--------------------------------------------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  -------------

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
                                  -------------
                         Commission File Number 1-10259

                                 HomeBase, Inc.

             (Exact name of Registrant as specified in its charter)


                DELAWARE                                        33-0109661
(State or other jurisdiction of incorporation or             (I.R.S. Employer
               organization)                                 Identification No.)

           3345 Michelson Drive
                Irvine, CA                                        92612
  (Address of principal executive offices)                      (Zip Code)

                                 (949) 442-5000
              (Registrant's telephone number, including area code)
                            ------------------------

           Securities registered pursuant to Section 12(b) of the Act:

                                                      Name of each exchange
Title of each class                                    on which registered
-------------------                                -----------------------------
Common Stock, par value $.01                          New York Stock Exchange
Preferred Share Purchase Rights                       New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No |_|

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant on April 5, 1999 was $164,813,609.

There were 37,881,636  shares of the Registrant's  Common Stock, $.01 par value,
outstanding as of April 5, 1999.

                      Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders(Part III)
                            ------------------------

Exhibits to Form 10-K have been  included  only in copies of the Form 10-K filed
with the Securities and Exchange Commission.
--------------------------------------------------------------------------------



<PAGE>






                                     PART 1

Item 1.  Business

General

HomeBase(R),  Inc. ("the Company" or "HomeBase") is the second largest  operator
of home improvement  warehouse  stores in the western United States.  At January
30, 1999,  the Company  operated 84 stores in 10 states.  The  Company's  stores
average  approximately  103,000  square  feet of indoor  space and include up to
30,000  square feet of additional  exterior  space for  full-service  garden and
landscaping  centers.  The Company offers a broad  assortment of brand-name home
improvement  and  building  supply  products  at  competitive   prices  to  both
Do-It-Yourself ("DIY") and professional  customers.  In certain categories,  the
Company  supplements  its brand-name  offerings with high quality  private label
products.

The Company's  goal is to be the first choice  destination  for shoppers of home
improvement  products by offering product selection at competitive  prices, with
superior  customer  service.  By the end of the first  fiscal  quarter  of 1998,
nearly  every  store in the chain had been  remodeled  or  opened  utilizing  an
improved  store  design.  The new design  features a layout that is inviting and
attractive to DIY shoppers  while  providing  easy access areas for  merchandise
sold primarily to contractors  and other  professional  customers.  Products are
displayed to facilitate shopping for all companion products needed to complete a
home improvement project.

The Company operates within a conventional 52 or 53 week accounting  fiscal year
that ends on the last  Saturday in January.  The 52 weeks ended January 30, 1999
is referred to herein as "fiscal 1998".  The 53 weeks ended January 31, 1998 and
the 52 weeks ended  January 25, 1997 are referred to herein as "fiscal 1997" and
"fiscal 1996", respectively.

The Company was  established  in 1989 when Zayre Corp.  (now The TJX  Companies,
Inc.)  combined its BJ's Wholesale Club division  ("BJ's") and HomeBase 
division to form Waban Inc. ("Waban"), and distributed all of Waban's 
outstanding common stock to Zayre Corp. shareholders on a pro-rata basis.

On July  26,  1997,  Waban  transferred  all of the net  assets  of BJ's to BJ's
Wholesale  Club,  Inc.  ("BJI").  On July 28,  1997,  Waban  distributed  to its
stockholders,  on a pro-rata basis,  all of the outstanding  common stock of BJI
(the "Distribution").  In connection with the Distribution,  the Company changed
its name from Waban Inc. to HomeBase,  Inc. The Company and BJI are  independent
public companies, separately traded on the New York Stock Exchange.

Significant Growth Initiatives

In October 1997, the Board of Directors  approved an  accelerated  timetable for
the completion of the 17 remaining  stores in the Company's  remodel program and
announced a more  aggressive  rate of new store  openings  through  fiscal 2000.
During  fiscal 1998,  the Company  successfully  completed the remodel of all 17
stores and opened one new store in Everett, Washington. An additional six stores
(five in California  and one in Arizona) have scheduled  openings  during fiscal
1999,  with one store having opened in March 1999. The Company plans to continue
this expansion with the opening of approximately eight new stores before the end
of fiscal 2000.

To provide capital to finance its accelerated  growth strategy,  on November 17,
1997,  the Company  completed  the private  placement of $100 million  principal
amount 5.25% convertible  subordinated notes due November 1, 2004 through a Rule
144A/Regulation S offering,  and received approximately $96 million, net of debt
issuance  costs.  The  resale of the notes and the  common  stock into which the
notes are convertible were registered on Form S-3 on February 10, 1998.

Building on the momentum of its previous growth initiative,  on February 2, 1999
the  Company  announced a new  strategic  program  designed to enhance  customer
service, increase customer traffic and improve same-store sales. The initiatives
involve an  incremental  investment  during  fiscal  1999 of  approximately  $13
million in payroll and  advertising  costs,  which is  designed to increase  the
number of sales  people in each store and  reinforce  the  HomeBase  brand to an
audience comprised of new and existing customers. In addition, the Company plans
to  increase  total  inventory  per store by  approximately  10%,  as a means of
further enhancing product selection.

Industry Outlook

The Company believes that demographic and lifestyle factors such as the maturing
of baby boomers, the increase in home-centered activities,  the increase in home
ownership  and the aging  housing  stock  will  create  growing  demand for home
improvement products and services.

The U.S.  Census Bureau  estimates that by the year 2000,  home ownership by the
U.S.  population  will  increase  to 70% from 67% in 1997 and that the number of
households will increase to 103 million from  approximately 100 million in 1998.
Homeowners  are more  likely to spend more to maintain  and improve  their homes
than  renters  do.  The Home  Improvement  Research  Institute  projects  annual
revenues in the home  improvement  market will reach $170  billion by the end of
1999.

Since the mid 1980's,  warehouse-format  home improvement  retailers have gained
significant market share in the United States by offering lower prices,  greater
product  selection and more in-stock  merchandise  than traditional home center,
hardware and lumber yard operators. In addition,  warehouse store operators have
been  able to take  advantage  of  economies  of scale  created  by large  sales
volumes.  Although the home  improvement  industry  remains  fragmented,  it has
experienced  increasing  consolidation during recent years. The Company believes
that this  trend will  continue.  It intends  to  capitalize  on its  continuing
strategy that is targeted at promoting a service-oriented shopping experience in
a store format that has an attractive ambiance and a customer-friendly layout.

Store Growth

The Company is the second largest operator of home improvement stores in most of
the markets that it serves.  The  Company's  new store  opening plan is oriented
towards   reinforcing   its  position  in  its  current  markets  and  expanding
selectively into adjoining markets. The Company focuses on retail locations that
are convenient for DIY and professional customers and that meet the criteria for
either having direct freeway access,  being in highly visible  locations,  or in
neighborhoods with robust housing growth.

During fiscal 1998, the Company completed the remodel of the remaining 17 stores
in its remodel program and opened one new store. More importantly,  a "pipeline"
of potential  sites for new store openings was developed,  in preparation  for a
more  vigorous pace of new store  openings in the coming  years.  The Company is
scheduled to open six stores in fiscal 1999, and  approximately  eight stores in
fiscal 2000.



<PAGE>


The following  table shows the number of Company stores opened and closed during
the last five fiscal years:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                           Stores in         Stores           Stores          Stores
                                          Operation at       Opened           Closed       in Operation
                                          Beginning of     During the       During the       at End of
Fiscal Year                                  Period          Period           Period          Period
-----------------------------------------------------------------------------------------------------------
    <S>                                        <C>              <C>             <C>             <C>
    1994                                       82               3               8               77
    1995                                       77               4               2               79
    1996                                       79               5               -               84
    1997                                       84               2               3               83
    1998                                       83               1               -               84
-----------------------------------------------------------------------------------------------------------
</TABLE>

Between 1993 and January 30, 1999,  the Company has remodeled or relocated 61 of
its stores and opened 18 new stores incorporating the improved store design.

Customer Service

The Company is  committed  to  providing  superior  service to its two  targeted
customer groups. At each store, carefully selected home improvement specialists,
who  have  extensive  experience  in  their  respective  fields,  are  available
throughout the store to assist DIY and professional customers. Nearly all of the
Company's  stores  also  offer  the  services  of  professional  ASID  certified
designers  who provide free  consultations  in customers'  homes.  The Company's
project and design  centers  feature  computer  aided design  ("CAD") tools that
allow  customers  to work  with  design  coordinators  in the  store,  or in the
convenience  of their own  homes,  to  conceptualize  and plan a variety of home
improvement  projects.  A unique  feature of the  in-home  CAD  consultation  is
real-time  delivery of home project designs to a customer before  departing from
the residence.  This immediate and tangible  service builds customer  excitement
and  momentum  and  confidence  in a decision to proceed  with the  selection of
HomeBase for these important home improvement projects.

The  Company  believes  that it is  important  to  expand  its DIY  business  by
providing  encouragement and skill enhancement programs for new and existing DIY
customers.  Accordingly,  the Company  provides  assistance  and training to DIY
customers,  including  regularly  scheduled  customer clinics on a wide range of
home improvement  projects.  The Company also offers "How-To" brochures that can
be found on its website at www.homebase.com. Installation services are available
for  over 100  product  categories  utilizing  carefully  screened  professional
contractors,  who  must  be  highly  recommended,   licensed  and  bonded.  This
installation  program has  solidified  relationships  with many of the Company's
best  professional  customers.  Delivery  services  are also  available  for the
convenience of customers.

The Company's stores also offer services that specifically  address the needs of
professional  customers.  Nearly all of the  Company's  stores  have  Contractor
Desks, with staff dedicated to handling  contractors'  special needs,  including
the ability to receive faxed orders and  pre-assemble  them for pick-up,  and to
quickly obtain  special items and sizes.  Bulk purchases can be delivered to job
sites for a nominal fee. To better serve the needs of the professional customer,
the Company has early and extended hours of operations.

In addition to accepting  all major  credit  cards,  the Company  offers its own
private label credit card to DIY and professional customers under a non-recourse
program operated by a major financial institution.  The utilization of this card
offers convenience to a customer and more importantly reinforces the pattern for
repeat purchases at HomeBase.


<PAGE>


Team Members

In support of its commitment to customer service, the Company seeks to hire only
the very best team members.  HomeBase  University  provides team members with an
extensive on-going curriculum.  Each store has skilled trades people who combine
extensive  career  experience  with in-house  education  programs to ensure that
customers will have access to  knowledgeable  and courteous  sales staff who can
assist  them with their home  improvement  questions  and  projects.  All of the
Company's sales team members receive extensive  training through a comprehensive
in-house training program that combines on-the-job training with formal seminars
and  meetings to emphasize  the  importance  of customer  service and to further
develop team member selling skills. In-house training includes periodic sessions
conducted by the Company's training staff or by manufacturers'  representatives,
as well as frequent meetings with store managers,  which provide sales training,
product updates and other information.

As of January  30,  1999,  the  Company had  approximately  8,400 team  members,
including approximately 500 who are engaged in various corporate  administration
and store support  functions.  Of the Company's total  personnel,  approximately
3,500  are  considered  part-time  (working  less than 33 hours  per  week).  In
February 1999,  the Company  announced a series of new  initiatives  designed to
increase sales,  which will result in the addition of more team members at every
store  throughout  early  fiscal  1999.  Exclusive  of the impact of this hiring
initiative,  the number of team  members  employed  fluctuates  depending on the
selling  season,  and is typically  higher during the second and third quarters,
which include the most active seasons for home  improvement  sales.  None of the
Company's  team  members  is a member  of a union.  The  Company  considers  its
relations with its team members to be excellent.

Merchandising

With 14 departments offering broad categories of home improvement and decorative
goods,  each  HomeBase  store  regularly  stocks  over  30,000  items and offers
thousands of  additional  items through  special  order.  The  Company's  stores
primarily  merchandise  quality,  brand-name  products.  Special  promotions  of
brand-name  products  are  regularly  featured  as  "Base  Buys"  which  provide
additional  savings  opportunities  for  customers.  In select  categories,  the
Company  supplements  brand-name  offerings  with  high  quality  private  label
products,  including the Infinity(R) line of paint, the Galleria(R) and Galleria
Gold(R) line in fashion lighting, and the PowerBuilt(R) brand of hand tools. The
Company  continually  evaluates its product mix for opportunities to add new and
exciting products in every aisle of the store to meet the ever-changing needs of
both the DIY and professional customer.

The table  below sets  forth the  Company's  percentage  of net sales by product
categories for fiscal 1998:
<TABLE>
<CAPTION>
                   Product Category                                        Percent

                   <S>                                                        <C>
                   Building Materials and Lumber                              23%
                   Electrical and Plumbing                                    18
                   Paint and Decor                                            18
                   Garden, Nursery and Seasonal                               16
                   Hardware and Tools                                         13
                   Project and Kitchen Design Center                          12
                                                                         -------------

                        Total                                                100%
                                                                         =============
</TABLE>

HomeBase has a  centralized  purchasing  function  located  within its Corporate
Support Center.  The Company attempts to maximize its distribution  efficiencies
through a  combination  of shipments  direct from vendors to the stores and from
its 410,000 square foot consolidation and distribution  center located in Rancho
Cucamonga,  California.  Before  the end of fiscal  1999,  the  Company  will be
relocating  this  center to a larger  675,000  square foot  facility  located in
Ontario, California .

Seasonality

Sales and earnings for the Company have  typically been higher in the second and
third quarter of the fiscal year, which include the most active seasons for home
improvement  sales,  and  lower in the  first  and  fourth  quarters.  Sales and
earnings can also be impacted  favorably or adversely as a result of  prevailing
regional weather patterns, such as El Nino and La Nina.

Marketing and Advertising

The Company  addresses its primary target customers  through a mix of newspaper,
direct mail, radio and television advertising. The primary advertising medium is
newspaper advertisements through freestanding inserts.  Television and radio are
used to reinforce the Company's image of providing superior customer service and
a broad  assortment of  merchandise  at competitive  prices.  Additionally,  the
Company  participates  in or hosts a variety of home  improvement  trade  shows,
supplier   conferences  and  contractor  product  shows.   Through  co-operative
advertising agreements, vendors participate in many of the Company's advertising
programs.  Consistent  with its previously  announced  growth  initiatives,  the
Company  intends to increase  the  frequency of its  electronic  and print media
offerings during fiscal 1999.

Management Information Systems

The Company  utilizes state of the art  technology  and  management  information
systems ("MIS") to monitor sales,  track inventory and provide rapid feedback on
the performance of its business.  Advanced frame relay  communications  systems,
advanced inventory tracking and ordering,  and in-store computer design tools to
help  customers  with their  remodeling  projects are examples of the  Company's
commitment to technology.

The  Company is  currently  in the  process of  implementing  a new  multi-level
merchandising  system that allows for improved  inventory and vendor information
management. The Company expects to complete the implementation of the new system
by the end of fiscal 1999.

In addition,  the Company  completed the  implementation  of a new Point-Of-Sale
("POS")  system in February 1999. The new POS system enables the Company to more
effectively  record its sales  information and to better support  merchandising,
inventory  replenishment  and  promotional  decisions.  In  addition to internal
efficiency  gains, an important  benefit of this investment is improved customer
service due to cashier ease of use that will help assure faster check out lines.

Competition

The home improvement, hardware and garden businesses are all highly competitive.
The  Company  competes  with a large  number  and  variety  of  wholesalers  and
retailers, including several large national chains that use the home improvement
warehouse  store format.  Competition  exists in the areas of customer  service,
price, product selection, store location and name recognition.  In addition, the
Company will experience competition for qualified personnel and for suitable new
store locations of sufficient size at acceptable prices.

The Company believes that its strong brand-name  recognition,  customer loyalty,
level of customer service,  the value offered by its competitive  prices and the
one-stop shopping available through its full range of home improvement products,
provide it an advantage over many of its traditional home center competitors.

Some  markets in which the Company  currently  operates or might  operate in the
future may  already  be at or near the  saturation  point in terms of  warehouse
stores competing with the Company's stores.  Certain of the Company's  principal
competitors  appear to have a strategy of clustering  stores within markets they
operate,  or of placing their warehouse  stores so close to the Company's stores
as to directly challenge the Company's competitive position in such markets. The
major  competitor  in the  Company's  market areas that also uses the  warehouse
store format is The Home Depot,  Inc. The Company also competes with other major
national and regional operators such as Builders Square (a division of Hechinger
Company),  Eagle Hardware & Garden, Inc. ("Eagle") and Orchard Supply & Hardware
(a division of Sears,  Roebuck, and Co.). In April 1998, Lowe's Companies,  Inc.
("Lowe's"),  the nation's second largest retailer of home improvement  products,
announced plans for a major expansion into California,  Arizona and Nevada, with
the  initial  stores to begin  opening  in late 1999.  On April 2, 1999,  Lowe's
completed the acquisition of Eagle.


Item 2. Properties

The Company  operated 84 stores as of January 30,  1999,  of which 66 are leased
under long-term leases and 18 are owned. The unexpired terms of the leases range
from  approximately  three to 19 years, and average  approximately 10 years. The
Company  has  options  to renew all of its leases  for  periods  that range from
approximately five to 25 years and average  approximately 18 years. These leases
require fixed monthly rental payments which are subject to various  adjustments.
In addition, certain leases require payment of a percentage of the store's gross
sales in excess of certain  amounts.  The Company also remains  obligated  under
leases for four  additional  stores that have been closed.  Most leases  require
that  the  Company  pay all  property  taxes,  insurance,  utilities  and  other
operating costs of the store.

