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      October 31, 1998
                               ---------------------------


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

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


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


             Delaware                              04-2269444
--------------------------------     ---------------------------------------
(State or other jurisdiction 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
                                -----     -----



   23,156,391 shares of Common Stock were outstanding on November 13, 1998.


                            Exhibit Index on page 14

                        Page 1 of 16 (including exhibits)

<PAGE>

                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                     FOR THE QUARTER ENDED OCTOBER 31, 1998




                                    I N D E X


                                                                          Page

Part I:  Financial Information

         Consolidated Condensed Statements of Operations for the             3
           Thirteen and Thirty-nine Weeks ended October 31, 1998
           and October 25, 1997

         Consolidated Condensed Balance Sheets as of                         4
           October 31, 1998, January 31, 1998, and 
           October 25, 1997

         Consolidated Condensed Statements of Cash Flows for the             5
           Thirty-nine Weeks ended October 31, 1998 and
           October 25, 1997

         Notes to Consolidated Condensed Financial Statements                6

         Management's Discussion and Analysis of Financial                  10
           Condition and Results of Operations


Part II: Other Information

         Submission of Matters to a Vote of Security Holders                14

         Exhibits and Reports on Form 8-K                                   14

<PAGE>

<TABLE>
                                                 PART I
                                          FINANCIAL INFORMATION


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




<CAPTION>
                                                             For the Thirteen             For the Thirty-nine
                                                               Weeks Ended                    Weeks Ended
                                                          -----------------------      --------------------------
                                                          October 31,  October 25,      October 31,   October 25,
                                                             1998         1997             1998           1997
                                                          -----------  -----------     ------------   ------------
<S>                                                       <C>          <C>             <C>            <C>
TOTAL SALES                                                $623,029     $550,235        $1,703,988     $1,528,869
Less: Leased department sales                                23,841       22,662            69,455         65,128
                                                          -----------  -----------     ------------   ------------
NET SALES                                                   599,188      527,573         1,634,533      1,463,741

Cost of merchandise sold                                    436,094      379,492         1,176,165      1,049,954
                                                          -----------  -----------     ------------   ------------
     GROSS PROFIT                                           163,094      148,081           458,368        413,787
 
Selling, general and administrative expenses                152,525      143,360           441,264        409,294
Leased department and other operating income                 (6,768)      (6,750)          (20,443)       (17,884)
Depreciation and amortization expense                         5,082        3,915            13,051         10,102
Amortization of the excess of revalued net assets
    over equity under fresh-start reporting                  (1,538)      (1,538)           (4,615)        (4,615)
Interest and debt expense, net                                3,847        3,758             9,093          9,359
                                                          -----------  -----------      ------------   ------------

     INCOME BEFORE INCOME TAXES                               9,946        5,336            20,018          7,531

Income tax provision                                         (3,738)      (1,817)           (7,523)        (2,564)
                                                          -----------  -----------      ------------   ------------

NET INCOME                                                   $6,208       $3,519           $12,495         $4,967
                                                          ===========  ===========      ============   ============




BASIC NET INCOME PER COMMON SHARE
    Net income                                               $0.27         $0.16            $0.55         $0.23
                                                          ===========   ===========      ============  ============

    Weighted average number of common shares outstanding     23,087        22,114           22,885        21,510
                                                          ===========   ===========      ============  ============


DILUTED NET INCOME PER COMMON SHARE
    Net income                                               $0.26         $0.15            $0.52         $0.21
                                                          ===========   ===========      ============  ============

    Weighted average common and common equivalent shares     24,145        23,893           24,141        23,545
                                                          ===========   ===========      ============  ============






<FN>
       (The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>                                                     
</TABLE>

<PAGE>

<TABLE>
                          AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                              CONSOLIDATED CONDENSED BALANCE SHEETS
                                         (In Thousands)
                                           (Unaudited)


                                                                     October 31,   January 31,   October 25,
<CAPTION>                                                              1998           1998         1997
                                                                    ------------  ------------  ------------
                                                    ASSETS          <C>           <C>           <C>
<S>
Current Assets:
     Cash and short-term investments                                   $28,421       $57,828        $18,748
     Receivables                                                        60,655        18,922         43,964
     Merchandise inventories                                           611,216       423,836        585,239
     Prepaid expenses and other current assets                          18,807        12,060         17,685
                                                                    -------------  ------------  ------------
              Total current assets                                     719,099       512,646        665,636

