SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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


For the quarterly period ended            August 4, 2001
                                -----------------------------------


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

For the transition period from                  to
                               -----------------  --------------------


                         Commission File Number 1-05380

                          AMES DEPARTMENT STORES, INC.
                          ----------------------------
             (Exact name of registrant as specified in its charter)


           Delaware                                    04-2269444
-------------------------------          ---------------------------------------
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
 incorporation or organization)


2418 Main Street, Rocky Hill, Connecticut                       06067
-----------------------------------------                   ------------
(Address of principal executive offices)                     (Zip Code)


Registrant's telephone number including area code:           (860) 257-2000
                                                            ----------------


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

                              YES [X]     NO [ ]


     29,408,057 shares of Common Stock were outstanding on August 31, 2001.


                            Exhibit Index on page 20

                                  Page 1 of 21


NY2:\1079784\01\N56001!.DOC\15079.0001
<PAGE>
                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                      FOR THE QUARTER ENDED AUGUST 4, 2001


                                    I N D E X

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<S>                                                                                                   <C>
PART I:         FINANCIAL INFORMATION

     ITEM 1.        Consolidated Condensed Statements of Operations                                     3
                       for the Thirteen Weeks and Twenty-Six weeks ended August 4, 2001
                       and July 29, 2000

                    Consolidated Condensed Balance Sheets as of                                         4
                       August 4, 2001, February 3, 2001, and July 29, 2000

                    Consolidated Condensed Statements of Cash Flows                                     5
                       for the Twenty-Six Weeks ended August 4, 2001 and July 29, 2000

                    Notes to Consolidated Condensed Financial Statements                                6

     ITEM 2.        Management's Discussion and Analysis of Financial
                       Condition and Results of Operations                                              12

     ITEM 3.        Quantitative and Qualitative Disclosures about Market Risk                          18


PART II:        OTHER INFORMATION

     ITEM 1.        Legal Proceedings                                                                   19


     ITEM 4.        Submission of Matters to a Vote of Security Holders                                 19

     ITEM 6.        Exhibits and Reports on Form 8-K                                                    20


</TABLE>



                                       2
<PAGE>
                                     PART I
ITEM 1.
                              FINANCIAL INFORMATION

                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                             (DEBTORS-IN-POSSESSION)
                    (In Thousands, Except Per Share Amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                  For the Thirteen                     For the Twenty-Six
                                                                     Weeks Ended                           Weeks Ended
                                                             August 4,         July 29,            August 4,         July 29,
                                                                2001             2000                 2001             2000
                                                            -------------    -------------        -------------    -------------
<S>                                                         <C>                                   <C>
     Total net sales                                            $806,014         $872,034           $1,599,701       $1,702,691
     Leased department and other income                           10,165           10,544               19,314           19,803
                                                            -------------    -------------        -------------    -------------

TOTAL REVENUE                                                    816,179          882,578            1,619,015        1,722,494

COSTS AND EXPENSES
     Cost of merchandise sold                                    581,464          630,881            1,147,420        1,233,805
     Selling, general and administrative expenses                236,297          248,166              475,012          495,581
     Depreciation and amortization expense, net                   18,836           17,240               38,472           34,937
     Interest and debt expense, net                               22,206           21,953               45,464           40,745
                                                            -------------    -------------        -------------    -------------

LOSS BEFORE INCOME TAXES                                        (42,624)         (35,662)             (87,353)         (82,574)
                                                            -------------    -------------        -------------    -------------
     Intraperiod income tax benefit                               16,197           13,551               33,194           31,378
     Deferred tax asset valuation allowance adjustment         (250,000)             --              (250,000)             --
                                                            -------------    -------------        -------------    -------------
     Income tax (provision) benefit                            (233,803)           13,551            (216,806)           31,378
                                                            -------------    -------------        -------------    -------------

NET LOSS                                                      $(276,427)        $(22,111)           $(304,159)        $(51,196)
                                                            =============    =============        =============    =============

     Weighted average number of common shares outstanding        29,408           29,404               29,401           29,365
                                                            =============    =============        =============    =============

     Net loss per share                                       $   (9.40)          $(0.75)             $(10.35)          $(1.74)
                                                            =============    =============        =============    =============
</TABLE>



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


                                       3
<PAGE>
                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                             (DEBTORS-IN-POSSESSION)
               (In Thousands, Except Shares and Per Share Amounts)

<TABLE>
<CAPTION>
                                                                             (Unaudited)                             (Unaudited)
                                                                           ----------------   -----------------   -----------------
                                                                              AUGUST 4,            FEBRUARY 3,        JULY 29,
                                                                                2001                 2001               2000
                                                                           ----------------   -----------------   -----------------
<S>                                                                        <C>                <C>                 <C>
                                            ASSETS
Current Assets:
     Cash and cash equivalents                                                       $19,322            $49,761          $31,305
     Receivables                                                                      32,335             17,039           32,262
     Merchandise inventories                                                         709,234            744,132          885,894
     Deferred taxes, net                                                              17,771             17,771           60,232
     Prepaid expenses and other current assets                                        33,074             41,494           41,402
                                                                             ----------------    ---------------    -------------
          Total current assets                                                       811,736            870,197        1,051,095
                                                                             ----------------    ---------------    -------------

Fixed Assets                                                                         722,243            761,903          706,522
     Less - Accumulated depreciation and amortization                              (242,086)          (213,904)        (167,245)
                                                                             ----------------    ---------------    -------------
          Net fixed assets                                                           480,157            547,999          539,277
                                                                             ----------------    ---------------    -------------

Other assets and deferred charges                                                     68,119             56,490           60,850
Deferred taxes, net                                                                  195,085            411,891          346,055
Beneficial lease rights, net                                                          39,277             50,675           54,899
Goodwill, net                                                                         57,199             58,475           59,750
                                                                             ----------------    ---------------    -------------
                                                                                  $1,651,573         $1,995,727       $2,111,926
                                                                             ================    ===============    =============

                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable:
          Trade                                                                     $303,159           $345,915         $227,834
          Other                                                                       80,355             78,371           93,152
                                                                               --------------    ---------------    -------------
               Total accounts payable                                                383,514            424,286          320,986
                                                                               --------------    ---------------    -------------

Current portion of capital lease and financing obligations                            19,018             19,018           22,057
Self-insurance reserves                                                               27,852             29,878           28,346
Accrued expenses and other current liabilities                                       105,431            114,205          112,144
Store closing reserves                                                               135,745            179,365           52,667
Current portion of Long Term Debt                                                    465,870                 --               --
                                                                               --------------    ---------------    -------------
     Total current liabilities                                                     1,137,430            766,752          536,200
                                                                               --------------    ---------------    -------------

