SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended February 3, 2001
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ______ to _______

AMES DEPARTMENT STORES, INC.
(Exact Name of Registrant as Specified In its Charter)

DELAWARE 04-2269444
- ------------------------- ------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
Incorporation or Organization)

2418 Main Street, Rocky Hill, Connecticut 06067
- ----------------------------------------- ---------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (860) 257-2000
--------------------------

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 par value NASDAQ
Series B Warrants None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No ___
-----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of March 30, 2001, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $61,549,061 based on the last reported sale
price of the Registrant's Common Stock on the NASDAQ National Market System.

29,393,057 shares of Common Stock were outstanding on March 30, 2001.

Documents Incorporated by Reference: Portions of the Registrant's
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the Registrant's fiscal year are incorporated by reference
in Part III.

Page 1 of 49 pages (including Exhibits) Exhibit Index on page 44

PART I

Certain statements discussed in Item 1 (Business), Item 3 (Legal
Proceedings), Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations), Item 7A (Quantitative and Qualitative
Disclosures About Market Risk) and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements concerning
Management's expectations, strategic objectives, business prospects, anticipated
economic performance and financial condition and other similar matters involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of results to differ
materially from any future results, performance or achievements discussed or
implied by such forward-looking statements. Such risks, uncertainties and other
important factors include, among others: general economic and business
conditions, decreased consumer spending, particularly among those customers who
comprise our primary customer base, increased competition from other discount
retailers, including the major national chains, as well as from merchandise
offerings on the internet, the seasonal nature of our business, severe adverse
weather conditions during the winter months, particularly during the peak
Christmas holiday shopping season, and various other matters, many of which are
beyond the Company's control and other factors as are described at the end of
Item 7 (Management's Discussion and Analysis of Financial Condition and Results
of Operations) of this Form 10-K. Forward-looking statements speak only as of
the date of the document in which they are made. We disclaim any obligation or
undertaking to provide any updates or revisions to any forward-looking statement
to reflect any change in our expectations or any change in events, conditions or
circumstances on which the forward-looking statement is based.

Item 1. Description of Business

Introduction

Ames Department Stores, Inc. is the largest regional discount retailer in
the United States. We currently operate 452 stores in nineteen contiguous states
in the Northeast, Midwest, and Mid-Atlantic regions, as well as the District of
Columbia. Our stores offer a wide range of both brand name and other quality
merchandise for the home and family at prices below those of conventional
department stores and specialty retailers. Our stores are smaller and more
customer friendly than the stores of most competing "big box" retailers,
including the national discount department store chains.

Ames is a Delaware corporation organized in 1962 as a successor to a
business originally founded in 1958. Ames was reorganized in December 1992 under
Chapter 11 of the United States Bankruptcy Code. Its principal executive offices
are located at 2418 Main Street, Rocky Hill, Connecticut, 06067; its telephone
number is (860) 257-2000; and its web site is http://www.AmesStores.com.

The Ames fiscal year ends on the Saturday nearest January 31st. Our fiscal
years ended January 29, 2000 and January 30, 1999, which we refer to as "Fiscal
1999" and "Fiscal 1998," respectively, consisted of fifty-two weeks. Our fiscal
year ended February 3, 2001, which we refer to as "Fiscal 2000", consisted of
fifty-three weeks.

Business Developments

Closing Stores

In November 2000, we announced the planned closing of thirty-two stores.
Thirty-one of the stores were under-performing stores acquired from the former
Hills Stores Company ("Hills"). The other store was closed as a result of the
expiration of its lease. Liquidation sales at these stores began December 31,
2000. All thirty-two stores were closed by the end of March 2001. We recorded a
$139.3 million expense in connection with these closings, including $9.5 million
for inventory write-offs. These charges represent future costs to be paid for
these stores and expenses related to the actual cessation of business in these
locations.

The Hills Acquisition

On November 12, 1998, Ames entered into an agreement for the acquisition of
Hills. On December 31, 1998, we acquired approximately 81.3% of the Hills
outstanding common stock and 74.4% of its outstanding convertible preferred
stock, in each case at a price of $1.50 per share, or an aggregate of $13.7
million. On the same date, we purchased approximately $144.1 million, or
approximately 73.9%, of the $195.0 million of outstanding Hills senior notes at
a price of approximately $700 for each $1,000 principal amount of those notes,
or an aggregate of $100.8 million. Pursuant to the terms of those offers,
holders of Hills shares and senior notes who tendered their securities for
purchase also received a deferred contingent cash right to receive a further
payment out of, and based upon, Hills's ultimate net recovery, if any, related
to a lawsuit brought by Hills in September 1995 against certain of its former
directors.

-2-

In March 1999, we consummated the merger of Hills into Ames. Shares of
Hills's common and convertible preferred stock not previously acquired by us
were automatically converted into the right to receive $1.50 per share (plus a
deferred contingent cash right as discussed above), and the $50.9 million of
outstanding Hills senior notes not previously purchased by us became direct
obligations of Ames.

The total cost of the Hills acquisition was approximately $330.0 million,
inclusive of the approximately $50.9 million of the Hills senior notes that
remained outstanding and $147.8 million of capitalized leasehold and financing
obligations related to Hills. Cash required for the acquisition totaled
approximately $129.0 million. Funds for these purposes were derived from
borrowings under our credit facility.

The acquisition has been recorded under the purchase method of accounting
and, accordingly, the results of operations of Hills are included since the date
of the acquisition in the accompanying consolidated financial statements. The
fair value of tangible assets acquired and liabilities assumed was $568 million
each. The purchase price of $129.0 million was recorded as two components: an
excess of cost over net assets acquired (goodwill) of $70.0 million, which is
being amortized over twenty-five years on a straight-line basis, and beneficial
lease rights of $59.0 million, which is being amortized over the life of the
respective leases (which average approximately twenty-five years).

At the time of the acquisition, Hills operated 155 discount department
stores in twelve states within or contiguous to our existing geographic region.

In February 1999, we began a program to remodel and convert 151 of the
acquired Hills stores to Ames stores. The four remaining Hills stores, as well
as seven Ames stores, were closed because they were in locations that were
either competitive with or under-performing other Hills or Ames stores. The
remodeling and conversion process was completed in September 1999.

The total cost of the remodeling and conversion was approximately $189.1
million and was funded primarily with proceeds from our liquidation of the Hills
merchandise inventories. The $189.1 million cost consists primarily of
expenditures for fixtures, signage, Point-Of-Sale ("POS") systems, training of
employees, and other labor costs, as well as other pre-opening costs.

Under an agreement with us, Gordon Brothers Retail Partners, LLC and The
Nassi Group, LLC were engaged to operate all of the acquired Hills stores and to
conduct inventory liquidation sales at each of those stores prior to its
scheduled remodeling or final closure. These two firms were responsible for
substantially all expenses associated with operating the Hills stores and
liquidating their inventory prior to their closure, including compensation of
all employees and rental payments under store leases. Upon completion of each
sale, they removed all unsold merchandise and turned over the store in "broom
clean" condition. Ames was entitled to retain from the liquidation proceeds a
minimum sum equal to 40% of the initial ticketed retail price of all items of
Hills merchandise on hand and on order as of January 2, 1999, irrespective of
the actual sales proceeds. In addition, Ames was entitled to share in that
portion, if any, of the proceeds from the sale of Hills merchandise in excess of
62% of the aggregate initial retail ticketed price. Proceeds from the sales
during the entire liquidation period exceeded the targeted percentage. We
received approximately $314 million from the liquidation of the Hills
inventories, representing the 40% minimum plus our share of the portion
exceeding the targeted percentage referenced above.

The Acquisition of Caldor Sites

We purchased the leases for nine stores and a distribution center from
Caldor Corporation ("Caldor") during Fiscal 1999 for a total cash purchase price
of $42.8 million. We assumed Caldor's leases for the nine stores and the
distribution center and we acquired all of the store fixtures in eight of the
stores and all racking, sorting systems, and materials handling equipment in the
distribution center.

The Acquisition of Goldblatt's Department Store Sites

In April 2000, the Company consummated its purchase of the leases for seven
stores from Goldblatt's Department Stores, Inc. ("Goldblatt's") for a cash
purchase price of $7.6 million. Six of the stores are located in Chicago,
Illinois and one is in Gary, Indiana.

-3-

Growth Strategy

Since 1994, we have pursued a program to improve our profitability through
vigorous cost containment initiatives, a highly focused approach to
merchandising, and the rationalization of our store base. During this time
period, we acquired and successfully integrated 224 stores, remodeled
eighty-nine of our existing stores, and closed eighty-two stores.

Beginning mid Fiscal 1998, we focused on enhancing our revenues, expanding
the breadth of our regional market, and increasing our penetration of that
market. In addition to our on-going program of store remodeling, we implemented
merchandising and marketing initiatives that in Fiscal 1999 resulted in a 6.2%
increase in same-store sales over Fiscal 1998. At the same time, we embarked on
a program to acquire groups of stores located primarily in states in which we
currently operate or that are contiguous with our existing regional market.

The Caldor, Hills, and Goldblatt's acquisitions were representative of our
growth strategy. The acquisitions significantly increased our revenue and
enabled us to leverage our administrative costs over a far larger operating
base. These acquisitions were particularly opportunistic for Ames, since they
permitted us to open well-maintained store sites in locations that were
complementary to our existing locations. The stores are located primarily in
communities with demographics similar to those of our existing locations. The
acquisitions expanded our selling space by 75.7%, substantially increased our
presence in five states and enabled us to enter five new states in which we
foresee opportunities to add additional stores to increase our market
penetration. The Hills acquisition enabled us to achieve significant economies
of scale.

In November 2000, we redirected our focus to initiatives to pare
unprofitable locations, improve cash flow, and streamline operations. These
preemptive initiatives were adopted to enable us to sustain our growth strategy
and be competitive in a soft retail environment.

Customers

Our customer base consists primarily of working women with families and
senior citizens. They have an average annual household income between $25,000
and $40,000 and their purchasing decisions are determined primarily by a desire
for low prices and shopping convenience. Our merchandise offerings, prices,
store design, and focus on customer service are targeted to meet the needs of
these cost-conscious consumers, who, we believe, are generally underserved by
other large discount retailers. We reinforce our image and drive customer
traffic by employing a "high/low" pricing strategy that is supplemented by
weekly advertising circulars and recurring promotional programs. We believe that
our knowledge of and focus on our target customers have enabled us to develop an
advantage in an increasingly competitive discount-retailing environment.

Merchandising and Customer Service

Our mission is to provide our customers a broad selection of quality
merchandise at prices they can afford in a shopping environment that is friendly
and convenient. Our merchandising strategy is targeted to our customer base, and
we believe this strategy has enabled us to develop a distinct competitive
advantage in serving our targeted customer base.

Ames sells merchandise in three major categories: home lines, softlines and
hardlines. The following table sets forth the types of merchandise offered
within each of these three categories and the percentage of our total sales
(excluding leased department sales) in Fiscal 2000 attributable to each
category:

-4-

Home Lines 41% Softlines 31% Hardlines 28%
- -------------- ------------- -------------
o Domestics, such as sheets, o Women's apparel, consisting o Health and beauty care
towels and bath accessories primarily of non-fashion basic products
items, sportswear and intimates
o Window treatments o Toys
o Men's workwear, denims,
o Home entertainment fleece goods, hosiery and o Hardware and paints
products underwear
o Automotive supplies
o Small appliances o Children's apparel
o Sporting goods
o Housewares o Jewelry
o Stationery
o Ready-to-assemble
furniture o Seasonal items, such as
Christmas and other
o Patio furniture holiday decorations.

o Crafts

In addition, all Ames stores include a shoe department operated by a
licensee that accounted for approximately 3.8% of our total sales in Fiscal
2000.

A significant portion of our net sales is derived from the sale of products
that bear readily-recognized brand names, including Cannon(R), Coleman(R),
Dickies(R), Fisher-Price(R), Fruit of the Loom(R), General Electric(R),
Hanes(R), Hasbro(R)Toy, Kodak(R), Magnavox(R), Mattel(R), Proctor-Silex(R),
Rider(R), Rubbermaid(R), Sunbeam(R), Timex(R) and Wrangler(R).

Women's apparel is the only product line that accounts for more than 10% of
our sales, generating approximately 12.0% of our Fiscal 2000 net sales. We carry
primarily staple, casual items of basic women's apparel, including outerwear,
sportswear, and intimates, with a particularly broad selection of merchandise in
"plus" sizes for the larger woman. Similarly, our selection of men's apparel is
limited to staple, non-fashion items that women frequently purchase for the men
in their families and that are most commonly sought by men within our target
customer base. We believe that our focus on basic apparel limits our exposure to
risks associated with changing fashion trends.

Our hardlines merchandise also consists primarily of products that are most
frequently purchased by women, such as health and beauty care products, toys,
stationery, gift wrap and holiday decorations. We concentrate our hardware
offerings on basic home repair and maintenance items, many of which are
purchased by women. Although we sell a number of hardware items and automotive
supplies that are more commonly purchased by men, our offerings of these
products are more limited than those of other large discount retailers.

Our home lines, which also consist primarily of products that are purchased
by women, include a "Crafts and More" department that features the largest
selection of crafts offered by any non-specialty retailer in the United States.
The crafts department has become a destination shop for Ames customers, and
accounted for approximately 3.1% of our Fiscal 2000 net sales.

In certain of our markets, we are able to customize or localize our
merchandising. We tailor our selection of discount products and customize each
store based on its demographics and purchasing patterns of our diverse customer
base. In our stores located in college towns, we offer a larger assortment of
the items most frequently desired by students for their dormitory rooms, as well
as stationery supplies, jeans, sweatshirts, athletic apparel, and similar
products. In our stores located in resort or vacation communities we feature
broader selections of such seasonal items as beach and camping supplies, and we
continue to stock those items throughout the duration of the related vacation
season. This micro-marketing strategy drives customer traffic to those stores
and develops and improves the loyalty of their customer base.

In addition to offering a merchandise selection that is specifically
tailored to the needs and preferences of our target customers, we strive to make
each customer's shopping experience pleasant and convenient. We offer an
extensive layaway program that accounted for approximately 5.6% of our Fiscal
2000 net sales. We have a fully staffed customer service desk at a location away
from the most heavily trafficked areas in the store to afford customers greater
privacy. We also implemented an "A+ Customer Service Program" which encourages
our store personnel to enhance customer satisfaction.

-5-

Marketing

We use a "high/low" promotional pricing strategy to attract customers to
our stores by offering greater discounts on selected items or categories of
merchandise while maintaining our regular discount prices on all other
merchandise. The "high/low" strategy also provides us greater control over
margins and inventory levels by allowing us to quickly adjust the number and mix
of deeply discounted items and increase or decrease our average pricing
discount. We are also able to tailor our selection of more heavily discounted
products to customer demographics.

Our marketing theme, "Bargains by the Bagful(R)," is designed to emphasize
our value pricing. We support the "Bargains by the Bagful(R)" theme through
several promotional programs, including "Special Buy" and "55Gold(R) Savings"
programs, as well as periodic event sales:

o Our "Special Buy" program allows us to offer selected items of
recognizable brand name and other quality merchandise to consumers at
deep discounts, thereby providing the customer with readily
recognizable values. "Special Buy" items are generally not actively
advertised. Instead, we use special signage and fixtures to make
"Special Buy" merchandise easily recognizable to customers, who are
often drawn to our stores as a result of their desire to discover the
latest "Special Buy" offerings. We are able to offer these deep
discounts because of our ability to react quickly to buying
opportunities for closeout and end-of-run products that are popular
with our customers. Apparel comprises approximately 95% of the
merchandise offered through our "Special Buy" program, although
"Special Buy" items also are offered in the hardlines and home lines
product categories.

o Our "55Gold(R) Savings" program provides a 10% discount on all
merchandise, including sale and "Special Buy" items, for consumers
aged fifty-five and older who present a "55Gold(R) Savings" card when
shopping on Tuesdays. Since its inception in late 1994, on average,
Tuesday has moved from being the lowest to the highest selling day in
the week. During Fiscal 2000, the "55Gold(R) Savings" program
generated sales of $413 million compared to $336 million in Fiscal
1999 and the number of active cardholders increased to 2.5 million
from 2.3 million over the same period.

o Our periodic "event" sales are heavily advertised, vendor-supported
promotions of selected categories of merchandise as well as promotions
that are intended to capitalize on seasonal shopping trends. Examples
include our "Baby Sale," "Housewares Spectacular," "Patio Plaza,"
"Shoe Sale" and "Underwear Fair." Our most successful special sale
promotions include the "Amazing March Sale," the October "Home Sale"
and the November "Ames Biggest Toy Sale," which is designed to attract
Christmas shoppers. Because of the substantial increase in unit volume
generated by these "event" sales, they are supported by many of our
major vendors either through gross margin allowances or cooperative
advertising.