Fixed Assets                                                           191,900       128,790        124,123
     Less - Accumulated depreciation and amortization                  (58,382)      (45,457)       (41,778)
                                                                    -------------  ------------  ------------ 
              Net fixed assets                                         133,518        83,333         82,345
                                                                    
Other assets and deferred charges                                       12,918        14,063          6,589
                                                                    -------------  ------------  ------------
                                                                      $865,535      $610,042       $754,570
                                                                    =============  ============  ============


                                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
      Accounts payable:
        Trade                                                         $256,130       $180,971      $239,147
        Other                                                           52,436         42,185        44,112
                                                                    ------------   ------------  ------------
              Total accounts payable                                   308,566        223,156       283,259

      Note payable - revolver                                          136,057            -         137,692
      Current portion of long-term debt and capital lease obligations    6,277          4,177         6,617
      Self-insurance reserves                                           32,092         31,657        33,001
      Accrued expenses and other current liabilities                    84,027         73,437        70,616
      Store closing reserves                                             9,781         12,050        11,520
                                                                     ------------  ------------  ------------
              Total current liabilities                                576,800        344,477       542,705

Long-term debt                                                             -            9,340         9,311
Capital lease obligations                                               43,996         26,393        25,992
Other long-term liabilities                                              8,577         10,943         9,422

Unfavorable lease liability                                             14,261         15,333        15,690
Excess of revalued net assets over equity under
   fresh-start reporting                                                25,559         30,174        31,712

Stockholders' Equity:
      Common stock                                                         231            225           223
      Additional paid-in capital                                       130,344        118,971        94,908
      Retained earnings                                                 66,681         54,186        24,607
      Treasury stock, at cost                                             (914)           -             -
                                                                     ------------  ------------  ------------
              Total Stockholders' Equity                               196,342        173,382       119,738
                                                                     ------------  ------------  ------------
                                                                      $865,535       $610,042      $754,570
                                                                     ============  ============  ============





<FN>
      (The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
</TABLE>

<PAGE>

                            AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                           CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                          (In Thousands)
                                            (Unaudited)
<TABLE>
<CAPTION>                                                                                 For the Thirty-nine
                                                                                              Weeks Ended
                                                                                  ------------------------------------
                                                                                   October 31,             October 25,
                                                                                      1998                    1997
                                                                                  ------------            ------------
<S>                                                                            <C>                        <C>
Cash flows from operating activities:
       Net income                                                                    $12,495                  $4,967
       Adjustments to reconcile net income to net cash
           used for operating activities:
       Income tax provision                                                            7,523                   2,564
       Depreciation and amortization of fixed and other assets                        13,733                  10,553
       Amortization of the excess of revalued net assets over equity                  (4,615)                 (4,615)
       Increase in accounts receivable                                               (41,447)                (24,893)
       Increase in merchandise inventories                                          (187,380)               (194,163)
       Increase in accounts payable                                                   85,410                  94,342
       Increase in accrued expenses and other current liabilities                     11,025                   3,497
       Increase in other working capital and other, net                               (9,292)                 (5,596)
                                                                                   ------------            ------------
Cash used for operations before store closing items                                 (112,548)               (113,344)
Payments of store closing costs                                                       (1,875)                (13,385)
                                                                                   ------------            ------------
Net cash used for operating activities                                              (114,423)               (126,729)
                                                                                   ------------            ------------
Cash flows from investing activities:
       Proceeds from sales of properties and leases                                      -                     1,900
       Purchases of fixed assets                                                     (39,919)                (28,031)
       Purchase of leases                                                                -                    (2,861)
                                                                                   ------------            ------------
Net cash used for investing activities                                               (39,919)                (28,992)
                                                                                   ------------            ------------
Cash flows from financing activities:
       Payments of debt and capital lease obligations                                (14,064)                (13,363)
       Short-term borrowings under the revolver, net                                 136,057                 137,692
       Proceeds from the excercise of options and warrants                             3,856                   4,021
       Purchase of treasury stock                                                       (914)                    -
                                                                                   ------------            ------------
Net cash provided by financing activities                                            124,935                 128,350
                                                                                   ------------            ------------
Decrease in cash and short-term investments                                          (29,407)                (27,371)
Cash and short-term investments, beginning of period                                  57,828                  46,119
                                                                                   ------------            ------------
Cash and short-term investments, end of period                                       $28,421                 $18,748
                                                                                   ============            ============
Supplemental disclosures of cash flow information: 
  Cash paid during the period for:
       Interest and debt fees not capitalized                                         $7,029                  $8,333
       Income taxes                                                                      119                       3
<FN>
           (The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
</TABLE>
                                                            
<PAGE>

                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (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  October 31, 1998 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.  The
       consolidated  condensed  balance  sheet at January 31, 1998 was  obtained
       from audited  financial  statements  previously filed with the SEC in the
       Company's  latest  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 Company's latest
       Form 10-K.