Long-term debt                                                                       244,147            606,057          752,761
Capital lease and financing obligations                                              128,615            165,365          170,220
Other long-term liabilities                                                           39,580             49,256           52,761
Excess of revalued net assets over equity under fresh-start reporting                  8,638             11,715           14,791
Commitments and contingencies (see Note 8) Stockholders' Equity:
     Preferred stock (3,000,000 shares authorized; no shares issued
       or outstanding at August 4, 2001, February 3, 2001 and July 29,
       2000; par value per share $.01)                                                   ---                ---              ---
     Common stock (40,000,000 shares authorized; 29,488,552, 29,473,552
       And 29,404,587 shares outstanding at August 4, 2001, February
       3, 2001 and July 29, 2000, respectively; par value per share $.01)                295                295              296
     Additional paid-in capital                                                      533,394            532,654          531,872
     (Accumulated deficit) Retained earnings                                       (439,604)          (135,445)           53,947
     Treasury stock (80,495 shares at August 4, 2001, February 3, 2001
       and July 29, 2000, respectively, at cost)                                       (922)              (922)            (922)
                                                                               --------------    ---------------    -------------
          Total stockholders' equity                                                  93,163            396,582          585,193
                                                                               --------------    ---------------    -------------
                                                                                  $1,651,573         $1,995,727       $2,111,926
                                                                               ==============    ===============    =============
</TABLE>

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


                                       4
<PAGE>
                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (DEBTORS-IN-POSSESSION)
                                 (In Thousands)

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                   FOR THE TWENTY-SIX
                                                                                       WEEKS ENDED
                                                                         ----------------------------------------
                                                                             AUGUST 4,            JULY 29,
                                                                               2001                 2000
                                                                         ------------------  --------------------
<S>                                                                      <C>                 <C>
Cash flows from operating activities:
      Net loss                                                                  ($304,159)             ($51,196)
      Expenses not requiring the outlay of cash:
           Income tax (provision) benefit                                          216,806              (31,378)
           Depreciation and amortization of fixed and other assets                  40,358                38,988
           Amortization of debt discounts and deferred financing costs               3,511                 2,400
                                                                         ------------------  --------------------
Cash used by operations before changes in working capital and
store closing activities                                                          (43,484)              (41,186)
Changes in working capital:
      Increase in receivables                                                     (15,296)               (6,960)
      Decrease (Increase) in merchandise inventories                                34,898              (54,507)
      Decrease in accounts payable                                                (40,772)             (100,594)
      Decrease in accrued expenses and other liabilities                          (16,768)              (22,447)
       Decrease (increase) in other working capital and other, net                   8,420               (9,072)
Changes due to store closing activities:
      Payments of store closing costs                                             (14,153)               (2,801)
                                                                         ------------------  --------------------
Net cash used for operating activities                                            (87,155)             (237,567)
                                                                         ------------------  --------------------
Cash flows from investing activities:
      Purchases of fixed assets                                                   (20,893)              (76,574)
      Purchases of leases                                                                -               (7,026)
                                                                         ------------------  --------------------
Net cash used for investing activities                                            (20,893)              (83,600)
                                                                         ------------------  --------------------
Cash flows from financing activities:
      Borrowings under the revolving credit facilities, net                        104,076               333,844
      Payments on debt and capital lease obligations                              (10,040)              (10,256)
      Repurchase of Hills Senior Notes                                                   -               (2,852)
      Deferred financing costs                                                    (16,427)                   ---
      Purchase of treasury stock                                                                             (8)
      Proceeds from the exercise of options and warrants, net                           -                  1,132
                                                                         ------------------  --------------------
Net cash provided by financing activities                                           77,609               321,860
                                                                         ------------------  --------------------
(Decrease) increase in cash and cash equivalents                                  (30,439)                   693
Cash and cash equivalents, beginning of period                                      49,761                30,612
                                                                         ------------------  --------------------
Cash and cash equivalents, end of period                                           $19,322               $31,305
                                                                         ==================  ====================

Supplemental disclosure of cash flow information: Cash paid
    during the period for:
           Interest and debt fees not capitalized                                  $45,833               $35,882
           Income taxes                                                                124                 1,654

</TABLE>

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


                                       5
<PAGE>
                          AMES DEPARTMENT STORES, INC.
                                AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                             (DEBTORS-IN-POSSESSION)

                                   (Unaudited)


1.       BASIS OF PRESENTATION :

         In the opinion of management, the accompanying unaudited consolidated
         condensed financial statements of Ames Department Stores, Inc. (a
         Delaware corporation) and subsidiaries (collectively "Ames" or the
         "Company") contain all adjustments (consisting of normal recurring
         adjustments) necessary for a fair presentation of such financial
         statements for the interim periods. Due to the seasonality of the
         Company's operations, the results of its operations for the interim
         period ended August 4, 2001 may not be indicative of total results for
         the full year. Certain information and footnote disclosures normally
         included in financial statements prepared in accordance with generally
         accepted accounting principles have been condensed or omitted pursuant
         to the rules and regulations promulgated by the Securities and Exchange
         Commission (the "SEC"). Certain prior year amounts have been
         reclassified to conform to the presentation used for the current year.
         Pursuant to the indenture governing the Ames Senior Notes (as defined
         in Note 5), all of Ames' subsidiaries have jointly and severally
         guaranteed the Ames Senior Notes on a full and unconditional basis.
         Separate financial statements of those subsidiaries have not been
         included herein because management has determined that they are not
         material to investors.

         The consolidated condensed balance sheet at February 3, 2001 was
         obtained from audited financial statements previously filed with the
         SEC in the Company's Annual Report on Form 10-K for the fiscal year
         ended February 3, 2001 (the "2000 Form 10-K"). The accompanying
         unaudited consolidated condensed financial statements should be read in
         conjunction with the financial statements and Notes thereto included in
         the 2000 Form 10-K.

         The accompanying unaudited consolidated condensed financial statements
         have been prepared on a going concern basis, which contemplates
         continuity of operations, realization of assets and liquidation of
         liabilities and commitments in the normal course of business and do not
         reflect any adjustments that might result if the Company is unable to
         continue as a going concern. The filing of the voluntary Chapter 11
         petitions referred to below, losses from operations and negative cash
         flow from operations raise doubt about the Company's ability to
         continue as a going concern. The appropriateness of using a going
         concern basis is dependent upon, among other things, confirmation of a
         plan or plans of reorganization, future profitable operations and the
         ability to generate cash from operations and financing sources
         sufficient to meet obligations. As a result of the filing of the
         Chapter 11 cases and related circumstances, realization of assets and
         liquidation of liabilities is subject to significant uncertainty. While
         under the protection of Chapter 11, the Debtors (as defined below in
         Note 2) may sell or otherwise dispose of assets, and liquidate or
         settle liabilities for amounts other than those reflected in the
         consolidated condensed financial statements. Further, a plan or plans
         of reorganization could materially change the amounts reported in the
         accompanying consolidated condensed financial statements. The
         consolidated condensed financial statements do not include any
         adjustments relating to recoverability of the value of recorded asset
         amounts or the amount and classification of liabilities that might be
         necessary as a consequence of a plan of reorganization. The Company
         anticipates significant adjustments to the consolidated condensed
         financial statements as a result of applying the provisions of
         Statement of Position 90-7 "Financial Reporting by Entities in
         Reorganization Under the Bankruptcy Code" during the proceedings. At
         this time, it is not possible to predict the outcome of the Chapter 11
         cases or their effect on the Company's business, its financial
         position, results of operations or cash flows. If it is determined that
         the liabilities subject to compromise in the Chapter 11 cases exceed
         the fair value of the assets, unsecured claims may be satisfied at less
         than 100% of their face value and equity interests of the Company's
         stockholders may have no value. The Company believes the DIP Facilities
         (as defined below in Note 2), which received interim approval from the
         Bankruptcy Court (as defined below in Note 2) on August 20, 2001,
         should provide the Company with adequate liquidity to conduct its
         business while it prepares a reorganization plan. However, the
         Company's liquidity, capital resources, results of operations and
         ability to continue as a going concern are subject to known and unknown
         risks and uncertainties, including those set forth in Item 2 below
         under "Forward Looking Statements."

