SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549

                             FORM 10-K
                             ---------
(Mark One)

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

            For the fiscal year ended January 30, 1999
                                OR
|_| TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934.

                    Commission File No. 1-11980

                          ANNTAYLOR, INC.
                          ---------------
      (Exact name of registrant as specified in its charter)


       DELAWARE                                51-0297083
(State or other jurisdiction of  (I.R.S. Employer Identification Number)
incorporation or organization)

     142 West 57th Street, New York, NY                10019
  (Address of principal executive offices)           (Zip Code)

                          (212) 541-3300
       (Registrant's telephone number, including area code)

    SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:



    Title of Each Class             Name of each exchange on which registered
8-3/4% SUBORDINATED NOTES DUE 2000        THE NEW YORK STOCK EXCHANGE


 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.

      Indicate  by check  mark  whether  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 _____.

      As of February 26, 1999, 1 share of Common Stock was outstanding.

               DOCUMENTS INCORPORATED BY REFERENCE:

                                      None.


      The registrant  meets the  conditions  set forth in General Instruction I
(1)(a) and (b) of Form 10-K and is  therefore  filing this form with the reduced
disclosure format.



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<PAGE>



                                     PART I


ITEM 1. BUSINESS

GENERAL

      AnnTaylor,  Inc.  (the  "Company" or "Ann  Taylor") is a leading  national
specialty retailer of better quality women's apparel, shoes and accessories sold
primarily  under the Ann Taylor  brand  name.  The  Company  believes  that "Ann
Taylor" is a highly  recognized  national brand that defines a distinct  fashion
point of view. Ann Taylor  merchandise  represents  classic  styles,  updated to
reflect  current  fashion  trends.  The  Company's  stores offer a full range of
career and casual separates, weekend wear, dresses, tops, accessories and shoes,
coordinated  as part of a  total  wardrobing  strategy.  This  total  wardrobing
strategy is  reinforced  by an emphasis on customer  service.  Ann Taylor  sales
associates are trained to assist customers in merchandise selection and wardrobe
coordination,  helping them achieve the "Ann Taylor look" while  reflecting  the
customers' personal styles.

      As of January 30, 1999,  the Company  operated 365 stores in 41 states and
the District of Columbia,  under the names Ann Taylor,  Ann Taylor Factory Store
and Ann Taylor  Loft.  Of the 306  stores  operated  under the Ann Taylor  name,
approximately three-quarters are located in regional malls and upscale specialty
retail  centers,  with the balance  located in downtown  and village  locations.
These stores represent the Company's core merchandise line. The Company believes
that  the  customer  base  for its  Ann  Taylor  stores  consists  primarily  of
relatively affluent, fashion-conscious women from the ages of 25 to 55, and that
the majority of its customers  are working women with limited time to shop,  who
are attracted to Ann Taylor by its focused  merchandising  and total  wardrobing
strategies, personalized customer service, efficient store layouts and continual
flow of new merchandise.

      As of January 30,  1999,  the Company  operated 46 Ann Taylor Loft stores.
Ann Taylor Loft is a separate  moderate-price store for women who appreciate the
Ann Taylor style but are more cost conscious.  Merchandise is designed  uniquely
for these  stores and is sold under the Ann Taylor Loft  label.  The first 30 of
the  Company's  Ann Taylor Loft stores were located in factory  outlet  centers,
including some Ann Taylor  Factory Stores that, in 1996,  were converted to Loft
stores after the  introduction of the Loft concept.  In 1998, the Company opened
its  first  16  Ann  Taylor  Loft  stores  outside  the  factory  outlet  center
environment,  primarily in regional malls and strip shopping  centers focused on
the  moderate-priced   consumer.   Management  believes  that  Ann  Taylor  Loft
represents  a  significant  opportunity  for  the  Company  to  compete  in  the
moderately-priced  women's  apparel  market.  See  "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations - Statement Regarding
Forward-Looking Disclosures".

      The Company also operates 13 Ann Taylor  Factory  stores in factory outlet
centers that serve  primarily as a clearance  vehicle for  merchandise  from Ann
Taylor stores.  Many of these stores also offer a limited  selection of original
priced Ann Taylor Loft merchandise.

      The  Company was  incorporated  under the laws of the state of Delaware in
1986.  All of the  outstanding  capital stock of the Company,  consisting of one
share of common stock, is owned by AnnTaylor Stores  Corporation  ("ATSC").  Ann
Taylor was acquired by ATSC in a leveraged buyout transaction in 1989.


STATEMENT REGARDING FORWARD LOOKING DISCLOSURES

      Sections of this Annual Report contain various forward looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995, with
respect to the financial  condition,  results of operations  and business of the
Company.   These  forward   looking   statements   involve   certain  risks  and
uncertainties,  and no  assurance  can be given that any of such matters will be
realized.  Actual results may differ materially from those  contemplated by such
forward  looking  statements.  See  "Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of  Operations - Statement  Regarding  Forward
Looking Disclosures".

==============================================================================
<PAGE>




ITEM 2. PROPERTIES

      As of January 30, 1999, the Company operated 365 stores, all of which were
leased.  The store  leases  typically  provide for  initial  terms of ten years,
although  some  leases have  shorter or longer  initial  periods,  and grant the
Company  the  right  to  extend  the term  for one or two  additional  five-year
periods.  Most of the store leases require Ann Taylor to pay a specified minimum
rent,  plus a contingent  rent based on a percentage of the store's net sales in
excess of a specified  threshold.  Most of the leases also require Ann Taylor to
pay real estate taxes, insurance and certain common area and maintenance costs.

      Ann Taylor  leases  corporate  offices at 142 West 57th Street in New York
City and office space at 1372 Broadway in New York City. The Company also leases
office space in New Haven, Connecticut.

      Ann Taylor's wholly owned  subsidiary,  AnnTaylor  Distribution  Services,
Inc.,  owns its 256,000 square foot  distribution  center located in Louisville,
Kentucky.  Nearly all Ann Taylor  merchandise  is  distributed  to the Company's
stores  through this facility.  The parcel on which the Louisville  distribution
center  is  located  comprises  approximately  20 acres  and  could  accommodate
possible future expansion of the facility.



ITEM 3. LEGAL PROCEEDINGS

      On April 26, 1996, certain alleged  stockholders of ATSC filed a purported
class action lawsuit in the United States  District  Court Southern  District of
New York,  against ATSC, the Company,  certain  directors and former officers of
ATSC and the Company,  ML&Co. and certain affiliates of ML&Co. (Novak v. Kasaks,
et. al., No. 96 CIV 3073  (S.D.N.Y.  1996)).  The  complaint  alleged  causes of
action under Section 10(b) and Section 20(a) of the  Securities  Exchange Act of
1934, as amended,  by alleging that ATSC and the other  defendants  engaged in a
fraudulent  scheme and  course of  business  that  operated a fraud or deceit on
purchasers of ATSC's common stock during the period commencing  February 3, 1994
through May 4, 1995 due to alleged  false and  misleading  statements  about the
Company and ATSC. The complaint sought,  among other things,  certification as a
class  action on behalf of all  purchasers  of common  stock  during  the period
commencing  February 3, 1994 through May 4, 1995,  the awarding of  compensatory
damages to the  plaintiffs and purported  members of the class,  the awarding of
costs, including pre-judgment and post-judgment interest,  reasonable attorneys'
fees and expert  witness fees to the  plaintiffs  and  purported  members of the
class and  equitable  and/or  injunctive  relief.  On March 10, 1998,  the Court
granted the defendants'  motions to dismiss the complaint.  The Court found that
the  complaint  failed to state a claim upon which  relief may be  granted,  and
failed to plead fraud with  particularity and an inability to do so. The Court's
Opinion granted the plaintiffs  leave to amend and re-file the complaint  within
thirty  days of the date of the  Opinion,  and the  plaintiffs  filed an amended
complaint  on April 9, 1998.  On November 9, 1998,  the Court  issued an Opinion
dismissing,  with  prejudice,  the amended  complaint.  On or about December 15,
1998,  the  plaintiffs  filed a notice of appeal  to the U.S  District  Court of
Appeals, Second Circuit,  seeking review of the Appellate Court's decision. This
appeal is presently  pending,  and any liability that may arise from this action
cannot  be  predicted  at this  time.  The  Company  believes  that the  amended
complaint is without merit and intends to defend the action vigorously.

      The  Company  is  also a  party  to  routine  litigation  incident  to its
business.  Although the amount of any liability that could arise with respect to
these actions cannot be accurately predicted, in the opinion of the Company, any
such  liability  will  not  have a  material  adverse  effect  on the  financial
position, results of operations or liquidity of the Company.


===============================================================================


<PAGE>


                                     PART II





ITEM 5. MARKET  FOR   REGISTRANT'S   COMMON   EQUITY  AND   RELATED
        STOCKHOLDER MATTERS

      There is no public market for the common stock of the Company.  All of the
outstanding  stock of the Company,  consisting of one share of common stock,  is
owned by ATSC.

      The  payment  of  dividends  by Ann  Taylor to ATSC is  subject to certain
restrictions  under  the  Company's  bank  credit  agreement  and the  indenture
relating to the Company's 8 3/4% Subordinated Notes due 2000. From time to time,
the  Company  pays  dividends  to  ATSC in  amounts  sufficient  to fund  ATSC's
operating  expenses.  Further,  in connection with the 8 1/2%  Company-Obligated
Mandatorily   Redeemable   Convertible   Preferred  Securities  (the  "preferred
securities")  issued by ATSC's financing  vehicle,  AnnTaylor Finance Trust (the
"Trust"),  the Company has made dividend payments to ATSC in amounts  sufficient
to allow ATSC to pay interest on certain debentures issued by ATSC to the Trust.
In August 1998, the Company declared a dividend of a promissory note to ATSC, in
the original  principal amount of $100,625,000 (the "Note Payable to ATSC"). The
Note Payable to ATSC has interest and payment terms substantially similar to the
terms  of the  debentures  issued  by  ATSC  to  the  Trust.  See  Note 2 to the
Consolidated Financial Statements of the Company.



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


SALES

      The  following  table  sets  forth  certain  sales and store  data for the
periods indicated:

                                                  Fiscal Year Ended       
                                        --------------------------------------
                                        Fiscal 1998   Fiscal 1997  Fiscal 1996
                                         (52 weeks)    (52 weeks)   (52 weeks) 
                                         ----------   -----------  -----------
Net sales ($000).......................   $911,939     $  781,028   $  798,117
      Total net sales increase 
        (decrease) percentage
        (52 week basis)................       16.8%          (2.1)%       10.6%
      Comparable store sales 
        increase (decrease) 
        percentage (52 week basis).....        7.9%          (5.5)%        1.8%
      Net sales per average 
        square foot....................   $    474     $      445   $      476
      Total store square footage
        at end of period ..............  2,038,000      1,808,000    1,705,000
      Number of
        New stores.....................         45             27           11
        Expanded stores................          8              9            7
        Closed stores..................          4             12            8
      Total stores open at end 
        of period......................        365            324          309

      The  Company's  net  sales do not  show  significant  seasonal  variation,
although  net sales in the fourth  quarter  have  historically  been  moderately
higher  than  in the  other  quarters.  As a  result,  the  Company  has not had
significant  overhead and other costs  generally  associated with large seasonal
variations.


===============================================================================
<PAGE>




RESULTS OF OPERATIONS

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

                                                       Fiscal Year        
                                               ---------------------------
                                               1998       1997        1996
                                               ----       ----        ----
    Net sales..............................   100.0%     100.0%      100.0%
    Cost of sales..........................    50.0       52.7        55.6
                                               ----       ----        ----
        Gross profit.......................    50.0       47.3        44.4
    Selling, general and 
       administrative expenses.............    38.4       39.5        36.5
    Studio shoe stores closing expense.....     ---        ---         0.4
    Employment contract separation 
       expense.............................     ---        ---         0.4
    Retirement of assets...................     0.4        ---         ---
    Amortization of goodwill...............     1.2        1.4         1.3
                                                ---        ---         ---
        Operating income...................    10.0        6.4         5.8
    Interest expense.......................     2.0        2.6         3.1
    Other expense, net.....................     ---        ---         --- 
                                               ----       ----        ---- 
    Income before income taxes 
       and extraordinary loss                   8.0        3.8         2.7
    Income tax provision...........             3.7        2.3         1.6
                                               ----       ----        ----
    Income before extraordinary loss            4.3        1.5         1.1
    Extraordinary loss.............             ---        ---         ---
                                               ----       ----        ----
    Net income.....................             4.3%       1.5%        1.1%
                                               ====       ====        ==== 



FISCAL 1998 COMPARED TO FISCAL 1997

      The  Company's  net sales  increased to  $911,939,000  in Fiscal 1998 over
$781,028,000 in Fiscal 1997, an increase of $130,911,000,  or 16.8%.  Comparable
store sales for Fiscal 1998  increased  7.9%,  compared to a decrease of 5.5% in
Fiscal  1997.   Management  believes  that  the  sales  increase  was  primarily
attributable to the opening of new stores, the expansion of existing stores, and
a net  increase  in  comparable  store  sales in 1998,  as a result of  improved
customer   acceptance  of  the  Company's   product  offerings  and  merchandise
assortment.