The following table sets forth the number and location of the Company's stores:

<TABLE>
<CAPTION>
                  -----------------------------------------------------------------------
                                                                       Number of
                       State                                            Stores
                  -----------------------------------------------------------------------
                       <S>                                                 <C>
                       California                                          47
                       Washington                                           9
                       Colorado                                             7
                       Arizona                                              5
                       Oregon                                               4
                       Nevada                                               3
                       New Mexico                                           3
                       Utah                                                 3
                       Texas                                                2
                       Idaho                                                1
                  -----------------------------------------------------------------------

                       Total                                               84
                  =======================================================================
</TABLE>

The average size of the Company's 84 stores in operation at January 30, 1999 was
approximately  103,000 square feet.  Most of the Company's  stores utilize up to
30,000 square feet of additional  exterior selling space for full-service garden
and landscaping  centers. The Company's stores are located in both free-standing
locations and shopping  centers.  In some  locations,  a HomeBase store shares a
center with a membership warehouse club or another large retailer.

Including space for parking,  a typical new HomeBase store requires eight to ten
acres of land.  Construction and site development costs for a new HomeBase store
average  approximately $5.0 million, land acquisition costs generally range from
$2.0 million to $9.0 million,  and the initial  capital  investment for fixtures
and  equipment  averages  approximately  $2.0  million.  In  addition to capital
expenditures,  each new store  requires  an  investment  of  approximately  $3.0
million for inventory (net of accounts payable) and pre-opening expenses.

The Company's  Corporate Support Center located in Irvine,  California  occupies
164,000 square feet under a lease expiring July 24, 2004, with options to extend
the lease through July 24, 2019. The Company's  consolidation  and  distribution
center in Rancho  Cucamonga,  California  occupies  410,000  square feet under a
lease expiring  December 31, 1999.  Prior to the lease  expiration,  the Company
will be relocating its consolidation and distribution center to a larger 675,000
square foot facility located in Ontario, California.


Item 3. Legal Proceedings

The Company is involved in various legal  proceedings  incident to the nature of
its  business.  Although  it is not  possible  to predict  the  outcome of these
proceedings,  or any claims  against the Company  related  thereto,  the Company
believes that such proceedings will not, individually or in the aggregate,  have
a  material  adverse  effect on either  its  financial  condition  or results of
operations.


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

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of fiscal 1998.



<PAGE>


Executive Officers of the Registrant

Pursuant  to  General  Instruction  G(3) of Form  10-K,  the  following  list is
included  as an  unnumbered  item  in  Part I of this  Report  in lieu of  being
included in the Proxy  Statement for the Annual  Meeting of  Stockholders  to be
held on June 3, 1999.

The  following is a list of names and ages of all of the  executive  officers of
the registrant  indicating all positions and offices with the registrant held by
each such person and each person's  principal  occupations or employment  during
the past five years.

<TABLE>
<CAPTION>
---------------------------- ------ ------------------------------------------------------------------------
                                                     Office and Employment Experience
Name                          Age                           During Last Five Years
---------------------------- ------ ------------------------------------------------------------------------

<S>                          <C>    <S>                  
Herbert J. Zarkin            60     Chairman  of the Board of the Company  since July 1997 and  Director of
                                    the Company since May 1993;  President,  Chief Executive Officer of the
                                    Company (May 1993 - July 1997).

Allan P. Sherman             54     President,  Chief  Executive  Officer and Director of the Company since
                                    July 1997;  Executive  Vice  President  of the Company (May 1993 - July
                                    1997);  President  of  the  HomeBase  division  (September  1993 - July
                                    1997); President of BJ's (May 1993 - September 1993).

Thomas F. Gallagher          47     Executive Vice President,  Store Operations since July 1997;  Executive
                                    Vice  President,  Store  Operations  of the HomeBase  division  (1996 -
                                    1997); Vice President, Sales Operations of BJ's (1993 - 1996).

William B. Langsdorf         42     Executive Vice President and Chief  Financial  Officer since July 1997;
                                    Senior Vice President, Finance of the HomeBase division (1993 - 1997).

Scott L. Richards            41     Executive  Vice  President,  Merchandising  since July 1997;  Executive
                                    Vice President,  Merchandising of the HomeBase  division (1996 - 1997);
                                    Vice President, Merchandising of the HomeBase division (1993 - 1996).

John L. Price                48     Vice  President,   General  Counsel  and  Secretary  since  July  1997;
                                    Assistant  General  Counsel of 20th  Century Industries (1995 - 1997);
                                    private  legal practice (1991 - 1995).

---------------------------- ------ ------------------------------------------------------------------------
</TABLE>

All officers hold office until the next annual meeting of the Board of Directors
in June 1999 and until their successors are elected and qualified.


<PAGE>





                                    PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

 The common stock of HomeBase(R), Inc. (the "Company"),  formerly Waban Inc., is
listed on the New York  Stock  Exchange  (symbol  HBI).  The  following  are the
quarterly high and low stock prices for the fiscal years ending January 30, 1999
and January 31, 1998:

<TABLE>
<CAPTION>
--------------------------------------- --------------------------------- ----------------------------------
                                               Fiscal Year Ended                  Fiscal Year Ended
               Quarters                         January 30, 1999                  January 31, 1998
--------------------------------------- --------------------------------- ----------------------------------

                                              High             Low              High              Low

<S>                                          <C>              <C>             <C>               <C>   
First                                         8 7/8           6 9/16          29 1/2  (1)       26 5/8  (1)
Second                                       10 1/8           7 5/8           35 5/16 (1)       26 3/8  (1)
Third                                         7 13/16         5 1/4           35 15/16(1)        7 11/16(1)
Fourth                                        7 5/8           5               10 1/16            6 3/4
--------------------------------------- ---------------- ---------------- ---------------- -----------------
</TABLE>

(1)  On July 26, 1997, the Company transferred all of the net assets of its BJ's
     Wholesale Club division ("BJ's") to BJ's Wholesale Club, Inc.  ("BJI").  On
     July 28, 1997, the Company  distributed to its stockholders,  on a pro-rata
     basis, all of the outstanding common stock of BJI (the "Distribution").  In
     connection with the  Distribution,  the Company changed its name from Waban
     Inc.  to  HomeBase,  Inc.  The Company  and BJI became  independent  public
     companies separately traded on the New York Stock Exchange. Stock prices on
     or before July 28, 1997 have not been restated to reflect the Distribution.


The number of stockholders of record at April 5, 1999 was 3,286.

The Company has never paid or declared a cash  dividend and the Company does not
presently intend to pay or declare any cash dividends on the common stock in the
future.  The  Senior  Bank  Facility  does not  permit  the  Company to pay cash
dividends.  Any  declaration and payment of dividends by the Company would be at
the discretion of the Board of Directors.



<PAGE>




Item 6. Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated  financial and operating data of the Company
for each of the five  fiscal  years in the period  ended  January  30,  1999 are
extracted or derived from the audited Consolidated Financial Statements, and the
notes thereto, of the Company, which have been audited by PricewaterhouseCoopers
LLP, independent accountants.  The selected consolidated financial and operating
data set forth below should be read in conjunction with "Management's Discussion
and  Analysis  of  Financial  Condition  and  Results  of  Operations"  and  the
Consolidated Financial Statements and the notes thereto.

<TABLE>
<CAPTION>
                                                                                   Fiscal Year Ended
--------------------------------------------------------------------------------------------------------------------------------
                                                           January 30,   January 31,   January 25,   January 27, January 28,
(Dollars in thousands, except per share data)                 1999           1998          1997         1996         1995
--------------------------------------------------------------------------------------------------------------------------------
                                                                         (53 Weeks)
Income Statement Data:
<S>                                                          <C>          <C>         <C>           <C>          <C>        
  Net sales                                                $ 1,442,341   $1,477,442   $ 1,452,696   $ 1,448,776  $ 1,357,190

  Cost of sales, including buying and occupancy costs        1,124,250    1,159,253     1,136,997     1,124,460    1,056,620
--------------------------------------------------------------------------------------------------------------------------------
  Gross profit                                                 318,091      318,189       315,699       324,316      300,570

  Selling, general and administrative expenses                 279,151      287,181       277,841       275,655      248,112

  Store closures and other charges                                   -       27,000             -             -            -
--------------------------------------------------------------------------------------------------------------------------------
  Operating income                                              38,940        4,008        37,858        48,661       52,458

  Interest on debt and capital leases (net)                      2,817        5,136        10,506         8,790        9,125
--------------------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations before income
   taxes and extraordinary loss                                 36,123       (1,128)       27,352        39,871       43,333

  Provision (benefit) for income taxes                          13,760         (445)       11,005        15,386       16,395
--------------------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations before
   extraordinary loss                                           22,363         (683)       16,347        24,485       26,938

  Income from discontinued operations, net of income taxes           -       20,575        60,313        48,492       38,052

  Extraordinary loss on early extinquishment of debt, net
   of income tax benefit                                             -       (8,663)            -             -            -
  
--------------------------------------------------------------------------------------------------------------------------------
  Net income                                                 $  22,363    $  11,229    $   76,660     $  72,977   $   64,990
================================================================================================================================

Basic net income (loss) per share (1):
  Income (loss) from continuing operations before
   extraordinary loss                                        $    0.59   $    (0.02)  $      0.50   $      0.74  $      0.81
  Income from discontinued operations                               -          0.57          1.83          1.47         1.15
  Extraordinary loss                                                -         (0.24)           -             -            -
--------------------------------------------------------------------------------------------------------------------------------
  Net income                                                 $    0.59   $     0.31   $      2.33   $      2.21  $      1.96
================================================================================================================================

Diluted net income (loss) per share (1):
  Income (loss) from continuing operations before
   extraordinary loss                                        $    0.54   $    (0.02)  $      0.49   $      0.74  $      0.81
  Income from discontinued operations                               -          0.57          1.82          1.46         1.14
  Extraordinary loss                                                -         (0.24)           -             -            -
--------------------------------------------------------------------------------------------------------------------------------
  Net income                                                 $    0.54   $     0.31   $      2.31   $      2.20   $     1.95
================================================================================================================================

Shares used in computation of net income per share:
  (In thousands)
    Basic                                                       37,845       35,770        32,839        33,014       33,143
    Diluted                                                     48,013       35,770        33,205        33,220       33,405

Balance Sheet Data:
Working capital                                              $ 261,930    $ 240,828    $  275,842    $  265,450   $  308,749
Net assets of discontinued operations (2)                            -            -       423,688       403,713      332,945
Total assets                                                   728,982      715,608     1,077,059     1,066,188    1,011,705
Long-term debt and obligations under capital leases            115,659      115,963       242,548       255,803      269,223
Stockholders' equity                                           382,499      359,667       631,925       555,120      488,089

Stores open at end of period                                        84           83            84            79           77
================================================================================================================================
</TABLE>

(1)  The Company adopted  Statement of Financial  Accounting  Standards No. 128,
     "Earnings per Share" ("SFAS No. 128") in fiscal 1997. Net income (loss) per
     share  amounts for all periods  prior to fiscal 1997 have been  restated to
     conform to the SFAS No. 128 requirements.
(2)  On July 26, 1997, the Company transferred all of the net assets of BJ's to 
     BJI and on July 28, 1997, the Company completed the Distribution.


<PAGE>


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

Results of Operations

Organization and Presentation

The Company operates within a conventional 52 or 53 week accounting  fiscal year
which ends on the last Saturday in January.  The 52 weeks ended January 30, 1999
is referred to herein as "fiscal 1998".  The 53 weeks ended January 31, 1998 and
the 52 weeks ended  January 25, 1997 are referred to herein as "fiscal 1997" and
"fiscal 1996", respectively.

On July 26, 1997, HomeBase, Inc. (the "Company"),  formerly known as Waban Inc.,
transferred  all of the net assets of its BJ's Wholesale Club division  ("BJ's")
to BJ's Wholesale Club, Inc. ("BJI").  On July 28, 1997, the Company distributed
to its stockholders, on a pro-rata basis, all of the outstanding common stock of
BJI (the "Distribution").  The financial statements for the periods prior to the
Distribution  have been  restated to present BJ's as a  discontinued  operation.
Income from discontinued  operations for fiscal 1997 includes  transaction costs
of $5.0 million (net of tax) incurred in connection with the  Distribution.  The
following  discussion  pertains to the  continuing  operations  of the  Company,
unless otherwise noted.

The following table presents the results of operations for the periods indicated
as a percentage of net sales.

<TABLE>
<CAPTION>
                                                                      Fiscal Year Ended
----------------------------------------------------------------------------------------------------------
                                                          January 30,      January 31,       January 25,
                                                             1999              1998             1997
----------------------------------------------------------------------------------------------------------

<S>                                                            <C>               <C>              <C>   
Net sales                                                      100.0%            100.0%           100.0%

Cost of sales, including buying and occupancy
   costs                                                        77.9              78.5             78.3
----------------------------------------------------------------------------------------------------------
Gross profit                                                    22.1              21.5             21.7

Selling, general and administrative expenses                    19.4              19.4             19.1

Store closures and other charges                                  -                1.8               -
----------------------------------------------------------------------------------------------------------
Operating income                                                 2.7               0.3              2.6

Interest on debt and capital leases (net)                        0.2               0.3              0.7
----------------------------------------------------------------------------------------------------------
Income from continuing operations before
   income taxes and extraordinary loss                           2.5                -               1.9

Provision for income taxes                                       0.9                -               0.8
----------------------------------------------------------------------------------------------------------
Income from continuing operations before
   extraordinary loss                                            1.6                -               1.1

Income from discontinued operations, net of
   income taxes                                                   -                1.4              4.2
----------------------------------------------------------------------------------------------------------
Income before extraordinary loss                                 1.6               1.4              5.3

Extraordinary loss on early extinguishment of
   debt, net of income taxes                                      -               (0.6)              -
----------------------------------------------------------------------------------------------------------
Net income                                                       1.6%              0.8%             5.3%
==========================================================================================================
</TABLE>


<PAGE>


Fiscal Year Ended January 30, 1999 (Fiscal 1998) Compared to Fiscal Year Ended 
January 31, 1998 (Fiscal 1997)

Net Sales

Fiscal 1998 consisted of 52 weeks compared to 53 weeks in fiscal 1997. Net sales
for fiscal 1998  decreased  2.4% to $1,442.3  million from  $1,477.4  million in
fiscal 1997, down slightly due to the prior year having one more sales week. The
sales  decrease  was also the  result  of  disruption  caused  by store  remodel
construction  during the first quarter of fiscal 1998 and increased  competition
in many of the markets in which the Company operates.  In addition,  the Company
had one less store open during  most of fiscal 1998  compared to the prior year.
Same  store  sales for the  comparable  52 weeks  declined  0.5% in fiscal  1998
primarily due to the disruption caused by store remodel  construction during the
first quarter of fiscal 1998 and increased competition in many of the markets in
which the Company operates.

Gross Profit

Gross profit increased to 22.1% of net sales in fiscal 1998 compared to 21.5% in
fiscal 1997. The  improvement was due to a number of factors,  including  higher
average  selling  margins  caused  by a change in the mix of  products  sold and
continuing buying efficiencies.

Selling, General and Administrative Expenses

Selling,  general and administrative expenses ("SG&A") was 19.4% of net sales in
both fiscal 1998 and fiscal 1997.

Higher  remodel  related  expenses  of  approximately  $4  million  and  pre-tax
settlement costs of approximately  $1.1 million  associated with the termination
of the Waban Inc.  Retirement Plan were offset by lower  preopening costs due to
one less store opening in fiscal 1998 than in fiscal 1997 and to favorable  cost
trends in self-insurance expenses.

Interest on Debt and Capital Leases, Net

Interest  on debt and  capital  leases,  net,  was $2.8  million in fiscal  1998
compared to $5.1 million in fiscal 1997.  Interest on debt and capital leases is
presented net of interest and investment income of $4.9 million and $2.6 million
in fiscal 1998 and 1997,  respectively.  Interest income increased due to higher
average  marketable  securities  balances  in fiscal  1998 as compared to fiscal
1997.

Income Tax Provision (Benefit)

The income tax rate for income from  continuing  operations  was 38.1% in fiscal
1998 compared to 39.5% in fiscal 1997. The decrease in the tax provision rate in
fiscal 1998 was primarily  attributable  to the realization of certain state tax
credits.
For fiscal 1999,  the Company  expects the tax provision  rate to be between 39%
and 40%.

Income (Loss) From Continuing Operations Before Extraordinary Loss

Income from continuing  operations before extraordinary loss for fiscal 1998 was
$22.4 million, or $0.54 per share, diluted,  compared to a loss of $0.7 million,
or $0.02 per share in fiscal 1997.  Excluding  store closures and other charges,
income from  continuing  operations for fiscal 1997 was $15.6 million,  or $0.44
per share, diluted.



<PAGE>


Net Income

Net  income  in fiscal  1998 was $22.4  million,  or $0.54 per  share,  diluted,
compared to $11.2  million,  or $0.31 per share,  diluted,  in fiscal 1997.  Net
income for fiscal  1997  includes  $20.6  million  in income  from  discontinued
operations for periods prior to the Distribution  and an  extraordinary  loss of
$8.7 million,  net of tax benefit,  recorded in July 1997,  associated  with the
early extinguishment of debt.


