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 January 29, 2000
                                             ----------------

                                       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 31, 2000,  the aggregate  market value of voting stock held by
non-affiliates  of the  Registrant was  $722,130,388  based on the last reported
sale  price of the  Registrant's  Common  Stock on the  NASDAQ  National  Market
System.

      29,399,112 shares of Common Stock were outstanding on March 31, 2000.

      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 57 pages (including Exhibits)                 Exhibit Index on page 52




<PAGE>



                                     PART I

Item 1.    Description of Business

Introduction


      Ames Department Stores,  Inc. is the largest regional discount retailer in
the United States.  We currently  operate 460 stores in 19 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.   They  are  situated  in  rural
communities,  small cities,  the suburbs of larger  metropolitan  areas,  and in
urban areas and 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.


Business Developments


The Hills Acquisition

      On November 12, 1998,  Ames entered into an agreement for the  acquisition
of Hills Stores Company. Pursuant to that agreement, we began a tender offer for
all of Hills'  outstanding  common and convertible  preferred stock.  Concurrent
with that tender offer, we offered to purchase all of Hills' outstanding 12 1/2%
Senior Notes due 2003 and solicited  consents from the holders of those notes to
eliminate and waive various  provisions of the indenture  governing those notes.
Following  the  expiration  of those offers on December  31,  1998,  we acquired
approximately  81.3%  of  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 right
to receive a further  cash payment out of, and based upon,  Hills'  ultimate net
recovery,  if any,  in a lawsuit  brought  by Hills in  September  1995  against
certain of its former directors.

      In March 1999,  we  consummated  the merger of Hills into Ames.  Shares of
Hills' 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 cost of acquiring the remaining  outstanding common and
preferred shares of Hills was $3.3 million. We also incurred  professional fees,
accounting,  legal and other costs of approximately  $11.0 million in connection
with the acquisition.

      The total cost of the Hills acquisition was approximately  $330.0 million,
inclusive of the  approximately  $50.9 million of the former Hills stores senior
notes that remained outstanding and $147.8 million of capitalized  leasehold and
financing  obligations  related  to the  Hills  Stores.  Cash  required  for the
acquisition totaled approximately $129.0 million.  Funds for these purposes were
derived from borrowings under our bank 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
aggregate  purchase price of $129.0 million was allocated to assets acquired and
liabilities assumed based on a final determination,  made during Fiscal 1999, 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
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 25 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 25 years).

     At the time of the  acquisition,  Hills  operated 155  discount  department
stores in twelve states within or contiguous to our existing  geographic region.
The  Hills  stores  had a sales  area  that was  similar  in size to that of the
typical Ames store. They were located in communities with demographics that were
similar to those of our  locations in  existence  then and they served a similar
target customer. The Hills acquisition was particularly  opportunistic for Ames,
since it permitted  us to obtain 155  well-maintained  stores in locations  that
were  complementary to, and to a large extent not competitive with, our existing
store locations. After a review of locations where a Hills store operated in the
same general market area as an existing Ames store,  we determined  that in only
eleven  instances  would  store  closings of one or the other be  required.  The
acquisition  substantially  increased our presence in five states and enabled us
to enter five new  states.  We also  acquired a Hills  distribution  facility in
Columbus, Ohio that was  complementary  to,  but not  duplicative  of,  our then
existing distribution centers.

     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 three  stages,  each stage
involving  approximately  one third of the  Hills  stores.  The first  stage was
completed in April 1999;  the second stage was  completed in July 1999;  and the
third stage 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 liquidation sales were conducted in
three  stages,  the first  having  ended on February 20, 1999 and the second and
third having ended on May 21, 1999 and July 16,  1999,  respectively.  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.  Pursuant to the agreement,  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  during Fiscal 1999.  During March 1999, we entered into two
agreements  with  Caldor to  purchase  seven of its stores in  Connecticut,  two
stores  in  Massachusetts  and a  649,000  square  foot  distribution  center in
Westfield,  Massachusetts,  for a total cash  purchase  price of $42.8  million.
Under the terms of the  agreements,  we  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.  During March and April 1999, the United
States Bankruptcy Court for the Southern District of New York approved our right
to purchase the leases for the stores and the  distribution  center.  All of the
transactions  subsequently  closed. We entered into a lease for and converted an
additional  Caldor store in New Jersey during the last fiscal  quarter  bringing
the total of former Caldor store openings for Fiscal 1999 to ten.

      The ten former  Caldor  stores,  which range in size from 48,771 to 74,139
square feet of selling space,  are in communities  with similar  demographics to
those in which our own stores are  located.  None of the stores is in a location
that is directly  competitive  with any of our existing  stores,  including  the
former Hills stores.  With the  acquisition of these stores,  we have become the
largest discount  department  store operator in Connecticut,  with a total of 22
stores in that state.


Recent Developments

The Acquisition of Goldblatt's Department Store Sites

      In February 2000 we entered into an agreement with Goldblatt's  Department
Stores, Inc. to purchase the leases to six of their stores in Chicago,  Illinois
and one  store in  Gary,  Indiana  for a cash  purchase  price of $7.6  million.
Completion  of the  purchase is  expected in April 2000.  Under the terms of the
agreement,  we will assume Goldblatt's leases for the seven stores.  Goldblatt's
will deliver the stores to us in "broom clean" condition.


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. Our efforts over the
past five years have  resulted in an increase in our gross margins in our stores
from 26.7% to 28.8% (with  respect to the former  Hills  stores,  excluding  the
period of time prior to their  conversion  to Ames stores) and a doubling of our
operating  margin.  During this time period we also  acquired  and  successfully
integrated 193 stores, remodeled 65 of our existing stores and closed 48 stores.

      Over the past two years,  we have  redirected  our focus to 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  and Hills  acquisitions  were  representative  of our  growth
strategy. The acquisitions have significantly  increased our revenue and enabled
us to leverage our  administrative  costs over a far larger  operating  base. In
fact, we  experienced  a 19% increase in operating  margin rate  (excluding  the
results of  operations  for the former Hills stores during the period that these
stores  were  operated  pursuant  to the  Agency  Agreement  and  certain  other
expenses)  in Fiscal 1999 from Fiscal 1998,  which is in part due to  leveraging
our administrative  costs over more stores. These acquisitions were particularly
opportunistic  for Ames,  since they  permitted  us to open 161  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.

      As a  further  step  in the  implementation  of our  growth  strategy,  we
recently agreed to acquire from Goldblatt's  Department Stores, Inc., the leases
for seven stores that we will convert to Ames stores during Fiscal 2000.


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 $35,000 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 that this merchandising 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  1999  attributable  to  each
category:
<TABLE>

           Home Lines 41%                        Softlines 31%                           Hardlines 28%
     ---------------------------         -------------------------------            ------------------------
<S>  <C>                                <C>                                        <C>

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 4% of our total sales in Fiscal 1999.

      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  11.7% of our Fiscal 1999 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% of our Fiscal 1999 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  micromarketing  strategy  drives  customer  traffic  at 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 6% of our Fiscal 1999
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  have  implemented  an "A+  Customer  Service  Program"  which
encourages  our  in-store  personnel  to enhance  customer  satisfaction  with a
well-defined  four-step method:  smile, greet the customer,  meet the customer's
needs and thank the  customer for shopping at Ames.  Since the  introduction  of
this program in 1995, our customer comment scores have consistently improved.


Marketing

      We use a "high/low"  promotional  pricing strategy to attract customers to
our stores by  periodically  offering  greater  discounts  on selected  items or
categories of merchandise  while  maintaining our regular discount prices on all
other merchandise.  In addition to increasing  customer traffic,  the "high/low"
strategy  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 and
purchasing patterns in individual store locations.

     Our main  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 55 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  1999,  the  "55Gold(R)
Savings"  program  generated  sales of $336 million  compared to $250 million in
Fiscal 1998 and the number of active  cardholders  increased to 2.3 million from
1.4 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,"  "Truckload Sale," "Patio Plaza," "Shoe Sale"
and "Underwear  Fair." Our most successful  special sale promotions  include the
"March Magic 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' "Bargains by the Bagful(R)" theme through  extensive use
of weekly full-color newspaper circulars.  We distributed 55 newspaper circulars
in Fiscal 1999,  with an average weekly  circulation  of 16 million  households.
These circulars generated approximately 48% of our net sales in Fiscal 1999.


Store Layout and Design

      Ames'  stores,  which range from  27,736 to 85,743  square feet of selling
space and average approximately 55,500 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' target  customer base of working  mothers and senior  citizens,
who prefer an easy-to-shop, convenient store environment. In 1994, we introduced
a new store prototype. The prototype 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.

     Our prototype store design has generally increased our return on investment
in our  remodeled  stores or, where the stores have been  subject to  increasing
competition,  significantly  enhanced  their  competitiveness.  We  continue  to
remodel our remaining stores to this pattern on an as-needed basis.


Store Locations

      We  currently  operate 460 stores  located in the  Northeast,  Midwest and
Mid-Atlantic regions. The Hills acquisition extended our presence into Illinois,
Indiana,  Kentucky,  North  Carolina and  Tennessee,  where we previously had no
stores, and substantially  strengthened our market penetration in several states
in which we had existing  operations,  including New York,  Ohio,  Pennsylvania,
Virginia and West  Virginia.  The  following  table sets forth,  as of March 31,
2000, the locations of our existing Ames stores:

                                Number of Stores
                               ------------------
                                                     Ames
                                                    ------
              Pennsylvania                            102
              New York                                 92
              Ohio                                     53
              Massachusetts                            35
              Maryland                                 24
              Maine                                    23
              Connecticut                              22
              New Hampshire                            20
              West Virginia                            19
              Virginia                                 14
              New Jersey                               15
              Vermont                                  12
              Indiana                                  10
              Rhode Island                              8
              Delaware                                  4
              Tennessee                                 3
              District of Columbia                      1
              Illinois                                  1
              Kentucky                                  1
              North Carolina                            1
                                                     ----
                                     Total:           460
                                                     ====

Purchasing

      We buy merchandise from more than 3,200 vendors, approximately 90% of whom
are located in the United States. No single supplier  accounted for more than 3%
of our purchases in Fiscal 1999 and there is no current or  anticipated  problem
with  respect to the  availability  of  merchandise.  Merchandise  is  purchased
centrally for all stores by buyers who are based at Ames' headquarters.

      We work  actively  with our  vendors  to  reduce  costs  and  improve  the
efficiency  of  our  supply  chain.  Nearly  1,900  vendors  participate  in our
electronic  ordering and  invoicing  program,  which is designed to automate the
inventory purchasing, delivery billing and payment process, reduce the number of
out-of-stock items and reduce the cycle time of product deliveries.


Distribution

      We operate  distribution  centers in  Leesport,  Pennsylvania;  Mansfield,
Massachusetts; and, as a result of the Hills and Caldor acquisitions,  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.

      We have a 5:00 am delivery program to ensure that merchandise is delivered
to our stores before business  hours.  This delivery  policy,  together with our
investments in in-store  automation,  have increased the efficiency of our store
stocking and delivery and reduced the number of out-of-stock items.


Management Information Systems

     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,  which includes  mainframe,  midrange and client server
systems;  support for midrange systems in Ames' four distribution  centers;  and
support for substantially  all information  systems equipment in all of the Ames
stores. We expect that this agreement will cost  less in  service delivery  than
if we had not outsourced our information technology support.

     In 1998,  we  invested  approximately  $35.0  million  in  state-of-the-art
technology for 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 point-of-sale  related  technology and
equipment  for the 163  stores  that we  opened  during  the  fiscal  year.  Our
point-of-sale  systems have  significantly  reduced the amount of time customers
spend  on the  checkout  line,  streamlined  layaway  and  credit  transactions,
facilitated  our  targeted   promotional   activities  and  increased   employee
productivity.

      We have developed and implemented a state-of-the-art target marketing tool
that will enable 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, will enable us to perform direct  mailings and identify  customers
with cross-shop marketing opportunities.

      Our new store office  systems are being used to automate  many  previously
manual, labor intensive processes including cash counting,  time keeping,  store
opening and closing  routines and other clerical  tasks.  In the receiving area,
the new  systems  are being  used to speed the  receipt of  merchandise  and its
movement to the sales floor.  Additionally,  these  systems  have  significantly
improved  the  process by which we send  customer  returns  to a central  return
center in Eastern Pennsylvania.

      Through these store automation systems we can capture valuable  financial,
merchandising,  logistics and shortage information and transmit this information
to our corporate  headquarters on a daily basis, enabling us to more effectively
operate our  business.  These  systems  have been  included in all of the former
Hills and Caldor stores that we converted to Ames stores.


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 such as Bradlees,  currently  operates  stores
within our regional  market and competes  with us for  customers  and  potential
store locations.  We currently 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 (37% of our annual sales in Fiscal 1999).  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  31,  2000,  we  employed   approximately   35,300   people.
Approximately  31,300 of our  employees  work in various  capacities  within our
stores,  approximately  3,000 are employed in our  distribution  centers and the
balance is  based at our corporate and regional  offices.  With the exception of
approximately   2,250  employees  at  our  distribution   centers  in  Leesport,
Pennsylvania; Mansfield and Westfield, Massachusetts; and Columbus, Ohio who are
covered by collective  bargaining  agreements  that expire at various times from
December 2000 to March 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, 2000, the Company's store lease  obligations for 460 stores
covered a total of  approximately  32.0  million  square  feet,  which  includes
approximately  597,000  square feet in seven  stores  already  opened as of that
date.  The average  store size is  approximately  69,400  square feet,  of which
approximately 80% is selling area.

