<PAGE>   1
                                                                      EXHIBIT 13
                                                                      ----------

FINANCIAL SUMMARY

(Thousands except per share amounts, ratios and store and associate data)
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------
 Fiscal year                            1998(+)        1997(+)        1996(+)        1995*(+)       1994(+)
---------------------------------------------------------------------------------------------------------------
 SUMMARY OF OPERATIONS
<S>                                   <C>            <C>            <C>            <C>            <C>
Net sales                             $3,885,753     $3,617,856     $2,997,340     $2,516,555     $2,108,310
Gross income                          $1,568,691     $1,337,537     $1,038,923     $  810,928     $  696,787
Operating income-                     $  670,849     $  495,552-    $  456,242-    $  384,196     $  334,388
Operating income as a
  percentage of sales-                     17.3%           13.7%-         15.2%-         15.3%          15.9%
Income before income taxes            $  657,199     $  473,836     $  428,310     $  337,959     $  334,388
Net income-                           $  394,199     $  283,836-    $  257,310-    $  202,959     $  200,388
Net income as a
  percentage of sales-                      10.1%           7.8%-          8.6%-          8.1%           9.5%
---------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL INFORMATION
Total assets                          $1,448,077     $1,347,700     $1,135,162     $  943,353     $  768,551
Return on average assets-                     28%            23%-           25%-           24%            29%
Working capital                       $  392,868     $  427,603     $  308,495     $  217,277     $  197,957
Current ratio                                1.7            2.0            1.9            1.8            2.2
Capital expenditures                  $  121,543     $  124,275     $  123,630     $  128,229     $  107,037
Long-term debt                        $  250,000     $  350,000     $  350,000     $  350,000           --

Debt-to-equity ratio                          41%            66%            93%           143%          --
Shareholders' equity                  $  608,743     $  530,895     $  377,253     $  245,037     $  550,395
Return on average
  shareholders' equity-                       69%            63%-           83%-           51%            39%
Comparable store sales increase                5%            11%             7%             1%            13%
---------------------------------------------------------------------------------------------------------------
PER SHARE RESULTS++
Basic net income-                     $     1.50     $     1.07-    $     0.97-     $  0.87     $     0.91
Diluted net income-                   $     1.49     $     1.07-    $     0.97-     $  0.87     $     0.91
Dividends                             $     0.53     $     0.50     $     0.46      $  0.11+          --
Book value                            $     2.36     $     2.00     $     1.42      $  0.92     $     2.50
Diluted weighted average
  shares outstanding                     265,060        266,212        265,708        232,365        220,500
---------------------------------------------------------------------------------------------------------------
STORES AND ASSOCIATES
  AT END OF YEAR
Total number of stores open                1,890          1,710          1,609          1,293          1,037
Selling square feet                    5,794,000      5,328,000      5,047,000      4,230,000      3,419,000
Number of associates                      55,000         50,000         43,900         39,300         30,100
---------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
 Fiscal year                              1993            1992          1991
-----------------------------------------------------------------------------------
 SUMMARY OF OPERATIONS
<S>                                    <C>            <C>            <C>
Net sales                              $1,630,828     $1,325,326     $1,199,496
Gross income                           $  496,500     $  397,936     $  366,938
Operating income                       $  218,462     $  167,287     $  177,837
Operating income as a
  percentage of sales                        13.4%          12.6%          14.8%
Income before income taxes             $  218,462     $  167,287     $  177,837
Net income                             $  132,462     $  102,287     $  106,404
Net income as a
  percentage of sales                         8.1%           7.7%           8.9%
-----------------------------------------------------------------------------------
OTHER FINANCIAL INFORMATION
Total assets                           $  655,061     $  611,429     $  487,388
Return on average assets                       21%            19%            26%
Working capital                        $  157,464     $  151,870     $  169,703
Current ratio                                 2.3            2.6            3.1
Capital expenditures                   $   81,145     $   78,792         76,975
Long-term debt                               --             --             --

Debt-to-equity ratio                         --             --             --
Shareholders' equity                   $  469,136     $  455,180     $  371,188
Return on average
  shareholders' equity                         29%            25%            36%
Comparable store sales increase                 9%             1%             8%
-----------------------------------------------------------------------------------
PER SHARE RESULTS
Basic net income                       $     0.60     $     0.46     $     0.48
Diluted net income                     $     0.60     $     0.46     $     0.48
Dividends                                    --             --             --
Book value                             $     2.13     $     2.06     $     1.68
Diluted weighted average
  shares outstanding                      220,500        220,500        220,500
-----------------------------------------------------------------------------------
STORES AND ASSOCIATES
  AT END OF YEAR
Total number of stores open                   879            743            662
Selling square feet                     2,915,000      2,349,000      1,895,000
Number of associates                       22,500         15,900         14,200
------------------------------------------------------------------------------------
</TABLE>


*        Fifty-three week fiscal year


-        Including special and nonrecurring charge of $67.6 million in 1997 and
         $12.0 million in 1996


+        Represents one quarter's dividend subsequent to the Company's October
         1995 initial public offering

34


(+)      Certain amounts for the five fiscal years ended January 30, 1999 have
         been restated as a result of the Company's change in accounting related
         to gift certificates, store credits and layaway sales (see Note 2 to
         the Consolidated Financial Statements).

++       Per share results reflect the impact of the five percent stock dividend
         issued on June 22, 1999 as if it had occurred at the beginning of 1991.

<PAGE>   2
MANAGEMENT'S DISCUSSION AND ANALYSIS


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CHANGE IN ACCOUNTING FOR GIFT CERTIFICATES, STORE CREDITS AND LAYAWAY SALES

The Company sells gift certificates in exchange for cash and issues store
credits in exchange for the value of returned merchandise.  These gift
certificates and store credits do not expire and both can be redeemed toward
the purchase of merchandise in the future. The Company also offers a layaway
sales program, which allows customers to make payments over a period of time
toward the purchase of merchandise.

As discussed in Note 2 to the Consolidated Financial Statements, the Company has
changed its accounting for gift certificates, store credit and layaway sales.
The change was made after the issuance of the recent Securities and Exchange
Commission Staff Accounting Bulletin, No. 101, "Revenue Recognition in Financial
Statements." The Company had historically recognized net receipts/(redemptions)
from gift certificates and store credits as a reduction/(increase) to general,
administrative and store operating expenses. Layaway sales were recognized upon
receipt of the initial payment. The Company now defers the recognition of income
on these transactions until the merchandise is delivered to the customer.

The Company has given retroactive effect to this accounting change by restating
its previously issued financial statements beginning with fiscal 1996. As a
result of the change in accounting, net income for 1998 was reduced from the
previously reported amounts by $6.0 million, or $.02 per share, net income for
1997 was reduced by $5.1 million or $.02 per share, and net income for 1996 was
reduced by $0.9 million, or $0.00 per share. The change in accounting also
results in a shift in the pattern of quarterly earnings (see Note 16 to the
Consolidated Financial Statements).

STOCK DIVIDEND DECLARED SUBSEQUENT TO 1998

On June 22, 1999, the Company declared a five percent stock dividend to
both The Limited and public shareholders. The stock dividend resulted in the
issuance of 11.8 million additional shares. All share and per share information
for all periods presented have been restated to reflect the five percent stock
divided (see Notes to the Consolidated Financial Statements).

RESULTS OF OPERATIONS

Net sales for the fourth quarter of 1998 were $1.531 billion, an increase of 10%
from $1.397 billion for the fourth quarter a year ago. Gross income increased to
$703.4 million from $592.5 million in 1997 and operating income increased to
$390.8 million from $253.4 million in 1997. Earnings per diluted share were
$0.88 versus $0.56 in 1997. In 1997, operating income included a $68 million
special and nonrecurring charge reflecting the closing of Cacique, a 118-store
lingerie business. Excluding this charge, earnings per diluted share increased
24% to $0.88 versus $0.71 for the fourth quarter in 1997.

    Net sales for the fiscal year ended January 30, 1999 were $3.886 billion, an
increase of 7% from $3.618 billion for last year. Gross income increased to
$1.569 billion from $1.338 billion in 1997 and operating income increased to
$670.8 million from $495.6 million in 1997. Earnings per diluted share were
$1.49 per share, compared to $1.07 last year. Excluding the impact of the
Cacique charge, sales increased 10% and earnings per diluted share increased 22%
to $1.49 versus $1.22 in 1997.


                                 [PHOTOGRAPH]


Business highlights include the following:
-------------------------------------------------------------------------------

o Bath & Body Works', Intimate Brands' fastest growing and highest profit margin
  business, sales grew 20% in 1998 to $1.272 billion. Operating profits grew
  23%.

o The Victoria's Secret brand grew to $2.588 billion in 1998, a 6% sales
  increase. Victoria's Secret brand teams continue to build strong brand equity
  through fashion-right, high-quality products, major product introductions, and
  successful brand extensions such as Victoria's Secret Beauty. The introduction
  of www.VictoriasSecret.com in December 1998 has increased the prospects of
  building a global sales base at a faster pace.

o Victoria's Secret Stores' sales increased 7% to $1.829 billion, while
  operating profits grew 14%.

o Sales at Victoria's Secret Catalogue were up 3%, while operating profits were
  down slightly. Sales productivity improved with a second half "fewer, better
  books" strategy and more focused mailings.

o In January 1999, the Company announced its intention to repurchase up to $500
  million of its common stock on a proportionate basis from both the open market
  and The Limited, Inc. As of January 30, 1999, the Company had repurchased a
  total of 2.7 million shares for $95.5 million.