Fiscal Year Ended January 31, 1998 (Fiscal 1997) Compared to Fiscal Year Ended 
January 25, 1997 (Fiscal 1996)

Net Sales

Fiscal 1997 consisted of 53 weeks compared to 52 weeks in fiscal 1996. Net sales
for fiscal 1997  increased  1.7% to $1,477.4  million from  $1,452.7  million in
fiscal  1996.  The  increase  in net sales  was  primarily  attributable  to the
additional  week of sales in  fiscal  1997,  partially  offset  by  declines  in
comparable  store sales and by store closures.  During fiscal 1997 and 1996, two
and five  stores  were  opened,  respectively,  and three and zero  stores  were
closed, respectively.

The  decline in  comparable  store  sales of 1.7% in fiscal  1997 was  primarily
attributable  to  increased  competition  in many of the  markets  in which  the
Company operates and to extensive remodel  construction in the fourth quarter of
fiscal 1997.

Gross Profit

Gross  profit was 21.5% in fiscal  1997  compared to 21.7% in fiscal  1996.  The
decrease is primarily due to a  combination  of slightly  lower average  selling
margins,  which were impacted by  competitive  conditions,  and somewhat  higher
buying and  occupancy  costs as a percentage of sales,  due to comparable  store
sales declines.

Selling, General and Administrative Expenses

Selling,  general and administrative  expenses ("SG&A") was 19.4% in fiscal 1997
compared  to 19.1% in fiscal  1996.  The  increase  as a percent of net sales is
primarily  attributable to higher remodel related costs in the fourth quarter of
fiscal 1997 of approximately $4 million,  partially offset by lower  pre-opening
expenses due to fewer stores being opened in fiscal 1997 than in fiscal 1996.

Store Closures and Other Charges

In the third quarter of fiscal 1997,  the Company  recorded  store  closures and
other charges of $27.0  million,  consisting of $22.3 million for store closures
and other related settlement costs, $1.7 million in asset impairment charges and
a $3.0 million increase in the fiscal 1993 restructuring reserve.

Costs  included  in the  reserve  for store  closures  primarily  include  lease
obligations on closed facilities,  write-downs of fixed assets and other related
settlement costs. The Company increased the fiscal 1993 restructuring reserve by
$3.0  million  for  additional  lease  obligations  due to delays  in  obtaining
subleases at terms acceptable to the Company.

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", long-lived assets held and used by the Company are reviewed for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be  recoverable.  For purposes of evaluating
the recoverability of long-lived  assets,  the recoverability  test is performed
using  undiscounted  net cash  flows of the  individual  stores.  The  Company's
quarterly  SFAS No. 121 analysis  performed in the third  quarter of fiscal 1997
indicated that the long-lived  assets at two stores were impaired.  Accordingly,
the Company  estimated  the fair value of these assets based on their  estimated
salvage  value and  recorded  an  impairment  charge of $1.7  million,  which is
included in store closures and other charges.

Interest on Debt and Capital Leases, Net

Interest  on debt and  capital  leases,  net,  was $5.1  million in fiscal  1997
compared to $10.5 million in fiscal 1996. Interest on debt and capital leases is
presented net of interest and investment income of $2.6 million and $1.8 million
in fiscal  1997 and 1996,  respectively.  Net  interest  expense in fiscal  1996
excludes capitalized interest of $0.9 million. Interest expense was allocated to
discontinued  operations  based on the  ratio of BJ's net  assets  to the sum of
consolidated net assets plus consolidated debt.

The decline in net interest expense in fiscal 1997 from fiscal 1996 is primarily
attributed  to lower average  outstanding  debt balances in fiscal 1997. In July
1997, $106.7 million of the Company's 6.5% convertible  subordinated  debentures
was converted  into common stock and the remaining $0.2 million was redeemed for
cash.  Also in July 1997,  the Company  repaid all of its 9.58% senior notes due
May 31, 1998,  totaling  $12.0 million,  and pursuant to a tender offer,  repaid
$93.4 million of its 11% senior  subordinated notes due May 15, 2004,  replacing
this debt with short-term bank  borrowings.  BJI assumed $72 million of the bank
borrowings at the time of the Distribution.

Income Tax Provision (Benefit)

The income tax rate for income from  continuing  operations  was 39.5% in fiscal
1997 compared to 40.2% in fiscal 1996.  The lower  effective rate in fiscal 1997
is primarily  attributed to a decrease in the effective tax rate in the state of
California, where most of the Company's stores are located.

Income (Loss) From Continuing Operations Before Extraordinary Loss

Loss from continuing  operations before  extraordinary  loss for fiscal 1997 was
$0.7 million, or $0.02 per share, diluted,  compared to income of $16.3 million,
or $0.49 per share,  diluted, in fiscal 1996. Excluding store closures and other
charges, income from continuing operations for fiscal 1996 was $15.6 million, or
$0.44 per share, diluted.

Excluding store closures and other charges,  income from  continuing  operations
for both  fiscal  1997 and fiscal  1996 was 1.1% of net sales.  The fiscal  1997
percentage, when compared to fiscal 1996, reflects a slightly lower gross profit
percentage, slightly higher SG&A and lower interest expense, as described above.

Income  from  continuing  operations  includes  all  of the  corporate  overhead
expenses  incurred by the Company prior to the Distribution and an allocation of
the Company's  interest  expense prior to the  Distribution.  As a result of the
Distribution,  the conversion of the convertible  subordinated  debt into common
stock and the  refinancing  of $112 million of other  indebtedness,  income from
continuing  operations for periods  preceding the Distribution is not comparable
to the Company's income from continuing operations after the Distribution.



<PAGE>


Net Income

Net  income  was $11.2  million,  or $0.31 per share,  diluted,  in fiscal  1997
compared to $76.7 million,  or $2.31 per share,  diluted,  in fiscal 1996. These
amounts  include  income from  discontinued  operations for periods prior to the
Distribution.

Income from  discontinued  operations  in fiscal  1997,  which  includes the net
income of BJ's for the first six months,  reduced by $5.0 million of transaction
costs,  net of tax,  incurred in  connection  with the  Distribution,  was $20.6
million,  or $0.57 per share,  diluted,  compared to $60.3 million, or $1.82 per
share, diluted, in fiscal 1996.

The results for fiscal 1997 include an extraordinary  loss of $8.7 million,  net
of tax, recorded in July 1997,  associated with the early  extinguishment of the
Company's  9.58% senior  notes due May 31, 1998 and of $93.4  million of its 11%
senior subordinated notes due May 15, 2004.


Liquidity and Capital Resources

Cash flow from  operating  activities  provides the Company  with a  significant
source of liquidity. Additionally, the Company has raised capital through a debt
offering  and has a  revolving  credit  facility  so as to provide  capital  for
corporate growth and working capital purposes.

On November  17,  1997,  the Company  completed  the private  placement  of $100
million  principal amount 5.25% convertible  subordinated  notes due November 1,
2004 through a Rule 144A/Regulation S offering,  and received  approximately $96
million,  net of debt issuance  costs.  The Company  subsequently  filed a shelf
registration statement on Form S-3, which was declared effective on February 10,
1998,  registering  the resale of the notes and the common  stock into which the
notes are  convertible.  The notes are  convertible,  subject to  adjustment  in
certain events,  into  approximately  9.8 million shares of the Company's common
stock at a conversion  price of $10.22 per share at any time after  February 15,
1998 and prior to maturity unless earlier redeemed or repurchased. Subsequent to
November 1, 2000,  the notes are  redeemable  at the option of the  Company,  in
whole or in part,  initially at 103.15% of principal  and  thereafter  at prices
declining to 100% on or after November 1, 2003,  together with accrued interest.
Interest  is  payable  semi-annually  on  May 1 and  November  1 of  each  year,
commencing on May 1, 1998. In the event of a change of control of HomeBase, each
holder of the notes has the right to require the Company to repurchase the notes
held by the holder,  in whole or in part,  at a redemption  price of 100% of the
principal  amount of the  notes put up for  redemption,  plus  accrued  interest
accrued through the repurchase date.

In July 1998,  the  Company  increased  its  revolving  credit  facility to $105
million from $90 million,  and extended the expiration date to July 9, 2001. The
credit facility includes a $40 million sub-facility for letters of credit and is
collateralized by inventory and accounts receivable.  The Company is required to
pay an annual  facility fee, which is currently  0.3% of the unused  commitment.
Interest is payable at the Company's  option either at (a) the Eurodollar  rate,
plus a margin, which is currently 1.2%, or (b) the agent bank's prime rate, plus
a margin,  which is currently  zero. The facility fee and borrowing  margins are
subject to adjustment  based on the Company's  fixed-charge  coverage ratio. The
credit facility is subject to certain covenants,  which include minimum tangible
net  worth   and   fixed-charge   coverage   requirements,   a  maximum   funded
debt-to-capital limitation and a prohibition on the payment of cash dividends.

At January 30, 1999, the Company had no borrowings under its revolving facility,
and had $22.7 million in letters of credit  outstanding.  At April 3, 1999,  the
Company had $81.8 million available for borrowing under the revolving facility.

In connection with previously announced growth initiatives,  the Company has six
stores with scheduled  openings during fiscal 1999, with one store having opened
in March 1999.  Further  expansion  plans  include the opening of  approximately
eight stores before the end of fiscal 2000. It is anticipated  that the majority
of the new stores will be leased.  The Company expects that it will cost between
approximately  $4.0 and $5.0 million to open each of these stores,  exclusive of
property  acquisition and development  costs.  The Company  estimates that total
capital expenditures,  including store openings,  will total between $40 million
to $45 million.

Additionally,  during  fiscal  1999 the Company  expects to fund an  incremental
investment of  approximately  $13 million in payroll and  advertising  costs and
increase total inventory per store by  approximately  10%. This spending is part
of a strategic  plan designed to enhance  customer  service,  increase  customer
traffic and improve same store sales.

At January 30, 1999, the Company had $63.5 million in cash, cash equivalents and
marketable  securities.  The Company believes that its current  resources,  cash
flows from operations and amounts  available under its revolving credit facility
will be sufficient to support its planned store expansion and related  strategic
initiatives and to finance operations through January 29, 2000.

Restructuring Reserves

As of January 31, 1998, $12.7 million of the Company's fiscal 1993 restructuring
charge remained  accrued on the Company's consolidated balance sheet.  During 
fiscal 1998, the Company incurred cash expenditures of $6.8 million, primarily
for lease  obligations  on closed  facilities and lease termination costs. As of
January 30, 1999, $5.9 million remained accrued on the Company's consolidated 
balance sheet, consisting primarily of lease obligations on closed facilities, 
which extend through 2007.

Recent Accounting Standards

In June 1998,  Statement of  Financial  Accounting  Standards  ("SFAS") No. 133,
"Accounting for Derivative  Instruments and Hedging Activities" was issued. SFAS
No.  133   establishes   accounting  and  reporting   standards  for  derivative
instruments and for hedging activities.  It is effective for all fiscal quarters
of fiscal years  beginning  after June 15, 1999. The Company  currently does not
have any  derivative  financial  instruments  and does not currently  employ any
hedging activities.

Risk Factors

If our new operating and sales  strategy does not attract enough new  customers,
our operating results could be harmed.

On February 2, 1999 we  announced a new  operating  and sales  strategy  program
designed  to  increase  the  number  of sales  people in each  store to  enhance
service,  which we believe will increase customer traffic and improve same store
sales. If same store sales do not increase, the higher costs associated with the
program could harm our operating  results.  The program  involves an incremental
investment  during  fiscal  1999 of  approximately  $13  million in payroll  and
advertising  costs.  In  addition,  we will  increase  inventory  per  store  by
approximately 10% as a means of further enhancing customer service.

If our  accelerated  growth  strategy  does not attract  more  customers  to our
stores, our operating results could be harmed.

We have been  implementing  a strategy of improving the appearance and design of
our stores to strengthen  our market  position in the western  United States and
improve our profitability.  Under the accelerated growth strategy,  we intend to
increase the pace of new store openings. We opened two new stores in fiscal 1997
and one new store in fiscal  1998.  We expect to open six stores in fiscal  1999
and approximately  eight stores in fiscal 2000. If the new stores do not achieve
substantial  net sales our operating  results and financial  condition  could be
harmed. We estimate that we will incur costs between approximately $4.0 and $5.0
million  to open  each of these  new  stores,  excluding  land  acquisition  and
building  development costs. As we grow, we will need to continually analyze the
sufficiency of our warehouse and distribution  space and may require  additional
facilities to support the growth.  Our new stores may not achieve  sales,  gross
profit or operating income  comparable to existing stores.  Although  management
carefully selects new store locations, the opening of additional HomeBase stores
in existing markets may reduce sales at existing HomeBase locations.

We may not be able to open new stores on a timely and profitable basis under our
accelerated growth strategy.

We may not be able to open new stores on a timely and profitable  basis if we
are not able to:

- find suitable new store  locations of sufficient size and at acceptable prices
- acquire the necessary governmental and regulatory permits and approvals,
  including zoning and development permits 
- construct the stores at budgeted cost and in a timely manner
- hire and train sufficient numbers of qualified store managers and staff for 
  new stores
- integrate these new stores in our operations.

Some of these success factors are beyond our control.

We may have difficulty  employing  enough  additional  trained  personnel and/or
improving  our  management  information  systems  under our  accelerated  growth
strategy.

The  accelerated  growth  strategy  will  require us to employ  more  personnel,
particularly  store managers and sales associates,  who possess the training and
experience  necessary to meet our  customer  service  standards.  We may find it
difficult to attract,  develop and retain the personnel  necessary to pursue our
accelerated  growth  strategy  successfully.  We also will  need to  continually
evaluate the adequacy of our management information systems, including inventory
control  and  distribution  systems.  In the  future we may need to  upgrade  or
reconfigure our management information systems to support our planned expansion.
If we are not able to attract and retain the  necessary  personnel  or to expand
and  enhance our  management  information  systems,  our  operating  results and
financial condition could be harmed.

More competition could harm our operating results.

The home improvement,  hardware and garden businesses are highly competitive. We
compete with a large number and variety of wholesalers and retailers,  including
several large national chains in the home  improvement  warehouse  merchandising
business,  some of which have  significantly  greater  financial  and  marketing
resources  than we do. The Home  Depot,  Inc.,  Lowe's  Companies,  Inc.,  Eagle
Hardware & Garden,  Inc. and Builder's Square (a division of Hechinger  Company)
are our major competitors that use the warehouse store format.

Competition is most intense in the areas of price, product selection,  location,
service and name recognition. Competitive factors could require price reductions
or cause an increase in operating costs, including increases in expenditures for
marketing and customer service, that would harm our operating results.

Some of the markets in which we now operate or in which we might  operate in the
future  may  already  be at or  near  the  saturation  point  in  terms  of home
improvement  stores.  Some of our major competitors appear to have a strategy of
clustering  stores  within or saturating  markets in which they  operate,  or of
placing their warehouse  stores so close to our stores as to directly  challenge
our  competitive  position  in  such  markets.  These  strategies  of our  major
competitors could harm our current  operations and endanger the profitability of
our accelerated growth strategy. Almost all of our stores have at least one home
improvement warehouse retailer within their trading area, at an average distance
of  approximately  three  miles.  Some  of our  major  competitors  either  have
expansion plans in place or may seek to imitate our strategy. We expect that our
major competitors will open additional stores in our current market areas, which
could harm our competitive position.

We will be harmed unless comparable store sales stop declining.

A  significant  measure of our  performance  is the change in same store sales,
which  calculates  the  change  from  year to year in the  sales  of each of our
stores,  and then  averages the results.  Our same store sales have  declined in
recent  years.  A variety of factors  affects our same store  sales,  including,
among others:

- the timing and concentration of new store openings
- actions of competitors,  including the opening of additional stores in our
  markets
- the retail sales environment 
- general economic 
- conditions weather
- conditions our ability to execute our business strategy effectively.

If these and other factors result in further  declines or  fluctuations  in same
store sales, our operating results and financial condition could be harmed.

Our  relatively  short history as a separate  company could harm our ability to
access credit facilities and the capital market.

Our  business  was  operated as a division of a much larger  company  until July
1997,  so  we do  not  have  a  significant  operating  history  as a  separate,
stand-alone  company.  Before July 1997, the two  divisions,  BJ's and HomeBase,
each had  access to the cash  flow  generated  by the other and to the  combined
credit of the  enterprise,  which was based on the combined assets and operating
results of the BJ's and HomeBase  divisions.  If our financial  performance as a
separate,  stand-alone  company is not good, it could harm our ability to access
credit facilities and capital markets in the future. To the extent we experience
reduced  access to  capital  or higher  capital  costs,  we may have  difficulty
financing  our  accelerated  growth  strategy  or our new  operating  and  sales
strategy, which could harm our operating results and financial condition.

Reliance on the western U.S. market could harm our operating results.

Our home improvement stores are located in the western United States, with more
than half of them in  California.  We have been  harmed in the past by  economic
downturns  experienced in our geographic markets,  and future economic downturns
in the western U.S. could again harm us.

The extent of our real estate holdings subjects us to substantial environmental
risks and regulations.