      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. The remainder of Ames' stores is  leased,  with leases whose initial terms
expire at various times between 2001 and 2023. The leases  generally have one or
more renewal  options,  each permitting an extension for at least five years. In
addition,  the leases  typically  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 former Caldor  distribution center in
Westfield,  Massachusetts  is a leased  property  that  comprises  approximately
649,000 square feet.  The former Hills  warehouse and  distribution  facility in
Columbus, Ohio, a leased property, is approximately 1.1 million square feet. The
former Hills facility in Grove City, Ohio closed in Spring 1999.

      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  2001, and a
lease, which expires in April 2006 for a 33,000 square foot in-house photography
studio  and print shop in Rocky  Hill.  Three  additional  former  Hills  leased
properties were closed in 1999: the buying and administrative  office in Canton,
Massachusetts,  the Hills  regional  office in  Aliquippa,  Pennsylvania,  and a
buying office in New York, New York. The Aliquippa,  Pennsylvania  lease expired
on its own terms  without  any  additional  cost to the  Company.  The other two
leases were settled under terms that were favorable to Ames.


Item 3.    Legal Proceedings.

      On March 21, 1995, a class action  complaint was filed against Ames in the
Superior Court Department of the Trial Court,  Suffolk County, and Massachusetts
entitled  David W.  Abrams,  Individually  and On Behalf  of All  Other  Persons
Similarly  Situated v. Ames Department  Stores,  Inc. The complaint alleged that
Ames  violated  Massachusetts  wage and hour law by failing to pay  Abrams,  and
other similarly situated Assistant Managers in Massachusetts,  time and one-half
their  regular  rates of pay for hours worked in excess of 40 hours a week.  The
complaint sought injunctive relief,  treble damages,  costs and attorneys' fees.
On April 21, 1995, the case was removed to the United States  District Court for
the District of  Massachusetts.  Ames denied the claims on the basis that Abrams
and other  similarly  situated  Assistant  Managers  were exempt  employees  not
entitled to  overtime  pay.  Ames  further  denied that the action was  properly
maintainable   as  a  class  action  and  that  the   plaintiff   was  a  proper
representative of the purported class.

      On March 14, 1996, Abrams amended his complaint to include Richard Serrano
as  name   representative  of  all  Replenishment   Assistant  Managers  located
throughout Massachusetts. On November 22, 1996, the Court remanded the claims of
Serrano and the  putative  class of  Replenishment  Assistant  Managers to State
Court because  Serrano failed to satisfy the amount in  controversy  requirement
for federal  jurisdiction.  On January 3, 1997, the United States District Court
for the District of  Massachusetts  certified a class of Hardlines and Softlines
Assistant  Managers  employed by Ames in any Ames store in  Massachusetts  on or
after March 21, 1993,  but limited the class to those  Assistant  Managers whose
claim satisfied the amount in controversy  requirement for federal  jurisdiction
as of April 21,  1995,  the date the case was removed to federal  court.  Abrams
caused notice to be sent to the class  apprising  them of the pending action and
their right to opt-out of the action if they did not wish to  participate in the
litigation.  On January 21,  1999,  the  parties  reached a  settlement  in this
action, which was preliminarily approved by the United States District Court for
the  District  of  Massachusetts  on  January  22,  1999.  Notice of the  Abrams
settlement was sent to all class members on January 26, 1999. On March 30, 1999,
the Court issued a Final Order approving the Abrams Settlement.  Under the terms
of the settlement  agreement,  each class member received a calculated amount of
cash and scrip  usable in any Ames store in exchange for a release of all claims
against the  Company.  The total cost to the  Company  was  $440,255 in cash and
$146,752  in  scrip.  Payments  have  been  made  according  to the terms of the
settlement agreement.

      On December 13, 1995,  a class action  complaint  was filed and on January
23,  1996 an amended  class  action  complaint  was filed in the  United  States
District Court for the District of  Massachusetts  entitled  Colleen Austin,  On
Behalf of Herself and Others Similarly Situated v. Ames Department Stores,  Inc.
et al. The factual allegations in the Austin complaint were essentially the same
as those in the Abrams complaint referenced above. However, the Austin complaint
also  included  claims  against Ames and certain of its  officers and  directors
under the Fair Labor  Standards  Act,  ERISA and the wage and hours laws of each
state  where  Ames does  business  and  purported  to state  claims on behalf of
Assistant Managers in each of those states.  Ames asserted,  among other things,
that the case was not properly  maintainable as a class action suit and that the
plaintiff was not a proper class  representative.  Ames also denied liability on
the basis that  Austin and other  similarly  situated  Assistant  Managers  were
exempt employees and moved to dismiss the claims under ERISA and the laws of all
states  except  Massachusetts.  On November 21, 1997,  the Court  granted  Ames'
motion to dismiss the ERISA claims and denied the  remainder  of the motion.  On
July 15,  1998,  the Court  approved  a class  action  settlement  that had been
reached  by the  parties.  Notice  of the  Austin  settlement  was  sent  to all
potential class members on August 19, 1998. The Austin settlement  provided that
in  exchange  for a release of all  claims  against  Ames each class  member who
elected to opt-in to the Austin settlement would receive a benefit,  either cash
or discounts on future  purchases at an Ames store,  based on the number of days
worked for Ames during the class period. Individuals who wished to opt-in to the
Austin settlement were required to sign and return a consent and release form on
or before  October 3, 1998. The total cost to the Company was $1,225,887 in cash
and $171,560 in discounts  usable on purchases made at Company stores.  Payments
have been made according to the terms of the settlement agreement.

      On December 6, 1996,  the remand  referenced  above from the United States
District Court for the District of  Massachusetts  of Abrams v. Ames  Department
Stores,  Inc. as to Richard  Serrano  and the  putative  class of  Replenishment
Assistant  Managers was docketed in the Superior  Court  Department of the Trial
Court,  Suffolk County,  Commonwealth of  Massachusetts.  This complaint alleged
that Ames violated  General Laws,  Chapter 151, ss. 1A by failing to pay Serrano
and other similarly situated Replenishment Assistant Managers located throughout
Massachusetts  time and one-half  their regular rates of pay for hours worked in
excess of 40 hours per week.  Serrano  agreed to a  voluntary  dismissal  of the
action on behalf of himself and other similarly situated Replenishment Assistant
Managers  pursuant to a class action  settlement in a wage and hour case reached
between Ames and another former  Replenishment  Assistant  Manager,  David Root,
entered into and approved by the United States  District  Court for the District
of  Massachusetts  on January 31, 1997 (David Root, On Behalf of Himself and All
Other Persons Similarly Situated v. Ames Department  Stores,  Inc., Civil Action
No.  96-11301-GAO).  Serrano  and  other  former or  then-current  Replenishment
Assistant Managers employed by Ames in Massachusetts had the option to opt-in to
the Root settlement.

     On March 18, 1997,  the complaint was further  amended to add Kristen Gould
as a named  plaintiff to represent the putative class of Hardlines and Softlines
Assistant  Managers  employed by Ames in any Ames stores in Massachusetts  whose
claim  failed to  satisfy  the amount in  controversy  requirement  for  federal
jurisdiction in the Abrams case. Gould's substantive claims mirror those alleged
in the Abrams case for Massachusetts Hardlines and Softlines Assistant Managers.
Also,  on March 18,  1997,  the Court  dismissed  Serrano's  action on behalf of
himself and other similarly situated  Replenishment  Assistant Managers pursuant
to the settlement reached between Ames and David Root described above. This case
has gone  forward  solely on behalf of the  Hardlines  and  Softlines  Assistant
Managers under the caption Kristen Gould v. Ames Department Stores, Inc., in the
Superior Court  Department of the Trial Court,  Suffolk County,  Commonwealth of
Massachusetts.  Ames  responded  to the Gould  complaint  and  asserted the same
defenses  as it did with regard to the Abrams  complaint.  Gould moved for class
certification  and on February 5, 1998, the Superior Court  certified a class of
Hardlines  and  Softlines  Assistant  Managers  employed  in any  Ames  store in
Massachusetts  on or after March 21, 1993 whose claim did not satisfy the amount
in controversy  requirement  for federal  jurisdiction  as of April 21, 1995. On
June 12, 1998, the Superior Court stayed the  proceedings in the Gould complaint
until the conclusion of the Abrams complaint in the United States District Court
for the  District  of  Massachusetts.  On April 7, 1999,  the  Company and Gould
reached a  settlement  of the Third  Complaint,  which  adopted the terms of the
Abrams Settlement.  On May 25, 1999, the Court preliminarily  approved the class
action   settlement,   which  had  been  reached  by  the  parties  (the  "Gould
Settlement"), and Notice was sent to class members on June 4, 1999. On September
17, 1999,  the Court entered final approval of the Gould  Settlement.  The total
cost to the Company was  $261,987  in cash and $87,329 in scrip.  Payments  have
been made according to the terms of the settlement agreement.

      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 factual  allegations in the Smoot
complaint are essentially the same as those in the Austin  complaint  referenced
above and are alleged on behalf of 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 anyone who worked for Ames as an Assistant  Manager  after the
date of the Austin  settlement  notice,  but who is not otherwise covered by the
previous  categories.  However,  the Smoot  complaint  does not  include  claims
against  Ames and  certain of its  officers  and  directors  under  ERISA.  Ames
believes,  among other things,  that the case is not properly  maintainable as a
class  action  suit.  Ames has  filed an answer in the case in which it has also
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 March 1, 1999, the plaintiffs moved for class certification of the state
law claims.  On May 14, 1999, the plaintiff's moved for Leave to Send Notice and
Consent to Join  pursuant to the Fair Labor  Standards  Act.  Both  motions were
allowed on December 13, 1999. As of this date, Notice of the action has not been
sent out to class members. The Company intends to defend this matter vigorously.

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 1999
to a vote of security holders, through the solicitation of proxies or otherwise.


                                     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 last 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.

                              Fiscal 1999                    Fiscal 1998
                        ---------------------------   -------------------------

                           Low          High               Low         High

      1st Quarter       $ 25 3/8     $ 38 3/4           $ 14         $25 1/2
      2nd Quarter         34 13/16     48 7/8             21 1/8      29 5/8
      3rd Quarter         27 5/8       42                 10 1/2      25 3/8
      4th Quarter         20 3/4       34 11/12           18 1/8      32 1/2


      On March 31, 2000, there were approximately 6,200 holders of record of the
common  stock.  On that date,  the  reported  sale price of our common stock was
$24.56.

      We paid no  quarterly  dividends to the holders of our common stock during
these periods.  Dividends  cannot be declared under the terms of our bank 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.

      On September 24, 1999, we adopted  Amendment No. 1 to the Rights Agreement
dated as November 30, 1994 as described in Note 6 to the Consolidated  Financial
Statements.


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.

<TABLE>


                                    Fiscal Year       Fiscal Year        Fiscal Year           Fiscal Year      Fiscal Year
                                      Ended             Ended              Ended                 Ended            Ended
                                  Jan. 29,  2000    Jan. 30, 1999(b)   Jan. 31, 1998(c)      Jan. 25, 1997    Jan. 27, 1996
                                 ----------------  -----------------  -----------------     ---------------  ---------------
                                                          (In millions, except per share data)
<S>                                 <C>                 <C>               <C>                  <C>              <C>
Net sales......................     $3,836.9(a)         $2,498.6(j)       $2,225.5(j)          $2,155.3(j)       $2,088.5(j)
Net income (loss)..............         17.1(i)             33.8(g)           34.5(d)              17.3(e)          (1.6)(f)
Diluted net income (loss) per
common share (h)...............         0.62(i)             1.40              1.46(d)              0.79(e)         (0.08)(f)
Total assets...................      1,975.3             1,483.4             610.0                536.8            502.6
Long-term debt and capital
leases.........................        602.2               287.7              35.7                 38.2             52.5


(a) Net sales reflects change in accounting for layaway sales pursuant to SAB
101.
(b) Includes Hills Stores Company financial results for January 1999.
(c) Fiscal year ended  January 31, 1998  consisted of 53 weeks;  all other years
presented  consisted of 52 weeks.
(d) Includes  charges of $1.6 million for the costs associated  with the closing
of two (2) stores.
(e) Includes  charges of $9.7 million for the costs associated  with the closing
of thirteen (13) stores and an  extraordinary loss,  net of tax, of $1.4 million
for the early extinguishment of debt.
(f) Includes  charges of $20.9 million for the costs associated with the closing
of seventeen (17) stores and property gains of $9.1 million.
(g) Includes $8.2 million for the costs associated with the closing of seven
stores.
(h) Net income  (loss) per common  share has been  restated to conform to the
requirements  of Statement of Financial  Accounting  Standards No. 128 "Earnings
per Share"  ("SFAS No. 128").  See Note 1 to the  Consolidated  Financial
Statements included in this Form 10-K for a further description of the
provisions of SFAS No. 128.
(i) 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 (see Note 8).
(j) Includes  adjustment  to sales to  reflect  the  effect  of  recording
promotional  coupons issued by Ames as markdowns,  which conforms to the current
treatment for coupon accounting.

</TABLE>

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

Overview

     Ames  changed  its  fiscal  year from the last  Saturday  in January to the
Saturday  nearest  January 31,  effective with the fiscal year ended January 30,
1999, which we refer to as "Fiscal 1998." We made this change so that our fiscal
year would coincide with the fiscal year of most other publicly-held  retailers.
Our fiscal year ended  January 29, 2000, which we refer to as "Fiscal 1999," and
Fiscal 1998 consisted of 52 weeks. Our fiscal year ended January 31, 1998, which
we refer to as "Fiscal 1997," consisted of 53 weeks.