      Gross profit as a percentage of net sales  increased to 50.0% in 1998 from
47.3% in 1997. As discussed in Note 1 to the Consolidated  Financial Statements,
the  Company  elected in Fiscal  1998 to change the method by which the  Company
accounts for inventory,  from the retail method to the average cost method.  The
effect of this  accounting  change on Fiscal  1998 net income was an increase of
$1,272,000.  Under the retail method,  gross margin as a percentage of net sales
would have been  approximately  49.8%.  The  increase in gross  margin  reflects
continued  merchandise margin improvements  resulting from the maturation of the
Company's sourcing organization, since the acquisition of the Company's sourcing
joint venture two years ago, as well as a reduction in markdowns as a percentage
of sales.  See  discussion of Sourcing  Acquisition  in Note 10 to the Company's
Consolidated Financial Statements.

      Selling,  general and administrative expenses were $349,955,000,  or 38.4%
of net sales, in 1998, compared to $308,232,000, or 39.5% of net sales, in 1997.
The decrease in selling,  general and administrative expenses as a percentage of
net sales was primarily  attributable  to increased  leverage on fixed  expenses
resulting from increased  comparable  store sales. The benefits of this leverage
were partially offset by an increase in the provision for management performance
bonus  expense,  and an increase  in  marketing  expenditures  in support of the
Company's strategic initiatives to enhance the Ann Taylor brand.


===============================================================================
<PAGE>




      Operating income increased to $91,587,000,  or 10.0% of net sales, in 1998
from  $50,000,000,  or 6.4% of net sales, in 1997.  Operating income in 1998 was
reduced by  $3,633,000,  or 0.4% of net  sales,  for the  retirement  of certain
assets in connection  with the  renovation of the Company's  corporate  offices.
Amortization of goodwill was $11,040,000, or 1.2% of net sales, in 1998 compared
to $11,040,000,  or 1.4% of net sales, in 1997.  Operating income without giving
effect to such amortization was $102,627,000, or 11.2% of net sales, in 1998 and
$61,040,000, or 7.8% of net sales, in 1997.

      Interest  expense was $18,117,000 in 1998 compared to $19,989,000 in 1997.
The decrease in interest expense was primarily attributable to a decrease in the
Company's  outstanding  long-term debt, resulting in part from the prepayment in
July 1997 of a $24,500,000  term loan referred to below, and to greater interest
income  earned  on cash on  hand.  The  weighted  average  interest  rate on the
Company's  outstanding  indebtedness  at January 30, 1999 was 8.60%  compared to
8.59% at January 31, 1998.

      The income tax provision was $33,579,000, or 46.1% of income before income
taxes, in the 1998 period,  compared to  $17,466,000,  or 59.3% of income before
income taxes and  extraordinary  loss, in 1997. The effective tax rates for both
periods  were  higher  than  the  statutory  rates,  primarily  as a  result  of
non-deductible  goodwill expense.  Without giving effect to such  non-deductible
goodwill amortization, the Company's effective income tax rate was 40% of income
before income taxes in the 1998 period,  compared to 43% before income taxes and
extraordinary  loss in the 1997 period. The decrease in the effective income tax
rate resulted primarily from the implementation of additional state tax planning
and from an increase in the amount of income earned outside the United States by
the Company's non-U.S. sourcing subsidiaries.

      As a result  of the  foregoing  factors,  the  Company  had net  income of
$39,324,000,  or  4.3%  of net  sales,  for  1998,  compared  to net  income  of
$11,824,000, or 1.5% of net sales, for 1997.

FISCAL 1997 COMPARED TO FISCAL 1996

      The  Company's  net sales  decreased to  $781,028,000  in Fiscal 1997 from
$798,117,000  in Fiscal 1996,  a decrease of  $17,089,000,  or 2.1%.  Comparable
store sales for Fiscal 1997 decreased  5.5% compared to Fiscal 1996.  Management
believes  that the  decreases  were  primarily  attributable  to lower  customer
acceptance of certain of the Company's  merchandise  offerings  and, to a lesser
extent,  planned  decreases in promotional  inventory for certain periods during
the year.

      Gross profit as a percentage of net sales  increased to 47.3% in 1997 from
44.4% in 1996. This increase was primarily  attributable to benefits achieved by
the Company's sourcing division.

      Selling,  general and administrative expenses were $308,232,000,  or 39.5%
of net sales, in 1997, compared to $291,027,000, or 36.5% of net sales, in 1996.
The increase in selling,  general and administrative expenses as a percentage of
net sales was primarily  attributable  to increased  tenancy  expense related to
increased retail square footage,  investments in certain strategic  initiatives,
such as marketing and enhanced merchandising  information systems, and decreased
leverage on fixed expenses due to lower sales in 1997.

      Operating income  increased to $50,000,000,  or 6.4% of net sales, in 1997
from  $46,461,000,  or 5.8% of net sales, in 1996.  Operating income in 1996 was
reduced by $3,500,000, or 0.4% of net sales, representing the estimated costs of
the  Company's  obligations  under  a  former  executive's  employment  contract
following  her  resignation  in  August  1996,  and  by  a  one-time  charge  of
$3,600,000,  or 0.4% of net sales,  relating to the planned  closing of all nine
Ann Taylor  Studio  shoe  stores  announced  in January  1997.  Amortization  of
goodwill was $11,040,000, or 1.4% of net sales, in 1997 compared to $10,086,000,
or 1.3% of net sales,  in 1996.  Operating  income without giving effect to such
amortization was $61,040,000,  or 7.8% of net sales, in 1997 and $56,547,000, or
7.1% of net sales, in 1996.

===============================================================================

<PAGE>



      Interest  expense was $19,989,000 in 1997 compared to $24,416,000 in 1996.
The decrease in interest expense was primarily attributable to a decrease in the
Company's  outstanding  long-term debt, resulting in part from the prepayment in
July 1997 of a $24,500,000  term loan referred to below, and to greater interest
income  earned  on cash on  hand.  The  weighted  average  interest  rate on the
Company's  outstanding  indebtedness  at January 31, 1998 was 8.59%  compared to
8.63% at February 1, 1997.

      The income tax provision was $17,466,000, or 59.3% of income before income
taxes and  extraordinary  loss, in the 1997 period compared to  $12,975,000,  or
60.0% of income before income taxes,  in 1996.  The effective tax rates for both
periods  were  higher  than  the  statutory  rates,  primarily  as a  result  of
non-deductible goodwill expense.

      On July 2, 1997, the Company used available cash to prepay the outstanding
balance of a  $24,500,000  term loan due  September  1998.  This loan  repayment
resulted in an extraordinary charge to earnings in Fiscal 1997 of $173,000,  net
of income tax benefit.

      As a result  of the  foregoing  factors,  the  Company  had net  income of
$11,824,000,  or  1.5%  of net  sales,  for  1997,  compared  to net  income  of
$8,667,000, or 1.1% of net sales, for 1996.


CHANGES IN FINANCIAL POSITION

      Accounts  receivable  increased  to  $71,049,000  at the end of 1998  from
$60,211,000  at the end of 1997,  an increase  of  $10,838,000,  or 18.0%.  This
increase was primarily attributable to construction allowance receivables, which
increased  $6,501,000  to  $12,485,000  in 1998,  and to third party credit card
receivables (American Express,  MasterCard, and Visa) which increased $2,182,000
and Ann Taylor  credit card  receivables,  which  increased  $2,097,000,  due to
increased sales.

      Merchandise inventories increased to $136,748,000 at January 30, 1999 from
$97,234,000  at January 31,  1998,  an increase of  $39,514,000,  or 40.6%.  The
increase in merchandise  inventories is primarily due to inventory purchased for
new store square footage,  planned  increases in inventory  levels and the early
shipment or receipt of Spring  merchandise.  Merchandise  inventories at January
30,  1999  and  January  31,  1998  included   approximately   $32,329,000   and
$21,124,000,  respectively,  of inventory associated with the Company's sourcing
division.  Inventory attributed to the sourcing division is principally finished
goods in transit from factories. Total square footage increased to approximately
2,038,000  square feet at January 30, 1999 from  approximately  1,808,000 square
feet at January  31,  1998.  Merchandise  inventory  on a per square foot basis,
excluding  inventory  associated  with  the  Company's  sourcing  division,  was
approximately  $51 at the end of 1998,  compared to approximately $42 at the end
of 1997, an increase of approximately 21.4%.  Inventory turned 5.0 times in 1998
compared to 5.1 times in 1997, excluding inventory associated with the Company's
sourcing division. Inventory turnover is determined by dividing cost of sales by
the  average of the cost of  inventory  at the  beginning  and end of the period
(excluding inventory associated with the sourcing division).


LIQUIDITY AND CAPITAL RESOURCES

      The  Company's  primary  sources  of  working  capital  are cash flow from
operations  and  borrowings   available  under  the  revolving  credit  facility
described  below.  The  following  table sets  forth  material  measures  of the
Company's liquidity:

                                                           Fiscal Year     
                                                     ------------------------
                                                     1998      1997      1996
                                                     ----      ----      ----
                                                      (dollars in thousands)
   
 Cash provided by operating activities........    $ 75,535  $ 71,589  $ 67,532
    Working capital...........................    $168,708  $122,181  $118,850
    Current ratio.............................      2.30:1    2.39:1    2.53:1
    Debt to equity ratio......................       .48:1     .22:1     .28:1

      Cash provided by operating  activities,  as presented on the  consolidated
statements of cash flows, increased in 1998 principally as a result of earnings,
noncash charges,  and an increase in accounts  payable and accrued  liabilities,
offset by increases in merchandise inventories, receivables and prepaid expenses
and other current assets.

==============================================================================
<PAGE>

      On June 30,  1998,  the Company  entered  into a new  $150,000,000  senior
secured  revolving  credit facility (the "Credit  Facility") with a syndicate of
lenders.  This facility replaced the Company's  then-existing  $122,000,000 bank
credit  agreement that was scheduled to expire in July 1998 and also resulted in
the non-renewal by the Company's  sourcing  division of its  $50,000,000  credit
facility and in the  non-renewal  by AnnTaylor  Funding,  Inc. of a  $40,000,000
accounts receivable facility. The Credit Facility is used by the Company for the
issuance of  commercial  and standby  letters of credit and to provide funds for
other general corporate purposes.

      Loans  outstanding  under the Credit  Facility  at any time may not exceed
$50,000,000.  The Company did not make any borrowings  under the loan provisions
of the Credit Facility  during Fiscal 1998, and there were no loans  outstanding
at fiscal year end.  The  outstanding  loan balance is required to be reduced to
zero for the thirty-day  period  commencing  January 1 each year. This cleandown
period was achieved for January 1999. Maximum availability for loans and letters
of credit  under the Credit  Facility is governed by a monthly  borrowing  base,
determined  by the  application  of  specified  advance  rates  against  certain
eligible  assets.  Based on this  calculation,  the maximum amount available for
loans and  letters of credit  under the Credit  Facility at January 30, 1999 was
approximately $131,054,000. Commercial and standby letters of credit outstanding
under the Credit Facility at January 30, 1999 were approximately $65,763,000.

      Amounts  outstanding  under the Credit  Facility  bear  interest at a rate
equal to, at the  Company's  option,  the lead  lender's Base Rate or Eurodollar
Rate,  plus a  margin  ranging  from  0.25% to 1.00%  and from  1.25% to  2.00%,
respectively.  In  addition,  the  Company  is  required  to pay the  lenders  a
quarterly  commitment fee on the unused  revolving loan  commitment  amount at a
rate ranging from 0.375% to 0.5% per annum. Fees for outstanding  commercial and
standby  letters  of credit  range  from  0.625% to 1.0% and from 1.25% to 2.0%,
respectively.

     The Credit  Facility  contains  financial  and other  covenants,  including
limitations  on  indebtedness,  liens,  investments  and  capital  expenditures,
restrictions  on dividends or other  distributions  to ATSC's  stockholders  and
maintenance of certain financial ratios including specified levels of net worth.
For Fiscal 1998, the capital expenditure limit was $52,000,000. For Fiscal 1999,
capital expenditures are limited to a maximum of $55,000,000.

     The  lenders  have been  granted a pledge of the  common  stock of ATSC and
certain of its subsidiaries,  and a security interest in substantially all other
tangible and  intangible  assets,  including  accounts  receivable,  trademarks,
inventory, store furniture and fixtures, of the Company and its subsidiaries, as
collateral for the Company's obligations under the Credit Facility.