<TABLE>
<CAPTION>

Intimate Brands Number of Stores

 1994      1995      1996      1997      1998
<S>        <C>      <C>       <C>       <C>
1,037      1,293     1,609     1,828*    1,890
</TABLE>

<TABLE>
<CAPTION>

Intimate Brands Capital Expenditures
(in millions)

 1994      1995      1996      1997      1998
<S>        <C>      <C>       <C>       <C>
 $107      $128      $124      $124      $122
</TABLE>

* Before closing 118 Cacique stores on January 31, 1998

                                                                              35
<PAGE>   3



FINANCIAL SUMMARY

The following summarized financial data compares 1998 to the comparable periods
for 1997 and 1996:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                          % Change
                                                                                                      ----------------------
NET SALES (MILLIONS):                                          1998         1997         1996         1998-97       1997-96
<S>                                                          <C>          <C>          <C>               <C>         <C>
  Victoria's Secret Stores                                   $ 1,829      $ 1,702      $ 1,450            7%          17%
  Bath & Body Works                                            1,272        1,057          753           20%          40%
-----------------------------------------------------------------------------------------------------------------------------
    Total retail sales                                         3,101        2,759        2,203           12%          25%

  Victoria's Secret Catalogue                                    759          734          684            3%           7%
  Other*                                                          26          125          110           --           --
-----------------------------------------------------------------------------------------------------------------------------
    Total net sales                                          $ 3,886      $ 3,618      $ 2,997            7%          21%
-----------------------------------------------------------------------------------------------------------------------------
COMPARABLE STORE SALES:
  Victoria's Secret Stores                                         4%          11%           5%
  Bath & Body Works                                                7%          11%          11%
-----------------------------------------------------------------------------------------------------------------------------
    Total comparable store sales increase*                         5%          11%           7%
-----------------------------------------------------------------------------------------------------------------------------
STORE DATA*:
  Retail sales increase attributable to new and
    remodeled stores (1998 change excludes impact
    of closing Cacique)                                            7%          14%          19%
  Retail sales per average selling square foot               $   558      $   532      $   495            5%           7%
  Retail sales per average store (thousands)                 $ 1,723      $ 1,661      $ 1,583            4%           5%
  Average store size at the end of year
    (selling square feet)                                      3,066        3,116        3,137           (2%)         (1%)
  Retail selling square feet at end of year (thousands)        5,794        5,328        5,047            9%           6%
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF STORES:
  Beginning of year                                            1,710        1,609        1,293
    Opened                                                       201          233          325
    Closed                                                       (21)        (132)          (9)
-----------------------------------------------------------------------------------------------------------------------------
  End of year                                                  1,890        1,710        1,609           11%           6%
==============================================================================================================================
</TABLE>

* Includes the Cacique business which was closed effective January 31, 1998

NET SALES

FOURTH QUARTER

Net sales for the fourth quarter of 1998 increased by 10% to $1.531 billion from
$1.397 billion in 1997. Excluding Cacique, net sales grew 12%. The net sales
increase, excluding Cacique, was primarily due to an 8% increase in comparable
store sales. The balance of the increase was due to the net addition of 180 new
stores and an increase in catalogue and other sales. Net sales for the fourth
quarter of 1997 increased 20% to $1.397 billion from $1.161 billion for 1996.
The sales increase was attributable to a 13% increase in comparable store sales,
new and remodeled stores, and an increase in catalogue and other sales.

FULL YEAR

Net sales for 1998 increased 7% to $3.886 billion from $3.618 billion in 1997.
Excluding Cacique, net sales grew 10%. The net sales increase, excluding
Cacique, was primarily due to the net addition of 180 new stores. The balance of
the increase was due to a 5% increase in comparable store sales and an increase
in catalogue and other sales. Sales for 1997 increased 21% to $3.618 billion
from $2.997 billion for 1996. The sales increase was primarily attributable to
new and remodeled stores. The balance of the increase was due to an 11% increase
in comparable store sales and a $58 million increase in catalogue and other
sales.

    In 1998, retail sales increased 12% to $3.101 billion, led by Bath & Body
Works' sales increase of 20%. Bath & Body Works' sales increase was primarily
attributable to the net addition of 140 new stores and 319,000 selling square
feet, as well as a 7% increase in comparable store sales. Overall, Bath & Body
Works' sales increase was primarily driven by the brand's new, unique holiday
product collections. Victoria's Secret Stores' sales increased 7% to $1.829
billion. The sales increase was primarily attributable to a 4% increase in
comparable store sales. The remaining increase came from the net addition of 40
new stores and 147,000 selling square feet.

    In 1997, retail sales increased 25% to $2.759 billion, also led by Bath &
Body Works' sales increase of 40%. Bath & Body Works' sales increase was
attributable to the net addition of 171 new stores and 419,000 selling square
feet, with the remaining increase coming from

36

<PAGE>   4
11% growth in comparable store sales. In 1997, Victoria's Secret Stores' sales
increased 17% to $1.702 billion. The sales increase was primarily attributable
to an 11% increase in comparable store sales, with the remaining increase coming
from the net addition of 53 new stores and 229,000 selling square feet.

    In 1998, Victoria's Secret Catalogue's net sales increased 3% to $759
million. The sales increase was attributable to an increased response rate. In
1997, Victoria's Secret Catalogue's net sales increased 7% to $734 million,
primarily driven by an 18% increase in catalogues mailed.

GROSS INCOME
FOURTH QUARTER

The fourth quarter of 1998 gross income rate (expressed as a percentage of net
sales) increased to 45.9% from 42.4% for the same period in 1997. The rate
increase was primarily due to a 2.2% increase in the merchandise margin rate
(which represents gross income before deduction of buying and occupancy costs)
and a 1.3% decrease in the buying and occupancy rate. The increase in the
merchandise margin rate was primarily attributable to higher retail markups and
reduced markdowns. The decrease in the buying and occupancy rate was primarily
due to accelerated depreciation expense at Victoria's Secret in 1997. Both the
merchandise margin rate and the buying and occupancy rate were also favorably
impacted by Bath & Body Works. This business increased to 39% of total Company
net sales in 1998 from 35% in 1997. Bath & Body Works has historically recorded
higher merchandise margins due to higher retail markups and lower buying and
occupancy costs as a result of smaller store sizes and higher sales
productivity. The Company believes that the continued strong growth of Bath &
Body Works will have a positive impact on the gross income rate going forward.

    The fourth quarter of 1997 gross income rate increased to 42.4% from 39.9%
for the same period in 1996. The rate improvement was primarily due to a 3.5%
increase in the merchandise margin rate, partially offset by a 1.0% increase in
the buying and occupancy expense rate. The increase in the merchandise margin
rate was primarily attributable to higher retail markups across all businesses,
particularly at Victoria's Secret Stores. Merchandise margins have also been
positively impacted by the growth of Bath & Body Works to 35% of total Company
net sales from 32% in 1996. The growth in the buying and occupancy expense rate
was primarily due to accelerated depreciation expense to regularly remodel and
refresh stores at Victoria's Secret, as well as, lower catalogue response rates.


FULL YEAR

In 1998, the gross income rate increased to 40.4% from 37.0% in 1997. The rate
increase was attributable to a 3.2% increase in the merchandise margin rate and
a slight decrease in the buying and occupancy expense rate. The increase in the
merchandise margin rate was primarily attributable to higher retail markups and
reduced markdowns, especially at Victoria's Secret Stores. Both the merchandise
margin rate and the buying and occupancy rate were also favorably impacted by
Bath & Body Works. This business increased to 33% of total Company net sales in
1998 from 29% in 1997.

    The 1997 gross income rate increased to 37.0% from 34.7% in 1996. The
increase was attributable to a 2.1% increase in the merchandise margin rate and
a slight decrease in the buying and occupancy expense rate. The increase in the
merchandise margin rate was primarily attributable to higher retail markups
across all businesses, but especially at Victoria's Secret Stores. The balance
of the merchandise margin rate increase was due to Bath & Body Works' growth to
29% of total Company net sales from 25% in 1996. The buying and occupancy rate
decrease was attributable to leverage resulting from 11% comparable store sales,
as well as, the favorable sales mix shift described above.

                                  [photograph]

                                                                              37
<PAGE>   5
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES

FOURTH QUARTER

The general, administrative and store operating expense rate (expressed as a
percentage of net sales) increased to 20.4% in the fourth quarter of 1998, from
19.4% for the same period in 1997. The rate increase was primarily due to the
continued investment in national advertising for Victoria's Secret. This
increase was partially offset by savings from the closing of Cacique.

    The general, administrative and store operating expense rate increased to
19.4% in the fourth quarter of 1997 from 16.8% for the same period in 1996. This
2.6% increase was primarily driven by investments in national advertising for
Victoria's Secret.

FULL YEAR
The general, administrative and store operating expense rates were 23.1%, 21.4%
and 19.0% in 1998, 1997 and 1996. The rate increases were primarily due to
increases in national advertising by Victoria's Secret and additional store
staffing to support product extensions and new initiatives at Victoria's Secret
Stores. In 1998, these increases were partially offset by savings from the
closing of Cacique.