      You  should  read the  discussion  that  follows in  conjunction  with the
consolidated  financial statements and related notes appearing elsewhere in this
annual report on Form 10-K.


Results of Operations

Fiscal 1999 Compared to Fiscal 1998

     During  Fiscal  1999,  the  inventory  in the 155 former  Hills  stores was
liquidated, and 151stores 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. Under the agreement,  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>

                                 Fiscal
                                  1998                                          Fiscal 1999
                                  ----           --------------------------------------------------------------------------

                                                                                                 Layaway
                                  Ames              Ames           Hills           Other          Adj.            Total
                                  ----              ----           -----           -----          ----            -----
                                                                  (In millions, except per share amounts)

<S>                                 <C>             <C>              <C>               <C>          <C>           <C>
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>
<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 prorata 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 the 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.

      Net sales  increased  to $3.5  billion in Fiscal 1999 from $2.4 billion in
Fiscal 1998 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.

      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.

      Selling, general and administrative  expenses  increased $231.8 million in
Fiscal 1999  compared to Fiscal  1998,  primarily as 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.

      Leased  department and other income  increased $9.9 million in Fiscal 1999
from Fiscal 1998. A substantial portion of the increase 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.

      Depreciation and amortization expense increased by $51.0 million in Fiscal
1999  compared  to  Fiscal  1998.  The  increase  results  from  the  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 (25 years on average) for the lease
rights and 25 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.

      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 the year,  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.  See Note 8 to the  consolidated
financial statements for additional information.

      Subsequent  to the date of these  financial  statements,  we announced the
purchase of the leases to seven Goldblatt's  stores in the Chicago area, marking
our entry to this market.


Fiscal 1998 Compared to Fiscal 1997

       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.  Immediately  following our
acquisition of Hills,  we began  implementing a series of initiatives to prepare
for the conversion of 151 of the Hills stores into Ames stores and the permanent
closure of the four  remaining  Hills  stores.  These  initiatives  included the
termination  of most of  Hills'  corporate  and  administrative  operations  and
personnel,  the announced  closure of seven Ames stores that we considered to be
directly  competitive  with acquired  Hills stores or  under-performing  and the
engagement of two experienced liquidation firms, Gordon Brothers Retail Partners
LLC and The Nassi Group LLC, to operate the Hills stores until their closure and
to liquidate Hills' merchandise inventories.

      Under our agreement  with Gordon  Brothers LLC and The Nassi Group LLC, we
were entitled to retain from the proceeds of the liquidation sales, as a minimum
guaranteed  amount,  40% of the initial  ticketed  retail price of the inventory
sold,  irrespective  of the actual price at which it is sold. The remaining sale
proceeds,  net of the  expenses of  operating  the stores,  were  payable to the
liquidators  as  compensation   for  their   services,   subject  to  additional
allocations to Ames to the extent that proceeds exceeded specified targets.  For
financial  reporting  purposes,  Hills'  net sales  during  the month of January
represent the actual sale proceeds from merchandise  liquidation sales, its cost
of  merchandise  sold  represents  the  guaranteed  minimum  amount that Ames is
entitled to retain, and its selling, general and administrative expenses include
the portion of those proceeds that were paid to the liquidators.

      Because of the unique nature of our contractual  arrangements  with Gordon
Brothers  LLC and The Nassi Group LLC, as well as the fact that the Hills stores
were in the process of liquidation, Hills' results for the month of January 1999
are not  representative of those of a retailer  operating in the ordinary course
of business and are not directly comparable to Ames' results exclusive of Hills.
The  acquisition  of Hills also resulted in various costs and charges during the
month of January 1999 that  impacted  Ames'  consolidated  results.  These other
costs and charges  consisted  principally of costs  associated with  terminating
contracts that became obsolete with the  acquisition of Hills,  the write-off of
deferred  financing costs related to a prior credit  facility,  interest expense
for borrowings incurred to finance the acquisition and a one-time charge for the
announced closing of the seven Ames stores.  The following table illustrates the
separate  contribution  of Ames' full year of operations and Hills' one month of
operations to various  components of the consolidated  results of operations for
Fiscal  1998,  as well as the  impact on the  consolidated  results of the other
costs and charges described above:

<PAGE>
<TABLE>



                                                          Fiscal                          Fiscal 1998
                                                           1997           ----------------------------------------------
                                                          ------          Ames         Hills        Other        Total
                                                                          ----         -----        -----        -----
                                                                                         (In millions)
<S>                                                       <C>            <C>             <C>      <C>            <C>
Total net sales                                           $2,225.5       $2,386.5       $112.1      $    -      $2,498.6
Leased department and other income                            25.0           29.2          1.0           -          30.2
                                                        -----------     ----------    ---------    --------     ---------
Total revenue                                              2,250.5        2,415.7        113.1           -       2,528.8
Costs and expenses:
Cost of merchandise sold                                   1,596.0        1,711.3         66.3           -       1,777.6
Selling, general, and administrative expense                 581.7          606.9         52.0         1.7         660.6
Depreciation and amortization expense, net                     6.6           11.3          3.2           -          14.5
Interest and debt expense, net                                11.6           11.4          2.0         1.9          15.3
Store closing charge                                           1.0              -            -         8.2           8.2
                                                        -----------     ----------    ---------    --------     ---------
Income (loss) before income taxes                             53.6           74.8        (10.4)      (11.8)         52.6
Income tax (provision) benefit                               (19.1)         (26.7)         3.7         4.2         (18.8)
                                                        -----------     ----------    ---------    --------     ---------
Net income (loss)                                            $34.5          $48.1        $(6.7)      $(7.6)        $33.8
                                                        ===========     ==========    =========    ========     =========
</TABLE>

      The circumstances  under which Hills' operations have been conducted since
December 31, 1998 and the accounting  treatment  accorded those  operations as a
consequence  of the agreement  with Gordon  Brothers and The Nassi Group distort
any direct comparison of the principal  components of Ames' consolidated results
for Fiscal 1998 and Fiscal 1997.  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  1998 are  presented  and
compared exclusive of the Hills results.  The impact of the Hills acquisition is
included in the comparison of depreciation and amortization expense and interest
and debt expense.

      Ames' net sales increased 7.3%, to $2.40 billion in Fiscal 1998 from $2.23
billion in Fiscal 1997, due primarily to 7.2% growth in same-store  sales.  Ames
experienced particularly strong sales improvements in sales of domestics,  toys,
ready to assemble furniture,  and women's  sportswear.  In comparing results for
the two fiscal years, you should bear in mind that net sales in Fiscal 1997 were
favorably  affected by the inclusion of a full or nearly full year of operations
of two stores that were closed in the  beginning  of Fiscal 1998 and by the fact
that Fiscal 1997 included one additional week of operations.

      Ames' gross  margin  increased  $45.7  million in Fiscal 1998  compared to
Fiscal 1997, but remained  unchanged as a percentage of net sales at 28.2%.  The
gross  margin  rate in Fiscal 1998  benefited  from a higher  average  markup on
sales, which was partially offset by higher markdowns.

      Ames' selling, general and administrative expenses increased $25.3 million
in Fiscal 1998,  but decreased as a percentage of net sales from 26.0% in Fiscal
1997 to 25.3% in Fiscal 1998. The percentage decrease was primarily attributable
to a reduction in store  related  expenses and  advertising  expense,  partially
offset by an increase in health and medical costs.

      Ames' leased department and other income increased $4.1 million, or 16.3%,
in Fiscal 1998  compared to Fiscal 1997.  The increase was due  primarily to the
leased shoe  department,  layaway and vending income,  as well as the receipt of
funds previously held in trust.

      Ames' depreciation and amortization  expense increased by $4.6 million, or
69.1%, in Fiscal 1998 compared to Fiscal 1997. The increase related primarily to
new point-of-sale  systems and store automation equipment acquired under certain
capital  leases.   The  Hills  acquisition  added  a  further  $3.2  million  of
depreciation   and   amortization   expense   associated   with  the  additional
depreciation  and  amortization of its fixed assets and beneficial  lease rights
and the amortization of goodwill relating to the excess of the Hills acquisition
cost over the value of the acquired  assets.  We are  amortizing  the beneficial
lease rights using the straight-line method over the terms of the related leases
(which  average  approximately  25 years) and are  amortizing the Hills goodwill
over 25 years on a straight-line  basis.  The  amortization of the excess of our
revalued net assets over equity under fresh-start reporting remained the same in
Fiscal 1998 as in Fiscal  1997.  We are  amortizing  this amount over a ten-year
period that will conclude in January 2003.

      The Hills  acquisition  resulted in a 31.5%, or $3.7 million,  increase in
consolidated  interest expense, net of interest income, in Fiscal 1998. Debt and
capital lease  obligations of Hills  accounted for $1.9 million of the increase.
Another $1.4 million of the increase was attributable to the non-cash  write-off
of deferred  financing costs under Ames' prior credit facility.  The balance was
attributable to borrowings  under our bank credit  agreement to finance costs of
the acquisition.

      In the fourth quarter of Fiscal 1998, we recorded  charges of $8.2 million
in  connection  with the  announced  closing  of seven  Ames  stores  that  were
scheduled to close in Fiscal 1999.  Principal  components  of these charges were
lease costs and the write-down of fixed assets.  We also planned for the closing
of four of the  acquired  Hills stores and,  pursuant to the purchase  method of
accounting,  provided for these  closings in the valuation of the acquired Hills
assets.  In the  fourth  quarter of Fiscal  1997,  we  recorded  charges of $1.6
million in connection with the closing of two stores,  of which $1.0 million was
classified  as a store  closing  charge and $0.6 million was recorded as part of
the cost of merchandise sold.

      We recorded an income tax  provision of $18.8  million in Fiscal 1998,  of
which  approximately  $0.5 million was paid in cash. In Fiscal 1997, we recorded
an income tax provision of $19.1 million,  of which  approximately  $0.3 million
was paid in cash. See Note 8 of the Notes to Consolidated Financial Statements.


Liquidity and Capital Resources

      Ames' principal sources of liquidity are its bank credit  agreement,  cash
from operations and cash on hand. Our current bank credit agreement provides for
a  revolving  credit  facility of up to $650  million  expiring  June 30,  2002.
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 1999 under the agreement was $414.9 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  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.  Our cash position
decreased by $22.1 million  during Fiscal 1998.  This decrease was due primarily
to $103.9 million paid out in the  acquisition of Hills (net of cash  acquired),
$51.6  million of capital  expenditures  and $16.3  million in debt and  capital
lease payments  partially  offset by $111.6 million in cash from  operations and
$44.9 million of borrowings under our bank credit facility.

       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. In Fiscal 1998,
the Hills  inventories were valued at  approximately  40% of the ticketed retail
price of the  merchandise,  representing  the minimum amount we were entitled to
retain out of the proceeds from the liquidation of the merchandise.  Merchandise
inventories  increased by $197.7 million in Fiscal 1998 due to planned increases
and the inclusion of $169.1 million of Hills merchandise inventories.

      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 ($189.1  million),  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. Net fixed assets increased by $288.3 million during
Fiscal 1998 due to the inclusion of $230.9  million in net fixed assets of Hills
and $77.5 million of capital expenditures,  including $25.9 million in new point
of sale equipment under capital leases. The Hills net fixed assets were adjusted
to their estimated fair value as of the acquisition date.

      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.

     Goodwill decreased $169.4 million 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 (see Note 8 to the Consolidated  Financial  Statements),  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 to 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 25 years using the straight-line method.

      Accounts payable increased $20.8 million due to an increase in merchandise
receipts in January 2000 over January 1999.  Accounts  payable  increased $173.6
million during Fiscal 1998 due to improved  payment terms,  and the inclusion of
Hills accounts payable of $127.8 million as of January 30, 1999.

      Long-term  debt as of January 29, 2000  consisted of borrowings  under our
bank credit agreement of $174.5 million, $47.2 million of Hills senior notes and
$200 million of Ames senior  notes.  Subsequent  to fiscal year end we announced
that we had amended our $650  million  credit  facility.  The amended  agreement
provides  Ames with a  reduction  in the  interest  rate  charged  and  enhanced
flexibility as to the usage of the funds available under the credit facility.

      Capital lease and financing  obligations  decreased by $7.2 million during
Fiscal  1999 as  payments  on capital  lease  obligations  exceeded  new capital
leases.

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


Capital Expenditures

      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  for Fiscal 1998 were $77.5 million and included the opening of six
new stores,  the remodeling of twenty-two  stores,  and the upgrading of certain
management information systems.

     Capital  expenditures are expected to be  approximately  $140.0 million for
Fiscal 2000.  These capital  expenditures  will be comprised of  remodeling  and
conversion of the former  Goldblatt's  stores, 25 new stores, and maintenance of
our existing stores. We expect to finance these  expenditures  through cash flow
from operations and borrowings under our bank 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  (37% of our  annual net sales in Fiscal  1999).  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).


Impact of Year 2000

      Ames  completed  its  remediation  and  testing of  systems  for Year 2000
vulnerabilities  in late 1999. No  disruptions in mission  critical  information
technology and  non-information  technology  systems were experienced during the
1999/2000 changeover and we believe those systems successfully  responded to the
Year 2000 date change.  Ames expensed  approximately $2.9 million during 1999 in
connection with its Year 2000 remediation  efforts.  Our total cost for our Year
2000 effort was  approximately  $6.7  million.  We are not aware of any material
problems resulting from Year 2000 issues,  either with our products and internal
systems, or with the products and services of third parties. We will continue to
monitor mission  critical  computer  applications and those of our suppliers and
vendors  throughout  the Year 2000 to ensure that any latent  Year 2000  matters
that may arise are addressed promptly.