      The Credit  Facility  matures on June 30, 2000 and  includes an  automatic
one-year extension,  contingent upon the satisfaction of certain conditions.  In
addition,  the commitments  under the Credit Facility  terminate on February 16,
2000 unless the Company's outstanding 8 3/4% Subordinated Notes due 2000 (the "8
3/4%  Notes")  are  refinanced  on or prior to such  date with the  proceeds  of
subordinated  debt or  capital  stock,  the  terms and  conditions  of which are
reasonably satisfactory to the Requisite Lenders under the Credit Facility.

      In April  and May of 1996,  ATSC  completed  the sale of an  aggregate  of
$100,625,000 of preferred securities issued by its financing vehicle,  AnnTaylor
Finance Trust. The preferred securities have a liquidation preference of $50 per
security and are convertible at the option of the holders thereof into shares of
common  stock of ATSC at a  conversion  rate of 2.545 shares of common stock
for each preferred  security.  A total of 2,012,500  preferred  securities  were
issued,  and are  convertible  into an aggregate  of 5,121,812  shares of common
stock,  representing  approximately 16% of ATSC's outstanding common stock as of
January 30, 1999.  ATSC received net proceeds of $95,984,000 in connection  with
the  sale  of  the  preferred  securities  and  applied  $94,000,000  to  reduce
outstanding  borrowings  under  the  Company's  then-existing  revolving  credit
facility.

      The  Company  and its  wholly  owned  subsidiary,  AnnTaylor  Distribution
Services, Inc., are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's  distribution  center land and
building in Louisville,  Kentucky.  The mortgage loan bears interest at 7.5% and
is payable in monthly  installments  of  approximately  $130,000.  The  mortgage
balance at January 30, 1999 was $5,157,000.
===============================================================================
<PAGE>

      The Company's capital expenditures totaled $45,131,000,  $22,945,000,  and
$16,107,000 in Fiscal 1998, Fiscal 1997 and Fiscal 1996,  respectively.  Capital
expenditures  were  primarily  attributable  to the Company's  store  expansion,
renovation,  and refurbishment  programs,  as well as the investment the Company
made in certain information systems and, in Fiscal 1998, the Company's corporate
offices.  The Company  expects its total  capital  expenditure  requirements  in
Fiscal 1999 will be approximately  $50,000,000,  including capital for new store
construction  for a planned square  footage  increase of  approximately  275,000
square feet, or 13.5%,  as well as capital to support  continued  investments in
information  systems.  The actual amount of the Company's  capital  expenditures
will depend in part on the number of stores opened, expanded and refurbished and
on the amount of construction allowances the Company receives from the landlords
of its new or expanded stores.

      Dividends and distributions from the Company to ATSC are restricted by the
Credit Facility and the Indenture for the 8 3/4% Notes.

      In order to finance its operations and capital  requirements,  the Company
expects to use internally  generated funds,  trade credit and funds available to
it under  the  Credit  Facility.  The  Company  believes  that  cash  flow  from
operations  and funds  available  under the Credit  Facility are  sufficient  to
enable  it to meet its  on-going  cash  needs  for its  business,  as  presently
conducted, for the foreseeable future.

     Effective  February 1, 1998,  the  Company  elected to change its method of
inventory  valuation  from the retail  method to the average  cost  method.  The
Company believes the average cost method is a preferable method for matching the
cost of merchandise with the revenues  generated.  The cumulative effect of this
accounting  change  on  February  1, 1998 was not  material,  and  therefore  no
disclosure is noted on the Consolidated  Statement of Operations.  The effect of
this  accounting  change on Fiscal 1998 net income was an increase of $1,272,000
on a diluted basis.  It is not possible to determine the effect of the change on
income in fiscal periods ending prior to February 1, 1998.

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities" ("SFAS No. 133"), which is effective for the Company for
the quarter  ended October 30, 1999.  SFAS No. 133  establishes  accounting  and
reporting  standards for derivatives and for hedging  activities.  Management is
currently  evaluating the impact of this standard and believes its adoption will
not affect the Company's consolidated financial position,  results of operations
or cash flows.

      In March 1998,  the American  Institute of  Certified  Public  Accountants
issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of Computer
Software  Developed or Obtained for  Internal  Use," which is effective  for the
Company for fiscal years  beginning  after December 15, 1998. The application of
SOP  98-1  is  not  anticipated  to  have a  material  impact  on the  Company's
consolidated financial statements.


YEAR 2000 STATUS

      Many computer systems use only two digits to identify a year (for example,
"99" is used for the year "1999").  As a result,  these systems may be unable to
process  accurately dates later than December 31, 1999, since they may recognize
"00" as the year  "1900",  instead  of the year  "2000".  This  anomaly is often
referred to as the "Year 2000  compliance"  issue.  Since 1997,  the Company has
been  executing  a plan to  remediate  or replace  affected  systems on a timely
basis.   Equipment  and  other  non-information   technology  systems  that  use
microchips or other embedded technology, such as certain conveyor systems at the
Company's  distribution  center,  are also  covered by the  Company's  Year 2000
compliance project.

      The Company's  Year 2000  compliance  project  includes  four phases:  (1)
evaluation  of the Company's  owned or leased  systems and equipment to identify
potential Year 2000 compliance issues; (2) remediation or replacement of Company
systems and equipment  determined to be non-compliant (and testing of remediated
systems before  returning them to production);  (3) inquiry  regarding Year 2000
readiness  of material  business  partners  and other third  parties on whom the
Company's business is dependent; and (4) development of contingency plans, where
feasible, to address potential third party non-compliance or failure of material
Company systems.
==============================================================================
<PAGE>

      The initial phase of the Company's  Year 2000  compliance  project was the
evaluation of all software,  hardware and equipment owned, leased or licensed by
the Company,  and  identification of those systems and equipment  requiring Year
2000 remediation. This analysis was completed during Fiscal 1998.

      All computer  hardware in the Company's U.S. home offices and distribution
center that was not Year 2000 compliant has been remediated or replaced, and all
computer  hardware  in the  Company's  retail  stores  that  was not  Year  2000
compliant  will be  remediated  or replaced  by the end of the first  quarter of
Fiscal  1999.  Of those  software  systems  that were  found not to be Year 2000
compliant,  approximately  90% of all material  systems have been  remediated or
replaced  by Year 2000  compliant  software.  The Company  anticipates  that all
remaining  material  systems,  including  certain  operating systems used in the
Company's  distribution center, will be remediated or replaced by the end of the
second  quarter of Fiscal 1999.  Hardware and software  unique to the  Company's
sourcing  offices  located  outside  the  United  States  are  scheduled  to  be
remediated or replaced by the end of the second quarter of Fiscal 1999.

      The  Company  engaged a  consultant  to assist  in the  evaluation  of the
equipment  used  in the  Company's  distribution  center  (other  than  computer
software and  hardware,  which were  included in the  analysis  and  remediation
efforts  described  above).  This equipment  evaluation has been completed,  and
remediation or replacement of distribution center equipment found not to be Year
2000  compliant is scheduled to be completed by the end of the second quarter of
Fiscal 1999.

      Over  the  past few  years,  the  Company's  strategic  plan has  included
significant  investment in and  modernization of many of the Company's  computer
systems. As a result, much of the costs and timing for replacement of certain of
the Company's systems that were not Year 2000 compliant were already anticipated
as part of the Company's planned  information  systems spending and did not need
to be accelerated as a result of the Company's Year 2000 project. The total cost
to the Company specifically  associated with addressing the Year 2000 issue with
respect to its systems and equipment has not been, and is not anticipated to be,
material to the  Company's  financial  position or results of  operations in any
given year. The Company estimates that the total additional cost of managing its
Year 2000 project,  remediating  existing  systems and  replacing  non-compliant
systems, is approximately $2.1 million, of which approximately $1.1 million will
be expensed as incurred  (including  $965,000  expensed in Fiscal 1998),  and $1
million which will be  capitalized  (including  $855,000  capitalized  in Fiscal
1998).

      Although  the  Company  believes  its Year 2000  compliance  efforts  with
respect to its systems will be successful,  any failure or delay could result in
actual costs and timing differing  materially from that presently  contemplated,
and in a disruption of business. The Company is developing a contingency plan to
permit its primary  operations  to continue if the Company's  modifications  and
conversions of its systems are not successfully completed on a timely basis, but
the foregoing cost estimates do not take into account any  expenditures  arising
out of a response to any such contingencies that materialize. The Company's cost
estimates  also do not include time or costs that may be incurred as a result of
third parties' failure to become Year 2000 compliant on a timely basis.

      The Company is  communicating  with its business  partners,  including key
manufacturers,  vendors,  banks  and  other  third  parties  with  whom  it does
business,  to obtain information regarding their state of readiness with respect
to the Year 2000 issue.  Failure of third parties to remediate  Year 2000 issues
affecting  their  respective  businesses  on a  timely  basis,  or to  implement
contingency  plans  sufficient  to permit  uninterrupted  continuation  of their
businesses  in the event of a failure  of their  systems,  could have a material
adverse effect on the Company's  business and results of operations.  Assessment
of third party Year 2000 readiness is expected to be substantially  completed by
the end of the first  quarter of Fiscal  1999.  The Company  will not be able to
determine its most reasonably  likely worst case scenarios  until  assessment of
third parties' Year 2000 compliance is completed.
===============================================================================
<PAGE>

      The Company's Year 2000 compliance project also includes  development of a
contingency plan designed to support critical  business  operations in the event
of the  occurrence of systems  failures or the  occurrence of reasonably  likely
worst case scenarios.  The Company  anticipates that  contingency  plans will be
substantially developed by the end of the second quarter of Fiscal 1999.

      The  Company  may  not be  able  to  compensate  adequately  for  business
interruption caused by certain third parties. Potential risks include suspension
or significant  curtailment of service or significant delays by banks, utilities
or common carriers, or at U.S. ports of entry. The Company's business also could
be  materially  adversely  affected by the failure of  governmental  agencies to
address Year 2000 issues  affecting the  Company's  operations.  For example,  a
significant  amount of the Company's  merchandise  is  manufactured  outside the
United  States,  and the  Company  is  dependent  upon the  issuance  by foreign
governmental  agencies of export visas for, and upon the U.S. Customs Service to
process  and permit  entry  into the United  States  of,  such  merchandise.  If
failures  in  government  systems  result  in the  suspension  or delay of these
agencies'  services,  the Company could experience  significant  interruption or
delays in its inventory flow.

      The costs and timing for  management's  completion of Year 2000 compliance
modification  and testing  processes are based on  management's  best estimates,
which were derived utilizing  numerous  assumptions of future events,  including
the continued  availability of certain resources,  the success of third parties'
Year 2000 compliance  efforts and other factors.  There can be no assurance that
these  assumptions  will be  realized  or that  actual  results  will  not  vary
materially.


STATEMENT REGARDING FORWARD LOOKING DISCLOSURES

      Sections  of this  Annual  Report on Form 10-K,  including  the  preceding
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations,  contain various forward looking  statements,  within the meaning of
the  Private  Securities  Litigation  Reform  Act of 1995,  with  respect to the
financial condition, results of operations and business of the Company. Examples
of  forward-looking  statements  are  statements  that use the  words  "expect",
"anticipate",  "plan", "intend",  "project",  "believe" and similar expressions.
These forward looking statements involve certain risks and uncertainties, and no
assurance can be given that any of such matters will be realized. Actual results
may differ materially from those contemplated by such forward looking statements
as a result of, among other things, failure by the Company to predict accurately
customer fashion preferences; a decline in the demand for merchandise offered by
the  Company;  competitive  influences;  changes  in levels of store  traffic or
consumer  spending  habits;  effectiveness  of the Company's brand awareness and
marketing  programs;  lack of sufficient  customer  acceptance of the Ann Taylor
Loft concept in the  moderate-priced  women's apparel market;  general  economic
conditions  that are less  favorable  than  expected or a downturn in the retail
industry;  the  inability  of the Company to locate new store sites or negotiate
favorable  lease terms for  additional  stores or for the  expansion of existing
stores;  a significant  change in the regulatory  environment  applicable to the
Company's  business;  an increase in the rate of import  duties or export quotas
with respect to the Company's merchandise; financial or political instability in
any of the countries in which the Company's goods are manufactured; any material
adverse  effects of the Year 2000 issue on the  business of the Company or third
parties  with which the  Company  does  business;  or an adverse  outcome of the
litigation  referred to in "Legal  Proceedings"  that  materially  and adversely
affects the Company's financial condition.  The Company assumes no obligation to
update or revise any such  forward  looking  statements,  which speak only as of
their date,  even if  experience  or future events or changes make it clear that
any projected  financial or operating  results  implied by such  forward-looking
statements will not be realized.