SPECIAL AND NONRECURRING CHARGES

In 1997, the Company recognized a $67.6 million fourth quarter charge which
represented the estimated loss on the closing of the Cacique business. Cacique
had $95.2 million in sales for 1997 and a $17.0 million operating loss. The
business closed effective January 31, 1998 (see Note 4 to the Consolidated
Financial Statements). After cash disbursements of $26.8 million in 1998,
accruals of $10.8 million, principally for contractual obligations, remained at
January 30, 1999.


    In 1996, the Company recognized a $12.0 million fourth quarter charge, which
represented the estimated loss on the April 1997 sale of Penhaligon's (a
U.K.-based subsidiary), which had 1996 sales of $5.5 million and a $3.1 million
operating loss.

OPERATING INCOME
FOURTH QUARTER

The operating income rate (expressed as a percentage of net sales) increased to
25.5% in the fourth quarter of 1998, from 18.1% for the same period in 1997.
Excluding the 1997 special and nonrecurring charge, the fourth quarter operating
income rate increased to 25.5% from 23.0%. The rate increase is primarily due to
an increase in the gross income rate which more than offset an increase in the
general, administrative and store operating expense rate. The operating income
rate decreased to 18.1% in the fourth quarter of 1997, from 22.1% in 1996.
Excluding special and nonrecurring charges, the operating income rate in the
fourth quarter of 1997 was flat to 1996 as a result of an increase in the gross
income rate offsetting an increase in the general, administrative and store
operating expense rate increase.

FULL YEAR
The operating income rate was 17.3%, 13.7% and 15.2% in 1998, 1997 and 1996.
Excluding special and nonrecurring charges, the operating income rate would have
been 15.6% in 1997 and 1996. The improvement in the operating income
rate was driven by increased gross income rates which more than offset greater
general, administrative and store operating rates.


INTEREST EXPENSE AND OTHER INCOME

In 1998, the Company incurred $7.6 million and $30.1 million in interest
for the fourth quarter and year, compared to $7.6 million and $30.3 million in
1997 for the same periods. Interest expense for 1998 and 1997 primarily resulted
from the $350 million of debt.


    In 1998, the Company earned $3.8 million and $16.4 million in other income
for the fourth quarter and year, compared to $3.7 million and $8.6 million in
1997 for the same periods. The full year increase is primarily due to interest
income earned (based upon the Federal Reserve AA composite 30-day rate) on
higher invested cash balances managed through The Limited, Inc.'s ("The
Limited") centralized cash management system (see Note 11 to the Consolidated
Financial Statements).


38
<PAGE>   6
FINANCIAL CONDITION

The Company's consolidated balance sheet as of January 30, 1999 provides
evidence of financial strength and flexibility. A more detailed discussion of
liquidity, capital resources and capital requirements follows.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities and cash available from The Limited's
centralized cash management system provide the resources to support current
operations, including projected growth, seasonal requirements, and capital
expenditures.

A summary of the Company's working capital position and capitalization follows
(thousands):


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                            1998            1997          1996
--------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>
Cash provided by operating
  activities                              $509,671       $440,475       $337,664
Working capital                           $392,868       $427,603       $308,495
Capitalization:
  Long-term debt                          $250,000       $350,000       $350,000
  Shareholders' equity                     608,743        530,895        377,253
--------------------------------------------------------------------------------
Total capitalization                      $858,743       $880,895       $727,253
--------------------------------------------------------------------------------
</TABLE>

In 1998, working capital has been reduced to reflect $100 million of debt due in
1999 (see Note 10 to the Consolidated Financial Statements) which will be repaid
through cash from operations. No additional borrowings are currently
anticipated.


The Company considers the following to be appropriate measures of liquidity and
capital resources:


<TABLE>
<CAPTION>
--------------------------------------------------------------------
                                         1998      1997       1996
--------------------------------------------------------------------
<S>                                      <C>        <C>       <C>
 Debt-to-capitalization ratio
   (long-term debt divided by
   total capitalization)                 29%        40%       48%
 Cash flow to capital investment
   (net cash provided by
   operating activities divided
   by capital expenditures)             419%       354%      273%
--------------------------------------------------------------------
</TABLE>


The Company's operations are seasonal in nature and are comprised of two
principal selling seasons: Spring (the first and second quarters) and Fall (the
third and fourth quarters). The fourth quarter, including the Holiday season,
has accounted for approximately 39% of net sales in each of the last three
years. Accordingly, cash requirements are highest in the third quarter as the
Company's inventory builds in anticipation of the Holiday season, which in turn
produces a substantial portion of the Company's operating cash flow for the
year.

OPERATING ACTIVITIES
Net cash provided by operating activities totaled $509.7 million, $440.5 million
and $337.7 million for 1998, 1997 and 1996. The increase in cash provided by
operating activities in 1998 was primarily driven by three factors: 1) an
increase in net income; 2) a difference in the amount and timing of income tax
payments; and 3) a decrease in paper inventory at Victoria's Secret Catalogue.
These increases were partially offset by cash used to fund inventory increases,
primarily in non-seasonal merchandise at Victoria's Secret Stores.

INVESTING ACTIVITIES
Investing activities were all for capital expenditures, primarily for new and
remodeled stores.

FINANCING ACTIVITIES

Financing activities included four quarterly cash dividend payments of $0.13 per
share. In addition, financing activities included two stock repurchases during
1998. In a repurchase completed in August 1998, the Company acquired 4.7 million
shares of its common stock for $106 million from its public shareholders. These
repurchased shares were specifically reserved to cover shares needed for
employee benefit plans. In January 1999, the Company announced its intention to
repurchase up to $500 million of its common stock. Purchases will be made on a
proportionate basis from both the Company's public shareholders and The Limited.
As of January 30, 1999, the Company had repurchased 0.4 million shares from
public shareholders for $14.8 million and 2.3 million shares from The Limited,
at the same weighted average per share price, for $80.7 million. Other financing
activities in 1998 included an $18.3 million net decrease in The Limited's
intercompany cash management account receivable (see Note 11 to the Consolidated
Financial Statements).


                                  [PHOTOGRAPH]
                                                                              39
<PAGE>   7
<TABLE>
<CAPTION>
A summary of stores and selling square feet follows:                                 Change from Prior Year
-------------------------------------------------------------------------------------------------------------
                                    Goal-1999             1998            1997       1999-98        1998-97
-------------------------------------------------------------------------------------------------------------
<S>                                  <C>             <C>             <C>             <C>            <C>
 Victoria's Secret Stores
   Stores                             919                  829             789           90             40
   Selling sq. ft.              3,995,000            3,702,000       3,555,000      293,000        147,000
 Bath &Body Works
   Stores                           1,231                1,061             921          170            140
   Selling sq. ft.              2,499,000            2,092,000       1,773,000      407,000        319,000
-------------------------------------------------------------------------------------------------------------
 Total retail
   Stores                           2,150                1,890           1,710          260            180
   Selling sq. ft.              6,494,000            5,794,000       5,328,000      700,000        466,000
-------------------------------------------------------------------------------------------------------------
</TABLE>

CAPITAL EXPENDITURES

Capital expenditures amounted to $121.5 million, $124.3 million and $123.6
million for 1998, 1997 and 1996, of which $87.0 million, $72.4 million and $91.5
million were for new stores and remodeling and expanding existing stores.

    The Company added approximately 466,000 selling square feet in 1998 which
represented an increase of 9% over 1997. The increase in selling square feet
resulted from the net addition of 180 new stores and the expansion of 48 stores.
The capital expenditures were funded with cash from operations.

    The Company anticipates spending $150 to $170 million in 1999 for capital
expenditures, of which $110 to $120 million will be for new stores and the
remodeling and expansion of existing stores.

    The Company announced its intention to add approximately 700,000 selling
square feet in 1999, which will represent a 12% increase over year-end 1998. It
is anticipated the increase will result from the addition of approximately 260
new stores and the expansion of approximately 40 stores. The Company expects
that future capital expenditures will be funded by net cash provided by
operating activities.

YEAR 2000 READINESS DISCLOSURES
The Year 2000 issue arises primarily from computer programs, commercial systems
and embedded chips that will be unable to properly interpret dates beyond the
year 1999. The Company utilizes a variety of proprietary and third party
computer technologies - both hardware and software - directly in its businesses.
The Company also relies on numerous third parties and their systems' ability to
address the Year 2000 issue. The Company's critical information technology
("IT") functions include point-of-sale equipment, merchandise distribution,
merchandise and non-merchandise procurement, credit card and banking services,
transportation, and business and accounting management systems. The Company is
using both internal and external resources to complete its Year 2000
initiatives.

    In order to address the Year 2000 issue, the Company is participating with
its parent, The Limited, which established a program management office to
oversee, monitor and coordinate the company-wide Year 2000 effort. This office
has developed and is implementing a Year 2000 plan. The implementation includes
five stages: (i) awareness, (ii) assessment, (iii) renovation / development,
(iv) validation, and (v) implementation. There are several areas of focus: (1)
renovation of legacy systems throughout the Company; (2) upgrade existing
software packages at two operating businesses; (3) assessment of Year 2000
readiness at key vendors and suppliers; and (4) evaluating facilities and
distribution equipment with embedded computer technology.

    The status of each area of focus is as follows:

(1) All five stages of Year 2000 implementation for renovation of legacy systems
are complete for significant IT systems at the Company's businesses.

(2) The upgrade of existing software packages at two of the Company's businesses
has been completed.