                                       6
<PAGE>
2.       SUBSEQUENT EVENTS

         A. STORE CLOSINGS

         On August 16, 2001 the Company announced that it will close 47
         locations. The stores began liquidation sales immediately and are
         expected to close in October 2001. The Company is in the process of
         determining the charge related to these store closings and expects to
         report this amount in the third quarter, with consideration of the
         Chapter 11 filing discussed below.

         B. CHAPTER 11 FILING

         On August 20, 2001, subsequent to the close of the fiscal quarter ended
         August 4, 2001, the Company and each of its four subsidiaries
         (collectively, the "Debtors") filed voluntary petitions under Chapter
         11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United
         States Bankruptcy Court for the Southern District of New York (the
         "Bankruptcy Court"). The Chapter 11 cases Nos. 01-42217 (REG) through
         01-42221 (REG) (the "Chapter 11 Cases") have been consolidated for the
         purpose of joint administration. As of August 20, 2001, the Debtors are
         continuing to operate their business as debtors-in-possession under
         Chapter 11 of the Bankruptcy Code and are subject to the jurisdiction
         of the Bankruptcy Court.

         As a result of these filings, actions to collect pre-petition
         indebtedness are stayed and other contractual obligations against the
         Debtors may not be enforceable. In addition, under the Bankruptcy Code,
         the Debtors may assume or reject executory contracts, including real
         estate leases, employment contracts, personal property leases, service
         contracts and other unexpired executory pre-petition contracts, subject
         to Bankruptcy Court approval. Parties affected by these rejections may
         file claims with the Bankruptcy Court in accordance with the Bankruptcy
         Code. The Debtors cannot presently determine or reasonably estimate the
         ultimate liability that may result from the filing of claims for all
         contracts that may be rejected. Substantially all pre-petition
         liabilities are subject to settlement under a plan of reorganization to
         be voted on by the creditors and equity holders and approved by the
         Bankruptcy Court. Although the Debtors expect to file a reorganization
         plan or plans that provide for emergence from bankruptcy sometime
         during Fiscal Year 2002, there can be no assurance that a
         reorganization plan or plans will be proposed by the Debtors or
         confirmed by the Bankruptcy Court or that any such plan will be
         consummated.

         As provided by the Bankruptcy Code, the Debtors have the exclusive
         right to submit a plan of reorganization for 120 days from the date of
         the filing of the voluntary petitions. Further extension may be sought
         and may be granted or rejected by the Bankruptcy Court. If the Debtors
         fail to file a plan of reorganization during such period or if such
         plan is not accepted by the required number of creditors and equity
         holders within the required period, any party in interest may
         subsequently file its own plan of reorganization for the Debtors. A
         plan of reorganization must be confirmed by the Bankruptcy Court, upon
         certain findings being made by the Bankruptcy Court which are required
         by the Bankruptcy Code. The Bankruptcy Court may confirm a plan of
         reorganization notwithstanding the non-acceptance of the plan by an
         impaired class of creditors or equity holders if certain requirements
         of the Bankruptcy Code are met. A plan of reorganization also could
         result in holders of the Company's common stock receiving no value for
         their interest. The Chapter 11 filing, the uncertainty regarding the
         eventual outcome of the reorganization case and the effect of other
         unknown adverse factors could threaten the Company's existence as a
         going concern.

         At the first day hearing held on August 20, 2001 before Judge Robert E.
         Gerber, the Bankruptcy Court entered its first day orders granting
         authority to the Debtors to, among other things, pay pre-petition and
         post-petition employee wages, salaries, benefits and other employee
         obligations, pay certain administrative fees and insurance related
         obligations and honor customer service programs, including warranties,
         returns, layaways and gift certificates.

         Schedules will be filed with the Bankruptcy Court setting forth the
         assets and liabilities of the Debtors as of the filing date as shown by
         the Company's accounting records. Differences between amounts shown by
         the Company and claims filed by creditors will be investigated and, if
         necessary, unresolved diputes will be determined by the Bankruptcy
         Court. The ultimate settlement terms for such liabilities are subject
         to a plan of reorganization, and accordingly, are not presently
         determinable.

         Subsequent to the Chapter 11 filing and the issuance of the Company's
         second quarter earnings press release, the Company updated its
         financial forecast and determined that an increase in its valuation
         allowance for deferred tax assets was appropriate. Such adjustment has
         been reflected in the August 4, 2001 consolidated condensed financial
         statements. See Note 7 for additional information regarding the
         deferred tax asset valuation adjustment.


                                       7
<PAGE>
         C. DEBTOR-IN-POSSESSION CREDIT FACILITIES

         The Company entered into a $700 million Debtor-In-Possession Credit
         Agreement, dated as of August 20, 2001 (the "GECC DIP Facility"), with
         General Electric Capital Corporation ("GE Capital"). The Company also
         entered into a $55 million Credit Agreement, dated as of August 20,
         2001 (the "Kimco DIP Facility" and, together with the GECC DIP
         Facility, the "DIP Facilities"), with Kimco Funding, LLC ("Kimco"). See
         Note 5 for a more detailed description of the DIP Facilities.

         On August 20, 2001, the Bankruptcy Court signed an Interim Order
         approving usage of the DIP Facilities.

3.       NET LOSS PER COMMON SHARE:

         Net loss per share was determined using the weighted average number of
         common shares outstanding. Diluted net loss per share was equal to
         basic net loss per share because inclusion of common stock equivalents
         would have been anti-dilutive. During the quarter ended August 4, 2001,
         no options were exercised. During the quarter ended July 29, 2000,
         options representing, 1,600 shares of Common Stock were exercised.

4.       INVENTORIES:

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

5.       DEBT:

         As a result of the Chapter 11 filing (see Note 2), the Ames Senior
         Notes and the Hills Senior Notes (see below) will be classified as
         "liabilities subject to settlement under the reorganization case." No
         principal or interest payments will be made without Bankruptcy Court
         approval until a reorganization plan defining the repayment terms has
         been approved. The Company expects to write off deferred financing
         costs of approximately $21.9 million associated with this long-term
         debt as well as the Prior Credit Facility (as defined below).

         DEBTOR-IN-POSSESSION CREDIT FACILITIES

         On August 20, 2001, the Company entered into the DIP Facilities. The
         GECC DIP Facility consists of a $575 million Tranche A Revolver
         (including a Swing Line Commitment of $30 million as a subfacility
         thereof), a $50 million fully drawn Tranche B Revolver and a $75
         million Term Loan. The GECC DIP Facility has a sublimit of $50 million
         for the issuance of letters of credit. Amounts borrowed under the
         Tranche A and Tranche B Revolvers bear interest at the Index Rate plus
         1.50% per annum or, at the election of the Company, the applicable
         LIBOR Rate plus 2.75% per annum. Amounts borrowed under the Term Loan
         bear interest at the Index Rate plus 5.25% per annum. The Company must
         also pay an unused commitment fee equal to 0.35% per annum multiplied
         by the average unused daily balance of the Revolving Loan and the Swing
         Line Loan. The GECC DIP Facility terminates on the earliest of, among
         other things, August 20, 2003 and the effective date of a plan of
         reorganization in the Chapter 11 Cases. Proceeds from the GECC DIP
         Facility were used to repay in full the Prior Credit Facility (as
         defined below), and will be used to pay such transaction costs and
         expenses related to the Chapter 11 Case, to provide working capital
         and for other general corporate purposes.