Accounting Policy Matters

     In June 1998 the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS") No. 133, " Accounting  for Derivative
Instruments and Hedging Activities." This statement  establishes  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 market value.
The statement  also requires  that changes in  derivatives  fair market value be
recognized  currently in earnings unless specific hedge accounting  criteria are
met.  SFAS No. 133 is  effective  for all fiscal  quarters  of all fiscal  years
beginning  after June 15,  2000,  with early  adoption at the  beginning  of any
fiscal quarter being  permitted.  We are currently  analyzing the impact of this
new pronouncement on our financial position and result of operations.

     In December  1999 the  Securities  and  Exchange  Commission  issued  Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition." Under SAB No. 101, we
are 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 current earnings for approximately $1.1 million,
net of $0.6 million tax benefit.

     We 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.  SOP 98-1 was  effective  for fiscal years  beginning
after December 15, 1998. This SOP requires companies to capitalize certain costs
incurred in connection with an internal-use  software  project.  Prior to Fiscal
1999, we expensed the costs of developing or obtaining  internal use software as
incurred.  The amount of internal use software costs  capitalized in Fiscal 1999
was approximately $1.6 million.


Forward-Looking Statements

         The  statements   contained  or   incorporated  by  reference  in  this
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations and elsewhere in this Annual Report 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 following:

     o Deteriorating  economic conditions in the United States,  particularly in
       the  regions in which our stores are  located;
     o Decreased  consumer  spending,  particularly  among those  consumers  who
       compromise our primary customer base;
     o Increased competition from other discount retailers,  including the major
       national chains, as well as from merchandise offerings on the Internet;
     o Severe adverse weather conditions during the winter months,  particularly
       during the peak Christmas holiday shopping season.

     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 bank credit
facility.  These loans bear interest at rates which vary with changes in (i) the
London  Interbank  Offered  Rate  (LIBOR) or (ii) a rate of  interest  announced
publicly by Bank of America NT&SA.

         We do not speculate on the future  direction of interest  rates.  As of
the end of fiscal years 1999 and 1998 our exposure to changing  market rates was
as follows:

                                             January 29,          January 30,
                                                2000                 1999
                                             -----------         ------------
Variable rate long term debt ($US)         $174.5 million       $44.9 million

Average interest rate                           8.31%               8.38%


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.


                                    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.

Security Ownership of Certain Beneficial Owners

      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.

<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 10, 2000       /s/ Joseph R. Ettore
                                ---------------------
                                Joseph R. Ettore,
                                Chairman, Chief Executive Officer, and Director



Dated:     April 10, 2000       /s/ Rolando de Aguiar
                                ----------------------
                                Rolando de Aguiar,
                                Senior Executive Vice President, Chief Financial
                                and Administrative Officer



Dated:     April 10, 2000       /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 10, 2000       /s/ Francis X. Basile
                                -----------------------
                                Francis X. Basile, Director


Dated:     April 10, 2000       /s/ Paul M. Buxbaum
                                --------------------
                                Paul M. Buxbaum, Director


Dated:     April 10, 2000       /s/ Alan Cohen
                                -------------------
                                Alan Cohen, Director


Dated:     April 10, 2000       /s/ Richard M. Felner
                                ----------------------
                                Richard M. Felner, Director


Dated:     April 10, 2000       /s/ Sidney S. Pearlman
                                -----------------------
                                Sidney S. Pearlman, Director


<PAGE>

                          AMES DEPARTMENT STORES, INC.
                                AND SUBSIDIARIES







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


                                    EXHIBITS

                  For the Fiscal Years Ended January 29, 2000,
                      January 30, 1999 and January 31, 1998


                 (With Report of Independent Public Accountants)


<PAGE>



                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES

            Index to Consolidated Financial Statements and Financial
                  Statement Schedule for the Fiscal Years Ended
             January 29, 2000, January 30, 1999 and January 31, 1998





Consolidated Financial Statements:


      Report of Independent Public Accountants.

      Consolidated  Statements of Operations  for the fiscal years ended January
           29, 2000, January 30, 1999 and January 31, 1998.

      Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.

      Consolidated Statements of Changes in Stockholders'  Equity for the fiscal
           years ended January 29, 2000, January 30, 1999 and January 31, 1998.

      Consolidated  Statements  of Cash Flows for the fiscal years ended January
           29, 2000, January 30, 1999 and January 31, 1998.

      Notes to Consolidated Financial Statements.



Schedule:
     II.  Valuation and  Qualifying  Accounts for the fiscal years ended January
          29, 2000, January 30, 1999 and January 31, 1998.


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.


<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 January
29, 2000 and January  30,  1999,  and the  related  consolidated  statements  of
operations,  changes in  stockholders'  equity and cash flows for the  fifty-two
weeks ended January 29, 2000, and the fifty-two weeks ended January 30, 1999 and
the  fifty-three  weeks ended  January 31, 1998.  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 January 29, 2000 and January 30, 1999, and the results of
their  operations and their cash flows for the fifty-two weeks ended January 29,
2000, and the fifty-two weeks ended January 30, 1999 and the  fifty-three  weeks
ended  January 31,  1998 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 13, 2000
<PAGE>

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


                                                                     52 Weeks            52 Weeks           53 Weeks
                                                                       Ended              Ended               Ended
                                                                    January 29,        January 30,         January 31,
                                                                       2000                1999               1998
                                                                   --------------     ---------------    ----------------
<S>                                                                  <C>                 <C>                 <C>
Ames net sales ..................................................    $3,459,737          $2,386,522          $2,225,456
Hills net sales..................................................       377,117             112,126                -
                                                                   --------------     ---------------    ----------------
     Total net sales.............................................     3,836,854           2,498,648           2,225,456
     Leased department and other income..........................        41,690              30,164              25,069
                                                                   --------------     ---------------    ----------------
Total revenue....................................................     3,878,544           2,528,812           2,250,525

Costs and expenses:
     Ames cost of merchandise sold...............................     2,463,301           1,711,337           1,595,974
     Hills cost of merchandise sold..............................       252,085              66,324                -
     Ames selling, general and administrative expenses..... .....       915,213             608,653             581,659
     Hills operating expenses and agency fees......... ..........       152,962              51,940                -
     Depreciation and amortization expense, net..................        65,495              14,478               6,659
     Interest and debt expense, net..............................        60,843              15,253              11,600
     Store closing charge........................................          -                  8,222               1,000
                                                                   --------------     ---------------    ----------------
Income (loss) before income taxes................................       (31,355)             52,605              53,633
Income tax benefit (provision)...................................        49,589             (18,775)            (19,087)
                                                                   --------------     ---------------    ----------------
Income before Cumulative Effect of Accounting Change.............        18,234              33,830              34,546

Cumulative Effect of Accounting Change, net of tax of $614.......        (1,107)               -                   -
                                                                   --------------     ---------------    ----------------
Net income.......................................................       $17,127             $33,830             $34,546
                                                                   ==============     ===============    ================
Basic net income per common share:
     Before Cumulative Effect of Accounting Change...............       $0.66               $1.47               $1.59
     Cumulative Effect of Accounting Change, net of tax..........       (0.04)                 -                   -
                                                                   --------------     ---------------    ----------------
     Net income..................................................       $0.62               $1.47               $1.59
                                                                   ==============     ===============    ================

     Weighted average common shares........ .....................      27,517              23,010              21,723
                                                                   ==============     ===============    ================

Diluted net income per common share:
     Before Cumulative Effect of Accounting Change...............       $0.66               $1.40               $1.46
     Cumulative Effect of Accounting Change, net of tax..........       (0.04)                 -                   -
                                                                   --------------     ---------------    ----------------
     Net income .................................................       $0.62               $1.40               $1.46
                                                                   ==============     ===============    ================

     Weighted average common and common equivalent shares              27,658              24,216              23,649
                                                                   ==============     ===============    ================

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

                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)


                                                                                             January 29,    January 30,
                                                                                                2000           1999
                                                                                           -------------- --------------
                                     ASSETS
<S>                                                                                           <C>            <C>
Current Assets:
     Cash and short-term investments.....................................................     $30,612        $35,744
     Receivables:
       Trade.............................................................................       7,426         13,315
       Other.............................................................................      17,876         16,929
                                                                                          -------------- --------------
           Total receivables.............................................................      25,302         30,244

     Merchandise inventories.............................................................     831,387        621,509
     Prepaid expenses and other current assets...........................................      36,772         16,075
     Deferred taxes, net.................................................................      28,854           -
                                                                                          -------------- --------------
           Total current assets..........................................................     952,927        703,572
                                                                                          -------------- --------------


Fixed Assets:
     Land and buildings..................................................................      25,388         22,319
     Property under capital leases.......................................................     176,107        159,654
     Fixtures and equipment..............................................................     310,750        179,766
     Leasehold improvements..............................................................     117,734         76,095
                                                                                          -------------- --------------
                                                                                              629,979        437,834
     Less - Accumulated depreciation and amortization....................................    (128,229)       (66,205)
                                                                                          -------------- --------------
           Net fixed assets..... ........................................................     501,750        371,629
                                                                                          -------------- --------------

Other assets and deferred charges.........................................................     57,256         16,447
Deferred taxes, net.......... ............................................................    346,055        102,406
Beneficial lease rights, net..............................................................     56,280         58,885
Goodwill, net.............................................................................     61,026        230,454
                                                                                          -------------- --------------
           Total Assets................................................................... $1,975,294     $1,483,393
                                                                                          ============== ==============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable:
       Trade..............................................................................   $325,356       $313,280
       Other..............................................................................     96,224         87,477
                                                                                          -------------- --------------
           Total accounts payable.........................................................    421,580        400,757
                                                                                          -------------- --------------

     Current portion of capital lease and financing obligations..... .....................     22,086         17,799
     Self-insurance reserves..............................................................     29,827         29,115
     Accrued compensation.................................................................     42,095         64,840
     Accrued expenses................................................ ....................     91,015        160,449
     Store closing reserves...............................................................     55,468         59,768
                                                                                          -------------- --------------
           Total current liabilities......................................................    662,071        732,728
                                                                                          -------------- --------------
Long-term debt............................................................................    421,769         95,810
Capital lease and financing obligations...................................................    180,404        191,904
Other long-term liabilities...............................................................     57,916        114,922
Excess of revalued net assets over equity under fresh-start reporting.....................     17,868         24,021
Commitments and contingencies

Stockholders' Equity:
     Preferred  stock  (3,000,000  shares   authorized;   no  shares  issued  or
       outstanding at January 29, 2000 and January 30, 1999,  respectively;  par
       value per share $.01) .............................................................       -              -
     Common stock (40,000,000 shares authorized; 29,233,650 and 23,921,545 shares
       outstanding at January 29, 2000 and January 30, 1999, respectively; par value per
       share$.01).........................................................................        293            239
     Additional paid-in capital...........................................................    530,744        236,667
     Retained earnings....................................................................    105,143         88,016
     Treasury stock (79,495 shares,  at cost).............................................       (914)          (914)
                                                                                          -------------- --------------
           Total stockholders' equity.....................................................    635,266        324,008
                                                                                          -------------- --------------
           Total Liabilities and Stockholders' Equity..................................... $1,975,294     $1,483,393
                                                                                          ============== ==============
<FN>
                    (The accompanying notes are an integral part of these consolidated financial statements.)
</FN>

<PAGE>


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



                                 Preferred Stock        Common Stock      Additional                  Treasury Stock
                                 ---------------------- ----------------   Paid-In      Retained    ---------------------   Total
                                   Shares     Amount   Shares    Amount     Capital      Earnings    Shares    Amount       Equity
                                 ----------  -------- --------- -------- ------------- ------------ ---------- ---------- ----------
Balance, January 25, 1997            -         $ -      20,474    $205      $88,341      $19,640        -         $ -      $108,186

Exercise of warrants                                     1,260      13        1,386                                          1,399
Exercise of stock options, net                             772       7        3,074                                          3,081
Utilization of tax attributes                                                26,170                                         26,170
Net income                                                                                34,546                            34,546
                                 ----------  -------- --------- -------- ------------- ------------ ---------- ---------- ----------
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
Utilization 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
Utilization 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
                                 ==========  ======== ========= ======== ============= ============ ========== ========== ==========
<FN>
              (The accompanying notes are an integral part of these consolidated financial statements.)
</FN>

</TABLE>
<PAGE>

<TABLE>


                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                                    52 Weeks            52 Weeks            53 Weeks
                                                                      Ended              Ended               Ended
                                                                   January 29,        January 30,         January 31,
                                                                      2000               1999                1998
                                                                 ----------------    ---------------     ---------------
<S>                                                                   <C>                <C>                 <C>
Cash flows from operating activities:
   Net income..................................................       $17,127            $33,830             $34,546
      Cumulative Effect of Accounting Change...................         1,107               -                   -
                                                                  ----------------    ---------------     ---------------
   Net income before cumulative effect adjustment                      18,234             33,830              34,546
   Expenses not requiring the outlay of cash:
      Income tax (benefit) provision...........................       (49,589)            18,275              18,764
      Depreciation and amortization of fixed and other assets..        65,495             15,487               6,884
      Amortization of debt discounts and deferred financing
      costs....................................................         4,880              2,787                 861
      Other, net...............................................        (1,841)            (3,514)              1,834
                                                                  ----------------    ---------------     ---------------
Cash provided by operations  before changes in working capital
and store closing activities...................................        37,179             66,865              62,889
Changes in working capital:
   Decrease (increase) in receivables..........................         4,942             (6,787)                149
   (Increase) decrease in merchandise inventories..............      (181,546)            12,259             (32,760)
   (Increase) decrease in prepaid expenses and other current
   assets......................................................       (20,697)            (2,962)                109
   Increase in accounts payable................................        20,823             12,233              34,239
   (Decrease) increase in accrued expenses and other
   current liabilities.........................................       (91,467)            24,302               5,033