===============================================================================

<PAGE>


ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      The Company mantains the majority of its cash and cash equivalents in
financial instruments with original maturities of three months or less.  These
financial instruments are subject to interest rate risk and will decline in 
value if interest rates increase.  Due to the short duration of the financial
instruments, a change of 100 basis points in interest rates would not have a
material effect on the Company's financial condition.

      The Company's outstanding long-term debt as of January 31, 1999 bears
interest at fixed rates; therefore, the Company's results of operations would 
only be affected by interest rate changes to the extent that fluctuating rate
loans are outstanding under the Credit Facility.  As of January 31, 1999, the
Company has no such amounts outstanding.  Future borrowings would be affected by
interest rate changes; however, the Company does not believe that a change of
100 basis points in interest rates would have a material effect on the Company's
financial condition.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The  following  consolidated  financial  statements of the Company for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997 are included
as a part of this Report (See Item 14):

      Consolidated  Statements of Operations  for the fiscal years ended January
         30, 1999, January 31, 1998 and February 1, 1997.

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

      Consolidated  Statements  of Cash Flows for the fiscal years ended January
         30, 1999, January 31, 1998 and February 1, 1997.

      Notes to Consolidated Financial Statements.



ITEM 9. CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURES

       None.

==============================================================================
<PAGE>



                                     PART IV




ITEM 14.   EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
           FORM 8-K

   (a)   List of documents filed as part of this Annual Report:
         The  following  consolidated  financial  statements of the
         Company and the independent  auditors' report are included
         on  pages  18  through  36 and are  filed  as part of this
         Annual Report:

         Consolidated  Statements  of  Operations  for  the  fiscal
         years  ended  January  30,  1999,  January  31,  1998  and
         February  1,  1997;  Consolidated  Balance  Sheets  as  of
         January  30,  1999  and  January  31,  1998;  Consolidated
         Statements  of Cash  Flows  for  the  fiscal  years  ended
         January 30, 1999,  January 31, 1998, and February 1, 1997;
         Notes to Consolidated  Financial  Statements;  Independent
         Auditors' Report.

   (b)   Reports on Form 8-K
         
         The  Company  filed a report  with  the  Commission  on Form 8-K  dated
         November  9,  1998  with  respect  to  the  dismissal  of  the  amended
         complaint,  filed in April 1998, of the purported  class action lawsuit
         against ATSC,  Ann Taylor,  certain  officers and directors of ATSC and
         Ann Taylor, ML&Co. and certain affiliates of ML&Co. The Company filed a
         report with the  Commission  on Form 8-K dated  December  17, 1998 with
         respect  to the  plaintiffs'  filing  of a  notice  of  appeal  of such
         dismissal.

   (c)   Exhibits
         
         The exhibits listed below are filed as a part of this Annual Report.


      EXHIBIT NUMBER
      --------------

   3.1     Certificate of Incorporation of the Company,  as amended.  
              Incorporated by reference  to Exhibit  3.3 to the Registration
              Statement of ATSC and Ann Taylor filed on May 3, 1989 
              (Registration No. 33-28522).

   3.2     By-Laws of the Company.  Incorporated  by reference to Exhibit 3.4 to
              the  Registration  Statement  of ATSC and Ann Taylor  filed on 
              May 3, 1989 (Registration No. 33-28522).

   4.1     Indenture,  dated as of June 15,  1993,  between Ann Taylor and Fleet
              Bank, N.A., as Trustee,  including the form of Subordinated  Note
              due 2000.  Incorporated by reference to Exhibit 4.1 to the Current
              Report on Form 8-K of Ann Taylor filed on July 7, 1993.

   4.1.1   Instrument of Resignation,  Appointment  and Acceptance,  dated as of
              December 1, 1995,  among Ann Taylor,  Fleet Bank,  N.A., as 
              Resigning Trustee,  and Norwest Bank  Minnesota,  N.A., the 
              Successor  Trustee.  Incorporated  by reference to Exhibit  4.1.1 
              to the Annual  Report on Form 10-K of the Company filed on 
              April 8, 1996.

   10.1    1989 Stock Option Plan. Incorporated by reference to Exhibit 10.18 to
              the  Registration  Statement  of ATSC and Ann  Taylor  filed on 
              May 3, 1989 (Registration No. 33-28522).

   10.1.1  Amendment  to 1989 Stock Option  Plan.  Incorporated  by reference to
              Exhibit  10.15.1  to the  Annual  Report on Form 10-K of the
              Company filed on April 30, 1993.

   10.2    Lease,  dated as of March 17, 1989, between Carven Associates and Ann
              Taylor concerning the West 57th Street headquarters.  Incorporated
              by  reference to Exhibit 10.21 to the Registration  Statement of 
              ATSC and Ann Taylor filed on May 3, 1989 (Registration No.
              33-28522).




===============================================================================
<PAGE>






EXHIBIT NUMBER
--------------


   10.2.1  First  Amendment to Lease,  dated as of November  14,  1990,  between
              Carven  Associates  and Ann  Taylor.  Incorporated  by  reference
              to Exhibit 10.17.1 to the Registration  Statement of ATSC filed on
              April 11, 1991 (Registration No. 33-39905).

   10.2.2  Second  Amendment to Lease,  dated as of February  28, 1993,  between
              Carven  Associates  and Ann  Taylor.  Incorporated  by  reference
              to Exhibit  10.17.2 to the  Annual  Report on Form 10-K of ATSC 
              filed on April 29, 1993.

   10.2.3  Extension and Amendment to Lease dated as of October 1, 1993, between
              Carven  Associates  and Ann  Taylor.  Incorporated  by  reference
              to Exhibit  10.11 to the Form 10-Q of Ann Taylor for the  Quarter
              ended October 30, 1993 filed on November 26, 1993.

   10.2.4  Modification  of Amendment and Extension to Lease,  dated as of April
              14, 1994 between Carven  Associates and Ann Taylor.  Incorporated
              by reference  to Exhibit  10.15.4  to the Annual  Report on Form
              10-K of ATSC filed on April 28, 1995.

   10.2.5  Fifth Amendment to Lease,  dated as of March 14, 1995, between Carven
              Associates  and Ann  Taylor.  Incorporated  by  reference  to 
              Exhibit 10.15.5 to the Annual  Report on Form 10-K of ATSC filed 
              on April 28, 1995.

   10.2.6  Sixth  Amendment  to Lease,  dated as of  January  5,  1996,  between
              Pacific  Metropolitan  Corporation  and Ann Taylor.  Incorporated
              by reference to Exhibit 10.8.6 to the Annual Report on Form 10-K 
              of ATSC filed on April 30, 1998.

   10.2.7  Seventh Amendment to Lease, dated as of June 5, 1996, between Pacific
              Metropolitan Corporation and Ann Taylor. Incorporated by reference
              to Exhibit  10.8.7 to the  Annual  Report on Form 10-K of ATSC  
              filed on April 30, 1998.

   10.2.8  Eighth Amendment to Lease,  undated,  between  Pacific  Metropolitan
              Corporation and Ann Taylor. Incorporated by reference to Exhibit 
              10.8.8 to the Annual Report on Form 10-K of ATSC filed on 
              April 30, 1998.

   10.2.9  Ninth Amendment to Lease, dated as of May 13, 1997,  between  Pacific
              Metropolitan  Corporation and Ann Taylor.  Incorporated by 
              reference to Exhibit 10.8.9 to the Annual Report on Form 10-K of 
              ATSC filed on April 30, 1998.

   10.2.10 Tenth Amendment to Lease, dated as of May 21, 1997,  between  Pacific
              Metropolitan  Corporation and Ann Taylor.  Incorporated by 
              reference to Exhibit 10.8.10  to the  Annual  Report on Form 10-K
              of ATSC filed on April 30, 1998.

   10.2.11 Eleventh Amendment to Lease, dated as of May 15, 1998, between 
              Pacific Metropolitan  Corporation and Ann Taylor.  Incorporated by
              reference to Exhibit 10.3.1 to the Annual Report on Form 10-K of 
              ATSC filed on March 26, 1999.

   10.3    Tax Sharing  Agreement,  dated as of July 13, 1989,  between ATSC and
             Ann Taylor.  Incorporated  by reference to Exhibit 10.24 to 
             Amendment No. 2 to the  Registration  Statement of ATSC and 
             Ann Taylor filed on July 13, 1989 (Registration No. 33-28522).

   10.4    Employment  Agreement  dated as of February 1, 1994  between ATSC and
              Sally Frame Kasaks.  Incorporated by reference to Exhibit 10.8 to
              the Form 10-Q of ATSC for the  Quarter  ended  October  29, 1994
              filed on December 9, 1994.

   10.5    Employment  Agreement  dated  February  16, 1996  between ATSC and J.
              Patrick  Spainhour.  Incorporated by reference to Exhibit 10.4 to
              the Annual Report on Form 10-K of ATSC filed on April 8, 1996.



===============================================================================






EXHIBIT NUMBER
--------------


10.5.1  Amendment to the Employment Agreement, dated August 23, 1996, between
           ATSC and J. Patrick  Spainhour.  Incorporated by reference to Exhibit
           10.11.1  to the  Annual  Report on Form 10-K of ATSC  filed on May 1,
           1997.

10.6    Employment  Agreement  dated  November  25,  1996  between  ATSC  and
           Patricia  DeRosa.  Incorporated  by reference to Exhibit 10.3 to Form
           10-Q of ATSC for the Quarter ended November 2, 1996 filed on December
           17, 1996.

10.7    Employment  Agreement dated September 20, 1996 between Ann Taylor and
           Dwight F. Meyer.  Incorporated  by  reference  to Exhibit 10.4 to the
           Form 10-Q of Ann Taylor for the Quarter ended  November 2, 1996 filed
           on December 17, 1996.

10.8    Separation Agreement dated July 15, 1997 between Ann Taylor and Barry
           Shapiro.  Incorporated  by reference  to Exhibit  10.15 to the Annual
           Report on Form 10-K of ATSC filed on April 30, 1998.

10.9    The AnnTaylor  Stores  Corporation  1992 Stock Option and  Restricted
           Stock and Unit Award Plan,  Amended and  Restated as of February  23,
           1994 (the "1992 Option Plan").  Incorporated  by reference to Exhibit
           10.15 to the Annual Report on Form 10-K of ATSC filed on May 1, 1997.

10.9.1  Amendment to the AnnTaylor  Stores  Corporation  Amended and Restated
           1992  Stock  Option and  Restricted  Stock and Unit  Award  Plan,  as
           approved by stockholders on June 18, 1997.  Incorporated by reference
           to  Exhibit  10.15.1 to the Form 10-Q of ATSC for the  Quarter  Ended
           August 2, 1997 filed on September 12, 1997.

10.9.2  Amendment to the AnnTaylor Stores Corporation  Amended and Restricted
           1992 Stock Option and  Restricted  Stock and Unit Award Plan dated as
           of January 16, 1998.  Incorporated by reference to Exhibit 10 of Form
           8-K of ATSC filed on March 12, 1998.

10.9.3  Amendment to the AnnTaylor  Stores  Corporation  Amended and Restated
           1992 Stock Option and  Restricted  Stock and Unit Award Plan dated as
           of May 2, 1998.  Incorporated  by reference to Exhibit 10.16.3 to the
           Form 10-Q of ATSC for the  Quarter  ended April 2, 1998 filed on June
           16, 1998.

10.10   AnnTaylor  Stores   Corporation   Amended  and  Restated   Management
           Performance  Compensation  Plan, as approved by  stockholders on June
           18, 1997. Incorporated by reference to Exhibit 10.16 to the Form 10-Q
           of ATSC for the Quarter  Ended August 2, 1997 filed on September  12,
           1997.


10.10.1 Amendment to the AnnTaylor  Stores  Corporation  Amended and Restated
           Management Performance  Compensation Plan dated as of March 12, 1998.
           Incorporated  by reference to Exhibit 10.17.1 to the Annual Report on
           Form 10-K of ATSC filed on April 30, 1998.

10.11   Associate  Stock Purchase Plan.  Incorporated  by reference
           to  Exhibit  10.31  to the  Form  10-Q of  ATSC  for the
           Quarter  Ended  October 31,  1992 filed on December  15,
           1992.


10.12   AnnTaylor Stores  Corporation  Deferred  Compensation Plan.
           Incorporated  by  reference  to  Exhibit  10.33  to  the
           Annual  Report on Form  10-K of ATSC  filed on April 28,
           1995.

10.12.1 Amendment to the AnnTaylor Stores Corporation  Deferred  Compensation
           Plan as  approved  by the  Board of  Directors  on August  11,  1995.
           Incorporated  by  reference  to Exhibit  10.33.11 to the Form 10-Q of
           ATSC for the Quarter Ended July 29, 1995 filed on September 11, 1995.