We reinforce Ames's "Bargains by the Bagful(R)" theme through extensive use
of weekly full-color newspaper circulars. We distributed fifty-three newspaper
circulars in Fiscal 2000, with an average weekly circulation to 16.4 million
households. These circulars generated approximately 48% of our net sales in
Fiscal 2000.

Store Layout and Design

Ames stores, which range from 26,736 to 85,743 square feet of selling space
and average approximately 55,000 square feet of selling space, are smaller and,
we believe, more customer friendly than those of most competing big box
retailers, particularly the national discount store chains. Their smaller size
appeals to Ames's target customer base of working mothers and senior citizens,
who prefer an easy-to-shop, convenient store environment. The prototype Ames
store features an open floor plan and wide aisles that allow customers to see
the entire store at a glance. Bright, attractive signage and "soft" corners
highlight key departments and make finding the right department easy. The home
lines department, our largest merchandise category, typically spans the back
wall of the store, with promotional pallet and bin displays bordering the main
aisle. Promotional items are placed throughout the store near similar
merchandise.

-6-

Store Locations

We currently operate 452 stores located in the Northeast, Midwest and
Mid-Atlantic regions. The following table sets forth, as of March 31, 2001, the
locations of our existing Ames stores:

Number of Stores
----------------
Ames
----
Pennsylvania 98
New York 93
Ohio 44
Massachusetts 34
Maryland 24
Maine 23
Connecticut 22
New Hampshire 20
New Jersey 16
Virginia 14
Illinois 13
West Virginia 13
Vermont 12
Rhode Island 8
Indiana 7
Delaware 5
Tennessee 3
District of Columbia 1
Kentucky 1
North Carolina 1
----
Total: 452
====

Purchasing

We buy merchandise from more than 3,250 vendors, approximately 88% of whom
are located in the United States. Merchandise is purchased centrally for all
stores by buyers who are based at Ames headquarters. No single supplier
accounted for more than 4% of our purchases in Fiscal 2000. Although we have not
had problems to date, the continued availability of merchandise is likely to
depend on our ability to meet our sales and margin plans in the coming months.

We work actively with our vendors to reduce costs and improve the
efficiency of our supply chain. Nearly 2,300 vendors participate in our
electronic ordering and invoicing program.

Distribution

We operate distribution centers in Leesport, Pennsylvania; Mansfield,
Massachusetts; Columbus, Ohio; and Westfield, Massachusetts, which aggregate
approximately 3.4 million square feet. Merchandise is shipped by vendors either
directly to our stores or to our distribution centers, which then make
deliveries to the stores using our own fleet of trucks.

Management Information Systems

In 1998, we invested approximately $35.0 million in hardware, software, and
communications equipment to automate our store operations. This investment
included new point-of-sale devices, office equipment to automate the office
functions at each store as well as equipment to improve the receipt and stocking
of merchandise at the stores. In 1999, we invested approximately $20.4 million
in POS related technology and equipment for the stores opened during the fiscal
year. In 2000, we invested approximately $26.6 million in technology and
equipment.

In June 1999, we announced a five-year, strategic outsourcing agreement
with IBM to support core information technology systems for the corporate office
and the stores. Under the agreement, IBM Global Services is responsible for all
data center operations and support for substantially all information systems
equipment.

-7-

We developed and implemented a target marketing tool that has enabled us to
evaluate and use customer information derived from our "55Gold(R) Savings"
program to enhance our ability to selectively market to these customer groups.
This marketing vehicle, which was fully implemented in January 2000, has enabled
us to perform direct mailings and identify customers with cross-shop marketing
opportunities.

In January 2000, we implemented a Data Warehouse system acquired from
Retek. This system supplies the merchandising and allocation divisions with
information on our inventory, selling, and vendor performance at the individual
SKU and store level of detail, and provides new and better views of critical
information in substantially less time than before, allowing quicker and better
informed merchandising decisions.

In June 2000, we implemented financial systems developed by Oracle
Corporation. These financial systems provide us with an integrated solution for
much of our financial information with significantly enhanced reporting and
analytical capabilities.

Competition

We operate in an extremely competitive environment. Many of our stores are
located in smaller communities and, in some cases, are the largest non-food
retail store in their market area. We compete, however, with many smaller stores
offering a similar range of products. Although Ames is the largest regional
discount retailer in the United States, we are still considerably smaller in
terms of our total number of stores, sales and earnings than the three leading
national chains: Wal-Mart, Kmart and Target Stores. Each of these chains, as
well as other regional operators, currently operates stores within our regional
market and competes with us for customers and potential store locations. We
anticipate a further increase in competition from these national discount store
chains.

Our merchandising focus is primarily directed to consumers who, we believe,
are underserved by the major national chains. Although this approach, combined
with our smaller store size, has enabled us to compete effectively with these
chains and operate profitably in proximity to their stores, we remain vulnerable
to the marketing power and high level of consumer recognition of the major
national discount chains.

Seasonality

Our business is seasonal in nature, with a large portion of our net sales
occurring in the second half of our fiscal year as a result of the
back-to-school and Christmas shopping seasons. Net sales are highest in the last
fiscal quarter (34% of our annual net sales in Fiscal 2000). The demand for
working capital is heaviest in May and from August through November, when
sufficient merchandise must be purchased for the spring, back-to-school, and
Christmas seasons, respectively.

Employees

As of March 7, 2001, we employed approximately 32,700 people. Approximately
29,000 of our employees work in various capacities within our stores,
approximately 2,700 are employed in our distribution centers and the balance is
based at our corporate and regional offices. With the exception of approximately
1,850 employees at our distribution centers who are covered by collective
bargaining agreements that expire at various times from April 2002 to December
2003, none of our employees is represented by a union.

Patents, Trademarks and Licenses

The mark "Ames" is registered with the United States Patent and Trademark
Office. We consider this mark and the associated name recognition to be valuable
to our business. We have a number of other trademarks, trade names, and service
marks including "Bargains by the Bagful, (R)" "Crafts & More, (R)" and
"Pawsitively Pets. (R)" Although we consider these additional marks and licenses
to be valuable in the aggregate, none of them individually is currently
considered to have a material impact on our business.

Item 2. Properties.

As of March 31, 2001, the Company's 452 operating stores covered a total of
approximately 31.0 million square feet. The average store size is approximately
68,700 square feet, of which approximately 80% is selling area.

-8-

The construction of one store, located in Monroeville, Pennsylvania, was
financed with an industrial development bond. Ames has an option to purchase
this location at nominal cost at the expiration of the lease term in May 2003.
Ames owns the building and leases the land occupied by the store in Mercerville,
New Jersey. The land and buildings for five other store locations are owned by
Ames. Ames leases the remainder of its stores with leases whose terms expire at
various times between 2001 and 2026. The leases generally have one or more
renewal options, typically permitting an extension for at least five years. In
addition, the leases generally provide for fixed annual rentals, payment of
certain taxes, insurance, and other charges, and additional rentals based on a
percentage of sales in excess of certain fixed amounts. Most of the fixtures and
equipment in the former Hills stores are leased. Except for vendor-owned
greeting card equipment and leased shoe department equipment, Ames owns the
fixtures and equipment in its other stores, some of which is subject to various
financing arrangements.

Ames warehouse and distribution facilities in Leesport, Pennsylvania and
Mansfield, Massachusetts are owned by the Company and occupy approximately 1.7
million square feet in the aggregate. The warehouse and distribution facility in
Westfield, Massachusetts is a leased property that comprises approximately
649,000 square feet. The warehouse and distribution facility in Columbus, Ohio,
a leased property, is approximately 1.1 million square feet.

Ames leases approximately 386,000 square feet of space in Rochester, New
York under a lease expiring on December 31, 2007, with two ten-year renewal
options. These premises have been subleased to an unaffiliated tenant for the
remainder of the lease term.

Ames owns and occupies its 225,000 square foot corporate office in Rocky
Hill, Connecticut. Ames has a lease for 11,000 square feet for its
plan-o-gramming facility in Rocky Hill, which expires in November 2006, and a
lease, which expires in April 2006, for a 33,000 square foot in-house
photography studio and print shop in Rocky Hill.

Item 3. Legal Proceedings.

On December 15, 1998, a class action complaint was filed in the United
States District Court for the District of Connecticut entitled Edmond Smoot, III
and Yousef S.A. Syed, Individually and on Behalf of All Others Similarly
Situated v. Ames Department Stores, Inc. The Complaint alleged that Ames
violated the Fair Labor Standards Act and state laws in those states in which it
does business by failing to pay Smoot, Syed, and other similarly situated
Assistant Managers time and one-half their regular rates of pay for hours worked
in excess of 40 hours a week. The allegations are similar to a previous class
action lawsuit entitled Colleen Austin, on Behalf of Herself and Others
Similarly Situated v. Ames Department Stores, Inc. et.al., as reported in the
Company's Form 10-K for the fiscal year ended January 29, 2000. The Company
settled the Austin class action lawsuit as well as other similar lawsuits that
were filed in 1995 and 1996, as reported in the Company's Form 10K for the
fiscal year ended January 29, 2000. The alleged class the current lawsuit
attempts to represent is those Assistant Managers who did not opt-in to the
settlement of the Austin complaint, those who opted in and continued to work for
Ames, and those who worked for Ames as an Assistant Manager after August 19,
1998, but who are not otherwise covered by the previous categories. Ames filed
an answer in the case in which it denied liability on the basis that Smoot and
Syed and other similarly situated Assistant managers were exempt employees and,
thus, not entitled to overtime pay. On November 14, 2000, the Court gave
preliminary approval to a class action settlement that had been reached by the
parties. Notice of the settlement and Fairness Hearing for final approval of the
settlement was mailed to class members. The deadline for filing objections to
the settlement has passed and no objections to the settlement were filed by
class members. The Fairness Hearing will be held on April 30, 2001. The
settlement, if approved, will require an evidentiary hearing on the proper
classification of the Assistant Manager position. The total cost of the
settlement to the Company will depend upon the outcome of the evidentiary
hearing. In the event the Company prevails, the total cost to the Company will
be $1 million dollars, inclusive of attorney's fees. If the plaintiffs prevail
at the evidentiary hearing, the cost to the Company will be $3 million dollars,
exclusive of attorney's fees. A date has not been set for the evidentiary
hearing.

Other Matters

Ames is party to various claims and legal proceedings covering a wide range
of matters that arise in the ordinary course of its business. Ames believes that
its probable liability as to these matters will not have a material adverse
effect on its consolidated financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted during the fourth quarter of Fiscal 2000 to
a vote of security holders, through the solicitation of proxies or otherwise.

-9-

PART II

Item 5. Market for the Registrant's Common Stock and Related Matters
Concerning Security Holders.

Our common stock is traded on the NASDAQ National Market System under the
symbol "AMES." The following table provides the high and low sale prices for our
common stock as reported on NASDAQ for the fiscal quarterly periods indicated
below. These prices do not include retail markups, markdowns or commissions.

Fiscal 2000 Fiscal 1999
----------------------------- ------------------------
Low High Low High
--- ---- --- ----
1st Quarter $ 13.63 $ 29.38 $ 25.38 $ 38.75
2nd Quarter 6.25 19.06 34.81 48.88
3rd Quarter 3.63 8.38 27.63 42
4th Quarter 0.44 6.34 20.75 34.92

On March 30, 2001, there were approximately 6,200 holders of record of the
common stock. On that date, the reported closing sale price of our common stock
was $2.09.

We paid no quarterly dividends to the holders of our common stock during
these periods. Dividends cannot be declared under the terms of our credit
facility. Any future determination to pay cash dividends will be at the
discretion of the board of directors and will be dependent upon our financial
condition, operating results, capital requirements, and such other factors as
the board of directors deems relevant.

Item 6. Selected Financial Data.

The following selected financial data of Ames should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as the Consolidated Financial Statements and related Notes
appearing elsewhere in this annual report on Form 10-K.

(In millions, except per share data)

Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998 Jan. 25, 1997
------------ ------------- -------------- -------------- -------------
(b) (b)
Net sales (a)........................ $3,953.6 $3,836.9 $2,498.6 $2,225.5 $2,155.3
Net (loss) income.................. (240.6)(c) 17.1(d) 33.8(e) 34.5(f) 17.3(g)
Basic net (loss) income per
common share..................... (8.19)(c) 0.62(d) 1.47(e) 1.59(f) 0.85(g)
Diluted net (loss) income per
common share..................... (8.19)(c) 0.62(d) 1.40(e) 1.46(f) 0.79(g)(h)
Total assets........................ 1,995.7 1,975.3 1,483.4 610.0 536.8
Long-term debt and capital
leases............................... 771.4 602.2 287.7 35.7 38.2

(a) Net sales for fiscal years ended February 3, 2001 and January 29, 2000
reflect the change in accounting for layaway sales adopted pursuant to
SAB 101 (see Note 1 to the Consolidated Financial Statements) and net
sales for fiscal years ended January 30, 1999, January 31, 1998, and
January 25, 1997 reflect adjustments due to the effect of recording
promotional coupons issued by Ames as markdowns, which conforms to the
current treatment for coupon accounting.
(b) Fiscal years ended February 3, 2001 and January 31, 1998 consisted of
fifty-three weeks; all other years presented consisted of fifty-two
weeks.
(c) Includes charges of $139.3 million for the costs associated with the
closing of thirty-two stores, including a $9.5 million charge for
inventory impairment, and an extraordinary loss, net of tax, of $7.0
million for the early extinguishment of debt.
(d) Includes cumulative effect adjustment for change in accounting for
layaway sales of $1.1 million, net of $0.6 million tax benefit, and
the recognition of approximately $38 million in tax benefits.
(e) Includes charges of $8.2 million for the costs associated with the
closing of seven stores.
(f) Includes charges of $1.6 million for the costs associated with the
closing of two stores.
(g) Includes charges of $9.7 million for the costs associated with the
closing of thirteen stores and an extraordinary loss, net of tax, of
$1.4 million for the early extinguishment of debt.
(h) Net (loss) income per common share has been restated to conform to the
requirements of Statement of Financial Accounting Standards No. 128
"Earnings per Share."

-10-

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related Notes appearing elsewhere in
this annual report on Form 10-K.

Results of Operations

Fiscal 2000 Compared to Fiscal 1999

The following table illustrates the consolidated results of operations for
the fifty-three weeks ended February 3, 2001, as compared to the consolidated
results of operations for the fifty-two weeks ended January 29, 2000.

Fiscal Fiscal Percentage
2000 1999 Change
-------------- ------------- --------------
(In millions, except per share amounts)
Total net sales $3,953.6 $3,836.8 3.0%
Leased department and other income 46.4 41.7 11.3%
-------------- -------------
Total revenue 4,000.0 3,878.5 3.1%
Costs and expenses:
Cost of merchandise sold 2,932.2 2,715.4 8.0%
Selling, general, and administrative expense 1,058.7 1,068.2 (1.0)%
Depreciation and amortization expense, net 79.7 65.5 21.7%
Interest and debt expense, net 88.0 60.8 44.7%
Store closing charge 129.8 - 100%
-------------- -------------
Loss before income taxes (288.4) (31.4)
Income tax benefit 54.8 49.6
-------------- -------------
(Loss) income before cumulative effect adjustment (233.6) 18.2
Cumulative effect adjustment, net of tax - (1.1)
-------------- -------------
(Loss) income before extraordinary item (233.6) 17.1
Extraordinary item, net of tax (7.0) -
============== =============
Net (loss) income $(240.6) $17.1
============== =============

The consolidated results of operations for Fiscal 1999 include the results
of the former Hills store during the period they were operated by professional
liquidators under an agency agreement (see detailed discussion below under
"Fiscal 1999 Compared to Fiscal 1998").

During Fiscal 2000, beginning in early spring, our business was affected by
a number of economic conditions. With higher gasoline prices leading the way,
our customers' disposable income levels were reduced, affecting their purchasing
power. This, coupled with a cold and wet spring, resulted in lower than forecast
sales. A cool summer, continued high gasoline prices, and an economic slowdown
later in the year further affected our sales.