We are subject to a variety of federal,  state and local  governmental  laws and
regulations  relating to the use, storage,  discharge,  emission and disposal of
hazardous  materials.  We have engaged and may continue to engage in real estate
development  projects  and we own 18 parcels of real  estate on which our stores
are located. If we do not comply with environmental laws, it could result in the
imposition of severe  penalties or  restrictions  on operations by  governmental
agencies or courts of law,  which could harm our operating  results or financial
condition.  We do not have  environmental  liability  insurance  to cover  these
events. We do not know of any significant  environmental hazard on properties we
own or  have  owned,  or  operate  or have  operated.  However,  if  significant
environmental  hazards  occur or are  discovered,  we could be subject to severe
penalties,  including the costs of  remediation,  which could harm our operating
results or financial condition.

Failure to qualify as tax free spin-off could harm us and our stockholders.

Prior to the  spin-off of the BJ's  division in July 1997,  we received a letter
ruling from the IRS to the effect that,  for federal  income tax  purposes,  the
spin-off and related asset  transfers would be tax-free to us and to the holders
of our common stock at the time of the spin-off.  The IRS letter ruling is based
on and subject to assumptions, facts, representations and advice provided to the
IRS by us,  BJI,  which is the  corporation  to  which  the  assets  of the BJ's
division  were  transferred,  holders of 5% or more of our common  stock and our
financial advisor at the time of the spin-off.  Although we are not aware of any
facts or circumstances that would make those assumptions, facts, representations
and advice  unobtainable  or  untrue,  future  events not within the  control of
HomeBase and BJI,  including,  for example,  an IRS challenge to the spin-off in
the event that BJI or HomeBase is acquired before July 28, 1999, could cause the
spin-off   not  to  qualify  for  tax-free   treatment,   resulting  in  adverse
consequences to us and our stockholders.

Potential conflicts of interest; management overlap.

Our  interests  and those of BJI may conflict  due to the ongoing  relationships
between the companies.  Sources of conflict include our continuing liability for
some of BJI's  contractual  obligations,  including  BJI  leases,  and the other
arrangements  between the parties  regarding  lease  liabilities.  In  addition,
Herbert J. Zarkin currently holds the executive offices of chairman of our board
of  directors  and  chairman of BJI's board of  directors;  Lorne R. Waxlax is a
director of both HomeBase and BJI; and Edward J. Weisberger serves as an officer
and director of both HomeBase and BJI. We have  implemented  procedures to limit
the involvement of Messrs. Zarkin, Waxlax and Weisberger in conflict situations,
including requiring them to abstain from voting as directors of HomeBase on some
matters.

Continuing obligations of HomeBase for lease liabilities after the spin-off.

Under the terms of the  spin-off,  BJI assumed all  liabilities  to  third-party
lessors for leases  entered into by HomeBase  before the spin-off for use by the
former BJ's division.  While we will continue to be liable, by law, with respect
to  those  lease  liabilities,   BJI  has  agreed  to  indemnify  us  for  those
liabilities.  However,  if BJI is not able to make payments under the indemnity,
we would be harmed.

We may be harmed if holders of our notes require us to  repurchase  some or all
of the notes upon a change of  control  and we do not have  sufficient  funds to
complete the repurchase.

We have  issued  $100  million  principal  amount of 5.25%  senior  subordinated
convertible notes. In the event of a change of control of HomeBase,  each holder
of our notes has the right to  require  us to  repurchase  the notes held by the
holder,  in whole or in part,  at a  redemption  price of 100% of the  principal
amount of the notes put up for  redemption,  plus interest  accrued  through the
repurchase  date.  If a change of control  were to occur,  we might not have the
financial  resources or be able to arrange  financing on acceptable terms to pay
the  repurchase  price for all the notes as to which  the  repurchase  option is
exercised.  Any  repurchase  in  connection  with a  change  of  control  could,
depending  on the  circumstances  and  absent a waiver  from the  holders of our
senior debt, be blocked due to the subordination  provisions of the notes. If we
do not repurchase  the notes when required,  an event of default with respect to
the  notes  and with  respect  to  senior  debt may  occur,  whether  or not the
repurchase  is  permitted  by the  subordination  provisions.  Such an  event of
default,  and its  consequences,  could harm our operating  results or financial
condition.

Our failure to be Year 2000  compliant or such a failure by our key suppliers or
customers  could  disrupt  our  operations  and harm our  operating  results  or
financial condition.

We have  conducted  a review of our  computer  systems and have  identified  the
systems  that  could be  affected  by the Year 2000  issue.  The Year 2000 issue
relates to the  inability  of  information  systems  to  recognize  and  process
date-sensitive  information beyond December 31, 1999. In addition,  many systems
and equipment that are not typically  thought of as  "computer-related"  contain
imbedded hardware and software that may be date-sensitive and can be impacted by
the Year 2000 issue. If our computer  systems cannot recognize a date using "00"
as the Year 2000,  it could result in  miscalculations  causing  disruptions  of
operations,  including,  among other  things,  a temporary  inability to process
transactions,   send  invoice  payments  or  engage  in  other  normal  business
activities.

Early in fiscal 1996,  we commenced a program to address the Year 2000 issue and
to pursue compliance with vendors.  The scope of the project includes:  ensuring
the compliance of all applications, operating systems and hardware on mainframe,
personal computer and local area network platforms; addressing issues related to
systems and equipment that do not contain  embedded  hardware and software;  and
addressing the compliance of third party vendors.

We  estimate  the total  cost of this  compliance  program  to be less than $2.0
million,  including  internal  staff  costs  and  the  cost  to  write  off  any
unamortized existing hardware and software that may need to be replaced. We have
incurred  approximately  $0.8 million through fiscal 1998, with a remaining $1.2
million in projected expenditures in fiscal 1999.

We  believe  that more than 90% of our  mainframe  applications,  including  all
financial and accounting  systems,  are now Year 2000 compliant.  We expect that
the  remaining  mainframe  systems  will be Year 2000  compliant  by the  second
quarter of fiscal 1999.  All other  equipment  and systems,  including  personal
computers,  local area networks,  and other  peripherals are expected to be Year
2000 compliant by the third quarter of fiscal 1999.

Although  we  anticipate  that our systems  and  applications  will be Year 2000
compliant on a timely basis, there can be no assurance that the systems of other
companies  with which we do  business  will be Year 2000  compliant  on a timely
basis.  In March 1998, we  established  a Year 2000  committee,  which  includes
members from various  business  units within  HomeBase.  The  committee  members
identified the major third party vendors from their  respective  business units.
We sent Year 2000 compliance  questionnaires  and, as of March 31, 1999, we have
received  responses  from  approximately  75%  of  the  vendors  polled.  We are
reviewing  their responses and assessing the need to develop  contingency  plans
for those vendors who may not be Year 2000  compliant.  The risks  involved with
not solving the Year 2000 issue include,  but are not limited to, the following:
loss of local or regional  electric power, loss of  telecommunication  services,
delays or cancellations of shipping or transportation,  the inability to process
credit card transactions and bank errors.

The discussion of our efforts, and management's  expectations,  relating to Year
2000 compliance are forward-looking statements. Our ability to achieve Year 2000
compliance  could be  affected  by,  among other  things,  the  availability  of
programming and testing resources,  failure to identify all susceptible systems,
non-compliance  by third  parties,  and other similar  uncertainties.  These and
other  unforeseen  factors  could harm our  financial  position,  liquidity  and
results of operations.


--------------------------------------------------------------------------------
  Forward-Looking Information
--------------------------------------------------------------------------------
This  report on Form 10-K contains "forward-looking statements" within the 
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 
21E of the Securities Exchange Act of 1934, as amended. When used in this 
report, the words "believe," "estimate," "expect," "anticipate," "plans," and 
similar expressions are intended to identify forward-looking statements. For 
this purpose, any statements contained herein that are not statements of 
historical fact may be deemed to be forward-looking statements.  Such statements
are subject to certain risks and uncertainties that could cause actual results 
to differ materially from those expected.  Although the Company believes that 
comments reflected in such forward-looking statements are reasonable, they are 
based on information existing at the time made.  Important factors that could
cause actual results to differ materially from expectations include, but are not
limited to, the successful implementation of the Company's accelerated growth 
strategy, general economic conditions prevailing in the Company's markets, 
competition and other factors.
--------------------------------------------------------------------------------


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company has not entered into any  transactions  using  derivative  financial
instruments.

The  Company's  major market risk  exposure is the  potential  loss arising from
changing interest rates and its impact on short-term investments. At January 30,
1999,  marketable  securities  consisted of $27.9 million in state and corporate
bonds,  classified  as  available-for-sale.  Currently,  the  Company  only  has
investments in fixed rate bonds. If interest rates were to increase and the fair
value of the bonds were to  decrease,  the  Company  has the ability to hold the
bonds until maturity.



<PAGE>


Item 8. Financial Statements and Supplementary Data



                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES




Report of Independent Accountants.............................................24

Report on Management's Responsibility.........................................24

Consolidated Statements of Income for the fiscal years ended 
January 30, 1999, January 31, 1998 and January 25, 1997.......................25

Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998.......26

Consolidated Statements of Cash Flows for the fiscal years ended
January 30, 1999, January 31, 1998 and January 25, 1997.......................27

Consolidated Statements of Stockholders' Equity for the fiscal years 
ended January 30, 1999, January 31, 1998 and January 25, 1997.................28

Notes to Consolidated Financial Statements....................................29





<PAGE>



                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of HomeBase, Inc.

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of income,  stockholders' equity and cash flows present
fairly, in all material respects,  the financial position of HomeBase,  Inc. and
subsidiaries  at January 30, 1999 and January 31, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended  January 30,  1999,  in  conformity  with  generally  accepted  accounting
principles.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.

PricewaterhouseCoopers LLP

Los Angeles, California
March 2, 1999


                     REPORT ON MANAGEMENT'S RESPONSIBILITY

The consolidated  financial statements and related financial information in this
annual report have been prepared by and are the  responsibility  of  management.
The consolidated financial statements were prepared in accordance with generally
accepted  accounting  principles and necessarily include amounts which are based
upon judgments and estimates made by management.

The  company  maintains a system of internal  controls  designed to provide,  at
appropriate  cost,   reasonable  assurance  that  the  assets  are  safeguarded,
transactions are executed in accordance with management's  authorization and the
accounting  records may be relied upon for the  preparation of the  consolidated
financial  statements.  The  accounting  and  control  systems  are  continually
reviewed  by  management  and  modified  as  necessary  in  response to changing
business  conditions and the  recommendations of the Company's internal auditors
and independent accountants.

The Audit Committee, which is comprised of members of the Board of Directors who
are neither officers nor employees,  meets  periodically  with  management,  the
internal auditors and the independent  accountants to review matters relating to
the Company's financial  reporting,  the adequacy of internal accounting control
and the  scope  and  results  of  audit  work.  The  internal  auditors  and the
independent accountants have free access to the Committee.

The    consolidated     financial    statements    have    been    audited    by
PricewaterhouseCoopers  LLP,  whose  opinion  as to their fair  presentation  in
accordance with generally accepted accounting principles appears above.



Allan P. Sherman                                  William B. Langsdorf
President and                                     Executive Vice President and
Chief Executive Officer                           Chief Financial Officer


<PAGE>


<TABLE>
<CAPTION>
                                                           HOMEBASE, INC.
                                                 CONSOLIDATED STATEMENTS OF INCOME
                                              (In thousands, except per share amounts)

                                                                               Fiscal Year Ended
---------------------------------------------------------------------------------------------------------------------
                                                                 January 30,        January 31,          January 25,
                                                                     1999              1998                1997
---------------------------------------------------------------------------------------------------------------------
                                                                                    (53 Weeks)

  <S>                                                              <C>                <C>                 <C>          
  Net sales                                                    $   1,442,341      $   1,477,442       $   1,452,696

  Cost of sales, including buying and
    occupancy costs                                                1,124,250          1,159,253           1,136,997
---------------------------------------------------------------------------------------------------------------------
  Gross profit                                                       318,091            318,189             315,699

  Selling, general and administrative
    expenses                                                         279,151            287,181             277,841
  Store closures and other charges                                         -             27,000                   -
---------------------------------------------------------------------------------------------------------------------
  Operating income                                                    38,940              4,008              37,858

  Interest on debt and capital leases, net                             2,817              5,136              10,506
---------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations before income
  taxes and extraordinary loss                                        36,123             (1,128)             27,352

  Provision (benefit) for income taxes                                13,760               (445)             11,005
---------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations before
    extraordinary loss                                                22,363               (683)             16,347

  Income from discontinued operations, net of
    income taxes of $0, $16,496, and $38,661                               -             20,575              60,313
---------------------------------------------------------------------------------------------------------------------
  Income before extraordinary loss                                    22,363             19,892              76,660

  Extraordinary loss on early extinguishment
    of debt, net of income tax benefit of $5,896                           -             (8,663)                  -
---------------------------------------------------------------------------------------------------------------------

  Net income                                                   $      22,363      $      11,229       $      76,660
=====================================================================================================================


  Basic net income per share:
    Income (loss) from continuing operations before
      extraordinary loss                                       $        0.59      $       (0.02)      $        0.50
    Income from discontinued operations                                    -               0.57                1.83
    Extraordinary loss                                                     -              (0.24)                  -
---------------------------------------------------------------------------------------------------------------------

    Net income                                                 $        0.59      $        0.31       $        2.33
=====================================================================================================================

  Diluted net income per share:
    Income (loss) from continuing operations before
      extraordinary loss                                       $        0.54      $       (0.02)      $        0.49
    Income from discontinued operations                                    -               0.57                1.82
    Extraordinary loss                                                     -              (0.24)                  -
---------------------------------------------------------------------------------------------------------------------

    Net income                                                 $        0.54      $        0.31       $        2.31
=====================================================================================================================



  Shares used in computation of net income per share:

  Basic                                                               37,845             35,770              32,839
  Diluted                                                             48,013             35,770              33,205
</TABLE>

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


<PAGE>



<TABLE>
<CAPTION>
                                                           HOMEBASE, INC.
                                                    CONSOLIDATED BALANCE SHEETS
                                                (In thousands, except share amounts)


--------------------------------------------------------------------------------------------------------------------
                                                                                     January 30,       January 31,
                                                                                         1999             1998
--------------------------------------------------------------------------------------------------------------------
 ASSETS
   Current assets:
   <S>                                                                                   <C>                <C>         
     Cash and cash equivalents                                                    $      35,578       $     44,603
     Marketable securities                                                               27,939              5,515
     Accounts receivable (net of allowance for doubtful accounts
      of $220 and $293)                                                                  20,759             27,781
     Merchandise inventories                                                            339,650            314,188
     Current deferred income taxes                                                        9,803             11,973
     Prepaid expenses and other current assets                                           17,044              9,857
     Prepaid federal and state income taxes                                                   -             10,265
--------------------------------------------------------------------------------------------------------------------
   Total current assets                                                                 450,773            424,182

   Property, net                                                                        256,835            258,697
   Property under capital leases, net                                                     5,198              5,637
   Deferred income taxes                                                                 10,205             13,965
   Other assets                                                                           5,971             13,127
--------------------------------------------------------------------------------------------------------------------

   Total assets                                                                   $     728,982       $    715,608
====================================================================================================================

 LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities:
     Accounts payable                                                             $     103,248       $     96,122
     Restructuring reserve                                                                2,066              6,151
     Accrued expenses and other current liabilities                                      75,838             80,783
     Accrued income taxes                                                                   691                  -
     Current installments of long-term debt                                               6,716                 72
     Obligations under capital leases due within one year                                   284                226
--------------------------------------------------------------------------------------------------------------------
   Total current liabilities                                                            188,843            183,354

   Long-term debt                                                                       100,293            107,015
   Obligations under capital leases, less portion due within one year                     8,366              8,650
   Noncurrent restructuring reserve                                                       3,862              6,537
   Other noncurrent liabilities                                                          45,119             50,385

   Commitments and contingencies

 STOCKHOLDERS' EQUITY
   Common stock, par value $.01 per share, authorized 190,000,000 shares,
     issued and outstanding 37,879,044 and 37,707,372 shares                                379                377
   Additional paid-in capital                                                           374,705            375,026
   Unearned compensation                                                                   (798)            (1,570)
   Unrealized holding gains                                                                  22                  6
   Retained earnings (deficit)                                                            8,191            (14,172)
--------------------------------------------------------------------------------------------------------------------
   Total stockholders' equity                                                           382,499            359,667
--------------------------------------------------------------------------------------------------------------------

   Total liabilities and stockholders' equity                                     $     728,982       $    715,608
====================================================================================================================
</TABLE>

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


<PAGE>



<TABLE>
<CAPTION>
                                                           HOMEBASE, INC.
                                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                           (In thousands)
                                                                             Fiscal Year Ended
------------------------------------------------------------------------------------------------------------------
                                                              January 30,       January 31,       January 25,
                                                                 1999              1998              1997
------------------------------------------------------------------------------------------------------------------
                                                                                 (53 Weeks)

CASH FLOWS FROM OPERATING ACTIVITIES:
   <S>                                                            <C>                <C>               <C>        
   Net income                                                $    22,363       $     11,229       $    76,660
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Net income from discontinued operations                         -            (20,575)          (60,313)
       Depreciation and amortization                              27,210             25,409            23,620
       Extraordinary loss                                              -              8,663                 -
       Loss on property disposals                                     14                620             1,037
       Amortization of premium (discount) on marketable            
         securities                                                 (367)                 -               122
       Other noncash items (net)                                     676              1,755               375
       Deferred income taxes                                       5,930             (4,762)            7,384