===============================================================================
<PAGE>




EXHIBIT NUMBER
--------------



10.13   Mortgage,  Assignment  of Rents and Leases,  Security  Agreement  and
           Fixture  Financing   Statement  dated  November  20,  1995,   between
           AnnTaylor  Distribution  Services,  Inc., as  Mortgagor,  and General
           Electric Capital  Assurance  Company,  as Mortgagee.  Incorporated by
           reference  to  Exhibit  10.34 to the Form 10-Q of Ann  Taylor for the
           Quarter ended October 28, 1995 filed on December 8, 1995.

10.14   Promissory Note dated November 20, 1995 from Ann Taylor and AnnTaylor
           Distribution  Services,  Inc.,  collectively as Borrower,  to General
           Electric  Capital  Assurance  Company,  as  Lender.  Incorporated  by
           reference  to  Exhibit  10.35 to the Form 10-Q of Ann  Taylor for the
           Quarter ended October 28, 1995 filed on December 8, 1995.

10.15   Stock and Asset Purchase Agreement,  dated as of June 7, 1996, by and
           among  ATSC,  Ann  Taylor,  Cygne and  Cygne  Group  (F.E.)  Limited.
           Incorporated  by reference to Exhibit 2 to the  Registrants'  Current
           Report on Form 8-K filed on June 10, 1996.

10.15.1 Amendment to Stock and Asset Purchase  Agreement,  dated as of August
           27, 1996, by and among ATSC, Ann Taylor, Cygne and Cygne Group (F.E.)
           Limited.  Incorporated by reference to Exhibit 3 to the  Registrants'
           Current Report on Form 8-K filed on August 30, 1996.

10.15.2 Stockholders  Agreement,  dated as of September 20, 1996, among ATSC,
           Cygne and Cygne Group (F.E.)  Limited,  a Hong Kong  corporation  and
           wholly  owned  subsidiary  of Cygne.  Incorporated  by  reference  to
           Exhibit  10.26.2 to the  Annual  Report on Form 10-K of ATSC filed on
           May 1, 1997.

10.15.3 Consulting  Agreement,  dated as of September  20, 1996, by and between
           ATSC, Cygne and Mr. Irving Benson. Incorporated by reference to 
           Exhibit 10.26.4 to the Annual Report on Form 10-K of ATSC filed on 
           May 1, 1997.

10.16   Commitment Letter dated as of May 7, 1998 among the Company,  Bank of
           America National Trust and Savings Association, BancAmerica Robertson
           Stephens,  Citicorp USA and CoreStates  Bank,  N.A.  Incorporated  by
           reference  to Exhibit  10.27 to the Form 10-Q of ATSC for the Quarter
           Ended May 2, 1998 filed on June 16, 1998.

10.17   Credit Agreement,  dated as of June 30, 1998 among the Company,  Bank
           of America, Citicorp USA and First Union National Bank, as Co-Agents,
           the  financial   institutions   from  time  to  time  party  thereto,
           BancAmerica Robertson Stephens, as Arranger,  and Bank of America, as
           Administrative  Agent.  Incorporated by reference to Exhibit 10.28 to
           the Form 10-Q of ATSC for the Quarter  Ended  August 1, 1998 filed on
           September 14, 1998.

10.17.1 Trademark Security Agreement,  dated as of June 30, 1998, made by Ann
           Taylor  in  favor  of  Bank  of  America,  as  Administrative  Agent.
           Incorporated by reference to Exhibit 10.28.1 to the Form 10-Q of ATSC
           for the Quarter Ended August 1, 1998 filed on September 14, 1998.

10.17.2 Guaranty,  dated as of June 30, 1998, made by the Company in favor of
           Bank of America, as Administrative  Agent.  Incorporated by reference
           to  Exhibit  10.28.2 to the Form 10-Q of ATSC for the  Quarter  Ended
           August 1, 1998 filed on September 14, 1998.

10.17.3 Security and Pledge  Agreement,  dated as of June 30,  1998,  made by
           ATSC  in  favor  of  Bank  of  America,   as  Administrative   Agent.
           Incorporated by reference to Exhibit 10.28.3 to the Form 10-Q of ATSC
           for the Quarter Ended August 1, 1998 filed on September 14, 1998.


==============================================================================
<PAGE>



EXHIBIT NUMBER
--------------



10.17.4 Security  and  Pledge  Agreement,  dated as of June 30,  1998 made by
           AnnTaylor  in  favor of Bank of  America,  as  Administrative  Agent.
           Incorporated by reference to Exhibit 10.28.4 to the Form 10-Q of ATSC
           for the Quarter Ended August 1, 1998 filed on September 14, 1998.

10.17.5 Subsidiary  Guaranty,  dated as of June 30,  1998  made by  AnnTaylor
           Distribution  Services in favor of Bank of America, as Administrative
           Agent.  Incorporated by reference to Exhibit 10.28.5 to the Form 10-Q
           of ATSC for the Quarter  Ended August 1, 1998 filed on September  14,
           1998.


10.18   AnnTaylor Stores  Corporation  Long-Term Cash Incentive  Compensation
           Plan, as approved by stockholders  on June 17, 1998.  Incorporated by
           reference to Exhibit A to the Proxy Statement dated May 1, 1998 filed
           on May 6, 1998.

18      Preferability letter relating to the change in accounting  principle.
           Incorporated  by reference to Exhibit 18 to the Form 10-Q of ATSC for
           the Quarter Ended May 2, 1998 filed on June 16, 1998.

27    Financial Data Schedule.


==============================================================================
<PAGE>

                            SIGNATURES





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

                                        ANNTAYLOR, INC.

                                        By:    /s/ J. Patrick Spainhour 
                                               ------------------------ 
                                                   J. Patrick Spainhour
                                                    Chairman and Chief
                                                    Executive Officer

Date:  March 26, 1999

    PURSUANT TO THE  REQUIREMENTS  OF THE SECURITIES  EXCHANGE ACT OF 1934, THIS
REPORT  HAS  BEEN  SIGNED  BELOW  BY THE  FOLLOWING  PERSONS  ON  BEHALF  OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.


/s/ J. Patrick Spainhour      Chairman and Chief Executive     March  26, 1999
-------------------------         Officer and Director         ---------------
    J. Patrick Spainhour          



   /s/ Patricia DeRosa        President  and  Chief            March 26, 1999
--------------------------        Operating Officer            --------------
       Patricia DeRosa            and Director   



   /s/ Walter J. Parks        Senior Vice President -          March 26, 1999
--------------------------        Chief Financial Officer      --------------
       Walter J. Parks            and Treasurer



   /s/ James M. Smith         Vice President and Controller    March 26, 1999
-------------------------         Principal Accounting Officer --------------
       James M. Smith   



  /s/ Gerald S. Armstrong     Director                         March 26, 1999
-------------------------                                      --------------
      Gerald S. Armstrong



 /s/ James J. Burke, Jr.      Director                         March 26, 1999
-----------------------                                        --------------
     James J. Burke, Jr.



/s/ Wesley E. Cantrell        Director                         March 26, 1999
----------------------                                         --------------
    Wesley E. Cantrell



/s/ Robert C. Grayson         Director                         March 26, 1999   
-----------------------                                        --------------
    Robert C. Grayson



/s/ Ronald W. Hovsepian       Director                         March 26, 1999   
-----------------------                                        --------------
    Ronald W. Hovsepian



/s/ Rochelle B. Lazarus       Director                         March 26, 1999   
-----------------------                                        --------------
    Rochelle B. Lazarus



/s/ Hanne M. Merriman         Director                         March 26, 1999   
-----------------------                                        --------------
    Hanne M. Merriman



===============================================================================
<PAGE>


                         ANNTAYLOR , INC.
            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




                                                          Page No.

Independent Auditors' Report.............................    19

Consolidated Financial Statements:

     Consolidated  Statements of  Operations  for the 
       fiscal years ended January 30, 1999, 
       January 31, 1998 and February 1, 1997.............    20

     Consolidated Balance Sheets as of January 30, 
       1999 and January 31, 1998.........................    21

     Consolidated  Statements  of Cash Flows for the 
       fiscal years ended  January 30, 1999, 
       January 31, 1998 and February 1, 1997.............    22

     Notes to Consolidated Financial Statements..........    23

===============================================================================
<PAGE>

                   INDEPENDENT AUDITORS' REPORT




To the Stockholder of ANNTAYLOR, INC.:


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

      In our opinion, such consolidated  financial statements present fairly, in
all  material   respects,   the  financial  position  of  the  Company  and  its
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.

      As  discussed  in Note 1 to the  consolidated  financial  statements,  the
Company  changed its method of  inventory  valuation  to the average cost method
from the retail method.




DELOITTE & TOUCHE LLP


New York, New York
March 8, 1999

==============================================================================
<PAGE>


                           ANNTAYLOR, INC.
                CONSOLIDATED STATEMENTS OF OPERATIONS
  For the Fiscal Years Ended January 30, 1999, January 31, 1998 and
                           February 1, 1997






                                           Fiscal Years Ended     
                                  -------------------------------------
                                  January 30,   January 31, February 1, 
                                      1999         1998         1997
                                      ----         ----         ----

                                              (in thousands)


Net sales..........................$911,939     $781,028    $798,117
Cost of sales...................... 455,724      411,756     443,443
                                    -------      -------     -------
Gross profit....................... 456,215      369,272     354,674
Selling, general and 
  administrative expenses.......... 349,955      308,232     291,027
Studio shoe stores closing expense.    ---          ---       3,600
Employment contract separation 
  expense..........................    ---          ---       3,500
Retirement of assets...............  3,633          ---         ---
Amortization of goodwill........... 11,040       11,040      10,086
                                    ------       ------      ------

Operating income................... 91,587       50,000      46,461
Interest expense................... 18,117       19,989      24,416
Other expense, net.................    567          548         403
                                    ------        -----       -----

Income before income taxes and 
  extraordinary loss............... 72,903       29,463      21,642
Income tax provision............... 33,579       17,466      12,975
                                    ------       ------      ------

Income before extraordinary loss... 39,324       11,997      8,667
Extraordinary loss (net of 
  income tax benefit of
  $130,000)........................    ---         173         ---
                                    ------       -----       -----

    Net income.....................$39,324    $ 11,824    $  8,667
                                    ======      ======       =====







    See accompanying notes to consolidated financial statements.

==============================================================================
<PAGE>


                          ANNTAYLOR, INC.
                    CONSOLIDATED BALANCE SHEETS
               January 30, 1999 and January 31, 1998







                                             January 30, January 31,
                                                1999       1998 
                                                ----       ---- 
                       ASSETS                    (in thousands)
Current assets
  Cash and cash equivalents.................$  67,031    $31,369
  Accounts receivable, net..................   71,049     60,211
  Merchandise inventories...................  136,748     97,234
  Prepaid expenses and other current assets.   23,637     21,291
                                              -------    -------
      Total current assets..................  298,465    210,105
Property and equipment, net.................  151,785    139,610
Goodwill, net...............................  319,699    330,739
Deferred financing costs, net...............    2,627      1,258
Other assets................................    2,841      1,949
                                              ------     -------
      Total assets..........................$ 775,417   $683,661
                                              =======    =======

        LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
  Accounts payable..........................$  65,419    $38,185
  Accrued salaries and bonus...............  . 17,132      5,848
  Accrued tenancy...........................    8,465      6,727
  Gift certificates redeemable..............    7,008      5,935
  Accrued expenses..........................   30,527     30,110
  Current portion of long-term debt.........    1,206      1,119
                                             --------    -------
      Total current liabilities............. 129,757      87,924
Long-term debt.............................. 204,576     105,157
Other liabilities...........................  12,386      10,082

Commitments and contingencies

Stockholder's equity
  Common stock, $1.00 par value; 
   1,000 shares authorized;
   1 share issued and outstanding...........       1          1
  Additional paid-in capital................ 354,762    445,886
  Retained earnings.........................  73,935     34,611
                                             -------    -------
      Total stockholder's equity............ 428,698    480,498
                                             -------    -------
      Total liabilities and stockholder's 
        equity                              $775,417    $683,661
                                            ========    ========





      See accompanying notes to consolidated financial statements.