(3) A vast network of vendors, suppliers and service providers located both
within and outside the United States provide the Company with merchandise for
resale, supplies for operational purposes and services. The Company has
identified key vendors, suppliers, and service providers and is making inquiries
to determine their Year 2000 status. The Company has obtained assurances from a
number of its key vendors regarding their Year 2000 status and expects to
complete this process in mid-1999. In addition, the Company is in the process of
conducting on-site assessments of certain of its key vendors to further assess
such vendors' progress and expects to complete this process in mid-1999. Also,
the Company, along with other major retail organizations, is participating in a
national industry Year 2000 survey of over 80,000 suppliers and vendors.

(4) The Company also utilizes various facilities and distribution equipment with
embedded computer technology, such as conveyors, elevators, security systems,
fire protection systems, and energy management systems. The Company's assessment
of these systems is in process and all stages of its efforts are expected to be
completed in the second quarter of 1999. The Company believes that the
reasonably likely worst-case scenario would

40


<PAGE>   8



involve short-term disruption of systems affecting its supply and distribution
channels. The Company is developing contingency plans, such as alternative
sourcing, and identifying the necessary actions that it would need to take if
critical systems or service providers were not Year 2000 compliant. The Company
expects to finalize these contingency plans by mid-1999.

    At the present time, the Company is not aware of any Year 2000 issues that
are expected to affect materially its products, services, competitive position
or financial performance. However, despite the Company's significant efforts to
make its systems, facilities and equipment Year 2000 compliant, the compliance
of third-party service providers and vendors (including, for instance,
government entities and utility companies) is beyond the Company's control.
Accordingly, the Company can give no assurances that the failure of systems of
other companies on which the Company's systems rely, or the failure of key
suppliers or other third parties to comply with Year 2000 requirements, will not
have a material adverse effect on the Company.

    Total expenditures incurred through 1998 related to remediation, testing,
conversion, replacement and upgrading system applications were $18 million. In
addition, the Company has incurred internal payroll costs (not separately
identified) relating to the Company's Year 2000 initiatives. Any additional
expenditures are not expected to be material. Total incremental expenses,
primarily depreciation and amortization of new package systems, are not expected
to have a material impact on the Company's financial condition during 1999 and
2000.

IMPACT OF INFLATION

The Company's results of operations and financial condition are presented based
on historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes the effects of inflation, if any, on the results of operations and
financial condition have been minor.

ADOPTION OF NEW ACCOUNTING STANDARDS

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires that certain external costs and internal payroll
and payroll-related costs be capitalized during the application development and
implementation stages of a software development project and amortized over the
software's useful life. The SOP is effective in the first quarter of 1999 and
the Company does not anticipate that this SOP will have an adverse effect on the
Company's results of operations.

    Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities," was
issued in April 1998. The SOP requires that entities expense start-up costs and
organization costs as they are incurred. The SOP is effective in the first
quarter of 1999 and the Company does not anticipate that this SOP will have an
adverse effect on the Company's results of operations.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Report or made by management of the Company involve risks and uncertainties
and are subject to change based on various important factors, many of which may
be beyond the Company's control. Accordingly, the Company's future performance
and financial results may differ materially from those expressed or implied in
any such forward-looking statements. Among other things, the foregoing
statements as to costs and dates relating to the Year 2000 effort are
forward-looking and are based on the Company's current best estimates, which may
be proven incorrect as additional information becomes available. The Company's
Year 2000-related forward-looking . statements are also based on assumptions
about many important factors, including the technical skills of employees and
independent contractors, the representations and preparedness of third parties,
the ability of vendors to deliver merchandise or perform services required by
the Company and the collateral effects of the Year 2000 issues on the Company's
business partners and customers. While the Company believes its assumptions are
reasonable, it cautions that it is impossible to predict factors that could
cause actual costs or timetables to differ materially from the expected results.
In addition to Year 2000 issues, the following factors, among others, in some
cases have affected and in the future could affect the Company's financial
performance and actual results and could cause actual results for 1998 and
beyond to differ materially from those expressed or implied in any
forward-looking statements included in this Report or otherwise made by
management: changes in consumer spending patterns, consumer preferences and
overall economic conditions, the impact of competition and pricing, changes in
weather patterns, political stability, currency and exchange risks and changes
in existing or potential duties, tariffs or quotas, postal rate increases and
charges, paper and printing costs, availability of suitable store locations at
appropriate terms, ability to develop new merchandise and ability to hire and
train associates.

                                                                              41
<PAGE>   9





CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                            1998             1997            1996
------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>             <C>
NET SALES                                               $ 3,885,753     $ 3,617,856     $ 2,997,340
Costs of goods sold, occupancy and buying costs          (2,317,062)     (2,280,319)     (1,958,417)
------------------------------------------------------------------------------------------------------
GROSS INCOME                                              1,568,691       1,337,537       1,038,923
General, administrative and store operating expenses       (897,842)       (774,385)       (570,681)
Special and nonrecurring charge                                --           (67,600)        (12,000)
------------------------------------------------------------------------------------------------------
OPERATING INCOME                                            670,849         495,552         456,242
Interest expense                                            (30,050)        (30,326)        (32,544)
Other income, net                                            16,400           8,610           4,612
------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES                                  657,199         473,836         428,310
Provision for income taxes                                  263,000         190,000         171,000
------------------------------------------------------------------------------------------------------
NET INCOME                                              $   394,199     $   283,836     $   257,310
------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
  Basic                                                 $      1.50     $      1.07     $      0.97
  Diluted                                               $      1.49     $      1.07     $      0.97
------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying Notes are an integral part of these Consolidated Financial
Statements.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Thousands)
----------------------------------------------------------------------------------------------
Assets                                                JANUARY 30, 1999    January 31, 1998
----------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>
CURRENT ASSETS:
  Cash and equivalents                                    $   387,774     $   308,720
  Accounts receivable                                          15,627          34,639
  Inventories                                                 479,896         417,703
  Intercompany receivable                                        --            12,457
  Other                                                        82,639          96,920
----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                          965,936         870,439
----------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET                                   398,469         392,504
----------------------------------------------------------------------------------------------
OTHER ASSETS                                                   83,672          84,757
----------------------------------------------------------------------------------------------
TOTAL ASSETS                                              $ 1,448,077     $ 1,347,700
----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
  Accounts payable                                        $    93,764     $    94,498
  Current portion of long-term debt                           100,000            --
  Accrued expenses                                            258,821         274,880
  Intercompany payable                                          5,860            --
  Income taxes                                                114,623          73,458
----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                     573,068         442,836
----------------------------------------------------------------------------------------------
LONG-TERM DEBT                                                250,000         350,000
----------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES                                           2,251          13,068
----------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES                                    14,015          10,901
----------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
  Common stock                                                  2,527           2,527
  Paid-in capital                                             672,391         674,620
  Retained earnings (deficit)                                 109,496        (144,365)
----------------------------------------------------------------------------------------------
                                                              784,414         532,782
Less: treasury stock, at average cost                        (175,671)         (1,887)
----------------------------------------------------------------------------------------------
Total shareholders' equity                                    608,743         530,895
----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                $ 1,448,077     $ 1,347,700
===============================================================================================
</TABLE>


The accompanying Notes are an integral part of these Consolidated Financial
Statements

42
<PAGE>   10

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(Thousands)
------------------------------------------------------------------------------------------------------------------------
                                         Common Stock
                                      -------------------------                   Retained     Treasury        Total
                                         Shares          Par       Paid-In        Earnings     Stock, at    Shareholders'
                                      Outstanding       Value      Capital       (Deficit)    Average Cost    Equity
------------------------------------------------------------------------------------------------------------------------
<S>               <C>                    <C>         <C>          <C>           <C>                         <C>
BALANCE, FEBRUARY 3, 1996                265,335     $   2,527    $ 675,421     $(432,911)         --       $ 245,037
Net income                                  --            --           --         257,310          --         257,310
Cash dividends                              --            --           --        (121,270)         --        (121,270)
Repurchase of common stock                  (247)         --           --            --       $  (3,986)       (3,986)
Exercise of stock options and other           35          --           (181)         --             343           162
------------------------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 1, 1997                265,123     $   2,527    $ 675,240     $(296,871)    $  (3,643)    $ 377,253
Net income                                  --            --           --         283,836          --         283,836
Cash dividends                              --            --           --        (131,330)         --        (131,330)
Exercise of stock options and other          104          --           (620)         --           1,756         1,136
------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1998                265,227     $   2,527    $ 674,620     $(144,365)    $  (1,887)    $ 530,895
Net income                                  --            --           --         394,199          --         394,199
Cash dividends                              --            --           --        (140,338)         --        (140,338)
Repurchase of common stock                (7,469)         --           --            --        (201,606)     (201,606)
Exercise of stock options and other          420          --         (2,229)         --          27,822        25,593
------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 30, 1999                258,178     $   2,527    $ 672,391     $ 109,496     $(175,671)    $ 608,743
------------------------------------------------------------------------------------------------------------------------
</TABLE>


The accompanying Notes are an integral part of these Consolidated Financial
Statements.