     Increase (decrease) in cash due to changes in:
       Accounts receivable                                         4,638               (136)            3,018
       Merchandise inventories                                   (25,462)             2,350           (17,740)
       Prepaid expenses and other current assets                    (604)            (4,882)             (952)
       Other assets                                               (1,136)               (74)             (488)
       Accounts payable                                            7,126             11,219           (21,945)
       Restructuring reserve                                      (6,564)            (1,135)          (14,591)
       Accrued expenses and other current liabilities              8,084               (345)           (6,988)
       Accrued income taxes                                       11,422              6,601            (5,315)
       Other noncurrent liabilities                               (5,266)            15,297            (1,572)
------------------------------------------------------------------------------------------------------------------

     Net cash provided by (used in) operating activities of:
       Continuing operations                                      48,064             51,234           (17,688)
       Discontinued operations                                         -              1,559           111,851
------------------------------------------------------------------------------------------------------------------
     Net cash provided by operating activities                    48,064             52,793            94,163

 CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of marketable securities                           (71,088)           (13,203)          (29,903)
     Sale of marketable securities                                11,589                  -            46,957
     Maturity of marketable securities                            38,553                365             3,140
     Property additions                                          (36,548)           (26,431)          (48,393)
     Property disposals                                              303                489             4,438
------------------------------------------------------------------------------------------------------------------

     Net cash used in investing activities of:
       Continuing operations                                     (57,191)           (38,780)          (23,761)
       Discontinued operations                                         -            (23,269)          (71,282)
------------------------------------------------------------------------------------------------------------------
     Net cash used in investing activities                       (57,191)           (62,049)          (95,043)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Borrowings of  long-term debt                                     -            100,000                 -
     Repayment of long-term debt                                     (78)          (130,746)          (12,828)
     Debt issuance costs                                            (226)            (4,861)                -
     Repayment of capital lease obligations                         (254)              (180)             (395)
     Purchase of treasury stock                                        -                  -           (11,392)
     Proceeds from sale and issuance of common stock                 660              5,815             9,016
     Cash paid to BJ's Wholesale Club, Inc. in spin-off                -             (5,000)                -
------------------------------------------------------------------------------------------------------------------

     Net cash provided by (used in) financing activities of:
       Continuing operations                                         102            (34,972)          (15,599)
       Discontinued operations                                         -             71,935              (231)
------------------------------------------------------------------------------------------------------------------
     Net cash provided by (used in) financing activities             102             36,963           (15,830)

     Net increase (decrease) in cash and cash equivalents         (9,025)            27,707           (16,710)
     Cash and cash equivalents at beginning of year               44,603             16,896            33,606
------------------------------------------------------------------------------------------------------------------

     Cash and cash equivalents at end of year                $    35,578       $     44,603       $    16,896
==================================================================================================================

Supplemental cash flow information:
   Interest paid (including discontinued operations)         $     1,570        $     9,480       $    21,229
   Income taxes paid (refunded) (including discontinued           (4,485)            35,713            45,937
     operations)

 Noncash financing and investing activities:
   Conversion of long-term debt to stock (net)               $         -        $   107,061       $        24
   Tax benefit of employee stock options                             466              2,202             2,122
------------------------------------------------------------------------------------------------------------------
</TABLE>

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


<PAGE>



<TABLE>
<CAPTION>
                                                           HOMEBASE, INC.
                                          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                           (In thousands)

------------------------------------------------------------------------------------------------------------------------------------
                                                                                     
                                                                          Unrealized                                  
                                   Common Stock     Additional              Holding    Retained   Treasury Stock      Total
                                -----------------   Paid-In     Unearned     Gains     Earnings   ---------------- Stockholders'
                                 Shares   Amount    Capital   Compensation  (Losses)   (Deficit)  Shares   Amount     Equity
--------------------------------------------------------------------------------------------------------------------------------

<S>                              <C>         <C>    <C>            <C>          <C>   <C>            <C>   <C>         <C>       
Balance, January 27, 1996        33,297    $  333   $329,868     $ (1,249)   $  22   $235,213       (568) $(9,067)  $  555,120
   Net income                         -         -          -            -        -     76,660          -        -       76,660
   Unrealized holding losses          -         -          -            -      (22)         -          -        -          (22)
   Purchase of treasury stock         -         -          -            -        -          -       (570) (11,392)     (11,392)
   Exercise of stock options          -         -       (715)           -        -          -        567    9,731        9,016
   Income tax benefit of stock
     options                          -         -      2,122            -        -          -          -        -        2,122
   Restricted stock grants            -         -        248         (940)       -          -         41      704           12
   Amortization of restricted 
     stock grants                     -         -          -          397        -          -          -        -          397
   Cancellation of restricted
     stock                          (27)        -       (582)         570        -          -          -        -          (12)
   Conversion of 6.5% debentures      -         -          -            -        -          -          1       24           24
--------------------------------------------------------------------------------------------------------------------------------
Balance, January 25, 1997        33,270       333    330,941       (1,222)       -    311,873       (529) (10,000)     631,925
   Net income                         -         -          -            -        -     11,229          -        -       11,229
   Unrealized holding gains           -         -          -            -        6          -          -        -            6
   Exercise of stock options        158         2      1,780            -        -          -        213    4,031        5,813
   Income tax benefit of stock 
     options                          -         -      2,202            -        -          -          -        -        2,202
   Restricted stock grants          263         3      1,959       (1,962)       -          -          -        -            -
   Amortization of restricted 
     stock grants                     -         -          -          469        -          -          -        -          469
   Cancellation of restricted
     stock                          (46)       (1)    (1,144)       1,145        -          -          -        -            -
   Conversion of 6.5% debentures  4,062        40    101,052            -        -          -        316    5,969      107,061
   Equity transfer in spin-off
     of BJ's Wholesale Club, Inc.     -         -    (61,764)           -        -   (337,274)         -        -     (399,038)
--------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998        37,707       377    375,026      ( 1,570)       6    (14,172)         -        -      359,667
   Net income                         -         -          -            -        -     22,363          -        -       22,363
   Unrealized holding gains           -         -          -            -       16          -          -        -           16
   Exercise of stock options        184         2        657            -        -          -          -        -          659
   Income tax benefit of stock
     options                          -         -        466            -        -          -          -        -          466
   Amortization of restricted   
     stock grants                     -         -          -          699        -          -          -        -          699
   Cancellation of restricted
     stock                          (12)        -        (95)          73        -          -          -        -          (22)
   Equity transfer adjustment 
     related to spin-off of BJ's       
     Wholesale Club, Inc.             -         -     (1,349)           -        -          -          -        -       (1,349)
--------------------------------------------------------------------------------------------------------------------------------

Balance, January 30, 1999        37,879   $   379   $374,705    $    (798)   $  22   $  8,191          -   $    -   $  382,499
================================================================================================================================
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.



<PAGE>




                                 HOMEBASE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization

HomeBase,  Inc.(R) ("the Company" or "HomeBase") is the second largest  operator
of home improvement  warehouse  stores in the western United States.  At January
30, 1999,  the Company  operated 84 stores in 10 states.  The  Company's  stores
average  approximately  103,000  square  feet of indoor  space and include up to
30,000 square feet of additional  exterior  full-service  garden and landscaping
centers.  The Company offers a broad  assortment of brand-name home  improvement
and  building  supply  products  at  competitive  prices to both  Do-It-Yourself
("DIY")  and  professional  customers.   In  certain  categories,   the  Company
supplements its brand-name offerings with high quality private label products.

On July 26,  1997,  the  Company  transferred  all of the net assets of its BJ's
Wholesale Club division ("BJ's") to BJ's Wholesale Club, Inc.  ("BJI").  On July
28, 1997, the Company distributed to its stockholders on a pro-rata basis all of
the  outstanding  common  stock  of  BJI  (the  "Distribution").  The  financial
statements  for the periods  presented  have been  restated to present BJ's as a
discontinued operation.  Income from discontinued operations for the fiscal year
ended January 31, 1998 includes  transaction  costs of $5.0 million (net of tax)
incurred in connection with the Distribution.

Note 2 - Summary of Accounting Policies

Basis of Presentation

The  consolidated  financial  statements  of the Company  include the  financial
statements of the Company's subsidiaries, all of which are wholly owned.

Fiscal Year

The Company operates within a conventional 52 or 53 week accounting  fiscal year
that ends on the last  Saturday in January.  The 52 weeks ended January 30, 1999
is referred to herein as "fiscal 1998".  The 53 weeks ended January 31, 1998 and
the 52 weeks ended  January 25, 1997 are referred to herein as "fiscal 1997" and
"fiscal 1996", respectively.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets and  liabilities  (e.g.,  co-operative
advertising  and  rebate  reserves,   self-insurance   reserves,  and  inventory
reserves) and disclosure of contingent assets and liabilities at the date of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

Cash Equivalents

The Company  considers highly liquid  investments  with an original  maturity of
three months or less at the time of purchase to be cash equivalents. Investments
with maturities exceeding three months are classified as marketable securities.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Marketable Securities

Management  determines the appropriate  classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt  securities  are  classified as  held-to-maturity  when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost,  adjusted for  amortization of premiums
and accretion of discounts to maturity.

Marketable   equity   securities   and  debt   securities   not   classified  as
held-to-maturity  are  classified  as   available-for-sale.   Available-for-sale
securities are carried at fair value, with the unrealized gains and losses,  net
of tax, reported as a separate  component of stockholders'  equity.  The cost of
securities  sold is based on the specific  identification  method.  Interest and
dividends  on  securities  classified  as  available-for-sale  are  included  in
investment income.

Merchandise Inventories

Inventories  are  stated at the  lower of cost,  determined  under the  weighted
average  cost  method,  or market.  The Company  recognizes  the  write-down  of
slow-moving  or obsolete  inventory in cost of sales when such  write-downs  are
probable and estimatable.

Property and Equipment

Property  and  equipment  are  stated  at cost.  Depreciation  expense  includes
amortization of property under capital leases.  Depreciation and amortization is
provided using the  straight-line  method using the following  estimated  useful
lives.

<TABLE>
--------------------------------------------------------------------------------------------------------------
  <S>                                                                    <C>
  Buildings                                                              33 years
  Property under capital leases and leasehold improvements               Shorter of lease term or useful life
  Furniture, fixtures, and equipment                                     3-10 years
--------------------------------------------------------------------------------------------------------------
</TABLE>

Preopening Costs

Preopening costs consist of direct  incremental  costs of opening a facility and
are charged to operations as incurred.

Interest on Debt and Capital Leases

Interest on debt and capital leases in the consolidated  statements of income is
presented net of interest and investment  income of $4.9 million,  $2.6 million,
and $1.8 million in fiscal 1998, 1997, and 1996, respectively.

Capitalized Interest

The Company capitalizes interest related to the development of owned facilities.
No interest  was  capitalized  in fiscal 1998 and fiscal  1997.  Interest in the
amount of $1.6 million was capitalized in fiscal 1996.

Long-Lived Assets

In fiscal 1996, the Company adopted Statement of Financial  Accounting Standards
("SFAS") No. 121,  "Accounting  for the Impairment of Long-Lived  Assets and for
Long-Lived  Assets  to Be  Disposed  Of".  In  accordance  with  SFAS  No.  121,
long-lived  assets  held and used by the  Company are  reviewed  for  impairment
whenever events or changes in circumstances indicate


<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

that the  carrying  amount of an asset may not be  recoverable.  For purposes of
evaluating the recoverability of long-lived  assets, the recoverability  test is
performed  using  undiscounted  net cash  flows  of the  individual  stores  and
consolidated  undiscounted net cash flows for long-lived assets not identifiable
to individual  stores.  Impairment  losses are calculated based on the estimated
salvage value of the impaired assets.

Advertising Costs

Advertising costs are expensed as incurred.  Net advertising expense was $20.7 
million, $19.5 million and $18.9 million for fiscal years 1998, 1997 and 1996, 
respectively.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes".  SFAS No.  109 is an asset and  liability  approach  that  requires  the
recognition of deferred tax assets and  liabilities  for the expected future tax
consequences  of events that have been  recognized  in the  Company's  financial
statements or tax returns.  In estimating future tax consequences,  SFAS No. 109
generally  considers all expected  future events other than proposed  changes in
the tax law or rates.

Discontinued Operations

Net sales from  discontinued  operations  were  $1,464.4  million  and  $2,922.8
million  for fiscal 1997 and fiscal  1996,  respectively.  Interest  expense was
allocated to  discontinued  operations  based on the ratio of BJ's net assets to
the sum of consolidated net assets plus consolidated  debt. In the first quarter
of fiscal 1998,  the Company  recorded an additional  equity  transfer to BJI of
approximately $1.3 million,  related to a net asset adjustment of BJ's as of the
time of the Distribution.

Stock-Based Compensation

During  fiscal  1996,  the  Company  adopted  SFAS  No.  123,   "Accounting  for
Stock-Based Compensation." SFAS No. 123 encourages the use of a fair-value-based
method of accounting for stock-based  awards under which the fair value of stock
options is determined on the date of grant and expensed over the vesting period.
Under SFAS No. 123, companies may, however, measure compensation costs for those
plans using the method prescribed by Accounting Principles Board Opinion ("APB")
No. 25,  "Accounting  for Stock Issued to  Employees."  Companies that apply APB
Opinion No. 25 are required to include pro forma disclosures of net earnings and
earnings  per share as if the  fair-value-based  method of  accounting  had been
applied.  The Company  elected to account for such plans under the provisions of
APB Opinion No. 25.

Reclassifications

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

New Accounting Standards

Effective  January 30,  1999,  the  Company  adopted  SFAS No. 132,  "Employers'
Disclosures about Pensions and Other Post-Retirement  Benefits".  The provisions
of  SFAS  No.  132  revises  employers'  disclosures  about  pension  and  other
post-retirement  benefit plans.  SFAS No. 132 does not change the measurement or
recognition of these plans,  and  standardizes  the disclosure  requirements for
pensions and other post-retirement benefits to the extent practicable.


<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In June 1998, SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging
Activities"  was  issued.  SFAS No. 133  establishes  accounting  and  reporting
standards for derivative instruments and for hedging activities. It is effective
for all fiscal  quarters of fiscal  years  beginning  after June 15,  1999.  The
Company  currently does not have any derivative  financial  instruments and does
not currently employ any hedging activities.

Note 3 - Supplemental Balance Sheet Information

Property and Equipment

Property and equipment consists of the following components:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                          January 30,      January 31,
(In thousands)                                                               1999              1998
-----------------------------------------------------------------------------------------------------------

<S>                                                                           <C>              <C>        
Land and buildings                                                        $   157,760      $   157,488
Leasehold improvements                                                         69,577           62,310
Furniture, fixtures and equipment                                             148,674          144,662
-----------------------------------------------------------------------------------------------------------
                                                                              376,011          364,460
Accumulated depreciation                                                     (119,176)        (105,763)
-----------------------------------------------------------------------------------------------------------

Property and equipment, net                                               $   256,835      $   258,697
===========================================================================================================
</TABLE>


Property under Capital Leases

Property under capital leases consists of the following components:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                          January 30,      January 31,
(In thousands)                                                               1999              1998
-----------------------------------------------------------------------------------------------------------

<S>                                                                             <C>              <C>        
Property under capital leases                                             $     9,696      $     9,696
Accumulated depreciation                                                       (4,498)          (4,059)
-----------------------------------------------------------------------------------------------------------

Property under capital leases, net                                        $     5,198      $     5,637
===========================================================================================================
</TABLE>


Accrued Expenses and Other Current Liabilities

The  following are the major  components  of accrued  expenses and other current
liabilities:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                          January 30,      January 31,
(In thousands)                                                               1999              1998
-----------------------------------------------------------------------------------------------------------

<S>                                                                            <C>              <C>        
Self-insurance reserves                                                   $    18,370      $    16,972
Employee compensation                                                          21,427           16,655
Sales and use taxes                                                            12,724            7,241
Rent, utilities, advertising and other                                         23,317           39,915
-----------------------------------------------------------------------------------------------------------

Total  accrued expenses and other current liabilities                     $    75,838      $    80,783
===========================================================================================================
</TABLE>



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 4 - Net Income Per Share

The Company adopted SFAS No. 128,  "Earnings per Share" in fiscal 1997. SFAS No.
128 replaced the  calculation  of primary and fully diluted net income per share
with basic and  diluted  net income per  share.  Unlike  primary  net income per
share, basic net income per share excludes any dilutive effects of stock options
and  convertible  securities.  Diluted  net  income  per share is similar to the
previously  reported  fully  diluted net income per share.  Net income per share
amounts  for  fiscal  1996 have been  restated  to  conform  to the SFAS No. 128
requirements.