==============================================================================
<PAGE>


                                 ANNTAYLOR, INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS
     For the Fiscal Years Ended January 30, 1999, January 31, 1998 and
                          February 1, 1997


                                                       Fiscal Years Ended  
                                                  -----------------------------
                                                  Jan. 30,   Jan. 31,    Feb. 1,
                                                     1999      1998       1997 
                                                     ----      ----       ---- 
                                                         (in thousands)
Operating activities:
   Net income..................................  $ 39,324   $ 11,824   $  8,667
   Adjustments to reconcile net income 
     to net cash provided by 
     operating activities:
       Extraordinary loss......................       ---        303       ---
       Equity earnings in CAT..................       ---        ---    (1,402)
       Provision for loss on 
          accounts receivable                       1,476      1,795     1,803
       Depreciation and amortization............   28,783     27,803    26,208
       Amortization of goodwill.................   11,040     11,040    10,086
       Amortization of deferred compensation....      465      1,065       191
       Non-cash interest........................    1,290      1,419     1,574
       Deferred income taxes....................    3,966     (2,687)     (985)
       Loss on disposal of property and 
         equipment..............................    4,175        248     3,209
       Change in assets and liabilities 
             net of effects from
             purchase of sourcing division:
             Decrease (increase) in receivables  (12,314)      1,599     4,987
             Decrease (increase) in merchandise 
                 inventories...................  (39,514)      3,003     9,342
             Decrease (increase) in prepaid 
                 expenses and
                 other current assets...........  (5,581)      1,894       247
             Decrease in other non-current 
                 assets and liabilities,
                 net............................     679       2,861       738
          Increase in accounts payable and 
                 accrued liabilities............  41,746       9,422     2,867
                                                  ------       -----     -----
   Net cash provided by operating activities....  75,535      71,589    67,532

Investing activities:
   Purchases of property and equipment.......... (45,131)    (22,945)  (16,107)
   Purchase of sourcing division................     ---        ---       (227)
                                                   -----     ------     ------
   Net cash used by investing activities........ (45,131)    (22,945)  (16,334)
                                                  ------      ------   -------
Financing activities:
   Repayments under revolving credit facility...       ---       ---  (101,000)
   Parent company contribution..................     9,036       869    96,194
   Repayment of term loan.......................       ---   (24,500)      ---
   Term loan prepayment penalty.................       ---      (184)      ---
   Payments of mortgage.........................    (1,119)     (416)     (266)
   Repayments under receivables facility........       ---    ------   (40,000)
   Payment of financing costs...................    (2,659)      (69)     (384)
                                                    ------    ------    ------ 
   Net cash provided by (used by) financing 
     activities.................................     5,258   (24,300)  (45,456)
                                                    ------    ------    ------ 
Net increase in cash............................    35,662    24,344     5,742
Cash, beginning of year.........................    31,369     7,025     1,283
                                                    ------    ------    ------
Cash, end of year...............................  $ 67,031  $ 31,369   $ 7,025
                                                    ======    ======    ======
Supplemental disclosures of cash flow information:
   Cash paid during the year for interest.......  $ 18,582  $ 19,251   $22,689
                                                    ======    ======   =======
   Cash paid during the year for income taxes...  $ 33,934  $ 17,220   $ 8,990
                                                    ======    ======   =======



    See accompanying notes to consolidated financial statements.

===============================================================================
<PAGE>

                          ANNTAYLOR, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Ann Taylor,  Inc. (the  "Company" or "Ann  Taylor") is a leading  national
specialty retailer of better quality women's apparel, shoes and accessories sold
principally under the Ann Taylor brand name.

      All of the  outstanding  capital  stock of the Company,  consisting of one
share of common stock is owned by AnnTaylor Stores Corporation ("ATSC").


Basis of Presentation

      The consolidated  financial statements include the accounts of the Company
and  its  subsidiaries.  All  intercompany  accounts  have  been  eliminated  in
consolidation.

      Certain Fiscal 1997 and 1996 amounts have been  reclassified to conform to
the Fiscal 1998 presentation.


FISCAL YEAR

      The Company follows the standard fiscal year of the retail industry, which
is a 52 or 53 week period  ending on the  Saturday  closest to January 31 of the
following calendar year. All fiscal years presented included 52 weeks.


FINANCE SERVICE CHARGE INCOME

      Income from  finance  service  charges  relating to customer  receivables,
which is deducted from selling, general and administrative expenses, amounted to
$8,422,000 for Fiscal 1998, $8,568,000 for Fiscal 1997 and $9,024,000 for Fiscal
1996.


MERCHANDISE INVENTORIES

      Merchandise inventories are stated at the lower of average cost or market.
Effective  February  1,  1998,  the  Company  elected  to change  its  method of
inventory  valuation  from the retail  method to the average  cost  method.  The
Company believes the average cost method is a preferable method for matching the
cost of merchandise with the revenues  generated.  The cumulative effect of this
accounting  change  on  February  1, 1998 was not  material,  and  therefore  no
disclosure is noted on the Consolidated  Statement of Operations.  The effect of
this accounting  change on Fiscal 1998 net income was an increase of $1,272,000.
It is not  possible  to  determine  the  effect  of the  change on income in any
previously reported fiscal years.


PROPERTY AND EQUIPMENT

      Property and equipment are recorded at cost. Depreciation and amortization
are computed on a  straight-line  basis over the  estimated  useful lives of the
assets (3 to 40 years) or, in the case of leasehold improvements, over the lives
of the respective leases, if shorter.


=============================================================================
<PAGE>



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



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


DEFERRED FINANCING COSTS

      Deferred  financing  costs are being  amortized  using the interest method
over the term of the related debt. Accumulated  amortization at January 30, 1999
and January 31, 1998 was $3,119,000 and $4,427,000, respectively.


GOODWILL

      Goodwill  relating to the 1989  acquisition of Ann Taylor by ATSC is being
amortized on a straight-line basis over 40 years.  Goodwill relating to the 1996
Sourcing  Acquisition (see Note 10) is being amortized on a straight-line  basis
over 25 years. Accumulated amortization at January 30, 1999 and January 31, 1998
was $98,891,000 and $87,851,000,  respectively.  On an annual basis, the Company
compares the carrying value of its goodwill to an estimate of the Company's fair
value to  evaluate  the  reasonableness  of the  carrying  value  and  remaining
amortization  period.  Fair  value  is  computed  using  projections  of  future
non-discounted cash flows.


INCOME TAXES

      The Company  accounts for income  taxes in  accordance  with  Statement of
Financial  Accounting  Standards No. 109,  "Accounting for Income Taxes",  which
requires an asset and liability  method of accounting for deferred income taxes.
Under the asset and liability  method,  deferred tax assets and  liabilities are
recognized,  and income or expense is  recorded,  for the  estimated  future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.

      Pursuant to a Tax Sharing Agreement, ATSC and the Company have agreed to
elect to file consolidated income tax returns for federal income tax purposes
and may elect to file such returns in states and other relevant jurisdictions
that permit such an election, for income tax purposes.  With respect to such
consolidated income tax returns, the Tax Sharing Agreement generally requires
the Company to pay to ATSC the entire tax shown to be due on such consolidated
returns, provided that the amount paid by the Company shall not exceed the
amount of taxes that would have been owed by the Company on a stand-alone basis.



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  amount of assets and  liabilities  and
disclosures  of contingent  assets and  liabilities at the date of the financial
statements and the reported  amounts of revenue and expenses during the reported
period. Actual results could differ from these estimates.


RECENT ACCOUNTING PRONOUNCEMENTS

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities" ("SFAS No. 133"), which is effective for the Company for
the quarter  ended October 30, 1999.  SFAS No. 133  establishes  accounting  and
reporting  standards for derivatives and for hedging  activities.  Management is
currently  evaluating the impact of this standard and believes its adoption will
not affect the Company's consolidated financial position,  results of operations
or cash flows.

==============================================================================

<PAGE>



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


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP 98-1"), "Accounting for the Costs of
Computer  Software  Developed or Obtained for Internal  Use," which is effective
for the  Company  for fiscal  years  beginning  after  December  15,  1998.  The
application  of SOP 98-1 is not  anticipated  to have a  material  impact on the
Company's consolidated financial statements.


2.  LONG-TERM DEBT

      The following table  summarizes  long-term debt outstanding at January 30,
1999 and January 31, 1998:

                                       January 30, 1999     January 31, 1998   
                                     --------------------  -------------------

                                     Carrying   Estimated  Carrying  Estimated
                                      Amount   Fair Value    Amount  Fair Value
                                      ------   ----------    ------  ----------

                                                   (in thousands)

Mortgage............................   $  5,157  $  5,157  $  6,276  $  6,276
8 3/4% Notes........................... 100,000   101,875   100,000   100,500
Note payable to ATSC................    100,625   100,625       ---      ---
                                        -------   -------   -------   -------
       Total debt...................    205,782   207,657   106,276   106,776
Less current portion................      1,206     1,206     1,119     1,119
                                        -------   -------   -------   -------
       Total long-term debt.........   $204,576  $206,451  $105,157  $105,657
                                       ========  ========  ========  ========


      In accordance with the  requirements of Statement of Financial  Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments",  the
Company  determined the estimated fair value of its financial  instruments using
quoted market information, as available. As judgement is involved, the estimates
are not  necessarily  indicative  of the amounts the Company  could realize in a
current market exchange.

      On June 30,  1998,  the Company  entered  into a new  $150,000,000  senior
secured  revolving  credit facility (the "Credit  Facility") with a syndicate of
lenders.  This facility replaced the Company's  then-existing  $122,000,000 bank
credit  agreement that was scheduled to expire in July 1998 and also resulted in
the non-renewal by the Company's  sourcing  division of its  $50,000,000  credit
facility and in the  non-renewal  by AnnTaylor  Funding,  Inc. of a  $40,000,000
accounts receivable facility. The Credit Facility is used by the Company for the
issuance of  commercial  and standby  letters of credit and to provide funds for
other general corporate purposes.

      Loans  outstanding  under the Credit  Facility  at any time may not exceed
$50,000,000.  The Company did not make any borrowings  under the loan provisions
of the Credit Facility during Fiscal 1998 and there were no loans outstanding at
fiscal year end. The outstanding  loan balance is required to be reduced to zero
for the thirty-day period commencing  January 1 each year. This cleandown period
was achieved for January  1999.  Maximum  availability  for loans and letters of
credit  under the Credit  Facility  is  governed  by a monthly  borrowing  base,
determined  by the  application  of  specified  advance  rates  against  certain
eligible  assets.  Based on this  calculation,  the maximum amount available for
loans and  letters of credit  under the Credit  Facility at January 30, 1999 was
approximately $131,054,000. Commercial and standby letters of credit outstanding
under the Credit Facility at January 30, 1999 were approximately $65,763,000.



==============================================================================
<PAGE>

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


2. LONG-TERM DEBT (CONTINUED)

      Amounts  outstanding  under the Credit  Facility  bear  interest at a rate
equal to, at the  Company's  option,  the lead  lender's Base Rate or Eurodollar
Rate,  plus a  margin  ranging  from  0.25% to 1.00%  and from  1.25% to  2.00%,
respectively.  In  addition,  the  Company  is  required  to pay the  lenders  a
quarterly  commitment fee on the unused  revolving loan  commitment  amount at a
rate ranging from 0.375% to 0.5% per annum. Fees for outstanding  commercial and
standby  letters  of credit  range  from  0.625% to 1.0% and from 1.25% to 2.0%,
respectively.

      The Credit  Facility  contains  financial and other  covenants,  including
limitations  on  indebtedness,  liens,  investments  and  capital  expenditures,
restrictions on dividends or other distributions to stockholders and maintenance
of certain financial ratios including  specified levels of net worth. For Fiscal
1998, the capital  expenditure limit was $52,000,000.  For Fiscal 1999,  capital
expenditures are limited to a maximum of $55,000,000.

      The lenders  have been granted a pledge of the common stock of the Company
and certain of its  subsidiaries,  and a security  interest in substantially all
other tangible and intangible assets, including accounts receivable, trademarks,
inventory, store furniture and fixtures, of the Company and its subsidiaries, as
collateral for the Company's obligations under the Credit Facility.

      The Credit  Facility  matures on June 30, 2000 and  includes an  automatic
one-year extension,  contingent upon the satisfaction of certain conditions.  In
addition,  the commitments  under the Credit Facility  terminate on February 16,
2000  unless the  outstanding  8 3/4%  Subordinated  Notes due 2000 (the "8 3/4%
Notes")  are  refinanced  on  or  prior  to  such  date  with  the  proceeds  of
subordinated  debt or  capital  stock,  the  terms and  conditions  of which are
reasonably satisfactory to the Requisite Lenders under the Credit Facility.