                                   [PICTURE]

<TABLE>
<CAPTION>

Intimate Brands Net Sales (in millions)

 1993      1994      1995      1996      1997     1998
<S>        <C>      <C>       <C>       <C>      <C>
$1,631    $2,108    $2,517    $2,997    $3,618   $3,886
</TABLE>
5-year compounded annual growth rate at 19%


<TABLE>
<CAPTION>

Intimate Brands Net Income (in millions)

 1993      1994      1995      1996      1997     1998
<S>        <C>      <C>       <C>       <C>      <C>
 $132      $200      $203      $264*     $324*    $394
</TABLE>


* Excluding special and nonrecurring charge
                                                                   43

5-year compounded annual growth rate at 26%



<PAGE>   11

CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                                1998        1997          1996
----------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>           <C>
OPERATING ACTIVITIES
Net income                                                  $ 394,199     $ 283,836     $ 257,310
----------------------------------------------------------------------------------------------------
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS
  Depreciation and amortization                               101,221       106,197        85,573
  Special and nonrecurring charge, net of income taxes             --        40,600         7,200
----------------------------------------------------------------------------------------------------
CHANGE IN ASSETS AND LIABILITIES
  Inventories                                                 (62,193)        7,097       (75,954)
  Accounts payable and accrued expenses                        (5,753)       64,885        55,410
  Income taxes                                                 30,348       (18,996)        2,664
  Other assets and liabilities                                 51,849       (43,144)        5,461
----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                     509,671       440,475       337,664
----------------------------------------------------------------------------------------------------
Investing activities
  Capital expenditures                                       (121,543)     (124,275)     (123,630)
----------------------------------------------------------------------------------------------------
Financing activities
  Dividends paid                                             (140,338)     (131,330)     (121,270)
  Repurchase of common stock                                 (201,606)           --        (3,986)
  Decrease (increase) in intercompany receivable/payable       18,317       (12,397)       34,076
  Stock options and other                                      14,553         1,136           162
----------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES                       (309,074)     (142,591)      (91,018)
----------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS                           79,054       173,609       123,016
Cash and equivalents, beginning of year                       308,720       135,111        12,095
----------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR                           $ 387,774     $ 308,720     $ 135,111
=====================================================================================================
</TABLE>



The accompanying Notes are an integral part of these Consolidated Financial
Statements.


<TABLE>
<CAPTION>
                                             1994     1995   1996    1997   1998
                                                          (in millions)

<S>                                         <C>      <C>     <C>     <C>     <C>
Intimate Brands Working Capital             $198     $217    $308    $428    $393
</TABLE>



<TABLE>
<CAPTION>
                                             VSS      BBW     VSC     OTHER
                                                     (in millions)
<S>                                          <C>      <C>      <C>      <C>
Intimate Brands Capital Expenditures
 by Business                                 $64      $45      $10      $3

                                                   Total: $122 million
</TABLE>



44

<PAGE>   12



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
Intimate Brands, Inc. (the "Company") includes specialty retail and catalogue
operations, which offer women's intimate and other apparel, personal care
products and accessories. The Limited, Inc. ("The Limited") owns approximately
85% of the outstanding common stock of the Company, which initiated public
ownership on October 24, 1995.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all significant subsidiaries which are more than 50% owned and controlled. All
significant intercompany balances and transactions have been eliminated in
consolidation.

FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal
years are designated in the financial statements and notes by the calendar year
in which the fiscal year commences. The results for fiscal years 1998, 1997 and
1996 represent 52-week periods ended January 30, 1999, January 31, 1998, and
February 1, 1997.

CASH AND EQUIVALENTS
Cash and equivalents include amounts on deposit with financial institutions and
money market investments with maturities of less than 90 days.

INVENTORIES
Inventories are principally valued at the lower of average cost or market, on a
first-in first-out basis, utilizing the retail method.

CATALOGUE AND ADVERTISING COSTS
Catalogue costs, primarily consisting of catalogue production and mailing costs,
are amortized over the expected future revenue stream, which is principally from
three to six months from the date catalogues are mailed. All other advertising
costs are expensed at the time the promotion first appears in media or in the
store. Catalogue and advertising costs amounted to $294 million, $255 million
and $229 million in 1998, 1997 and 1996. At January 30, 1999 and January 31,
1998, $26.7 million and $26.1 million of unamortized catalogue costs were
included in other current assets.

PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are computed for
financial reporting purposes on a straight-line basis, using service lives
ranging principally from 10 to 15 years for building and leasehold improvements,
and 3 to 10 years for other property and equipment. The cost of assets sold or
retired and the related accumulated depreciation or amortization are removed
from the accounts with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major renewals and
betterments that extend service lives are capitalized. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that full recoverability is questionable. Factors used in the valuation include,
but are not limited to, management's plans for future operations, brand
initiatives, recent operating results and projected cash flows.

GOODWILL AMORTIZATION
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies and is amortized on a straight-line basis over
30 years.

INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires the use of the liability method. Under this method, deferred tax assets
and liabilities are recognized based on the difference between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect in the years in which those temporary differences
are expected to reverse. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.

   The Company is included in The Limited's consolidated Federal and certain
state income tax groups for income tax reporting purposes and is responsible for
its proportionate share of income taxes calculated upon its Federal taxable
income at a current estimate of the annual effective tax rate.

                                                                              45

<PAGE>   13
SHAREHOLDERS' EQUITY

On June 22, 1999, the Company declared a five percent stock dividend to both The
Limited and public shareholders. All share and per share information for all
periods presented have been restated to reflect the five percent stock dividend
(see Note 3).

At January 30, 1999, there were 578 million of $0.01 par value Class A shares
and 578 million of $0.01 par value Class B shares authorized, of which 40.0
million Class A shares and 218.2 million Class B shares were issued and
outstanding, net of 4.9 million Class A shares and 2.3 million Class B shares
held in treasury. At January 31, 1998, there were approximately 44.7 million
Class A shares and 220.5 million Class B shares issued and outstanding net of
0.1 million Class A shares held in treasury. In addition, there are 58 million
of $0.01 par value preferred shares authorized, none of which have been issued.


   Holders of Class A common stock generally have identical rights to holders of
Class B common stock, except that holders of Class A common stock are entitled
to one vote per share while holders of Class B common stock are entitled to
three votes per share on all matters submitted to a vote of shareholders. Each
share of Class B common stock is convertible while held by The Limited or any of
its subsidiaries into one share of Class A common stock.


   In 1998, the Board of Directors authorized two stock repurchases. In a
repurchase completed in August 1998, the Company acquired 4.7 million shares of
its common stock for $106 million from its public shareholders. These
repurchased shares were specifically reserved to cover shares needed for
employee benefit plans. In January 1999, the Company announced its intention to
repurchase up to $500 million of its common stock. Purchases will be made on a
proportionate basis from both the Company's public shareholders and The
Limited. As of January 30, 1999, the Company had repurchased 0.4 million shares
from public shareholders for $14.8 million and 2.3 million shares from The
Limited, at the same weighted average per share price, for $80.7 million.


REVENUE RECOGNITION

The Company recognizes retail sales at the time the customer takes possession of
merchandise; that is, the point of sale. Gift certificate sales and store
credits are deferred until redemption. Layaway sales are deferred until final
payment. Catalogue sales are recorded upon shipment of merchandise. A reserve is
provided for the gross profit on projected merchandise returns, based on prior
experience.


EARNINGS PER SHARE
Net income per share is computed in accordance with SFAS No. 128, "Earnings Per
Share." Earnings per basic share is computed based upon the weighted average
number of outstanding common shares. Earnings per diluted share includes the
weighted average effect of dilutive options and restricted stock.

Weighted average common shares outstanding (thousands):


<TABLE>
<CAPTION>
-----------------------------------------------------------------
                                   1998      1997       1996
-----------------------------------------------------------------
<S>                              <C>        <C>        <C>
Common shares issued             265,335    265,335    265,335
Treasury shares                   (2,279)     (137)       (44)
-----------------------------------------------------------------
Basic shares                     263,056    265,198    265,291
Dilutive effect of options
  and restricted shares            2,004      1,014        417
-----------------------------------------------------------------
Diluted shares                   265,060    266,212    265,708
-----------------------------------------------------------------
</TABLE>

The computation of earnings per diluted share excludes options to purchase
612,000, 69,000 and 789,000 shares of common stock that were outstanding at
year-end 1998, 1997 and 1996 because the options' exercise price was greater
than the average market price of the common shares.


USE OF ESTIMATES IN THE PREPARATION
OF FINANCIAL STATEMENTS
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 at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Since actual results may differ from those estimates, the
Company revises its estimates and assumptions as new information becomes
available.


RECLASSIFICATIONS
Certain amounts on previously reported financial statement captions have been
reclassified to conform to current year presentation (see Note 2).

2. CHANGE IN ACCOUNTING

   The Company sells gift certificates in exchange for cash and issues store
credits in exchange for the value of returned merchandise. These gift
certificates and store credits do not expire and both can be redeemed toward the
purchase of merchandise in the future. The Company also offers a layaway sales
program, which allows customers to make payments over a period of time toward
the purchase of merchandise.

   The Company has changed its accounting for gift certificates, store credits
and layaway sales. The change was made after the issuance of the recent
Securities and Exchange Commission Staff Accounting Bulletin, No. 101, "Revenue
Recognition in Financial Statements."  The Company had historically recognized
net receipts/(redemptions) from gift certificates and store credits as a
reduction/(increase) to general, administrative and store operating expenses.
Layaway sales were recognized upon receipt of the initial payment. The Company
now defers the recognition of income on these transactions until the merchandise
is delivered to the customer.