The following table sets forth the computation of net income per share:

<TABLE>
<CAPTION>
                                                                        Fiscal Year Ended
------------------------------------------------------ ----------------------------------------------------
                                                         January 30,       January 31,      January 25,
(In thousands)                                               1999             1998              1997
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                          <C>               <C>              <C>        
Numerator:

   Income (loss) from continuing operations
     before extraordinary loss                          $    22,363       $      (683)     $    16,347
  Income from discontinued operations (net
    of income taxes)                                              -            20,575           60,313
   Extraordinary loss (net of income taxes)                       -            (8,663)               -
------------------------------------------------------ ----------------- ---------------- -----------------
   Numerator for basic net income per share             $    22,363       $    11,229      $    76,660

Effect of dilutive securities:
   5.25% convertible subordinated notes (1)                   3,574                 -                -
------------------------------------------------------ ----------------- ---------------- -----------------

   Numerator for diluted net income per share           $    25,937       $    11,229      $    76,660
====================================================== ================= ================ =================
</TABLE>


<TABLE>
<CAPTION>
                                                                        Fiscal Year Ended
------------------------------------------------------ ----------------- ---------------- -----------------
                                                         January 30,       January 31,      January 25,
(In thousands)                                               1999             1998              1997
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                          <C>               <C>              <C>   
Denominator:
   Denominator for basic net income per share-
     weighted average shares                                 37,845            35,770           32,839

Effect of dilutive securities:
   Employee stock options (2)                                   381                 -              366
   Assumed conversion of 5.25%
     convertible subordinated notes (1)                       9,787                 -                -
------------------------------------------------------ ----------------- ---------------- -----------------

   Denominator for diluted net income per share              48,013            35,770           33,205
====================================================== ================= ================ =================
</TABLE>


(1)  In fiscal 1997, the effect of the conversion of the convertible  securities
     has been  excluded  from the  computation  of diluted  net income per share
     because it was antidilutive.
(2)  In fiscal 1997,  the effect of stock options was  antidilutive  because the
     Company reported a net loss from continuing  operations.  These shares have
     been excluded from the computation of diluted net income per share.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 5 - Debt

At January 30,  1999 and  January 31,  1998,  long-term  debt  consisted  of the
following components:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                          January 30,      January 31,
(In thousands)                                                               1999              1998
-----------------------------------------------------------------------------------------------------------

<S>                                                                           <C>              <C>
Real estate debt, interest at 9.25%, maturing through March 1,
   2003 (repaid February 26, 1999)                                        $       372      $       450
Senior subordinated notes, interest at 11%,
   maturing May 15, 2004 (1)                                                    6,637            6,637
Convertible subordinated notes, interest at 5.25%,
   maturing November 1, 2004                                                  100,000          100,000
-----------------------------------------------------------------------------------------------------------
                                                                              107,009          107,087
Less current installments                                                      (6,716)             (72)
-----------------------------------------------------------------------------------------------------------

Total long-term debt                                                      $   100,293      $   107,015
===========================================================================================================
</TABLE>

The following are the aggregate  maturities  of long-term  debt  outstanding  at
January 30, 1999:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                  Real          Senior      Convertible
                                                 Estate      Subordinated   Subordinated
(In thousands)                                    Debt         Debt (1)         Debt           Total
-----------------------------------------------------------------------------------------------------------

Fiscal years ending January:
         <S>                                        <C>             <C>          <C>             <C>          
         2000                                    $   79        $    6,637    $         -   $       6,716
         2001                                        87                 -              -              87
         2002                                        95                 -              -              95
         2003                                       105                 -              -             105
         2004                                         6                 -        100,000         100,006
-----------------------------------------------------------------------------------------------------------

         Total                                   $  372        $    6,637    $   100,000   $     107,009
===========================================================================================================
</TABLE>
(1)  The  Company  intends  to call and  repay  the  $6.6  million,  11%  senior
     subordinated  notes on May 15, 1999.  In July 1997,  the Company  purchased
     U.S.  Treasury  securities and deposited them in escrow with the trustee of
     the notes, to be used to retire the debt and pay interest through May 1999.

As of January 30, 1999,  long-term real estate debt was  collateralized  by land
and buildings with a net book value of approximately $8.3 million.

On November  17,  1997,  the Company  completed  the private  placement  of $100
million,  5.25%  convertible  subordinated  notes due November 1, 2004 through a
Rule 144A/Regulation S offering,  and received approximately $96 million, net of
debt issuance costs. The Company subsequently filed a registration  statement on
Form S-3,  which was declared  effective on February 10, 1998,  registering  the
notes and the common stock into which the notes are  convertible.  The notes are
convertible,  subject to adjustment in certain events,  into  approximately  9.8
million shares of the Company's common stock at a conversion price of $10.22 per
share at any time after  February 15, 1998 and prior to maturity  unless earlier
redeemed  or  repurchased.  Subsequent  to  November  1,  2000,  the  notes  are
redeemable  at the  option of the  Company,  in whole or in part,  initially  at
103.15% of  principal  and  thereafter  at prices  declining to 100% on or after
November  1,  2003,   together  with  accrued  interest.   Interest  is  payable
semi-annually  on May 1 and November 1 of each year,  commencing on May 1, 1998.
In the event of a change of control of  HomeBase,  each  holder of the notes has
the right to require the Company to repurchase the notes held by the holder,  in
whole or in part, at a redemption  price of 100% of the principal  amount of the
notes  put  up  for  redemption,  plus  accrued  interest  accrued  through  the
repurchase date.


<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In July 1998,  the  Company  increased  its  revolving  credit  facility to $105
million from $90  million,  and extended  the  expiration  to July 9, 2001.  The
credit agreement  includes a $40 million  sub-facility for letters of credit and
is collateralized by inventory and accounts receivable.  The Company is required
to pay an annual facility fee, which is currently 0.30% of the total commitment.
Interest on  borrowings  is payable at the  Company's  option  either at (a) the
Eurodollar rate plus a margin, which is currently 1.20%, or (b) the agent bank's
prime  rate  plus a  margin,  which is  currently  zero.  The  facility  fee and
borrowing   margins  are  subject  to   adjustment   based  upon  the  Company's
fixed-charge   coverage  ratio.  The  credit  facility  is  subject  to  certain
covenants,  which include minimum tangible net worth and  fixed-charge  coverage
requirements,  a maximum funded debt-to-capital limitation, and a prohibition on
the payment of cash dividends.

At  January  30,  1999,  the  Company  had  letters  of  credit  outstanding  of
approximately $22.7 million primarily to support the purchase of inventories.

Note 6 - Leases

The Company is obligated  under  long-term  leases for the rental of real estate
and fixtures and equipment, some of which are classified as capital leases under
the provisions of SFAS No. 13, "Accounting for Leases", as amended. In addition,
the Company is generally required to pay insurance,  real estate taxes and other
operating expenses and, in some cases,  additional rentals based on a percentage
of sales or increases in the Consumer Price Index.  The real estate leases range
up to 25 years and have  varying  renewal  options.  The fixture  and  equipment
leases range up to 10 years.

Future minimum lease payments as of January 30, 1999 were:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------- -------------------
                                                                          Capital           Operating
(In thousands)                                                            Leases              Leases
--------------------------------------------------------------------------------------- -------------------

Fiscal years ending January:
   <S>                                                                       <C>                <C>         
   2000                                                                 $     1,455        $     71,979
   2001                                                                       1,455              72,045
   2002                                                                       1,455              71,118
   2003                                                                       1,455              64,595
   2004                                                                       1,507              63,398
   Thereafter                                                                10,259             393,616
--------------------------------------------------------------------------------------- -------------------

   Total minimum lease payments                                              17,586     $       736,751
                                                                                        ===================
   Less amount representing interest                                         (8,936)
---------------------------------------------------------------------------------------

   Present value of net minimum capital lease payments                  $     8,650
=======================================================================================
</TABLE>


Rental expense under operating  leases amounted to $66.8 million,  $64.8 million
and $65.1  million in fiscal 1998,  1997 and 1996,  respectively.  These amounts
exclude rent of $3.8 million, $2.4 million and $3.5 million in fiscal 1998, 1997
and 1996,  respectively,  which was charged to the restructuring or closed store
reserves.  Future minimum lease payments have not been reduced by future minimum
sublease rentals of $4.0 million under an operating lease.

The table of future minimum lease payments above includes lease  commitments for
two  stores  that were  closed in  connection  with the  Company's  fiscal  1993
restructuring  and two stores that were  closed in fiscal  1997.  During  fiscal
1998, the Company entered into a sublease agreement for one of the locations.


<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 7 - Income Taxes

Income (loss) before income taxes and the related provision (benefit) for income
taxes consist of the following components:
<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended
-----------------------------------------------------------------------------------------------------------
                                                        January 30,       January 31,      January 25,
(In thousands)                                              1999             1998              1997
-----------------------------------------------------------------------------------------------------------

<S>                                                          <C>              <C>              <C>
Income (loss) before income taxes:
     Continuing operations                              $    36,123       $    (1,128)     $    27,352
     Discontinued operations                                      -            37,071           98,974
     Extraordinary loss                                           -           (14,559)               -
-----------------------------------------------------------------------------------------------------------

Total                                                   $    36,123       $    21,384      $   126,326
===========================================================================================================

                                                                       Fiscal Year Ended
-----------------------------------------------------------------------------------------------------------
                                                        January 30,       January 31,      January 25,
(In thousands)                                              1999             1998              1997
-----------------------------------------------------------------------------------------------------------

Provision (benefit) for income taxes attributable
     to income from continuing operations               $    13,760       $      (445)     $    11,005
Provision for income taxes attributable to income
     from discontinued operations                                 -            16,496           38,661
Benefit for income taxes attributable to
     extraordinary loss                                           -            (5,896)               -
-----------------------------------------------------------------------------------------------------------

Total provision for income taxes                        $    13,760       $    10,155      $    49,666
===========================================================================================================
</TABLE>

The following  are the  significant  components  of the provision  (benefit) for
income taxes attributable to continuing operations:
<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended
-----------------------------------------------------------------------------------------------------------
                                                        January 30,       January 31,      January 25,
(In thousands)                                              1999             1998             1997
-----------------------------------------------------------------------------------------------------------

<S>                                                           <C>               <C>              <C>
Current:
     Federal                                            $     6,183       $     3,475      $     3,710
     State                                                    1,647               842              (73)
-----------------------------------------------------------------------------------------------------------
Total current                                           $     7,830       $     4,317      $     3,637
-----------------------------------------------------------------------------------------------------------

Deferred:
     Federal                                            $     5,652       $    (3,847)     $     5,822
     State                                                      278              (915)           1,546
-----------------------------------------------------------------------------------------------------------
Total deferred                                          $     5,930       $    (4,762)     $     7,368
-----------------------------------------------------------------------------------------------------------

Total provision (benefit) for income taxes attributable
    to income from continuing operations                $    13,760       $      (445)     $    11,005
===========================================================================================================
</TABLE>



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following is a reconciliation  of the statutory  federal income tax rate and
the effective income tax rate for income from continuing operations:
<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended
-----------------------------------------------------------------------------------------------------------
                                                        January 30,       January 31,      January 25,
                                                            1999             1998              1997
-----------------------------------------------------------------------------------------------------------

<S>                                                          <C>               <C>              <C>
Statutory federal income tax rate                            35%               35%              35%
State income taxes, net of federal tax
    benefit                                                   2                 4                4
Other                                                         1                 1                1
-----------------------------------------------------------------------------------------------------------

Effective income tax rate                                    38%               40%              40%
===========================================================================================================
</TABLE>

The following  are the  significant  components  of the  Company's  deferred tax
assets and liabilities as of January 30, 1999 and January 31, 1998:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                          January 30,      January 31,
(In thousands)                                                               1999              1998
-----------------------------------------------------------------------------------------------------------

<S>                                                                            <C>              <C>
Deferred tax assets:
     Self-insurance reserves                                              $    15,557      $    16,754
     Rental step liabilities                                                    4,531            4,940
     Restructuring reserve                                                      2,792            5,748
     Closed store reserve                                                       7,108            7,866
     Capital leases                                                             1,491            1,399
     Compensation and benefits                                                  2,217            2,255
     Other                                                                      5,227            4,416
-----------------------------------------------------------------------------------------------------------
Total deferred tax assets                                                 $    38,923      $    43,378
-----------------------------------------------------------------------------------------------------------

Deferred tax liabilities:
     Accelerated depreciation                                             $     8,898      $    10,225
     Other                                                                     10,017            7,215
-----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                            $    18,915      $    17,440
-----------------------------------------------------------------------------------------------------------

Net deferred tax assets                                                   $    20,008      $    25,938
===========================================================================================================
</TABLE>

The Company has not established a valuation  allowance  because its deferred tax
assets can be realized by  offsetting  taxable  income  mainly in the  carryback
period,  and also against  deferred tax  liabilities  and future taxable income,
which  management  believes  will more  likely  than not be earned  based on the
Company's historical earnings record.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 8 - Investments In Marketable Securities

The following is a summary of available-for-sale securities:

<TABLE>
<CAPTION>
                                                       Fiscal Year Ended January 30, 1999
-----------------------------------------------------------------------------------------------------------
                                        Amortized     Gross Unrealized Gross Unrealized     Estimated
(In thousands)                             Cost            Gains            Losses          Fair Value
-----------------------------------------------------------------------------------------------------------

<S>                                           <C>              <C>                 <C>          <C>        
U.S. corporate securities               $     14,743   $         -        $         -      $    14,743
Obligations of state and
   political subdivisions                     13,174            22                  -           13,196
-----------------------------------------------------------------------------------------------------------

          Total debt securities         $     27,917   $        22        $         -      $    27,939
===========================================================================================================

                                                       Fiscal Year Ended January 31, 1998
-----------------------------------------------------------------------------------------------------------
                                        Amortized     Gross Unrealized Gross Unrealized     Estimated
(In thousands)                             Cost            Gains            Losses          Fair Value
-----------------------------------------------------------------------------------------------------------

U.S. corporate securities               $          -   $         -        $         -      $         -
Obligations of state and
   political subdivisions                      5,509             7                 (1)           5,515
-----------------------------------------------------------------------------------------------------------

          Total debt securities         $      5,509   $         7        $        (1)     $     5,515
===========================================================================================================
</TABLE>

The following are  contractual  maturities of  available-for-sale  securities at
January 30, 1999:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                           Amortized        Estimated
(In thousands)                                                               Cost           Fair Value
-----------------------------------------------------------------------------------------------------------

<S>                                                                            <C>              <C>        
Less than one year                                                        $    19,830      $    19,845
1-5 years                                                                       8,087            8,094
-----------------------------------------------------------------------------------------------------------

                                                                          $    27,917      $    27,939
===========================================================================================================
</TABLE>

The following is other information on available-for-sale securities:

<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended
-----------------------------------------------------------------------------------------------------------
                                                        January 30,       January 31,      January 25,
(In thousands)                                              1999             1998              1997
-----------------------------------------------------------------------------------------------------------

<S>                                                         <C>                     <C>         <C>        
Sales proceeds                                         $    11,589        $         -      $    46,957
Gross realized gains (losses)                                   (1)                 -               13
-----------------------------------------------------------------------------------------------------------
</TABLE>

The specific  identification  method is used to compute realized gains or losses
on the sale of marketable securities.

As of January 30, 1999,  marketable  securities  classified as  held-to-maturity
consisted of U.S. Treasury  securities,  which are included in "Prepaid expenses
and other current assets" on the  consolidated  balance sheet at their amortized
cost of $7.2 million.  These  securities  were purchased and deposited in escrow
with the trustee of the Company's senior subordinated notes to be used to retire
the debt and pay interest through May 1999.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following are contractual  maturities of  held-to-maturity  securities as of
January 30, 1999 (in thousands):


<TABLE>
--------------------------------------------------------------------------------

<S>                                                                     <C>        
Less than one year                                                $     7,367
1-5 years                                                                   -
--------------------------------------------------------------------------------

Total                                                             $     7,367
================================================================================
</TABLE>

Note 9 - Disclosures About Fair Value of Financial Instruments

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

Cash and Cash Equivalents

The carrying  amount  approximates  fair value because of the short  maturity of
these instruments.

Marketable Securities

The fair value of the Company's marketable  securities is based on quoted values
provided by an independent pricing service utilized by broker dealers and mutual
fund companies.

Real Estate Debt and General Corporate Debt

The fair value of the Company's  real estate debt and general  corporate debt is
estimated  based on the current rates for similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.

Subordinated Debt

The fair  value of the  Company's  subordinated  debt is based on quoted  market
prices.

The  following  are  the  estimated  fair  values  of  the  Company's  financial
instruments:

<TABLE>
<CAPTION>
                                              January 30, 1999                  January 31, 1998
-----------------------------------------------------------------------------------------------------------
                                         Carrying                          Carrying
(In thousands)                            Amount         Fair Value         Amount          Fair Value
-----------------------------------------------------------------------------------------------------------

<S>                                         <C>             <C>              <C>               <C>          
Cash and cash equivalents               $     35,578    $    35,578       $    44,603    $      44,603
Marketable securities                         27,939         27,939             5,515            5,515
Real estate debt                                (372)          (387)             (450)            (479)
Senior subordinated debt  (1)                 (6,637)        (7,228)           (6,637)          (7,538)
Convertible subordinated debt               (100,000)       (80,690)         (100,000)         (92,500)
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) A total of $6.6 million of the Company's 11% senior  subordinated  notes
    remains outstanding,  which the Company intends to call and repay on May 15,
    1999. In July 1997,  the Company  purchased  U.S.  Treasury  securities  and
    deposited them in escrow with the trustee of the notes, to be used to retire
    the debt and pay interest through May 1999. Therefore, the fair value of the
    senior  subordinated  debt at January 30, 1999 is deemed to be the amortized
    cost of the treasury securities.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 10 - Capital Stock, Stock Options and Stock Purchase Plans

At January  30,  1999,  the Company had two  stock-based  employee  compensation
plans.