Changes due to store closing activities:
   Payments of store closing costs.............................        (9,470)            (2,547)            (13,907)
   Store closing charge........................................          -                 8,222               1,000
                                                                  ----------------    ---------------     ---------------
Net cash (used for) provided by operating activities                 (240,236)           111,585              56,752
                                                                  ----------------    ---------------     ---------------

Cash flows from investing activities:
   Acquisition costs, net of cash acquired....................           -              (103,857)               -
   Proceeds from the disposition of properties................           -                  -                  1,900
   Purchases of fixed assets..................................       (209,606)           (51,602)            (32,875)
   Purchases of leases........................................        (38,835)              -                 (2,801)
                                                                  ----------------    ---------------     ---------------
Net cash used for investing activities                               (248,441)          (155,459)            (33,776)
                                                                  ----------------    ---------------     ---------------
Cash flows from financing activities:
   Borrowings under the revolver credit facilities, net.......        129,609             44,935                -
   Payments on debt and capital lease obligations.............        (22,191)           (16,262)            (15,747)
   Repurchase of Hills senior notes...........................         (4,636)              -                   -
   Proceeds from the issuance of senior notes.................        200,000               -                   -
   Proceeds from the issuance of common stock, net............        187,262               -                   -
   Deferred financing costs...................................         (7,939)           (10,902)               -
   Proceeds from the exercise of options and warrants.........          1,440              4,933               4,480
   Purchase of treasury stock.................................           -                  (914)               -
                                                                  ----------------    ---------------     ---------------
Net cash provided by (used for) financing activities..........        483,545             21,790             (11,267)
                                                                  ----------------    ---------------     ---------------
(Decrease) increase in cash and short-term investments........         (5,132)           (22,084)             11,709
Cash and short-term investments, beginning of period..........         35,744             57,828              46,119
                                                                  ----------------    ---------------     ---------------
Cash and short-term investments, end of period................        $30,612            $35,744             $57,828
                                                                  ================    ===============     ===============

<FN>
              (The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
</TABLE>
<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.  As of March
31,  2000,  Ames  operated 460  discount  department  stores in 19 states in the
Northeast,  Midwest  and  Mid-Atlantic  regions,  as  well  as the  District  of
Columbia.  The stores are located in rural  communities,  small cities and urban
areas, and the suburbs of larger metropolitan areas.

(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  changed its fiscal year from the last  Saturday in January to
the Saturday  nearest  January 31,  effective with the fiscal year ended January
30, 1999. This change was made so that the Company's  fiscal year would coincide
with the fiscal year of most other publicly-held retailers.  There was no impact
on the  current  year period as a result of this  change.  The fiscal year ended
January 29, 2000 ("Fiscal  1999" or "1999")  included 52 weeks.  The fiscal year
ended January 30, 1999 ("Fiscal 1998" or "1998")  included 52 weeks.  The fiscal
year ended January 31, 1998 ("Fiscal 1997" or "1997") included 53 weeks.

(d)   Cash and short-term investments:

      Ames considers all highly liquid  investments with an original maturity of
three months or less when purchased to be cash and short-term investments. As of
January 29, 2000 and January 30, 1999 there were no 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.  SOP 98-1 was effective for fiscal years
beginning  after  December 15, 1998.  This SOP requires  companies to capitalize
certain costs  incurred in connection  with an  internal-use  software  project.
Prior to Fiscal 1999, the Company  expensed the costs of developing or obtaining
internal  use software as  incurred.  The amount of internal  use software costs
capitalized in 1999 was approximately $1.6 million.

(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.

(h)    Intangible assets:

      Beneficial  lease  rights  represent  the excess of fair market value over
contract value of certain of the leases  acquired in the Hills  Acquisition  (as
defined in Note 2 below).  Goodwill  represents the excess of cost over the fair
value of net tangible assets  acquired at the date of  acquisition.  Accumulated
amortization  of goodwill  and  beneficial  lease rights at January 29, 2000 was
$9.0 million and $2.8 million respectively. See Note 2 for further explanation.

(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 (10)
years,  equipment over seven (7) years,  motor vehicles over five (5) years, and
computer software and hardware over three (3) to five (5) years.  Property under
capital leases and leasehold  improvements  are depreciated  over the shorter of
their estimated useful lives or their related lease terms.

      Beneficial  lease rights are being amortized over the terms of the related
leases (which average approximately 25 years).  Goodwill is being amortized over
a 25-year period.

      The excess of revalued net assets over equity under fresh-start  reporting
is being  amortized over a 10-year  period.  The amount  recorded as a credit to
depreciation and  amortization  was $6.2 million in each of Fiscal 1999,  Fiscal
1998 and Fiscal 1997.

      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.  During Fiscal 1997 the Company  recorded an  impairment  loss of
$1.2 million.

(j)  Deferred charges:

      Pursuant to SOP 98-5,  "Reporting  on the Costs of  Start-Up  Activities,"
expenses related to new store openings are expensed when incurred.

      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.  In December 1992,
Ames adopted Statement of Financial  Accounting  Standards No. 109,  "Accounting
for Income  Taxes"  ("SFAS No.  109") under  fresh-start  reporting.  Under this
method,  any  deferred  income  taxes  recorded  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.  The Company  determines  its liability for claims
based on the  circumstances of each individual claim and estimates its liability
for claims incurred but not yet reported based on historical  experience.  As of
January  29,  2000 and January 30,  1999,  Ames had  established  self-insurance
reserves of $66.8 million and $66.3 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.

(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)   Earnings per common share:

     In February 1997 the Financial  Accounting Standards Board issued Statement
Financial  Accounting  Standards No. 128, "Earnings per Share" ("SFAS No. 128").
Under SFAS No. 128, the  presentation of Primary and Fully Diluted  Earnings per
Share was replaced by Basic and Diluted  Earnings per Share. The Company adopted
the provisions of SFAS No. 128 effective  January 31, 1998, and has restated all
periods presented.

      Net  income per common  share for each of Fiscal  1999,  1998 and 1997 was
determined by using the weighted average number of common and common  equivalent
shares outstanding during that fiscal year. Common equivalent shares represented
the assumed exercise of the Company's outstanding Series B and Series C Warrants
and stock options.

(o)   Stock-based compensation:

      Statement of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based  Compensation,"  ("SFAS No. 123")  encourages,  but does not require
companies to record  compensation  cost for  stock-based  employee  compensation
plans at fair  value.  The  Company  has  chosen  to  continue  to  account  for
stock-based   compensation  using  the  intrinsic  value  method  prescribed  in
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees,"  ("APB  Opinion No. 25") and related  interpretations.  Accordingly,
compensation  cost for stock  options is measured as the excess,  if any, of the
quoted  market  price of the  Company's  stock  at the  date of  grant  over the
exercise price of the options.

(p)   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.

     In December  1999 the  Securities  and  Exchange  Commission  issued  Staff
Accounting Bulletin "SAB" No. 101 "Revenue Recognition".  Under SAB No. 101, the
Company is required to change the method in which it accounts for layaway sales.
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 Company
adopted SAB No. 101 during the fourth  quarter of Fiscal  1999,  effective as of
the  beginning  of Fiscal  1999.  The impact of adopting  this SAB resulted in a
cumulative effect adjustment to current earnings for approximately $1.1 million,
net of $0.6 million tax benefit.

(q)   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 $123.9
million,  $79.7  million,  and $79.3 million for Fiscal 1999,  Fiscal 1998,  and
Fiscal 1997, respectively.



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,  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  has been  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,  which is being amortized over 25 years on a
straight-line basis, and beneficial lease rights of $59 million,  which is being
amortized over the life of the respective  leases (which averaged  approximately
25 years).

     Initially,  the  estimate of the fair market  value of assets  acquired and
liabilities  assumed had  resulted in a valuation  of goodwill of  approximately
$231  million.  The final  determination  of the fair  market  values  decreased
goodwill by $161 million. The primary changes were a reduction of $114.1 million
in  deferred  tax asset  valuation  allowances  (see Note 8 to the  Consolidated
Financial Statements);  a reduction in accrued liabilities and reserves of $48.3
million  as these  liabilities  were no  longer  deemed to be  required;  and an
increase  of $28.3  million to  inventory  values as a result of the higher than
expected  proceeds upon liquidation of the Hills  inventory.  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 market
value. Since the date of acquisition,  goodwill has been reduced by $9.0 million
of amortization expense.

      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 because they were in locations  that were either  competitive
with, or were  under-performing,  other Hills or Ames stores. The remodeling and
conversion  process  was  conducted  in  three  stages,   each  stage  involving
approximately  one third of the Hills  stores.  The first stage was completed in
April  1999;  the second was  completed  in July 1999;  and the third  stage 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.  Accordingly,
the Agent managed the sale of the inventory acquired in the Hills Acquisition as
well as certain other inventory identified in the Agency Agreement.

      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.

Agency Agreement Accounting

      As discussed earlier, the results of operations of Hills since the date of
the acquisition  have been included in the accompanying  consolidated  financial
statements.  For the month of January  1999,  and for the duration of the Agency
Agreement,  the  following  accounting  treatment  was applied to recognize  the
results of the Hills  stores  prior to their  conversion  to Ames stores  during
Fiscal 1999:  Hills net sales were  recorded as "Hills Net Sales" and  represent
net sales achieved by the Hills stores prior to their conversion to Ames stores.
"Hills Cost of Merchandise  Sold"  represents  the cost of  merchandise  sold in
connection with the above referenced sales as adjusted for the Guaranteed Return
amount mentioned above. "Hills Operating Expenses and Agency Fees " includes the
following:  the  associated  store expenses  incurred while  operating the Hills
stores prior to their conversion to Ames stores,  which were reimbursable to the
Company out of the proceeds of Hills merchandise sales per the Agency Agreement;
the Agency Fee (defined  below) due to the Agent for the period  presented;  and
other expenses (e.g.,  non-store payroll,  non-store rent, etc.) associated with
supporting the Hills stores prior to their conversion to Ames stores, which were
not reimbursable under the Agency Agreement.

      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 targeted  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 March 1999,  the Company  entered into two  agreements  with Caldor
Corporation  to  purchase  seven of its  stores in  Connecticut,  two  stores in
Massachusetts  and a 649,000  square  foot  distribution  center  in  Westfield,
Massachusetts, for a total cash purchase price of $42.8 million. Under the terms
of the agreements,  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.  During March and April 1999, the United States Bankruptcy
Court for the  Southern  District of New York  approved the  Company's  right to
purchase  the  leases for the stores  and the  distribution  center.  All of the
transactions subsequently closed.

     A component of the $42.8  million  purchase  price was recorded as fixtures
and equipment in the Westfield  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.


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>

                                                                          Fiscal 1999
                                        ---------------------------------------------------------------------------------
                                                                                              Layaway
                                            Ames            Hills            Other             Adj.            Total
                                            ----            -----            -----             ----            -----
                                                            (In millions, except per share amounts)
<S>                                       <C>               <C>              <C>               <C>            <C>
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>

      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,  capital lease and financing
obligations assumed in the Hills Acquisition.

      The  "Other"  column  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  "Layaway  Adj."  column  represents  the  impact of the change in the
method of  accounting  for  layaway  sales.  The  Company  adopted the change in
accounting   for  layaway  sales  in  the  fourth  quarter  of  Fiscal  1999  in
consideration  of the Staff  Accounting  Bulletin No. 101 "Revenue  Recognition"
issued by the staff of the Securities  and Exchange  Commission in December 1999
(see Note 1).

     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>

                                                                                   Fiscal 1998
                                                       --------------------------------------------------------------------
                                                                                             Other Costs
                                                                                                 and
                                                            Ames             Hills             Charges           Total
                                                            ----             -----             -------           -----
                                                                     (In millions, except per share amounts)
<S>                                                       <C>                <C>                <C>            <C>
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.

      The "Other Costs and Charges"  column in the foregoing  table consists of:
the cost to exit certain Ames contractual  obligations  rendered obsolete by the
Hills Acquisition;  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.  The closings were part of planned  closings  resulting from the
overlap in certain Ames and Hills locations.


4.   Long-Term Debt:

The Company's  outstanding long-term debt as of January 29, 2000 and January 30,
1999 is listed and described below:
<TABLE>
                                                                                         1/29/00               1/30/99
                                                                                     -----------------     ----------------
                                                                                                (000's omitted)
<S>                                                                                      <C>                   <C>
Secured Debt:
   Borrowings under the Credit Agreement........................................         $174,544              $44,935
Unsecured Debt:
   12.5% Senior Notes, due July 2003, discount rate of 11.79%...................           46,295               50,875
   10% Senior Notes, due April 2006.............................................          200,000                  ---
                                                                                     -----------------     ----------------
Total Face Value of Debt........................................................         $420,839              $95,810
   Add: Premium.................................................................              930                 -
                                                                                     -----------------     ----------------
Amount Due After One Year.......................................................         $421,769              $95,810
                                                                                     =================     ================

</TABLE>

The Credit Agreement

      On December 31, 1998, in connection with the Hills  Acquisition  (see Note
2), certain of the Company's subsidiaries entered into an agreement (the "Credit
Agreement") with a syndicate of other banks and financial  institutions for whom
BankAmerica  Business  Credit,  Inc., is serving as agent.  The Credit Agreement
provides for a secured revolving credit facility of up to $650 million.