   The Company has given retroactive effect to this accounting change by
restating its previously issued financial statements beginning with fiscal 1996.
The impact of the restatement on the Consolidated Statements of Operations
relates principally to gift certificates and store credits. The impact for the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 is as
follows (in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                        January 30, 1999             January 31, 1998                February 1, 1997
                                        ----------------             ----------------                ----------------
                                   As Previously       As        As Previously       As        As Previously         As
                                     Reported       Restated       Reported       Restated       Reported         Restated
                                   -------------  -----------    -------------  -----------    -------------    -----------
<S>                                <C>            <C>            <C>            <C>             <C>             <C>
General, administrative and        $ (914,548)    $ (897,842)    $ (787,780)    $ (774,385)     $ (584,903)     $ (570,681)
  store operating expenses

Operating income                      680,849        670,849        504,652        495,552         458,142         456,242

Income before income taxes            667,199        657,199        482,936        473,836         430,210         428,310

Provision for income taxes            267,000        263,000        194,000        190,000         172,000         171,000

Net income                         $  400,199     $  394,199     $  288,936     $  283,836      $  258,210      $  257,310

Basic earnings per share           $     1.52     $     1.50     $     1.09     $     1.07      $     0.97      $     0.97

Diluted earnings per share         $     1.51     $     1.49     $     1.09     $     1.07      $     0.97      $     0.97
</TABLE>


   The change in accounting also results in a shift in the pattern of quarterly
earnings (see Note 16). In addition, the restatement resulted in changes to the
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998, and to
Notes 1, 8, 9, 15 and 16.



   Although the restatement has no impact on the cash flows of the Company,
certain classifications within the Consolidated Statements of Cash Flows for the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 were
adjusted to reflect the restatement.


   In addition to the above, the Company reclassified certain distribution costs
related to Bath and Body Works from general, administrative and store operating
expense to buying and occupancy expense, consistent with the Company's other
businesses. Such amounts were $26.7 million, $22.5 million and $16.1 million in
1998, 1997 and 1996.


3. SUBSEQUENT EVENT

On June 22, 1999, the Company declared a five percent stock dividend to both The
Limited and public shareholders which resulted in the issuance of 11.8 million
shares of common stock. Accordingly, common stock, additional paid-in capital
and retained earnings were adjusted in fiscal 1999 based on the fair market
value of the additional shares issued.

All share and per share information for all periods presented have been
restated to reflect the five percent stock dividend.



4. SPECIAL AND NONRECURRING CHARGES


During the fourth quarter of 1997, the Company recognized a $67.6 million charge
in conjunction with closing Cacique, a 118-store lingerie business, effective
January 31, 1998. The amount included noncash charges of $30 million comprised
principally of write-offs and liquidations of store assets. After cash
disbursements of $26.8 million in 1998, accruals of $10.8 million,
principally for contractual obligations, remained at January 30, 1999. During
the fourth quarter of 1996, the Company recognized a $12.0 million charge
representing the estimated loss on the sale of Penhaligon's, a U.K.-based
subsidiary. The transaction closed in April 1997.

                                       46
<PAGE>   14
5. PROPERTY AND EQUIPMENT


 Property and equipment, at cost, consisted of (thousands):

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                         1998             1997
--------------------------------------------------------------------------------
<S>                                                    <C>              <C>
Furniture, fixtures
  and equipment                                        $672,077         $613,983
Land, building improvements
  and leaseholds                                        147,302          127,918
Construction in progress                                  1,682            1,885
--------------------------------------------------------------------------------
                                                        821,061          743,786
Less: accumulated depreciation
  and amortization                                      422,592          351,282
--------------------------------------------------------------------------------
Property and equipment, net                            $398,469         $392,504
================================================================================
</TABLE>


6. Leased Facilities and Commitments


Annual store rent is comprised of a fixed minimum amount, and/or contingent rent
based upon a percentage of sales exceeding a stipulated amount. Store lease
terms generally require additional payments covering taxes, common area costs
and certain other expenses.

A summary of rent expense follows (thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                          1998            1997            1996
--------------------------------------------------------------------------------
<S>                                     <C>             <C>             <C>
Store rent:
  Fixed minimum                         $159,368        $155,571        $133,215
  Contingent                              22,414          19,229          13,098
--------------------------------------------------------------------------------
Total store rent                         181,782         174,800         146,313

Buildings, equipment
  and other                               18,092          17,196          15,633
--------------------------------------------------------------------------------
Total rent expense                      $199,874        $191,996        $161,946
================================================================================
</TABLE>


Rent expense includes charges from The Limited and its subsidiaries for store,
office and distribution center space under formal agreements which approximate
market rates. At January 30, 1999, the Company was committed to noncancelable
leases with remaining terms of 1 to 20 years. These commitments include store
leases with initial terms, which primarily range from 10 to 20 years, and
offices and distribution centers leased from The Limited with initial terms of
15 years.


A summary of total minimum rent commitments and the related party portion (see
Note 10) under noncancelable leases follows (thousands):


<TABLE>
<CAPTION>
                   Total        Related Party
---------------------------------------------
<S>              <C>              <C>
 1999            $174,399         $ 29,408
 2000             173,718           29,672
 2001             169,458           29,436
 2002             161,116           28,855
 2003             144,551           27,860
 Thereafter       478,048          120,768

</TABLE>


7. OTHER ASSETS

<TABLE>
<CAPTION>
Other assets consisted of (thousands):
-------------------------------------------------------------------------------
                                                             1998        1997
-------------------------------------------------------------------------------
<S>                                                       <C>           <C>
  Goodwill, net of accumulated amortization
    of $32,143 and $29,034                                $ 70,312     $ 73,421
  Other                                                     13,360       11,336
-------------------------------------------------------------------------------
  Total other assets                                      $ 83,672     $ 84,757
================================================================================
</TABLE>

<PAGE>   15

8. Accrued Expenses

Accrued expenses consisted of (thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                              1998          1997
--------------------------------------------------------------------------------
<S>                                                       <C>           <C>
  Compensation,
    payroll taxes and benefits                            $ 44,939      $ 53,529
  Deferred revenue                                          56,500        46,500
  Rent                                                      42,319        27,214
  Taxes, other than income                                  13,789        14,806
  Merchandise returns                                       15,959        15,913
  Interest                                                  13,663        13,948
  Cacique closing                                           10,787        28,403
  Other                                                     60,865        74,567
--------------------------------------------------------------------------------
  Total accrued expenses                                  $258,821      $274,880
================================================================================
</TABLE>

9. Income Taxes

The provision for income taxes consisted of (thousands):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                          1998           1997             1996
-------------------------------------------------------------------------------
<S>                                    <C>            <C>            <C>
  Currently payable:
    Federal                            $ 207,900      $ 180,500      $ 146,700
    State                                 42,400         29,900         28,300
-------------------------------------------------------------------------------
                                         250,300        210,400        175,000
-------------------------------------------------------------------------------
  Deferred:
    Federal                               10,200        (23,600)        (5,700)
    State                                  2,500          3,200          1,700
-------------------------------------------------------------------------------
                                          12,700        (20,400)        (4,000)
-------------------------------------------------------------------------------
  Total provision                      $ 263,000      $ 190,000      $ 171,000
-------------------------------------------------------------------------------
</TABLE>

A reconciliation between the statutory Federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                            1998          1997           1996
-------------------------------------------------------------------------------
<S>                                         <C>          <C>              <C>
  Federal income tax rate                   35.0%        35.0 %           35.0%
  State income taxes,
    net of Federal income
    tax effect                               4.5%         4.5 %            4.5%
  Other items, net                           0.5%         0.6 %            0.4%
-------------------------------------------------------------------------------
  Total                                     40.0%        40.1 %           39.9%
===============================================================================
</TABLE>

                                                                              47
<PAGE>   16

Income taxes payable included net current deferred tax assets of $38.4 million
and $61.9 million at January 30, 1999 and January 31, 1998. Current income tax
obligations are treated as having been settled through the intercompany accounts
as if the Company were filing its income tax returns on a separate company
basis. Such amounts were $232.7 million, $236.0 million and $167.0 million in
1998, 1997 and 1996.


A summary of the effect of temporary differences that give rise to deferred
income taxes follows (thousands):


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1998                                          Assets    Liabilities       Total
---------------------------------------------------------------------------------
<S>                                         <C>          <C>           <C>
EXCESS OF TAX OVER
  BOOK DEPRECIATION                               --     $(40,600)     $(40,600)
SPECIAL AND NONRECURRING CHARGE             $  4,500           --         4,500
STATE INCOME TAXES                             9,900           --         9,900
OTHER, NET                                    62,300           --        62,300
---------------------------------------------------------------------------------
TOTAL DEFERRED INCOME TAXES                 $ 76,700     $(40,600)     $ 36,100
---------------------------------------------------------------------------------

1997
---------------------------------------------------------------------------------
Excess of tax over
  book depreciation                               --     $(34,100)     $(34,100)
Special and nonrecurring charge             $ 15,100           --        15,100
State income taxes                            12,700           --        12,700
Other, net                                    71,300      (16,200)       55,100
---------------------------------------------------------------------------------
Total deferred income taxes                 $ 99,100     $(50,300)     $ 48,800
=================================================================================
</TABLE>


10. LONG-TERM DEBT


Long-term debt consists of notes which represent the Company's proportionate
share of certain long-term debt of The Limited. The interest rates and
maturities of the notes parallel those of the corresponding debt of The Limited.