2.     Net Income Per Common Share:
       ----------------------------
          Net income per share was determined  using the weighted average number
       of common shares  outstanding.  29,169 warrants were converted and 21,550
       options were exercised during the quarter ended October 31, 1998.  During
       the quarter ended October 25, 1997,  376,949  warrants were converted and
       273,650 options were exercised.

3.     Inventories:
       ------------
          Inventories  are  valued  at  the  lower of cost or market.  Effective
       October 25, 1997,  the Company changed from the retail last-in, first-out
      (LIFO) method of accounting for inventories  to  the  first-in,  first-out
      (FIFO) method and restated all prior periods for  the  change.  The change
       had no impact on the historical results of operations of the Company.

4.     Debt:
       -----
          On December 27,  1996,  the Company  entered  into an  agreement  with
       BankAmerica Business Credit,  Inc., as agent, two financial  institutions
       as co-agents  (together with the agent,  the  "Agents"),  and a syndicate
       consisting of five other banks and financial institutions,  for a secured
       revolving credit facility of up to $320 million,  with a sublimit of $100
       million  for  letters  of credit  and a $20  million  term  loan  portion
       available for capital expenditures (the "Credit Agreement").

          The Credit  Agreement is in effect until June 30, 2000,  is secured by
       substantially all of the assets of the Company,  and requires the Company
       to meet certain financial covenants.  In addition,  each year outstanding
       borrowings  under the Credit  Agreement  may not exceed any  balance  due
       under the term loan portion plus up to $20 million in revolver  loans for
       a consecutive  30-day period  between  November 15th and February 15th of
       the  following  year.  The Company is in  compliance  with the  financial
       covenants through the quarter ended October 31, 1998.

<PAGE>

          As of October 31, 1998,  borrowings of $136.1 million were outstanding
       under the  Credit  Agreement.  In  addition,  $19.5 and $2.6  million  of
       standby and trade letters of credit, respectively, were outstanding under
       the  Credit  Agreement.  The  weighted  average  interest  rates  on  the
       borrowings for the thirteen and thirty-nine  weeks ended October 31, 1998
       were 7.3% and 7.6% respectively. The peak borrowing level through October
       31, 1998 was $148.3 million.

          The amount of borrowing  under the Credit  Agreement  shall not exceed
       the sum of (i) an amount  equal to 60% of  inventory  not  covered by any
       outstanding  letter  of  credit  plus  (ii)  an  amount  equal  to 50% of
       inventory covered by any outstanding  letter of credit. In addition,  the
       Credit  Agreement  provides  for the  potential  establishment  of  other
       reserves contingent upon the Company's financial performance. Each Agent,
       in  addition,  reserves  the right to adjust  the total  available  to be
       borrowed by  establishing  reserves,  making  determinations  of eligible
       inventory,  revising  standards of eligibility or decreasing from time to
       time the percentages set forth above. Reference can be made to the latest
       Form  10-K for  further  descriptions  of the  Credit  Agreement  and for
       descriptions of the Company's other obligations not discussed herein.

 5.    Stock Options:
       --------------
          The Company has three stock  option plans (the  "Option  Plans"):  the
       1994 Management  Stock Option Plan, the 1998  Management  Stock Incentive
       Plan and the 1994 Non-Employee Directors Stock Option Plan.

          In October 1995, the Financial  Accounting Standards Board issued SFAS
       No.123 "Accounting for Stock-Based Compensation." SFAS No.123 establishes
       a fair-value  based method of accounting  for  stock-based  compensation;
       however,   it  allows  entities  to  continue   accounting  for  employee
       stock-based  compensation  under the intrinsic value method prescribed by
       Accounting  Principles Board Opinion No. 25, "Accounting for Stock Issued
       to Employees."  The Company elected to account for the Option Plans under
       APB Opinion No. 25, under which no compensation cost has been recognized,
       and adopt SFAS No. 123 through disclosure.