As the economy continued to slow in the third quarter, we reacted
decisively with a focus on reducing inventories for the fall and Holiday season,
curtailing selling, general, and administrative expenses, limiting capital
expenditures, and reviewing our store base to ensure that we closed all stores
whose closure would result in a net cash flow improvement.

The increases in net sales and leased department and other income in Fiscal
2000 compared to Fiscal 1999 are primarily attributable to the net addition of
twenty-four new stores during the year, partially offset by a 2.1% decrease in
same store sales.

-11-

Gross margin decreased $100.0 million in Fiscal 2000 compared to Fiscal
1999. Gross margin as a percentage of sales decreased from 29.2% in Fiscal 1999
to 25.8% in Fiscal 2000. The decrease is primarily attributable to higher
markdowns and a reduction in the vendor allowances received in Fiscal 2000 when
compared to Fiscal 1999 when we opened 163 new stores. We incurred higher
markdowns in 2000 than in 1999 resulting from significantly higher seasonal
clearance activities in the first half of 2000.

The decrease in selling, general, and administrative expenses during Fiscal
2000 compared to Fiscal 1999 was primarily a result of a decrease in pre-opening
expenses partially offset by a full year of operating expenses in the converted
former Hills stores. Selling, general, and administrative expenses decreased as
a percentage of sales from 27.8% in Fiscal 1999 to 26.8% in Fiscal 2000.

The increase in depreciation and amortization expense during Fiscal 2000
compared to Fiscal 1999 resulted primarily from a full year's depreciation and
amortization of the fixed assets and beneficial lease rights acquired from Hills
in Fiscal 2000 compared to less than a full year's depreciation and amortization
in Fiscal 1999.

The increase in interest expense in Fiscal 2000 is mainly attributable to a
higher level of borrowings under our revolving credit facility as well as a full
year of interest expense associated with the Ames Senior Notes issued in April
1999.

The $129.8 million store closing charge is related to the store closings
previously announced, as described below. We recorded an extraordinary charge of
$7.0 million in Fiscal 2000 for the write-off of deferred financing costs and
other exit expenses associated with the early termination of our prior revolving
credit facility.

We recorded a consolidated income tax benefit of $54.8 million in Fiscal
2000 compared to $49.6 million in Fiscal 1999. The increase is primarily a
result of our Fiscal 2000 operating loss partially offset by an increase in the
valuation allowance recorded against certain deferred tax assets. See Note 8 to
the Consolidated Financial Statements for additional information.

Store Closing Charges

On November 9, 2000, we announced the planned closing of thirty-two stores.
All but one of the stores were under-performing stores that we acquired in the
Hills acquisition in December 1998. The other store was closed as a result of
the expiration of its lease. In connection with the closings, we recorded
charges of $139.3 million, including a $9.5 million charge for the impairment of
inventory classified as part of cost of merchandise sold. The stores were closed
during the first quarter of 2001.

The following items represent the major components of the total charges
recorded in connection with the store closings:

Item Charge
---------------
(in thousands)
Lease costs $ 88,815
Net fixed asset write-down 29,307
Other occupancy costs 9,101
Severance costs 2,583
---------------
Store closing charge 129,806
Inventory write-down 9,453
---------------
Total charges $139,259
===============

The lease and other occupancy costs provided for in the store closing
charge include all projected occupancy costs from date of closing until
estimated lease disposition date.

Fixed assets associated with the closing of stores were reviewed to
determine whether their recorded values had been diminished. The review of the
closed stores resulted in a write-down of $29.3 million which includes $19.7
million related to fixtures, equipment, and leasehold improvements, and $9.6
million related to beneficial lease rights.

During Fiscal 2000 and Fiscal 1999, with respect to the thirty-two stores,
we recorded net sales of $205.0 million and $147.7 million, respectively,
exclusive of the period when the thirty-one former Hills stores were operating
under the "Hills" name. For the same years, the pre-tax operating loss for the
thirty-two stores was $20.4 million and $12.9 million, respectively.

-12-

We expect to incur substantially all of the charges included in the reserve
except the lease and other occupancy costs in the first quarter of the fiscal
year ending February 2, 2002. Lease and other related occupancy costs are
expected to be paid over the terms of the leases. We expect to fund these costs
with cash from operations. We believe closing these under-performing stores will
improve profitability.

Fiscal 1999 Compared to Fiscal 1998

On December 31, 1998, we acquired approximately 81.3% of the outstanding
voting stock of Hills Stores Company. Accordingly, the operations of Hills and
its subsidiaries during the month of January 1999 are included in our
consolidated results of operations for Fiscal 1998.

During Fiscal 1999, the inventory in the 155 former Hills stores was
liquidated, and 151 stores were remodeled and opened as Ames stores. This
process was completed in September 1999. During the liquidation period,
professional liquidators operated the former Hills stores under an agency
agreement with Ames. Ames received a minimum guaranteed amount of 40% of the
initial ticketed retail price of the inventory sold and had the potential to
receive a greater return if the sale proceeds exceeded a specified percentage of
retail value. For financial reporting purposes in the charts that follow, Hills
net sales represent the actual sale proceeds from the merchandise liquidation
sales, its cost of merchandise sold represents the cost of merchandise sold as
adjusted for the guaranteed return amount, and its selling, general, and
administrative expenses include the portion of those proceeds that were to be
paid to the liquidators.

Upon completion of the liquidation and remodeling, the Hills stores were
reopened and participated in grand opening promotions. Consequently, we incurred
higher than normal pre-opening and promotion expenses in Fiscal 1999.

Because of the liquidation activity, the remodeling activity, and the large
volume of grand openings with their associated expenses, the consolidated
operating results are not representative of those of a retailer operating in the
ordinary course of business and are not directly comparable to previously
published Ames results exclusive of Hills.

Fiscal
1998 Fiscal 1999
---- --------------------------------------------------------------------------
Layaway
Ames Ames Hills Other Adj. Total
(In millions)
Total net sales $2,386.5 $3,465.6 $375.6 $-- $(4.4) $3,836.8
Leased department and
other income.............. 29.2 39.1 2.6 -- -- 41.7
--------------- ------------ ----------- ---------- ------------ ------------
Total revenue 2,415.7 3,504.7 378.2 -- (4.4) 3,878.5
Costs and expenses:
Cost of merchandise sold 1,711.3 2,467.8 251.2 -- (3.6) 2,715.4
Selling, general, and
administrative expense 606.9 838.7 153.0 76.5 -- 1,068.2
Depreciation and
amortization expense, net 11.3 49.1 11.1 5.3 -- 65.5
Interest and debt expense,
net 11.4 54.1 4.1 2.6 -- 60.8

--------------- ------------ ----------- ---------- ------------ ------------
Income (loss) before income
taxes............. 74.8 95.0 (41.2) (84.4) (0.8) (31.4)
Income tax (provision)
benefit..................... (26.7) (34.2) 14.8 68.7 0.3 49.6
--------------- ------------ ----------- ---------- ------------ ------------
Income (loss) before
cumulative effect adj. 48.1 60.8 (26.4) (15.7) (0.5) 18.2
Cumulative effect
adjustment, net of tax -- -- -- -- (1.1) (1.1)
--------------- ------------ ----------- ---------- ------------ ------------
Net income (loss) $48.1 $60.8 $(26.4) $(15.7) $(1.6) $17.1
=============== ============ =========== ========== ============ ============

-13-

The "Ames" column for Fiscal 1998 (above) represents the results of the
Ames store base excluding (a) the results of operations for the Hills stores
acquired as of December 31, 1998 and (b) other costs and charges related to the
Hills acquisition. Including the effect of the Hills stores and other costs
related to the acquisition, we recorded consolidated net income of $33.8 million
for the fifty-two weeks ended January 30, 1999.

The "Ames" column for Fiscal 1999 (above) represents (a) the results of the
Ames store base, (b) the results of the former Hills stores after their
conversion to Ames stores and (c) certain expenses associated with the
acquisition of Hills, including the interest expense on the acquired Hills
senior notes and a pro rata share of the amortization of the goodwill recorded
in connection with the acquisition.

The "Hills" column for Fiscal 1999 (above) represents (a) the results of
operations for the Hills stores during the period that these stores were
operated pursuant to an agency agreement, including depreciation and interest
expense directly associated with such stores and (b) Hills corporate overhead
expenses, principally the Canton, Massachusetts's corporate facility (see Note 2
to the accompanying Consolidated Financial Statements for further discussion of
the agency agreement accounting).

The "Other" column for Fiscal 1999 (above) represents expenses incurred
during the period of remodeling the Hills stores (i.e., pre-opening expenses
incurred during the conversion or "dark" period) as well as certain other
expenses and tax benefits.

The above "Layaway Adj." column represents the impact of the change in the
method of accounting for layaway sales. We adopted the change in accounting for
layaway sales in the fourth quarter of Fiscal 1999 in consideration of Staff
Accounting Bulletin No. 101 "Revenue Recognition" issued by the staff of the
Securities and Exchange Commission in December 1999.

The liquidation and remodeling activity in the former Hills stores distorts
any direct comparison of the principal components of Ames consolidated results
for Fiscal 1999 and Fiscal 1998 and prior years. Accordingly, in the discussion
that follows, Ames net sales, gross margin, selling, general, and administrative
expenses, and its leased department and other income for Fiscal 1999 and Fiscal
1998 will be compared excluding the pre-conversion Hills results and other
charges. The comparison of depreciation and amortization expense as well as
interest and debt expense will be on a consolidated basis.

The $1.1 billion increase in net sales in Fiscal 1999 was due primarily to
the sales contribution of the former Hills stores after conversion to the Ames
format and 6.2% growth in same store sales. We experienced strong increases in
our Ladies Sportswear, Toys and Home Entertainment departments.

A substantial portion of the $9.9 million increase in leased department and
other income in Fiscal 1999 resulted from additional leased sales originating in
the former Hills stores, as well as an increase in layaway fees, also
originating in the former Hills stores.

Gross margin increased $322.6 million in Fiscal 1999 compared to Fiscal
1998. The increase is primarily attributable to the inclusion of the former
Hills stores and an increase in the gross margin rate from 28.3% to 28.8% in
Fiscal 1999. The gross margin rate in Fiscal 1999 benefited from lower
markdowns.

The $231.8 million increase in selling, general, and administrative
expenses in Fiscal 1999 was primarily a result of the addition of the former
Hills stores. Selling, general, and administrative expenses decreased as a
percentage of net sales from 25.4% in Fiscal 1998 to 24.2% in Fiscal 1999. The
decrease resulted from the 6.2% comparable store sales gain and improved
efficiencies of scale due to the Hills acquisition.

Depreciation and amortization expense increased $51.0 million in Fiscal
1999 compared to Fiscal 1998. The increase resulted from additional depreciation
and amortization of the former Hills fixed assets and beneficial lease rights
and the amortization of goodwill. The beneficial lease rights and goodwill
related to the Hills acquisition are being amortized on a straight-line basis
over the term of the underlying lease (twenty-five years on average) for the
lease rights and twenty-five years for goodwill. The amortization of the excess
of our revalued net assets over equity under fresh start reporting remained the
same in Fiscal 1999 as in Fiscal 1998. We are amortizing this amount over a
ten-year period, which will conclude in January 2003.

-14-

Net interest expense increased $45.6 million in Fiscal 1999 compared to
Fiscal 1998. The increase was primarily attributable to interest expense
incurred for our 10% senior notes, the Hills capital lease and financing
obligations, and a higher level of borrowings under our bank credit agreement.
During Fiscal 1999, we completed the issuance of our 10% senior notes to support
the conversion of the former Hills stores. See the liquidity and capital
resources section of this document for further discussion of these events.

We recorded a consolidated income tax benefit of $49.6 million in Fiscal
1999 compared to an $18.8 million provision in Fiscal 1998. The Fiscal 1999
benefit primarily represents the reduction of a valuation allowance of $38.1
million previously recorded against certain deferred tax assets, which reflects
our expectation of using the net operating loss carry-forwards and other
deferred tax assets in the foreseeable future.

Liquidity and Capital Resources

Our principal sources of liquidity are our credit agreement, cash from
operations, and cash on hand. Our current credit agreement, which expires March
2, 2004, provides for a credit facility of up to $800 million. Borrowings under
the agreement are secured by substantially all of our assets and we are required
to meet certain financial covenants if our availability under the credit
agreement falls below specified levels. Our peak borrowing level in Fiscal 2000
under our previous bank credit agreement was $611.1 million.

On April 27, 1999, we completed the sale of $200 million of Ames 10% senior
notes. The net proceeds from the sale of the Ames senior notes, approximately
$193.4 million, were used to reduce outstanding borrowings under our bank credit
facility. The Ames senior notes pay interest semi-annually in April and October
and mature in April 2006.

On May 24, 1999, we completed the public offering of 5.1 million shares of
Common Stock at a price of $38.75 per share. The proceeds of approximately
$187.3 million, net of underwriting discounts, were used to reduce our
borrowings under the bank credit facility and for general corporate purposes.

Our cash position increased $19.1 million during Fiscal 2000. The increase
was due primarily to $187.3 million in additional credit agreement borrowings
partially offset by $127.1 million of capital expenditures, a reduction in
accrued expenses of $18.9 million, and debt repayments of $22.7 million. Our
cash position decreased $5.1 million during Fiscal 1999. The decrease was due
primarily to $209.6 million of capital expenditures, inventory investments of
$181.5 million, and $25.8 million in debt and capital lease payments, partially
offset by $129.6 million of borrowings under our bank credit agreement, $193.4
million from the issuance of the Ames senior notes, and the net amount of $187.3
million from the issuance of Common Stock.

The $87.3 million decrease in merchandise inventories in Fiscal 2000
resulted from our efforts to minimize inventories in the wake of the economic
slowdown. Merchandise inventories increased $210.1 million in Fiscal 1999 due to
the addition of twelve new stores, in addition to fully stocking the former
Hills stores and recording the inventory in the converted Hills stores at cost
in Fiscal 1999 as compared to liquidation value in Fiscal 1998.

Net fixed assets increased by $46.2 million during Fiscal 2000 due to
$127.1 million in capital expenditures partially offset by $84.7 million in
depreciation expense. Net fixed assets increased by $130.1 million during Fiscal
1999 due to $209.6 million in capital expenditures, primarily relating to
remodeling the former Hills stores, and opening twelve other stores. These
additions were partially offset by the additional writedown of $29.8 million in
fixed assets acquired from Hills and depreciation expense of $61.1 million
recorded during Fiscal 1999.

Beneficial lease rights represent the excess of the fair market value of
the acquired Hills leases over contract value of those leases. We are amortizing
this amount over the terms of the related leases using the straight-line method.

The $2.6 million reduction in goodwill in Fiscal 2000 is entirely from
amortization. Goodwill decreased $169.4 million in Fiscal 1999 as a result of
the final determination of the fair market value of the assets and liabilities
acquired with the Hills stores and a full year of amortization expense, which
approximated $8.3 million. The primary changes were the reduction of $114.1
million deferred tax asset valuation allowance, a reduction in accrued
liabilities and reserves of $48.3 million as these liabilities were no longer
deemed to be required, and the increase of $28.3 million in inventory values.
When the Hills inventory was liquidated, proceeds generated were greater than
anticipated. These changes were partially offset by an additional $29.8 million
write-down of fixed assets (primarily fixtures) acquired from Hills to recognize
their deemed fair value. Goodwill is being amortized over twenty-five years
using the straight-line method.

Accounts payable increased $20.8 million in Fiscal 1999 due to an increase
in merchandise receipts in January 2000 over January 1999.

Long-term debt as of February 3, 2001 consisted of borrowings under our
bank credit agreement of $361.8 million, $44.3 million of Hills senior notes,
and $200 million of Ames senior notes.

-15-

We believe that the availability under our credit agreement, along with our
current available cash plus expected cash flows from our operations, will enable
us to fund our expected needs for working capital, capital expenditures, and
debt service requirements. Our sales results in the fiscal month of March were
negatively impacted by severe weather, as was the case with others in the retail
industry, and were well below plan, contributing directly to an unplanned
reduction in our borrowing availability. Achievement of expected cash flows from
operations and compliance with our credit agreement covenants (see Note 4 to the
Consolidated Financial Statements) are dependent upon a number of factors,
including the attainment of sales, gross profit, expense levels, vendor
relations, and flow of merchandise that are consistent with our financial
projections, particularly for the balance of the Spring season.

