007

Monthly Sales Reporting DatesFebruary 03/08/07March 04/12/07April 05/10/07May 06/07/07June 07/12/07July 08/09/07

August 09/06/07September 10/11/07October 11/08/07

November 12/06/07December 01/10/08

January 02/07/08

Quarterly Earnings Report Dates1st Quarter Earnings 5/24/072nd Quarter Earnings 8/23/073rd Quarter Earnings 11/21/074th Quarter Earnings 2/28/08

Live webcasts of the quarterly earnings conferencecalls can be accessed through our Web sitewww.LimitedBrands.com. Audio replays of both month-ly sales and quarterly earnings conference calls can be accessed through our Web site, www.LimitedBrands.com, or by dialing 1-800-337-6551 followed by theconference call passcode, LTD (or 583).

About This ReportThis annual report is produced with environmentally friendlyprocesses and products. The paper for the cover and Chair-man’s Letter contains 20% post-consumer wasteand the paper for the 10-K is 100% post-consumer waste.The environmental savings from using recycled contentpaper is:· 1,259 fewer trees used· 508,942 fewer gallons of water consumed· 551 million BTUs of energy saved· 59,703 fewer pounds of solid waste generated· 111,701 fewer pounds of atmospheric emissions

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Thousands of Dollars)

See accompanying notes to consolidated financial statements.

Common Stock

Additional Paid-in Capital

Balance, December 28, 1997 $104,849 454,498 — 1,457,495 (3,903) (174,822) 1,838,117Net earnings — — — 206,365 — — 206,365Other comprehensive earnings — — — — (5,722) — (5,722) Comprehensive earnings 200,643Purchase of treasury stock — — — — — (178,917) (178,917)Stock option and warrant transactions — 66,818 — — — 60,195 127,013Dividends declared — — — (42,061) — — (42,061)Balance, December 27, 1998 104,849 521,316 — 1,621,799 (9,625) (293,544) 1,944,795Net earnings — — — 188,953 — — 188,953Other comprehensive earnings — — — — (23,357) — (23,357) Comprehensive earnings 165,596Purchase of treasury stock — — — — — (237,532) (237,532)Stock option and warrant transactions — (52,892) — — — 105,747 52,855Dividends declared — — — (46,642) — — (46,642)Other (2) (95) — — — — (97)Balance, December 26, 1999 104,847 468,329 — 1,764,110 (32,982) (425,329) 1,878,975Net loss — — — (144,631) — — (144,631)Other comprehensive earnings — — — — (11,736) — (11,736) Comprehensive earnings (156,367)Purchase of treasury stock — — — — — (367,548) (367,548)Stock option and warrant transactions — (1,708) — — — 7,406 5,698Restricted stock activity — (2,537) (6,889) — — 12,159 2,733Dividends declared — — — (36,085) — — (36,085)Balance, December 31, 2000 $104,847 464,084 (6,889) 1,583,394 (44,718) (773,312) 1,327,406

Deferred Compensation

Retained Earnings

Accumulated Other

Comprehensive Earnings Treasury Stock

Total Shareholders’

Equity

19 20

Page 13: Victoria's Secret Annual Report

Victoria’s Secret

For more information write to:Investor RelationsLimited Brands56 Kingsland StreetColumbus, Ohio 41212

Tel: +44 58 7333 5821Fax: +44 58 7333 4812

www.victoriassecret.com