          If the  Company  had elected to  recognize  compensation  cost for the
       Option  Plans based on the fair value at the grant dates for awards under
       those plans,  consistent with the method  prescribed by SFAS No. 123, net
       income and net income per diluted  common  share would have  approximated
       the pro forma amounts indicated below:


                                 For the Thirteen        For the Thirty-nine
                                   Weeks Ended               Weeks Ended
                             -----------------------   -----------------------
                             October 31,  October 25,  October 31,  October 25,
                                1998         1997         1998         1997
                             -----------------------   -----------------------
       Net Income (in thousands)
         As reported            $6,208      $3,519       $12,495      $4,967
         Pro forma               5,279       3,363        10,741       4,494

       Net Income per diluted
         common share
         As reported             $0.26       $0.15         $0.52       $0.21
         Pro forma                0.22        0.14          0.44        0.19

          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 at
       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.

<PAGE>

6.     Income Taxes:
       -------------
          The Company's estimated annual effective income tax rate for each year
       was applied to the income  before income taxes for each period to compute
       a non-cash  income tax provision.  The income tax provisions are included
       as  additions  to paid-in  capital on the  balance  sheet for all periods
       presented.

 7.    Litigation:
       -----------
          Reference  can be  made  to  the  latest  Form  10-K  (Note  12 to the
       Consolidated  Financial  Statements) for various litigation involving the
       Company,  for which there were no material  changes since the filing date
       of the Form 10-K, except as follows:

          With regard to the Second  Complaint (the Austin matter),  on July 15,
       1998, the Court  approved a class action  settlement  (the  "Settlement")
       which had been reached by the  parties.  Notices of the  Settlement  were
       sent to all potential  class members on August 19, 1998.  The  Settlement
       provides that in exchange for a release of all claims against the Company
       each class member who elected to opt-in to the Settlement  will receive a
       benefit,  either cash or discounts on future  purchases at an Ames store,
       based on the  number of days  worked  for the  Company  during  the class
       period.  Individuals who wished to opt-in to the Settlement were required
       to sign and return a Consent  and  Release  Form on or before  October 3,
       1998.  The maximum cost of the  Settlement  to the Company  cannot exceed
       $1.5  million in cash if all  participants  elect cash or $4.5 million in
       discounts on purchases if all participants  elect discounts.  The Company
       believes it has adequately reserved for the settlement.

          With regard to the Fifth Complaint (the Moschelle matter), pursuant to
       the terms of the  Settlement,  the parties  jointly moved to dismiss this
       action  without  prejudice  to the rights of any class member who did not
       elect to opt-in to the  Settlement  by the stated  deadline and the court
       has granted the motion.

 8. Treasury Stock:
    ---------------
          On August 10,  1998,  the  Company's  Board  of  Directors  approved a
       stock repurchase program and authorized management to purchase up  to 1.5
       million common shares.   During the quarter ended  October 31, 1998,  the
       Company acquired 76,481 shares of its common stock.  During the course of
       the quarter,  as a consequence of ongoing discussions with  Hills  Stores
       Company, the Company was precluded from making further purchases.

 9. Subsequent Event:
    -----------------
          On  November  12,  1998,  the Company  announced  that it had signed a
       definitive   agreement   pursuant  to  which  the   Company,   through  a
       wholly-owned  subsidiary,  HSC  Acquisition  Corp.,  would  acquire Hills
       Stores Company ("Hills"). Under the terms of the transaction, the Company
       has commenced a tender offer for all 11.2 million  outstanding  shares of
       Hills' stock,  including the Series A convertible  preferred stock,  (the
       "Equity"),  at a price of $1.50 per share, and a separate tender offer at
       $550 (including  accrued  interest and consent fees) per $1,000 principal
       amount,  for  Hills'  12 1/2 % Senior  Subordinated  Notes  due 2003 (the
       "Notes"),  of which there is $195 million in the  aggregate  outstanding.
       The Company  will also share with the holders of the Equity and the Notes
       a potential recovery in the form of deferred  contingent cash rights with
       regard to litigation  initiated by Hills against certain of Hills' former
       directors.  Any  potential  recovery  will be  divided  as  follows:  50%
       noteholders, 25% equity holders, and 25% Ames.

<PAGE>

          The transaction is contingent on each of the following: (i) the tender
       of at least 60% of the Equity; (ii) the tender of at least 66 2/3% of the
       Notes;  (iii)  the  consent  of at  least  66  2/3% of the  Notes  to the
       modification  or elimination of certain  covenants;  and (iv)  regulatory
       approval and other customary closing conditions.

          The  acquisition,  if  consummated,  will be  accounted  for under the
       purchase method of accounting.  In connection with the  acquisition,  the
       Company has  arranged for a new 42 month $650  million  revolving  credit
       facility   which  will  be  used:  (i)  to  refinance  the  secured  debt
       outstanding under the Company's and Hills'  existing  credit  facilities;
      (ii) to finance the purchase of the Equity and the Notes; (iii) to finance
       the  post-acquisition  remodeling and pre-opening  program for the Hills'
       stores;  and (iv) to provide for the ongoing working capital needs of the
       Company subsequent to the acquisition.