Capital lease and financing obligations decreased by $18.1 million during
Fiscal 2000 as payments on capital lease obligations exceeded new capital
leases.

We have not paid any cash dividends during the past five fiscal years. The
payment of cash dividends is restricted under the terms of our credit agreement.

Capital Expenditures

Capital expenditures for Fiscal 2000 were $127.1 million, and primarily
consisted of costs related to the opening of twenty-six new stores, remodeling
of twenty-three stores, and systems and facility improvements. Capital
expenditures for Fiscal 1999 were $209.6 million and included, among other
items, the opening of twelve new stores, the remodeling of the former Hills
stores, and the upgrading of selected management information systems, including
the completion of our chain-wide installation of new point-of-sale information
equipment and related software in our stores.

Capital expenditures are expected to be approximately $40.0 million in
Fiscal 2001. These capital expenditures will be primarily comprised of five new
stores and maintenance of our existing stores. We expect to finance these
expenditures through cash flow from operations and borrowings under our credit
agreement. Land, buildings and improvements are financed principally through
long-term leases.

Seasonality

Legal

We are party to various claims and legal proceedings on a wide range of
matters that arise in the ordinary course of business. Ames intends to defend
these issues vigorously and believes that the final outcome of the various
proceedings will not have a material adverse impact on its consolidated
financial position or results of operations (see Item 3 Legal Proceedings).

New Accounting Matters

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
derivative instruments and Hedging Activities." In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," an amendment of SFAS No. 133. These statements establish accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statements also require that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
statements are effective, prospectively, for all fiscal quarters of all fiscal
years beginning after June 15, 2000. We adopted SFAS No. 133, as amended by SFAS
No. 138, effective the beginning of Fiscal 2001. The impact of adopting this
standard was not significant.

In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition." Under SAB No. 101, we
were required to change the method in which we account for layaway sales. Prior
to the adoption of SAB No. 101, we recorded layaway sales when customers placed
merchandise on layaway. The pronouncement mandates that layaway sales be
recorded when the customer takes possession of the merchandise. We adopted SAB
No. 101 during the fourth quarter of Fiscal 1999, effective as of the beginning
of Fiscal 1999. The impact of adopting this pronouncement resulted in a
cumulative effect adjustment to Fiscal 1999 earnings of approximately $1.1
million, net of $0.6 million tax benefit.

-16-

Forward-Looking Statements

The statements contained or incorporated by reference under the captions
"Business," "Legal Proceedings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Quantitative and Qualitative
Disclosures about Market Risk" and elsewhere in this Form 10-K that are not
historical facts are "forward-looking statements," as that term is defined in
the Private Securities Litigation Reform Act of 1995. Those statements include
all discussions of strategy as well as statements that contain such
forward-looking expressions as "believes," "estimates," "intends," "may,"
"will," "should," or "anticipates" or the negative thereof. In addition, from
time to time, our representatives or we have made or may make forward-looking
statements orally or in writing. Furthermore, forward-looking statements may be
included in our filings with the Securities and Exchange Commission as well as
in the press releases or oral presentations made by or with the approval of one
of our authorized executive officers.

We caution you to bear in mind that forward-looking statements, by their
very nature, involve assumptions and expectations and are subject to risks and
uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained herein are reasonable, no
assurance can be given that those assumptions or expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from our expectations include, but are not limited to, the ones
discussed below.

Our financial performance is sensitive to changes in overall economic
conditions that impact consumer spending, particularly discretionary spending.
Future economic conditions affecting disposable consumer income such as
employment levels, business conditions, fuel and energy costs, interest rates,
and tax rates could reduce consumer spending or cause consumers to shift their
spending to other products. A general slowdown in the United States economy or
an uncertain economic outlook would adversely affect consumer spending habits,
which would likely result in lower net sales than expected on a quarterly or
annual basis. A general reduction in the level of discretionary spending or
shifts in consumer discretionary spending to other products could adversely
affect our growth, net sales, and profitability. Our operating results may be
adversely affected by unfavorable local, regional or national economic
conditions, especially those affecting the Northeast, Midwest or Mid-Atlantic
Regions where our 452 stores are currently located.

Our business is affected by the pattern of seasonality common to most
retailers. Our net sales and net income are generally weakest during the first
two fiscal quarters and strongest during the third and fourth quarters.
Historically, we have generated a significant portion of our net sales and
profits during our fourth fiscal quarter, which includes the Christmas selling
season, and have experienced losses or minimal earnings in the first, second,
and third fiscal quarters.

We realize a disproportionately large amount of our net sales and net
income during the Christmas selling season. In anticipation of the holidays, we
purchase substantial amounts of seasonal inventory and hire many temporary
employees. If for any reason our net sales during the Christmas selling season
were below seasonal norms, we could have excess inventory, necessitating
mark-downs to minimize this excess, which would reduce our profitability and
adversely affect our operating results.

We continually change our mix of seasonal merchandise, non-seasonal
merchandise, and consumable products. Our gross profit margins may fluctuate
from quarter to quarter. Our quarterly and annual results of operations,
including comparable store net sales and income, also fluctuate for a variety of
other reasons, including adverse weather conditions, particularly during the
peak Christmas season, and difficulties in obtaining sufficient quantities of
merchandise from our suppliers.

The retail industry is highly competitive and we expect competition to
increase in the future. We compete with many smaller stores offering a similar
range of products. Although Ames is the largest regional discount retailer in
the United States, we are still considerably smaller in terms of our total
number of stores, sales and earnings than the three leading national chains:
Wal-Mart, Kmart, and Target Stores. Each of these chains, as well as other
regional operators, currently operates stores within our regional market and
competes with us for customers and potential store locations. We anticipate a
further increase in competition from these national discount store chains.

-17-

The efficient operation of our business is heavily dependent on our
information systems. We depend on others to maintain and periodically upgrade
many of these systems so that they can continue to support our business. The
software programs supporting many of our systems were licensed to us by
independent software developers. The inability of these developers to continue
to maintain and upgrade these information systems and software programs would
disrupt our operations if we were unable to convert to alternate systems in an
efficient and timely manner.

Our business is dependent on continued good relations with our vendors. In
particular, we believe that we generally are able to obtain attractive pricing
and other terms from vendors because we are perceived as a desirable customer.
Our failure to maintain good relations with our vendors could increase our
exposure to shifts in market demand, which may in turn lead to improper
inventory levels and increased inventory markdown rates.

Substantially all of our assets are encumbered by bank debt. At February 3,
2001, the amount of bank debt outstanding was $361.8 million. As of March 30,
2001, we were in compliance with all of the covenants contained in our credit
agreement. However, if we fail to comply with all of the covenants contained in
the credit agreement (including a fixed charge coverage ratio if our borrowing
availability falls below a certain specified level) or otherwise default on our
secured debt, the lender could foreclose against our assets and effectively
force a termination of our business. In addition, our leveraged position impairs
our ability to obtain additional financing to fund working capital requirements,
capital expenditures or other purposes.

The amount of our credit facility for cash borrowings and letters of credit
needed for the purchase of new inventory is based on specified percentages of
our inventory on hand as well as in-transit inventory from overseas, certain
receivables and certain of our owned real estate. Our borrowing availability
under the existing credit facility fluctuates relative to this borrowing base.
This borrowing base varies in value as a result of sales, merchandise purchases,
and profitability. Lack of short-term liquidity due to reaching the limits of
our borrowing availability would adversely affect our business, results of
operations, and financial condition.

We incurred net losses of $240.6 million in our fiscal year ended February
3, 2001 and, to date, consistent with normal seasonal patterns as discussed
above, we have continued to incur net losses in the first quarter in our current
fiscal year. There can be no assurance that losses will not continue in the
future. If losses do continue to occur, we will likely need to obtain additional
capital to continue our operations.

All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
these factors and the cautionary statements contained herein.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

We have exposure to interest rate volatility primarily relating to interest
rate changes applicable to revolving loans under our credit facility. These
loans bear interest at rates which vary with changes in (i) the London Interbank
Offered Rate (LIBOR) or (ii) the Index Rate (as defined in our credit
agreement).

We do not speculate on the future direction of interest rates. As of the
end of fiscal years 2000 and 1999 our exposure to changing market rates was as
follows:

February 3, 2001 January 29, 2000
---------------------- ---------------------
Variable rate long-term debt ($US)................. $361.8 million $174.5 million
Average interest rate.............................. 8.54% 8.31%

A one percent increase in the average interest rate would have resulted in
an additional $4.4 million in interest expense during Fiscal 2000.

Item 8. Financial Statements and Supplementary Data.

See Index to Consolidated Financial Statements.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

-18-

PART III
Item 10. Directors and Executives of the Registrant.

Information as to the officers and directors of the Company required by
Items 401 and 405 of Regulation S-K is incorporated herein by reference from the
information set forth under the caption "DIRECTORS AND EXECUTIVE OFFICERS" of
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
within 120 days after the close of its fiscal year.

Item 11. Executive Compensation.

The information required by Item 402 of Regulation S-K is incorporated
herein by reference from the information set forth under the sections titled
"Executive Compensation," "Board Meetings and Committees," "Compensation of
Directors," "Employment Contracts, Termination, Severance and Change-of-Control
Arrangements," "Additional Information with respect to Board of Directors
Interlocks and Insider Participation in Compensation Decisions," "The
Compensation Committee's Report on Executive Compensation," and "Stock
Performance Graph" of the Company's definitive proxy statement to be filed
pursuant to Regulation 14A under the Exchange Act within 120 days after the
close of its fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The information required by Item 403 of Regulation S-K is incorporated
herein by reference from the information set forth under the sections titled
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" of the Company's definitive proxy statement to be filed pursuant to
Regulation 14A under the Exchange Act within 120 days after the close of its
fiscal year.

Item 13. Certain Relationships and Related Transactions.

The information required by Item 404 of Regulation S-K is incorporated
herein by reference from the information set forth under the section titled
"Transactions with Management and Others" of the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Exchange Act within
120 days after the close of its fiscal year.

PART IV

Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.

(a) Documents Filed as Part of this Form 10-K

1. Financial Statements

The Financial Statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Form 10-K.

2. Financial Statement Schedule

The Financial Statement Schedule listed in the accompanying
Index to Consolidated Financial Statements is filed as part of
this Form 10-K.

3. Exhibits

The Exhibits filed as part of this Form 10-K are listed on the
Exhibit Index immediately preceding such Exhibits, incorporated
herein by reference.

(b) There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.

-19-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

AMES DEPARTMENT STORES, INC.
(Registrant)

Dated: April 13, 2001 /s/JOSEPH R. ETTORE
-------------------
Joseph R. Ettore,
Chairman, Chief Executive
Officer, and Director

Dated: April 13, 2001 /s/ROLANDO DE AGUIAR
--------------------
Rolando de Aguiar,
Senior Executive Vice
President, Chief Financial and
Administrative Officer

Dated: April 13, 2001 /s/MARK VON MAYRHAUSER
----------------------
Mark von Mayrhauser,
Vice President, Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Dated: April 13, 2001 /s/FRANCIS X. BASILE
--------------------
Francis X. Basile, Director

Dated: April 13, 2001 /s/PAUL M. BUXBAUM
------------------
Paul M. Buxbaum, Director

Dated: April 13, 2001 /s/ALAN COHEN
-------------
Alan Cohen, Director

Dated: April 13, 2001 /s/RICHARD M. FELNER
--------------------
Richard M. Felner, Director

Dated: April 13, 2001 /s/SIDNEY S. PEARLMAN
---------------------
Sidney S. Pearlman, Director

Dated: April 13, 2001 /s/JOSEPH A. POLLICINO
----------------------
Joseph A. Pollicino, Director

-20-

AMES DEPARTMENT STORES, INC.
AND SUBSIDIARIES

FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
(FORM 10-K)

EXHIBITS

For the Fiscal Years Ended February 3, 2001,
January 29, 2000 and January 30, 1999

(With Report of Independent Public Accountants)

-21-

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements and Financial
Statement Schedule for the Fiscal Years Ended
February 3, 2001, January 29, 2000 and January 30, 1999

Consolidated Financial Statements:

Report of Independent Public Accountants......................................................23
Consolidated Statements of Operations for the fiscal years ended February 3, 2001,
January 29, 2000 and January 30, 1999...................................................24
Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000.......................25
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended
February 3, 2001, January 29, 2000 and January 30, 1999.................................26
Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2001,
January 29, 2000 and January 30, 1999...................................................27
Notes to Consolidated Financial Statements....................................................28

Schedule:
II. Valuation and Qualifying Accounts for the fiscal years ended February
3, 2001, January 29, 2000 and January 30, 1999.

Schedules Omitted:
All other schedules are omitted as they are not applicable or the
information is shown in the consolidated financial statements or notes thereto.

-22-

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of

AMES DEPARTMENT STORES, INC.:

We have audited the accompanying consolidated balance sheets of Ames
Department Stores, Inc. (a Delaware corporation) and subsidiaries as of February
3, 2001 and January 29, 2000, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the fifty-three
weeks ended February 3, 2001, and the fifty-two weeks ended January 29, 2000 and
January 30, 1999. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ames Department Stores, Inc.
and subsidiaries as of February 3, 2001 and January 29, 2000, and the results of
their operations and their cash flows for the fifty-three weeks ended February
3, 2001, and the fifty-two weeks ended January 29, 2000 and January 30, 1999 in
conformity with accounting principles generally accepted in the United States.

Our audits were performed for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

/s/Arthur Andersen LLP

New York, New York
March 16, 2001

-23-

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
February 3, January 29, January 30,
2001 2000 1999
-------------- --------------- ----------------
Net sales.......................................................... 3,953,585 3,836,854 2,498,648
Leased department and other income............................ 46,413 41,690 30,164
-------------- --------------- ----------------
Total revenue...................................................... 3,999,998 3,878,544 2,528,812

Costs and expenses:
Cost of merchandise sold...................................... 2,932,251 2,715,386 1,777,661
Selling, general, and administrative expenses................. 1,058,668 1,068,175 660,593
Depreciation and amortization expense, net.................... 79,689 65,495 14,478
Interest and debt expense, net................................ 87,961 60,843 15,253
Store closing charge.......................................... 129,806 - 8,222
-------------- --------------- ----------------

(Loss) income before income taxes.................................. (288,377) (31,355) 52,605
Income tax benefit (provision)..................................... 54,753 49,589 (18,775)
-------------- --------------- ----------------
Income before Cumulative Effect of Accounting Change............... (233,624) 18,234 33,830
Cumulative Effect of Accounting Change, net of tax of $614......... - (1,107) -
-------------- --------------- ----------------
(Loss) income before extraordinary item............................ (233,624) 17,127 33,830
Extraordinary loss on early extinguishment of debt, net of tax..... (6,964) - -
-------------- --------------- ----------------

Net (loss) income.................................................. ($240,588) $17,127 $33,830
============== =============== ================

Basic net (loss) income per common share:
Before Cumulative Effect of Accounting Change and
Extraordinary item............................................ ($7.95) $0.66 $1.47
Cumulative Effect of Accounting Change, net of tax............ - (0.04) -
Extraordinary item, net of tax................................ (0.24) - -
-------------- --------------- ----------------
Net (loss) income............................................. ($8.19) $0.62 $1.47
============== =============== ================

Weighted average common shares................................ 29,383 27,517 23,010
============== =============== ================
Diluted net income per common share:
Before Cumulative Effect of Accounting Change and
Extraordinary item............................................ ($7.95) $0.66 $1.40
Cumulative Effect of Accounting Change, net of tax............ - (0.04) -
Extraordinary item, net of tax................................ (0.24) - -
-------------- --------------- ----------------
Net (loss) income............................................. ($8.19) * $0.62 $1.40
============== =============== ================

Weighted average common and common equivalent shares 29,543 27,658 24,216
============== =============== ================

* Common equivalent shares have not been included because the effect would be anti-dilutive.