         The GECC DIP Facility replaced the Company's former credit facility
         under the Credit Agreement dated as of March 2, 2001 (the "Prior
         Credit Facility") with GE Capital, as agent, and a syndicate of other
         banks and financial institutions. The Prior Credit Facility provided
         for a secured revolving credit facility of up to $750 million, with a
         sub-limit of $50 million for letters of credit, and a secured term
         facility for $50 million. On August 20, 2001, as part of its Interim
         Order, the Bankruptcy Court authorized the Company to use the proceeds
         of the GECC DIP Facility to repay the Company's outstanding
         indebtedness under the Prior Credit Facility.

         The lenders under the GECC DIP Facility have a super-priority claim
         against the estates of the Debtors (except with respect to the
         Company's right, title and interest in all real property leases in
         which the lenders under the Kimco DIP Facility have a first priority
         Lien).

         The Kimco DIP Facility consists of a $55 million term loan. Amounts
         borrowed under the Kimco DIP Facility bear interest at the Index Rate
         plus 6.00% per annum. The Company must also pay an additional fee on or


                                       8
<PAGE>
         prior to July 31, 2002 and each anniversary date thereof occurring on
         or prior to the maturity date equal to 0.33% multiplied by the
         aggregate principal amount of loans outstanding on such date. The Kimco
         DIP Facility terminates on the earliest of, among other things, August
         20, 2003 and the effective date of a plan of reorganization in the
         Chapter 11 Cases. Proceeds from the Kimco DIP Facility will be used for
         the financing of (i) capital expenditures relating to the Company's
         real property assets, (ii) its operating expenses and (iii)
         intercompany loans to Ames Merchandising Corporation.

         The lenders under the Kimco DIP Facility have a priority claim against
         the estates of the Debtors, which ranks junior to the super-priority
         claims of the lenders under the GECC DIP Facility (except with respect
         to the Company's right, title and interest in all real property leases
         in which the lenders under the Kimco DIP Facility have a first priority
         lien).

         As of August 4, 2001, borrowings of $465.9 million were outstanding
         under the Prior Credit Facility. These borrowings are included in the
         current portion of long-term debt in the accompanying consolidated
         condensed balance sheet as of August 4, 2001. In addition, $33.9 and
         $2.8 million of standby and trade letters of credit, respectively, were
         outstanding under the Prior Credit Agreement. The weighted average
         interest rate on the borrowings for the thirteen weeks ended August 4,
         2001 was 8.39%. The peak borrowing level through August 4, 2001 was
         $559.7 million and occurred in the fiscal month of May, 2001. These
         borrowings have been replaced by borrowings under the DIP Facilities
         described above.

         SENIOR NOTES DUE 2003

         The 12.5% Senior Notes due 2003 (the "Hills Senior Notes") were, at the
         time of the acquisition of Hills, an unsecured obligation of Hills. The
         Company had Hills Senior Notes with a recorded value of $44.1 million
         outstanding as of August 4, 2001. The Hills Senior Notes pay interest
         in January and June and mature July 2003. No principal or interest
         payments will be made without Bankruptcy Court approval until a
         reorganization plan defining the repayment terms has been approved.

         SENIOR NOTES DUE 2006

         The Company has $200.0 million of its 10% seven-year senior notes (the
         "Ames Senior Notes") outstanding as of August 4, 2001. The Ames Senior
         Notes pay interest semi-annually in April and October and mature April
         2006. No principal or interest payments will be made without Bankruptcy
         Court approval until a reorganization plan defining the repayment terms
         has been approved.


6.       STOCK OPTIONS:

         The Company has four stock option plans (the "Option Plans"): the 1994
         Management Stock Option Plan, the 1994 Non-Employee Directors Stock
         Option Plan (as amended), the 1998 Management Stock Incentive Plan, as
         amended and restated, and the 2000 Store Manager Stock Option Plan.

         The Company accounts for its stock option plans under Accounting
         Principles Board ("APB") Opinion No. 25. Had compensation cost for the
         Company's stock option grants been determined in accordance with SFAS
         No. 123, the Company's net income and net income per common share for
         quarters ended August 4, 2001 and July 29, 2000 would have approximated
         the pro forma amounts below

<TABLE>
<CAPTION>
                                                FOR THE THIRTEEN              FOR THE TWENTY-SIX WEEKS
                                                   WEEKS ENDED                         ENDED
                                          ------------------------------    -----------------------------
             (In Thousands)                AUGUST 4,         JULY 29,        AUGUST 4,        JULY 29,
                                             2001              2000             2001            2000
                                          ------------      ------------    -------------    ------------
<S>                                       <C>                               <C>
 Net loss:
 As reported                               ($276,427)         ($22,111)       ($304,159)       ($51,196)
 Pro forma                                 ($278,386)         ($24,645)       ($308,564)       ($56,097)

 Basic net loss per common share: (a)
 As reported                                  ($9.40)           ($0.75)         ($10.35)         ($1.74)
 Pro forma                                    ($9.47)           ($0.84)         ($10.50)         ($1.91)

</TABLE>

                                       9
<PAGE>
         (a) Common stock equivalent shares have not been included because the
         effect would be anti-dilutive.

         The fair value of stock options used to compute pro forma net income
         and net income per diluted common share is the estimated present value
         as of the grant date using the Black-Scholes option-pricing model with
         the following weighted average assumptions: no dividend yield, expected
         option volatilities, a risk-free interest rate equal to U.S. Treasury
         securities with a maturity equal to the expected life of the option and
         an expected life from date of grant until option expiration date.

7.       INCOME TAXES:

         The Company's estimated annual effective income tax rate for fiscal
         2000 was applied to the loss before income taxes for the thirteen and
         twenty six weeks ended July 29, 2000 to compute a non-cash income tax
         benefit. The income tax benefit was included in current deferred taxes
         in the accompanying consolidated condensed balance sheet as of July 29,
         2000.

         In assessing the realizability of deferred tax assets, management
         considers whether it is more likely than not that some portion or all
         of the deferred taxes will be realized. Based on a number of factors,
         including the Company's filing for Chapter 11 Bankruptcy protection on
         August 20, 2001 as previously discussed and management's current
         financial forecasts, the Company has recorded an increase to the
         valuation allowance during the quarter ended August 4, 2001, resulting
         in a non-cash charge of $250 million. Management is in the process of
         updating these financial forecasts and projections for the purpose of
         submission to the Bankruptcy Court in anticipation of establishing
         a plan of reorganization. These financial projections and plan of
         reorganization will be subject to review and approval. As a result, the
         recorded valuation allowance will be subject to further adjustment in
         future periods.

8.       COMMITMENTS AND CONTINGENCIES:

         Reference can be made to the 2000 Form 10-K (Item 3 - Legal
         Proceedings) for various litigation involving the Company, for which
         there were no material changes since the filing date of the 2000 Form
         10-K.