      On  August  13,  1998,  the  Company  declared  a  dividend  to  its  sole
stockholder,  ATSC,  of a promissory  note in the original  principal  amount of
$100,625,000  (the "Note Payable to ATSC").  The Note Payable to ATSC was issued
by  the  Company  on  August  28,  1998  and  has  interest  and  payment  terms
substantially  similar  to the  terms  of the 8  1/2%  Convertible  Subordinated
Debentures Due 2016 (the  "Convertible  Debentures") that were issued in 1996 by
ATSC to AnnTaylor  Finance Trust. The Note Payable to ATSC was declared in order
to  (1)  relieve  the  Company  of the  administrative  burden  associated  with
declaring cash dividends to ATSC quarterly, which has been necessary in order to
provide  ATSC with  funds  sufficient  to meet its  quarterly  interest  payment
obligations on the Convertible Debentures,  and (2) enhance financial reporting,
by more closely  associating  the debt  obligation  with the entity that was the
ultimate  beneficiary  of the cash received upon the creation of debt.  ATSC has
pledged  the Note  Payable  to ATSC to the  lenders  as  collateral  for  ATSC's
guarantee  of the  Company's  performance  of its  obligations  under the Credit
Facility.

      On June 28, 1993, Ann Taylor issued $110,000,000 principal amount of its 8
3/4% Notes.  The outstanding  principal  amount of these notes as of January 30,
1999 was $100,000,000.

      In July 1993,  Ann Taylor entered into a  $110,000,000  (notional  amount)
interest rate swap  agreement,  which had the effect of converting the Company's
interest  obligations  on  the 8  3/4%  Notes  to a  variable  rate.  Under  the
agreement,  the Company  received a fixed rate of 4.75% and paid a floating rate
based on LIBOR, as determined in six month intervals. The swap agreement matured
in July 1996. Net receipts or payments  under the agreement  were  recognized as
adjustments to interest expense.

===============================================================================
<PAGE>


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




2.  LONG-TERM DEBT (CONTINUED)

      The  Company  and  its  wholly  owned  subsidiary  AnnTaylor  Distribution
Services,  Inc. are parties to a $7,000,000 seven-year mortgage loan maturing in
Fiscal 2002. The loan is secured by the Company's  distribution  center land and
building in Louisville,  Kentucky.  The mortgage loan bears interest at 7.5% and
is payable in monthly installments of approximately  $130,000. The mortgage loan
balance at January 30, 1999 was $5,157,000.

      The  aggregate  principal  payments of all  long-term  obligations  are as
follows:

        Fiscal Year                            (in thousands)
        -----------                            
         1999....................................  $  1,206
         2000....................................   101,300
         2001....................................     1,401
         2002....................................     1,250
         2003....................................       ---  
         2004 and thereafter.....................   100,625
                                                    -------

            Total................................  $205,782
                                                   ========



3.  PREFERRED SECURITIES

      In April and May of Fiscal 1996,  ATSC  completed the sale of an aggregate
of $100,625,000 of 8 1/2%  Company-Obligated  Mandatorily Redeemable Convertible
Preferred  Securities  (the  "preferred  securities")  issued  by its  financing
vehicle,  AnnTaylor Finance Trust, a Delaware business trust (the "Trust").  The
preferred  securities  have  a  liquidation   preference  of  $50  per  security
($100,625,000 in the aggregate) and are convertible at the option of the holders
thereof into ATSC's common stock at a conversion  rate of 2.545 shares of common
stock for each  preferred  security  (equivalent  to $19.65  per share of common
stock,  which  represented  a 20%  premium to the $16.375  closing  price of the
common stock on the New York Stock  Exchange at the date of the execution of the
purchase agreement relating to the sale of the preferred  securities).  The sole
assets  of  the  Trust  are  $103,700,000  of 8  1/2%  Convertible  Subordinated
Debentures  of ATSC  maturing on April 15, 2016. A total of 2,012,500  preferred
securities  were  issued,  and are  convertible  into an  aggregate of 5,121,812
shares of ATSC's common stock.  ATSC received net proceeds of $95,984,000 in
connection  with the sale of the preferred  securities.  The carrying  value and
estimated  fair  value of the  preferred  securities  at January  30,  1999 were
$96,624,000 and $196,219,000, respectively.


==============================================================================

<PAGE>


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

4.  ALLOWANCE FOR DOUBTFUL ACCOUNTS

      A summary of activity  in the  allowance  for  doubtful  accounts  for the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997 is as
follows:


                                                   Fiscal Years Ended      
                                          -------------------------------------

                                          January 30,   January 31,  February 1,
                                              1999          1998         1997
                                              ----          ----         ----

                                           (in thousands)

      Balance at beginning of year..........  $  812       $  811      $   736
      Provision for loss on accounts 
        receivable..........................   1,476        1,795        1,803
      Accounts written off..................  (1,468)      (1,794)      (1,728)
                                             -------      -------        -----
      Balance at end of year................ $   820      $   812      $   811
                                              ======       ======       ======


5.  COMMITMENTS AND CONTINGENCIES

RENTAL COMMITMENTS

      Ann Taylor occupies its retail stores and administrative  facilities under
operating leases, most of which are non-cancelable.  Some leases contain renewal
options for periods ranging from one to ten years under  substantially  the same
terms and  conditions as the original  leases.  Most of the store leases require
Ann Taylor to pay a specified  minimum rent,  plus a contingent  rent based on a
percentage  of the  store's  net sales in excess of a  specified  threshold.  In
addition,  most of the  leases  require  Ann  Taylor to pay real  estate  taxes,
insurance  and  certain  common  area and  maintenance  costs in addition to the
future minimum lease payments shown below.

      Future  minimum lease payments under  non-cancelable  operating  leases at
January 30, 1999 are as follows:


      Fiscal Year                         (in thousands)
      -----------
       1999..................................$ 78,042
       2000..................................  77,068
       2001..................................  73,767
       2002..................................  71,265
       2003..................................  64,978
       2004 and thereafter................... 252,340
       ----                                   -------
       Total.................................$617,460
                                             ========

      Rent expense for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997 was as follows:

                                              Fiscal Years Ended      
                                  -------------------------------------------

                                  January 30,    January 31,      February 1,
                                     1999           1998            1997
                                     ----           ----            ----
                   

                                           (in thousands)

      Minimum rent................  $66,358        $59,495       $55,571
      Percentage rent.............   2,414           1,671         2,433
                                     -----          -----          -----
           Total..................  $68,772        $61,166       $58,004
                                     ======         ======        ======

Litigation

      The Company has been named as a defendant in several legal actions arising
from its normal business  activities.  Although the amount of any liability that
could arise with respect to these actions cannot be accurately predicted, in the
opinion of the  Company,  any such  liability  will not have a material  adverse
effect on the  financial  position,  results of  operations  or liquidity of the
Company.
==============================================================================

<PAGE>



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


5. COMMITMENTS AND CONTINGENCIES (CONTINUED)


    In addition,  ATSC, Ann Taylor,  certain  directors and former  officers and
directors of ATSC and Ann Taylor,  Merrill  Lynch & Co.  ("ML&Co.")  and certain
affiliates of ML&Co.  have been named as defendants in a purported  class action
lawsuit filed in April 1996 by certain alleged  stockholders  alleging that ATSC
and the other defendants  engaged in a fraudulent  scheme and course of business
that  operated a fraud or deceit on purchasers of ATSC's common stock during the
period from February 3, 1994 through May 4, 1995.  On March 10, 1998,  the Court
issued an Opinion  dismissing the  complaint.  The Court's  Opinion  granted the
plaintiffs  leave to amend and re-file the  complaint  within thirty days of the
date of the Opinion,  and an amended  complaint  was filed by the  plaintiffs on
April 9, 1998. On November 9, 1998, the Court issued an Opinion dismissing, with
prejudice,  the amended complaint. On or about December 15, 1998, the plaintiffs
filed a notice of appeal to the U.S District Court of Appeals,  Second  Circuit,
seeking  review of the  Appellate  Court's  decision.  The  appeal is  presently
pending,  and any liability  that may arise from this action cannot be predicted
at this time. The Company  believes that the amended  complaint is without merit
and intends to defend the action vigorously.


6. ENTERPRISE-WIDE OPERATING INFORMATION

      In Fiscal 1998,  the Company  adopted  Statement  of Financial  Accounting
Standards  No. 131,  "Disclosure  About  Segments of an  Enterprise  and Related
Information",  which establishes  annual and interim reporting  standards for an
enterprise's  operating  segments and related  disclosures  about its  products,
services,  major customers and the material  countries in which the entity holds
assets and reports revenues.

      The  Company  is a  specialty  retailer  of  women's  apparel,  shoes  and
accessories.  Given  the  economic  characteristics  of the store  formats,  the
similar  nature  of the  products  sold,  the type of  customer  and  method  of
distribution,  the operations of the Company are aggregated  into one reportable
segment.  The Company  believes that the customer  base for its stores  consists
primarily of relatively affluent, fashion-conscious women from the ages of 25 to
55, and that the majority of its  customers  are working women with limited time
to shop.


7.  PROPERTY AND EQUIPMENT

      Property and equipment consists of the following:
                                                    Fiscal Years Ended  
                                          -------------------------------------
                                          January 30, 1999     January 31, 1998
                                          ----------------     ----------------
                                                (in thousands)
         Land and building................... $  8,683            $  8,625
         Leasehold improvements..............   93,168              85,332
         Furniture and fixtures..............  153,395             136,314
         Construction in progress............   11,059               6,422
                                               -------             -------
                                               266,305            236,693
         Less accumulated depreciation 
          and amortization..................   114,520             97,083
                                               -------            -------
             Net property and equipment..... $ 151,785           $139,610
                                               =======            =======


8.  EXTRAORDINARY ITEM

      On July 2, 1997, the Company used  available  cash to prepay  $24,500,000,
the outstanding  balance of its term loan due September 1998,  which resulted in
an  extraordinary  charge to earnings in Fiscal 1997 of $173,000,  net of income
tax benefit.
===============================================================================


<PAGE>


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




9.  NONRECURRING CHARGES

STUDIO SHOE STORES CLOSING

      In connection  with the planned closing of all of the Company's Ann Taylor
Studio shoe stores,  announced in January 1997,  the Company  recorded a pre-tax
charge of $3,600,000 in Fiscal 1996. Of the total  impairment  loss,  $2,500,000
represented  impairment  of  long-lived  assets  such as  properties  and  store
fixtures and  $1,100,000  pertained to lease and other  related  costs for these
locations until the properties are sublet.

RESIGNATION OF A FORMER EXECUTIVE

      Effective  August 23, 1996, a former executive and Director of the Company
and Ann Taylor resigned. In connection with this resignation, a one-time pre-tax
charge of $3,500,000 was recorded in Fiscal 1996 relating to the estimated costs
of the Company's  obligations under the former executive's  employment  contract
with the Company.

RETIREMENT OF ASSETS

      In the fourth  quarter of Fiscal 1998,  the Company  recorded a $3,633,000
non-cash  pre-tax  charge for the  retirement  of certain  assets.  This  charge
related to the write-off of the net book value of the assets relinquished during
the renovation of the Company's corporate offices.


10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH MERRILL LYNCH AND ITS AFFILIATES

     At January 30, 1999,  certain  affiliates of ML&Co. held approximately 6.7%
of ATSC's outstanding common stock. Two of the members of the Board of Directors
of the Company and ATSC serve as  representatives  of ML&Co. and its affiliates.
As a result,  ML&Co.  and such  affiliates  are in a position to  influence  the
management of the Company and ATSC.

      In Fiscal 1996, ATSC paid  approximately  $1,207,500 to ML&Co. and Merrill
Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch") in connection with
their services as placement agents for the sale of the preferred securities (see
Note 3). ATSC agreed to indemnify ML&Co. and Merrill Lynch, as placement agents,
against certain  liabilities,  including  certain  liabilities under the federal
securities law, in connection with the sale of the preferred securities.


==============================================================================
<PAGE>


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


10.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)

SOURCING ACQUISITION

      In Fiscal 1995, the Company purchased approximately 16% of its merchandise
directly  from  Cygne  Designs,  Inc.  ("Cygne")  and an  additional  38% of its
merchandise through the Company's direct sourcing joint venture with Cygne known
as CAT. On September 20, 1996 (the "Effective Date"),  pursuant to the Stock and
Asset  Purchase  Agreement  dated as of June 7, 1996, by and among ATSC, Ann
Taylor,   Cygne  and  Cygne  Group  F.E.  Limited  (as  amended,  the  "Purchase
Agreement"), Ann Taylor acquired the entire interest of Cygne in CAT and certain
of the assets  (the  "Assets")  of the Ann Taylor  Woven  Division of Cygne (the
"Division")  that  were  used  for  sourcing  merchandise  for Ann  Taylor  (the
"Sourcing Acquisition").  As a result of the Sourcing Acquisition, CAT became an
indirect wholly owned  subsidiary of the Company.  CAT was  subsequently  merged
into Ann Taylor and now performs all of Ann Taylor's direct sourcing  functions,
including  those  previously  provided  by the  Division,  as a division  of Ann
Taylor. For financial reporting purposes, the transaction has been accounted for
as of the Effective  Date under the purchase  method of accounting in accordance
with  Accounting  Principles  Board  Opinion No. 16,  "Accounting  for  Business
Combinations".