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

-24-

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

February 3, January 29,
2001 2000
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents............................................................. $49,761 $30,612
Receivables:
Trade............................................................................... 6,978 7,426
Other............................................................................... 10,061 17,876
-------------- --------------
Total receivables............................................................... 17,039 25,302
Merchandise inventories............................................................... 744,132 831,387
Prepaid expenses and other current assets............................................. 41,494 36,772
Deferred taxes, net................................................................... 17,771 28,854
-------------- --------------
Total current assets............................................................ 870,197 952,927
-------------- --------------

Fixed Assets:
Land and buildings.................................................................... 32,179 25,388
Property under capital leases......................................................... 180,585 176,107
Fixtures and equipment................................................................ 389,986 310,750
Leasehold improvements................................................................ 159,153 117,734
-------------- --------------
761,903 629,979
Less - Accumulated depreciation and amortization...................................... (213,904) (128,229)
-------------- --------------
Net fixed assets............................................................... 547,999 501,750
-------------- --------------
Other assets and deferred charges.......................................................... 56,490 57,256
Deferred taxes, net........................................................................ 411,891 346,055
Beneficial lease rights, net............................................................... 50,675 56,280
Goodwill, net.............................................................................. 58,475 61,026
-------------- --------------
Total Assets................................................................... $1,995,727 $1,975,294
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade.......................................................................... $345,915 $325,356
Other.......................................................................... 78,371 96,224
-------------- --------------
Total accounts payable.................................................... 424,286 421,580
-------------- --------------

Current portion of capital lease and financing obligations............................ 19,018 22,086
Self-insurance reserves............................................................... 29,878 29,827
Accrued compensation.................................................................. 39,366 42,095
Accrued expenses...................................................................... 74,839 91,015
Store closing reserves................................................................ 179,365 55,468
-------------- --------------
Total current liabilities................................................. 766,752 662,071
-------------- --------------

Long-term debt............................................................................. 606,057 421,769
Capital lease and financing obligations.................................................... 165,365 180,404
Other long-term liabilities................................................................ 49,256 57,916
Excess of revalued net assets over equity under fresh-start reporting...................... 11,715 17,868
Commitments and contingencies
Stockholders' Equity:
Preferred stock (3,000,000 shares authorized; no shares issued or
outstanding at February 3, 2001 and January 29, 2000, respectively; par
value per share $.01) .............................................................. - -
Common stock (40,000,000 shares authorized; 29,473,552 and 29,233,650 shares
outstanding at February 3, 2001 and January 29, 2000, respectively; par value per
share $.01)......................................................................... 295 293
Additional paid-in capital............................................................ 532,654 530,744
(Accumulated deficit) Retained earnings............................................... (135,445) 105,143
Treasury stock (80,495 and 79,495 shares at February 3, 2001 and January 29, 2000,
respectively, at cost).............................................................. (922) (914)
-------------- --------------
Total stockholders' equity................................................ 396,582 635,266
-------------- --------------
Total Liabilities and Stockholders' Equity...................................... $1,995,727 $1,975,294
============== ==============
(The accompanying notes are an integral part of these consolidated financial statements.)

-25-

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)

Retained
Preferred Stock Common Stock Additional Earnings Treasury Stock
-------------------- ------------------- Paid-In (Accum. ----------------- Total
Shares Amount Shares Amount Capital Deficit) Shares Amount Equity
---------- --------- -------- ---------- ----------- ----------- -------- -------- -----------
Balance, January 31, 1998 - - 22,506 $225 $118,971 $54,186 - - $173,382
Exercise of warrants........... 824 8 1,387 1,395
Exercise of stock options,
net............................ 331 3 1,106 1,109
Issuance of common stock
pursuant to executive
employment agreement........... 70 1 1,640 1,641
Issuance of restricted common
stock, net..................... 190 2 2
Vesting of restricted common
stock.......................... 788 788
Recognition of tax attributes.. 112,775 112,775
Acquisition of treasury shares. (79) ($914) (914)
Net income..................... 33,830 33,830
---------- --------- -------- ---------- ----------- ----------- -------- -------- -----------
Balance, January 30, 1999 - - 23,921 $239 $236,667 $88,016 (79) ($914) $324,008
Exercise of stock options, net. 170 2 1,073 1,075
Issuance of common stock
pursuant to the equity offering 5,100 51 187,211 187,262
Issuance of restricted common
stock, net..................... 30 1 1
Issuance of common stock to
Board of Directors............. 12 367 367
Recognition of tax attributes.. 105,426 105,426
Net income..................... 17,127 17,127
---------- --------- -------- ---------- ----------- ----------- -------- -------- -----------
Balance, January 29, 2000 - - 29,233 $293 $530,744 $105,143 (79) ($914) $635,266
Exercise of warrants........... 100 1 591 592
Exercise of stock options, net. 145 1 550 551
Forfeiture of restricted common
stock, net..................... (5)
Acquisition of treasury shares. (1) (8) (8)
Stock option compensation...... 774 774
Other.......................... (5) (5)
Net loss....................... (240,588) (240,588)
---------- --------- -------- ---------- ----------- ----------- -------- -------- -----------
Balance, February 3, 2001 - - 29,473 $ 295 $532,654 ($135,445) (80) ($922) $396,582
========== ========= ======== ========== =========== =========== ======== ======== ===========

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

-26-

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
February 3, January 29, January 30,
2001 2000 1999
---------------- --------------- ---------------
Cash flows from operating activities:
Net (loss) income........................................... ($240,588) $17,127 $33,830
Cumulative Effect of Accounting Change................... - 1,107 -
---------------- --------------- ---------------
Net (loss) income before cumulative effect adjustment....... (240,588) 18,234 33,830
Expenses not requiring the outlay of cash:
Income tax (benefit) provision........................... (54,753) (49,589) 18,275
Extraordinary loss on early extinguishment of debt, net
of tax................................................... 6,964 - -
Depreciation and amortization of fixed and other assets.. 87,739 65,495 15,487
Amortization of debt discounts and deferred financing
costs.................................................... 4,788 4,880 2,787
Other, net............................................... 344 (1,841) (3,514)
---------------- --------------- ---------------
Cash (used for)provided by operations before changes in
working capital and store closing activities................... (195,506) 37,179 66,865
Changes in working capital:
Decrease (increase) in receivables.......................... 8,263 4,942 (6,787)
Decrease (increase) in merchandise inventories.............. 87,255 (181,546) 12,259
(Increase) decrease in prepaid expenses and other current
assets..................................................... (4,722) (20,697) (2,962)
Increase in accounts payable................................ 2,706 20,823 12,233
(Decrease) increase in accrued expenses and other
current liabilities........................................ (26,886) (91,467) 24,302
Changes due to store closing activities:
Payments of store closing costs............................. (5,909) (9,470) (2,547)
Store closing charge........................................ 129,806 - 8,222
---------------- --------------- ---------------
Net cash (used for) provided by operating activities (4,993) (240,236) 111,585
---------------- --------------- ---------------
Cash flows from investing activities:
Acquisition costs, net of cash acquired..................... - - (103,857)
Purchases of fixed assets................................... (127,075) (209,606) (51,602)
Purchases of leases......................................... (7,054) (38,835) -
---------------- --------------- ---------------
Net cash used for investing activities (134,129) (248,441) (155,459)
---------------- --------------- ---------------
Cash flows from financing activities:
Borrowings under the revolver credit facilities, net........ 187,251 129,609 44,935
Payments on debt and capital lease obligations.............. (22,668) (22,191) (16,262)
Repurchase of Hills senior notes............................ (2,852) (4,636) -
Proceeds from the issuance of senior notes.................. - 200,000 -
Proceeds from the issuance of common stock, net............. - 187,262 -
Payments of deferred financing costs........................ (4,595) (7,939) (10,902)
Proceeds from the exercise of options and warrants.......... 1,143 1,440 4,933
Purchase of treasury stock.................................. (8) - (914)
---------------- --------------- ---------------
Net cash provided by financing activities...................... 158,271 483,545 21,790
---------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents............... 19,149 (5,132) (22,084)
Cash and cash equivalents, beginning of period................. 30,612 35,744 57,828
---------------- --------------- ---------------
Cash and cash equivalents, end of period....................... $49,761 $30,612 $35,744
================ =============== ===============

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

-27-

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:

(a) Nature of operations:

Ames Department Stores, Inc. (a Delaware corporation) and its subsidiaries
(collectively, "Ames" or the "Company") are retail merchandisers operating under
one business segment. As of March 31, 2001, Ames operated 452 discount
department stores in nineteen states in the Northeast, Midwest, and Mid-Atlantic
regions, as well as the District of Columbia.

(b) Basis of presentation and principles of consolidation:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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 those estimates.

The consolidated financial statements include the accounts of Ames and its
subsidiaries, all of which are wholly-owned. All intercompany accounts and
transactions have been eliminated.

Certain prior year items have been reclassified to conform to the current
year presentation.

The Company's fiscal year ends on the Saturday nearest to January 31st. The
fiscal year ended February 3, 2001 ("Fiscal 2000" or "2000") included
fifty-three weeks. The fiscal years ended January 29, 2000 ("Fiscal 1999" or
"1999") and January 30, 1999 ("Fiscal 1998" or "1998") included fifty-two weeks.

(d) Cash and cash equivalents:

Ames considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash and cash equivalents. As of
February 3, 2001 and January 29, 2000, there were no such short-term
investments.

(e) Inventory valuation:

Inventories are valued at the lower of cost, using the first-in, first-out
(FIFO) method, or market and include the capitalization of transportation and
distribution center costs.

(f) Internal use software:

The Company adopted Statement of Position ("SOP") 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" effective the
beginning of Fiscal 1999. Prior to Fiscal 1999, the Company expensed the costs
of developing or obtaining internal use software as incurred. The amount of
internal use software cost capitalized in 1999 and 2000 was approximately $1.6
million and $2.4 million, respectively.

(g) Fixed assets:

Land and buildings, fixtures and equipment, and leasehold improvements are
recorded at cost. Major replacements and betterments are capitalized.
Maintenance and repairs are charged to earnings as incurred. The cost of assets
sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of disposal, with the resulting gain or
loss included in earnings.

-28-

(h) Intangible assets:

Beneficial lease rights represent the excess of fair market value over
contract value of certain of the leases acquired in the acquisition of Hills
(see Note 2 for further explanation). Goodwill represents the excess of cost
over the fair value of net tangible assets acquired at the date of acquisition.
As of February 3, 2001, accumulated amortization of goodwill and accumulated
amortization of beneficial lease rights were $11.6 million and $8.2 million,
respectively.

The recoverability of the carrying values of intangible assets is evaluated
periodically based on a review of forecasted operating cash flows and the
profitability of the related business. There were no material adjustments to the
carrying values of intangible assets resulting from these evaluations in Fiscal
1999 and 1998. During Fiscal 2000, beneficial lease rights totaling $9.6 million
and $2.8 million were written off due to the closing of thirty-two stores and
the write-off of impaired assets, respectively, under Statement of Financial
Accounting Standards ("SFAS") No. 121.

(i) Depreciation and amortization:

Buildings and fixtures and equipment are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives.
Buildings are depreciated over 31.5 years, furniture and fixtures over ten
years, equipment over seven years, motor vehicles over five years, and computer
software and hardware over three to five years. Property under capital leases
and leasehold improvements are depreciated over the shorter of their estimated
useful lives or their related lease terms. The Company currently has buildings
with an aggregate net book value of $117.4 million and $111.4 million and
point-of-sale equipment with a net book value of $35.3 million and $25.8 million
under capital leases for Fiscal 1999 and 2000, respectively.

Beneficial lease rights are being amortized over the terms of the related
leases (which average approximately twenty-five years). Goodwill is being
amortized over a twenty-five year period.

The excess of revalued net assets over equity under fresh-start reporting
is being amortized over a ten-year period. The amount recorded as a credit to
depreciation and amortization was $6.2 million in each of Fiscal 2000, 1999, and
1998.

The unfavorable lease liability is being amortized on a straight-line basis
over the applicable lease terms (see Note 5).

Depreciation and amortization includes adjustments recorded pursuant to the
application of Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The Company did not record an impairment loss during Fiscal 1999 and 1998,
but recorded an impairment charge of $5.0 million for Fiscal 2000.

(j) Deferred charges:

Debt transaction costs and related issue expenses are deferred and
amortized over the term of the associated debt. Lease acquisition and related
costs are deferred and amortized over the term of the lease.

(k) Income taxes:

Ames files a consolidated federal income tax return. Recorded deferred
income taxes are provided for at currently effected statutory rates on the
differences in the basis of assets and liabilities for tax and financial
reporting purposes. If recorded, deferred income taxes are classified in the
balance sheet as current or non-current based upon the expected future period in
which such deferred income taxes are anticipated to reverse.

(l) Self-insurance reserves:

The Company is self-insured for workers compensation, general liability,
property and casualty, and accident and health insurance claims, subject to
certain limitations. The Company has insurance coverage for losses that may
occur above certain levels. As of February 3, 2001 and January 29, 2000, Ames
had established self-insurance reserves of $60.5 million and $66.8 million,
respectively. The long-term portion of these reserves is classified as part of
other long-term liabilities in the Consolidated Balance Sheets. These reserves
are subject to changes in estimates as claims are settled or continue to remain
outstanding.

-29-

(m) Leased department and other income:

Ames has an agreement with an independent contractor that allows the
independent contractor to operate shoe departments within the Ames stores. Ames
receives a percentage of the sales under the agreement.

(n) Revenue Recognition:

The Company recognizes revenue when its customer takes possession of
merchandise. An appropriate return for estimated sales returns is recorded and
is reflected in accrued expenses in the accompanying Consolidated Balance
Sheets.

The Company adopted Staff Accounting Bulletin ("SAB") No. 101 during the
fourth quarter of Fiscal 1999, effective as of the beginning of Fiscal 1999.
Prior to the adoption of SAB No. 101, the Company recorded layaway sales when
customers placed merchandise on layaway. SAB No. 101 mandates that layaway sales
be recorded when the customer takes possession of the merchandise. The impact of
adopting this SAB resulted in a cumulative effect adjustment to 1999 earnings
for approximately $1.1 million, net of $0.6 million tax benefit.

(o) Advertising Expense:

The Company participates in cooperative advertising programs supported by
our vendors. Advertising costs are expensed as incurred and are presented net of
any funds received from vendors for these programs. The Company expensed $136.6
million, $123.9 million, and $79.7 million for Fiscal 2000, 1999, and 1998,
respectively.

(p) New Accounting Pronouncements:

In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. In June 2000, SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," an amendment of
SFAS No. 133, was issued. These statements establish accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statements
also require that changes in a derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. The statements
are effective, prospectively, for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company adopted SFAS No. 133, as amended by
SFAS No. 138, effective the beginning of Fiscal 2001. The impact of adopting
this standard was not significant.

2. Acquisition and Agency Agreement

Acquisition of Hills Stores Company

On December 31, 1998, HSC Acquisition Corp. ("HSC"), a wholly-owned
subsidiary of the Company at the time, acquired in excess of 80% of the
outstanding voting stock of Hills Stores Company ("Hills") and approximately 74%
of the outstanding Hills 12.5% senior notes. In April 1999, Hills was merged
with and into Ames Department Stores, Inc. Total cash consideration for the
acquisition of Hills was approximately $129 million.

The acquisition was recorded under the purchase method of accounting and,
accordingly, the results of operations of Hills since the acquisition date are
included in the accompanying consolidated financial statements. The aggregate
purchase price of $129 million was allocated to assets acquired and liabilities
assumed based on a determination of respective fair market values at the date of
acquisition. The fair value of tangible assets acquired and liabilities assumed
were $568 million each. The balance of the purchase price, $129 million, was
recorded as two components: an excess of cost over net assets acquired
(goodwill) of $70 million, and beneficial lease rights of $59 million.

At the time of the acquisition, Hills operated 155 discount department
stores. During 1999, the Company remodeled and converted 151 of the Hills stores
to Ames stores. The four remaining Hills stores along with seven other Ames
stores were closed. The remodeling and conversion process was completed in
September 1999.

Agency Agreement Overview

Concurrent with the Hills acquisition, the Company entered into a
transition and agency agreement (the "Agency Agreement") with Gordon Brothers
Retail Partners, LLC and The Nassi Group, LLC, (collectively, the "Agent"),
which provided that the Agent shall serve for a period of time to operate all of
the acquired Hills stores and to conduct inventory liquidation sales at each of
those stores prior to its scheduled remodeling or final closure.

-30-

The Agency Agreement entitled the Company to receive out of the sale
proceeds a minimum amount equal to 40% of the initial retail value or ticketed
selling price of the merchandise (the "Guaranteed Return"). The Company was also
entitled to an additional payment if the proceeds of the sale exceeded a target
percentage of the initial retail value. Finally, the Agency Agreement entitled
the Company to reimbursement of certain store operating expenses (e.g., payroll,
rent, advertising, etc.) out of the sale proceeds during the agency period.