         On August 20, 2001, the Debtors filed their voluntary petitions for
         reorganization under Chapter 11 of the Bankruptcy Code with the United
         States Bankruptcy Court for the Southern District of New York, Case
         Nos. 01-42217 through 01-42221 (REG). All civil litigation commenced
         against the Debtors prior to that date has been stayed by operation of
         law.

9.       CLOSED STORE RESERVES:

         The Company has established reserves against the costs associated with
         the closure of a number of stores. The following items represent the
         major components of the change in the closed store reserves.

                                                         (in thousands)
             Balance 2/3/01                                 $179,365
                      Lease costs                              7,078
                      Fixed asset write-downs                 29,467
                      Other occupancy costs                    5,996
                      Severance                                1,079
                                                         ------------
             Balance 8/4/01                                 $135,745
                                                         ============

         The above activity is exclusive of any charges for the closing of the
         47 stores announced subsequent to the end of the quarter and which will
         be recorded in the third quarter.

10.      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

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

         During June 2001, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards ("SFAS") No. 141 " Business
         Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets".
         In addition to requiring the use of the purchase method for all
         business combinations, SFAS 141 requires intangible assets that meet


                                       10
<PAGE>
         certain criteria to be recognized as assets apart from gooodwill. SFAS
         142 addresses accounting and reporting standards for acquired goodwill
         and other intangible assets, and generally, requires that goodwill and
         indefinite life intangible assets no longer be amortized but be tested
         for impairment annually. Finite life intangible assets will continue to
         be amortized over their useful lives. The impact of these statements on
         the Company's consolidated financial statements is currently being
         evaluated.














                                       11
<PAGE>
ITEM 2.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion and analysis should be read in conjunction with the
consolidated condensed financial statements and footnotes presented in this
report.

CHAPTER 11 FILING

On August 20, 2001, subsequent to the close of the fiscal quarter ended August
4, 2001, the Company and each of its four subsidiaries (collectively, the
"Debtors") filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). The Chapter 11 cases
Nos. 01-42217 (REG) through 01-42221 (REG) (the "Chapter 11 Cases") have been
consolidated for the purpose of joint administration. As of August 20, 2001, the
Debtors are continuing to operate their business as debtors-in-possession under
Chapter 11 of the Bankruptcy Code and are subject to the jurisdiction of the
Bankruptcy Court.

As a result of these filings, actions to collect pre-petition indebtedness are
stayed and other contractual obligations against the Debtors may not be
enforceable. In addition, under the Bankruptcy Code, the Debtors may assume or
reject executory contracts, including real estate leases, employment contracts,
personal property leases, service contracts and other unexpired executory
pre-petition contracts, subject to Bankruptcy Court approval. Parties affected
by these rejections may file claims with the Bankruptcy Court in accordance with
the Bankruptcy Code. The Debtors cannot presently determine or reasonably
estimate the ultimate liability that may result from the filing of claims for
all contracts that may be rejected. Substantially all pre-petition liabilities
are subject to settlement under a plan of reorganization to be voted on by the
creditors and equity holders and approved by the Bankruptcy Court. Although the
Debtors expect to file a reorganization plan or plans that provide for emergence
from bankruptcy sometime during Fiscal Year 2002, there can be no assurance that
a reorganization plan or plans will be proposed by the Debtors or confirmed by
the Bankruptcy Court or that any such plan will be consummated.

As provided by the Bankruptcy Code, the Debtors have the exclusive right to
submit a plan of reorganization for 120 days from the date of the filing of the
voluntary petitions. Further extension may be sought and may be granted or
rejected by the Bankruptcy Court. If the Debtors fail to file a plan of
reorganization during such period or if such plan is not accepted by the
required number of creditors and equity holders within the required period, any
party in interest may subsequently file its own plan of reorganization for the
Debtors. A plan of reorganization must be confirmed by the Bankruptcy Court,
upon certain findings being made by the Bankruptcy Court which are required by
the Bankruptcy Code. The Bankruptcy Court may confirm a plan of reorganization
notwithstanding the non-acceptance of the plan by an impaired class of creditors
or equity holders if certain requirements of the Bankruptcy Code are met. A plan
of reorganization also could result in holders of the Company's common stock
receiving no value for their interest. The Chapter 11 filing, the uncertainty
regarding the eventual outcome of the reorganization case and the effect of
other unknown adverse factors could threaten the Company's existence as a going
concern.

At the first day hearing held on August 20, 2001 before Judge Robert E. Gerber,
the Bankruptcy Court entered its first day orders granting authority to the
Debtors to, among other things, pay pre-petition and post-petition employee
wages, salaries, benefits and other employee obligations, pay certain
administrative fees and insurance related obligations and honor customer service
programs, including warranties, returns, layaways and gift certificates.

Schedules will be filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Company's
accounting records. Differences between amounts shown by the Company and claims
filed by creditors will be investigated and if necessary, unresolved disputes
will be determined by the Bankruptcy Court. The ultimate settlement terms for
such liabilities are subject to a plan of reorganization, and accordingly, are
not presently determinable.

Subsequent to the Chapter 11 filing and the issuance of the Company's second
quarter earnings press release, the Company updated its financial forecast and
determined that an increase in its valuation allowance for deferred tax assets
was appropriate. Such adjustment has been reflected in the August 4, 2001
consolidated condensed financial statements. See Note 7 for additional
information regarding the deferred tax asset valuation adjustment.


                                       12
<PAGE>
FORWARD-LOOKING STATEMENTS

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

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

The filing of the voluntary Chapter 11 petitions referred to above, losses from
operations and negative cash flow from operations raise doubt about the
Company's ability to continue as a going concern. In addition, the Company is
subject to the risks associated with (i) the ability of the Company to operate
pursuant to the terms of the DIP Facilities (defined below), (ii) the ability of
the Company to operate successfully under the Chapter 11 proceedings, (iii) the
approval of plans and activities by the Bankruptcy Court and (iv) the ability of
the Company to create and have approved a reorganization plan in the Chapter 11
Cases.

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

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

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

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

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


                                       13
<PAGE>
operators, currently operates stores within our regional market and competes
with us for customers and potential store locations. We anticipate a further
increase in competition from these national discount store chains.

Our merchandising focus is primarily directed to consumers who, we believe, are
underserved by the major national chains. Although this approach, combined with
our smaller store size, has enabled us to compete effectively with these chains
and operate profitably in proximity to their stores, we remain vulnerable to the
marketing power and high level of consumer recognition of the major national
discount chains. We expect to face increased competition in the future which
could adversely affect our business, results of operations, and financial
condition.

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

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

Substantially all of our assets are encumbered by debt incurred through our
credit agreement borrowings. At August 4, 2001, the amount of credit agreement
debt outstanding was $465.9 million. Our leveraged position impairs our ability
to obtain additional financing to fund working capital requirements, capital
expenditures or other purposes.

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

We incurred a year to date net loss of $304.2 million as of the end of the
quarter ended August 4, 2001 and, to date, consistent with normal seasonal
patterns as discussed above, we have continued to incur net losses in the third
quarter in our current fiscal year. There can be no assurance that losses will
not continue in the future. If losses do continue to occur, we will likely need
to obtain additional capital to continue our operations.