<PAGE>

<TABLE>
                        AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                            FISCAL QUARTER ENDED OCTOBER 31, 1998
                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                                  AND RESULTS OF OPERATIONS

<CAPTION>

Results of Operations
---------------------
     The following  table sets forth the number of stores in operation as of the
dates indicated:

                                  Number of Stores in Operation
                              ------------------------------------
                              October 31,  January 31,  October 25,
                                 1998         1998         1997
                              ----------   ----------   ----------

                                  301          298          298


    The following  discussion and analysis is based on the results of operations
for the thirteen and  thirty-nine  weeks ended  October 31, 1998 and October 25,
1997. During fiscal 1998, six (6) stores were opened, two (2) stores were closed
and  one (1)  store  was  temporarily  closed  as a  result  of a  fire.  In the
comparable prior-year period, nine (9) stores were opened,  thirteen (13) stores
were  closed  and the  Company  determined  that it would  not  re-open  a store
previously closed as a result of flooding.

     The  following  table  sets  forth the  operating  results  expressed  as a
percentage of net sales for the periods indicated:

                                                    Thirteen                  Thirty-nine
                                                   Weeks Ended                Weeks Ended
                                              -----------------------    ------------------------
                                              October 31,  October 25,   October 31,   October 25,
                                                 1998         1997          1998          1997
                                              ----------   ----------    ----------    ----------
<S>                                           <C>          <C>           <C>           <C>
Net sales                                        100.0%       100.0%        100.0%        100.0%
Cost of merchandise sold                          72.8         71.9          72.0          71.7
                                              ----------   ----------    ----------    ----------
Gross margin                                      27.2         28.1          28.0          28.3
Expenses and (income):
Selling, general and administrative expenses      25.5         27.2          27.0          28.0
Leased department and other operating income      (1.1)        (1.3)         (1.3)         (1.2)
Depreciation and amortization expense              0.8          0.8           0.8           0.7
Amortization of the excess of revalued net assets
    over equity under fresh-start reporting       (0.3)        (0.3)         (0.3)         (0.3)
Interest and debt expense, net                     0.6          0.7           0.6           0.6
                                              ----------   ----------    ----------    ----------

       Income before income taxes                  1.7          1.0           1.2           0.5

Income tax provision                              (0.7)        (0.3)         (0.4)         (0.2)
                                              ----------   ----------    ----------    ----------
       Net income                                  1.0%         0.7%          0.8%          0.3%
                                              ==========   ==========    ==========    ==========

</TABLE>

<PAGE>

          Net sales for the  thirteen  weeks ended  October  31, 1998  increased
       $71.6 million or 13.6% from the prior-year's  third quarter due primarily
       to an increase of 12.0% in comparable-store sales and the net addition of
       three (3) stores.  Net sales for the thirty-nine  weeks ended October 31,
       1998 increased $170.8 million or 11.7% as compared to the same prior-year
       period.   Comparable-store   sales   increased  by  9.6%  for  the  first
       thirty-nine weeks.

          Gross  margin  increased  $15.0  million  and  $44.6  million  for the
       thirteen and thirty-nine weeks ended October 31, 1998,  respectively,  as
       compared  to the  same  prior-year  periods.  Gross  margin  rates,  as a
       percentage  of net  sales,  decreased  90 and 30  basis  points  for  the
       thirteen and thirty-nine weeks ended October 31, 1998,  respectively,  as
       compared  to  the  same  prior-year  periods.  Gross  margin  rates  were
       unfavorably  impacted by a higher percentage of sales consisting of lower
       margin items.

          Selling,  general and  administrative  expenses for the thirteen weeks
       ended October 31, 1998  increased  $9.2 million,  but decreased 170 basis
       points as a  percentage  of net  sales  compared  to the same  prior-year
       period due primarily to net sales increases. The percentage decrease also
       reflected   a   favorable    performance   in   advertising   and   lower
       compensation-related  expenses  partially  offset by  increases in health
       insurance and  volume-related  expenses  compared to the same  prior-year
       period.   For  the  thirty-nine   week  period,   selling,   general  and
       administrative  expenses increased $31.9 million, but decreased 100 basis
       points as a  percentage  of net sales as compared to the same  prior-year
       period due primarily to favorable  performances  in store and advertising
       expenses.