The Agent was paid a fee (the "Agency Fee") for its services pursuant to
the Agency Agreement. The Agency Fee was an amount equal to the proceeds from
the sales of Hills merchandise less a deduction for the reimbursement of store
operating expenses, the Guaranteed Return and an allocation to the Company based
on sale proceeds in excess of specified levels. The Agency Fee recorded during
Fiscal 1999 and 1998 was $41.7 million and $21.7 million, respectively.

The inventory liquidation sales at the Hills stores were completed during
the quarter ended July 31, 1999. Proceeds from the sales during the entire
agency period exceeded the target percentage referenced above. The Company
shared in the excess and thereby realized in excess of the Guaranteed Return for
the acquired Hills inventory.

Acquisition of Caldor Sites

During the first quarter of 1999, the Company purchased nine Caldor stores
and a former Caldor distribution center for a total cash purchase price of $42.8
million. The Company assumed Caldor's leases for the nine stores and the
distribution center and acquired all of the store fixtures in eight of the
stores and all racking, sorting systems, and materials handling equipment in the
distribution center.

A component of the $42.8 million purchase price was recorded as fixtures
and equipment in the distribution center. The balance of the purchase price was
recorded under other assets and deferred charges, and is being amortized over
the remaining term of the leases.

Acquisition of Goldblatt's Department Store Leases

In April 2000, the Company consummated its purchase of the leases for seven
stores from Goldblatt's Department Stores, Inc. for a cash purchase price of
$7.6 million.

3. Supplemental Information

The following table illustrates the separate contribution to the Company's
consolidated results of operations for Fiscal 1999 of (i) the operations of Ames
stores during that year, (ii) the operation of the former Hills stores during
that year and various other costs and charges discussed below:

Fiscal 1999
---------------------------------------------------------------------------------
Layaway
Ames Hills Other Adj. Total
---- ----- ----- ---- -----
(In millions, except per share amounts)
Net sales............................. $3,465.6 $375.6 $ -- $(4.4) $3,836.8
Leased department and other
income................................ 39.1 2.6 -- -- 41.7
------------- ----------- -------------- ------------ -------------
Total revenue......................... 3,504.7 378.2 -- (4.4) 3,878.5
Costs and expenses:
Cost of merchandise sold........... 2,467.8 251.2 -- (3.6) 2,715.4
Selling, general,and
administrative expenses............ 838.7 153.0 76.5 -- 1,068.2
Depreciation and amortization
expense, net....................... 49.1 11.1 5.3 -- 65.5
Interest and debt expense, net..... 54.1 4.1 2.6 -- 60.8
------------- ----------- -------------- ------------ -------------
Income (loss) before income taxes and
cumulative effect..................... 95.0 (41.2) (84.4) (0.8) (31.4)
Income tax (provision) benefit........ (34.2) 14.8 68.7 0.3 49.6
------------- ----------- -------------- ------------ -------------
Income (loss) before Cumulative
Effect................................ 60.8 (26.4) (15.7) (0.5) 18.2
Cumulative Effect of Accounting
Change, net of tax.................... -- -- -- (1.1) (1.1)
------------- ----------- -------------- ------------ -------------
Net income (loss)..................... $60.8 $(26.4) $(15.7) $(1.6) $17.1
============= =========== ============== ============ =============
Diluted net income (loss) per common
share................................. $2.20 $(0.95) $(0.57) $(0.06) $0.62
============= =========== ============== ============ =============
Weighted average common and common
equivalent shares..................... 27.7 27.7 27.7 27.7 27.7
============= =========== ============== ============ =============

-31-

The "Ames" column represents (a) the results of the Ames store base, (b)
the results of the former Hills stores after their conversion to Ames stores,
and (c) certain expenses associated with the acquisition of Hills, including the
interest expense on the acquired Hills senior notes and a pro rata share of the
amortization of the goodwill recorded in connection with the acquisition.

The "Hills" column represents (a) the results of operations for the Hills
stores during the period that these stores were operated pursuant to the Agency
Agreement including depreciation and interest expense directly associated with
such stores and (b) Hills corporate overhead expenses, principally the Canton,
Massachusetts facility. The cost of merchandise for Hills represents the
merchandise sold during this liquidation period adjusted for the Guaranteed
Return (see Note 2). The selling, general, and administrative expenses for
former Hills include the reimbursable store operating expenses of $84.8 million,
the Agency Fee of $41.7 million, and other non-reimbursable expenses of $26.5
million. The depreciation and amortization expense for Hills includes the
depreciation and amortization of the revalued fixed assets, the amortization of
the beneficial lease rights, and the goodwill recorded in the Hills acquisition.
The interest expense reflects interest on the debt and capital lease and
financing obligations assumed in the Hills acquisition.

The "Other" column represents expenses incurred during the period of
remodeling the Hills stores as well as certain other expenses and tax benefits.

The "Layaway Adj." column represents the impact of the change in the method
of accounting for layaway sales.

The following table illustrates the separate contribution to the Company's
consolidated results of operations for Fiscal 1998 of (i) the operations of Ames
stores during that year and (ii) the operation of the Hills stores during
January 1999 and various other costs and charges discussed below:

Fiscal 1998
--------------------------------------------------------------------
Ames Hills Other Total
--------------- ------------- -------------- -------------
(In millions, except per share amounts)
Net sales.......................................... $2,386.5 $112.1 $ -- $2,498.6
Leased department and other income................. 29.2 1.0 -- 30.2
--------------- ------------- -------------- -------------
Total revenue...................................... 2,415.7 113.1 -- 2,528.8
Costs and expenses:
Cost of merchandise sold........................ 1,711.3 66.3 -- 1,777.6
Selling, general, and administrative expenses... 606.9 52.0 1.7 660.6
Depreciation and amortization expense, net...... 11.3 3.2 -- 14.5
Interest and debt expense, net.................. 11.4 2.0 1.9 15.3
Store closing charge............................ -- -- 8.2 8.2
--------------- ------------- -------------- -------------
Income (loss) before income taxes.................. 74.8 (10.4) (11.8) 52.6
Income tax (provision) benefit..................... (26.7) 3.7 4.2 (18.8)
--------------- ------------- -------------- -------------
Net income (loss).................................. $48.1 $(6.7) $(7.6) $33.8
=============== ============= ============== =============
Diluted net income (loss) per common share......... $1.99 $(0.27) $(0.32) $1.40
=============== ============= ============== =============
Weighted average common and common equivalent
shares............................................. 24.2 24.2 24.2 24.2
=============== ============= ============== =============

In January 1999, the Hills stores were being operated pursuant to the terms
and conditions of the Agency Agreement (see Note 2). Approximately one-third of
the Hills stores were conducting liquidation sales during January 1999 in order
to prepare these stores for their conversion to Ames stores. The cost of
merchandise for Hills represents the merchandise sold during January 1999
adjusted for the Guaranteed Return. The selling, general, and administrative
expenses for Hills include the reimbursable store operating expenses of $25.4
million, Agency Fee of $21.7 million, and other non-reimbursable expenses of
$4.8 million. The depreciation and amortization expense for Hills includes the
depreciation and amortization of the revalued fixed assets, the amortization of
the beneficial lease rights, and the goodwill recorded in the Hills acquisition.
The interest expense reflects interest on the debt, capital lease and financing
obligations assumed in the Hills acquisition.

-32-

The "Other" column in the foregoing table consists of the cost to exit
certain Ames contractual obligations rendered obsolete by the acquisition of
Hills, the write-off of the deferred financing costs related to the Company's
1996 credit agreement, the incremental interest expense incurred in January in
connection with financing the purchase price of Hills, and the charge recorded
in connection with the announced closing of seven Ames stores that closed in
1999.

4. Long-Term Debt:

The Company's outstanding long-term debt as of February 3, 2001 and January
29, 2000 is listed and described below:

February 3, January 29,
2001 2000
----------------- ----------------
Secured Debt: (000's omitted)
Borrowings under the Prior Credit Agreement................................... $361,794 $174,544
Unsecured Debt:
12.5% Senior Notes, due July 2003, discount rate of 11.79%.................... 43,605 46,295
10% Senior Notes, due April 2006.............................................. 200,000 200,000
----------------- ----------------
Total Face Value of Debt......................................................... $605,399 $420,839
Add: Premium.................................................................. 658 930
----------------- ----------------
Amount Due After One Year........................................................ $606,057 $421,769
================= ================

The Credit Agreement

In January 2001, the Company signed a commitment letter from General
Electric Capital Corporation ("GE Capital") for an $800 million senior secured
financing, and subsequently entered into an agreement (the "Credit Agreement")
with GE Capital, as agent, and a syndicate of other banks and financial
institutions. The Credit Agreement provides for a secured revolving credit
facility of up to $750 million, with a sub-limit of $50 million for letters of
credit, and a secured term facility for $50 million.

The Credit Agreement replaced the Company's previously existing $650
million credit facility (the "Prior Credit Agreement").

The Credit Agreement expires on March 2, 2004 and is secured by
substantially all of the assets of the Company. The interest rate per annum on
borrowings under the Credit Agreement is equal to the Index Rate (as defined in
the Credit Agreement) plus a specified margin or the LIBOR Rate (as defined in
the Credit Agreement) plus a specified margin.

Fees required under the Credit Agreement include (a) monthly commitment
fees on the unused portion of the facility, (b) an initial closing fee, and (c)
a monthly collateral monitoring fee and an annual administrative fee for the
account of the agent.

The maximum amount of borrowing under the Credit Agreement cannot exceed
the lesser of (a) the total facility less (i) letters of credit outstanding and
(ii) a specified minimum balance (the "Minimum Availability") or (b) an amount
derived from combining specified percentages of the Company's inventory on hand
as well as in-transit inventory from overseas, certain receivables and certain
of the Company's owned real estate (each of which may be offset by certain
specified reserves) less (i) letters of credit outstanding and (ii) the Minimum
Availability.

In addition, if the Company's incremental borrowing capacity under the
Credit Agreement averages below a specified level (the "Fixed Charge
Availability") over a five-day period, then the Company must be in compliance
with a fixed charge coverage ratio for a specified period of time, after which
the Company's borrowing capacity must be above the Fixed Charge Availability.
The Credit Agreement also restricts the payment of cash dividends.

The Company believes that the availability under the Credit Agreement,
along with its current available cash plus expected cash flows from its
operations, will enable the Company to fund its expected needs for working
capital, capital expenditures, and debt service requirements. Achievement of
expected cash flows from operations and compliance with the Credit Agreement
covenant are dependent upon the Company's attainment of its Fiscal 2001 business
plan.

-33-

For Fiscal 2000 and Fiscal 1999, the weighted average interest rate on the
Company's revolving credit facilities was 8.61% and 8.12%, respectively, and the
peak borrowing levels for the two years were $611 million and $415 million,
respectively. As of February 3, 2001, borrowings under the Prior Credit
Agreement were $362 million and $1.2 million and $31.3 million was outstanding
in trade and standby letters of credit, respectively.

Senior Notes due 2003

The 12.5% Senior Notes due 2003 (the "Hills Senior Notes") were, at the
time of the acquisition of Hills, an unsecured obligation of Hills. The Hills
Senior Notes pay interest semiannually in January and July and mature July 2003.

During Fiscal 1999 and 2000, the Company, through open market purchases,
acquired Hills Senior Notes having a face value of $4.6 million and $2.7
million, respectively. In addition, during Fiscal 1999, as part of the final
valuation of the fair market value of all assets and liabilities acquired in the
Hills acquisition, the Company revalued the Hills Senior Notes at a discounted
rate of 11.79%. As of February 3, 2001 and January 29, 2000, Hills Senior Notes
with a face value of $43.6 million and $46.3 million and a recorded value of
$44.3 million and $47.2 million, respectively, remained outstanding.

Senior Notes due 2006

On April 27, 1999, the Company completed the sale of $200 million of its
10% seven-year senior notes (the "Ames Senior Notes"). The net proceeds from the
sale of the Ames Senior Notes, approximately $193.4 million, were used to reduce
outstanding borrowings under the Prior Credit Agreement.

The Ames Senior Notes pay interest semi-annually in April and October and
mature April 2006.

As of February 3, 2001, the payments due on long-term debt for the next
five years and thereafter were as follows:

Fiscal Years
Ending January Amount
-------------- ------
(000's omitted)
2002....................................................... $ ---
2003....................................................... 361,794
2004....................................................... 43,605
2005....................................................... ---
2006....................................................... ---
Thereafter................................................. 200,000

5. Lease Commitments, Beneficial Leases and Unfavorable Lease Liability:

Ames is committed under long-term leases for various retail stores,
warehouses, and equipment expiring at various dates through 2026 with varying
renewal options and escalating rent clauses. Some leases are classified as
capital leases under SFAS No. 13. Ames generally pays for real estate taxes,
insurance, and specified maintenance costs under real property leases. Most
leases also provide for contingent rentals based on percentage of sales in
excess of specified amounts.

Future minimum lease payments for leases as of February 3, 2001 were as
follows:

Lease Payments
-------------------------------------------------
Capital Financing Operating
Fiscal Year Ending January Leases Obligations Leases
- -------------------------- ------ ----------- ------
(000's omitted)
2002................................................................ $33,654 $ 6,257 $77,308
2003................................................................ 30,333 4,678 64,301
2004................................................................ 27,468 5,081 57,675
2005................................................................ 21,579 12,250 51,021
2006................................................................ 18,986 - 44,116
Thereafter.......................................................... 145,085 - 277,191
------------ --------------- -------------
Total minimum lease payments........................................ 277,105 28,266 $571,612
=============
Less: amount representing estimated executory costs................. 1,457 -
------------ ---------------
Net minimum lease payments.......................................... 275,648 28,266
Less: amount representing interest.................................. 113,232 6,299
------------ ---------------
Present value of net minimum lease payments......................... 162,416 21,967
Less: currently payable............................................. 14,883 4,135
------------ ---------------
Long-term lease obligations......................................... $147,533 $ 17,832
============ ===============

-34-

At February 3, 2001, the financing obligations represent sale/leaseback
arrangements. The leases, which have terms up to forty-four months, include
options to purchase some or all of the assets either at the end of the initial
lease term or renewal periods at an amount not greater than the then current
fair market value of the properties.

Total minimum lease payments have not been reduced by minimum sublease
rentals to be received in the aggregate under non-cancellable subleases of
operating leases of approximately $8.0 million as of February 3, 2001.
Amortization of capital lease assets was approximately $19.5, $19.8, and $2.8
million for Fiscal 2000, Fiscal 1999, and Fiscal 1998, respectively. Accumulated
amortization of capital lease assets at February 3, 2001 was $45.7 million. Rent
expense (income) was as follows:

Fiscal Fiscal Fiscal
2000 1999 1998
-------------- ------------- -------------
(000's omitted)
Minimum rent on operating leases............................... $81,661 $78,946 $55,566
Contingent rental expense...................................... 9,084 8,812 7,797
Sublease rental income......................................... (1,950) (1,423) (1,609)

An unfavorable lease liability was recorded in December 1992 under fresh
start reporting and represents the estimated liability related to lease
commitments that exceeded market rents for similar locations. As of February 3,
2001 and January 29, 2000, the unfavorable lease liability was $10.0 million and
$11.2 million, respectively, and is classified as part of other long-term
liabilities in the Consolidated Balance Sheets. This liability is being
amortized as a reduction to depreciation and amortization expense in the
Consolidating Statements of Operations over the remaining lease terms. The
amortization, recorded as a reduction to depreciation and amortization expense,
was $1.3 million in Fiscal 2000 and $1.4 million in each of fiscal years 1999
and 1998.

6. Stockholders' Equity:

Common Stock

On May 24, 1999, the Company completed the public offering of 5.1 million
shares of Common Stock at a price of $38.75 per share. The proceeds, net of
underwriting discounts, of approximately $187.3 million, were used to reduce
borrowings under the Prior Credit Agreement and for general corporate purposes.

The Board of Directors of the Company may authorize the issuance of one or
more series of Preferred Stock and specify for each such series the voting
powers (but not greater than one vote per share), designations, preferences, and
relative, participating, optional, redemption, conversion, exchange, or other
special rights, qualifications, limitations, or restrictions of such series, and
the number of shares in each series.

Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by stockholders and are entitled to receive dividends
when, as, and if declared by the Board of Directors. Dividends cannot be
declared under the terms of the Credit Agreement.