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

BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities and commitments in the
normal course of business and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The filing of the
voluntary Chapter 11 petitions referred to above, losses from operations and
negative cash flow from operations raise doubt about the Company's ability to
continue as a going concern. The appropriateness of using a going concern basis
is dependent upon, among other things, confirmation of a plan or plans of
reorganization, future profitable operations and the ability to generate cash
from operations and financing sources sufficient to meet obligations. As a
result of the filing of the Chapter 11 cases and related circumstances,
realization of assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the Debtors may sell or
otherwise dispose of assets, and liquidate or settle liabilities for amounts
other than those reflected in the consolidated condensed financial statements.
Further, a plan or plans of reorganization could materially change the amounts
reported in the accompanying consolidated condensed financial statements. The
consolidated condensed financial statements do not include any adjustments
relating to recoverability of the value of recorded asset amounts or the amount
and classification of liabilities that might be necessary as a consequence of a
plan of reorganization. The Company anticipates significant adjustments to the
consolidated condensed financial statements as a result of applying the
provisions of Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" during the proceedings. At this time,
it is not possible to predict the outcome of the Chapter 11 cases or their
effect on the Company's business, its financial position, results of operations
or cash flows. If it is determined that the


                                       14
<PAGE>
liabilities subject to compromise in the Chapter 11 cases exceed the fair value
of the assets, unsecured claims may be satisfied at less than 100% of their face
value and equity interests of the Company's stockholders may have no value. The
Company believes the DIP Facilities, which received interim approval from the
Bankruptcy Court on August 20, 2001, should provide the Company with adequate
liquidity to conduct its business while it prepares a reorganization plan.
However, the Company's liquidity, capital resources, results of operations and
ability to continue as a going concern are subject to known and unknown risks
and uncertainties, including those set forth above under "Forward-looking
Statements."

STORE CLOSINGS

In our annual report on Form 10-K for the year ended February 3, 2001 ("Fiscal
2000") we disclosed the planned closing of thirty-two stores. We completed the
closing of the thirty-two stores by the end of March 2001. All but one of the
stores were under-performing stores that were acquired in the Hills Stores
Company acquisition in December 1998; the other store was closed as a result of
the expiration of its lease.

On August 16, 2001 the Company announced that it will close 47 locations. The
stores began liquidation sales immediately and are expected to close in October
2001.

RESULTS OF OPERATIONS

A significant factor affecting the Company's results of operations and financial
condition for the quarter ended August 4, 2001, was the continued deterioration
of its liquidity position caused by declining sales volume and the slowing of
merchandise shipments from suppliers. The following tables illustrate the
consolidated results of operations for the thirteen and twenty-six weeks ended
August 4, 2001, as compared to the consolidated results of operations for the
thirteen and twenty-six weeks ended July 29, 2000.

<TABLE>
<CAPTION>
                                                        AUGUST 4,           JULY 29,            PERCENTAGE
               For the thirteen weeks ended               2001                2000                CHANGE
                                                      --------------      --------------      ----------------
                                                               (In thousands)
<S>                                                   <C>                 <C>                 <C>
Net sales                                                  $806,014            $872,034           (7.6)%
Leased department and other income                           10,165              10,544           (3.6)%
                                                      --------------      --------------
Total revenue                                               816,179             882,578           (7.5)%
Costs and expenses:
      Cost of merchandise sold                              581,464             630,881           (7.8)%
      Selling, general, and administrative expense          236,297             248,166           (4.8)%
      Depreciation and amortization expense, net             18,836              17,240            9.3%
      Interest and debt expense, net                         22,206              21,953            1.2%
                                                      --------------      --------------
Loss before income taxes                                   (42,624)            (35,662)
Income tax (provision) benefit                            (233,803)              13,551
                                                      --------------      --------------
Net loss                                                 ($276,427)           ($22,111)
                                                      ==============      ==============


                                                         AUGUST 4,           JULY 29,            PERCENTAGE
           For the twenty-six weeks ended                  2001                2000                CHANGE
                                                       --------------      --------------     -----------------
                                                                (In thousands)

Net sales                                                1,599,701            1,702,691           (6.0)%
Leased department and other income                          19,314               19,803           (2.5)%
                                                       --------------      --------------
Total revenue                                            1,619,015            1,722,494           (6.0)%
Costs and expenses:
     Cost of merchandise sold                            1,147,420            1,233,805           (7.0)%
     Selling, general and administrative expense           475,012              495,581           (4.1)%
     Depreciation and amortization expense, net             38,472               34,937           10.1%
     Interest and debt expense, net                         45,464               40,745           11.6%
                                                       --------------      --------------
Loss before income taxes                                  (87,353)             (82,574)
Income tax (provision) benefit                           (216,806)               31,378
                                                       --------------      --------------
Net loss                                                 (304,159)             (51,196)
                                                       ==============      ==============
</TABLE>

                                       15
<PAGE>
The decrease in net sales is primarily attributable to a comparable store sales
decrease of 7.4% for the quarter and for the first half of Fiscal 2001 compared
to the same periods in Fiscal 2000.

Gross margin as a percentage of sales improved to 27.9% from 27.7% during the
second quarter of fiscal 2001 compared to the same period in Fiscal 2000. During
the twenty six weeks ended August 4, 2001, gross margin rates improved from
27.5% to 28.3% compared to the same period in Fiscal 2000. The improvement is
the result of reduced promotional markdowns.

The decrease in selling, general and administrative expenses primarily resulted
from cost reduction programs and the closing of the thirty-two stores. Selling,
general and administrative expenses as a percentage of sales increased slightly
from 28.1% to 29.0% for the quarter and from 28.8% to 29.3% for the first twenty
six weeks as compared to last year; the increase was primarily a result of lower
than expected sales.

The increase in depreciation and amortization expense is primarily a result of
additional depreciation associated with the new store and remodeling
expenditures incurred during Fiscal 2000. Capital expenditures for Fiscal 2000
were $127.1 million, of which $50.5 million was incurred after the second
quarter.

The increase in interest expense is mainly attributable to a higher level of
borrowings under our credit facility.

Our estimated annual effective income tax rate for fiscal 2000 was applied to
the loss before income taxes for each period to compute a non-cash income tax
benefit. The income tax benefit was included in current assets in the
consolidated condensed balance sheets as of July 29, 2000.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
taxes will be realized. Based on a number of factors, including the Company's
filing for Chapter 11 Bankruptcy protection on August 20, 2001 as previously
discussed and management's current financial forecasts, the Company has recorded
an increase to the valuation allowance during the quarter ended August 4, 2001,
resulting in a non-cash charge of $250 million. Management is in the process of
updating these financial forecasts and projections for the purpose of submission
to the Bankruptcy Court in anticipation of establishing a plan of
reorganization. These financial projections and plan of reorganization will be
subject to review and approval. As a result, the recorded valuation allowance
will be subject to further adjustment in future periods.


LIQUIDITY AND CAPITAL RESOURCES

CURRENT YEAR

The Company's liquidity position deteriorated in the second quarter primarily
due to a continuation of declining sales that resulted in a significant
deficiency in cash necessary for operating activities. As described above under
"Chapter 11 Filing," on August 20, 2001, the Company filed a voluntary petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The following
table reflects certain balance sheet account balances as of the end of the
current year fiscal quarter compared to the same account balances as of the
beginning of the current fiscal year.

