SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

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

                   For the fiscal year ended February 3, 2001
                                -----------------
                                       OR
    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                    For the transition period from ______ to _______


                          AMES DEPARTMENT STORES, INC.
             (Exact Name of Registrant as Specified In its Charter)

  DELAWARE                                                04-2269444
-------------------------                      ------------------------------
(State or Other Jurisdiction             (I.R.S. Employer Identification Number)
Incorporation or Organization)

2418 Main Street, Rocky Hill, Connecticut                     06067
-----------------------------------------           ---------------------------
(Address of Principal Executive Offices)                             (Zip Code)

Registrant's Telephone Number, Including Area Code       (860) 257-2000
                                                    --------------------------

        Securities Registered Pursuant to Section 12(b) of the Act: None

           Securities Registered Pursuant to Section 12(g) of the Act:

          Title of Each Class Name of Each Exchange on Which Registered
           Common Stock, $.01 par value                          NASDAQ
           Series B Warrants                                     None

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

      Yes   X    No ___
          -----

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

     As of March 30, 2001,  the  aggregate  market value of voting stock held by
non-affiliates of the Registrant was $61,549,061 based on the last reported sale
price of the Registrant's Common Stock on the NASDAQ National Market System.

      29,393,057 shares of Common Stock were outstanding on March 30, 2001.

     Documents   Incorporated  by  Reference:   Portions  of  the   Registrant's
definitive  proxy  statement to be filed  pursuant to Regulation  14A within 120
days after the end of the Registrant's fiscal year are incorporated by reference
in Part III.




Page 1 of 49 pages (including Exhibits)                Exhibit Index on page 44
<PAGE>


                                     PART I

     Certain  statements   discussed  in  Item  1  (Business),   Item  3  (Legal
Proceedings),   Item  7  (Management's  Discussion  and  Analysis  of  Financial
Condition and Results of  Operations),  Item 7A  (Quantitative  and  Qualitative
Disclosures  About  Market  Risk) and  elsewhere  in this  Form 10-K  constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform  Act of  1995.  Such  forward-looking  statements  concerning
Management's expectations, strategic objectives, business prospects, anticipated
economic  performance and financial  condition and other similar matters involve
known and unknown risks,  uncertainties  and other important  factors that could
cause the  actual  results,  performance  or  achievements  of results to differ
materially  from any future results,  performance or  achievements  discussed or
implied by such forward-looking  statements. Such risks, uncertainties and other
important  factors  include,   among  others:   general  economic  and  business
conditions,  decreased consumer spending, particularly among those customers who
comprise our primary  customer base,  increased  competition from other discount
retailers,  including the major  national  chains,  as well as from  merchandise
offerings on the internet,  the seasonal nature of our business,  severe adverse
weather  conditions  during  the  winter  months,  particularly  during the peak
Christmas holiday shopping season, and various other matters,  many of which are
beyond the  Company's  control and other  factors as are described at the end of
Item 7 (Management's  Discussion and Analysis of Financial Condition and Results
of Operations) of this Form 10-K.  Forward-looking  statements  speak only as of
the date of the document in which they are made.  We disclaim any  obligation or
undertaking to provide any updates or revisions to any forward-looking statement
to reflect any change in our expectations or any change in events, conditions or
circumstances on which the forward-looking statement is based.

Item 1.    Description of Business

Introduction

     Ames Department  Stores,  Inc. is the largest regional discount retailer in
the United States. We currently operate 452 stores in nineteen contiguous states
in the Northeast,  Midwest, and Mid-Atlantic regions, as well as the District of
Columbia.  Our stores  offer a wide  range of both brand name and other  quality
merchandise  for the home and  family  at  prices  below  those of  conventional
department  stores and  specialty  retailers.  Our stores are  smaller  and more
customer  friendly  than the  stores  of most  competing  "big  box"  retailers,
including the national discount department store chains.

     Ames is a  Delaware  corporation  organized  in 1962  as a  successor  to a
business originally founded in 1958. Ames was reorganized in December 1992 under
Chapter 11 of the United States Bankruptcy Code. Its principal executive offices
are located at 2418 Main Street, Rocky Hill,  Connecticut,  06067; its telephone
number is (860) 257-2000; and its web site is http://www.AmesStores.com.

     The Ames fiscal year ends on the Saturday  nearest January 31st. Our fiscal
years ended January 29, 2000 and January 30, 1999,  which we refer to as "Fiscal
1999" and "Fiscal 1998," respectively,  consisted of fifty-two weeks. Our fiscal
year ended February 3, 2001,  which we refer to as "Fiscal  2000",  consisted of
fifty-three weeks.

Business Developments

Closing Stores

     In November  2000, we announced the planned  closing of thirty-two  stores.
Thirty-one of the stores were  under-performing  stores acquired from the former
Hills Stores  Company  ("Hills").  The other store was closed as a result of the
expiration of its lease.  Liquidation  sales at these stores began  December 31,
2000. All thirty-two  stores were closed by the end of March 2001. We recorded a
$139.3 million expense in connection with these closings, including $9.5 million
for inventory  write-offs.  These charges  represent future costs to be paid for
these stores and expenses  related to the actual  cessation of business in these
locations.

The Hills Acquisition

     On November 12, 1998, Ames entered into an agreement for the acquisition of
Hills.  On  December  31,  1998,  we acquired  approximately  81.3% of the Hills
outstanding  common  stock and 74.4% of its  outstanding  convertible  preferred
stock,  in each case at a price of $1.50 per  share,  or an  aggregate  of $13.7
million.  On the same  date,  we  purchased  approximately  $144.1  million,  or
approximately  73.9%, of the $195.0 million of outstanding Hills senior notes at
a price of  approximately  $700 for each $1,000 principal amount of those notes,
or an  aggregate  of $100.8  million.  Pursuant  to the  terms of those  offers,
holders of Hills  shares and senior  notes who  tendered  their  securities  for
purchase  also  received a deferred  contingent  cash right to receive a further
payment out of, and based upon,  Hills's ultimate net recovery,  if any, related
to a lawsuit  brought by Hills in September  1995 against  certain of its former
directors.

                                      -2-
<PAGE>

     In March  1999,  we  consummated  the merger of Hills into Ames.  Shares of
Hills's common and  convertible  preferred  stock not previously  acquired by us
were  automatically  converted into the right to receive $1.50 per share (plus a
deferred  contingent  cash right as discussed  above),  and the $50.9 million of
outstanding  Hills senior  notes not  previously  purchased by us became  direct
obligations of Ames.

     The total cost of the Hills acquisition was  approximately  $330.0 million,
inclusive  of the  approximately  $50.9  million of the Hills  senior notes that
remained  outstanding and $147.8 million of capitalized  leasehold and financing
obligations  related  to  Hills.  Cash  required  for  the  acquisition  totaled
approximately  $129.0  million.  Funds  for these  purposes  were  derived  from
borrowings under our credit facility.

     The  acquisition  has been recorded under the purchase method of accounting
and, accordingly, the results of operations of Hills are included since the date
of the acquisition in the accompanying  consolidated  financial statements.  The
fair value of tangible assets acquired and liabilities  assumed was $568 million
each. The purchase price of $129.0  million was recorded as two  components:  an
excess of cost over net assets  acquired  (goodwill) of $70.0 million,  which is
being amortized over twenty-five years on a straight-line  basis, and beneficial
lease rights of $59.0  million,  which is being  amortized  over the life of the
respective leases (which average approximately twenty-five years).

     At the time of the  acquisition,  Hills  operated 155  discount  department
stores in twelve states within or contiguous to our existing geographic region.

     In  February  1999,  we began a program to remodel  and  convert 151 of the
acquired Hills stores to Ames stores.  The four remaining Hills stores,  as well
as seven Ames  stores,  were closed  because  they were in  locations  that were
either  competitive  with or  under-performing  other Hills or Ames stores.  The
remodeling and conversion process was completed in September 1999.

     The total cost of the remodeling and  conversion was  approximately  $189.1
million and was funded primarily with proceeds from our liquidation of the Hills
merchandise   inventories.   The  $189.1  million  cost  consists  primarily  of
expenditures for fixtures,  signage,  Point-Of-Sale ("POS") systems, training of
employees, and other labor costs, as well as other pre-opening costs.

     Under an agreement with us, Gordon  Brothers Retail  Partners,  LLC and The
Nassi Group, LLC were engaged to operate all of the acquired Hills stores and to
conduct  inventory  liquidation  sales  at each of  those  stores  prior  to its
scheduled  remodeling or final  closure.  These two firms were  responsible  for
substantially  all  expenses  associated  with  operating  the Hills  stores and
liquidating  their inventory prior to their closure,  including  compensation of
all employees and rental  payments under store leases.  Upon  completion of each
sale,  they removed all unsold  merchandise  and turned over the store in "broom
clean"  condition.  Ames was entitled to retain from the liquidation  proceeds a
minimum sum equal to 40% of the initial  ticketed  retail  price of all items of
Hills  merchandise on hand and on order as of January 2, 1999,  irrespective  of
the actual  sales  proceeds.  In  addition,  Ames was  entitled to share in that
portion, if any, of the proceeds from the sale of Hills merchandise in excess of
62% of the aggregate  initial  retail  ticketed  price.  Proceeds from the sales
during the entire  liquidation  period  exceeded  the  targeted  percentage.  We
received   approximately   $314  million  from  the  liquidation  of  the  Hills
inventories,  representing  the  40%  minimum  plus  our  share  of the  portion
exceeding the targeted percentage referenced above.

The Acquisition of Caldor Sites

     We  purchased  the leases for nine  stores and a  distribution  center from
Caldor Corporation ("Caldor") during Fiscal 1999 for a total cash purchase price
of $42.8  million.  We  assumed  Caldor's  leases  for the nine  stores  and the
distribution  center and we acquired  all of the store  fixtures in eight of the
stores and all racking, sorting systems, and materials handling equipment in the
distribution center.

The Acquisition of Goldblatt's Department Store Sites

     In April 2000, the Company consummated its purchase of the leases for seven
stores from  Goldblatt's  Department  Stores,  Inc.  ("Goldblatt's")  for a cash
purchase  price of $7.6  million.  Six of the  stores are  located  in  Chicago,
Illinois and one is in Gary, Indiana.

                                      -3-
<PAGE>

Growth Strategy

     Since 1994, we have pursued a program to improve our profitability  through
vigorous  cost   containment   initiatives,   a  highly   focused   approach  to
merchandising,  and the  rationalization  of our store  base.  During  this time
period,   we  acquired  and  successfully   integrated  224  stores,   remodeled
eighty-nine of our existing stores, and closed eighty-two stores.

     Beginning mid Fiscal 1998, we focused on enhancing our revenues,  expanding
the breadth of our regional  market,  and  increasing  our  penetration  of that
market. In addition to our on-going program of store remodeling,  we implemented
merchandising  and marketing  initiatives that in Fiscal 1999 resulted in a 6.2%
increase in same-store  sales over Fiscal 1998. At the same time, we embarked on
a program to acquire  groups of stores  located  primarily in states in which we
currently operate or that are contiguous with our existing regional market.

     The Caldor, Hills, and Goldblatt's  acquisitions were representative of our
growth  strategy.  The  acquisitions  significantly  increased  our  revenue and
enabled us to  leverage  our  administrative  costs over a far larger  operating
base. These  acquisitions were  particularly  opportunistic for Ames, since they
permitted  us to  open  well-maintained  store  sites  in  locations  that  were
complementary  to our existing  locations.  The stores are located  primarily in
communities with demographics  similar to those of our existing  locations.  The
acquisitions  expanded our selling space by 75.7%,  substantially  increased our
presence  in five  states  and  enabled  us to enter five new states in which we
foresee   opportunities  to  add  additional   stores  to  increase  our  market
penetration.  The Hills acquisition enabled us to achieve significant  economies
of scale.

     In  November   2000,  we  redirected  our  focus  to  initiatives  to  pare
unprofitable  locations,  improve cash flow,  and streamline  operations.  These
preemptive  initiatives were adopted to enable us to sustain our growth strategy
and be competitive in a soft retail environment.

Customers

     Our customer  base  consists  primarily of working  women with families and
senior  citizens.  They have an average annual  household income between $25,000
and $40,000 and their purchasing  decisions are determined primarily by a desire
for low prices and shopping  convenience.  Our  merchandise  offerings,  prices,
store  design,  and focus on customer  service are targeted to meet the needs of
these cost-conscious  consumers,  who, we believe, are generally  underserved by
other  large  discount  retailers.  We  reinforce  our image and drive  customer
traffic by employing a  "high/low"  pricing  strategy  that is  supplemented  by
weekly advertising circulars and recurring promotional programs. We believe that
our knowledge of and focus on our target customers have enabled us to develop an
advantage in an increasingly competitive discount-retailing environment.

Merchandising and Customer Service

     Our  mission is to  provide  our  customers  a broad  selection  of quality
merchandise at prices they can afford in a shopping environment that is friendly
and convenient. Our merchandising strategy is targeted to our customer base, and
we believe  this  strategy  has  enabled  us to  develop a distinct  competitive
advantage in serving our targeted customer base.

     Ames sells merchandise in three major categories: home lines, softlines and
hardlines.  The  following  table  sets forth the types of  merchandise  offered
within  each of these three  categories  and the  percentage  of our total sales
(excluding  leased  department  sales)  in  Fiscal  2000  attributable  to  each
category:

                                      -4-
<PAGE>
<TABLE>
<S>                                 <C>                                         <C>
Home Lines 41%                      Softlines 31%                               Hardlines 28%
--------------                      -------------                               -------------
o     Domestics, such as sheets,    o     Women's apparel, consisting           o     Health and beauty care
      towels and bath accessories         primarily of non-fashion basic              products
                                          items, sportswear and intimates
o     Window treatments                                                         o     Toys
                                    o     Men's workwear, denims,
o     Home entertainment                  fleece goods, hosiery and             o     Hardware and paints
      products                            underwear
                                                                                o     Automotive supplies
o     Small appliances              o     Children's apparel
                                                                                o     Sporting goods
o     Housewares                    o     Jewelry
                                                                                o     Stationery
o     Ready-to-assemble
      furniture                                                                 o     Seasonal items, such as
                                                                                      Christmas and other
o     Patio furniture                                                                 holiday decorations.

o     Crafts
</TABLE>

     In  addition,  all Ames  stores  include a shoe  department  operated  by a
licensee  that  accounted  for  approximately  3.8% of our total sales in Fiscal
2000.

     A significant portion of our net sales is derived from the sale of products
that bear  readily-recognized  brand  names,  including  Cannon(R),  Coleman(R),
Dickies(R),   Fisher-Price(R),   Fruit  of  the  Loom(R),  General  Electric(R),
Hanes(R),  Hasbro(R)Toy,  Kodak(R),  Magnavox(R),  Mattel(R),  Proctor-Silex(R),
Rider(R), Rubbermaid(R), Sunbeam(R), Timex(R) and Wrangler(R).

     Women's apparel is the only product line that accounts for more than 10% of
our sales, generating approximately 12.0% of our Fiscal 2000 net sales. We carry
primarily staple,  casual items of basic women's apparel,  including  outerwear,
sportswear, and intimates, with a particularly broad selection of merchandise in
"plus" sizes for the larger woman. Similarly,  our selection of men's apparel is
limited to staple,  non-fashion items that women frequently purchase for the men
in their  families  and that are most  commonly  sought by men within our target
customer base. We believe that our focus on basic apparel limits our exposure to
risks associated with changing fashion trends.

     Our hardlines merchandise also consists primarily of products that are most
frequently  purchased by women,  such as health and beauty care products,  toys,
stationery,  gift wrap and holiday  decorations.  We  concentrate  our  hardware
offerings  on basic  home  repair  and  maintenance  items,  many of  which  are
purchased by women.  Although we sell a number of hardware  items and automotive
supplies  that  are more  commonly  purchased  by men,  our  offerings  of these
products are more limited than those of other large discount retailers.

     Our home lines, which also consist primarily of products that are purchased
by women,  include a "Crafts  and More"  department  that  features  the largest
selection of crafts offered by any non-specialty  retailer in the United States.
The crafts  department  has become a destination  shop for Ames  customers,  and
accounted for approximately 3.1% of our Fiscal 2000 net sales.

     In  certain  of our  markets,  we are able to  customize  or  localize  our
merchandising.  We tailor our selection of discount  products and customize each
store based on its demographics and purchasing  patterns of our diverse customer
base. In our stores  located in college towns,  we offer a larger  assortment of
the items most frequently desired by students for their dormitory rooms, as well
as  stationery  supplies,  jeans,  sweatshirts,  athletic  apparel,  and similar
products.  In our stores  located in resort or vacation  communities  we feature
broader selections of such seasonal items as beach and camping supplies,  and we
continue to stock those items  throughout  the duration of the related  vacation
season.  This  micro-marketing  strategy drives customer traffic to those stores
and develops and improves the loyalty of their customer base.

     In  addition  to  offering a  merchandise  selection  that is  specifically
tailored to the needs and preferences of our target customers, we strive to make
each  customer's  shopping  experience  pleasant  and  convenient.  We  offer an
extensive  layaway program that accounted for  approximately  5.6% of our Fiscal
2000 net sales. We have a fully staffed customer service desk at a location away
from the most heavily  trafficked areas in the store to afford customers greater
privacy.  We also  implemented an "A+ Customer Service Program" which encourages
our store personnel to enhance customer satisfaction.

                                      -5-
<PAGE>

Marketing

     We use a "high/low"  promotional  pricing strategy to attract  customers to
our stores by offering  greater  discounts on selected  items or  categories  of
merchandise   while  maintaining  our  regular  discount  prices  on  all  other
merchandise.  The  "high/low"  strategy  also  provides us greater  control over
margins and inventory levels by allowing us to quickly adjust the number and mix
of  deeply  discounted  items and  increase  or  decrease  our  average  pricing
discount.  We are also able to tailor our  selection of more heavily  discounted
products to customer demographics.