      The Credit  Agreement  replaced a $320 million  secured  revolving  credit
facility.

      The Credit  Agreement  is in effect  until the earlier of June 30, 2002 or
its earlier  termination  pursuant to its terms 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 Base Rate (as defined on the Credit
Agreement) plus 0% (subject to upward adjustments).  Alternatively, the interest
rate per annum may be equal to LIBOR Rate (as  defined in the Credit  Agreement)
plus 1.50% (subject to upward adjustments).

      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)
an initial agency fee and annual  collateral  management fees for the account of
the agent.

      For Fiscal 1999 and Fiscal 1998, the weighted average interest rate on the
Company's  revolving credit facilities was  8.12% and 7.57%,  respectively,  and
the peak  borrowing  levels for the two fiscal  years were  $414.9  million  and
$148.3  million,  respectively.  As of January 29,  2000,  borrowings  under the
Credit  Agreement  were $174.5  million and $2.1  million and $20.0  million was
outstanding in trade and standby letters of credit, respectively.

      The amount of borrowing under the Credit  Agreement may not exceed the sum
of (a) an amount  equal to 70% of certain  inventory  in the  possession  of the
Company  (depending  on the  period  of  year  as  provided  for  in the  Credit
Agreement)  plus (b) an  amount  equal to 50% of  certain  inventory  not in the
possession of the Company,  but covered by any outstanding letter of credit. The
agent,  in  addition,  reserves  the right to adjust the total  available  to be
borrowed by establishing reserves,  making determinations of eligible inventory,
revising   standards  of  eligibility  or  decreasing  from  time  to  time  the
percentages set forth above.

      The  financial  covenant  under the Credit  Agreement is only in effect if
Combined Availability (as defined in the Credit Agreement) falls below specified
levels in any month and is limited to a minimum fixed charge  coverage ratio (as
defined in the Credit Agreement). As of January 29, 2000, the Company's Combined
Availability was not below the specified level.

Senior Notes due 2003

      The 12.5% Senior Notes due 2003 (the "Hills  Senior  Notes")  were, at the
time of the acquisition of Hills, an unsecured obligation of Hills.

      The Company, in November 1998, made a tender offer to purchase at a stated
discount  all of the  Hills'  Senior  Notes,  which at the time  totaled  $195.0
million.  Upon expiration of the tender offer, the Company on December 31, 1998,
paid cash of $100.8 million  (including the related accrued interest) to acquire
Hills Senior Notes having a face value of $144.1 million.

      The tendering holders of the Senior Notes,  representing 73.9% of the then
outstanding  Senior Notes,  consented to certain  modifications to the indenture
governing the Senior Notes.  Included among the modifications  were the deletion
of the sections covering  reporting  requirements,  debt and lien incurrence and
asset sales and additional subsidiary guarantees.

      During Fiscal 1999, the Company,  through open market purchases,  acquired
Hills  Senior  Notes having a face value of $4.6  million.  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 January 29, 2000,
Hills  Senior Notes with a face value of $46.3  million and a recorded  value of
$47.2 million 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 Credit Agreement.

      The Ames Senior Notes pay interest  semi-annually in April and October and
mature April 2006.  Prior to April 15, 2002, the Company may redeem up to 35% of
the Ames Senior Notes with the proceeds of one or more public  equity  offerings
at a redemption price of 110% of the principal amount thereof. On or after April
15,  2003,  the  Company  may  redeem  some  or  all of the  Ames  Senior  Notes
outstanding  at a redemption  price equal,  initially,  to 105% of the principal
amount thereof.  In both cases, the accrued and unpaid interest will be added to
the redemption price on the applicable redemption date.

      The Ames  Senior  Notes were issued  under an  indenture  among Ames,  its
existing  subsidiaries and The Chase Manhattan Bank. The financial  covenants in
the indenture  restrict  Ames'  ability to:  borrow  money;  pay dividends on or
purchase  Ames'  stock;  make  investments;  use  assets  as  security  in other
transactions;  sell certain assets or merge with other companies; and enter into
transactions  with  affiliates.  If a  Change  of  Control  (as  defined  in the
indenture) occurs, each holder of the Ames Senior Notes has the right to require
the Company to purchase all or any part of that holder's Ames Senior Notes for a
payment in cash equal to 101% of the aggregate  principal  amount of Ames Senior
Notes purchased plus accrued and unpaid interest.

      As of January 29, 2000,  the  payments due on long-term  debt for the next
five years and thereafter were as follows:

      Fiscal Years                                           Amount
     Ending January                                      ---------------
    ----------------                                     (000's omitted)
      2001.....................................             $  ---
      2002.....................................                ---
      2003.....................................              174,544
      2004.....................................               46,295
      2005.....................................                ---
      Thereafter...............................              200,000


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 2023 with varying
renewal  options and  escalating  rent  clauses.  Some leases are  classified as
capital leases under  Statement of Financial  Accounting  Standards 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.

<TABLE>
     Future minimum lease payments for leases as of January 29, 2000 were as follows:

                                                                                        Lease Payments
                                                                        -------------------------------------------------
                                                                         Capital          Financing         Operating
Fiscal Year Ending January                                               Leases          Obligations          Leases
                                                                                       (000's omitted)
<S>                                                                       <C>                 <C>              <C>
2001......................................................                $33,982             $ 8,081          $69,391
2002......................................................                 33,305               6,434           64,820
2003......................................................                 30,287               4,678           56,111
2004......................................................                 27,202               5,081           49,498
2005......................................................                 21,146              12,309           42,846
Thereafter................................................                154,045                 ---          183,924
                                                                        ------------     ---------------    -------------
Total minimum lease payments..............................                299,967              36,583         $466,590
                                                                                                            =============
Less: amount representing estimated executory costs.......                  2,064                 ---
                                                                        ------------     ---------------
Net minimum lease payments................................                297,903              36,583
Less: amount representing interest........................                122,961               9,036
                                                                        ------------     ---------------
Present value of net minimum lease payments...............                174,942              27,547
Less: currently payable...................................                 16,678               5,408
                                                                        ------------     ---------------
Long-term lease obligations...............................               $158,264             $22,139
                                                                        ============     ===============
</TABLE>

      At January 29, 2000, the financing  obligations  represent  sale/leaseback
arrangements.  The leases, which have terms from 42 months to ten years, 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  payments  have not been reduced by minimum  sublease  rentals to be
received in the aggregate under non-cancellable subleases of operating leases of
approximately $7.3 million as of January 29, 2000. Amortization of capital lease
assets was  approximately  $19.8,  $2.8 and $0.4 million for Fiscal 1999, Fiscal
1998 and Fiscal 1997,  respectively.  Accumulated  amortization of capital lease
assets at January 29,  2000 was $23.6  million.  Rent  expense  (income)  was as
follows:
<TABLE>

                                                                      Fiscal          Fiscal             Fiscal
                                                                       1999            1998               1997
                                                                       ----            ----               ----
                                                                                       (000's omitted)
<S>                                                                  <C>              <C>                <C>
Minimum rent on operating leases..............................       $78,946          $55,566            $48,577
Contingent rental expense.....................................         8,812            7,797              6,651
Sublease rental income........................................        (1,423)          (1,609)            (1,730)


</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 January 29,
2000 and January 30, 1999, the unfavorable  lease liability is $11.2 million and
$13.7  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 $1.4 million in each of Fiscal years 1999, 1998 and 1997.

      Beneficial  lease  rights  were  recorded  in  connection  with the  Hills
Acquisition and represent the excess of fair market value over contract value of
certain of the Hills leases. Beneficial lease rights are being amortized as part
of depreciation and  amortization in the  Consolidated  Statements of Operations
over the terms of the related leases (which average approximately 25 years).


6.    Stockholders' Equity:

Common Stock

      As  provided  under  the  Restated   Certificate  of  Incorporation,   the
authorized  capital stock of Ames consists of 43,000,000 shares divided into two
classes:  (i) 3,000,000  shares of preferred  stock, par value of $.01 per share
(the "Preferred  Stock"),  and (ii) 40,000,000 shares of common stock, par value
$.01 per share (the "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 Credit Agreement and for general corporate purposes.

      There were no shares of Preferred Stock outstanding as of January 29, 2000
and January 30, 1999.  There were  29,233,650  and  23,921,545  shares of Common
Stock outstanding as of January 29, 2000 and January 30, 1999, respectively.

      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 no 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.

      The Common Stock does not have any  preemptive  right or  subscription  or
redemption  privilege.  The Common  Stock also does not have  cumulative  voting
rights, which means the holder or holders of more than half of the shares voting
for the election of directors  can elect all the directors  then being  elected.
All of the shares of Common Stock are fully paid and nonassessable.

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.  During the  course of the third and  fourth  quarters  of
Fiscal  1998,  the  Company  suspended  further  purchases  due to  the  pending
acquisition  of Hills.  The Company did not  repurchase  any of its Common Stock
during Fiscal 1999.

 Warrants

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

      An aggregate of  2,120,000  Series C 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  January 31,  1999.  The  exercise
price was $1.11 per share. On January 31, 1999, the remaining  outstanding 8,635
Series C Warrants  expired.  There  were no  outstanding  Series C  Warrants  at
January 29, 2000.

      The exercise price of the Series B Warrants are subject to adjustment upon
the occurrence of certain events, including,  among other things, the payment of
a stock dividend,  a merger or consolidation  and the issuance for consideration
of rights,  options or warrants  (other than  rights to  purchase  Common  Stock
issued to shareholders generally) to acquire Common Stock.

      A  holder  of  Series  B  Warrants  is not  entitled  to any  rights  as a
stockholder of the Company, including, without limitation, the right to vote the
underlying shares of Common Stock, until the holder has exercised the warrants.

Stock Purchase Rights Agreement

      On  November  30,  1994,  the  Company  adopted  a Stock  Purchase  Rights
Agreement (the "Rights Agreement"). Under the terms of the Rights Agreement, one
purchase right ("Right"),  with an exercise price of $14.00, is attached to each
share of Common Stock  outstanding as of, or issued  subsequent to, November 30,
1994 but prior to the occurrence of certain  events (as more fully  described in
the Rights Agreement).  The Rights become exercisable in the event that a person
or group (an "Acquiring  Person")  either  acquires 15% or more of the Company's
outstanding  voting  stock or  announces  an intention to acquire 20% or more of
such stock. Once exercisable,  each Right will,  depending on the circumstances,
entitle a holder,  other than an Acquiring  Person, to purchase shares of either
the Company or an  acquiring  company  having a market  value equal to twice the
exercise  price.  The Rights  Agreement  was  adopted to assure  that all of the
Company's  stockholders  receive full value for their investment in the event of
stock  accumulation by an Acquiring Person.  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 1998 Stock  Incentive Plan (the "1998  Incentive  Plan"),  approved by
stockholders  in May 1998,  provides  for the grant of Awards (as defined in the
1998  Incentive  Plan) and makes  available  for Awards an  aggregate  amount of
1,800,000  shares of Common  Stock,  with no  individual  awardee  to receive in
excess of 300,000 shares of Common Stock.  With respect to such Awards under the
1998  Incentive  Plan,  the Company  may grant  awards in the form of options to
purchase  Common Stock  provided that the exercise  price shall not be less than
100% of the fair market  value of the Common  Stock on the date the stock option
is granted.

      Pursuant to the 1994 Management Stock Option Plan (the "1994 Option Plan")
approved  by  stockholders  in June 1994,  the Company  may grant  options  with
respect to an  aggregate  of up to  1,700,000  shares of Common  Stock,  with no
individual  optionee to receive in excess of 200,000 shares of Common Stock upon
exercise of options granted. The exercise prices of the options are equal to the
fair market value of the Common  Stock on the date the options are granted.  The
options become  exercisable  over one to five years and terminate  after five to
ten years from the grant date.

      Pursuant  to the  1994  Non-Employee  Directors  Stock  Option  Plan  (the
"Non-Employee Plan") approved by stockholders in May 1995, the Company may grant
to  non-employee  directors  options to purchase up to an  aggregate  of 200,000
shares of Common Stock. The exercise prices of the options are equal to the fair
market  value of the  Common  Stock on the date the  options  are  granted.  The
options become  exercisable in full six months after date of grant and terminate
ten years after date of grant.  Effective on the date of each annual  meeting of
stockholders  of the  Company  commencing  with the 1996  Annual  Meeting,  each
non-employee  director  of the  Company  then in office was granted an option to
purchase 2,500 shares, with the date of grant to be the date of such meeting. At
the  1998  Annual  Meeting,  the  stockholders  approved  an  amendment  to  the
Non-Employee  Plan  increasing the number of options granted on the date of each
Annual Meeting from 2,500 to 7,500 effective as of the May 27, 1998 grant. As of
January 29, 2000,  157,500 options had been granted under the Non-Employee Plan;
137,500 options were exercisable.