          Depreciation  and amortization  expense  increased by $1.2 million but
       remained flat as a percentage of net sales,  in the thirteen  weeks ended
       October  31,  1998,  compared  to the  same  prior-year  period.  For the
       thirty-nine  weeks ended October 31, 1998,  depreciation and amortization
       increased  $2.9 million or 10 basis points as a percentage  of net sales,
       compared with the same  prior-year  period.  The adoption of  fresh-start
       reporting as of December 26, 1992 resulted in the write-off of all of the
       Company's non-current assets at that date, and therefore depreciation and
       amortization expense results only from capital additions after that date.

          The  amortization  of the excess of  revalued  net assets  over equity
       under  fresh-start  reporting  remained  the same in the current  periods
       presented as compared to the prior year.  The Company is amortizing  this
       amount over a ten-year period.

          Interest and debt  expense,  net of interest  income,  increased  $0.1
       million,  but decreased 10 basis points as a percentage of net sales, for
       the thirteen weeks ended October 31, 1998 as compared to the period ended
       October 31,  1997.  The  increase in interest  and debt  expenses was due
       primarily  to the  addition  of capital  lease  obligations  incurred  in
       connection  with  the  Company's  installation  of new  store  automation
       systems and point-of-sale terminals (the "POS Capital Leases"), partially
       offset  by  lower  short-term  borrowing  rates  and the  payment  of the
       mortgage on the  distribution  center in Mansfield,  MA, (the  "Mansfield
       Mortgage").  For the thirty-nine  weeks ended October 31, 1998,  interest
       and debt expense decreased $0.3 million but remained flat as a percentage
       of net sales,  compared with the same prior-year period. The reduction in
       year-to-date  interest and debt  expense was  attributable,  in part,  to
       lower  short-term  interest  rates  and  the  payment  of  the  Mansfield
       Mortgage, partially offset by the addition of the POS Capital Leases.

          The Company's estimated annual effective income tax rate for each year
       was applied to the income  before income taxes for each period to compute
       a non-cash  income tax provision.  The income tax provisions are included
       as  additions  to paid-in  capital on the  balance  sheet for all periods
       presented.

<PAGE>

Liquidity and Capital Resources
-------------------------------
          On December 27,  1996,  the Company  entered  into an  agreement  with
       BankAmerica Business Credit,  Inc., as agent, two financial  institutions
       as co-agents  (together with the agent,  the  "Agents"),  and a syndicate
       consisting of five other banks and financial institutions,  for a secured
       revolving credit facility of up to $320 million,  with a sublimit of $100
       million for letters of credit (the "Credit Agreement").

          The Credit Agreement is in effect until June 30, 2000. The Company was
       in  compliance  with the  financial  covenants  of the  Credit  Agreement
       through the quarter ended October 31, 1998. Reference can be made to Note
       4 of  this  Quarterly  Report  and  the  latest  Form  10-K  for  further
       descriptions of the Credit Agreement.

          Merchandise inventories, increased $26.0 million from October 25, 1997
       to  October  31,  1998 due  primarily  to planned  increases  and the net
       addition  of three new stores.  The  increase  in  inventories  of $187.4
       million  from  January 31, 1998 to October 31, 1998 was  principally  the
       result of the normal seasonal build-up of inventories.

          Trade accounts  payable  increased $17.0 million from October 25, 1997
       to  October  31,  1998  primarily  due to planned  merchandise  inventory
       increases,  the net  addition  of three new  stores  and  improved  trade
       payment  terms.  The  increase of $75.2  million from January 31, 1998 to
       October  31,  1998 was  principally  the  result of the  normal  seasonal
       build-up of merchandise inventories referenced above, the net addition of
       three new stores and improved trade payment terms.

          Capital expenditures totaled $64.2 million (including $24.3 million in
       POS Capital Leases) for the thirty-nine weeks ended October 31, 1998. For
       the  balance  of the  year,  capital  expenditures  are  estimated  to be
       approximately $21 million.

          On  August 10,  1998,  the  Company's  Board of  Directors  approved a
       stock  repurchase  program  and  authorized  management  to  purchase  up
       to 1.5 million common shares.  During the quarter ended October 31, 1998,
       the Company acquired 76,481 shares of its common stock. During the course
       of the quarter, as a consequence of ongoing discussions with Hills Stores
       Company, the Company was precluded from making further purchases.

          The net operating loss  carryovers  remaining  after fiscal year 1997,
       subject to any  limitations  pursuant to Internal  Revenue Code Sec. 382,
       should offset income on which taxes would  otherwise be payable in future
       years.