     Our marketing theme,  "Bargains by the Bagful(R)," is designed to emphasize
our value  pricing.  We support the  "Bargains by the  Bagful(R)"  theme through
several  promotional  programs,  including "Special Buy" and "55Gold(R) Savings"
programs, as well as periodic event sales:

     o    Our  "Special  Buy"  program  allows  us to  offer  selected  items of
          recognizable brand name and other quality  merchandise to consumers at
          deep   discounts,   thereby   providing   the  customer  with  readily
          recognizable  values.  "Special  Buy" items are generally not actively
          advertised.  Instead,  we use  special  signage  and  fixtures to make
          "Special Buy" merchandise  easily  recognizable to customers,  who are
          often drawn to our stores as a result of their  desire to discover the
          latest  "Special  Buy"  offerings.  We are  able to offer  these  deep
          discounts   because  of  our  ability  to  react   quickly  to  buying
          opportunities  for closeout and  end-of-run  products that are popular
          with  our  customers.  Apparel  comprises  approximately  95%  of  the
          merchandise  offered  through  our  "Special  Buy"  program,  although
          "Special  Buy" items also are offered in the  hardlines and home lines
          product categories.

     o    Our  "55Gold(R)  Savings"  program  provides  a 10%  discount  on  all
          merchandise,  including  sale and "Special  Buy" items,  for consumers
          aged fifty-five and older who present a "55Gold(R)  Savings" card when
          shopping on Tuesdays.  Since its  inception in late 1994,  on average,
          Tuesday has moved from being the lowest to the highest  selling day in
          the  week.  During  Fiscal  2000,  the  "55Gold(R)   Savings"  program
          generated  sales of $413  million  compared to $336  million in Fiscal
          1999 and the number of active  cardholders  increased  to 2.5  million
          from 2.3 million over the same period.

     o    Our periodic  "event" sales are heavily  advertised,  vendor-supported
          promotions of selected categories of merchandise as well as promotions
          that are intended to capitalize on seasonal shopping trends.  Examples
          include our "Baby  Sale,"  "Housewares  Spectacular,"  "Patio  Plaza,"
          "Shoe Sale" and  "Underwear  Fair." Our most  successful  special sale
          promotions  include the "Amazing  March Sale," the October "Home Sale"
          and the November "Ames Biggest Toy Sale," which is designed to attract
          Christmas shoppers. Because of the substantial increase in unit volume
          generated by these  "event"  sales,  they are supported by many of our
          major vendors  either  through gross margin  allowances or cooperative
          advertising.

     We reinforce Ames's "Bargains by the Bagful(R)" theme through extensive use
of weekly full-color newspaper circulars.  We distributed  fifty-three newspaper
circulars in Fiscal 2000,  with an average  weekly  circulation  to 16.4 million
households.  These  circulars  generated  approximately  48% of our net sales in
Fiscal 2000.

Store Layout and Design

     Ames stores, which range from 26,736 to 85,743 square feet of selling space
and average  approximately 55,000 square feet of selling space, are smaller and,
we  believe,  more  customer  friendly  than  those  of most  competing  big box
retailers,  particularly the national discount store chains.  Their smaller size
appeals to Ames's target customer base of working  mothers and senior  citizens,
who prefer an  easy-to-shop,  convenient store  environment.  The prototype Ames
store  features an open floor plan and wide aisles that allow  customers  to see
the entire  store at a glance.  Bright,  attractive  signage and "soft"  corners
highlight key departments and make finding the right  department  easy. The home
lines department,  our largest  merchandise  category,  typically spans the back
wall of the store, with promotional  pallet and bin displays  bordering the main
aisle.   Promotional   items  are  placed  throughout  the  store  near  similar
merchandise.

                                      -6-
<PAGE>

Store Locations

     We  currently  operate  452 stores  located in the  Northeast,  Midwest and
Mid-Atlantic  regions. The following table sets forth, as of March 31, 2001, the
locations of our existing Ames stores:
<TABLE>
<S>                                   <C>
                 Number of Stores
                 ----------------
                                      Ames
                                      ----
Pennsylvania                             98
New York                                 93
Ohio                                     44
Massachusetts                            34
Maryland                                 24
Maine                                    23
Connecticut                              22
New Hampshire                            20
New Jersey                               16
Virginia                                 14
Illinois                                 13
West Virginia                            13
Vermont                                  12
Rhode Island                              8
Indiana                                   7
Delaware                                  5
Tennessee                                 3
District of Columbia                      1
Kentucky                                  1
North Carolina                            1
                                       ----
                       Total:           452
                                       ====
</TABLE>

Purchasing

     We buy merchandise from more than 3,250 vendors,  approximately 88% of whom
are located in the United  States.  Merchandise  is purchased  centrally for all
stores  by  buyers  who are  based  at Ames  headquarters.  No  single  supplier
accounted for more than 4% of our purchases in Fiscal 2000. Although we have not
had problems to date,  the continued  availability  of  merchandise is likely to
depend on our ability to meet our sales and margin plans in the coming months.

     We work  actively  with  our  vendors  to  reduce  costs  and  improve  the
efficiency  of  our  supply  chain.  Nearly  2,300  vendors  participate  in our
electronic ordering and invoicing program.

Distribution

     We operate  distribution  centers  in  Leesport,  Pennsylvania;  Mansfield,
Massachusetts;  Columbus,  Ohio; and Westfield,  Massachusetts,  which aggregate
approximately 3.4 million square feet.  Merchandise is shipped by vendors either
directly  to  our  stores  or to  our  distribution  centers,  which  then  make
deliveries to the stores using our own fleet of trucks.

Management Information Systems

     In 1998, we invested approximately $35.0 million in hardware, software, and
communications  equipment  to automate  our store  operations.  This  investment
included  new  point-of-sale  devices,  office  equipment to automate the office
functions at each store as well as equipment to improve the receipt and stocking
of merchandise at the stores. In 1999, we invested  approximately  $20.4 million
in POS related  technology and equipment for the stores opened during the fiscal
year.  In 2000,  we  invested  approximately  $26.6  million in  technology  and
equipment.

     In June 1999,  we announced a five-year,  strategic  outsourcing  agreement
with IBM to support core information technology systems for the corporate office
and the stores. Under the agreement,  IBM Global Services is responsible for all
data center  operations and support for  substantially  all information  systems
equipment.

                                      -7-
<PAGE>

     We developed and implemented a target marketing tool that has enabled us to
evaluate  and use customer  information  derived  from our  "55Gold(R)  Savings"
program to enhance our ability to selectively  market to these customer  groups.
This marketing vehicle, which was fully implemented in January 2000, has enabled
us to perform direct mailings and identify  customers with cross-shop  marketing
opportunities.

     In January  2000,  we  implemented a Data  Warehouse  system  acquired from
Retek.  This system  supplies the  merchandising  and allocation  divisions with
information on our inventory,  selling, and vendor performance at the individual
SKU and store level of detail,  and  provides  new and better  views of critical
information in substantially less time than before,  allowing quicker and better
informed merchandising decisions.

     In  June  2000,  we  implemented  financial  systems  developed  by  Oracle
Corporation.  These financial systems provide us with an integrated solution for
much of our financial  information  with  significantly  enhanced  reporting and
analytical capabilities.

Competition

     We operate in an extremely competitive environment.  Many of our stores are
located in smaller  communities  and,  in some cases,  are the largest  non-food
retail store in their market area. We compete, however, with many smaller stores
offering a similar  range of  products.  Although  Ames is the largest  regional
discount  retailer in the United States,  we are still  considerably  smaller in
terms of our total number of stores,  sales and earnings  than the three leading
national chains:  Wal-Mart,  Kmart and Target Stores.  Each of these chains,  as
well as other regional operators,  currently operates stores within our regional
market and competes  with us for customers and  potential  store  locations.  We
anticipate a further increase in competition from these national  discount store
chains.

     Our merchandising focus is primarily directed to consumers who, we believe,
are underserved by the major national chains.  Although this approach,  combined
with our smaller store size,  has enabled us to compete  effectively  with these
chains and operate profitably in proximity to their stores, we remain vulnerable
to the  marketing  power and high  level of  consumer  recognition  of the major
national discount chains.

Seasonality

     Our business is seasonal in nature,  with a large  portion of our net sales
occurring   in  the  second  half  of  our  fiscal  year  as  a  result  of  the
back-to-school and Christmas shopping seasons. Net sales are highest in the last
fiscal  quarter  (34% of our  annual net sales in Fiscal  2000).  The demand for
working  capital is  heaviest  in May and from  August  through  November,  when
sufficient  merchandise  must be purchased for the spring,  back-to-school,  and
Christmas seasons, respectively.

Employees

     As of March 7, 2001, we employed approximately 32,700 people. Approximately
29,000  of  our  employees  work  in  various   capacities  within  our  stores,
approximately 2,700 are employed in our distribution  centers and the balance is
based at our corporate and regional offices. With the exception of approximately
1,850  employees  at our  distribution  centers  who are  covered by  collective
bargaining  agreements  that expire at various times from April 2002 to December
2003, none of our employees is represented by a union.

Patents, Trademarks and Licenses

     The mark "Ames" is  registered  with the United States Patent and Trademark
Office. We consider this mark and the associated name recognition to be valuable
to our business. We have a number of other trademarks,  trade names, and service
marks  including  "Bargains  by the  Bagful,  (R)"  "Crafts  &  More,  (R)"  and
"Pawsitively Pets. (R)" Although we consider these additional marks and licenses
to be  valuable  in the  aggregate,  none  of  them  individually  is  currently
considered to have a material impact on our business.

Item 2.    Properties.

     As of March 31, 2001, the Company's 452 operating stores covered a total of
approximately  31.0 million square feet. The average store size is approximately
68,700 square feet, of which approximately 80% is selling area.

                                      -8-
<PAGE>

     The construction of one store,  located in Monroeville,  Pennsylvania,  was
financed with an  industrial  development  bond.  Ames has an option to purchase
this  location at nominal cost at the  expiration of the lease term in May 2003.
Ames owns the building and leases the land occupied by the store in Mercerville,
New Jersey.  The land and buildings for five other store  locations are owned by
Ames.  Ames leases the remainder of its stores with leases whose terms expire at
various  times  between  2001 and 2026.  The leases  generally  have one or more
renewal options,  typically  permitting an extension for at least five years. In
addition,  the leases  generally  provide for fixed annual  rentals,  payment of
certain taxes,  insurance,  and other charges, and additional rentals based on a
percentage of sales in excess of certain fixed amounts. Most of the fixtures and
equipment  in the former  Hills  stores  are  leased.  Except  for  vendor-owned
greeting card  equipment  and leased shoe  department  equipment,  Ames owns the
fixtures and equipment in its other stores,  some of which is subject to various
financing arrangements.

     Ames warehouse and  distribution  facilities in Leesport,  Pennsylvania and
Mansfield,  Massachusetts are owned by the Company and occupy  approximately 1.7
million square feet in the aggregate. The warehouse and distribution facility in
Westfield,  Massachusetts  is a leased  property  that  comprises  approximately
649,000 square feet. The warehouse and distribution facility in Columbus,  Ohio,
a leased property, is approximately 1.1 million square feet.

     Ames leases  approximately  386,000 square feet of space in Rochester,  New
York under a lease  expiring on December  31, 2007,  with two  ten-year  renewal
options.  These premises have been subleased to an  unaffiliated  tenant for the
remainder of the lease term.

     Ames owns and occupies its 225,000  square foot  corporate  office in Rocky
Hill,   Connecticut.   Ames  has  a  lease  for  11,000   square  feet  for  its
plan-o-gramming  facility in Rocky Hill,  which expires in November  2006, and a
lease,  which  expires  in  April  2006,  for  a  33,000  square  foot  in-house
photography studio and print shop in Rocky Hill.

Item 3.   Legal Proceedings.

     On December  15, 1998,  a class  action  complaint  was filed in the United
States District Court for the District of Connecticut entitled Edmond Smoot, III
and  Yousef  S.A.  Syed,  Individually  and on  Behalf of All  Others  Similarly
Situated  v. Ames  Department  Stores,  Inc.  The  Complaint  alleged  that Ames
violated the Fair Labor Standards Act and state laws in those states in which it
does  business  by failing  to pay Smoot,  Syed,  and other  similarly  situated
Assistant Managers time and one-half their regular rates of pay for hours worked
in excess of 40 hours a week.  The  allegations  are similar to a previous class
action  lawsuit  entitled  Colleen  Austin,  on Behalf  of  Herself  and  Others
Similarly  Situated v. Ames Department  Stores,  Inc. et.al., as reported in the
Company's  Form 10-K for the fiscal  year ended  January 29,  2000.  The Company
settled the Austin class action  lawsuit as well as other similar  lawsuits that
were  filed in 1995 and 1996,  as  reported  in the  Company's  Form 10K for the
fiscal  year ended  January 29,  2000.  The  alleged  class the current  lawsuit
attempts to  represent  is those  Assistant  Managers  who did not opt-in to the
settlement of the Austin complaint, those who opted in and continued to work for
Ames,  and those who worked for Ames as an  Assistant  Manager  after August 19,
1998, but who are not otherwise covered by the previous  categories.  Ames filed
an answer in the case in which it denied  liability  on the basis that Smoot and
Syed and other similarly  situated Assistant managers were exempt employees and,
thus,  not  entitled to  overtime  pay. On  November  14,  2000,  the Court gave
preliminary  approval to a class action  settlement that had been reached by the
parties. Notice of the settlement and Fairness Hearing for final approval of the
settlement  was mailed to class members.  The deadline for filing  objections to
the  settlement  has passed and no  objections to the  settlement  were filed by
class  members.  The  Fairness  Hearing  will be held on  April  30,  2001.  The
settlement,  if  approved,  will  require an  evidentiary  hearing on the proper
classification  of  the  Assistant  Manager  position.  The  total  cost  of the
settlement  to the  Company  will  depend  upon the  outcome of the  evidentiary
hearing.  In the event the Company prevails,  the total cost to the Company will
be $1 million dollars,  inclusive of attorney's fees. If the plaintiffs  prevail
at the evidentiary  hearing, the cost to the Company will be $3 million dollars,
exclusive  of  attorney's  fees.  A date has not  been  set for the  evidentiary
hearing.

Other Matters

     Ames is party to various claims and legal proceedings covering a wide range
of matters that arise in the ordinary course of its business. Ames believes that
its  probable  liability as to these  matters  will not have a material  adverse
effect on its consolidated financial position or results of operations.

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

     There were no matters submitted during the fourth quarter of Fiscal 2000 to
a vote of security holders, through the solicitation of proxies or otherwise.

                                      -9-
<PAGE>

                                     PART II


Item 5.   Market  for the  Registrant's  Common  Stock and  Related  Matters
          Concerning Security Holders.

     Our common stock is traded on the NASDAQ  National  Market System under the
symbol "AMES." The following table provides the high and low sale prices for our
common stock as reported on NASDAQ for the fiscal  quarterly  periods  indicated
below. These prices do not include retail markups, markdowns or commissions.
<TABLE>
      <S>                    <C>            <C>             <C>        <C>

                              Fiscal 2000                   Fiscal 1999
                       -----------------------------   ------------------------
                              Low            High            Low        High
                              ---            ----            ---        ----
      1st Quarter          $ 13.63         $ 29.38        $ 25.38     $ 38.75
      2nd Quarter             6.25           19.06          34.81       48.88
      3rd Quarter             3.63             8.38         27.63       42
      4th Quarter             0.44            6.34          20.75       34.92
</TABLE>

     On March 30, 2001, there were approximately  6,200 holders of record of the
common stock. On that date, the reported  closing sale price of our common stock
was $2.09.

     We paid no  quarterly  dividends  to the holders of our common stock during
these  periods.  Dividends  cannot be  declared  under  the terms of our  credit
facility.  Any  future  determination  to  pay  cash  dividends  will  be at the
discretion  of the board of directors  and will be dependent  upon our financial
condition,  operating results,  capital requirements,  and such other factors as
the board of directors deems relevant.

Item 6.    Selected Financial Data.

     The following selected financial data of Ames should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as the Consolidated  Financial Statements and related Notes
appearing elsewhere in this annual report on Form 10-K.

                                   (In millions, except per share data)
<TABLE>
<S>                                <C>              <C>              <C>                 <C>               <C>
                                   Fiscal Year      Fiscal Year        Fiscal Year        Fiscal Year       Fiscal Year
                                      Ended            Ended              Ended              Ended             Ended
                                   Feb. 3, 2001    Jan. 29, 2000     Jan. 30, 1999      Jan. 31, 1998      Jan. 25, 1997
                                   ------------    -------------     --------------     --------------     -------------
                                       (b)                                                    (b)
Net sales (a)........................ $3,953.6         $3,836.9           $2,498.6           $2,225.5          $2,155.3
Net (loss) income..................     (240.6)(c)         17.1(d)            33.8(e)            34.5(f)           17.3(g)
Basic  net  (loss)  income  per
common share.....................        (8.19)(c)         0.62(d)            1.47(e)            1.59(f)           0.85(g)
Diluted  net (loss)  income per
common share.....................        (8.19)(c)         0.62(d)            1.40(e)            1.46(f)           0.79(g)(h)
Total assets........................   1,995.7          1,975.3            1,483.4              610.0             536.8
Long-term   debt  and   capital
leases...............................    771.4            602.2              287.7               35.7              38.2
</TABLE>

     (a)  Net sales for fiscal years ended February 3, 2001 and January 29, 2000
          reflect the change in accounting for layaway sales adopted pursuant to
          SAB 101 (see Note 1 to the Consolidated  Financial Statements) and net
          sales for fiscal years ended January 30, 1999,  January 31, 1998,  and
          January 25, 1997  reflect  adjustments  due to the effect of recording
          promotional coupons issued by Ames as markdowns, which conforms to the
          current treatment for coupon accounting.
     (b)  Fiscal years ended  February 3, 2001 and January 31, 1998 consisted of
          fifty-three  weeks;  all other years presented  consisted of fifty-two
          weeks.
     (c)  Includes  charges of $139.3 million for the costs  associated with the
          closing of  thirty-two  stores,  including a $9.5  million  charge for
          inventory  impairment,  and an extraordinary loss, net of tax, of $7.0
          million for the early extinguishment of debt.
     (d)  Includes  cumulative  effect  adjustment  for change in accounting for
          layaway  sales of $1.1 million,  net of $0.6 million tax benefit,  and
          the recognition of approximately $38 million in tax benefits.
     (e)  Includes  charges of $8.2  million for the costs  associated  with the
          closing of seven stores.
     (f)  Includes  charges of $1.6  million for the costs  associated  with the
          closing of two stores.
     (g)  Includes  charges of $9.7  million for the costs  associated  with the
          closing of thirteen stores and an  extraordinary  loss, net of tax, of
          $1.4 million for the early extinguishment of debt.
     (h)  Net (loss) income per common share has been restated to conform to the
          requirements  of Statement of Financial  Accounting  Standards No. 128
          "Earnings per Share."

                                      -10-
<PAGE>

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

     The Ames fiscal year ends on the Saturday  nearest January 31st. Our fiscal
years ended January 29, 2000 and January 30, 1999,  which we refer to as "Fiscal
1999" and "Fiscal 1998," respectively,  consisted of fifty-two weeks. Our fiscal
year ended February 3, 2001,  which we refer to as "Fiscal  2000,"  consisted of
fifty-three weeks.

     The following  discussion and analysis  should be read in conjunction  with
the Consolidated  Financial  Statements and related Notes appearing elsewhere in
this annual report on Form 10-K.