Under its 1989 Stock  Incentive  Plan  ("1989  Plan"),  the  Company has granted
options to certain key employees,  which expire 10 years from the grant date, to
purchase  common  stock at prices  equal to 100% of the fair  value on the grant
date.  Options  outstanding  are  exercisable  over  various  periods  generally
starting one year after the grant date.  The Company has also issued  restricted
stock  awards to certain  key  employees  at no cost  under the 1989  Plan.  The
restrictions  on the  transferability  of  those  shares  which  are tied to the
Company's performance lapse over periods that range up to eight years. For other
awards,  restrictions  on the sale of shares lapse over periods that range up to
four  years.  The 1989 Plan  expired in January  1998,  except as to options and
restricted  shares then  outstanding.  At January 30,  1999,  2,050,020  options
issued under the 1989 Plan remained  outstanding at prices ranging from $2.20 to
$6.45 per share.

Under  its 1995  Director  Stock  Option  Plan,  the  Company  has  granted  its
non-employee  directors options to purchase common stock at prices equal to 100%
of the fair value on the grant date.  These options,  which expire 10 years from
the grant date, are  exercisable  over periods  starting one year after they are
granted. A maximum of 150,000 shares may be issued under the 1995 Director Stock
Option Plan. In the third quarter of fiscal 1998, the Board of Directors elected
to suspend the 1995 Director  Stock Option Plan.  Any grants to Directors  after
that date will be issued under the Company's 1997 Stock Incentive Plan.

Under its 1997 Stock  Incentive Plan, the Company has granted options to certain
key  employees,  which expire 10 years from the grant date,  to purchase  common
stock at  prices  equal to 100% of the fair  value on the  grant  date.  Options
outstanding are exercisable  over various  periods  generally  starting one year
after the grant date.  The Company has also issued  restricted  stock  awards to
certain  key  employees  at no cost under its 1997  Stock  Incentive  Plan.  The
restrictions  on the  transferability  of those  shares  lapse over periods that
range up to four years.  A maximum of  3,500,000  shares may be issued under the
1997 Stock Incentive Plan.

In connection with the  Distribution,  all outstanding  options of directors and
employees who transferred to BJI were canceled.  All outstanding options held by
the remaining  directors and employees of the Company were replaced;  the number
of options was  proportionately  adjusted and the exercise prices were decreased
using a ratio of the average closing price of the Company's common stock for the
10  days  immediately  following  the  Distribution  to the  fair  value  of the
Company's  common stock before the  Distribution.  The adjustment  preserved the
economic  value of the options that existed prior to the  Distribution  date. In
July 1997,  the number of options  issuable under the 1989 Plan was increased by
1.5 million shares as a result of the proportionate option adjustment.

The  Company  applies  APB  Opinion  No. 25 in  accounting  for its  stock-based
compensation.  During  fiscal  1997 and  1996,  263,391  and  41,000  shares  of
restricted  stock were  issued at a  weighted-average  grant-date  fair value of
$7.45 and $22.92,  respectively.  Total  pre-tax  compensation  cost  charged to
income for stock-based employee  compensation awards in fiscal 1998, fiscal 1997
and 1996 was $0.7, $0.5 and $0.4 million,  respectively,  and consisted entirely
of compensation  expense related to restricted stock, which is charged to income
ratably over the period during which the  restrictions  lapse.  No  compensation
cost was  recognized  for the  Company's  stock options under APB Opinion No. 25
because the exercise price equaled the market price of the  underlying  stock on
the date of the grant.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Pro forma information  regarding net income and net income per share is required
by SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation,"  and has  been
determined  as if the Company had accounted for its stock options under the fair
value method of that  statement.  The fair value for these options was estimated
at the  grant  date  using  the  Black-Scholes  option  pricing  model  with the
following weighted average assumptions:

<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended
-----------------------------------------------------------------------------------------------------------
                                                        January 30,       January 31,      January 25,
                                                            1999             1998              1997
-----------------------------------------------------------------------------------------------------------

<S>                                                         <C>               <C>              <C>  
Risk-free interest rate                                     4.62%             5.64%            6.47%
Expected volatility                                         37.0%             36.0%            37.0%
Dividend yield                                                   -                 -                -
Expected option life                                     4.5 years         4.5 years        4.5 years
-----------------------------------------------------------------------------------------------------------
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the existing  models may not provide a reliable  single measure of the
fair value of its stock options.

For purposes of the following pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period:

<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended
-----------------------------------------------------------------------------------------------------------
                                                        January 30,       January 31,      January 25,
(In thousands, except per share amounts)                    1999             1998              1997
-----------------------------------------------------------------------------------------------------------

<S>                                                          <C>               <C>              <C>
Pro forma income (loss) from continuing
     operations                                         $    20,617       $    (1,772)     $    15,246

Pro forma net income                                    $    20,617       $    10,140      $    75,559

Pro forma income (loss) per share--Income
     from continuing operations:
        Basic                                           $     0.54        $    (0.05)      $     0.46
        Diluted                                         $     0.43        $    (0.05)      $     0.46

Pro forma income per share--Net income:
        Basic                                           $     0.54        $     0.28       $     2.30
        Diluted                                         $     0.43        $     0.28       $     2.28
-----------------------------------------------------------------------------------------------------------
</TABLE>

The effects of applying the provisions of SFAS No. 123 for pro forma  disclosure
purposes  are not  necessarily  representative  of the effects on  reported  net
income for future years because  options vest over several years and  additional
awards  generally  are  made  each  year.  In  accordance  with  the  transition
requirements of SFAS No. 123, the pro forma disclosures above only include stock
options awarded after January 28, 1995.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The  following is a summary of the Company's  stock option  activity and related
information:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                           Number Of     Weighted-Average
                                                                            Options       Exercise Price
-----------------------------------------------------------------------------------------------------------

<S>                                                                         <C>                 <C>  
Fiscal Year Ended January 25, 1997:

Outstanding at beginning of year                                            2,479,550      $    16.56
          Granted                                                             789,625           24.13
          Exercised                                                          (566,923)          15.96
          Forfeited                                                          (162,628)          19.22
          Expired                                                                   -                -
-----------------------------------------------------------------------------------------------------------

Outstanding at January 25, 1997                                             2,539,624      $    18.88
===========================================================================================================

Fiscal Year Ended January 31, 1998:
          Granted                                                             817,650      $     9.26
          BJ's spin-off adjustments                                         1,213,988                -
          Exercised                                                          (422,337)          17.35
          Forfeited                                                        (1,040,860)          17.82
          Expired                                                                   -                -
-----------------------------------------------------------------------------------------------------------

Outstanding at January 31, 1998                                             3,108,065      $     5.30
===========================================================================================================

Fiscal Year Ended January 30, 1999:
          Granted                                                             531,850      $     6.15
          Exercised                                                          (184,172)           3.58
          Forfeited                                                          (159,904)           6.43
          Expired                                                                   -                -
-----------------------------------------------------------------------------------------------------------

Outstanding at January 30, 1999                                             3,295,839      $     5.48
===========================================================================================================
</TABLE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                           Number Of     Weighted-Average
                                                                            Options       Exercise Price
-----------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                 <C>
Exercisable at:
          January 25, 1997                                                  1,064,190           16.67
          January 31, 1998                                                  1,100,056            3.82
          January 30, 1999                                                  1,594,476            4.42
-----------------------------------------------------------------------------------------------------------

Weighted-average fair value of options granted during the year:
          Fiscal 1996                                                                      $    10.40
          Fiscal 1997                                                                            3.55
          Fiscal 1998                                                                            2.32
-----------------------------------------------------------------------------------------------------------
</TABLE>

The following is additional  information related to stock options outstanding at
January 30, 1999:

<TABLE>
<CAPTION>
                         Options Outstanding                                  Options Exercisable
----------------------------------------------------------------------- -----------------------------------
                                                          Weighted-
                                           Weighted-       Average                          Weighted-
                                            Average       Remaining                          Average
        Range Of             Number        Exercise      Contractual         Number          Exercise
     Exercise Prices       Outstanding       Price      Life (Years)      Exercisable         Price
----------------------------------------------------------------------- -----------------------------------

<S>  <C>          <C>         <C>               <C>           <C>           <C>                  <C>   
   $ 2.20   to  $ 3.23          348,214   $     2.83          5.2             320,214      $     2.80
     3.24   to    4.64        1,149,188         4.13          5.9             899,657            4.11
     4.65   to    6.45        1,071,789         6.04          8.2             258,430            5.99
     6.46   to    9.00          726,648         8.05          8.7             116,175            7.83
                         ----------------                               -----------------

   $ 2.20   to  $ 9.00        3,295,839   $     5.48          7.2           1,594,476      $     4.42
                         ================                               =================
</TABLE>


<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

As of January 30,  1999,  January 31,  1998 and  January  25,  1997,  2,363,860,
2,723,306 and  1,687,373  shares,  respectively,  were reserved for future stock
awards under the Company's stock option plans.

In 1989 the Company  adopted a  stockholder  rights plan  designed to discourage
attempts to acquire the Company on terms not approved by the Board of Directors.
Under the plan,  stockholders  were  issued  one Right for each  share of common
stock  owned,  which  entitles  them to purchase  1/100 share of Series A Junior
Participating  Preferred Stock ("Series A Preferred Stock") at an exercise price
of $75. The Company has designated  1,900,000 shares of Series A Preferred Stock
for use under the rights plan; none has been issued. Generally, the terms of the
Series A Preferred  Stock are designed so that 1/100 share of Series A Preferred
Stock is the economic  equivalent of one share of the Company's common stock. In
the event any person  acquires 15% or more of the Company's  outstanding  stock,
the Rights become  exercisable  for the number of common  shares  which,  at the
time, would have a market value of two times the exercise price of the Right.

The Company has  authorized  10,000,000  shares of  preferred  stock,  $0.01 par
value, of which no shares have been issued.

Note 11 - Pensions and Other Post-Retirement Benefits

The Waban Inc.  Retirement Plan (the "Retirement  Plan") was a  non-contributory
defined benefit retirement plan covering  full-time  employees who have attained
21 years of age and have  completed  one year of service.  Benefits are based on
compensation earned in each year of service. No benefits have accrued under this
plan since July 4, 1992,  when it was  frozen.  On July 26,  1997,  the Board of
Directors  approved the  termination of the Retirement  Plan. In accordance with
generally accepted accounting principles,  the costs to terminate the Retirement
Plan were not recognized until the Plan was settled, which occurred in the first
quarter of fiscal 1998.  The Plan was settled  through cash payments and through
the purchase of non-participating annuity contracts.

The  Company   sponsors  a  defined   benefit   post-retirement   medical   plan
("Post-Retirement  Medical  Plan") that covers  employees  and their spouses who
retire after age 55 with at least 10 years of service,  who are not eligible for
Medicare,  and who  participated in a  Company-sponsored  medical plan.  Amounts
contributed by retired  employees  under this plan are based on years of service
prior to retirement. The Post-Retirement Medical Plan is not funded.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The  following  table  provides  a  reconciliation   of  the  Company's  benefit
obligations, plan assets and funded status of the plans.

<TABLE>
<CAPTION>
                                                                                   Post-Retirement
                                                   Retirement Plan                  Medical Plan
-----------------------------------------------------------------------------------------------------------
                                             January 30,     January 31,     January 30,    January 31,
(In thousands)                                  1999             1998           1999            1998
-----------------------------------------------------------------------------------------------------------

<S>                                               <C>              <C>               <C>            <C>
Change in Benefit Obligation:
     Benefit obligation at beginning of year $    3,331       $    3,204      $      595     $      393
     Service cost                                     -               62             118            102
     Interest cost                                    -              203              40             32
     Actuarial loss                                 670               65              14             68
     Benefits paid                               (4,001)            (203)              -              -
-----------------------------------------------------------------------------------------------------------

     Benefit obligation at end of year       $        -       $    3,331      $      767     $      595
===========================================================================================================

Change in Plan Assets:
     Fair value of assets at beginning of
       year                                  $    3,450       $    3,206      $        -     $        -
     Actual return on plan assets                    94               67               -              -
     Employer contribution                          457              380               -              -
     Benefits paid                               (4,001)            (203)              -              -
-----------------------------------------------------------------------------------------------------------
     Fair value of plan assets at end of
       year                                  $        -       $    3,450      $        -     $        -
===========================================================================================================


     Funded status                                    -              119            (767)          (595)
     Unrecognized net actuarial (gain)/loss           -              676             (24)           (41)
     Unrecognized prior service cost                  -                -               -              -
-----------------------------------------------------------------------------------------------------------

Prepaid (accrued) benefit cost               $        -       $      795      $     (791)    $     (636)
===========================================================================================================


Weighted-average assumptions:

     Discount rate                                    -             6.75%           6.50%          6.75%
     Expected return on plan assets                   -             9.00%                -              -

-----------------------------------------------------------------------------------------------------------
</TABLE>

Net periodic pension and other post-retirement medical benefit costs include the
following components:
<TABLE>
<CAPTION>
                                                                                   Post-Retirement
                                                  Retirement Plan                    Medical Plan
                                          --------------------------------  -------------------------------
                                                 Fiscal Year Ended                Fiscal Year Ended
-----------------------------------------------------------------------------------------------------------
                                             January 30,    January 31,      January 30,    January 31,
(In thousands)                                  1999            1998             1999           1998
-----------------------------------------------------------------------------------------------------------

<S>                                               <C>                <C>            <C>             <C>    
Components of net periodic benefit cost:
     Service cost                            $        -       $       62       $    119      $      102
     Interest cost                                    -              203             40              32
     Expected return on plan assets                   -             (260)             -               -
     Amortization of prior service cost               -               18              -              (2)
     Loss due to settlement of plan               1,100                -              -               -
-----------------------------------------------------------------------------------------------------------

     Net periodic benefit cost               $    1,100       $       23       $    159      $      132
===========================================================================================================
</TABLE>

For measurement  purposes,  an annual rate of increase in the per capita cost of
medical  coverage  of 8.0% in 1998  grading  down to 4.5% after  seven years was
assumed as of January 31, 1998.


<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Assumed  health care cost trend rates have a  significant  effect on the amounts
reported for the Post-Retirement Medical Plan. A one-percentage-point  change in
the assumed health care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                 1-Percentage Point              1-Percentage Point
                                                      Increase                        Decrease
-----------------------------------------------------------------------------------------------------------

<S>                                                        <C>                            <C>   
Effect on total of service and interest
    cost components                                     $  20                           $ (18)
Effect on postretirement medical benefit
    obligation                                          $  92                           $ (82)

-----------------------------------------------------------------------------------------------------------
</TABLE>

In  1994,  the  Company  established  a  non-contributory  defined  contribution
retirement  plan for certain key  employees.  Under the plan,  the Company funds
annual retirement  contributions for the designated participants on an after-tax
basis. For fiscal years 1998, 1997 and 1996, the Company's  contribution equaled
5% of  participants'  base  salary.  Participants  become  fully vested in their
contribution  accounts at the end of the fiscal year in which they complete four
years of service.  The Company's expense under this plan was $0.5 million,  $0.5
million, and $0.4 million in fiscal years 1998, 1997 and 1996, respectively.

Under the  Company's  401(k)  Savings  Plans,  participating  employees may make
pre-tax  contributions  up to 15% of covered  compensation.  The Company matches
employee  contributions at 100% of the first one percent of covered compensation
and 50% of the next four  percent and is payable as of the end of each  calendar
quarter. The Company's expense under these plans was $1.8 million,  $1.8 million
and $2.1 million in fiscal years 1998, 1997 and 1996, respectively.

Note 12 - Store Closures and Other Charges

In October 1997, the Board of Directors  approved an accelerated growth strategy
that provided for a more rapid  completion  of its store remodel  program and an
increased rate for new store  openings.  In connection  with this strategy,  the
Board of Directors also approved the closure of three  under-performing  stores.
In the third quarter of fiscal 1997,  the Company  recorded  store  closures and
other  charges of $27.0 million  consisting of $22.3 million for store  closures
and other related  settlement costs,  $1.7 million in asset impairment  charges,
and a $3.0  million  increase in the fiscal 1993  restructuring  reserve.  Costs
included in the reserve for store closures  primarily  include lease obligations
on closed  facilities,  write-downs of fixed assets and other related settlement
costs.

During fiscal 1997, the Company increased the fiscal 1993 restructuring  reserve
by $3.0  million for  additional  lease  obligations  due to delays in obtaining
subleases on terms acceptable to the Company.

In accordance with SFAS No. 121,  long-lived assets held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the  carrying  amount of an asset may not be  recoverable.  For purposes of
evaluating the recoverability of long-lived  assets, the recoverability  test is
performed  using  undiscounted  net cash  flows of the  individual  stores.  The
Company's  quarterly  SFAS No. 121 analysis  performed  in the third  quarter of
fiscal 1997 indicated  that the  long-lived  assets at two stores were impaired.
Accordingly, the Company estimated the fair value of these assets based on their
estimated salvage value and recorded an impairment charge of $1.7 million, which
is included in "Store closures and other charges" in the consolidated  statement
of income.