Treasury Stock

In August 1998, the Company's Board of Directors approved a stock
repurchase program and authorized management to purchase up to 1.5 million
shares of Common Stock. During Fiscal 1998, the Company acquired 79,495 shares
of its Common Stock. The Company did not repurchase any of its Common Stock
during Fiscal 1999. During Fiscal 2000, the Company acquired 1,000 shares of its
Common Stock, increasing the total Common Stock held to 80,495 shares.

Warrants

An aggregate of 200,000 Series B Warrants were issued on December 30, 1992.
Each such warrant entitled the holder to purchase one share of Common Stock at
any time from June 30, 1993 through December 30, 2000. The exercise price was
$5.92 per share. During Fiscal 1998, 100,000 Series B Warrants were exercised.
No Series B Warrants were exercised during Fiscal 1999. During Fiscal 2000, the
remaining, outstanding 100,000 Series B Warrants were exercised.

-35-

Stock Purchase Rights Agreement

On November 30, 1994, the Company adopted a Stock Purchase Rights Agreement
(the "Rights Agreement"). Unless previously redeemed by the Company, the Rights
will expire on November 29, 2004.

On September 24, 1999, the Company amended the Rights Agreement (the
"Amendment"), which was approved by the Company's Board of Directors. Among
other things, the Amendment amends the exercise price of a right issued pursuant
to the Rights Agreement to $180.00, subject to adjustment, and makes certain
other technical amendments to the Rights Agreement, most notably the elimination
of certain provisions commonly known as "continuing director" provisions.

7. Stock Options:

The Company currently has in place four stock option plans that, in
general, permit the Company to grant to employees and non-employee directors
options to purchase the Company's Common Stock at an exercise price not less
than 100% of the fair market value of the Common Stock on the date of grant.
These options, depending upon the plan under which they were granted, are
exercisable from six months to five years after date of grant and generally
terminate ten years after date of grant.

The following table sets forth the stock option activity for all stock
option plans for Fiscal 2000, Fiscal 1999 and Fiscal 1998 (shares in thousands):

2000 1999 1998
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year................... 1,618 $22.88 1,128 $12.00 914 $3.97
Granted............................. 1,202 7.84 744 35.51 608 19.09
Exercised........................... (145) 3.78 (173) 6.48 (375) 3.90
Forfeited........................... (135) 18.20 (81) 21.46 (19) 12.42
----- ---- ----
Outstanding at end of year.......... 2,540 17.11 1,618 22.88 1,128 12.00
===== ===== =====
Options exercisable at year-end..... 780 19.83 559 10.93 490 5.79
=== === ===
Weighted average fair
value of options granted.......... $5.95 $24.90 $13.56
===== ====== ======

The fair value of options granted per the above table was estimated on the
date of grant using the Black-Scholes pricing model with the following
assumptions: no dividend yield, expected option volatilities ranging from 68% to
118%, a risk-free interest rate equal to U.S. Treasury securities with a
maturity equal to the expected life of the option (weighted average interest
rate of 6.0%, 5.3% and 5.2% for 2000, 1999 and 1998, respectively), and an
expected life from date of grant until option expiration date (weighted average
expected life of 5.2, 5.3 and 5.4 years for 2000, 1999 and 1998, respectively).

The following table summarizes information about stock options outstanding
as of February 3, 2001 (options in thousands):

Options Outstanding Options Exercisable
------------------------------------------- -------------------------
Weighted
Number Average Weighted
Range of Of Options Remaining Weighted Number Weighted
Exercise Prices Outstanding Contractual Average Exercisable Average
at 2/3/01 Life Exercise Price at 2/3/01 Exercise Price
--------- ---- -------------- ----------- --------------

$1.50-3.00...... 84 4.2 $2.49 84 $2.49
$3.13-4.59...... 117 3.4 3.64 108 3.57
$6.06-7.06...... 228 4.4 6.99 10 6.74
$7.45-8.44...... 867 4.4 7.47 50 7.70
$14.38-24.75.... 589 2.9 19.26 254 17.64
$29.00-48.50.... 655 3.5 35.77 274 36.33
--- ---

2,540 3.8 17.11 780 19.83
==== ---

-36-

The Company accounts for its stock option plans under Accounting Principles
Board ("APB") Opinion No. 25. Had compensation cost for the Company's 2000,
1999, and 1998 stock option grants been determined in accordance with SFAS No.
123, the Company's net income and net income per common share for Fiscal 2000,
Fiscal 1999, and Fiscal 1998 would have approximated the proforma amounts below:

Fiscal 2000 Fiscal 1999 Fiscal 1998
----------- ----------- -----------
As As As
Reported Proforma Reported Proforma Reported Proforma
-------- -------- -------- -------- -------- --------
Net income.................. ($240,588) ($246,344) $17,127 $10,747 $33,830 $32,065
Net income per common share:
- - basic..................... ($8.19) ($8.38) $0.62 $0.39 $1.47 $1.39
- - diluted................... (a) (a) $0.62 $0.39 $1.40 $1.32

(a) Common stock equivalents have not been included because the effect would be anti-dilutive.

SFAS 123 does not apply to stock options granted prior to 1995.

8. Income Taxes:

The Company adopted SFAS No. 109 "Accounting for Income Taxes" in
conjunction with the adoption of fresh-start reporting in December 1992.

As a consequence of the adoption of fresh-start reporting and SFAS No. 109,
any tax benefits realized in the prior years for tax purposes after the
consummation date for pre-consummation cumulative temporary differences, as well
as for the pre-consummation net operating loss carryovers, were reported as
additions to paid-in-capital rather than as reductions in the tax provisions in
the Consolidated Statements of Operations. Tax benefits or liabilities realized
for book purposes after the consummation date were segregated from
pre-consumption deferred tax assets. Such tax benefits or liabilities of
post-consummation will impact future income tax provisions. Such income tax
provisions will have no significant impact on the Company's taxes payable or
cash flows.

For Fiscal 2000, the Company recorded an income tax benefit of $54.8
million. Included in that benefit is a provision for state income taxes of
approximately $1.1 million, of which $0.3 million will be paid in cash. During
this fiscal year, the Company increased its valuation allowance by $64 million,
as discussed below.

The (benefit) provision for income taxes is comprised of the following:

Fiscal Fiscal Fiscal
2000 1999 1998
---- ---- ----
(In millions)
Federal income tax............................................. $ --- $ --- $ 0.5
State income tax............................................... 1.1 1.2 ---
Deferred tax (benefit) provision............................... (55.9) (12.7) 18.3
Valuation allowance reduction.................................. --- (38.1) ---
------------ ------------- -------------
Total income tax (benefit) provision...................... $(54.8) $ (49.6) $ 18.8
============ ============= =============

-37-

Significant components of the Company's deferred tax assets (liabilities)
are as follows:

February 3, January 29,
2001 2000
---- ----
(In millions)
Fixed assets............................................................... $(2) $ 4
Self insurance reserves.................................................... 15 23
Store closing reserves..................................................... 75 22
Leases..................................................................... - 2
Inventory reserves......................................................... 2 1
Vacation pay reserve and other............................................. 45 37
Net operating loss carryovers.............................................. 400 327
-------------- --------------
Total deferred tax assets.................................................. 535 416
Valuation allowances...................................................... (105) (41)
-------------- --------------
Net deferred tax assets.................................................... $ 430 $ 375
============== ==============

The Company's provision for income taxes resulted in effective rates that
varied from the statutory federal income tax rate as follows:

Fiscal 2000 Fiscal 1999 Fiscal 1998
----------- ----------- -----------
Statutory federal income tax (benefit) rate...................... (35.0%) (35.0%) 35.0%
State and local taxes, net of federal benefit.................... (5.0%) (3.7%) 2.9%
Goodwill amortization............................................ (0.4%) 2.3% (3.4%)
Other............................................................ 0.7% 0.4% 1.1%
--------------- ------------ --------------
Effective tax rate before valuation allowance reduction.......... (39.7%) (36.0%) 35.6%
Valuation allowance (reduction) increase......................... 21.2% (122.1%) ---
--------------- ------------ --------------
Total effective tax (benefit) rate............................... (18.5%) (158.1%) 35.6%
=============== ============ ==============

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some or all of the deferred taxes will
not be realized. The Company has increased its valuation allowance on its
deferred tax assets by $64 million during Fiscal 2000. The valuation allowance
reduced the deferred tax asset to an amount, which the Company believes, more
likely than not, that it will realize based on the Company's estimated future
earnings. If the Company is unable to generate sufficient taxable income in the
future during the loss carryforward periods, increases in the valuation
allowance will be required through a charge to the tax expense.

The Company has net operating loss carryovers of approximately $1.0
billion, which are currently available without any annual limitation. The
ability to use these losses will expire between 2007 and 2021. Net operating
losses and other tax credits will be subject to an annual limitation if the
Company experiences a change in control as defined by Internal Revenue Code
Section 382. Additionally, the Company has filed a $20 million refund claim
under Section 172(f) of the Internal Revenue Code. The Company has received from
the IRS an adverse Technical Advice Memorandum ("TAM"). The positions set forth
in the TAM would have the effect of denying all or virtually all of the refund
claim. The Company is presently considering what further action to take.

In addition, Ames has targeted jobs tax credit carryovers of approximately
$7 million, which will expire beginning in 2004, and alternative minimum tax
credit carryovers of approximately $4 million, which have no expiration period.
Federal net operating loss carryovers for fiscal years subsequent to January 27,
1990 are subject to future adjustments, if any, by the IRS.

As a result of the acquisition of the common stock of Hills, Ames had
succeeded to the tax attributes of Hills, including net operating losses of $241
million and general business credits of $11 million. These tax attributes expire
between 2001 and 2018. Ames also has succeeded to minimum tax credit
carryforwards of $3 million, which do not expire. These tax attributes are
significantly limited under Internal Revenue Code Sections 382 and 383,
respectively, as a result of the change in control caused by the Hills
acquisition. The resulting deferred tax asset has been reduced accordingly.
These tax attributes would be further limited if the Company experiences a
change in control as defined by Internal Revenue Code Section 382.

Ames has substantial potential state net operating loss carryovers. The
utilizable amounts of such state operating losses have not been quantified
because of the uncertainty related to the mix of future profits in specific
states.

-38-

Hills filed a claim for a refund of federal taxes for the subsequent years.
The refund claim, which is pending from the IRS, could result in a refund of
approximately $7.0 million. If the Company receives this refund amount, there
will be a corresponding adjustment to goodwill recorded in connection with the
Hills acquisition.

9. Benefit and Compensation Plans:

Retirement and Savings Plans

Ames has defined contribution retirement and savings plans that are
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986,
as amended, for employees who are classified as full-time and have at least
sixty days of service, or who are part-time and have one year of service, and
have completed at least one thousand hours of service in a twelve month period.
For each participant's contribution (up to a maximum of 5% of such participant's
total compensation), the Company contributes to the Retirement and Savings Plan
an amount equal to 50% of the first 4% and 100% of the next 1% contribution.
Ames funds all administrative costs incurred by the plans. Ames's expense
associated with this plan amounted to approximately $5.2 million, $6.0 million,
and $3.6 million, in 2000, 1999, and 1998, respectively.

Annual Incentive Compensation Plan

The Company has an Annual Incentive Compensation Plan (the "Annual Bonus
Plan") that is subject to annual review by the Board of Directors. The Annual
Bonus Plan provides annual cash bonuses based on the achievement of the
Company's financial goals for the year (and customer service goals for store and
field management). There are approximately 1,500 members of management eligible
under the plan. Bonus expense recorded under the plan was $8.8 million, $9.4
million, and $8.3 million for Fiscal 2000, 1999, and 1998, respectively.

Restricted Stock Awards

1995 Long Term Incentive Plan

Pursuant to the Company's 1995 Long Term Incentive Plan (the "1995
Incentive Plan"), the Company may make awards of an aggregate amount of up to
500,000 shares of Common Stock and cash payments in an amount up to 50% of the
fair market value (as defined in the 1995 Incentive Plan) of the Common Stock
awarded, determined as of and paid on the vesting date.

As of February 3, 2001, awards aggregating to 355,000 shares of Common
Stock had been made to certain executives of the Company, 35,000 of which remain
unvested.

1998 Incentive Plan

Pursuant to the Company's 1998 Management Stock Incentive Plan (the "1998
Incentive Plan"), awards aggregating 180,000, 45,000 and 10,000 shares of Common
Stock were made to certain executives during Fiscal 1998, 1999, and 2000,
respectively. As of February 3, 2001, awards with respect to 205,000 shares of
Common Stock, net of forfeitures, remained issued. Fifty percent (50%) of the
awards with respect to 195,000 shares of Common Stock vest on the fourth
anniversary from the date of grant and 50% on the fifth anniversary. The
remaining awards with respect to 10,000 shares of Common Stock vest three years
from the date of grant.

A portion of the estimated market value of the awards, including the cash,
has been accrued as compensation expense as of February 3, 2001. The Company
recorded as compensation expense for the 1995 Incentive Plan and the 1998
Incentive Plan $1.2 million, $1.3 million, and $1.9 million during Fiscal 2000,
1999, and 1998, respectively.

Hills Post Retirement Benefits

In connection with the acquisition of Hills, Ames assumed the obligations
for a post retirement medical plan. The plan was subsequently curtailed and the
cost associated with the remaining closed group of retirees is not significant.

-39-

10. Commitments and Contingencies:

Wage and Hour Litigation

Since March 1995, the Company has been named as a defendant in several
class action complaints which allege that the Company was obligated to pay
overtime to its hardlines and softlines assistant store managers. The Company
has consistently stated its belief that these positions are appropriately
designated as exempt positions not calling for overtime pay. The Company has
settled several of these cases. These settlements have not required any change
in the Company's treatment of the status of its hardlines and softlines
assistant managers. The Company has entered into a settlement as to one
remaining case. This settlement, which is subject to court approval, is
described in Item 3 of this report on Form 10-K.

Other Matters

In June 1999, the Company announced a $112 million, five-year, strategic
outsourcing agreement with IBM to support core information technology systems
for the corporate office and the stores. Under the agreement, IBM Global
Services is responsible for all data center operations and support for
substantially all information systems equipment.

The Company is party to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business. The
Company believes that its likely liability as to these matters will not have a
material adverse effect on its consolidated financial position or results of
operations.

11. Supplemental Cash Flow Information:

Fiscal Fiscal Fiscal
2000 1999 1998
------------- ------------- ------------
Cash paid for interest and income taxes were as follows: (000's omitted)
Interest...................................................... $81,726 $51,485 $12,166
Income taxes.................................................. $1,834 $3,646 $125
Ames entered into other non-cash investing and financing
activities as follows:
New capital lease obligations................................. $4,478 $14,942 $25,859
Issuance of Common Stock under the 1998 Incentive Plan........ --- $1 $2

Inventory increased $28.3 million in Fiscal 1999 when a purchase accounting
valuation adjustment related to the Hills acquisition was deemed to be no longer
necessary and was eliminated, resulting in a corresponding reduction of
goodwill. This increase in inventory is properly not reflected as a use of cash
in the Consolidated Statement of Cash Flows.

12. Fair Values of Financial Instruments:

The Company's financial instruments as of February 3, 2001 and January 29,
2000 were cash, cash equivalents, and long-term debt. For cash and cash
equivalents, the carrying amounts reported in the Consolidated Balance Sheets
approximated fair values. For long-term debt obligations, the fair values were
estimated using a discounted cash flow analysis (based upon the Company's
incremental borrowing rates for similar types of borrowing arrangements).

The carrying amounts and fair values of the Company's financial instruments
at February 3, 2001 and January 29, 2000 were as follows:

Fiscal 2000 Fiscal 1999
------------------------------ -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------- ------------ --------------
(000's omitted)
Cash and cash equivalents....................... $49,761 $49,761 $30,612 $30,612
Long-term debt:
Secured debt................................. 361,794 361,794 174,544 174,544
Unsecured debt............................... 244,263 96,377 247,225 236,758

13. Store Closing Charges:

In the fourth quarter of Fiscal 2000, the Company recorded charges of
$139.3 million in connection with the closing of thirty-two stores, including a
$9.5 million inventory impairment charge classified as part of cost of
merchandise sold. The Company closed the stores during the first quarter of
2001, resulting in a workforce reduction of approximately 2,000 employees.

-40-

The Company did not record any charges in connection with the closing of
stores in Fiscal 1999. The Company recorded a charge in Fiscal 1998 of $8.2
million for the closing of seven stores.