Results of Operations

Fiscal 2000 Compared to Fiscal 1999

     The following table illustrates the consolidated  results of operations for
the  fifty-three  weeks ended February 3, 2001, as compared to the  consolidated
results of operations for the fifty-two weeks ended January 29, 2000.
<TABLE>
<S>                                                         <C>               <C>            <C>
                                                            Fiscal            Fiscal         Percentage
                                                            2000              1999            Change
                                                        --------------    -------------    --------------
                                                            (In millions, except per share amounts)
Total net sales                                              $3,953.6        $3,836.8               3.0%
Leased department and other income                               46.4            41.7              11.3%
                                                        --------------    -------------
Total revenue                                                 4,000.0         3,878.5               3.1%
Costs and expenses:
   Cost of merchandise sold                                   2,932.2         2,715.4               8.0%
   Selling, general, and administrative expense               1,058.7         1,068.2             (1.0)%
   Depreciation and amortization expense, net                    79.7         65.5                 21.7%
   Interest and debt expense, net                                88.0         60.8                 44.7%
   Store closing charge                                         129.8              -                100%
                                                        --------------    -------------
Loss before income taxes                                      (288.4)           (31.4)
Income tax benefit                                               54.8             49.6
                                                        --------------    -------------
(Loss) income before cumulative effect adjustment             (233.6)             18.2
Cumulative effect adjustment, net of tax                       -                  (1.1)
                                                        --------------    -------------
(Loss) income before extraordinary item                         (233.6)           17.1
Extraordinary item, net of tax                                    (7.0)           -
                                                        ==============    =============
Net (loss) income                                              $(240.6)         $17.1
                                                        ==============    =============
</TABLE>

     The consolidated  results of operations for Fiscal 1999 include the results
of the former Hills store during the period they were  operated by  professional
liquidators  under an agency  agreement  (see  detailed  discussion  below under
"Fiscal 1999 Compared to Fiscal 1998").

     During Fiscal 2000, beginning in early spring, our business was affected by
a number of economic  conditions.  With higher  gasoline prices leading the way,
our customers' disposable income levels were reduced, affecting their purchasing
power. This, coupled with a cold and wet spring, resulted in lower than forecast
sales. A cool summer,  continued high gasoline prices,  and an economic slowdown
later in the year further affected our sales.

     As  the  economy  continued  to  slow  in the  third  quarter,  we  reacted
decisively with a focus on reducing inventories for the fall and Holiday season,
curtailing  selling,  general,  and  administrative  expenses,  limiting capital
expenditures,  and  reviewing our store base to ensure that we closed all stores
whose closure would result in a net cash flow improvement.

     The increases in net sales and leased department and other income in Fiscal
2000 compared to Fiscal 1999 are primarily  attributable  to the net addition of
twenty-four new stores during the year,  partially  offset by a 2.1% decrease in
same store sales.

                                      -11-
<PAGE>

     Gross margin  decreased  $100.0  million in Fiscal 2000  compared to Fiscal
1999.  Gross margin as a percentage of sales decreased from 29.2% in Fiscal 1999
to 25.8% in Fiscal  2000.  The  decrease  is  primarily  attributable  to higher
markdowns and a reduction in the vendor allowances  received in Fiscal 2000 when
compared  to Fiscal  1999 when we opened  163 new  stores.  We  incurred  higher
markdowns in 2000 than in 1999  resulting  from  significantly  higher  seasonal
clearance activities in the first half of 2000.

     The decrease in selling, general, and administrative expenses during Fiscal
2000 compared to Fiscal 1999 was primarily a result of a decrease in pre-opening
expenses  partially offset by a full year of operating expenses in the converted
former Hills stores. Selling,  general, and administrative expenses decreased as
a percentage of sales from 27.8% in Fiscal 1999 to 26.8% in Fiscal 2000.

     The increase in depreciation  and  amortization  expense during Fiscal 2000
compared to Fiscal 1999 resulted  primarily from a full year's  depreciation and
amortization of the fixed assets and beneficial lease rights acquired from Hills
in Fiscal 2000 compared to less than a full year's depreciation and amortization
in Fiscal 1999.

     The increase in interest expense in Fiscal 2000 is mainly attributable to a
higher level of borrowings under our revolving credit facility as well as a full
year of interest  expense  associated with the Ames Senior Notes issued in April
1999.

     The $129.8  million store closing  charge is related to the store  closings
previously announced, as described below. We recorded an extraordinary charge of
$7.0 million in Fiscal 2000 for the  write-off of deferred  financing  costs and
other exit expenses associated with the early termination of our prior revolving
credit facility.

     We recorded a  consolidated  income tax benefit of $54.8  million in Fiscal
2000  compared to $49.6  million in Fiscal  1999.  The  increase is  primarily a
result of our Fiscal 2000 operating loss partially  offset by an increase in the
valuation  allowance recorded against certain deferred tax assets. See Note 8 to
the Consolidated Financial Statements for additional information.

Store Closing Charges

     On November 9, 2000, we announced the planned closing of thirty-two stores.
All but one of the stores were  under-performing  stores that we acquired in the
Hills  acquisition  in December  1998. The other store was closed as a result of
the  expiration  of its lease.  In  connection  with the  closings,  we recorded
charges of $139.3 million, including a $9.5 million charge for the impairment of
inventory classified as part of cost of merchandise sold. The stores were closed
during the first quarter of 2001.

     The following  items  represent  the major  components of the total charges
recorded in connection with the store closings:
<TABLE>
                 <S>                                              <C>

                 Item                                             Charge
                                                               ---------------
                                                                 (in thousands)
                 Lease costs                                       $ 88,815
                 Net fixed asset write-down                          29,307
                 Other occupancy costs                                9,101
                 Severance costs                                      2,583
                                                               ---------------
                    Store closing charge                            129,806
                    Inventory write-down                              9,453
                                                               ---------------
                 Total charges                                     $139,259
                                                               ===============
</TABLE>

     The lease and  other  occupancy  costs  provided  for in the store  closing
charge  include  all  projected  occupancy  costs  from  date of  closing  until
estimated lease disposition date.

     Fixed  assets  associated  with the  closing  of stores  were  reviewed  to
determine  whether their recorded values had been diminished.  The review of the
closed stores  resulted in a write-down of $29.3  million which  includes  $19.7
million related to fixtures,  equipment,  and leasehold  improvements,  and $9.6
million related to beneficial lease rights.

     During Fiscal 2000 and Fiscal 1999, with respect to the thirty-two  stores,
we  recorded  net sales of $205.0  million  and  $147.7  million,  respectively,
exclusive of the period when the  thirty-one  former Hills stores were operating
under the "Hills" name. For the same years,  the pre-tax  operating loss for the
thirty-two stores was $20.4 million and $12.9 million, respectively.

                                      -12-
<PAGE>

     We expect to incur substantially all of the charges included in the reserve
except the lease and other  occupancy  costs in the first  quarter of the fiscal
year  ending  February  2, 2002.  Lease and other  related  occupancy  costs are
expected to be paid over the terms of the leases.  We expect to fund these costs
with cash from operations. We believe closing these under-performing stores will
improve profitability.

Fiscal 1999 Compared to Fiscal 1998

     On December 31, 1998, we acquired  approximately  81.3% of the  outstanding
voting stock of Hills Stores Company.  Accordingly,  the operations of Hills and
its  subsidiaries  during  the  month  of  January  1999  are  included  in  our
consolidated results of operations for Fiscal 1998.

     During  Fiscal  1999,  the  inventory  in the 155 former  Hills  stores was
liquidated,  and 151  stores  were  remodeled  and opened as Ames  stores.  This
process  was  completed  in  September  1999.  During  the  liquidation  period,
professional  liquidators  operated  the  former  Hills  stores  under an agency
agreement  with Ames.  Ames received a minimum  guaranteed  amount of 40% of the
initial  ticketed  retail price of the  inventory  sold and had the potential to
receive a greater return if the sale proceeds exceeded a specified percentage of
retail value. For financial reporting purposes in the charts that follow,  Hills
net sales  represent the actual sale proceeds from the  merchandise  liquidation
sales,  its cost of merchandise  sold represents the cost of merchandise sold as
adjusted  for the  guaranteed  return  amount,  and its  selling,  general,  and
administrative  expenses  include the portion of those  proceeds that were to be
paid to the liquidators.

     Upon completion of the  liquidation  and remodeling,  the Hills stores were
reopened and participated in grand opening promotions. Consequently, we incurred
higher than normal pre-opening and promotion expenses in Fiscal 1999.

     Because of the liquidation activity, the remodeling activity, and the large
volume of grand  openings  with  their  associated  expenses,  the  consolidated
operating results are not representative of those of a retailer operating in the
ordinary  course of  business  and are not  directly  comparable  to  previously
published Ames results exclusive of Hills.
<TABLE>
<S>                               <C>              <C>             <C>             <C>           <C>              <C>
                                  Fiscal
                                   1998                                         Fiscal 1999
                                   ----           --------------------------------------------------------------------------
                                                                                                 Layaway
                                   Ames             Ames           Hills           Other          Adj.            Total
                                                                               (In millions)
Total net sales                     $2,386.5        $3,465.6         $375.6            $--          $(4.4)        $3,836.8
Leased department and
other income..............              29.2            39.1            2.6             --              --            41.7
                              ---------------    ------------    -----------     ----------    ------------    ------------
Total revenue                        2,415.7         3,504.7          378.2             --           (4.4)         3,878.5
Costs and expenses:
   Cost of merchandise sold          1,711.3         2,467.8          251.2             --           (3.6)         2,715.4
   Selling, general, and
   administrative expense              606.9           838.7          153.0           76.5              --         1,068.2
   Depreciation and
   amortization expense, net            11.3            49.1           11.1            5.3              --            65.5
   Interest and debt expense,
   net                                  11.4            54.1            4.1            2.6              --            60.8

                              ---------------    ------------    -----------     ----------    ------------    ------------
Income (loss) before income
taxes.............                      74.8            95.0          (41.2)         (84.4)           (0.8)          (31.4)
Income tax (provision)
benefit.....................           (26.7)          (34.2)          14.8           68.7             0.3            49.6
                              ---------------    ------------    -----------     ----------    ------------    ------------
Income (loss) before
cumulative effect adj.                  48.1            60.8          (26.4)         (15.7)           (0.5)           18.2
Cumulative effect
adjustment, net of tax                    --              --             --             --            (1.1)           (1.1)
                              ---------------    ------------    -----------     ----------    ------------    ------------
Net income (loss)                      $48.1           $60.8         $(26.4)        $(15.7)          $(1.6)          $17.1
                              ===============    ============    ===========     ==========    ============    ============
</TABLE>

                                      -13-
<PAGE>


     The "Ames"  column for Fiscal 1998  (above)  represents  the results of the
Ames store base  excluding  (a) the results of  operations  for the Hills stores
acquired as of December 31, 1998 and (b) other costs and charges  related to the
Hills  acquisition.  Including  the effect of the Hills  stores and other  costs
related to the acquisition, we recorded consolidated net income of $33.8 million
for the fifty-two weeks ended January 30, 1999.

     The "Ames" column for Fiscal 1999 (above) represents (a) the results of the
Ames store  base,  (b) the  results  of the  former  Hills  stores  after  their
conversion  to  Ames  stores  and  (c)  certain  expenses  associated  with  the
acquisition  of Hills,  including  the interest  expense on the  acquired  Hills
senior notes and a pro rata share of the  amortization of the goodwill  recorded
in connection with the acquisition.

     The "Hills"  column for Fiscal 1999 (above)  represents  (a) the results of
operations  for the Hills  stores  during the  period  that  these  stores  were
operated  pursuant to an agency agreement,  including  depreciation and interest
expense  directly  associated with such stores and (b) Hills corporate  overhead
expenses, principally the Canton, Massachusetts's corporate facility (see Note 2
to the accompanying  Consolidated Financial Statements for further discussion of
the agency agreement accounting).

     The "Other"  column for Fiscal 1999 (above)  represents  expenses  incurred
during the period of  remodeling  the Hills stores (i.e.,  pre-opening  expenses
incurred  during the  conversion  or "dark"  period)  as well as  certain  other
expenses and tax benefits.

     The above "Layaway Adj." column  represents the impact of the change in the
method of accounting for layaway sales.  We adopted the change in accounting for
layaway  sales in the fourth  quarter of Fiscal 1999 in  consideration  of Staff
Accounting  Bulletin  No. 101 "Revenue  Recognition"  issued by the staff of the
Securities and Exchange Commission in December 1999.

     The liquidation and remodeling activity in the former Hills stores distorts
any direct comparison of the principal  components of Ames consolidated  results
for Fiscal 1999 and Fiscal 1998 and prior years. Accordingly,  in the discussion
that follows, Ames net sales, gross margin, selling, general, and administrative
expenses,  and its leased department and other income for Fiscal 1999 and Fiscal
1998 will be  compared  excluding  the  pre-conversion  Hills  results and other
charges.  The comparison of  depreciation  and  amortization  expense as well as
interest and debt expense will be on a consolidated basis.

     The $1.1 billion  increase in net sales in Fiscal 1999 was due primarily to
the sales  contribution of the former Hills stores after  conversion to the Ames
format and 6.2% growth in same store sales. We experienced  strong  increases in
our Ladies Sportswear, Toys and Home Entertainment departments.

     A substantial portion of the $9.9 million increase in leased department and
other income in Fiscal 1999 resulted from additional leased sales originating in
the  former  Hills  stores,  as  well  as an  increase  in  layaway  fees,  also
originating in the former Hills stores.

     Gross margin  increased  $322.6  million in Fiscal 1999  compared to Fiscal
1998.  The increase is  primarily  attributable  to the  inclusion of the former
Hills  stores and an  increase  in the gross  margin rate from 28.3% to 28.8% in
Fiscal  1999.  The  gross  margin  rate in  Fiscal  1999  benefited  from  lower
markdowns.

     The  $231.8  million  increase  in  selling,  general,  and  administrative
expenses  in Fiscal 1999 was  primarily  a result of the  addition of the former
Hills stores.  Selling,  general,  and  administrative  expenses  decreased as a
percentage  of net sales from 25.4% in Fiscal 1998 to 24.2% in Fiscal 1999.  The
decrease  resulted  from the  6.2%  comparable  store  sales  gain and  improved
efficiencies of scale due to the Hills acquisition.

     Depreciation  and  amortization  expense  increased $51.0 million in Fiscal
1999 compared to Fiscal 1998. The increase resulted from additional depreciation
and  amortization  of the former Hills fixed assets and beneficial  lease rights
and the  amortization  of  goodwill.  The  beneficial  lease rights and goodwill
related to the Hills  acquisition are being  amortized on a straight-line  basis
over the term of the  underlying  lease  (twenty-five  years on average) for the
lease rights and twenty-five years for goodwill.  The amortization of the excess
of our revalued net assets over equity under fresh start reporting  remained the
same in Fiscal  1999 as in Fiscal  1998.  We are  amortizing  this amount over a
ten-year period, which will conclude in January 2003.

                                      -14-
<PAGE>

     Net interest  expense  increased  $45.6  million in Fiscal 1999 compared to
Fiscal  1998.  The  increase  was  primarily  attributable  to interest  expense
incurred  for our 10%  senior  notes,  the Hills  capital  lease  and  financing
obligations,  and a higher level of borrowings under our bank credit  agreement.
During Fiscal 1999, we completed the issuance of our 10% senior notes to support
the  conversion  of the former  Hills  stores.  See the  liquidity  and  capital
resources section of this document for further discussion of these events.

     We recorded a  consolidated  income tax benefit of $49.6  million in Fiscal
1999  compared to an $18.8  million  provision in Fiscal  1998.  The Fiscal 1999
benefit  primarily  represents  the reduction of a valuation  allowance of $38.1
million previously recorded against certain deferred tax assets,  which reflects
our  expectation  of using  the net  operating  loss  carry-forwards  and  other
deferred tax assets in the foreseeable future.

Liquidity and Capital Resources

     Our  principal  sources of liquidity  are our credit  agreement,  cash from
operations,  and cash on hand. Our current credit agreement, which expires March
2, 2004, provides for a credit facility of up to $800 million.  Borrowings under
the agreement are secured by substantially all of our assets and we are required
to meet  certain  financial  covenants  if our  availability  under  the  credit
agreement falls below specified levels.  Our peak borrowing level in Fiscal 2000
under our previous bank credit agreement was $611.1 million.

     On April 27, 1999, we completed the sale of $200 million of Ames 10% senior
notes.  The net proceeds from the sale of the Ames senior  notes,  approximately
$193.4 million, were used to reduce outstanding borrowings under our bank credit
facility.  The Ames senior notes pay interest semi-annually in April and October
and mature in April 2006.

     On May 24, 1999, we completed the public  offering of 5.1 million shares of
Common  Stock at a price of $38.75  per share.  The  proceeds  of  approximately
$187.3  million,  net  of  underwriting  discounts,  were  used  to  reduce  our
borrowings under the bank credit facility and for general corporate purposes.

     Our cash position  increased $19.1 million during Fiscal 2000. The increase
was due primarily to $187.3 million in additional  credit  agreement  borrowings
partially  offset by $127.1  million of capital  expenditures,  a  reduction  in
accrued  expenses of $18.9 million,  and debt  repayments of $22.7 million.  Our
cash position  decreased  $5.1 million  during Fiscal 1999. The decrease was due
primarily to $209.6 million of capital  expenditures,  inventory  investments of
$181.5 million, and $25.8 million in debt and capital lease payments,  partially
offset by $129.6 million of borrowings under our bank credit  agreement,  $193.4
million from the issuance of the Ames senior notes, and the net amount of $187.3
million from the issuance of Common Stock.

     The $87.3  million  decrease  in  merchandise  inventories  in Fiscal  2000
resulted  from our efforts to minimize  inventories  in the wake of the economic
slowdown. Merchandise inventories increased $210.1 million in Fiscal 1999 due to
the  addition of twelve new stores,  in  addition to fully  stocking  the former
Hills stores and recording  the inventory in the converted  Hills stores at cost
in Fiscal 1999 as compared to liquidation value in Fiscal 1998.

     Net fixed  assets  increased  by $46.2  million  during  Fiscal 2000 due to
$127.1  million in capital  expenditures  partially  offset by $84.7  million in
depreciation expense. Net fixed assets increased by $130.1 million during Fiscal
1999 due to $209.6  million  in  capital  expenditures,  primarily  relating  to
remodeling  the former Hills  stores,  and opening  twelve other  stores.  These
additions were partially offset by the additional  writedown of $29.8 million in
fixed  assets  acquired  from Hills and  depreciation  expense of $61.1  million
recorded during Fiscal 1999.

     Beneficial  lease rights  represent  the excess of the fair market value of
the acquired Hills leases over contract value of those leases. We are amortizing
this amount over the terms of the related leases using the straight-line method.

     The $2.6  million  reduction  in goodwill  in Fiscal 2000 is entirely  from
amortization.  Goodwill  decreased  $169.4 million in Fiscal 1999 as a result of
the final  determination  of the fair market value of the assets and liabilities
acquired with the Hills stores and a full year of  amortization  expense,  which
approximated  $8.3  million.  The primary  changes were the  reduction of $114.1
million  deferred  tax  asset  valuation  allowance,   a  reduction  in  accrued
liabilities  and reserves of $48.3 million as these  liabilities  were no longer
deemed to be required,  and the increase of $28.3  million in inventory  values.
When the Hills  inventory was liquidated,  proceeds  generated were greater than
anticipated.  These changes were partially offset by an additional $29.8 million
write-down of fixed assets (primarily fixtures) acquired from Hills to recognize
their deemed fair value.  Goodwill is being  amortized  over  twenty-five  years
using the straight-line method.