      The  following  table sets forth the stock  option  activity for all stock
option plans for Fiscal 1999, Fiscal 1998 and Fiscal 1997 (shares in thousands):
<TABLE>
                                                 1999                      1998                    1997
                                                 ----                      ----                    ----

                                                  Weighted                  Weighted                  Weighted
                                       Number      Average       Number      Average       Number      Average
                                         of       Exercise         of       Exercise         of       Exercise
                                       Shares       Price        Shares       Price        Shares       Price
                                       ------       -----        ------       -----        ------       -----
<S>                                    <C>          <C>            <C>         <C>         <C>           <C>
Outstanding at beginning
    of year.........................   1,128        $12.00         914         $3.97       1,664         $3.73
Granted.............................     744         35.51         608         19.09          76          9.43
Exercised...........................    (173)         6.48        (375)         3.90        (775)         4.03
Forfeited...........................     (81)        21.46         (19)        12.42         (51)         3.59
                                       ------                    ------                    ------
Outstanding at end of year..........   1,618         22.88       1,128         12.00         914          3.97
                                       ======                    ======                    ======
Options exercisable at
    year-end........................     559         10.93         490          5.79         640          3.77
                                       ======                    ======                    ======
Weighted average fair
  value of options granted........     $24.90                    $13.56                     $7.09
                                       ======                    ======                     =====
</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,  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 5.3%, 5.2% and
6.4% for 1999,  1998 and 1997,  respectively)  and an expected life from date of
grant until option  expiration date (weighted  average expected life of 5.3, 5.4
and 6.0 years for 1999, 1998 and 1997, respectively).

      The following table summarizes information about stock options outstanding
as of January 29, 2000 (options in thousands):
<TABLE>

                                         Options Outstanding                       Options Exercisable
                     -------------------------------------------------     --------------------------------
                                          Weighted
                          Number           Average                              Weighted
                        of Options        Remaining          Weighted            Number           Weighted
    Range of           Outstanding       Contractual         Average          Exercisable         Average
 Exercise Prices       at 1/29/00           Life          Exercise Price      at 1/29/00      Exercise Price
-----------------     -------------     -------------    -----------------   -------------   ----------------
<S>                        <C>              <C>               <C>                <C>              <C>
$1.50-3.00..........        99              4.4               $2.46                99              $2.46
$3.13-4.38..........       241              1.0                3.68               241               3.68
$5.06-15.56.........       273              3.6               14.33               104              13.85
$18.38-24.75........       302              3.3               22.89                77              22.27

$29.00-41.00........       703              4.5               35.65                38              48.50
                         ------            -----             -------             -----            -------
                         1,618              3.6               22.88               559              10.93
                         ======                                                 =======
</TABLE>

     The Company  accounts  for its stock option plans under APB Opinion No. 25.
Had compensation  cost for the Company's 1999, 1998 and 1997 stock option grants
been  determined in  accordance  with SFAS No. 123, the Company's net income and
net income per common share for Fiscal  1999,  Fiscal 1998 and Fiscal 1997 would
have approximated the pro-forma amounts below:
<TABLE>

                                            Fiscal 1999                Fiscal 1998                 Fiscal 1997
                                            -----------                -----------                 -----------
                                            As                         As                          As
                                         Reported   Proforma        Reported   Proforma         Reported   Proforma
                                        ---------- ----------      ---------- ----------       ---------- ----------
<S>                                      <C>         <C>             <C>         <C>              <C>        <C>
Net income...............                $17,127     $10,747         $33,830     $32,065          $34,546    $34,147
Net income per common share:

- basic.....................               $0.62       $0.39           $1.47       $1.39            $1.59      $1.57
- diluted...................               $0.62       $0.39           $1.40       $1.32            $1.46      $1.44

      SFAS 123 does not apply to stock options granted prior to 1995.
</TABLE>


8.    Income Taxes:

      The  Company  adopted  SFAS No. 109 in  conjunction  with the  adoption of
fresh-start  reporting in December  1992.  Under SFAS No. 109,  deferred  income
taxes are recognized by applying the enacted statutory tax rates in future years
to the changes in "cumulative  temporary  differences" (the differences  between
financial   statement   carrying   values  and  the  tax  basis  of  assets  and
liabilities).

     As a consequence of the adoption of fresh-start reporting and SFAS No. 109,
any tax  benefits  realized  for tax purposes  after the  Consummation  Date for
pre-consummation   cumulative  temporary   differences,   as  well  as  for  the
pre-consummation  net operating  loss  carryovers,  are reported as additions to
paid-in capital (see Consolidated Statements of Changes in Stockholders' Equity)
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 will be  segregated  from the  pre-consummation  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  1999,  the  Company  recorded  an income tax  benefit of $49.6
million.  Included in that  benefit is a  provision  for state  income  taxes of
approximately  $1.2 million,  which will be paid in cash.  The above tax benefit
amount includes an income tax benefit of $12.7 million,  related to current year
operations  and a benefit of $38.1 million in  connection  with the reduction of
the  valuation  allowance  for  post-consummation  net deferred  tax assets,  as
discussed below.

      The (benefit) provision for income taxes is comprised of the following:
<TABLE>

                                                                          Fiscal           Fiscal            Fiscal
                                                                           1999             1998              1997
                                                                           ----             ----              ----
                                                                                        (In millions)
<S>                                                                       <C>              <C>                <C>
      Federal income tax.........................................         $   -            $  0.5            $  0.3
      State income tax...........................................            1.2               -                 -
      Deferred tax (benefit) provision...........................          (12.7)            18.3              18.8
      Valuation allowance reduction..............................          (38.1)              -                 -
                                                                       ------------    -------------     -------------
           Total income tax (benefit) provision..................         $(49.6)          $ 18.8            $ 19.1
                                                                       ============    =============     =============
</TABLE>


      Significant  components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>

                                                                                    January 29,           January 30,
                                                                                       2000                  1999
                                                                                       ----                  ----
                                                                                              (In millions)
<S>                                                                                     <C>                  <C>
      Fixed assets..............................................................        $ 4                  $ 47
      Self insurance reserves...................................................         23                    13
      Store closing reserves....................................................         22                    20
      Leases....................................................................          2                    36
      Inventory reserves........................................................          1                    57
      Vacation pay reserve and other............................................         37                    72
      Net operating loss carryovers.............................................        327                   158
                                                                                   --------------        --------------
      Total deferred tax assets.................................................        416                   403
      Valuation allowances......................................................        (41)                 (301)
                                                                                   --------------        --------------
      Net deferred tax assets...................................................      $ 375                  $102
                                                                                   ==============        ==============
</TABLE>
      The Company's  provision for income taxes resulted in effective rates that
varied from the statutory federal income tax rate as follows:
<TABLE>

                                                                                    Fiscal 1999       Fiscal 1998       Fiscal 1997
                                                                                    -----------       -----------       -----------
<S>                                                                                    <C>               <C>                <C>
      Statutory federal income tax (benefit) rate...............................       (35.0%)           35.0%              35.0%
      State and local taxes, net of federal benefit.............................        (3.7%)            2.9%               2.8%
      Goodwill amortization.....................................................         2.3%            (3.4%)             (4.0%)
      Other.....................................................................         0.4%             1.1%               1.7%
                                                                                    -----------       -----------       -----------
      Effective tax rate before valuation allowance reduction...................       (36.0%)           35.6%              35.5%
      Valuation allowance reduction.............................................      (122.1%)             -                  -
                                                                                    -----------       -----------       -----------
      Total effective tax (benefit)rate ........................................      (158.1%)           35.6%              35.5%
                                                                                    ===========       ===========       ===========
</TABLE>

      The Company has reduced its valuation allowance on its deferred tax assets
by $259 million during Fiscal 1999, which reflects the Company's  expectation of
utilization of net operating loss carryforwards and other deferred tax assets in
the  foreseeable   future  after   considering  the  adjustments  for  potential
contingencies.  The Company has revised it's policy in determining its potential
to utilize net operating loss  carryforward  and other deferred tax assets.  The
reduction of the valuation  allowance  resulted in a  corresponding  addition to
paid-in-capital  of $107  million,  income  tax  benefit  of $38  million  and a
reduction of goodwill,  recorded in connection  with the Hills  Acquisition,  of
$114 million.

      The addition to paid-in-capital is attributable to the valuation allowance
reduction  on $107 million of Ames  pre-consummation  net  operating  losses and
temporary differences, which were originally  established by the Company as part
of the adoption of fresh-start  reporting in December  1992. The  recognition of
income tax benefit of $38.1  million is  attributable  to the  reduction  of the
valuation  allowance amounts previously recorded against  post-consummation  net
operating losses and temporary  differences.  The remaining  valuation allowance
reduction of $114 million is a result of the recognition of certain deferred tax
assets realized in connection with the Hills Acquisition and therefore  resulted
in  a  corresponding  reduction  to  goodwill  previously  recorded.  The  above
referenced increase to paid-in-capital was reduced by a corresponding adjustment
for  approximately  $1.6 million relating to certain prior year state income tax
liabilities.

      A portion of the Ames deferred tax assets  (including those created by the
Hills  Acquisition)  continue  to require a valuation  allowance  because of the
uncertainty  of future  recognition  of such deferred tax assets.  In subsequent
periods,  Ames may further  reduce the  valuation  allowance,  provided that the
possibility  of  utilization  of the  deferred tax asset is more likely than not
expected to occur, as defined by SFAS No. 109.

      The  Company has net  operating  loss  carryovers  of  approximately  $816
million,  which are currently  available  without any annual  limitation.  These
losses will expire between 2007 and 2020. Additionally,  the Company has filed a
$20 million refund claim under Section 172(f) of the Internal  Revenue Code. The
claim  represents a 10-year  carryback  of  qualified  expenses and is currently
under review by the Internal Revenue Service ("IRS").  The claim, if successful,
will reduce net operating losses by approximately $47 million.

      In addition, Ames has targeted jobs tax credit carryovers of approximately
$7  million,  which will  expire in 2007,  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 the Hills  Stores
Company,  Ames has  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 2000 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.

      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.

      The IRS has  completed  its  audit of Hills  for the  1991,  1992 and 1993
fiscal  years.  The final  outcome of this  examination  did not have an adverse
effect on the Company. 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 Plan

      Ames has a defined  contribution  retirement  and savings  plan (the "Ames
Retirement and Savings Plan") that is 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  60 days of  service,  or who are
part-time and have one year of service,  and have completed at least 1,000 hours
of service in a 12-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 plan.  Ames' expense  associated with this plan amounted to approximately
$3.4  million,  $3.3  million,  and  $3.0  million,  in  1999,  1998  and  1997,
respectively.

Hills Plan

      Hills has a defined  contribution  retirement and savings plan (the "Hills
Retirement  and Savings  Plan ") that is  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  60 days  of  service,  or who are
part-time  and have one year of service and have  completed at least 1,000 hours
of service in a 12-month period.  For each  participant's  contribution (up to a
maximum of 5% of such  participant's  total  compensation)  Ames  contributes an
amount  equal to 50% of the  first  4% and 100% of the next 1% of  contribution.
Ames  funds  all  administrative  costs  incurred  by  the  plan.  The  expenses
associated with this plan were $2.6 million for Fiscal 1999 and $0.3 million for
Fiscal 1998.

Retirement Plan

      Ames  has  an  unfunded  Retirement  Plan  for   Officers/Directors   (the
"Retirement  Plan").  It provides that every person who is employed by Ames when
he or she retires,  dies or becomes  disabled and who serves as both a full-time
officer and a director  of Ames and has  completed  five years of  service,  not
necessarily consecutive,  in both of these capacities,  is eligible for benefits
under the Retirement Plan.

      The maximum annual benefit under the Retirement Plan is $100,000,  reduced
by  certain  of  each  participant's  annual  Social  Security  benefits.   Each
participant  in the  Retirement  Plan is entitled to benefits for a period of 10
years.  The Company has a reserve  established for potential  payments under the
Retirement  Plan.  No  payments  were made  under this plan  during the  periods
presented.

The G.C. Murphy Company Life Insurance Plan

      The G.C.  Murphy  Company Life  Insurance  Plan (the "GCM Plan") granted a
flat dollar amount (defined  benefit) of group term life insurance at no cost to
certain  retired  employees.  This plan excludes G.C.  Murphy Co.  employees who
retired  from Ames after  January 31,  1986.  The amount of  coverage  varies by
retiree, is payable only upon death, and has no loan or cash value. During 1997,
the Company entered into a contract with an insurance company, which effectively
transferred to the insurance company all future liabilities  associated with the
GCM Plan in exchange for fixed annual payments over ten years.

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  incentive 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 $9.4 million,
$8.3 million, and $6.3 million for Fiscal 1999, 1998 and 1997, respectively.

Restricted Stock Awards

1995 Long Term Incentive Plan

       Pursuant  to the  Company's  1995 Long  Term  Incentive  Plan (the  "1995
Incentive  Plan"),  approved by the  stockholders  in May  1995, the Company may
make awards of an  aggregate  of up to 500,000  shares of Common  Stock and cash
payment 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.  Each award  under the 1995  Incentive  Plan vests in full on the
third anniversary of the date of grant of such award.  Awards may be made to the
Chief  Executive  Officer,  any  Executive  Vice  President  and any Senior Vice
President of the Company. Other than for death or disability, awards, which have
not  vested, are  forfeited  upon  the  termination  of  the  employment  of the
executive.

      As of January 29, 2000,  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  Incentive  Plan (as defined in Note 7),
awards  aggregating  180,000  shares  of  Common  Stock  were  made  to  certain
executives during Fiscal 1998. Awards  aggregating 30,000 shares of Common Stock
were made to certain  executives during Fiscal 1999. Fifty percent (50%) of each
stock award under the 1998 Incentive Plan vests on the fourth  anniversary  from
the date of grant and 50% on the fifth anniversary.  There is no cash payment to
be made relative to the vesting of the grant.