<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 13 - Restructuring Reserves

As of January 31, 1998, $12.7 million of the Company's fiscal 1993 restructuring
charge  remained  accrued on the Company's  consolidated  balance sheet.  During
fiscal 1998, the Company incurred cash  expenditures of $6.8 million,  primarily
for lease obligations on closed  facilities and lease  termination  costs. As of
January 30, 1999, $5.9 million  remained  accrued on the Company's  consolidated
balance sheet,  consisting  primarily of lease obligations on closed facilities,
which extend through 2007.

Note 14 - Commitments and Contingencies

The Company is involved in various legal  proceedings  incident to the character
of its  business.  Although  it is not  possible to predict the outcome of these
proceedings,  or any claims  against the Company  related  thereto,  the Company
believes that such proceedings will not, individually or in the aggregate,  have
a  material  adverse  effect on either  its  financial  condition  or results of
operations.

Note 15 - Selected Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
Fiscal Year ended January 30, 1999:                                  Quarter Ended
--------------------------------------------- --------------- -------------- -------------- --------------
                                                  May 2,        August 1,     October 31,    January 30,
(In thousands, except per share data)              1998           1998           1998           1999
--------------------------------------------- --------------- -------------- -------------- --------------


  <S>                                             <C>              <C>           <C>             <C>        
  Net sales                                   $   348,897      $   424,625   $   360,067     $   308,753
  Gross profit                                     76,937           97,417        79,800          63,937
  Income from continuing operations                    91           14,693         7,165             414
  Net income                                           91           14,693         7,165             414

  Basic net income per share:
   Net income                                 $         -      $      0.39   $      0.19    $      0.01

  Diluted net income per share:
   Net income                                 $         -      $      0.32   $      0.17    $      0.01
--------------------------------------------- --------------- -------------- -------------- --------------


Fiscal Year ended January 31,       1998:                            Quarter Ended
--------------------------------------------- --------------- -------------- -------------- --------------
                                                April 26,       July 26,      October 25,    January 31,
(In thousands, except per share data)              1997           1997           1997           1998
--------------------------------------------- --------------- -------------- -------------- --------------
                                                                                             (14 Weeks)

  Net sales                                   $   360,204      $   420,404   $    368,432    $  328,402
  Gross profit                                     77,936           93,355         78,905        67,993
  Income (loss) from continuing operations          2,271           11,218        (10,288)       (3,884)
  Income from discontinued operations               8,532           12,043              -             -
  Net income (loss)                                10,803           14,598        (10,288)       (3,884)

  Basic net income per share:
   Income (loss) from continuing              
     operations                                $     0.07     $       0.32   $      (0.27)   $    (0.10)
   Income from discontinued operations               0.25             0.34              -             -
   Net income (loss)                                 0.32             0.42          (0.27)        (0.10)

  Diluted net income per share:
   Income (loss) from continuing operations    $     0.07     $       0.31   $      (0.27)   $    (0.10)
   Income from discontinued operations               0.25             0.34              -             -
   Net income (loss)                                 0.32             0.41          (0.27)        (0.10)
--------------------------------------------- --------------- -------------- -------------- --------------
</TABLE>


<PAGE>


                                 HOMEBASE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Net income for the first quarter of fiscal 1998 includes a $1.1 million charge 
related to the termination of the Waban Inc. Retirement Plan.

Net income for the second quarter of fiscal 1997 included an extraordinary loss
of $8.7 million,  net of tax, related to the early  extinguishment of certain of
the Company's debt,  primarily  consisting of call premiums and the write-off of
debt issuance costs.

Net income for the third quarter of fiscal 1997 includes  $27.0 million  ($16.3
million, net of tax) in store closures and other charges.

In fiscal 1998 and 1997,  the  quarterly per share amounts do not sum to the per
share amounts for the respective  year-to-date periods due to differences in the
weighted average number of shares outstanding in each quarterly reporting period
versus the weighted  average  number of shares  outstanding  for the  respective
year-to-date periods.

The quarterly per share amounts for fiscal 1997 have been restated in accordance
with SFAS No. 128.


<PAGE>



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

None


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     The  Company  will file  with the  Securities  and  Exchange  Commission  a
definitive  Proxy Statement no later than 120 days after the close of its fiscal
year ended January 30, 1999 (the "Proxy Statement"). The information required by
this Item that is not set forth below or under the heading  "Executive  Officers
of the Registrant" in Part I of this report is incorporated  herein by reference
to the Proxy Statement.

Item 11. Executive Compensation

     The information  required by this Item is incorporated  herein by reference
to the Proxy  Statement.  However,  information  under  "Executive  Compensation
Committee  Report"  and  "Performance  Graph" in the Proxy  Statement  is not so
incorporated.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information  required by this Item is incorporated  herein by reference
to the Proxy Statement.

Item 13. Certain Relationships and Related Transactions

     The information  required by this Item is incorporated  herein by reference
to the Proxy Statement.



<PAGE>




                                    PART IV

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

A. The Financial  Statements and Financial  Statement Schedules filed as part of
this report are listed and indexed on page 23. Schedules other than those listed
in the index have been omitted  because they are not included  elsewhere in this
report.

B. Listed below are all exhibits filed as part of this report.  Certain exhibits
are  incorporated by reference to documents  previously  filed by the Registrant
with the  Securities and Exchange  Commission  pursuant to Rule 12b-32 under the
Securities Exchange Act of 1934, as amended.


Exhibit
No.            Exhibit
--------       -----------------------------------------------------------------
3.1            Amended and Restated  Certificate of Incorporation of the Company
               (incorporated  herein by reference to the  Registrant's  Form S-8
               (#333-32473), dated July 30, 1997).
3.2            By-Laws, as Amended, of the Company (incorporated herein by 
               reference to the Registrant's Form S-8 (#333-32473), dated July 
               30, 1997).
4.0            Instruments  Defining Rights of Security Holders (See Exhibits 
               3.1, 3.2, 4.7 and 10.13).  
4.1            Specimen  Common  Stock  Certificate  (incorporated  herein by
               reference to the Registrant's Form S-3 (Registration No. 
               333-43789), dated February 10, 1998).
4.2            5.25%  Convertible  Subordinated  Note (Rule 144A)  (incorporated
               herein by reference to the  Registrant's  From S-3  (Registration
               No. 333-43789), dated February 10, 1998).
4.3            5.25% Convertible Subordinated  Note (Regulation S) (incorporated
               herein by reference to the Registrant's From S-3 (Registration 
               No. 333-43789), dated February 10, 1998).
4.4            Indenture, dated as of November 10, 1997, between the Company and
               State  Street  Bank  and  Trust  Company  of   California,   N.A.
               (incorporated  herein by reference to the  Registrant's  Form S-3
               (Registration No. 333-43789), dated February 10, 1998).
4.5            Registration Rights Agreement, dated as of November 10, 1997, by 
               and between the Company and Prudential Securities Incorporated
               (incorporated herein by reference to the Registrant's Form S-3 
               (Registration No. 333-43789), dated February 10, 1998).
4.6            Purchase  Agreement,  dated as of December 10, 1997,  between the
               Company  and  Prudential  Securities  Incorporated  (incorporated
               herein by reference to the  Registrant's  Form S-3  (Registration
               No. 333-43789), dated February 10, 1998).
4.7            Rights Agreement dated as of April 6, 1999 between the Company 
               and First Chicago Trust Company of New York (incorporated  herein
               by reference to the Registrant's Form 8-A (Registration No. 001-
               10259), dated April 6, 1999).
4.8            5.25% Convertible Subordinated Note (Registered) (incorporated 
               herein by reference to the Registrant's Form S-3 (Registration 
               No. 333-43789), dated February 10, 1998).
10.0 *         Change of Control  Severance  Benefit  Plan for Key  Employees,
               dated January 28, 1998  (incorporated  herein by reference to the
               Registrant's Form S-3 (Registration No. 333-43789), dated 
               February 10, 1998).
10.1 *         HomeBase, Inc. 1989 Stock Incentive Plan, as amended 
               (incorporated  herein by reference to the Registrant's  From 10-Q
               (File No. 1-10259), dated July 26, 1997).
10.2 *         Waban Inc. Executive  Retirement Plan  (incorporated  herein by
               reference to the Registrant's Form 10-K for the fiscal year ended
               January 29, 1994).
10.3 *         Waban Inc. Retirement Plan for Directors,  as amended September
               17, 1990  (incorporated  herein by reference to the  Registrant's
               Form 10-Q for the fiscal quarter ended October 27, 1990).
10.4 *         Waban Inc. General  Deferred  Compensation  Plan  (incorporated
               herein by reference to the Registrant's  Form 10-K for the fiscal
               year ended January 27, 1990).
10.5 *         Waban Inc.  Growth  Incentive  Plan,  as amended  (incorporated
               herein by reference to the Registrant's  From 10-K for the fiscal
               year ended January 27, 1990).


<PAGE>







Exhibit
No.            Exhibit
--------       -----------------------------------------------------------------
10.6 *         Amendment  dated as of January 29, 1994 between the Company and
               The TJX  Companies,  Inc. to Executives  Services  Agreement with
               respect to Arthur F. Loewy  (incorporated  herein by reference to
               the Registrant's  Form 10-K for the fiscal year ended January 29,
               1994).
10.7 *         Employment  Agreement dated as of July 28, 1997 with Herbert J.
               Zarkin (incorporated herein by reference to the Registrant's From
               10-Q (File No. 1-10259), dated July 26, 1997).
10.8 *         Employment Agreement dated as of July 28, 1997 with Edward J.
               Weisberger (incorporated herein by reference to the Registrant's
               From 10-Q (File No. 1-10259), dated July 26, 1997).
10.9 *         Employment  Agreement  dated as of July 28, 1997 with Allan P.
               Sherman  (incorporated  herein by reference  to the  Registrant's
               Form 10-Q (File No. 1-10259), dated October 25, 1997).
10.9.1 *       Loan  Agreement  dated as of  January  19,  1994 with  Allan P.
               Sherman  (incorporated  herein by reference  to the  Registrant's
               Form 10-K for the fiscal year ended January 29, 1994).
10.9.2 *       Promissory  Note  dated as of January  19,  1994 with Allan P.
               Sherman to the Company  (incorporated  herein by reference to the
               Registrant's  Form 10-K for the  fiscal  year ended  January  29,
               1994).
10.10 *        Employment Agreement,  dated as of July 28, 1997 with Thomas F.
               Gallagher  (incorporated  herein by reference to the Registrant's
               From 10-Q (File No. 1-10259), dated July 26, 1997).
10.11 *        Employment  Agreement,  dated as of July 28,  1997 with  Scott
               Richards  (incorporated  herein by reference to the  Registrant's
               From 10-Q (File No. 1-10259), dated July 26, 1997).
10.12 *        Employment Agreement, dated as of July 28, 1997 with William B.
               Langsdorf  (incorporated  herein by reference to the Registrant's
               From 10-Q (File No. 1-10259), dated July 26, 1997).
10.13 *        Form of  Indemnification  Agreement between the Company and its
               officers and directors  (incorporated  herein by reference to the
               Registrant's  Form 10-K for the  fiscal  year ended  January  27,
               1990).
10.14 *        Form of Change  of  Control  Severance  Agreement  between  the
               Company  and  officers  of the  Company  (incorporated  herein by
               reference to the Registrant's From 10-Q (File No. 1-10259), dated
               July 26, 1997).
10.15          Credit Agreement dated as of July 9, 1997 among the Company  and
               certain banks (incorporated herein by reference to the 
               Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997)
10.15.1        First Amendment to Credit Agreement, dated October 28, 1997 among
               the Company and certain banks.
10.15.2        Second  Amendment  to Credit  Agreement,  dated  November 7, 1997
               among the Company and certain banks.
10.15.3        Third  Amendment  to Credit  Agreement,  dated  December 24, 1997
               among the Company and certain banks.
10.16          * Waban Inc. 1995 Director Stock Option Plan (incorporated herein
               by reference to the  Registrant's  definitive  Proxy Statement on
               Schedule 14A (File No. 1-10259) for the Registrant's  1995 Annual
               Meeting of Stockholders).
10.17          Separation and Distribution Agreement, dated as of July 10, 1997,
               between the Company and BJ's Wholesale Club, Inc.  (incorporated
               herein by reference to the Registrant's Form 8-K (File No.
               1-10259), dated July 28, 1997).
10.18          Services  Agreement,  dated as of July 28,  1997,  between the 
               Company and BJ's  Wholesale Club,  Inc.  (incorporated  herein by
               reference to the Registrant's  Form 8-K (File No. 1-10259), dated
               July 28, 1997).
10.19          Tax Sharing  Agreement,  dated as of July 28,  1997,  between the
               Company and BJ's Wholesale  Club,  Inc.  (incorporated  herein by
               reference to the Registrant's Form 8-K (File No.
               1-10259), dated July 28, 1997).
10.20 *        Employee Benefits Agreement, dated as of July 28, 1997, between
               the Company and BJ's Wholesale Club, Inc. (incorporated herein by
               reference to the Registrant's Form 8-K (File No. 1-10259),  dated
               July 28, 1997).
10.21 *         HomeBase,  Inc. 1997 Stock Incentive Plan (incorporated  herein
               by reference to the  Registrant's  From 10-Q (File No.  1-10259),
               dated July 26, 1997).
10.22 *        Change of Control  Severance  Agreement,  dated August 31, 1998
               with Herbert J. Zarkin  (incorporated  herein by reference to the
               Registrant's  From 10-Q (File No.  1-10259),  dated  October  31,
               1998).



<PAGE>




Exhibit
No.            Exhibit
--------       -----------------------------------------------------------------
10.23 *        Employment Agreement,  dated June 1, 1998 with Allan P. Sherman
               (incorporated  herein by reference to the Registrant's  From 10-Q
               (File No. 1-10259), dated October 31, 1998).
10.24 *        Change of Control  Severance  Agreement,  dated August 31, 1998
               with Allan P.  Sherman  (incorporated  herein by reference to the
               Registrant's  From 10-Q (File No.  1-10259),  dated  October  31,
               1998).
10.25 *        Change of Control  Severance  Agreement,  dated August 31, 1998
               with Thomas F. Gallagher (incorporated herein by reference to the
               Registrant's  From 10-Q (File No.  1-10259),  dated  October  31,
               1998).
10.26 *        Change of Control  Severance  Agreement,  dated August 31, 1998
               with William B.  Langsdorf  (incorporated  herein by reference to
               the Registrant's From 10-Q (File No. 1-10259),  dated October 31,
               1998).
10.27 *        Change of Control  Severance  Agreement,  dated August 31, 1998
               with Scott L. Richards  (incorporated  herein by reference to the
               Registrant's  From 10-Q (File No.  1-10259),  dated  October  31,
               1998).
10.28 *        Change of Control  Severance  Agreement,  dated August 31, 1998
               with Edward J.  Weisberger  (incorporated  herein by reference to
               the Registrant's From 10-Q (File No. 1-10259),  dated October 31,
               1998).
10.29 *        Change of Control  Severance  Benefit  Plan for Key  Employees,
               dated  August 31, 1998  (incorporated  herein by reference to the
               Registrant's  From 10-Q (File No.  1-10259),  dated  October  31,
               1998).
10.30 *        HomeBase,  Inc.  Executive  Retirement  Plan,  First Amendment,
               dated  August 31, 1998  (incorporated  herein by reference to the
               Registrant's  From 10-Q (File No.  1-10259),  dated  October  31,
               1998).
21.0 #         Subsidiaries of the Company.
23.0 #         Consent of Independent Accountants.
27.0 #         Financial Data Schedule--Fiscal 1998.


*              Management contract or other compensatory plan or arrangement.
#              Filed herewith.


               Reports on Form 8-K
               -----------------------------------------------------------------

               No reports on Form 8-K were filed in the fourth quarter of fiscal
               1998.




<PAGE>



                                 SIGNATURES

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


                                                        HomeBase, Inc.


Dated April 9, 1999                                 By: /s/ALLAN P. SHERMAN
                                                        ------------------------
                                                        Allan P. Sherman
                                                        President and
                                                        Chief Executive Officer


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


<TABLE>
<CAPTION>
                 Signature                                  Title                      Date
-------------------------------------------------------------------------------------------------

<S>                                                                               <C>    
    /s/ HERBERT J. ZARKIN                  Chairman of the Board of               April 9, 1999
    --------------------------------       Directors
           Herbert J. Zarkin               

    /s/ ALLAN P. SHERMAN                   President, Chief Executive Officer of  April 9, 1999
    --------------------------------       the Company and Director
           Allan P. Sherman                (Principal Executive Officer)
                                           

    /s/ WILLIAM B. LANGSDORF               Executive Vice President, Chief        April 9, 1999
    --------------------------------       Financial Officer (Principal
           William B. Langsdorf            Financial Officer and Principal
                                           Accounting Officer)

    /s/ JOHN D. BARR                       Director                               April 9, 1999
    --------------------------------
           John D. Barr

    /s/ ROBERT W. COX                      Director                               April 9, 1999
    --------------------------------
           Robert W. Cox

    /s/ HAROLD LEPPO                       Director                               April 9, 1999
    --------------------------------
           Harold Leppo

    /s/ ARTHUR F. LOEWY                    Director                               April 9, 1999
    --------------------------------
           Arthur F. Loewy

    /s/ LORNE R. WAXLAX                    Director                               April 9, 1999
    --------------------------------
           Lorne R. Waxlax

    /s/ EDWARD J. WEISBERGER               Director                               April 9, 1999
    --------------------------------
           Edward J. Weisberger
</TABLE>