     Accounts payable  increased $20.8 million in Fiscal 1999 due to an increase
in merchandise receipts in January 2000 over January 1999.

     Long-term  debt as of February 3, 2001  consisted of  borrowings  under our
bank credit  agreement of $361.8  million,  $44.3 million of Hills senior notes,
and $200 million of Ames senior notes.

                                      -15-
<PAGE>

     We believe that the availability under our credit agreement, along with our
current available cash plus expected cash flows from our operations, will enable
us to fund our expected needs for working  capital,  capital  expenditures,  and
debt service  requirements.  Our sales results in the fiscal month of March were
negatively impacted by severe weather, as was the case with others in the retail
industry,  and were well  below  plan,  contributing  directly  to an  unplanned
reduction in our borrowing availability. Achievement of expected cash flows from
operations and compliance with our credit agreement covenants (see Note 4 to the
Consolidated  Financial  Statements)  are  dependent  upon a number of  factors,
including  the  attainment  of  sales,  gross  profit,  expense  levels,  vendor
relations,  and flow of  merchandise  that  are  consistent  with our  financial
projections, particularly for the balance of the Spring season.

     Capital lease and financing  obligations  decreased by $18.1 million during
Fiscal  2000 as  payments  on capital  lease  obligations  exceeded  new capital
leases.

     We have not paid any cash dividends  during the past five fiscal years. The
payment of cash dividends is restricted under the terms of our credit agreement.

Capital Expenditures

     Capital  expenditures  for Fiscal 2000 were $127.1  million,  and primarily
consisted of costs related to the opening of twenty-six  new stores,  remodeling
of  twenty-three  stores,  and  systems  and  facility   improvements.   Capital
expenditures  for Fiscal 1999 were  $209.6  million  and  included,  among other
items,  the opening of twelve new stores,  the  remodeling  of the former  Hills
stores, and the upgrading of selected management information systems,  including
the completion of our chain-wide  installation of new point-of-sale  information
equipment and related software in our stores.

     Capital  expenditures  are expected to be  approximately  $40.0  million in
Fiscal 2001. These capital  expenditures will be primarily comprised of five new
stores and  maintenance  of our  existing  stores.  We expect to  finance  these
expenditures  through cash flow from operations and borrowings  under our credit
agreement.  Land,  buildings and improvements are financed  principally  through
long-term leases.

Seasonality

     Our business is seasonal in nature,  with a large  portion of our net sales
occurring   in  the  second  half  of  our  fiscal  year  as  a  result  of  the
back-to-school and Christmas shopping seasons. Net sales are highest in the last
fiscal  quarter  (34% of our  annual net sales in Fiscal  2000).  The demand for
working  capital is  heaviest  in May and from  August  through  November,  when
sufficient  merchandise  must be purchased for the spring,  back-to-school,  and
Christmas seasons, respectively.

Legal

     We are party to  various  claims and legal  proceedings  on a wide range of
matters  that arise in the ordinary  course of business.  Ames intends to defend
these  issues  vigorously  and  believes  that the final  outcome of the various
proceedings  will  not  have a  material  adverse  impact  on  its  consolidated
financial position or results of operations (see Item 3 Legal Proceedings).

New Accounting Matters

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

     In December  1999 the  Securities  and  Exchange  Commission  issued  Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition." Under SAB No. 101, we
were required to change the method in which we account for layaway sales.  Prior
to the adoption of SAB No. 101, we recorded  layaway sales when customers placed
merchandise  on  layaway.  The  pronouncement  mandates  that  layaway  sales be
recorded when the customer takes possession of the  merchandise.  We adopted SAB
No. 101 during the fourth quarter of Fiscal 1999,  effective as of the beginning
of Fiscal  1999.  The  impact  of  adopting  this  pronouncement  resulted  in a
cumulative  effect  adjustment  to Fiscal 1999  earnings of  approximately  $1.1
million, net of $0.6 million tax benefit.

                                      -16-
<PAGE>

Forward-Looking Statements

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

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

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

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

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

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

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

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

                                      -17-
<PAGE>

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

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

     Substantially all of our assets are encumbered by bank debt. At February 3,
2001, the amount of bank debt  outstanding was $361.8  million.  As of March 30,
2001,  we were in compliance  with all of the covenants  contained in our credit
agreement.  However, if we fail to comply with all of the covenants contained in
the credit  agreement  (including a fixed charge coverage ratio if our borrowing
availability  falls below a certain specified level) or otherwise default on our
secured  debt,  the lender could  foreclose  against our assets and  effectively
force a termination of our business. In addition, our leveraged position impairs
our ability to obtain additional financing to fund working capital requirements,
capital expenditures or other purposes.

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

     We incurred net losses of $240.6  million in our fiscal year ended February
3, 2001 and, to date,  consistent  with normal  seasonal  patterns as  discussed
above, we have continued to incur net losses in the first quarter in our current
fiscal  year.  There can be no  assurance  that losses will not  continue in the
future. If losses do continue to occur, we will likely need to obtain additional
capital to continue our operations.

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

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

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

     We do not speculate on the future  direction of interest  rates.  As of the
end of fiscal years 2000 and 1999 our  exposure to changing  market rates was as
follows:
<TABLE>
<S>                                                    <C>                       <C>

                                                       February 3, 2001          January 29, 2000
                                                      ----------------------    ---------------------
Variable rate long-term debt ($US).................   $361.8 million            $174.5 million
Average interest rate..............................     8.54%                     8.31%
</TABLE>

     A one percent  increase in the average interest rate would have resulted in
an additional $4.4 million in interest expense during Fiscal 2000.

Item 8.     Financial Statements and Supplementary Data.

        See Index to Consolidated Financial Statements.

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

        None.

                                      -18-
<PAGE>

                                    PART III
Item 10.   Directors and Executives of the Registrant.

     Information  as to the  officers and  directors of the Company  required by
Items 401 and 405 of Regulation S-K is incorporated herein by reference from the
information  set forth under the caption  "DIRECTORS AND EXECUTIVE  OFFICERS" of
the Company's  definitive proxy statement to be filed pursuant to Regulation 14A
under the  Securities  Exchange Act of 1934, as amended,  (the  "Exchange  Act")
within 120 days after the close of its fiscal year.

Item 11.   Executive Compensation.

     The  information  required by Item 402 of  Regulation  S-K is  incorporated
herein by reference  from the  information  set forth under the sections  titled
"Executive  Compensation,"  "Board Meetings and  Committees,"  "Compensation  of
Directors," "Employment Contracts, Termination,  Severance and Change-of-Control
Arrangements,"  "Additional  Information  with  respect  to Board  of  Directors
Interlocks  and  Insider   Participation   in  Compensation   Decisions,"   "The
Compensation   Committee's   Report  on  Executive   Compensation,"  and  "Stock
Performance  Graph" of the  Company's  definitive  proxy  statement  to be filed
pursuant  to  Regulation  14A under the  Exchange  Act within 120 days after the
close of its fiscal year.

Item 12.   Security Ownership of Certain Beneficial Owners and Management.

     The  information  required by Item 403 of  Regulation  S-K is  incorporated
herein by reference  from the  information  set forth under the sections  titled
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" of the  Company's  definitive  proxy  statement to be filed  pursuant to
Regulation  14A under the  Exchange  Act  within 120 days after the close of its
fiscal year.

Item 13.   Certain Relationships and Related Transactions.

     The  information  required by Item 404 of  Regulation  S-K is  incorporated
herein by  reference  from the  information  set forth under the section  titled
"Transactions  with  Management  and Others" of the Company's  definitive  proxy
statement to be filed  pursuant to Regulation  14A under the Exchange Act within
120 days after the close of its fiscal year.

                                     PART IV

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


      (a)  Documents Filed as Part of this Form 10-K

           1.   Financial Statements


                The Financial Statements listed in the accompanying Index to
                 Consolidated Financial Statements are filed as part of this
                 Form 10-K.


           2.   Financial Statement Schedule

                The Financial Statement Schedule listed in the accompanying
                 Index to Consolidated Financial Statements is filed as part of
                 this Form 10-K.


           3.   Exhibits

                The Exhibits filed as part of this Form 10-K are listed on the
                 Exhibit Index immediately preceding such Exhibits, incorporated
                 herein by reference.

      (b) There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.

                                      -19-
<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.


                          AMES DEPARTMENT STORES, INC.
                                  (Registrant)



Dated:     April 13, 2001                        /s/JOSEPH R. ETTORE
                                                 -------------------
                                                 Joseph R. Ettore,
                                                 Chairman, Chief Executive
                                                 Officer, and Director



Dated:     April 13, 2001                        /s/ROLANDO DE AGUIAR
                                                 --------------------
                                                 Rolando de Aguiar,
                                                 Senior Executive Vice
                                                 President, Chief Financial and
                                                 Administrative Officer



Dated:     April 13, 2001                        /s/MARK VON MAYRHAUSER
                                                 ----------------------
                                                 Mark von Mayrhauser,
                                                 Vice President, Controller


     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.



Dated:     April 13, 2001                        /s/FRANCIS X. BASILE
                                                 --------------------
                                                 Francis X. Basile, Director

Dated:     April 13, 2001                        /s/PAUL M. BUXBAUM
                                                 ------------------
                                                 Paul M. Buxbaum, Director

Dated:     April 13, 2001                        /s/ALAN COHEN
                                                 -------------
                                                 Alan Cohen, Director

Dated:     April 13, 2001                        /s/RICHARD M. FELNER
                                                 --------------------
                                                 Richard M. Felner, Director

Dated:     April 13, 2001                        /s/SIDNEY S. PEARLMAN
                                                 ---------------------
                                                 Sidney S. Pearlman, Director

Dated:     April 13, 2001                        /s/JOSEPH A. POLLICINO
                                                 ----------------------
                                                 Joseph A. Pollicino, Director

                                      -20-
<PAGE>











                          AMES DEPARTMENT STORES, INC.
                                AND SUBSIDIARIES

                       FINANCIAL STATEMENTS AND FINANCIAL
                               STATEMENT SCHEDULE
                                   (FORM 10-K)


                                    EXHIBITS

                  For the Fiscal Years Ended February 3, 2001,
                      January 29, 2000 and January 30, 1999


                 (With Report of Independent Public Accountants)


















                                      -21-
<PAGE>


                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES

            Index to Consolidated Financial Statements and Financial
                  Statement Schedule for the Fiscal Years Ended
             February 3, 2001, January 29, 2000 and January 30, 1999





<TABLE>
<S>                                                                                                <C>
Consolidated Financial Statements:

     Report of Independent Public Accountants......................................................23
     Consolidated Statements of Operations for the fiscal years ended February 3, 2001,
           January 29, 2000 and January 30, 1999...................................................24
     Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000.......................25
     Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended
           February 3, 2001, January 29, 2000 and January 30, 1999.................................26
     Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2001,
           January 29, 2000 and January 30, 1999...................................................27
     Notes to Consolidated Financial Statements....................................................28
</TABLE>

Schedule:
     II.  Valuation and Qualifying  Accounts for the fiscal years ended February
          3, 2001, January 29, 2000 and January 30, 1999.


Schedules Omitted:
     All  other  schedules  are  omitted  as  they  are  not  applicable  or the
information is shown in the consolidated financial statements or notes thereto.






                                      -22-
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of

 AMES DEPARTMENT STORES, INC.:


     We have  audited  the  accompanying  consolidated  balance  sheets  of Ames
Department Stores, Inc. (a Delaware corporation) and subsidiaries as of February
3, 2001 and  January  29,  2000,  and the  related  consolidated  statements  of
operations,  changes in stockholders'  equity and cash flows for the fifty-three
weeks ended February 3, 2001, and the fifty-two weeks ended January 29, 2000 and
January 30,  1999.  These  consolidated  financial  statements  and the schedule
referred  to below  are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and schedule based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States.  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,  the financial statements referred to above present fairly,
in all material respects, the financial position of Ames Department Stores, Inc.
and subsidiaries as of February 3, 2001 and January 29, 2000, and the results of
their  operations and their cash flows for the fifty-three  weeks ended February
3, 2001, and the fifty-two  weeks ended January 29, 2000 and January 30, 1999 in
conformity with accounting principles generally accepted in the United States.

     Our  audits  were  performed  for the  purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the purpose of complying with
the  Securities  and  Exchange  Commission's  rules and is not part of the basic
financial  statements.   This  schedule  has  been  subjected  to  the  auditing
procedures  applied in the audits of the basic financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.


                                                /s/Arthur Andersen LLP








New York, New York
March 16, 2001





                                      -23-
<PAGE>


                                   AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                     (In thousands, except per share amounts)
<TABLE>
<S>                                                                 <C>                <C>                 <C>


                                                                     53 Weeks            52 Weeks           52 Weeks
                                                                       Ended              Ended               Ended
                                                                    February 3,        January 29,         January 30,
                                                                       2001                2000               1999
                                                                   --------------     ---------------    ----------------
Net sales..........................................................  3,953,585          3,836,854           2,498,648
     Leased department and other income............................     46,413             41,690              30,164
                                                                   --------------     ---------------    ----------------
Total revenue......................................................  3,999,998          3,878,544           2,528,812

Costs and expenses:
     Cost of merchandise sold......................................  2,932,251          2,715,386           1,777,661
     Selling, general, and administrative expenses.................  1,058,668          1,068,175             660,593
     Depreciation and amortization expense, net....................     79,689             65,495              14,478
     Interest and debt expense, net................................     87,961             60,843              15,253
     Store closing charge..........................................    129,806                  -               8,222
                                                                   --------------     ---------------    ----------------

(Loss) income before income taxes..................................   (288,377)           (31,355)             52,605
Income tax benefit (provision).....................................     54,753             49,589             (18,775)
                                                                   --------------     ---------------    ----------------
Income before Cumulative Effect of Accounting Change...............   (233,624)            18,234              33,830
Cumulative Effect of Accounting Change, net of tax of $614.........          -             (1,107)                  -
                                                                   --------------     ---------------    ----------------
(Loss) income before extraordinary item............................   (233,624)            17,127              33,830
Extraordinary loss on early extinguishment of debt, net of tax.....     (6,964)                 -                   -
                                                                   --------------     ---------------    ----------------

Net (loss) income..................................................  ($240,588)           $17,127             $33,830
                                                                   ==============     ===============    ================

Basic net (loss) income per common share:
     Before Cumulative Effect of Accounting Change and
     Extraordinary item............................................     ($7.95)             $0.66               $1.47
     Cumulative Effect of Accounting Change, net of tax............          -              (0.04)                  -
     Extraordinary item, net of tax................................      (0.24)                 -                   -
                                                                   --------------     ---------------    ----------------
     Net (loss) income.............................................     ($8.19)             $0.62               $1.47
                                                                   ==============     ===============    ================

     Weighted average common shares................................     29,383             27,517              23,010
                                                                   ==============     ===============    ================
Diluted net income per common share:
     Before Cumulative Effect of Accounting Change and
     Extraordinary item............................................     ($7.95)             $0.66               $1.40
     Cumulative Effect of Accounting Change, net of tax............          -              (0.04)                  -
     Extraordinary item, net of tax................................      (0.24)                 -                   -
                                                                   --------------     ---------------    ----------------
     Net (loss) income.............................................     ($8.19) *           $0.62               $1.40
                                                                   ==============     ===============    ================

     Weighted average common and common equivalent shares               29,543             27,658              24,216
                                                                   ==============     ===============    ================

   * Common equivalent shares have not been included because the effect would be anti-dilutive.

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

                                      -24-
<PAGE>



                                   AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                      (In thousands, except per share amounts)
<TABLE>
<S>                                                                                          <C>            <C>
                                                                                             February 3,    January 29,
                                                                                                2001           2000
                                                                                            -------------- --------------
                                                         ASSETS
Current Assets:
     Cash and cash equivalents.............................................................     $49,761        $30,612
     Receivables:
       Trade...............................................................................       6,978          7,426
       Other...............................................................................      10,061         17,876
                                                                                            -------------- --------------
           Total receivables...............................................................      17,039         25,302
     Merchandise inventories...............................................................     744,132        831,387
     Prepaid expenses and other current assets.............................................      41,494         36,772
     Deferred taxes, net...................................................................      17,771         28,854
                                                                                            -------------- --------------
           Total current assets............................................................     870,197        952,927
                                                                                            -------------- --------------

Fixed Assets:
     Land and buildings....................................................................      32,179         25,388
     Property under capital leases.........................................................     180,585        176,107
     Fixtures and equipment................................................................     389,986        310,750
     Leasehold improvements................................................................     159,153        117,734
                                                                                            -------------- --------------
                                                                                                761,903        629,979
     Less - Accumulated depreciation and amortization......................................    (213,904)      (128,229)
                                                                                            -------------- --------------
            Net fixed assets...............................................................     547,999        501,750
                                                                                            -------------- --------------
Other assets and deferred charges..........................................................      56,490         57,256
Deferred taxes, net........................................................................     411,891        346,055
Beneficial lease rights, net...............................................................      50,675         56,280
Goodwill, net..............................................................................      58,475         61,026
                                                                                            -------------- --------------
            Total Assets...................................................................  $1,995,727     $1,975,294
                                                                                            ============== ==============
                                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable:
            Trade..........................................................................    $345,915       $325,356
            Other..........................................................................      78,371         96,224
                                                                                            -------------- --------------
                 Total accounts payable....................................................     424,286        421,580
                                                                                            -------------- --------------

     Current portion of capital lease and financing obligations............................      19,018         22,086
     Self-insurance reserves...............................................................      29,878         29,827
     Accrued compensation..................................................................      39,366         42,095
     Accrued expenses......................................................................      74,839         91,015
     Store closing reserves................................................................     179,365         55,468
                                                                                            -------------- --------------
                 Total current liabilities.................................................     766,752        662,071
                                                                                            -------------- --------------

Long-term debt.............................................................................     606,057        421,769
Capital lease and financing obligations....................................................     165,365        180,404
Other long-term liabilities................................................................      49,256         57,916
Excess of revalued net assets over equity under fresh-start reporting......................      11,715         17,868
Commitments and contingencies
Stockholders' Equity:
     Preferred stock (3,000,000 shares authorized; no shares issued or
       outstanding at February 3, 2001 and January 29, 2000, respectively; par
       value per share $.01) ..............................................................           -              -
     Common stock (40,000,000 shares authorized; 29,473,552 and 29,233,650 shares
       outstanding at February 3, 2001 and January 29, 2000, respectively; par value per
       share $.01).........................................................................         295            293
     Additional paid-in capital............................................................     532,654        530,744
     (Accumulated deficit) Retained earnings...............................................    (135,445)       105,143
     Treasury stock (80,495 and 79,495 shares at February 3, 2001 and January 29, 2000,
       respectively, at cost)..............................................................        (922)          (914)
                                                                                            -------------- --------------
                 Total stockholders' equity................................................     396,582        635,266
                                                                                            -------------- --------------
           Total Liabilities and Stockholders' Equity......................................  $1,995,727     $1,975,294
                                                                                            ============== ==============
               (The accompanying notes are an integral part of these consolidated financial statements.)
</TABLE>