      In consideration for Cygne's interest in CAT and the Assets,  ATSC and the
Company  paid (i)  2,348,145  shares of common stock of ATSC having an aggregate
value,  as of the Effective  Date, of  $36,000,000,  (ii)  $3,200,000 in cash as
payment for  inventory  and fixed assets and (iii)  approximately  $6,500,000 in
cash in  settlement  of  open  accounts  payable  by Ann  Taylor  to  Cygne  for
merchandise  delivered by Cygne prior to the  closing.  The Company also assumed
certain  liabilities  related to the  operations of the  Division.  The purchase
price was subject to post-closing  adjustments based upon final determination of
the value of certain of the assets  purchased  and  liabilities  assumed.  As of
February 1, 1997, certain post-closing  adjustments reduced the net cash paid to
approximately  $227,000. The total purchase price to the Company of the Sourcing
Acquisition  has been  allocated  to the  tangible  and  intangible  assets  and
liabilities  of CAT and the Division that were  acquired,  based on estimates of
their  respective  fair values.  The excess of the purchase  price over the fair
value of the net assets acquired was recorded as goodwill and is being amortized
on a straight-line basis over 25 years.

      The following unaudited proforma consolidated data for the Company for the
fiscal year ended  February 1, 1997 has been  presented  to reflect the Sourcing
Acquisition as if it had occurred at the beginning of such period:

                                              Fiscal Year Ended
                                              February 1, 1997 
                                              ---------------- 
                                              Actual    Proforma
                                              ------    --------
                                                (in thousands)
  
    Net sales...............................$798,117      $798,117
    Net income..............................$  8,667      $ 11,595


      The proforma data set forth above does not purport to be indicative of the
results  that  actually  would have  occurred if the  Sourcing  Acquisition  had
occurred at the beginning of the period  presented or of results which may occur
in the future.

===============================================================================
<PAGE>


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




10.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)

      A summary of the noncash  activity  that occurred in the fiscal year ended
February 1, 1997 in conjunction with the Sourcing Acquisition is as follows:


                                                   (in thousands)

    Fair value of assets acquired ....................  $  4,727
    Excess of  purchase  price  over the fair  
      value of net  assets acquired..................     38,340
    Ann Taylor's previous investment in CAT...........    (6,840)
    Issuance of ATSC's common stock...................   (36,000)
                                                         ------- 
    Cash paid ........................................  $    227
                                                        ========



11. STOCK OPTION PLANS

      ATSC accounts for stock options in accordance with  Accounting  Principles
Board Opinion No. 25, under which no compensation costs have been recognized for
stock option awards.  Had  compensation  costs of option awards been  determined
under a fair  value  alternative  method  as stated in  Statement  of  Financial
Accounting  Standards No. 123, "Accounting for Stock-Based  Compensation",  ATSC
would have been  required  to prepare a fair value  model for such  options  and
record such amount in the financial statements as compensation expense. Proforma
net income  before  extraordinary  loss for Fiscal 1998,  Fiscal 1997 and Fiscal
1996 after taking into account such expense would have been $38.4 million, $11.0
million and $8.2 million,  respectively.  For purposes of this calculation, ATSC
arrived at the fair value of each stock  grant at the date of grant by using the
Black  Scholes  option  pricing  model  with  the  following   weighted  average
assumptions used for grants for the fiscal years ended January 30, 1999, January
31, 1998 and February 1, 1997:  risk-free  interest rate of 5.4%, 6.2% and 5.8%,
respectively; expected life of 4.0 years, 5.0 years and 4.3 years, respectively;
and expected volatility of 59.4%, 67.9% and 55.2%, respectively.

===============================================================================
<PAGE>



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

12.   INCOME TAXES

      The  provision  for income  taxes for the fiscal  years ended  January 30,
1999, January 31, 1998 and February 1, 1997 consists
of the following:
                                           Fiscal Years Ended    
                                  ---------------------------------------    
                                  January 30,  January 31,    February 1,
                                     1999         1998           1997 
                                     ----         ----           ---- 
                                         (in thousands)
    Federal:
     Current.......................$21,589      $14,427       $ 9,898
     Deferred......................  2,748       (1,917)         (802)
                                    ------      -------         -----
       Total federal............... 24,337       12,510         9,096
                                    ------       ------         -----
    State and local:
     Current.......................  7,869        5,538         3,844
     Deferred......................  1,217         (769)         (152)
                                    ------       -------        -----
       Total state and local.......  9,086        4,769         3,692
                                    ------       ------         -----
    Foreign:
     Current.......................    156          187           187
     Deferred......................    ---          ---           ---
                                    ------       ------         -----
       Total foreign...............    156          187           187
                                    ------       ------         -----
     Total.........................$33,579      $17,466       $12,975
                                    ======       ======        ======


      The  reconciliation  between  the  provision  for  income  taxes  and  the
provision  for income taxes at the federal  statutory  rate for the fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997 is as follows:


                                              Fiscal Years Ended     
                                      -------------------------------------

                                      January 30,   January 31, February 1,
                                          1999        1998        1997 
                                          ----        ----        ---- 

                                               (in thousands)

Income before income taxes and 
   extraordinary loss..............     $72,903    $29,463     $21,642
                                         ======     ======      ======
Federal statutory rate.............          35%        35%         35%
                                         ======     ======      ======
Provision for income taxes at 
    federal statutory rate.........    $ 25,516     10,312     $ 7,575
State and local income taxes, 
    net of federal
   income tax benefit..............      4,660       3,800       2,273
Non-deductible amortization of 
    goodwill.......................      3,500       3,500       3,429
Unremitted earnings of foreign 
    subsidiaries..................        (188)       (314)       (382)
Other..............................         91         168          80
                                        ------      ------      ------
Provision for income taxes.........    $33,579     $17,466     $12,975
                                       =======     =======     =======


============================================================================
<PAGE>


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


12.   INCOME TAXES (CONTINUED)

      The tax effects of significant items comprising the Company's net deferred
tax assets as of January 30, 1999 and January 31, 1998 are as follows:

                                          January 30,     January 31,
                                              1999           1998
                                              ----           ----
 
                                                (in thousands)
    Current:
     Inventory............................  $   128        $ 2,854
     Accrued expenses.....................    3,812          4,269
     Real estate..........................   (1,686)        (1,634)
     Other................................      ---            ---
                                             ------         ------
    Total current.........................  $ 2,254        $ 5,489
                                             ======         ======
    Noncurrent:
     Depreciation and amortization........  $(5,510)       $(4,982)
     Rent expense.........................    4,786          4,364
     Other................................      276            901
                                             ------         ------
    Total noncurrent......................  $  (448)       $   283
                                             =======        ======


      Income taxes provided reflect the current and deferred tax consequences of
events that have been  recognized in the Company's  financial  statements or tax
returns.  U.S. federal income taxes are provided on unremitted  foreign earnings
except those that are considered  permanently  reinvested,  which at January 30,
1999 amounted to approximately  $6,864,000.  However, if these earnings were not
considered  permanently  reinvested,  under current law, the  incremental tax on
such undistributed earnings would be approximately $2,149,000.



13. RETIREMENT PLANS

      Savings Plan. The Company maintains a defined contribution 401(k) savings 
plan for  substantially  all  full-time  employees of the Company and its 
subsidiaries.  Participants may contribute to the plan an  aggregate  of up to 
10% of their  annual  earnings.  The Company makes a matching  contribution of 
50% with respect to the first 3% of each participant's annual earnings 
contributed to the plan.  The Company's  contributions  to the plan for Fiscal 
1998, Fiscal 1997 and Fiscal 1996 were $592,000, $519,000 and $390,000,
respectively. 


       Pension Plan. Substantially all full-time employees of  the  Company and
its   subsidiaries  are  covered  under  a noncontributory defined benefit 
pension plan.  Through  December 31, 1997, the pension plan was a "cash  balance
pension  plan".  Each  participant  accrued a benefit  based on  compensation  
and years of service  with the  Company.  As of January 1, 1998,  the  Plan was
amended  and the  formula  to  calculate  benefits  was changed  to a career  
average  formula.  The new  career  average formula  was used to  determine the
funding  status of the plan beginning in Fiscal 1997.  The Company's  funding  
policy for the plan is to  contribute  annually the amount necessary to provide
for  benefits   based  on  accrued   service  and  projected  pay increases.  
Plan assets  consist  primarily  of cash,  equity and fixed  income  securities.

     In Fiscal 1998,  the Company  adopted  Statement  of  Financial  Accounting
Standards   No.  132,   "Employers'   Disclosures   about   Pensions  and  Other
Postretirement  Benefits",  which  standardizes the disclosure  requirements for
pension and other postretirement benefits,  eliminates certain disclosures,  and
requires  additional  information on the changes in the benefit  obligations and
fair value of plan assets.
==============================================================================
<PAGE>


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




13. Retirement Plans (continued)

      The following  table provides  information for the Pension Plan at January
30, 1999, January 31, 1998 and February 1, 1997:



                                                      Fiscal Years Ended     
                                                 -----------------------------

                                                 Jan. 30,    Jan. 31,   Feb. 1,
                                                   1999        1998      1997 
                                                   ----        ----      ---- 
                                                           (in thousands)
      Change in benefit obligation:
      Benefit obligation, 
        beginning of year.................         $3,820    $3,413    $2,893
      Service cost........................            669       571       981
      Interest............................            292       250       212
      Plan amendments.....................            ---        81       ---
      Actuarial loss (gain)...............            348      (103)     (316)
      Benefits paid.......................           (487)     (392)     (357)
                                                    -----     -----    ------
      Benefit obligation, end of year.....         $4,642    $3,820    $3,413
                                                   ------    ------    ------

      Change in plan assets:
      Fair value of plan assets, beginning 
        of year...........................          5,128     4,745     2,537
      Actual return on plan assets........          1,205       907     2,333
      Employer contribution (refund)......          1,640      (132)      232
      Benefits paid.......................           (487)     (392)     (357)
                                                    -----   -------    ------
      Fair value of plan assets, end of year        7,486     5,128     4,745
                                                    -----     -----     -----

      Funded status (fair value of plan 
         assets less benefit obligation)...         2,844     1,308     1,332
      Unrecognized net actuarial gain......        (1,675)   (1,361)     (802)
      Unrecognized prior service cost......            69        75       ---
                                                    -----     -----     -----
      Prepaid benefit cost.................      $  1,238    $   22    $  530
                                                  =======   =======    ======


Net pension cost includes the following components:

                                                Fiscal Years Ended     
                                     --------------------------------------- 

                                     January 30,  January 31,   February 1,
                                        1999          1998         1997 
                                        ----          ----         ---- 

Service cost........................$   669        $   571       $   981 
Interest cost.......................    292            250           213 
Expected return on assets...........   (481)          (409)         (218)
Amortization of prior gains.........    (61)           (42)           (9)
Amortization of prior service cost..      6              6           --- 
                                      -----         ------        ------
Net periodic pension cost...........$   425        $   376       $   967 
                                      =====         ======        ======

For the fiscal years ended  January 30,  1999,  January 31, 1998 and February 1,
1997, the following actuarial assumptions were used:


                                                Fiscal Years Ended     
                                        ---------------------------------     

                                        January 30, January 31, February 1,
                                           1999        1998       1997 
                                           ----        ----       ---- 

Discount rate.......................      6.75%       7.50%      8.00%
Long-term rate of return on assets..      9.00%       9.00%      9.00%
Rate of increase in future compensation   4.00%       4.00%      4.00%

==============================================================================
<PAGE>


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



14. STOCKHOLDER'S EQUITY

      The following summarizes the changes in stockholder's equity during Fiscal
1998, Fiscal 1997 and Fiscal 1996:

                                          Additional                 Total
                                 Common    Paid-in    Retained   Stockholder's
                                  Stock    Capital    Earnings       Equity
                                  -----    -------    --------       ------

                                                    (in thousands)


Balance at February 3, 1996....... $ 1    $311,567     $ 14,120    $325,688
   Net income..................... ---         ---        8,667       8,667
   Parent company contributions... ---     132,385         ---      132,385
                                   ---     -------      ------      -------
Balance at February 1, 1997.......   1     443,952      22,787      466,740
   Net income..................... ---         ---      11,824       11,824 
   Parent company contributions... ---       1,934         ---        1,934 
                                   ---       -----      ------      -------
Balance at January 31, 1998.......   1     445,886      34,611      480,498 
   Net income..................... ---         ---      39,324       39,324 
   Parent company contributions... ---       9,501         ---        9,501 
   Note payable to ATSC........... ---    (100,625)        ---     (100,625)
                                   ---    --------      ------      -------

Balance at January 30, 1999....... $ 1   $354,762     $ 73,935     $428,698 
                                   ===    =======       ======      =======