          The Company  believes that available cash and expected cash flows from
       the current fiscal year's operations and beyond,  and the availability of
       its  financing  facilities,  will enable the Company to fund its expected
       needs  for  working  capital,   capital  expenditures  and  debt  service
       requirements.

Accounting Pronouncements
-------------------------
          In April 1998, the Accounting  Standards  Executive  Committee (AcSEC)
       issued  Statement  of  Position  (SOP) 98-5,  "Reporting  on the Costs of
       Start-Up  Activities."  The SOP is effective  for fiscal years  beginning
       after  December 15, 1998 although  earlier  adoption is allowed.  The SOP
       will require  that the costs of start-up  activities,  excluding  capital
       expenditures, be expensed as incurred. The Company currently expenses the
       costs  associated  with the  opening  of new  stores in the year they are
       opened.  These costs are carried as prepaid expenses prior to the opening
       of the new stores.  The  Company  expects to adopt SOP 98-5 as of January
       30, 1999 and does not anticipate the adoption will materially  affect the
       Company's results of operations or financial position.

<PAGE>

Year 2000
---------
          As  previously  reported,  the Company has  initiated a  comprehensive
       program to prepare its  computer  systems and  applications  for the year
       2000.  The  assessment  phase of the  Company's  remediation  program  is
       complete and the systems  development and testing stages are in progress.
       The  Company  has  spent  approximately  $3.1  million  on its Year  2000
       initiatives to date and expects that full  implementation  of the program
       will involve an additional $2 to $3 million for conversion and testing of
       systems.  These costs  include  incremental  expenses  such as  software,
       outside  consulting  and other  expenses.  Additionally,  the Company has
       allocated existing systems development staff to Year 2000 initiatives and
       estimates  these  internal  costs to be $3 to $4 million over the life of
       the project.

          The  Company  has  formally  communicated  with all of its vendors and
       suppliers to determine  the extent to which the Company may be vulnerable
       to any third parties' failure to remediate their own Year 2000 issues. As
       previously  disclosed,  the first phase, which included sending Year 2000
       surveys and questionnaires, is complete and the response evaluation phase
       is  currently in progress.  The Company has not had  sufficient  response
       from  vendors  to  provide  an  estimate  of  the  potential   impact  of
       non-compliance  on the part of such  vendors.  Management is currently in
       the final stages of developing  contingency plans which include,  but are
       not limited to, securing alternative vendors who are Year 2000 compliant,
       developing  manual  merchandise   ordering   processes,   and  evaluating
       alternative merchandise assortments. It is too early to determine to what
       extent, if any, these contingency plans will have to be implemented.

          Although the Company expects to be Year 2000 compliant by mid-1999 and
       does not expect to be  materially  impacted by the external  environment,
       such  future  events  cannot be known with  certainty.  Furthermore,  the
       Company's  estimates of future remediation costs and completion dates are
       based on presently available information and may be updated as additional
       information becomes available.

Subsequent Event
----------------
          On  November  12,  1998,  the Company  announced  that it had signed a
       definitive   agreement   pursuant  to  which  the   Company,   through  a
       wholly-owned  subsidiary,  HSC  Acquisition  Corp.,  would  acquire Hills
       Stores Company ("Hills"). Under the terms of the transaction, the Company
       has commenced a tender offer for all 11.2 million  outstanding  shares of
       Hills' stock,  including the Series A convertible  preferred stock,  (the
       "Equity"),  at a price of $1.50 per share, and a separate tender offer at
       $550 (including  accrued  interest and consent fees) per $1,000 principal
       amount,  for  Hills'  12 1/2 % Senior  Subordinated  Notes  due 2003 (the
       "Notes"),  of which there is $195 million in the  aggregate  outstanding.
       The Company  will also share with the holders of the Equity and the Notes
       a potential recovery in the form of deferred  contingent cash rights with
       regard to litigation  initiated by Hills against certain of Hills' former
       directors.  Any  potential  recovery  will be  divided  as  follows:  50%
       noteholders, 25% equity holders, and 25% Ames.

          The transaction is contingent on each of the following: (i) the tender
       of at least 60% of the Equity; (ii) the tender of at least 66 2/3% of the
       Notes;  (iii)  the  consent  of at  least  66  2/3% of the  Notes  to the
       modification  or elimination of certain  covenants;  and (iv)  regulatory
       approval and other customary closing conditions.