                                      -25-
<PAGE>
<TABLE>
<S>                                                  <C>      <C>       <C>         <C>         <C>       <C>

                                                      AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                                               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                     (In thousands)

                                                                                     Retained
                                Preferred Stock      Common Stock        Additional  Earnings    Treasury Stock
                               -------------------- -------------------  Paid-In     (Accum.    -----------------    Total
                                Shares    Amount     Shares    Amount     Capital     Deficit)   Shares   Amount     Equity
                               ---------- --------- -------- ---------- ----------- ----------- -------- -------- -----------
Balance, January 31, 1998            -         -     22,506      $225    $118,971     $54,186         -        -    $173,382
Exercise of warrants...........                         824         8       1,387                                      1,395
Exercise of stock options,
net............................                         331         3       1,106                                      1,109
Issuance of common stock
pursuant to executive
employment agreement...........                          70         1       1,640                                      1,641
Issuance of restricted common
stock, net.....................                         190         2                                                      2
Vesting of restricted common
stock..........................                                               788                                        788
Recognition of tax attributes..                                           112,775                                    112,775
Acquisition of treasury shares.                                                                    (79)   ($914)        (914)
Net income.....................                                                         33,830                        33,830
                               ---------- --------- -------- ---------- ----------- ----------- -------- -------- -----------
Balance, January 30, 1999            -         -     23,921      $239    $236,667      $88,016     (79)   ($914)    $324,008
Exercise of stock options, net.                         170         2       1,073                                      1,075
Issuance of common stock
pursuant to the equity offering                       5,100        51     187,211                                    187,262
Issuance of restricted common
stock, net.....................                          30         1                                                      1
Issuance of common stock to
Board of Directors.............                          12                   367                                        367
Recognition of tax attributes..                                           105,426                                    105,426
Net income.....................                                                         17,127                        17,127
                               ---------- --------- -------- ---------- ----------- ----------- -------- -------- -----------
Balance, January 29, 2000            -         -     29,233      $293    $530,744     $105,143     (79)   ($914)    $635,266
Exercise of warrants...........                         100         1         591                                        592
Exercise of stock options, net.                         145         1         550                                        551
Forfeiture of restricted common
stock, net.....................                          (5)
Acquisition of treasury shares.                                                                     (1)      (8)          (8)
Stock option compensation......                                               774                                        774
Other..........................                                                (5)                                        (5)
Net loss.......................                                                       (240,588)                     (240,588)
                               ---------- --------- -------- ---------- ----------- ----------- -------- -------- -----------
Balance, February 3, 2001            -         -     29,473     $ 295    $532,654    ($135,445)    (80)   ($922)    $396,582
                               ========== ========= ======== ========== =========== =========== ======== ======== ===========

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

                                      -26-
<PAGE>


                                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (In thousands)
<TABLE>
<S>                                                                 <C>                <C>                 <C>

                                                                    53 Weeks            52 Weeks            52 Weeks
                                                                      Ended              Ended               Ended
                                                                   February 3,        January 29,         January 30,
                                                                      2001                2000                1999
                                                                  ----------------    ---------------     ---------------
Cash flows from operating activities:
   Net (loss) income...........................................     ($240,588)           $17,127             $33,830
      Cumulative Effect of Accounting Change...................             -              1,107                   -
                                                                  ----------------    ---------------     ---------------
   Net (loss) income before cumulative effect adjustment.......      (240,588)            18,234              33,830
   Expenses not requiring the outlay of cash:
      Income tax (benefit) provision...........................       (54,753)           (49,589)             18,275
      Extraordinary loss on early extinguishment of debt, net
      of tax...................................................         6,964                  -                   -
      Depreciation and amortization of fixed and other assets..        87,739             65,495              15,487
      Amortization of debt discounts and deferred financing
      costs....................................................         4,788              4,880               2,787
      Other, net...............................................           344             (1,841)             (3,514)
                                                                  ----------------    ---------------     ---------------
Cash (used for)provided by operations before changes in
working capital and store closing activities...................      (195,506)            37,179              66,865
Changes in working capital:
   Decrease (increase) in receivables..........................         8,263              4,942              (6,787)
   Decrease (increase) in merchandise inventories..............        87,255           (181,546)             12,259
   (Increase) decrease in prepaid expenses and other current
    assets.....................................................        (4,722)           (20,697)             (2,962)
   Increase in accounts payable................................         2,706             20,823              12,233
   (Decrease) increase in accrued expenses and other
    current liabilities........................................       (26,886)           (91,467)             24,302
Changes due to store closing activities:
   Payments of store closing costs.............................        (5,909)            (9,470)             (2,547)
   Store closing charge........................................       129,806                  -               8,222
                                                                  ----------------    ---------------     ---------------
Net cash (used for) provided by operating activities                   (4,993)          (240,236)            111,585
                                                                  ----------------    ---------------     ---------------
Cash flows from investing activities:
   Acquisition costs, net of cash acquired.....................             -                  -            (103,857)
   Purchases of fixed assets...................................      (127,075)          (209,606)            (51,602)
   Purchases of leases.........................................        (7,054)           (38,835)                  -
                                                                  ----------------    ---------------     ---------------
Net cash used for investing activities                               (134,129)          (248,441)           (155,459)
                                                                  ----------------    ---------------     ---------------
Cash flows from financing activities:
   Borrowings under the revolver credit facilities, net........       187,251            129,609              44,935
   Payments on debt and capital lease obligations..............       (22,668)           (22,191)            (16,262)
   Repurchase of Hills senior notes............................        (2,852)            (4,636)                  -
   Proceeds from the issuance of senior notes..................             -            200,000                   -
   Proceeds from the issuance of common stock, net.............             -            187,262                   -
   Payments of deferred financing costs........................        (4,595)            (7,939)            (10,902)
   Proceeds from the exercise of options and warrants..........         1,143              1,440               4,933
   Purchase of treasury stock..................................            (8)                 -                (914)
                                                                  ----------------    ---------------     ---------------
Net cash provided by financing activities......................       158,271            483,545              21,790
                                                                  ----------------    ---------------     ---------------
Increase (decrease) in cash and cash equivalents...............        19,149             (5,132)            (22,084)
Cash and cash equivalents, beginning of period.................        30,612             35,744              57,828
                                                                  ----------------    ---------------     ---------------
Cash and cash equivalents, end of period.......................       $49,761            $30,612             $35,744
                                                                  ================    ===============     ===============

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

                                      -27-
<PAGE>



                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Summary of Significant Accounting Policies:

(a)   Nature of operations:

     Ames Department Stores, Inc. (a Delaware  corporation) and its subsidiaries
(collectively, "Ames" or the "Company") are retail merchandisers operating under
one  business  segment.  As of  March  31,  2001,  Ames  operated  452  discount
department stores in nineteen states in the Northeast, Midwest, and Mid-Atlantic
regions, as well as the District of Columbia.

 (b)  Basis of presentation and principles of consolidation:

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosures  of contingent  assets and  liabilities at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

     The consolidated  financial statements include the accounts of Ames and its
subsidiaries,  all of which are  wholly-owned.  All  intercompany  accounts  and
transactions have been eliminated.

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

(c)    Fiscal year:

     The Company's fiscal year ends on the Saturday nearest to January 31st. The
fiscal  year  ended  February  3,  2001  ("Fiscal  2000"  or  "2000")   included
fifty-three  weeks.  The fiscal years ended January 29, 2000  ("Fiscal  1999" or
"1999") and January 30, 1999 ("Fiscal 1998" or "1998") included fifty-two weeks.

(d)   Cash and cash equivalents:

     Ames considers all highly liquid  investments with an original  maturity of
three  months  or less when  purchased  to be cash and cash  equivalents.  As of
February  3,  2001  and  January  29,  2000,   there  were  no  such  short-term
investments.

(e)   Inventory valuation:

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

(f)   Internal use software:

     The Company adopted  Statement of Position ("SOP") 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" effective the
beginning of Fiscal 1999.  Prior to Fiscal 1999, the Company  expensed the costs
of  developing  or obtaining  internal  use software as incurred.  The amount of
internal use software cost capitalized in 1999 and 2000 was  approximately  $1.6
million and $2.4 million, respectively.

(g)  Fixed assets:

     Land and buildings,  fixtures and equipment, and leasehold improvements are
recorded  at  cost.   Major   replacements   and  betterments  are  capitalized.
Maintenance and repairs are charged to earnings as incurred.  The cost of assets
sold  or  retired  and the  related  amounts  of  accumulated  depreciation  are
eliminated from the accounts in the year of disposal, with the resulting gain or
loss included in earnings.

                                      -28-
<PAGE>

(h)    Intangible assets:

     Beneficial  lease  rights  represent  the excess of fair market  value over
contract  value of certain of the leases  acquired in the  acquisition  of Hills
(see Note 2 for further  explanation).  Goodwill  represents  the excess of cost
over the fair value of net tangible  assets acquired at the date of acquisition.
As of February 3, 2001,  accumulated  amortization  of goodwill and  accumulated
amortization  of  beneficial  lease rights were $11.6  million and $8.2 million,
respectively.

     The recoverability of the carrying values of intangible assets is evaluated
periodically  based on a review  of  forecasted  operating  cash  flows  and the
profitability of the related business. There were no material adjustments to the
carrying values of intangible  assets resulting from these evaluations in Fiscal
1999 and 1998. During Fiscal 2000, beneficial lease rights totaling $9.6 million
and $2.8 million were  written off due to the closing of  thirty-two  stores and
the write-off of impaired  assets,  respectively,  under  Statement of Financial
Accounting Standards ("SFAS") No. 121.

(i)   Depreciation and amortization:

     Buildings  and  fixtures  and  equipment  are  recorded  at  cost  and  are
depreciated  on  a  straight-line  basis  over  their  estimated  useful  lives.
Buildings  are  depreciated  over 31.5 years,  furniture  and fixtures  over ten
years,  equipment over seven years, motor vehicles over five years, and computer
software and hardware over three to five years.  Property  under capital  leases
and leasehold  improvements  are depreciated over the shorter of their estimated
useful lives or their related lease terms.  The Company  currently has buildings
with an  aggregate  net book  value of $117.4  million  and $111.4  million  and
point-of-sale equipment with a net book value of $35.3 million and $25.8 million
under capital leases for Fiscal 1999 and 2000, respectively.

     Beneficial  lease rights are being  amortized over the terms of the related
leases  (which  average  approximately  twenty-five  years).  Goodwill  is being
amortized over a twenty-five year period.

     The excess of revalued net assets over equity under  fresh-start  reporting
is being  amortized over a ten-year  period.  The amount recorded as a credit to
depreciation and amortization was $6.2 million in each of Fiscal 2000, 1999, and
1998.

     The unfavorable lease liability is being amortized on a straight-line basis
over the applicable lease terms (see Note 5).

     Depreciation and amortization includes adjustments recorded pursuant to the
application of Statement of Financial  Accounting  Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The Company did not record an impairment  loss during Fiscal 1999 and 1998,
but recorded an impairment charge of $5.0 million for Fiscal 2000.

(j)  Deferred charges:

     Debt  transaction  costs  and  related  issue  expenses  are  deferred  and
amortized over the term of the associated  debt.  Lease  acquisition and related
costs are deferred and amortized over the term of the lease.

(k)   Income taxes:

     Ames files a  consolidated  federal  income tax return.  Recorded  deferred
income  taxes are  provided for at  currently  effected  statutory  rates on the
differences  in the  basis  of  assets  and  liabilities  for tax and  financial
reporting  purposes.  If recorded,  deferred  income taxes are classified in the
balance sheet as current or non-current based upon the expected future period in
which such deferred income taxes are anticipated to reverse.

(l)   Self-insurance reserves:

     The Company is self-insured for workers  compensation,  general  liability,
property and  casualty,  and accident and health  insurance  claims,  subject to
certain  limitations.  The Company has  insurance  coverage  for losses that may
occur above certain  levels.  As of February 3, 2001 and January 29, 2000,  Ames
had  established  self-insurance  reserves of $60.5  million and $66.8  million,
respectively.  The long-term  portion of these reserves is classified as part of
other long-term  liabilities in the Consolidated  Balance Sheets. These reserves
are subject to changes in  estimates as claims are settled or continue to remain
outstanding.

                                      -29-
<PAGE>

(m)   Leased department and other income:

     Ames has an  agreement  with an  independent  contractor  that  allows  the
independent  contractor to operate shoe departments within the Ames stores. Ames
receives a percentage of the sales under the agreement.

(n)   Revenue Recognition:

     The Company  recognizes  revenue  when its  customer  takes  possession  of
merchandise.  An appropriate  return for estimated sales returns is recorded and
is  reflected  in accrued  expenses  in the  accompanying  Consolidated  Balance
Sheets.

     The Company adopted Staff  Accounting  Bulletin  ("SAB") No. 101 during the
fourth  quarter of Fiscal 1999,  effective  as of the  beginning of Fiscal 1999.
Prior to the adoption of SAB No. 101, the Company  recorded  layaway  sales when
customers placed merchandise on layaway. SAB No. 101 mandates that layaway sales
be recorded when the customer takes possession of the merchandise. The impact of
adopting  this SAB resulted in a cumulative  effect  adjustment to 1999 earnings
for approximately $1.1 million, net of $0.6 million tax benefit.

(o)   Advertising Expense:

     The Company  participates in cooperative  advertising programs supported by
our vendors. Advertising costs are expensed as incurred and are presented net of
any funds received from vendors for these programs.  The Company expensed $136.6
million,  $123.9  million,  and $79.7 million for Fiscal 2000,  1999,  and 1998,
respectively.

(p)   New Accounting Pronouncements:

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

2.    Acquisition and Agency Agreement

Acquisition of Hills Stores Company

     On December  31,  1998,  HSC  Acquisition  Corp.  ("HSC"),  a  wholly-owned
subsidiary  of the  Company  at  the  time,  acquired  in  excess  of 80% of the
outstanding voting stock of Hills Stores Company ("Hills") and approximately 74%
of the  outstanding  Hills 12.5% senior notes.  In April 1999,  Hills was merged
with and into Ames  Department  Stores,  Inc. Total cash  consideration  for the
acquisition of Hills was approximately $129 million.

     The  acquisition  was recorded under the purchase method of accounting and,
accordingly,  the results of operations of Hills since the acquisition  date are
included in the accompanying  consolidated  financial statements.  The aggregate
purchase price of $129 million was allocated to assets  acquired and liabilities
assumed based on a determination of respective fair market values at the date of
acquisition.  The fair value of tangible assets acquired and liabilities assumed
were $568 million each.  The balance of the purchase  price,  $129 million,  was
recorded  as two  components:  an  excess  of  cost  over  net  assets  acquired
(goodwill) of $70 million, and beneficial lease rights of $59 million.

     At the time of the  acquisition,  Hills  operated 155  discount  department
stores. During 1999, the Company remodeled and converted 151 of the Hills stores
to Ames  stores.  The four  remaining  Hills  stores along with seven other Ames
stores were closed.  The  remodeling  and  conversion  process was  completed in
September 1999.

Agency Agreement Overview

     Concurrent  with  the  Hills  acquisition,   the  Company  entered  into  a
transition and agency  agreement (the "Agency  Agreement")  with Gordon Brothers
Retail  Partners,  LLC and The Nassi Group,  LLC,  (collectively,  the "Agent"),
which provided that the Agent shall serve for a period of time to operate all of
the acquired Hills stores and to conduct inventory  liquidation sales at each of
those stores prior to its scheduled remodeling or final closure.

                                      -30-
<PAGE>

     The Agency  Agreement  entitled  the  Company  to  receive  out of the sale
proceeds a minimum  amount equal to 40% of the initial  retail value or ticketed
selling price of the merchandise (the "Guaranteed Return"). The Company was also
entitled to an additional  payment if the proceeds of the sale exceeded a target
percentage of the initial retail value.  Finally,  the Agency Agreement entitled
the Company to reimbursement of certain store operating expenses (e.g., payroll,
rent, advertising, etc.) out of the sale proceeds during the agency period.

     The Agent was paid a fee (the "Agency  Fee") for its  services  pursuant to
the Agency  Agreement.  The Agency Fee was an amount equal to the proceeds  from
the sales of Hills  merchandise less a deduction for the  reimbursement of store
operating expenses, the Guaranteed Return and an allocation to the Company based
on sale proceeds in excess of specified  levels.  The Agency Fee recorded during
Fiscal 1999 and 1998 was $41.7 million and $21.7 million, respectively.

     The inventory  liquidation  sales at the Hills stores were completed during
the  quarter  ended July 31,  1999.  Proceeds  from the sales  during the entire
agency  period  exceeded the target  percentage  referenced  above.  The Company
shared in the excess and thereby realized in excess of the Guaranteed Return for
the acquired Hills inventory.

Acquisition of Caldor Sites

     During the first quarter of 1999, the Company  purchased nine Caldor stores
and a former Caldor distribution center for a total cash purchase price of $42.8
million.  The  Company  assumed  Caldor's  leases  for the nine  stores  and the
distribution  center  and  acquired  all of the store  fixtures  in eight of the
stores and all racking, sorting systems, and materials handling equipment in the
distribution center.

     A component of the $42.8  million  purchase  price was recorded as fixtures
and equipment in the distribution  center. The balance of the purchase price was
recorded under other assets and deferred  charges,  and is being  amortized over
the remaining term of the leases.

Acquisition of Goldblatt's Department Store Leases

     In April 2000, the Company consummated its purchase of the leases for seven
stores from  Goldblatt's  Department  Stores,  Inc. for a cash purchase price of
$7.6 million.