<TABLE>
<CAPTION>
                                              AUGUST 4,           FEBRUARY 3,                        PERCENTAGE
                                                2001                 2001             CHANGE           CHANGE
                                            --------------      ----------------    ------------    -------------
                                                              (In thousands)
                                            ----------------------------------------------------
<S>                                         <C>                                                     <C>
Cash and cash equivalents                         $19,322               $49,761       ($30,439)          (61.1)%
Merchandise inventories                           709,234               744,132        (34,898)           (4.7)%
Net fixed assets                                  480,157               547,999        (67,842)          (12.4)%
Trade accounts payable                            303,159               345,915        (42,756)          (12.4)%
Store closing reserves                            135,745               179,365        (43,620)          (24.3)%
Long-term debt                                    244,147               606,057       (361,910)          (59.7)%
Capital lease and financing obligations           128,615               165,365        (36,750)          (22.2)%

</TABLE>

The decrease in our cash position was primarily due to merchandise inventory
purchases, reduction of accounts payable, and payments of deferred financing
costs and capital expenditures. These cash reductions were partially offset by
additional credit agreement borrowings of $104.1 million.

The decrease in merchandise inventories from February 3, 2001 was due to the
closing of 32 stores in March of 2001 as well as the unplanned decline in
merchandise shipments from suppliers in July of 2001.

The decrease in net fixed assets was due to net fixed asset retirements totaling
$51.1 million (including capital lease retirements), primarily associated with
the thirty-two stores that were closed, and $42.1 million in depreciation
expense partially offset by $20.9 million in capital expenditures and $4.5
million in capital lease additions.


                                       16
<PAGE>
The decrease in trade accounts payable was principally the result of a decrease
in purchases resulting from the closing of 32 stores in March of 2001.

Store closing reserves decreased primarily as a result of costs related to the
thirty-two store closings, including $29.5 million in fixed asset write-downs,
$1.1 million in severance costs and $13.0 million in occupancy costs.

Long-term debt as of August 4, 2001 consisted of $200.0 million of the Ames
senior notes, and $44.1 million of the Hills senior notes. No principal or
interest payments will be made without Bankruptcy Court approval until a
reorganization plan defining the repayment terms has been approved. The
borrowings under our credit facility have been reclassified to short-term debt
as of August 4, 2001 due to our Chapter 11 filing.

The decrease in capital lease and financing obligations was due to $31.2 million
in write-offs associated with the closing of the thirty-two stores as referenced
above and $10.0 million in payments on capital lease obligations partially
offset by $4.5 million in capital lease additions.

Our principal sources of liquidity are our credit agreement, cash from
operations, and cash on hand. Our former credit agreement has been replaced by
Debtor in Possession financing agreements as a result of our filing for
reorganization.

On August 20, 2001, the Company entered into a $700 million Debtor-In-Possession
Credit Agreement, dated as of August 20, 2001 ( the "GECC DIP Facility"), with
General Electric Capital Corporation ("GE Capital"). The Company also entered
into a $55 million Credit Agreement, dated as of August 20, 2001 (the "Kimco DIP
Facility" and, together with the GECC DIP Facility, the "DIP Facilities"), with
Kimco Funding, LLC ("Kimco"). The GECC DIP Facility consists of a $575 million
Tranche A Revolver (including a Swing Line Commitment of $30 million as a
subfacility thereof), a $50 million fully drawn Tranche B Revolver and a $75
million Term Loan. The GECC DIP Facility has a sublimit of $50 million for the
issuance of letters of credit. Amounts borrowed under the Tranche A and Tranche
B Revolvers bear interest at the Index Rate plus 1.50% per annum or, at the
election of the Company, the applicable LIBOR Rate plus 2.75% per annum. Amounts
borrowed under the Term Loan bear interest at the Index Rate plus 5.25% per
annum. The Company must also pay an unused commitment fee equal to 0.35% per
annum multiplied by the average unused daily balance of the Revolving Loan and
the Swing Line Loan. The GECC DIP Facility terminates on the earliest of, among
other things, August 20, 2003 and the effective date of a plan of reorganization
in the Chapter 11 Cases. Proceeds from the GECC DIP Facility were used to repay
in full the Prior Credit Facility (as defined below), and will be used to pay
such transaction costs and expenses related to the Chapter 11 Cases, to provide
working capital and for other general corporate purposes.

The GECC DIP Facility replaced the Company's former credit facility under the
Credit Agreement, dated as of March 2, 2001 (the "Prior Credit Facility"), with
GE Capital, as agent, and a syndicate of other banks and financial institutions.
The Prior Credit Facility provided for a secured revolving credit facility of up
to $750 million, with a sub-limit of $50 million for letters of credit, and a
secured term facility for $50 million. On August 20, 2001, as part of its
Interim Order, the Bankruptcy Court authorized the Company to use the proceeds
of the GECC DIP Facility to repay the Company's outstanding indebtedness under
the Prior Credit Facility.

The lenders under the GECC DIP Facility have a super-priority claim against the
estates of the Debtors (except with respect to the Company's right, title and
interest in all real property leases in which the lenders under the Kimco DIP
Facility have a first priority lien).

The Kimco DIP Facility consists of a $55 million term loan. Amounts borrowed
under the Kimco DIP Facility bear interest at the Index Rate plus 6.00% per
annum. The Company must also pay an additional fee on or prior to July 31, 2002
and each anniversary date thereof occurring on or prior to the maturity date
equal to 0.33% multiplied by the aggregate principal amount of loans outstanding
on such date. The Kimco DIP Facility terminates on the earliest of, among other
things, August 20, 2003 and the effective date of a plan of reorganization in
the Chapter 11 Cases. Proceeds from the Kimco DIP Facility will be used for the
financing of (i) capital expenditures relating to the Company's real property
assets, (ii) its operating expenses and (iii) intercompany loans to Ames
Merchandising Corporation.

The lenders under the Kimco DIP Facility have a priority claim against the
estates of the Debtors, which ranks junior to the super-priority claims of the
lenders under the GECC DIP Facility (except with respect to the Company's right,
title and interest in all real property leases in which the lenders under the
Kimco DIP Facility have a first priority lien).

As of August 4, 2001, borrowings of $465.9 million were outstanding under the
Prior Credit Facility. These borrowings are included in the current portion of
long-term debt in the accompanying consolidated condensed balance sheet as of
August 4, 2001. In

                                       17
<PAGE>
addition, $33.9 and $2.8 million of standby and trade letters of credit,
respectively, were outstanding under the Prior Credit Facility. The weighted
average interest rate on the borrowings for the thirteen weeks ended August 4,
2001 was 8.39%. The peak borrowing level through August 4, 2001 was $559.7
million and occurred in the fiscal month of May, 2001. These borrowings have
been replaced by borrowings under the DIP Facilities described above.


Achievement of expected cash flows from operations and compliance with our
credit agreement covenants (see Note 5 to the consolidated financial statements)
are dependent upon the attainment of sales, gross profit, expense levels, vendor
relations, and flow of merchandise that are consistent with our financial
projections.

COMPARABLE QUARTERS

The following table reflects certain balance sheet account balances as of the
end of the current fiscal quarter compared to the same account balances at the
end of the Fiscal 2000 first quarter.