          The  acquisition,  if  consummated,  will be  accounted  for under the
       purchase method of accounting.  In connection with the  acquisition,  the
       Company has  arranged for a new 42 month $650  million  revolving  credit
       facility   which  will  be  used:  (i)  to  refinance  the  secured  debt
       outstanding under the Company's and Hills'  existing  credit  facilities;
      (ii) to finance the purchase of the Equity and the Notes; (iii) to finance
       the  post-acquisition  remodeling  and pre-opening program for the Hills'
       stores; and (iv) to provide for the ongoing working capital needs  of the
       Company subsequent to the acquisition.

<PAGE>

                                     Part II

                                OTHER INFORMATION


Item 1.        Legal Proceedings
               -----------------
                    Reference  can  be  made  to  Note  12 to  the  Consolidated
               Financial  Statements  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 Note 7 of this Quarterly Report.


Item 4.        Submission of Matters to a Vote of Security Holders
               ---------------------------------------------------
                    There  were  no  matters  submitted  to a vote  of  security
               holders during the third quarter ended October 31, 1998,  through
               the solicitation of proxies or otherwise.


Item 5.        Other Information
               -----------------
                    Any notice of a proposal submitted by a stockholder  outside
               of the  process of Rule 14a-8  after  February  22,  1999 will be
               considered untimely.  Therefore, the proxy solicited on behalf of
               the  Company's  Board  of  Directors  will  confer  discretionary
               authority to vote on any such proposal properly coming before the
               1999 Annual Meeting.

                    Stock  options  granted  to  many  of the  Company's  senior
               executives pursuant to the 1994 Management Stock Option Plan will
               expire  in  March  1999.  As  previously  reported,  the  Company
               anticipates  that in the normal  course of  business  some senior
               executives  may sell some shares of Ames Common  Stock during the
               fourth  quarter of 1998 and the first quarter of 1999, in part to
               cover the cost of option  exercises  or for the  payment of taxes
               associated with prior stock grants.


Item 6.        Exhibits and Reports on Form 8-K
               --------------------------------

    (a)        Index to Exhibits
               ----------------- 


               Exhibit No.             Exhibit                          Page No.
               -----------             -------                          --------

                   11        Schedule of computation of basic              16
                             and diluted earnings per share


    (b)        Reports on Form 8-K:
               --------------------

               There were no reports on Form 8-K filed with the  Securities  and
               Exchange Commission during the third quarter.

<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:     December 9, 1998          /s/ Joseph R. Ettore
                                          -------------------------------------
                                          Joseph R. Ettore, President, Director,
                                          and Chief Executive Officer






     Dated:     December 9, 1998          /s/ Rolando de Aguiar
                                          -------------------------------------
                                          Rolando de Aguiar, Executive Vice
                                          President and Chief Financial Officer






     Dated:     December 9, 1998          /s/ Mark von Mayrhauser
                                          -------------------------------------
                                          Mark von Mayrhauser
                                          Vice President and Controller

<PAGE>

<TABLE>                                                                     
                                                                                                                          Exhibit 11


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



<CAPTION>                                                          For the Thirteen                For the Thirty-nine
                                                                     Weeks Ended                       Weeks Ended
                                                           -------------------------------   -------------------------------
                                                             October 31,      October 25,      October 31,      October 25,
                                                                1998             1997             1998             1997
                                                           --------------   --------------   --------------   --------------
<S>                                                        <C>              <C>              <C>              <C>
Net income                                                      $6,208          $3,519          $12,495          $4,967
                                                           ==============   ==============   ==============   ==============



For Basic Net Income Per Share
------------------------------
   Weighted average number of common shares
           outstanding during the period                        23,087          22,114           22,885          21,510
                                                           ==============   ==============   ==============   ==============

        Basic net income per share                               $0.27           $0.16            $0.55           $0.23
                                                           ==============   ==============   ==============   ==============



For Diluted Net Income Per Share
--------------------------------
   Weighted average number of common shares
           outstanding during the period                        23,087          22,114           22,885            21,510

   Add:    Common stock equivalent shares represented by
              -Series B Warrants                                    63             121              106                83
              -Series C Warrants                                   403             859              481             1,113
              -Options under 1994 Management Stock Option Plan
                    and 1998 Management Stock Incentive Plan       536             745              608               795
              -Options under 1994 Non-Employee Directors
                    Stock Option Plan                               56              54               61                44
                                                           --------------   --------------   --------------   --------------
   Weighted average number of common and common
           equivalent shares used in the calculation of
           diluted net income per share                         24,145          23,893           24,141            23,545
                                                           ==============   ==============   ==============   ==============

        Diluted net income per share                             $0.26           $0.15            $0.52             $0.21
                                                           ==============   ==============   ==============   ==============

</TABLE>