3.    Supplemental Information

     The following table illustrates the separate  contribution to the Company's
consolidated results of operations for Fiscal 1999 of (i) the operations of Ames
stores  during that year,  (ii) the  operation of the former Hills stores during
that year and various other costs and charges discussed below:
<TABLE>
<S>                                         <C>            <C>              <C>               <C>             <C>
                                                                          Fiscal 1999
                                        ---------------------------------------------------------------------------------
                                                                                              Layaway
                                            Ames            Hills            Other             Adj.            Total
                                            ----            -----            -----             ----            -----
                                                            (In millions, except per share amounts)
Net sales.............................     $3,465.6        $375.6           $    --           $(4.4)         $3,836.8
Leased department and other
income................................         39.1           2.6                --              --              41.7
                                        -------------     -----------    --------------     ------------    -------------
Total revenue.........................      3,504.7         378.2                --            (4.4)          3,878.5
Costs and expenses:
   Cost of merchandise sold...........      2,467.8         251.2                --            (3.6)          2,715.4
   Selling, general,and
   administrative expenses............        838.7         153.0              76.5              --           1,068.2
   Depreciation and amortization
   expense, net.......................         49.1          11.1               5.3              --              65.5
   Interest and debt expense, net.....         54.1           4.1               2.6              --              60.8
                                        -------------     -----------    --------------     ------------    -------------
Income (loss) before income taxes and
cumulative effect.....................         95.0         (41.2)            (84.4)           (0.8)            (31.4)
Income tax (provision) benefit........        (34.2)         14.8              68.7             0.3              49.6
                                        -------------     -----------    --------------     ------------    -------------
Income (loss) before Cumulative
Effect................................         60.8         (26.4)            (15.7)           (0.5)             18.2
Cumulative Effect of Accounting
Change, net of tax....................           --            --                --            (1.1)             (1.1)
                                        -------------     -----------    --------------     ------------    -------------
Net income (loss).....................        $60.8        $(26.4)           $(15.7)          $(1.6)            $17.1
                                        =============     ===========    ==============     ============    =============
Diluted net income (loss) per common
share.................................        $2.20        $(0.95)           $(0.57)         $(0.06)            $0.62
                                        =============     ===========    ==============     ============    =============
Weighted average common and common
equivalent shares.....................         27.7          27.7              27.7            27.7              27.7
                                        =============     ===========    ==============     ============    =============
</TABLE>

                                      -31-
<PAGE>


     The "Ames" column  represents  (a) the results of the Ames store base,  (b)
the results of the former Hills stores  after their  conversion  to Ames stores,
and (c) certain expenses associated with the acquisition of Hills, including the
interest  expense on the acquired Hills senior notes and a pro rata share of the
amortization of the goodwill recorded in connection with the acquisition.

     The "Hills"  column  represents (a) the results of operations for the Hills
stores during the period that these stores were operated  pursuant to the Agency
Agreement  including  depreciation and interest expense directly associated with
such stores and (b) Hills corporate overhead  expenses,  principally the Canton,
Massachusetts  facility.  The  cost of  merchandise  for  Hills  represents  the
merchandise  sold during this  liquidation  period  adjusted for the  Guaranteed
Return (see Note 2). The  selling,  general,  and  administrative  expenses  for
former Hills include the reimbursable store operating expenses of $84.8 million,
the Agency Fee of $41.7 million,  and other  non-reimbursable  expenses of $26.5
million.  The  depreciation  and  amortization  expense for Hills  includes  the
depreciation and amortization of the revalued fixed assets,  the amortization of
the beneficial lease rights, and the goodwill recorded in the Hills acquisition.
The  interest  expense  reflects  interest  on the debt and  capital  lease  and
financing obligations assumed in the Hills acquisition.

     The  "Other"  column  represents  expenses  incurred  during  the period of
remodeling the Hills stores as well as certain other expenses and tax benefits.

     The "Layaway Adj." column represents the impact of the change in the method
of accounting for layaway sales.

     The following table illustrates the separate  contribution to the Company's
consolidated results of operations for Fiscal 1998 of (i) the operations of Ames
stores  during  that  year and (ii) the  operation  of the Hills  stores  during
January 1999 and various other costs and charges discussed below:
<TABLE>
<S>                                                       <C>               <C>                 <C>            <C>
                                                                                   Fiscal 1998
                                                       --------------------------------------------------------------------
                                                            Ames             Hills              Other            Total
                                                       ---------------    -------------     --------------    -------------
                                                                     (In millions, except per share amounts)
Net sales..........................................       $2,386.5           $112.1             $   --         $2,498.6
Leased department and other income.................           29.2              1.0                 --             30.2
                                                       ---------------    -------------     --------------    -------------
Total revenue......................................        2,415.7            113.1                 --          2,528.8
Costs and expenses:
   Cost of merchandise sold........................        1,711.3             66.3                 --          1,777.6
   Selling, general, and administrative expenses...          606.9             52.0                1.7            660.6
   Depreciation and amortization expense, net......           11.3              3.2                 --             14.5
   Interest and debt expense, net..................           11.4              2.0                1.9             15.3
   Store closing charge............................             --               --                8.2              8.2
                                                       ---------------    -------------     --------------    -------------
Income (loss) before income taxes..................           74.8            (10.4)             (11.8)            52.6
Income tax (provision) benefit.....................          (26.7)             3.7                4.2            (18.8)
                                                       ---------------    -------------     --------------    -------------
Net income (loss)..................................          $48.1            $(6.7)             $(7.6)           $33.8
                                                       ===============    =============     ==============    =============
Diluted net income (loss) per common share.........          $1.99           $(0.27)            $(0.32)           $1.40
                                                       ===============    =============     ==============    =============
Weighted average common and common equivalent
shares.............................................           24.2             24.2               24.2             24.2
                                                       ===============    =============     ==============    =============
</TABLE>

     In January 1999, the Hills stores were being operated pursuant to the terms
and conditions of the Agency Agreement (see Note 2). Approximately  one-third of
the Hills stores were conducting  liquidation sales during January 1999 in order
to  prepare  these  stores  for their  conversion  to Ames  stores.  The cost of
merchandise  for Hills  represents  the  merchandise  sold during  January  1999
adjusted for the Guaranteed  Return.  The selling,  general,  and administrative
expenses for Hills include the  reimbursable  store operating  expenses of $25.4
million,  Agency Fee of $21.7 million,  and other  non-reimbursable  expenses of
$4.8 million.  The depreciation and amortization  expense for Hills includes the
depreciation and amortization of the revalued fixed assets,  the amortization of
the beneficial lease rights, and the goodwill recorded in the Hills acquisition.
The interest expense reflects interest on the debt,  capital lease and financing
obligations assumed in the Hills acquisition.

                                      -32-
<PAGE>

     The  "Other"  column in the  foregoing  table  consists of the cost to exit
certain Ames  contractual  obligations  rendered  obsolete by the acquisition of
Hills,  the write-off of the deferred  financing  costs related to the Company's
1996 credit agreement,  the incremental  interest expense incurred in January in
connection  with financing the purchase price of Hills,  and the charge recorded
in  connection  with the  announced  closing of seven Ames stores that closed in
1999.

4.    Long-Term Debt:

     The Company's outstanding long-term debt as of February 3, 2001 and January
29, 2000 is listed and described below:
<TABLE>
<S>                                                                                    <C>                   <C>
                                                                                       February 3,           January 29,
                                                                                           2001                 2000
                                                                                     -----------------     ----------------
Secured Debt:                                                                                   (000's omitted)
   Borrowings under the Prior Credit Agreement...................................        $361,794             $174,544
Unsecured Debt:
   12.5% Senior Notes, due July 2003, discount rate of 11.79%....................          43,605               46,295
   10% Senior Notes, due April 2006..............................................         200,000              200,000
                                                                                     -----------------     ----------------
Total Face Value of Debt.........................................................        $605,399             $420,839
   Add: Premium..................................................................             658                  930
                                                                                     -----------------     ----------------
Amount Due After One Year........................................................        $606,057             $421,769
                                                                                     =================     ================
</TABLE>


The Credit Agreement

     In January  2001,  the Company  signed a  commitment  letter  from  General
Electric  Capital  Corporation ("GE Capital") for an $800 million senior secured
financing,  and subsequently  entered into an agreement (the "Credit Agreement")
with GE  Capital,  as  agent,  and a  syndicate  of other  banks  and  financial
institutions.  The Credit  Agreement  provides  for a secured  revolving  credit
facility of up to $750  million,  with a sub-limit of $50 million for letters of
credit, and a secured term facility for $50 million.

     The Credit  Agreement  replaced  the  Company's  previously  existing  $650
million credit facility (the "Prior Credit Agreement").

     The  Credit  Agreement   expires  on  March  2,  2004  and  is  secured  by
substantially  all of the assets of the Company.  The interest rate per annum on
borrowings  under the Credit Agreement is equal to the Index Rate (as defined in
the Credit  Agreement) plus a specified  margin or the LIBOR Rate (as defined in
the Credit Agreement) plus a specified margin.

     Fees required  under the Credit  Agreement  include (a) monthly  commitment
fees on the unused portion of the facility,  (b) an initial closing fee, and (c)
a monthly  collateral  monitoring fee and an annual  administrative  fee for the
account of the agent.

     The maximum amount of borrowing  under the Credit  Agreement  cannot exceed
the lesser of (a) the total facility less (i) letters of credit  outstanding and
(ii) a specified  minimum balance (the "Minimum  Availability") or (b) an amount
derived from combining specified  percentages of the Company's inventory on hand
as well as in-transit  inventory from overseas,  certain receivables and certain
of the  Company's  owned  real  estate  (each of which may be offset by  certain
specified  reserves) less (i) letters of credit outstanding and (ii) the Minimum
Availability.

     In addition,  if the Company's  incremental  borrowing  capacity  under the
Credit   Agreement   averages  below  a  specified   level  (the  "Fixed  Charge
Availability")  over a five-day  period,  then the Company must be in compliance
with a fixed charge coverage ratio for a specified  period of time,  after which
the Company's  borrowing  capacity must be above the Fixed Charge  Availability.
The Credit Agreement also restricts the payment of cash dividends.

     The Company  believes  that the  availability  under the Credit  Agreement,
along  with its  current  available  cash  plus  expected  cash  flows  from its
operations,  will  enable the  Company to fund its  expected  needs for  working
capital,  capital expenditures,  and debt service  requirements.  Achievement of
expected cash flows from  operations  and compliance  with the Credit  Agreement
covenant are dependent upon the Company's attainment of its Fiscal 2001 business
plan.

                                      -33-
<PAGE>

     For Fiscal 2000 and Fiscal 1999, the weighted  average interest rate on the
Company's revolving credit facilities was 8.61% and 8.12%, respectively, and the
peak  borrowing  levels for the two years were $611  million  and $415  million,
respectively.  As of  February  3,  2001,  borrowings  under  the  Prior  Credit
Agreement  were $362 million and $1.2 million and $31.3 million was  outstanding
in trade and standby letters of credit, respectively.

Senior Notes due 2003

     The 12.5% Senior Notes due 2003 (the "Hills  Senior  Notes")  were,  at the
time of the  acquisition of Hills, an unsecured  obligation of Hills.  The Hills
Senior Notes pay interest semiannually in January and July and mature July 2003.

     During Fiscal 1999 and 2000,  the Company,  through open market  purchases,
acquired  Hills  Senior  Notes  having  a face  value of $4.6  million  and $2.7
million,  respectively.  In addition,  during  Fiscal 1999, as part of the final
valuation of the fair market value of all assets and liabilities acquired in the
Hills  acquisition,  the Company revalued the Hills Senior Notes at a discounted
rate of 11.79%.  As of February 3, 2001 and January 29, 2000, Hills Senior Notes
with a face value of $43.6  million and $46.3  million  and a recorded  value of
$44.3 million and $47.2 million, respectively, remained outstanding.

Senior Notes due 2006

     On April 27, 1999,  the Company  completed  the sale of $200 million of its
10% seven-year senior notes (the "Ames Senior Notes"). The net proceeds from the
sale of the Ames Senior Notes, approximately $193.4 million, were used to reduce
outstanding borrowings under the Prior Credit Agreement.

     The Ames Senior Notes pay interest  semi-annually  in April and October and
mature April 2006.

     As of February 3, 2001,  the payments  due on  long-term  debt for the next
five years and thereafter were as follows:
<TABLE>
      <S>                                                           <C>
      Fiscal Years
      Ending January                                                 Amount
      --------------                                                 ------
                                                                 (000's omitted)
      2002.......................................................  $    ---
      2003.......................................................   361,794
      2004.......................................................    43,605
      2005.......................................................       ---
      2006.......................................................       ---
      Thereafter.................................................   200,000
</TABLE>

5.    Lease Commitments, Beneficial Leases and Unfavorable Lease Liability:

     Ames is  committed  under  long-term  leases  for  various  retail  stores,
warehouses,  and  equipment  expiring at various dates through 2026 with varying
renewal  options and  escalating  rent  clauses.  Some leases are  classified as
capital  leases under SFAS No. 13. Ames  generally  pays for real estate  taxes,
insurance,  and specified  maintenance  costs under real property  leases.  Most
leases also  provide for  contingent  rentals  based on  percentage  of sales in
excess of specified amounts.

     Future  minimum  lease  payments  for leases as of February 3, 2001 were as
follows:
<TABLE>
<S>                                                                      <C>              <C>               <C>
                                                                                       Lease Payments
                                                                        -------------------------------------------------
                                                                         Capital          Financing         Operating
Fiscal Year Ending January                                               Leases          Obligations          Leases
--------------------------                                               ------          -----------          ------
                                                                                       (000's omitted)
2002................................................................      $33,654             $ 6,257          $77,308
2003................................................................       30,333               4,678           64,301
2004................................................................       27,468               5,081           57,675
2005................................................................       21,579              12,250           51,021
2006................................................................       18,986                   -           44,116
Thereafter..........................................................      145,085                   -          277,191
                                                                        ------------     ---------------    -------------
Total minimum lease payments........................................      277,105              28,266         $571,612
                                                                                                            =============
Less: amount representing estimated executory costs.................        1,457                   -
                                                                        ------------     ---------------
Net minimum lease payments..........................................      275,648              28,266
Less: amount representing interest..................................      113,232               6,299
                                                                        ------------     ---------------
Present value of net minimum lease payments.........................      162,416              21,967
Less: currently payable.............................................       14,883               4,135
                                                                        ------------     ---------------
Long-term lease obligations.........................................     $147,533            $ 17,832
                                                                        ============     ===============
</TABLE>

                                      -34-
<PAGE>

     At February 3, 2001,  the financing  obligations  represent  sale/leaseback
arrangements.  The leases,  which have terms up to  forty-four  months,  include
options to purchase  some or all of the assets  either at the end of the initial
lease term or renewal  periods at an amount not  greater  than the then  current
fair market value of the properties.

     Total  minimum  lease  payments  have not been reduced by minimum  sublease
rentals to be received  in the  aggregate  under  non-cancellable  subleases  of
operating  leases  of  approximately  $8.0  million  as  of  February  3,  2001.
Amortization of capital lease assets was  approximately  $19.5,  $19.8, and $2.8
million for Fiscal 2000, Fiscal 1999, and Fiscal 1998, respectively. Accumulated
amortization of capital lease assets at February 3, 2001 was $45.7 million. Rent
expense (income) was as follows:
<TABLE>
      <S>                                                                <C>               <C>                <C>
                                                                         Fiscal            Fiscal             Fiscal
                                                                          2000              1999               1998
                                                                     --------------    -------------      -------------
                                                                                       (000's omitted)
      Minimum rent on operating leases...............................      $81,661          $78,946            $55,566
      Contingent rental expense......................................        9,084            8,812              7,797
      Sublease rental income.........................................       (1,950)          (1,423)            (1,609)
</TABLE>

     An  unfavorable  lease  liability was recorded in December 1992 under fresh
start  reporting  and  represents  the  estimated  liability  related  to  lease
commitments that exceeded market rents for similar locations.  As of February 3,
2001 and January 29, 2000, the unfavorable lease liability was $10.0 million and
$11.2  million,  respectively,  and is  classified  as part of  other  long-term
liabilities  in  the  Consolidated  Balance  Sheets.  This  liability  is  being
amortized  as a  reduction  to  depreciation  and  amortization  expense  in the
Consolidating  Statements of  Operations  over the  remaining  lease terms.  The
amortization,  recorded as a reduction to depreciation and amortization expense,
was $1.3  million in Fiscal 2000 and $1.4  million in each of fiscal  years 1999
and 1998.

6.    Stockholders' Equity:

Common Stock

     On May 24, 1999, the Company  completed the public  offering of 5.1 million
shares of Common  Stock at a price of $38.75 per  share.  The  proceeds,  net of
underwriting  discounts,  of approximately  $187.3 million,  were used to reduce
borrowings under the Prior Credit Agreement and for general corporate purposes.

     The Board of Directors of the Company may  authorize the issuance of one or
more  series of  Preferred  Stock and  specify  for each such  series the voting
powers (but not greater than one vote per share), designations, preferences, and
relative,  participating,  optional, redemption,  conversion, exchange, or other
special rights, qualifications, limitations, or restrictions of such series, and
the number of shares in each series.

     Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by stockholders  and are entitled to receive  dividends
when,  as,  and if  declared  by the  Board of  Directors.  Dividends  cannot be
declared under the terms of the Credit Agreement.

Treasury Stock

     In  August  1998,  the  Company's  Board  of  Directors  approved  a  stock
repurchase  program  and  authorized  management  to  purchase up to 1.5 million
shares of Common Stock.  During Fiscal 1998, the Company  acquired 79,495 shares
of its Common  Stock.  The Company did not  repurchase  any of its Common  Stock
during Fiscal 1999. During Fiscal 2000, the Company acquired 1,000 shares of its
Common Stock, increasing the total Common Stock held to 80,495 shares.

 Warrants

     An aggregate of 200,000 Series B Warrants were issued on December 30, 1992.
Each such  warrant  entitled the holder to purchase one share of Common Stock at
any time from June 30, 1993 through  December 30, 2000.  The exercise  price was
$5.92 per share.  During Fiscal 1998,  100,000 Series B Warrants were exercised.
No Series B Warrants were exercised during Fiscal 1999.  During Fiscal 2000, the
remaining, outstanding 100,000 Series B Warrants were exercised.

                                      -35-
<PAGE>

Stock Purchase Rights Agreement

     On November 30, 1994, the Company adopted a Stock Purchase Rights Agreement
(the "Rights Agreement").  Unless previously redeemed by the Company, the Rights
will expire on November 29, 2004.

     On  September  24,  1999,  the Company  amended the Rights  Agreement  (the
"Amendment"),  which was approved by the  Company's  Board of  Directors.  Among
other things, the Amendment amends the exercise price of a right issued pursuant
to the Rights  Agreement to $180.00,  subject to  adjustment,  and makes certain
other technical amendments to the Rights Agreement, most notably the elimination
of certain provisions commonly known as "continuing director" provisions.

7.    Stock Options:

     The  Company  currently  has in place  four stock  option  plans  that,  in
general,  permit the Company to grant to employees  and  non-employee  directors
options to purchase the  Company's  Common  Stock at an exercise  price not less
than 100% of the fair  market  value of the  Common  Stock on the date of grant.
These  options,  depending  upon the plan  under  which they were  granted,  are
exercisable  from six  months to five years  after  date of grant and  generally
terminate ten years after date of grant.