Long-term debt consisted of (thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------
                                                1998       1997
--------------------------------------------------------------------
<S>                                           <C>        <C>
7 1/2% debentures due March 2023              $100,000   $100,000
9 1/8% notes due February 2001                 150,000    150,000
8 7/8% notes due August 1999                   100,000    100,000
--------------------------------------------------------------------
                                               350,000    350,000
Less current portion of long-term debt         100,000         --
--------------------------------------------------------------------
                                              $250,000   $350,000
====================================================================
</TABLE>

Each of the notes is to be automatically prepaid concurrently with any
prepayment of the corresponding debt of The Limited. The debt of The Limited
corresponding to the 7 1/2% debentures maturing in 2023 is subject to early
redemption by The Limited at its option beginning in 2003 at specified declining
premiums. The other notes are not subject to early redemption by The Limited.
Interest paid approximated $30.3 million, $30.4 million and $35.7 million in
1998, 1997 and 1996.


11. RELATED PARTY TRANSACTIONS


Transactions between the Company and The Limited and its wholly-owned
subsidiaries commonly occur in the normal course of business and principally
consist of the following:

- Merchandise purchases

- Capital expenditures

- Real estate management and leasing

- Inbound and outbound transportation

- Corporate services


Information with regard to these transactions is as follows:

   Significant purchases are made from Mast, a wholly-owned subsidiary of The
Limited. Mast is a contract manufacturer and apparel importer. Prices are
negotiated on a competitive basis by merchants of the Company with Mast.

   The Company's real estate operations, which include all aspects of lease
negotiations, ongoing dealings with landlords and developers, and lease and
utility payments, are handled centrally by the Real Estate Division of The
Limited. Specifically identifiable costs are charged directly to the Company.
All other services-related costs not specifically attributable are allocated to
the Company based on new and remodeled store construction projects and open
selling square feet in relation to the totals for The Limited.

   The Company's store design and construction operations are coordinated
centrally by the Store Planning Division of The Limited ("Store Planning
Division"). The Store Planning Division facilitates the design and construction
of new stores and remodels and, upon completion, transfers store assets to the
Company at actual cost. Store Planning Division expenses are charged to the
Company based on new and remodeled store construction projects and open selling
square feet in relation to the totals for The Limited.

   The Company's inbound and outbound transportation expenses, exclusive of
Victoria's Secret Catalogue (which maintains its own order fulfillment
operation), are managed centrally by Limited Distribution Services, a
wholly-owned subsidiary of The Limited. Inbound freight is charged to the
Company based on actual receipts while outbound freight is charged based on
weight shipped.

   The Limited provides certain services to the Company including, among other
things, aircraft, certain tax, treasury, legal, accounting and audit, corporate
development, risk management, associate benefit plan administration, human
resources and compensation, and government affairs services. Specifically
identifiable

48

<PAGE>   17
costs are charged directly to the Company. All other services-related costs not
specifically attributable to an operating business have been allocated to the
Company based upon a percentage of sales.

   The Company participates in The Limited's centralized cash management system.
Under this system, cash received from the Company's operations is transferred to
The Limited's centralized cash accounts and cash disbursements are funded from
the centralized cash accounts on a daily basis. The intercompany account
represents an interest-earning asset or interest-bearing liability. Interest on
the intercompany account is calculated based on the Federal Reserve AA Composite
30-day rate. The amount of the intercompany payable to The Limited under these
agreements at January 30, 1999 is $5.9 million.

   The Company is charged rent expense, common area maintenance charges and
utilities for stores shared with other consolidated subsidiaries of The Limited.
The charges are based on square footage and represent the proportionate share of
the underlying leases with third parties.

   The Company is also charged rent expense and utilities at market rates for
the distribution center and home office space that it occupies according to
formal 15-year lease agreements, which contain options to renew.

   The Company and The Limited have entered into intercompany agreements which
establish the provision of services in accordance with the terms described
above. The prices charged to the Company for services provided under these
agreements may be higher or lower than prices that may be charged by third
parties. It is not practicable to estimate what these costs would be if The
Limited were not providing these services and the Company were required to
purchase these services from outsiders or develop internal expertise. Management
believes the charges and allocations described above are fair and reasonable.

The following table summarizes the related party transactions between the
Company and The Limited and its wholly-owned subsidiaries (thousands):

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                               1998         1997          1996
--------------------------------------------------------------------------------
<S>                                         <C>           <C>           <C>
Mast purchases                              $383,193      $360,192      $367,240
Capital expenditures                          73,603        75,474        88,740
Inbound and outbound freight                  50,163        45,308        31,816
Corporate charges                             69,864        51,376        35,130
Store leases and other occupancy              26,223        38,700        35,510
Distribution center, MIS and
  home office expenses                        22,955        17,302        11,253
Centrally managed benefits                    44,064        40,736        32,713
Interest charges                              30,050        30,326        32,544
Interest income                               15,136         8,610         4,612
--------------------------------------------------------------------------------
</TABLE>

The Company has no arrangements with The Limited that result in the Company's
guarantee, pledge of assets or stock to provide collateral for The Limited's
debt obligations.

   Proprietary credit cards accepted by the Company are offered to customers
through Alliance Data Systems, a 31%-owned venture of The Limited.


12. STOCK OPTIONS AND RESTRICTED STOCK



Under the Company's stock plan, associates may be granted up to 18.4 million
restricted shares or options to purchase the Company's common stock at the
market price on the date of grant. Options generally vest 25% per year over the
first four years of the grant. Of the options granted, 0.2 million options in
1998 and 2.4 million options in 1997 had graduated vesting schedules over six
years. Options have a maximum term of ten years.


   The Company adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," effective with the 1996 financial statements, but
elected to continue to measure compensation expense in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense for stock options has been recognized. If compensation
expense had been determined based on the estimated fair value of options granted
since 1995, consistent with the methodology in SFAS No. 123, the pro forma
effects on the Company's net income and earnings per diluted share would have
been a reduction of approximately $3.8 million or $0.02 per share in 1998, $2.8
million or $0.01 per share in 1997 and $1.0 million or $0.00 per share in 1996.


   The weighted average per share fair value of options granted ($6.99, $5.23
and $3.61 during 1998, 1997 and 1996) was used to calculate the pro forma
compensation expense. The fair value was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions for 1998,
1997 and 1996: dividend yields of 2.8%, 3.1% and 3.7%; volatility of 34%, 27%
and 31%; risk-free interest rates of 5%, 6% and 5.25%; assumed forfeiture rates
of 20%, 15% and 15%; and expected lives of 5.6 years, 6.5 years and 5 years.

   Approximately 425,000, 1,514,000 and 177,000 restricted shares were granted
in 1998, 1997 and 1996, with market values at date of grant of $12.9 million,
$30.2 million and $3.0 million. Restricted stock grants generally vest either on
a graduated scale over four years or 100% at the end of a fixed vesting period,
principally five years. In 1997, 1,155,000 restricted shares, were granted with
graduated vesting schedules over six years.


                                                                              49
<PAGE>   18
[photo]


These grants included 893,000 restricted shares with performance requirements,
all of which have been met.


   The market value of restricted shares is being amortized as compensation
expense over the vesting period, generally four to six years. Compensation
expense related to restricted stock awards amounted to $11.6 million, $10.0
million and $3.0 million in 1998, 1997 and 1996.

A summary of stock options outstanding for 1998 is as follows:


<TABLE>
<CAPTION>
            Options Outstanding              Options Exercisable
---------------------------------------------------------------------------
                        Weighted
                         Average          Weighted              Weighted
Range of                Remaining         Average                Average
Exercise      Number   Contractual        Exercise     Number   Exercisable
 Prices    Outstanding     Life             Price   Exercisable    Price
---------------------------------------------------------------------------
<S>        <C>         <C>               <C>        <C>         <C>
$13 - $17   1,470,000      7.2             $15        594,000       $15
$18 - $23   3,208,000      8.5             $20        332,000       $20
$24 - $28   1,164,000      9.5             $26              -         -
---------------------------------------------------------------------------
$13 - $28   5,842,000      8.4             $20        926,000       $17
---------------------------------------------------------------------------
</TABLE>


A summary of stock option activity follows:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                               1998                       1997                     1996
                       -------------------------  ----------------------    ---------------------
                                      Weighted                 Weighted                 Weighted
                                      Average                  Average                   Average
                          Shares   Option Price    Shares   Option Price     Shares    Option Price
-------------------------------------------------------------------------------------------------
<S>                     <C>           <C>        <C>           <C>          <C>         <C>
Outstanding at
  beginning of year     4,518,000     $17.76     1,607,000     $15.10       716,000     $16.13
Granted                 1,800,000      24.20     3,228,000      18.90       978,000      14.37
Exercised                (287,000)     15.55       (69,000)     15.25       (16,000)     16.15
Canceled                 (189,000)     18.48      (247,000)     16.74       (71,000)     15.31
-------------------------------------------------------------------------------------------------
Outstanding at
  end of year           5,842,000     $19.83     4,519,000     $17.76     1,607,000     $15.10
-------------------------------------------------------------------------------------------------
Options exercisable
  at year-end             926,000     $16.77       439,000     $15.58       132,000     $16.05
-------------------------------------------------------------------------------------------------
</TABLE>



13. RETIREMENT BENEFITS


The Company participates in a qualified defined contribution retirement plan and
a nonqualified supplemental retirement plan sponsored by The Limited.
Participation in the qualified plan is available to all associates who have
completed 1,000 or more hours of service with the Company during certain
12-month periods and attained the age of 21. Participation in the nonqualified
plan is subject to service and compensation requirements. The Company's
contributions to these plans are based on a percentage of the associates'
eligible annual compensation. The cost of these plans was $14.4 million, $12.7
million and $11.7 million in 1998, 1997 and 1996.


14. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.

CURRENT ASSETS AND CURRENT
LIABILITIES

The carrying value of cash equivalents, accounts receivable, accounts payable,
current portion of long-term debt and accrued expenses approximates fair value
because of their short maturity.

LONG-TERM DEBT

The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The estimated fair value
of the Company's long-term debt at January 30, 1999 and January 31, 1998 was
$257.5 million and $364.1 million compared to the carrying value of $250.0
million in 1998 and $350.0 million in 1997.

50
<PAGE>   19
[photo]


15. SEGMENT INFORMATION


The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company determines operating segments
based on a business's operating characteristics. Reportable segments were
determined based on the similar economic characteristics of the retail
businesses and the similar methods used to distribute products for the
store-based operations of Victoria's Secret Stores and Bath & Body Works. The
Catalogue segment consists of the Victoria's Secret Catalogue operations. Sales
outside the United States were insignificant.

Segment information follows (in thousands):


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                                                  Reconciling
 1998                     Retail       Catalogue      Other(a)        Items           Total
------------------------------------------------------------------------------------------------
<S>                     <C>           <C>           <C>           <C>                <C>
NET SALES               $3,101,298    $  759,335    $   25,120             --        $3,885,753
INTERSEGMENT SALES            --            --         368,995     $ (368,995)(C)            --
DEPRECIATION AND
 AMORTIZATION               87,581         8,556         5,084             --           101,221
OPERATING INCOME
 (LOSS)                    656,576        65,113       (50,840)            --           670,849
TOTAL ASSETS               796,095       179,045       472,937             --         1,448,077
CAPITAL EXPENDITURES       108,790         9,580         3,173             --           121,543
------------------------------------------------------------------------------------------------
1997
------------------------------------------------------------------------------------------------
Net sales               $2,758,756    $  734,362    $  124,738           --          $3,617,856
Intersegment sales            --            --         305,454     $ (305,454)(c)            --
Depreciation and
 amortization               89,500         6,943         9,754             --           106,197
Operating income
 (loss)                    555,527        71,508       (63,883)       (67,600)(b)       495,552
Total assets               700,953       218,335       428,412             --         1,347,700
Capital expenditures       101,269        17,619         5,387             --           124,275
------------------------------------------------------------------------------------------------

1996
------------------------------------------------------------------------------------------------
Net sales               $2,203,498    $  684,303    $  109,539           --          $2,997,340
Intersegment sales              --            --       263,155     $ (263,155)(c)            --
Depreciation and
 amortization               67,729         6,661        11,183             --            85,573
Operating income
 (loss)                    442,631        68,089       (42,478)       (12,000)(b)       456,242
Total assets               654,523       163,790       316,849             --         1,135,162
Capital expenditures       112,491         5,970         5,169             --           123,630
------------------------------------------------------------------------------------------------
</TABLE>


(a)      Included in "other" category are the Cacique lingerie business, which
         was closed effective January 31, 1998. Gryphon and Corporate, none of
         which are significant operating segments


(b)      Includes special and nonrecurring charge of $67.6 million in 1997 and
         $12.0 million in 1996 (see Note 4)


(c)      Represents intersegment sales elimination.

                                                                              51
<PAGE>   20

In addition to its operating segments, management also focuses on Victoria's
Secret as a brand. Sales of the Victoria's Secret brand grew 6% in 1998 and 14%
in 1997 and totaled $2.588 billion in 1998, $2.436 billion in 1997 and $2.134
billion in 1996.


16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial results follow (thousands except per share
amounts):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
                            First     Second      Third      Fourth
--------------------------------------------------------------------------
1998 Quarters
--------------------------------------------------------------------------
<S>                         <C>        <C>        <C>       <C>
AS RESTATED(+):

NET SALES                   $770,868   $874,708   $708,985  $1,531,192
Costs of goods sold,
occupancy and buying
  costs                      504,011    543,694    441,607     827,750
Gross income                 266,857    331,014    267,378     703,442
General, administrative
   and store operating
   expenses                  185,839    202,197    197,160     312,646
Operating income              81,018    128,817     70,218     390,796
Income before income
   taxes                      77,827    126,662     65,727     386,983
Provision for income
   taxes                      31,000     50,800     26,200     155,000
Net income                    46,827     75,862     39,527     231,983
Net income per share:
   Basic                       $0.18      $0.29      $0.15       $0.89
   Diluted                      0.18       0.28       0.15        0.88

AS PREVIOUSLY REPORTED:

Net Sales                   $770,868   $874,708   $708,985  $1,531,192
Costs of goods sold,
   occupancy and buying
   costs                     498,996    538,564    434,042     818,754
Gross income                 271,872    336,144    274,943     712,438
General, administrative
   and store operating
   expenses                  200,454    211,227    204,325     298,542
Operating income              71,418    124,917     70,618     413,896
Income before income
   taxes                      68,227    122,762     66,127     410,083
Provision for income
   taxes                      27,200     49,200     26,400     164,200
Net income                    41,027     73,562     39,727     245,883
Net income per share:
   Basic                       $0.15      $0.28      $0.15       $0.94
   Diluted                      0.15       0.28       0.15        0.93
--------------------------------------------------------------------------
1997 Quarters
--------------------------------------------------------------------------
AS RESTATED(+):

Net sales                   $704,041   $826,574   $689,978  $ 1,397,263
Costs of goods sold,
   occupancy and
   buying costs              480,541    548,303    446,697      804,777
Gross income                 223,500    278,271    243,281      592,486
General, administrative
   and store operating
   expenses                  155,918    167,786    179,220      271,462
Special and
   nonrecurring items            -          -          -         67,600
Operating income              67,582    110,485     64,061      253,424
Income before income
   taxes                      62,098    104,698     57,534      249,506
Provision for income
   taxes                      24,800     41,900     23,100      100,200
Net income                    37,298     62,798     34,434      149,306
Net income per share:
   Basic                       $0.14      $0.24      $0.13        $0.56
   Diluted                      0.14       0.24       0.13         0.56

AS PREVIOUSLY REPORTED:

Net sales                   $704,041   $826,574   $689,978   $1,397,263
Costs of goods sold,
   occupancy and buying
   costs                     475,959    544,003    440,751      797,111
Gross income                 228,082    282,571    249,227      600,152
General, administrative
   and store operating
   expenses                  167,800    175,086    183,566      261,328
Special and
   nonrecurring items            -          -          -         67,600
Operating income              60,282    107,485     65,661      271,224
Income before income
   taxes                      54,798    101,698     59,134      267,306
Provision for income
   taxes                      21,900     40,700     23,700      107,700
Net income                    32,998     60,998     35,434      159,606
Net income per share:
   Basic                       $0.12      $0.23      $0.13         0.60(*)
   Diluted                      0.12       0.23       0.13         0.60(*)

(+)The Company changed its accounting related to gift certificates, store
credits and layaway sales (see Note 2). The Company has given retroactive effect
to this accounting change by restating its previously issued financial
statements.
</TABLE>

(*)      Including special and nonrecurring charge of $67.6 million ($0.15 per
         diluted share) in the fourth quarter of 1997 in conjunction with the
         closing of Cacique (see Note 4)


The Company's common stock is traded on the New York Stock Exchange ("IBI"). On
January 30, 1999, there were approximately 1,400 shareholders of record.
However, when including active associates who participate in the Company's stock
purchase plan, associates who own shares through Company sponsored retirement
plans and others holding shares in broker accounts under street names, the
Company estimates the shareholder base at approximately 60,000.

MARKET PRICE AND DIVIDEND INFORMATION


<TABLE>
<CAPTION>
                             Market Price
                         -------------------------------------
                                                    Cash
                                                  Dividend
Fiscal Year End 1998      High         Low        Per Share
-----------------------------------------------------------------
<S>                    <C>          <C>             <C>
4th Quarter            $38  5/16    $22  1/16        $0.13
3rd Quarter             22  5/16     17  5/8         0.13
2nd Quarter             28  11/16    21  1/16        0.13
1st Quarter             27  11/16    24  3/4         0.13
=================================================================
Fiscal Year End 1997
-----------------------------------------------------------------
4th Quarter            $24  3/16    $20  3/16       $0.12
3rd Quarter             23  13/16    19  3/16        0.12
2nd Quarter             22           18  1/8         0.12
1st Quarter             19  5/8      16  5/16        0.12
=================================================================
</TABLE>


REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF INTIMATE BRANDS, INC.


     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, shareholders' equity, and cash flows
present fairly, in all material respects, the consolidated financial position of
Intimate Brands, Inc. and its subsidiaries at January 30, 1999 and January 31,
1998, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended January 30, 1999 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these consolidated statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

The consolidated financial statements for each of the three years in the period
ended January 30, 1999 have been restated as described in Note 2.


/s/ PricewaterhouseCoopers LLP


Columbus, Ohio
February 17, 1999, except for the information in Notes 2 and 3 as to which the
date is February 16, 2000



52