The following items represent the major components of the total charges
recorded in January 2001 and 1999 in connection with store closings:

Fiscal Fiscal Fiscal
Item 2000 1999 1998
---- -------------- --------------- ------------
(000's omitted)
Lease costs $ 88,815 $ --- $ 6,254
Net fixed asset write-down 29,307 --- 1,161
Other occupancy costs 9,101 --- 437
Severance costs 2,583 --- 370
-------------- --------------- ------------
Store closing charge 129,806 --- 8,222
Inventory write-down 9,453 --- ---
-------------- --------------- ------------
Total charges $139,259 --- $ 8,222
============== =============== ============

The lease and other occupancy costs provided for in the store closing
charge include all projected occupancy costs from date of closing until
estimated lease disposition date.

Fixed assets associated with the closing stores were reviewed for
impairment in accordance with SFAS No. 121. The review of the closing stores
resulted in a write-down of $29.3 million which includes $19.7 million related
to fixtures, equipment, and leasehold improvements, and $9.6 million related to
beneficial lease rights.

The remaining closed store reserve recorded at the end of Fiscal 1999
primarily reflects the anticipated costs of ongoing property lease commitments
for previously announced closed stores and other related facility exit costs.

Management expects to incur substantially all of the charges included in
the reserve except lease and other occupancy costs in the first quarter of
fiscal year ending February 2, 2002. The lease costs and other occupancy costs
are expected to be paid over nine years.

During Fiscal 2000 and 1999, with respect to the thirty-two stores, the
Company recorded net sales of $205.0 million and $147.7 million, respectively,
exclusive of the period when the thirty-one former Hills stores were operating
under the "Hills" name. For the same years, the pre-tax operating loss for the
thirty-two stores was $20.4 million and $12.9 million, respectively.

The Company paid approximately $5.9 million, $9.5 million, and $2.5 million
in Fiscal 2000, 1999, and 1998, respectively, primarily for lease costs related
to previously closed stores.

14. Leased Department and Other Income:

The following is a summary of the major components of "Leased department
and other income":

Fiscal Fiscal Fiscal
Item 2000 1999 1998
---- -------------- -------------- -------------
(In thousands)
Leased department income......................................... $27,490 $25,378 $17,914
Concession and vending income.................................... 2,046 1,991 1,508
Layaway service fees............................................. 4,193 3,736 2,644
Gain on sale of assets, net...................................... 3,953 2,479 1,350
Various other.................................................... 8,731 8,106 6,748
-------------- -------------- -------------
$46,413 $41,690 $30,164
============== ============== =============

-41-

15. Quarterly Financial Data (Unaudited):

Summarized, unaudited, quarterly financial data for the last three fiscal
years are shown below.

First Second Third Fourth
----- ------ ----- ------
(In thousands, except per share data)
Fiscal 2000:
Net sales....................................... $830,657 $872,034 $920,321 $1,330,573
Gross margin.................................... 227,733 241,153 230,559 321,889
Loss before cumulative effect adjustment and
extraordinary item.............................. (29,085) (22,111) (37,236) (145,192)
Loss per share before cumulative effect
adjustment and extraordinary item............... (0.99) (0.75) (1.27) (4.94)
Net loss........................................ (29,085) (22,111) (37,236) (152,156)
Net loss per share - basic............... (0.99) (0.75) (1.27) (5.18)
diluted............. (b) (b) (b) (b)

Fiscal 1999: (a)
Net sales....................................... $ 816,159 $ 859,975 $ 883,500 $1,277,220
Gross margin.................................... 238,586 258,953 245,045 378,884
Income (loss) before cumulative effect
adjustment...................................... (28,639) (21,478) (27,700) 96,051
Income (loss) per diluted share before
cumulative effect adjustment.................... (1.19) (0.78) (0.95) 3.23
Net income (loss)............................... (29,746) (21,478) (27,700) 96,051
Net income (loss) per share - basic............. (1.23) (0.78) (0.95) 3.30
diluted........... (1.23) (0.78) (0.95) 3.23

(a) The first three quarters were restated to reflect the adoption of SAB No. 101 as of the beginning of Fiscal 1999 (see Note 1).
(b) Common stock equivalents have not been included because the effect would be anti-dilutive.

16. Pro Forma Information (Unaudited):

The following table reflects unaudited pro forma combined results of
operations of the Company and Hills on the basis that the Hills acquisition had
taken place at the beginning of Fiscal 1998:

Year Ended
January 30, 1999
----------------
(In Thousands, except per share amounts)
Net sales......................................................... $4,131,194
Net income (loss)................................................. (54,903)
Earnings (loss) per Common share.................................. $ (2.39)

The unaudited pro forma results were prepared for comparative purposes
only. It does not purport to be indicative of the results of operations which
actually would have resulted had the acquisition been consummated at the
beginning of Fiscal 1998, or of future results of operations of the consolidated
entities.

The above pro forma net income and earnings per common share amounts for
the year ended January 30, 1999 reflect the previously recorded write-down of
Hills deferred tax assets of approximately $49.6 million (which is net of a
reversal of approximately $5.9 million of accrued tax liabilities). Excluding
the write-down of the Hills deferred tax assets recorded as of October 31, 1998,
pro forma net loss and loss per common share would have been $5.3 million and
$0.23, respectively, for the year ended January 30, 1999.

-42-

SCHEDULE II

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)

Balance at Charged to Balance at
Beginning Cost and End of
Description of Period Expense Reclassifications Deductions Period
- ----------- --------- ------- ----------------- ---------- ------

Fiscal 2000:

Store Closing
Reserve $55,468 $129,806 (d) --- ($5,909) $179,365

Fiscal 1999:

Store Closing
Reserve $59,768 --- $5,170 (a) ($9,470) $55,468 (c)

Fiscal 1998:

Store Closing
Reserve $12,050 $8,222 $42,043 (b) ($2,547) $59,768

(a) Represents an adjustment to the fair market value of assumed Hills store closing liabilities recorded in connection with
the finalization of the Hills acquisition accounting and reclassification of other liabilities associated with closed stores.
(b) Represents the store (and other facilities) closing reserve assumed and recorded in connection with the Hills acquisition.
(c) The majority of this reserve relates to ongoing property lease commitments for stores closed through Fiscal 1999.
(d) Represents the closing of thirty-two stores.

-43-

E X H I B I T I N D E X

Cross-reference
Exhibit Or page number
Number Exhibit In Form 10-K
- ------ ------- ------------

2.1 Third Amended and Restated Plan of Reorganization of the Ames
Department Stores, Inc. and other members of the Ames Group, Citibank,
N.A. as Agent, the Parent Creditor's Committee, the Subsidiaries
Creditor's Committee, the Bond holders' Committee and the Employees'
Committee dated October 23, 1992 (incorporated herein by reference to
Exhibit 2 of the Registrant's Report on Form 8-K filed with the
Commission on December 31, 1992).

2.2 Statement of Ames Group with respect to conditions to Consummation of
Third Amended and Restated Joint Plan of Reorganization of Ames
Department Stores, Inc. other members of Ames Group, Citibank, N.A.,
the Parent Creditor's Committee, Subsidiaries Creditors' Committee,
Bondholders' Committee and Employees' Committee dated December 28,
1992 (incorporated herein by reference to Exhibit 2B of the
Registrant's Report on Form 8-K filed with the Commission on December
31, 1992).

2.3 Ames Department Stores, Inc. Information Supplementing Disclosure
Statement dated December 29, 1992 (incorporated herein by reference to
Exhibit 2C of the Registrant's Report on Form 8-K filed with the
Commission on December 31, 1992).

2.4 Agreement and Plan of Merger, dated as of November 12, 1998, among
Ames Department Stores, Inc., HSC Acquisition Corporation and Hills
Stores Company (incorporated herein by reference to Exhibit 99(c)(1)
of the Registrant's Schedule 14D-1 filed with the Commission on
November 12, 1998).

3.1 Amended and Restated Certificate of Incorporation of Ames Department
Stores, Inc.(incorporated herein by reference to the Registrant's
definitive proxy filed with the Commission on April 8, 1996).

3.2 Form of By-laws of Ames Department Stores, Inc. as amended February
23, 1995 (incorporated herein by reference to Exhibit 3(b) of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 28, 1995).

4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of
Ames Department Stores, Inc.

4.2 Series B Warrant Certificate for Purchase of New Common Stock of Ames
Department Stores, Inc. (incorporated herein by reference to Form 8-A
filed with the Commission on December 11, 1992).

-44-

E X H I B I T I N D E X

Cross-reference
Exhibit Or page number
Number Exhibit In Form 10-K
- ------ ------- ------------

4.3 Rights Agreement, dated as of November 30, 1994, between Ames
Department Stores, Inc. and Chemical Bank, as Rights Agent
(incorporated herein by reference to Exhibit 4 of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended October
29, 1994).

4.4 Amendment No. 1, dated as of September 24, 1999, to the Rights
Agreement dated as of November 30, 1994, by and between Ames
Department Stores, Inc. and ChaseMellon Shareholder Services, L.L.C.
as successor to Chemical Bank as Rights Agent (incorporated herein by
reference to Exhibit 4 of the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended October 30, 1999).

10.1 Retirement and Savings Plan as restated December 27, 1984, and
Amendment No. 1 (incorporated herein by reference to Exhibit 10(n) of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
January 26, 1985).

10.2 Settlement Agreement, dated March 31, 1994, between Ames Department
Stores, Inc. and Subsidiaries and Wertheim Schroder & Co. Incorporated
and James A. Harmon (incorporated herein by reference to Exhibit 10 of
the Registrant's Report on Form 8-K filed with the Commission on April
8, 1994).

10.3 1994 Management Stock Option Plan (incorporated herein by reference to
the Registrant's definitive Proxy statement filed with the Commission
on May 5, 1994).

10.4 1994 Non-Employee Directors Stock Option Plan (incorporated by
reference to the Registrant's definitive Proxy statement filed with
the Commission on April 10, 1995).

10.5 1995 Long Term Incentive Plan (incorporated by reference to the
Registrant's definitive Proxy statement filed with the Commission on
April 10, 1995).

10.6 Employment Agreement, dated June 1, 1998, between Ames Department
Stores, Inc. and Joseph R. Ettore, (incorporated herein by reference
to Exhibit 10(j) of the Registrant's Report on Form 8-K filed with the
Commission on June 30, 1998).

10.7 Second Amended and Restated Credit Agreement, dated December 31, 1998,
among certain financial institutions, as Lenders, BankAmerica Business
Credit, as the Administrative Agent, and Ames FS, Inc., Ames
Merchandising Corporation, and Hills Department Store Company,
(incorporated herein by reference to Exhibit 10(k) of the Registrant's
Report on Form 8-K filed with the Commission on January 15, 1999).

-45-

E X H I B I T I N D E X

Cross-reference
Exhibit Or page number
Number Exhibit In Form 10-K
- ------ ------- ------------

10.8 Post Merger Transition and Agency Agreement, dated as of December 31,
1998, among the Gordon Brothers Retail Partners, LLC and The Nassi
Group, LLC, Hills Stores Company, Hills Department Stores Company and
Ames Merchandising Corporation (incorporated herein by reference to
Exhibit 10(l) of the Registrant's Report on Form 8-K filed with the
Commission on January 15, 1999).

10.9 1998 Stock Incentive Plan (incorporated herein by reference to the
Registrant's definitive proxy statement filed with the Commission on
April 8, 1998).

10.10Employment Agreement, dated March 23, 1999, between Ames Department
Stores, Inc. and Denis Lemire (incorporated herein by reference to
Exhibit 10 of the Registrant's Report on Form 8-K filed with the
Commission on April 2, 1999).

10.11Employment Agreement, dated March 23, 1999, between Ames Department
Stores, Inc. and Rolando de Aguiar (incorporated herein by reference
to Exhibit 10 of the Registrant's Report on Form 8-K filed with the
Commission on April 2, 1999).

10.12Senior Secured Financing Agreement dated March 2, 2001, between Ames
Department Stores, Inc. and GE Capital (incorporated herein by
reference to Exhibit 10 on Form 8-K filed with the Commission on March
12, 2001).

11 Schedule of computation of basic and diluted net earnings per share. 47

12 Ratio of Earnings to Fixed Charges 48

21 Subsidiaries of the Registrant 49

-46-

Exhibit 11

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED
NET EARNINGS PER SHARE
(In thousands, except per share amounts)

53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
February 3, January 29, January 30,
2001 2000 1999
--------------- ------------- --------------
Income before Cumulative Effect adjustment and
Extraordinary item.......................................... ($233,624) $18,234 $33,830
Cumulative Effect adjustment, net of tax......................... - (1,107) -
Extraordinary item, net of tax................................... (6,964) - -
--------------- ------------- --------------
Basic and diluted net income................................ ($240,588) $17,127 $33,830
=============== ============= ==============
For Basic Earnings Per Share:
Weighted average number of common shares outstanding during
the period (a)................................................... 29,383 27,517 23,010
Basic earnings per share:
Basic income per share before Cumulative Effect adjustment
and Extraordinary item........................................... ($7.95) $0.66 $1.47
Cumulative Effect adjustment, net of tax......................... - (0.04) -
Extraordinary item, net of tax................................... (0.24) - -
--------------- ------------- --------------
Basic net income per share.................................. ($8.19) $0.62 $1.47
=============== ============= ==============
For Diluted Earnings Per Share:
Weighted average number of common shares outstanding during
the period (a)................................................... 29,383 27,517 23,010
Add Common stock equivalent shares represented by:
Series B Warrants........................................... 3 20 98
Series C Warrants........................................... - - 440
Options under 1994 Management Stock Option
Plan and 1998 Stock Incentive Plan.......................... 113 106 606
Options under 2000 Store Manager Stock Option Plan.......... 14 - -
Options under 1994 Non-Employee Director
Stock Option Plan........................................... 30 15 62
--------------- ------------- --------------
Weighted average number of common and common equivalent
shares........................................................... 29,543 27,658 24,216
=============== ============= ==============
Diluted earnings per share:
Diluted income per share before cumulative effect
adjustment....................................................... ($7.95) 0.66 1.40
Cumulative Effect adjustment, net of tax......................... - (0.04) -
Extraordinary item, net of tax................................... (0.24) - -
--------------- ------------- --------------
Diluted net income per share................................ ($8.19) (b) $0.62 $1.40
=============== ============= ==============

(a) The weighted average number of common shares outstanding is net of Treasury Stock.
(b) Common stock equivalents have not been included because the effect would be anti-dilutive.

-47-

Exhibit 12
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except ratio data)

Fiscal Year Ended
-------------------------------------------------------------------------
February 3, January 29, January 30, January 31, January 25,
2001 2000 1999 1998 1997
------------ ------------ ------------- ------------ ------------

(Loss) income before income taxes,
extraordinary item and cumulative
effect adjustment (288,377) (31,355) 52,605 53,633 26,804

Add:
Interest expense 87,961 60,843 15,253 11,600 19,043
Interest component of rental
expense 28,876 29,253 21,121 18,409 16,541
------------ ------------ ------------- ------------ ------------

Earnings available for fixed charges (171,540) 58,741 88,979 83,642 62,388

Fixed Charges:
Interest expense 87,961 60,843 15,253 11,600 19,043
Interest component of rental expense 28,876 29,253 21,121 18,409 16,541
------------ ------------ ------------- ------------ ------------

Total fixed charges 116,837 90,096 36,374 30,009 35,584

Ratio of earnings to fixed charges (1.5)x 0.7x 2.4x 2.8x 1.8x

For the purpose of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes, extraordinary item, and cumulative effect
adjustment plus fixed charges (net of capitalized interest). Fixed charges
consist of interest expense on all indebtedness and capitalized interest,
amortized premiums, discounts and capitalized expenses related to indebtedness,
and one-third of rent expense on operating leases representing that portion of
rent expense deemed by us to be attributable to interest. For the fiscal year
ended February 3, 2001, the amount of additional earnings that would have been
required to cover fixed charges for this period was $288.4 million.

-48-

EXHIBIT 21

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT

As of February 3, 2001, the subsidiaries of the Company were as follows:

Name State of Incorporation
---- ----------------------

Ames Transportation Systems, Inc..................................................... Delaware

AmesPlace.com, Inc................................................................... Delaware

Ames Realty II, Inc.................................................................. Delaware

Ames Merchandising Corporation....................................................... Delaware

-49-