     The  following  table sets forth the stock  option  activity  for all stock
option plans for Fiscal 2000, Fiscal 1999 and Fiscal 1998 (shares in thousands):
<TABLE>
<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
                                                 2000                      1999                    1998
                                      ------------------------- ------------------------- -------------------------
                                                    Weighted                  Weighted                  Weighted
                                       Number       Average      Number       Average      Number       Average
                                        of          Exercise      of          Exercise      of          Exercise
                                       Shares       Price        Shares       Price        Shares       Price
                                       ------       -----        ------       -----        ------       -----
Outstanding at
beginning of year...................   1,618        $22.88       1,128        $12.00         914         $3.97
Granted.............................   1,202          7.84         744         35.51         608         19.09
Exercised...........................    (145)         3.78        (173)         6.48        (375)         3.90
Forfeited...........................    (135)        18.20         (81)        21.46         (19)        12.42
                                        -----                      ----                      ----
Outstanding at end of year..........   2,540         17.11       1,618         22.88       1,128         12.00
                                       =====                     =====                     =====
Options exercisable at year-end.....     780         19.83         559         10.93         490          5.79
                                         ===                       ===                       ===
Weighted average fair
  value of options granted..........   $5.95                    $24.90                    $13.56
                                       =====                    ======                    ======
</TABLE>

     The fair value of options  granted per the above table was estimated on the
date  of  grant  using  the  Black-Scholes  pricing  model  with  the  following
assumptions: no dividend yield, expected option volatilities ranging from 68% to
118%,  a  risk-free  interest  rate  equal to U.S.  Treasury  securities  with a
maturity  equal to the expected life of the option  (weighted  average  interest
rate of 6.0%,  5.3% and 5.2% for  2000,  1999 and  1998,  respectively),  and an
expected life from date of grant until option  expiration date (weighted average
expected life of 5.2, 5.3 and 5.4 years for 2000, 1999 and 1998, respectively).

     The following table summarizes  information about stock options outstanding
as of February 3, 2001 (options in thousands):
<TABLE>
<S>                     <C>               <C>               <C>              <C>               <C>
                                    Options Outstanding                       Options Exercisable
                         -------------------------------------------         -------------------------
                                         Weighted
                        Number           Average                             Weighted
    Range of          Of Options        Remaining          Weighted           Number           Weighted
 Exercise Prices      Outstanding      Contractual         Average         Exercisable         Average
                       at 2/3/01           Life         Exercise Price      at 2/3/01       Exercise Price
                       ---------           ----         --------------     -----------      --------------

$1.50-3.00......             84              4.2              $2.49               84              $2.49
$3.13-4.59......            117              3.4               3.64              108               3.57
$6.06-7.06......            228              4.4               6.99               10               6.74
$7.45-8.44......            867              4.4               7.47               50               7.70
$14.38-24.75....            589              2.9              19.26              254              17.64
$29.00-48.50....            655              3.5              35.77              274              36.33
                            ---                                                  ---

                          2,540              3.8              17.11              780              19.83
                           ====                                                  ---
</TABLE>

                                      -36-
<PAGE>

     The Company accounts for its stock option plans under Accounting Principles
Board ("APB")  Opinion No. 25. Had  compensation  cost for the  Company's  2000,
1999, and 1998 stock option grants been  determined in accordance  with SFAS No.
123, the  Company's  net income and net income per common share for Fiscal 2000,
Fiscal 1999, and Fiscal 1998 would have approximated the proforma amounts below:
<TABLE>
<S>                                 <C>            <C>            <C>            <C>          <C>            <C>

                                         Fiscal 2000                   Fiscal 1999                 Fiscal 1998
                                         -----------                   -----------                 -----------
                                      As                            As                           As
                                   Reported       Proforma       Reported       Proforma      Reported       Proforma
                                   --------       --------       --------       --------      --------       --------
Net income..................      ($240,588)     ($246,344)      $17,127        $10,747       $33,830        $32,065
Net income per common share:
- basic.....................         ($8.19)        ($8.38)        $0.62          $0.39         $1.47          $1.39
- diluted...................         (a)             (a)           $0.62          $0.39         $1.40          $1.32

(a) Common stock equivalents have not been included because the effect would be anti-dilutive.
</TABLE>

      SFAS 123 does not apply to stock options granted prior to 1995.

8.    Income Taxes:

     The  Company  adopted  SFAS  No.  109  "Accounting  for  Income  Taxes"  in
conjunction with the adoption of fresh-start reporting in December 1992.

     As a consequence of the adoption of fresh-start reporting and SFAS No. 109,
any tax  benefits  realized  in the  prior  years  for tax  purposes  after  the
consummation date for pre-consummation cumulative temporary differences, as well
as for the  pre-consummation  net operating  loss  carryovers,  were reported as
additions to paid-in-capital  rather than as reductions in the tax provisions in
the Consolidated Statements of Operations.  Tax benefits or liabilities realized
for  book  purposes   after  the   consummation   date  were   segregated   from
pre-consumption  deferred  tax  assets.  Such tax  benefits  or  liabilities  of
post-consummation  will impact  future  income tax  provisions.  Such income tax
provisions  will have no  significant  impact on the Company's  taxes payable or
cash flows.

     For Fiscal  2000,  the  Company  recorded  an income  tax  benefit of $54.8
million.  Included in that  benefit is a  provision  for state  income  taxes of
approximately  $1.1 million,  of which $0.3 million will be paid in cash. During
this fiscal year, the Company increased its valuation  allowance by $64 million,
as discussed below.

      The (benefit) provision for income taxes is comprised of the following:
<TABLE>
      <S>                                                                 <C>              <C>               <C>
                                                                          Fiscal           Fiscal            Fiscal
                                                                           2000             1999              1998
                                                                           ----             ----              ----
                                                                                        (In millions)
      Federal income tax.............................................    $  ---           $  ---             $  0.5
      State income tax...............................................       1.1              1.2                ---
      Deferred tax (benefit) provision...............................     (55.9)           (12.7)              18.3
      Valuation allowance reduction..................................       ---            (38.1)               ---
                                                                       ------------    -------------     -------------
           Total income tax (benefit) provision......................    $(54.8)         $ (49.6)            $ 18.8
                                                                       ============    =============     =============
</TABLE>

                                      -37-
<PAGE>

     Significant  components of the Company's deferred tax assets  (liabilities)
are as follows:
<TABLE>
      <S>                                                                           <C>                   <C>
                                                                                    February 3,           January 29,
                                                                                       2001                  2000
                                                                                       ----                  ----
                                                                                              (In millions)
      Fixed assets...............................................................      $(2)                   $ 4
      Self insurance reserves....................................................       15                     23
      Store closing reserves.....................................................       75                     22
      Leases.....................................................................        -                      2
      Inventory reserves.........................................................        2                      1
      Vacation pay reserve and other.............................................       45                     37
      Net operating loss carryovers..............................................      400                    327
                                                                                   --------------        --------------
      Total deferred tax assets..................................................      535                    416
      Valuation allowances......................................................      (105)                   (41)
                                                                                   --------------        --------------
      Net deferred tax assets....................................................    $ 430                  $ 375
                                                                                   ==============        ==============
</TABLE>

     The Company's  provision for income taxes resulted in effective  rates that
varied from the statutory federal income tax rate as follows:
<TABLE>
      <S>                                                                <C>               <C>               <C>
                                                                         Fiscal 2000       Fiscal 1999       Fiscal 1998
                                                                         -----------       -----------       -----------
      Statutory federal income tax (benefit) rate......................  (35.0%)            (35.0%)           35.0%
      State and local taxes, net of federal benefit....................   (5.0%)             (3.7%)            2.9%
      Goodwill amortization............................................   (0.4%)              2.3%            (3.4%)
      Other............................................................    0.7%               0.4%             1.1%
                                                                       ---------------    ------------     --------------
      Effective tax rate before valuation allowance reduction..........  (39.7%)            (36.0%)           35.6%
      Valuation allowance (reduction) increase.........................   21.2%            (122.1%)             ---
                                                                       ---------------    ------------     --------------
      Total effective tax (benefit) rate...............................  (18.5%)           (158.1%)           35.6%
                                                                       ===============    ============     ==============
</TABLE>

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some or all of the  deferred  taxes will
not be  realized.  The Company has  increased  its  valuation  allowance  on its
deferred tax assets by $64 million during Fiscal 2000.  The valuation  allowance
reduced the deferred tax asset to an amount,  which the Company  believes,  more
likely than not, that it will realize based on the  Company's  estimated  future
earnings.  If the Company is unable to generate sufficient taxable income in the
future  during  the  loss  carryforward  periods,  increases  in  the  valuation
allowance will be required through a charge to the tax expense.

     The  Company  has net  operating  loss  carryovers  of  approximately  $1.0
billion,  which are  currently  available  without  any annual  limitation.  The
ability to use these  losses will expire  between 2007 and 2021.  Net  operating
losses and other tax  credits  will be subject  to an annual  limitation  if the
Company  experiences  a change in control as defined by  Internal  Revenue  Code
Section  382.  Additionally,  the Company has filed a $20 million  refund  claim
under Section 172(f) of the Internal Revenue Code. The Company has received from
the IRS an adverse Technical Advice Memorandum ("TAM").  The positions set forth
in the TAM would have the effect of denying all or  virtually  all of the refund
claim. The Company is presently considering what further action to take.

     In addition,  Ames has targeted jobs tax credit carryovers of approximately
$7 million,  which will expire  beginning in 2004, and  alternative  minimum tax
credit carryovers of approximately $4 million,  which have no expiration period.
Federal net operating loss carryovers for fiscal years subsequent to January 27,
1990 are subject to future adjustments, if any, by the IRS.

     As a result of the  acquisition  of the  common  stock of  Hills,  Ames had
succeeded to the tax attributes of Hills, including net operating losses of $241
million and general business credits of $11 million. These tax attributes expire
between  2001  and  2018.   Ames  also  has  succeeded  to  minimum  tax  credit
carryforwards  of $3 million,  which do not  expire.  These tax  attributes  are
significantly  limited  under  Internal  Revenue  Code  Sections  382  and  383,
respectively,  as a  result  of the  change  in  control  caused  by  the  Hills
acquisition.  The  resulting  deferred tax asset has been  reduced  accordingly.
These tax  attributes  would be further  limited if the  Company  experiences  a
change in control as defined by Internal Revenue Code Section 382.

     Ames has  substantial  potential state net operating loss  carryovers.  The
utilizable  amounts  of such state  operating  losses  have not been  quantified
because  of the  uncertainty  related to the mix of future  profits in  specific
states.

                                      -38-
<PAGE>

     Hills filed a claim for a refund of federal taxes for the subsequent years.
The refund  claim,  which is pending  from the IRS,  could result in a refund of
approximately  $7.0 million.  If the Company receives this refund amount,  there
will be a corresponding  adjustment to goodwill  recorded in connection with the
Hills acquisition.

9.    Benefit and Compensation Plans:

Retirement and Savings Plans

     Ames  has  defined  contribution  retirement  and  savings  plans  that are
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986,
as amended,  for  employees  who are  classified  as full-time and have at least
sixty days of service,  or who are part-time  and have one year of service,  and
have  completed at least one thousand hours of service in a twelve month period.
For each participant's contribution (up to a maximum of 5% of such participant's
total compensation),  the Company contributes to the Retirement and Savings Plan
an  amount  equal to 50% of the  first 4% and 100% of the next 1%  contribution.
Ames  funds all  administrative  costs  incurred  by the plans.  Ames's  expense
associated with this plan amounted to approximately $5.2 million,  $6.0 million,
and $3.6 million, in 2000, 1999, and 1998, respectively.

Annual Incentive Compensation Plan

     The Company has an Annual  Incentive  Compensation  Plan (the "Annual Bonus
Plan") that is subject to annual  review by the Board of  Directors.  The Annual
Bonus  Plan  provides  annual  cash  bonuses  based  on the  achievement  of the
Company's financial goals for the year (and customer service goals for store and
field management).  There are approximately 1,500 members of management eligible
under the plan.  Bonus expense  recorded  under the plan was $8.8 million,  $9.4
million, and $8.3 million for Fiscal 2000, 1999, and 1998, respectively.

Restricted Stock Awards

1995 Long Term Incentive Plan

     Pursuant  to the  Company's  1995  Long  Term  Incentive  Plan  (the  "1995
Incentive  Plan"),  the Company may make awards of an aggregate  amount of up to
500,000  shares of Common Stock and cash  payments in an amount up to 50% of the
fair market  value (as defined in the 1995  Incentive  Plan) of the Common Stock
awarded, determined as of and paid on the vesting date.

     As of  February 3, 2001,  awards  aggregating  to 355,000  shares of Common
Stock had been made to certain executives of the Company, 35,000 of which remain
unvested.

1998 Incentive Plan

     Pursuant to the Company's 1998  Management  Stock Incentive Plan (the "1998
Incentive Plan"), awards aggregating 180,000, 45,000 and 10,000 shares of Common
Stock  were made to certain  executives  during  Fiscal  1998,  1999,  and 2000,
respectively.  As of February 3, 2001,  awards with respect to 205,000 shares of
Common Stock, net of forfeitures,  remained  issued.  Fifty percent (50%) of the
awards  with  respect  to  195,000  shares of Common  Stock  vest on the  fourth
anniversary  from  the  date of  grant  and 50% on the  fifth  anniversary.  The
remaining  awards with respect to 10,000 shares of Common Stock vest three years
from the date of grant.

     A portion of the estimated market value of the awards,  including the cash,
has been  accrued as  compensation  expense as of February 3, 2001.  The Company
recorded  as  compensation  expense  for the  1995  Incentive  Plan and the 1998
Incentive Plan $1.2 million,  $1.3 million, and $1.9 million during Fiscal 2000,
1999, and 1998, respectively.

Hills Post Retirement Benefits

     In connection with the  acquisition of Hills,  Ames assumed the obligations
for a post retirement medical plan. The plan was subsequently  curtailed and the
cost associated with the remaining closed group of retirees is not significant.

                                      -39-
<PAGE>

10.       Commitments and Contingencies:

Wage and Hour Litigation

     Since  March 1995,  the  Company  has been named as a defendant  in several
class  action  complaints  which  allege that the Company was  obligated  to pay
overtime to its hardlines and softlines  assistant store  managers.  The Company
has  consistently  stated its  belief  that these  positions  are  appropriately
designated  as exempt  positions  not calling for overtime  pay. The Company has
settled several of these cases.  These  settlements have not required any change
in  the  Company's  treatment  of the  status  of its  hardlines  and  softlines
assistant  managers.  The  Company  has  entered  into  a  settlement  as to one
remaining  case.  This  settlement,  which  is  subject  to court  approval,  is
described in Item 3 of this report on Form 10-K.

Other Matters

     In June 1999, the Company  announced a $112 million,  five-year,  strategic
outsourcing  agreement with IBM to support core information  technology  systems
for the  corporate  office  and the  stores.  Under the  agreement,  IBM  Global
Services  is  responsible  for  all  data  center  operations  and  support  for
substantially all information systems equipment.

     The  Company is party to various  claims and legal  proceedings  covering a
wide range of matters that arise in the  ordinary  course of its  business.  The
Company  believes that its likely  liability as to these matters will not have a
material  adverse effect on its  consolidated  financial  position or results of
operations.

11.        Supplemental Cash Flow Information:
<TABLE>
      <S>                                                                  <C>             <C>               <C>

                                                                           Fiscal           Fiscal           Fiscal
                                                                            2000             1999             1998
                                                                        -------------    -------------     ------------
      Cash paid for interest and income taxes were as follows:                         (000's omitted)
         Interest......................................................    $81,726          $51,485          $12,166
         Income taxes..................................................     $1,834           $3,646             $125
      Ames entered into other non-cash investing and financing
      activities as follows:
         New capital lease obligations.................................     $4,478          $14,942          $25,859
         Issuance of Common Stock under the 1998 Incentive Plan........        ---               $1               $2
</TABLE>

     Inventory increased $28.3 million in Fiscal 1999 when a purchase accounting
valuation adjustment related to the Hills acquisition was deemed to be no longer
necessary  and  was  eliminated,  resulting  in  a  corresponding  reduction  of
goodwill.  This increase in inventory is properly not reflected as a use of cash
in the Consolidated Statement of Cash Flows.

12.   Fair Values of Financial Instruments:

     The Company's financial  instruments as of February 3, 2001 and January 29,
2000  were  cash,  cash  equivalents,  and  long-term  debt.  For  cash and cash
equivalents,  the carrying amounts  reported in the Consolidated  Balance Sheets
approximated fair values.  For long-term debt obligations,  the fair values were
estimated  using a  discounted  cash flow  analysis  (based  upon the  Company's
incremental borrowing rates for similar types of borrowing arrangements).

     The carrying amounts and fair values of the Company's financial instruments
at February 3, 2001 and January 29, 2000 were as follows:
<TABLE>
      <S>                                               <C>               <C>             <C>              <C>
                                                                 Fiscal 2000                      Fiscal 1999
                                                       ------------------------------    -----------------------------
                                                        Carrying           Fair           Carrying          Fair
                                                         Amount            Value           Amount           Value
                                                       --------------   -------------    ------------   --------------
                                                                              (000's omitted)
      Cash and cash equivalents.......................   $49,761         $49,761          $30,612         $30,612
      Long-term debt:
         Secured debt.................................   361,794         361,794          174,544         174,544
         Unsecured debt...............................   244,263          96,377          247,225         236,758
</TABLE>

13.   Store Closing Charges:

     In the fourth  quarter of Fiscal  2000,  the  Company  recorded  charges of
$139.3 million in connection with the closing of thirty-two stores,  including a
$9.5  million  inventory  impairment  charge  classified  as  part  of  cost  of
merchandise  sold.  The Company  closed the stores  during the first  quarter of
2001, resulting in a workforce reduction of approximately 2,000 employees.

                                      -40-
<PAGE>

     The Company did not record any  charges in  connection  with the closing of
stores in Fiscal  1999.  The  Company  recorded a charge in Fiscal  1998 of $8.2
million for the closing of seven stores.

     The following  items  represent  the major  components of the total charges
recorded in January 2001 and 1999 in connection with store closings:
<TABLE>
      <S>                                                                 <C>                <C>              <C>
                                                                          Fiscal             Fiscal           Fiscal
      Item                                                                 2000               1999             1998
      ----                                                              --------------    ---------------    ------------
                                                                                       (000's omitted)
      Lease costs                                                          $ 88,815             $  ---         $ 6,254
      Net fixed asset write-down                                             29,307                ---           1,161
      Other occupancy costs                                                   9,101                ---             437
      Severance costs                                                         2,583                ---             370
                                                                        --------------    ---------------    ------------
         Store closing charge                                               129,806                ---           8,222
         Inventory write-down                                                 9,453                ---             ---
                                                                        --------------    ---------------    ------------
      Total charges                                                        $139,259                ---         $ 8,222
                                                                        ==============    ===============    ============
</TABLE>

     The lease and  other  occupancy  costs  provided  for in the store  closing
charge  include  all  projected  occupancy  costs  from  date of  closing  until
estimated lease disposition date.

     Fixed  assets   associated  with  the  closing  stores  were  reviewed  for
impairment  in  accordance  with SFAS No. 121. The review of the closing  stores
resulted in a write-down of $29.3 million which includes  $19.7 million  related
to fixtures, equipment, and leasehold improvements,  and $9.6 million related to
beneficial lease rights.

     The  remaining  closed  store  reserve  recorded  at the end of Fiscal 1999
primarily  reflects the anticipated  costs of ongoing property lease commitments
for previously announced closed stores and other related facility exit costs.