<TABLE>
<CAPTION>
                                              AUGUST 4,            JULY 29,                          PERCENTAGE
                                                2001                 2000             CHANGE           CHANGE
                                            --------------      ----------------    ------------    -------------
                                                              (In thousands)
                                            ----------------------------------------------------
<S>                                         <C>                                                     <C>
Cash and cash equivalents                         $19,322               $31,305       ($11,983)          (38.3)%
Merchandise inventories                           709,234               885,894       (176,660)          (19.9)%
Net fixed assets                                  480,157               539,277        (59,120)          (11.0)%
Trade accounts payable                            303,159               227,834          75,325            33.1%
Other accounts payable                             80,355                93,152        (12,797)          (13.7)%
Store closing reserves                            135,745                52,667          83,078           157.7%
Long-term debt                                    244,147               752,761       (508,614)          (67.6)%
Capital lease and financing obligations           128,615               170,220        (41,605)          (24.4)%

</TABLE>

The decrease in merchandise inventories from July 29, 2000 was due to the
closing of 32 stores in March of 2001 as well as the unplanned decline in
merchandise shipments from suppliers in July of 2001.

The reduction in net fixed assets resulted from write-offs primarily associated
with the closing of thirty-two stores, as referenced above, and $88.0 million in
depreciation expense offset by $71.4 million in capital expenditures and $8.9
million in capital lease additions incurred during the twelve months ended
August 4, 2001.

The decrease in trade accounts payable from July 29, 2000 primarily resulted
from decreased purchases of merchandise related to the 32 closed stores and our
inventory reduction efforts.

The decrease in other accounts payable results from our expense control programs
and a reduction in selling general and administrative expenses from the closing
of the 32 stores in March of 2001.

Store closing reserves increased as a result of the $129.8 million charge taken
in the fourth quarter of Fiscal 2000 offset by $43.6 million in the current year
usage previously discussed and $3.1 million in usage during the second half of
fiscal 2000.

The decrease in long-term debt is a result of the reclassification of the
borrowings under our revolving credit agreement from long-term debt to
short-term.

The decrease in capital lease and financing obligations was due to $31.2 million
in write-offs associated with the closing of the thirty-two stores as referenced
above and $22.4 million in payments on capital lease obligations partially
offset by $8.9 million in capital lease additions.

ITEM 3.
           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                       18
<PAGE>
We do not speculate on the future direction of interest rates. As of August 4,
2001, approximately $465.9 million of our debt bore interest at variable rates.
We believe that the effect, if any, of possible near term changes in interest
rates on our consolidated financial position, results of operations or cash
flows would not be significant.


                                     PART II
                                OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS.

         Reference can be made to Item 3 - Legal Proceedings included in the
         Company's most recent Form 10-K for various litigation involving the
         Company, for which there were no material changes since the filing date
         of the Form 10-K, except as set forth in Part I, Item 2 - Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations.

         On August 20, 2001, the Debtors filed their voluntary petitions for
         reorganization under Chapter 11 of the Bankruptcy Code with the United
         States Bankruptcy Court for the Southern District of New York, Case
         Nos. 01-42217 through 01-42221 (REG). All civil litigation commenced
         against the Debtors prior to that date has been stayed by operation of
         law.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         The Annual Meeting of Stockholders was held Tuesday, June 12, 2001, to
         consider and act upon the following matters:

(a)      The stockholders elected for one-year terms all persons nominated for
         directors as set forth in the Company's proxy statement filed May 18,
         2000. Each nominee for director was elected as follows:

<TABLE>
<CAPTION>
                                                   For                   Withheld
                                            ------------------      ------------------
<S>                                         <C>                     <C>
     Election of directors as a slate
           Francis X. Basile                    27,568,040               538,116
           Paul M. Buxbaum                      27,568,044               538,112
           Alan Cohen                           27,568,044               538,112
           Joseph R. Ettore                     27,607,659               498,497
           Richard M. Felner                    27,568,044               538,112
           Sidney S. Pearlman                   27,607,963               498,193
           Joseph A. Pollicino                  27,607,963               498,193


(b)      The stockholders approved the amendments to the 1994 Non-Employee
         Directors Stock Option Plan as set forth in the Company's proxy
         statement filed May 15, 2001 as follows:

                 For                             Against                         Abstentions
         ------------------                 ------------------                ------------------
             26,911,807                         1,043,968                          150,381

(c)      The stockholders ratified the appointment of Arthur Andersen LLP as
         independent certified public accountants and auditors for the Company
         for the fiscal year ending February 2, 2002 as follows:

                 For                             Against                         Abstentions
         ------------------                 ------------------               ------------------
             27,843,011                          160,502                           102,643

</TABLE>

                                       19
<PAGE>
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      Index to Exhibits

         EXHIBIT NO.                            EXHIBIT
         -----------                            -------

         10.13             Debtor-In-Possession Credit Agreement, dated as of
                           August 20, 2001, among Ames Merchandising
                           Corporation, as Borrower, the other Credit Parties
                           signatory thereto, as Credit Parties, the Lenders
                           signatory thereto, as Lenders, and General Electric
                           Capital Corporation, as Agent and Lender.

         10.14             Credit Agreement, dated as of August 20, 2001, among
                           Ames Realty II, Inc., a Debtor and a
                           Debtor-In-Possession under Chapter 11 of the
                           Bankruptcy Code, as Borrower, the other Credit
                           Parties signatory thereto, each a Debtor and a
                           Debtor-In-Possession under Chapter 11 of the
                           Bankruptcy Code, as Credit Parties, the Lenders
                           signatory thereto from time to time, as Lenders, and
                           Kimco Funding, LLC, as Agent and Lender.

         11                Schedule of computation of basic and diluted net
                           income (loss) per share

         12                Ratio of Earnings to Fixed Charges


(b)      Reports on Form 8-K

         A Current Report on Form 8-K reporting one item under Item 3 -
         Bankruptcy or Receivership and two items under Item 7(c) was filed on
         August 24, 2001.




                                       20
<PAGE>
                                   SIGNATURES


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


                                AMES DEPARTMENT STORES, INC.
                                (REGISTRANT)

Dated:  September 24, 2001
                                /s/ Joseph R. Ettore
                                -----------------------------------------------
                                Joseph R. Ettore, Chairman, Chief Executive
                                Officer, and Director



Dated:  September 24, 2001
                                /s/ Rolando de Aguiar
                                -----------------------------------------------
                                Rolando de Aguiar, Senior Executive Vice
                                President, Chief Financial and Administrative
                                Officer


                                       21
<PAGE>
                                 EXHIBIT INDEX

         EXHIBIT NO.                            EXHIBIT
         -----------                            -------

         10.13             Debtor-In-Possession Credit Agreement, dated as of
                           August 20, 2001, among Ames Merchandising
                           Corporation, as Borrower, the other Credit Parties
                           signatory thereto, as Credit Parties, the Lenders
                           signatory thereto, as Lenders, and General Electric
                           Capital Corporation, as Agent and Lender.

         10.14             Credit Agreement, dated as of August 20, 2001, among
                           Ames Realty II, Inc., a Debtor and a
                           Debtor-In-Possession under Chapter 11 of the
                           Bankruptcy Code, as Borrower, the other Credit
                           Parties signatory thereto, each a Debtor and a
                           Debtor-In-Possession under Chapter 11 of the
                           Bankruptcy Code, as Credit Parties, the Lenders
                           signatory thereto from time to time, as Lenders, and
                           Kimco Funding, LLC, as Agent and Lender.

         11                Schedule of computation of basic and diluted net
                           income (loss) per share

         12                Ratio of Earnings to Fixed Charges