     Management  expects to incur  substantially  all of the charges included in
the  reserve  except  lease and other  occupancy  costs in the first  quarter of
fiscal year ending  February 2, 2002. The lease costs and other  occupancy costs
are expected to be paid over nine years.

     During Fiscal 2000 and 1999,  with respect to the  thirty-two  stores,  the
Company  recorded net sales of $205.0 million and $147.7 million,  respectively,
exclusive of the period when the  thirty-one  former Hills stores were operating
under the "Hills" name. For the same years,  the pre-tax  operating loss for the
thirty-two stores was $20.4 million and $12.9 million, respectively.

     The Company paid approximately $5.9 million, $9.5 million, and $2.5 million
in Fiscal 2000, 1999, and 1998, respectively,  primarily for lease costs related
to previously closed stores.

14.   Leased Department and Other Income:

     The following is a summary of the major  components  of "Leased  department
and other income":
<TABLE>
      <S>                                                                 <C>               <C>               <C>
                                                                          Fiscal            Fiscal            Fiscal
                                 Item                                      2000              1999              1998
                                 ----                                   --------------    --------------    -------------
                                                                                        (In thousands)
      Leased department income.........................................     $27,490           $25,378          $17,914
      Concession and vending income....................................       2,046             1,991            1,508
      Layaway service fees.............................................       4,193             3,736            2,644
      Gain on sale of assets, net......................................       3,953             2,479            1,350
      Various other....................................................       8,731             8,106            6,748
                                                                        --------------    --------------    -------------
                                                                            $46,413           $41,690          $30,164
                                                                        ==============    ==============    =============
</TABLE>

                                      -41-
<PAGE>

15.   Quarterly Financial Data (Unaudited):

     Summarized,  unaudited,  quarterly financial data for the last three fiscal
years are shown below.
<TABLE>
<S>                                                      <C>                <C>             <C>               <C>
                                                         First              Second          Third             Fourth
                                                         -----              ------          -----             ------
                                                                (In thousands, except per share data)
Fiscal 2000:
    Net sales.......................................     $830,657           $872,034       $920,321         $1,330,573
    Gross margin....................................      227,733            241,153        230,559            321,889
    Loss before cumulative effect adjustment and
    extraordinary item..............................      (29,085)           (22,111)       (37,236)          (145,192)
    Loss per share before cumulative effect
    adjustment and extraordinary item...............        (0.99)             (0.75)         (1.27)             (4.94)
    Net loss........................................      (29,085)           (22,111)       (37,236)          (152,156)
    Net loss per share -        basic...............        (0.99)             (0.75)         (1.27)             (5.18)
                                diluted.............          (b)               (b)             (b)                (b)

Fiscal 1999: (a)
    Net sales.......................................    $ 816,159          $ 859,975      $ 883,500         $1,277,220
    Gross margin....................................      238,586            258,953        245,045            378,884
    Income (loss) before cumulative effect
    adjustment......................................      (28,639)           (21,478)       (27,700)            96,051
    Income (loss) per diluted share before
    cumulative effect adjustment....................        (1.19)             (0.78)         (0.95)              3.23
    Net income (loss)...............................      (29,746)           (21,478)       (27,700)            96,051
    Net income (loss) per share - basic.............        (1.23)             (0.78)         (0.95)              3.30
                                  diluted...........        (1.23)             (0.78)         (0.95)              3.23

(a) The first three quarters were restated to reflect the adoption of SAB No. 101 as of the beginning of Fiscal 1999 (see Note 1).
(b) Common stock equivalents have not been included because the effect would be anti-dilutive.
</TABLE>

16.   Pro Forma Information (Unaudited):

     The  following  table  reflects  unaudited  pro forma  combined  results of
operations of the Company and Hills on the basis that the Hills  acquisition had
taken place at the beginning of Fiscal 1998:
<TABLE>
      <S>                                                                       <C>
                                                                              Year Ended
                                                                          January 30, 1999
                                                                          ----------------
                                                              (In Thousands, except per share amounts)
      Net sales.........................................................    $4,131,194
      Net income (loss).................................................       (54,903)
      Earnings (loss) per Common share..................................      $  (2.39)
</TABLE>

     The  unaudited pro forma  results were  prepared for  comparative  purposes
only. It does not purport to be  indicative  of the results of operations  which
actually  would  have  resulted  had the  acquisition  been  consummated  at the
beginning of Fiscal 1998, or of future results of operations of the consolidated
entities.

     The above pro forma net income and earnings  per common  share  amounts for
the year ended January 30, 1999 reflect the  previously  recorded  write-down of
Hills  deferred tax assets of  approximately  $49.6  million  (which is net of a
reversal of approximately  $5.9 million of accrued tax  liabilities).  Excluding
the write-down of the Hills deferred tax assets recorded as of October 31, 1998,
pro forma net loss and loss per common  share  would have been $5.3  million and
$0.23, respectively, for the year ended January 30, 1999.

                                      -42-
<PAGE>
<TABLE>

                                                                                                                        SCHEDULE II




                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In Thousands)
<S>                       <C>               <C>                 <C>                     <C>                 <C>

                        Balance at          Charged to                                                     Balance at
                         Beginning           Cost and                                                        End of
Description              of Period            Expense          Reclassifications        Deductions           Period
-----------              ---------            -------          -----------------        ----------           ------

Fiscal 2000:

Store Closing
Reserve                    $55,468            $129,806 (d)          ---                  ($5,909)           $179,365

Fiscal 1999:

Store Closing
Reserve                    $59,768                 ---           $5,170     (a)          ($9,470)            $55,468 (c)

Fiscal 1998:

Store Closing
Reserve                    $12,050              $8,222          $42,043     (b)          ($2,547)            $59,768

(a)   Represents an adjustment to the fair market value of assumed Hills store closing liabilities recorded in connection with
      the finalization of the Hills acquisition accounting and reclassification of other liabilities associated with closed stores.
(b)   Represents the store (and other facilities) closing reserve assumed and recorded in connection with the Hills acquisition.
(c)   The majority of this reserve relates to ongoing property lease commitments for stores closed through Fiscal 1999.
(d)   Represents the closing of thirty-two stores.
</TABLE>




                                      -43-
<PAGE>
<TABLE>
<S>                                                                                                     <C>

                                                E X H I B I T I N D E X




                                                                                                    Cross-reference
Exhibit                                                                                              Or page number
Number                                             Exhibit                                            In Form 10-K
------                                             -------                                            ------------

     2.1  Third  Amended  and  Restated  Plan  of  Reorganization  of  the  Ames
          Department Stores, Inc. and other members of the Ames Group, Citibank,
          N.A.  as Agent,  the Parent  Creditor's  Committee,  the  Subsidiaries
          Creditor's Committee,  the Bond holders'  Committee and the Employees'
          Committee dated October 23, 1992 (incorporated  herein by reference to
          Exhibit  2 of the  Registrant's  Report  on Form  8-K  filed  with the
          Commission on December 31, 1992).

     2.2  Statement of Ames Group with respect to conditions to  Consummation of
          Third  Amended  and  Restated  Joint  Plan of  Reorganization  of Ames
          Department Stores, Inc. other members of Ames Group,  Citibank,  N.A.,
          the Parent Creditor's  Committee,  Subsidiaries  Creditors' Committee,
          Bondholders'  Committee and  Employees'  Committee  dated December 28,
          1992   (incorporated   herein  by  reference  to  Exhibit  2B  of  the
          Registrant's  Report on Form 8-K filed with the Commission on December
          31, 1992).

     2.3  Ames Department  Stores,  Inc.  Information  Supplementing  Disclosure
          Statement dated December 29, 1992 (incorporated herein by reference to
          Exhibit  2C of the  Registrant's  Report  on Form 8-K  filed  with the
          Commission on December 31, 1992).

     2.4  Agreement  and Plan of Merger,  dated as of November 12,  1998,  among
          Ames Department  Stores,  Inc., HSC Acquisition  Corporation and Hills
          Stores Company  (incorporated  herein by reference to Exhibit 99(c)(1)
          of the  Registrant's  Schedule  14D-1  filed  with the  Commission  on
          November 12, 1998).

     3.1  Amended and Restated  Certificate of  Incorporation of Ames Department
          Stores,  Inc.(incorporated  herein by  reference  to the  Registrant's
          definitive proxy filed with the Commission on April 8, 1996).

     3.2  Form of By-laws of Ames Department  Stores,  Inc. as amended  February
          23, 1995  (incorporated  herein by  reference  to Exhibit  3(b) of the
          Registrant's  Annual  Report on Form 10-K for the  fiscal  year  ended
          January 28, 1995).

     4.1  Specimen  Certificate  for shares of Common Stock,  $.01 par value, of
          Ames Department Stores, Inc.

     4.2  Series B Warrant  Certificate for Purchase of New Common Stock of Ames
          Department Stores, Inc.  (incorporated herein by reference to Form 8-A
          filed with the Commission on December 11, 1992).

                                      -44-
<PAGE>


                                                E X H I B I T I N D E X




                                                                                                    Cross-reference
Exhibit                                                                                              Or page number
Number                                             Exhibit                                            In Form 10-K
------                                             -------                                            ------------

     4.3  Rights  Agreement,  dated  as  of  November  30,  1994,  between  Ames
          Department   Stores,   Inc.  and  Chemical   Bank,   as  Rights  Agent
          (incorporated  herein by  reference  to Exhibit 4 of the  Registrant's
          Quarterly  Report on Form 10-Q for the quarterly  period ended October
          29, 1994).

     4.4  Amendment  No.  1,  dated as of  September  24,  1999,  to the  Rights
          Agreement  dated  as  of  November  30,  1994,  by  and  between  Ames
          Department Stores, Inc. and ChaseMellon  Shareholder Services,  L.L.C.
          as successor to Chemical Bank as Rights Agent (incorporated  herein by
          reference to Exhibit 4 of the  Registrant's  Quarterly  Report on Form
          10-Q for the quarterly period ended October 30, 1999).

     10.1 Retirement  and  Savings  Plan as  restated  December  27,  1984,  and
          Amendment No. 1 (incorporated  herein by reference to Exhibit 10(n) of
          the Registrant's  Annual Report on Form 10-K for the fiscal year ended
          January 26, 1985).

     10.2 Settlement  Agreement,  dated March 31, 1994,  between Ames Department
          Stores, Inc. and Subsidiaries and Wertheim Schroder & Co. Incorporated
          and James A. Harmon (incorporated herein by reference to Exhibit 10 of
          the Registrant's Report on Form 8-K filed with the Commission on April
          8, 1994).

     10.3 1994 Management Stock Option Plan (incorporated herein by reference to
          the Registrant's  definitive Proxy statement filed with the Commission
          on May 5, 1994).

     10.4 1994  Non-Employee   Directors  Stock  Option  Plan  (incorporated  by
          reference to the  Registrant's  definitive  Proxy statement filed with
          the Commission on April 10, 1995).

     10.5 1995  Long Term  Incentive  Plan  (incorporated  by  reference  to the
          Registrant's  definitive  Proxy statement filed with the Commission on
          April 10, 1995).

     10.6 Employment  Agreement,  dated June 1, 1998,  between  Ames  Department
          Stores, Inc. and Joseph R. Ettore,  (incorporated  herein by reference
          to Exhibit 10(j) of the Registrant's Report on Form 8-K filed with the
          Commission on June 30, 1998).

     10.7 Second Amended and Restated Credit Agreement, dated December 31, 1998,
          among certain financial institutions, as Lenders, BankAmerica Business
          Credit,  as  the  Administrative   Agent,  and  Ames  FS,  Inc.,  Ames
          Merchandising   Corporation,   and  Hills  Department  Store  Company,
          (incorporated herein by reference to Exhibit 10(k) of the Registrant's
          Report on Form 8-K filed with the Commission on January 15, 1999).

                                      -45-
<PAGE>

                                                E X H I B I T I N D E X




                                                                                                    Cross-reference
Exhibit                                                                                              Or page number
Number                                             Exhibit                                            In Form 10-K
------                                             -------                                            ------------

     10.8 Post Merger Transition and Agency Agreement,  dated as of December 31,
          1998,  among the Gordon  Brothers Retail  Partners,  LLC and The Nassi
          Group, LLC, Hills Stores Company,  Hills Department Stores Company and
          Ames Merchandising  Corporation  (incorporated  herein by reference to
          Exhibit  10(l) of the  Registrant's  Report on Form 8-K filed with the
          Commission on January 15, 1999).

     10.9 1998 Stock  Incentive  Plan  (incorporated  herein by reference to the
          Registrant's  definitive  proxy statement filed with the Commission on
          April 8, 1998).

     10.10Employment  Agreement,  dated March 23, 1999,  between Ames Department
          Stores,  Inc.  and Denis Lemire  (incorporated  herein by reference to
          Exhibit  10 of the  Registrant's  Report  on Form 8-K  filed  with the
          Commission on April 2, 1999).

     10.11Employment Agreement, dated March 23, 1999, between Ames Department
          Stores, Inc. and Rolando de Aguiar  (incorporated herein by reference
          to Exhibit 10 of the  Registrant's  Report on Form 8-K filed with the
          Commission on April 2, 1999).

     10.12Senior Secured Financing  Agreement dated March 2, 2001,  between Ames
          Department  Stores,  Inc.  and  GE  Capital  (incorporated  herein  by
          reference to Exhibit 10 on Form 8-K filed with the Commission on March
          12, 2001).

     11   Schedule of  computation  of basic and diluted net earnings per share.                            47

     12   Ratio of Earnings to Fixed Charges                                                                48

     21   Subsidiaries of the Registrant                                                                    49




</TABLE>

                                      -46-
<PAGE>
<TABLE>

                                                                                                           Exhibit 11

                                     AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                                      SCHEDULE OF COMPUTATION OF BASIC AND DILUTED
                                                 NET EARNINGS PER SHARE
                                        (In thousands, except per share amounts)
<S>                                                                 <C>                     <C>               <C>

                                                                      53 Weeks               52 Weeks         52 Weeks
                                                                       Ended                   Ended             Ended
                                                                    February 3,             January 29,       January 30,
                                                                        2001                    2000             1999
                                                                    ---------------         -------------    --------------
Income before Cumulative Effect adjustment and
     Extraordinary item..........................................    ($233,624)               $18,234           $33,830
Cumulative Effect adjustment, net of tax.........................            -                 (1,107)                -
Extraordinary item, net of tax...................................       (6,964)                     -                 -
                                                                    ---------------         -------------    --------------
     Basic and diluted net income................................    ($240,588)               $17,127           $33,830
                                                                    ===============         =============    ==============
For Basic Earnings Per Share:
Weighted average number of common shares outstanding during
the period (a)...................................................       29,383                 27,517            23,010
Basic earnings per share:
Basic income per share before Cumulative Effect adjustment
and Extraordinary item...........................................       ($7.95)                 $0.66             $1.47
Cumulative Effect adjustment, net of tax.........................            -                  (0.04)                -
Extraordinary item, net of tax...................................        (0.24)                     -                 -
                                                                    ---------------         -------------    --------------
     Basic net income per share..................................       ($8.19)                 $0.62             $1.47
                                                                    ===============         =============    ==============
For Diluted Earnings Per Share:
Weighted average number of common shares outstanding during
the period (a)...................................................       29,383                 27,517            23,010
Add Common stock equivalent shares represented by:
     Series B Warrants...........................................            3                     20                98
     Series C Warrants...........................................            -                      -               440
     Options under 1994 Management Stock Option
     Plan and 1998 Stock Incentive Plan..........................          113                    106               606
     Options under 2000 Store Manager Stock Option Plan..........           14                      -                 -
     Options under 1994 Non-Employee Director
     Stock Option Plan...........................................           30                     15                62
                                                                    ---------------         -------------    --------------
Weighted average number of common and common equivalent
shares...........................................................       29,543                 27,658            24,216
                                                                    ===============         =============    ==============
Diluted earnings per share:
Diluted income per share before cumulative effect
adjustment.......................................................       ($7.95)                  0.66              1.40
Cumulative Effect adjustment, net of tax.........................            -                  (0.04)                -
Extraordinary item, net of tax...................................        (0.24)                     -                 -
                                                                    ---------------         -------------    --------------
     Diluted net income per share................................       ($8.19)   (b)           $0.62             $1.40
                                                                    ===============         =============    ==============

(a) The weighted average number of common shares outstanding is net of Treasury Stock.
(b) Common stock equivalents have not been included because the effect would be anti-dilutive.
</TABLE>

                                      -47-
<PAGE>

<TABLE>


                                                                                                         Exhibit 12
                                    AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                                         RATIO OF EARNINGS TO FIXED CHARGES
                                          (In thousands, except ratio data)
<S>                                          <C>            <C>            <C>             <C>            <C>
                                                                        Fiscal Year Ended
                                             -------------------------------------------------------------------------
                                             February 3,    January 29,    January 30,     January 31,    January 25,
                                                2001           2000            1999           1998           1997
                                             ------------   ------------   -------------   ------------   ------------

(Loss) income before income taxes,
      extraordinary item and cumulative
      effect adjustment                         (288,377)       (31,355)         52,605         53,633         26,804

Add:
      Interest expense                            87,961         60,843          15,253         11,600         19,043
      Interest component of rental
      expense                                     28,876         29,253          21,121         18,409         16,541
                                             ------------   ------------   -------------   ------------   ------------

Earnings available for fixed charges            (171,540)        58,741          88,979         83,642         62,388

Fixed Charges:
      Interest expense                            87,961         60,843          15,253         11,600         19,043
      Interest component of rental expense        28,876         29,253          21,121         18,409         16,541
                                             ------------   ------------   -------------   ------------   ------------

Total fixed charges                              116,837         90,096          36,374         30,009         35,584

Ratio of earnings to fixed charges                (1.5)x           0.7x            2.4x           2.8x           1.8x
</TABLE>

For the purpose of calculating the ratio of earnings to fixed charges,  earnings
consist of income before income taxes, extraordinary item, and cumulative effect
adjustment  plus fixed  charges (net of  capitalized  interest).  Fixed  charges
consist  of  interest  expense on all  indebtedness  and  capitalized  interest,
amortized premiums,  discounts and capitalized expenses related to indebtedness,
and one-third of rent expense on operating leases  representing  that portion of
rent expense deemed by us to be  attributable  to interest.  For the fiscal year
ended February 3, 2001,  the amount of additional  earnings that would have been
required to cover fixed charges for this period was $288.4 million.



                                      -48-
<PAGE>
<TABLE>



                                                                                                                         EXHIBIT 21




                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                         SUBSIDIARIES OF THE REGISTRANT


     As of February 3, 2001, the subsidiaries of the Company were as follows:
<S>                                                                                     <C>

    Name                                                                                State of Incorporation
    ----                                                                                ----------------------

Ames Transportation Systems, Inc.....................................................         Delaware

AmesPlace.com, Inc...................................................................         Delaware

Ames Realty II, Inc..................................................................         Delaware

Ames Merchandising Corporation.......................................................         Delaware

</TABLE>





                                      -49-
<PAGE>