      The shares for the  outstanding  awards under both the 1995 Incentive Plan
and the 1998  Incentive  Plan have been  issued and are being held in custody by
the Company on behalf of the grantees thereof. A portion of the estimated market
value of the  awards,  including  the cash,  has been  accrued  as  compensation
expense as of January 30, 1999. The Company recorded as compensation expense for
the 1995  Incentive Plan and the 1998 Stock  Incentive  Plan $1.3 million,  $1.9
million, and $2.0 million during Fiscal 1999, 1998 and 1997, respectively.

Stock Appreciation Rights

      In June 1998, the Company extended the employment agreement with Joseph R.
Ettore,  Chief Executive  Officer and President.  In connection  therewith,  Mr.
Ettore was granted  125,000 stock  appreciation  rights (SARs) which entitle Mr.
Ettore to receive in cash upon  exercise  the excess of (a) the average  closing
price of a share of Common  Stock  during the twenty  trading  days prior to the
exercise date over (b) $2.00. Mr. Ettore's SARs were exercisable on or after May
31, 1999.

     In August 1999, Mr. Ettore  exercised  125,000 SARs. There are no remaining
SARs issued or outstanding as of January 29, 2000.

Income Continuation Plan

      Certain  officers  of Ames  participate  in an  Income  Continuation  Plan
("ICP"),  which  guarantees up to one year's salary in the event of  termination
other than for cause.  As of January 29,  2000,  the Company had no  obligations
under the ICP.

Key Employee Continuity Benefit Plan

      Ames has a Key Employee  Continuity  Benefit Plan (the "Continuity  Plan")
that covers all officers,  Vice President and above, and certain other employees
of  Ames.  If the  employment  of any  participant  in the  Continuity  Plan  is
terminated,  other  than  for  death,  disability,  cause  (as  defined  in  the
Continuity  Plan), or by the participant  other than for good reason (as defined
in the Continuity Plan), within 18 months after a change of control of Ames, the
participant  will  receive  a lump sum cash  severance  payment.  The  severance
payment is 2.99 times Base  Compensation  for the President  and Executive  Vice
Presidents,  two times Base Compensation for Senior Vice Presidents and selected
Vice Presidents and 1 times Base  Compensation for other Vice  Presidents.  Base
Compensation is defined  generally as the sum of the  participant's  annual base
compensation in effect  immediately prior to the participant's  termination plus
one-third  of the value of the cash and stock  bonuses  paid to the  participant
during the 36 months  ending on the date of  termination.  For  purposes  of the
Continuity  Plan,  a  change  of  control  includes  but is not  limited  to the
acquisition  by any  person  of  beneficial  ownership  of 20% or  more  of Ames
outstanding  voting securities or the failure of the individuals who constituted
the Board of Directors at the beginning of any period of 12  consecutive  months
to continue to constitute a majority of the Board during such period.

Hills Post Retirement Benefits

      Hills has a  retiree  medical  plan  that  provides  medical  benefits  to
eligible  retirees  of Hills.  This plan is  accounted  for in  accordance  with
Statement of Financial Accounting Standards No. 106: "Employers'  Accounting for
Post  retirement  Benefits  Other Than  Pensions"  ("FAS 106").  This  statement
requires  accrual  of post  retirement  benefits  during  the years an  employee
provides  services.  Benefit costs were  historically  funded  principally  on a
pay-as-you-go  basis.  During  Fiscal  1999,  the Plan was  amended to  restrict
eligibility  to employees who had attained age 61 with nine (9) years of service
as of December 31, 1999.  This change  reduced the Company's  liability for Post
Retirement Benefit Costs by $2.6 million. The status of the plan is as follows:
<TABLE>

                                                                                         January 29,        January 30,
                                                                                            2000               1999
                                                                                        --------------     --------------
                                                                                                (000's omitted)
<S>                                                                                        <C>                <C>
      Accumulated post retirement benefit obligation ("APBO") for:
         Active employees.......................................................           $1,478             $2,293
         Retirees...............................................................              310                 61
                                                                                        --------------     --------------
                                                                                            1,788              2,354
      Plan assets at fair value.................................................             -                  -
      Unfunded APBO.............................................................            1,788              2,354
      Unrecognized actuarial gain...............................................             -                 1,442
                                                                                        --------------     --------------
      Accrued post retirement benefit cost......................................           $1,788             $3,796
                                                                                        ==============     ==============
</TABLE>

      The assumed  health care cost trend rate used in measuring the APBO was 7%
in fiscal year 1999 grading down to 5% by fiscal year 2002 and remaining at that
level  thereafter.  A one  percentage  point increase in the assumed health care
cost  trend  rate  would  increase  the APBO at the end of  fiscal  year 1999 by
$52,300  (or by 3%) and the service  and  interest  cost by $35,200 (or by 11%).
Conversely,  a one  percentage  point  decrease in the assumed  health care cost
trend rate would decrease the APBO at the end of the fiscal year 1999 by $50,700
(or by 3%) and the service and interest  cost by $28,800 (or by 9%). The assumed
discount rate used in determining the APBO was 7%.


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 is vigorously  defending  one remaining  case,
which it does not believe represents a material exposure.

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,   which  includes
mainframe,  midrange and client server systems;  support for midrange systems in
Ames' four distribution  centers;  and support for substantially all information
systems  equipment  in all of the Ames  stores.  The Company  expects  that this
agreement  will cost  less  in  service  delivery than if it had not  outsourced
its information technology support.

      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>
                                                                                    Fiscal           Fiscal           Fiscal
                                                                                     1999             1998             1997
                                                                                     ----             ----             ----
                                                                                               (000's omitted)
  Cash paid for interest and income taxes were as follows:
<S>                                                                                 <C>              <C>              <C>
         Interest...............................................................    $51,485          $12,166          $11,655
         Income taxes...........................................................      3,646              125               73
  Ames entered into other  non-cash  investing and
  financing  activities as follows:
         New capital lease obligations..........................................    $14,942          $25,859          $ 2,940
         Issuance of Common Stock under the 1998
         Incentive Plan.........................................................       -                   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 Financial  Accounting  Standards Board requires disclosure of the fair
value of financial instruments under Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial  Instruments." The following
methods and  assumptions  were used by the Company in estimating  the fair value
disclosures for its financial instruments.

      The Company's financial instruments as of January 29, 2000 and January 30,
1999 were cash and  short-term  investments,  and long-term  debt.  For cash and
short-term  investments,  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 January 29, 2000 and January 30, 1999 were as follows:
<TABLE>

                                                               Fiscal 1999                       Fiscal 1998
                                                               -----------                       -----------
                                                        Carrying           Fair           Carrying          Fair
                                                         Amount            Value           Amount           Value
                                                        --------         --------         --------        ---------
                                                                              (000's omitted)
<S>                                                      <C>             <C>              <C>             <C>
      Cash and short-term investments............        $30,612         $30,612          $35,744         $35,744
      Long-term debt:
         Secured debt............................        174,544         174,544           44,935          44,935
         Unsecured debt..........................        247,225         236,758           50,875          50,875

</TABLE>


13.   Store Closing Charges:

     The Company did not record any  charges in  connection  with the closing of
stores during Fiscal 1999. The Company spent  approximately  $9.5 million,  $2.5
million and $13.9 million in Fiscal 1999, 1998 and 1997,  respectively,  related
to store closing costs.

      In the  fourth  quarter  of 1998,  the  Company  recorded  charges of $8.2
million in connection with the closing of seven stores that overlap markets with
acquired Hills stores. The seven stores were closed during Fiscal 1999.

      In the  fourth  quarter  of 1997,  the  Company  recorded  charges of $1.6
million in  connection  with the  closing  of two  stores.  The $1.6  million is
classified  in two line items:  $1.0  million as store  closing  charge and $0.6
million as part of cost of merchandise sold.

      The following  items  represent the major  components of the total charges
recorded in January 1999 and 1998 in connection with store closings:
<TABLE>

                                                                            Fiscal           Fiscal           Fiscal
      Item                                                                   1999             1998             1997
      ----                                                                   ----             ----             ----
                                                                                         (000's omitted)
<S>                                                                          <C>               <C>               <C>
      Lease costs.................................................           $  -              $ 6,254           $ 363
      Net fixed asset write-down..................................              -                1,161             394
      Severance costs.............................................              -                  370             113
      Other.......................................................              -                  437             130
                                                                           -----------    ---------------    ------------
      Store closing charge........................................              -                8,222           1,000
      Inventory write-down........................................              -                 -                560
                                                                           -----------    ---------------    ------------
      Total charges                                                             -              $ 8,222          $1,560
                                                                           ===========    ===============    ============
<FN>
      The lease  costs  provided  for in the store  closing  charge  include all
projected occupancy costs from date of closing until estimated lease disposition
date.

     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.

</FN>
</TABLE>


14.   Leased Department and Other Income:

      The  following  is a  summary  of the  major  components  of  the  "Leased
department and other income":
<TABLE>
                                                                          Fiscal            Fiscal            Fiscal
                                 Item                                      1999              1998              1997
                                 ----                                      ----              ----              ----
                                                                                        (In thousands)

<S>                                                                       <C>               <C>              <C>
      Leased department income.................................           $25,378           $17,914          $16,592
      Concession and vending income............................             1,991             1,508            1,252
      Layaway service fees.....................................             3,736             2,644            2,605
      Gain on sale of assets, net..............................             2,479             1,350            1,084
      Various other............................................             8,106             6,748            3,536
                                                                        --------------    --------------    -------------
                                                                          $41,690           $30,164          $25,069
                                                                        ==============    ==============    =============
</TABLE>


15.   Recently Issued Accounting Pronouncements:

     In June 1998 the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS") No. 133, " Accounting  for Derivative
Instruments and Hedging Activities." This statement  establishes  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
Statement  also  requires that changes in  derivatives  fair value be recognized
currently in earnings  unless specific hedge  accounting  criteria are met. SFAS
No. 133 is effective, prospectively, for all fiscal quarters of all fiscal years
beginning  after June 15,  2000,  with early  adoption at the  beginning  of any
fiscal quarter being permitted.  Management is currently analyzing the impact of
this new  pronouncement  on the  Company's  financial  position  and  result  of
operations.


16.   Quarterly Financial Data (Unaudited):

     Summarized  unaudited quarterly financial data (in thousands except for per
share amounts) for the last three fiscal years are shown below.
<TABLE>
                                                      First              Second          Third             Fourth
                                                    ----------         ----------      ----------        ----------
                                                                (In thousands, except per share data)

Fiscal 1999: (a)

<S>                                                  <C>                 <C>             <C>              <C>
    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

Fiscal 1998:

    Net sales....................................... $  497,045(b)       $ 535,047(b)    $596,030(b)        $870,526(b)

    Gross margin....................................    138,434            156,836        163,094            262,623

    Net income (loss)...............................     (2,943)             8,386          6,000             22,387
    Net income (loss) per share-basic...............      (0.13)              0.37           0.26               0.96

                                diluted.............      (0.13)              0.35           0.25               0.92

Fiscal 1997:

    Net sales....................................... $  430,629(b)       $ 502,414(b)    $524,864(b)        $767,549(b)

    Gross margin....................................    118,984            146,863        148,081            215,554

    Net income (loss)...............................     (5,930)             7,378          3,519             29,579
    Net income (loss) per share-basic...............      (0.28)              0.34           0.16               1.32

                                diluted.............      (0.28)              0.31           0.15               1.23

<FN>
(a) First three quarters restated to reflect the adoption of SAB No. 101 as
    of the beginning of Fiscal 1999 (see Note 1).
(b) Restated to reflect the effect of recording  promotional  coupons  issued by
    Ames  as  markdowns,   which  conforms  to  current   treatment  for  coupon
    accounting.
</FN>
</TABLE>


17.   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 each of the fiscal years presented:
<TABLE>
                                                                          Year Ended
                                                          January 30, 1999         January 31, 1998
                                                         ------------------       ------------------
                                                          (In Thousands, except per share amounts)
<S>                                                           <C>                      <C>
      Net sales....................................           $4,131,194               $4,001,392
      Net income (loss)............................              (54,903)                  27,635
      Earnings (loss) per common share.............               $(2.39)                   $1.27
</TABLE>
      These  unaudited  pro forma  results have been  prepared  for  comparative
purposes only. They do 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 1997 or 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.


18.   Subsequent Events:

     In February  2000 the Company  entered into an agreement  with  Goldblatt's
Department  Stores,  Inc.  to  purchase  the  leases  to six of their  stores in
Chicago,  Illinois and one store in Gary,  Indiana for a cash purchase  price of
$7.6 million.  Completion  of the purchase is expected in April 2000.  Under the
terms of the agreement, the Company will assume Goldblatt's leases for the seven
stores.  Goldblatt's  will  deliver the stores to the  Company in "broom  clean"
condition.
<PAGE>
<TABLE>




                                                                                                           SCHEDULE II

                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In Thousands)


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

Fiscal 1999:

<S>                             <C>                                  <C>                      <C>              <C>
Store Closing Reserve           $59,768            -                 $5,170     (a)           ($9,470)         $55,468 (d)

Fiscal 1998:

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

Fiscal 1997:

Store Closing Reserve           $24,438             $1,000             $519     (c)          ($13,907)         $12,050


(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)    Represents reclassifications of liabilities associated with closed stores
       and other reclassifications.
(d)    The majority of this reserve relates to ongoing property lease
       commitments for stores closed through Fiscal 1999.
</TABLE>



<PAGE>




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


<TABLE>

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


<S>             <C>                                                                                  <C>
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).

<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).

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).





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




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


10.7            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).

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).

10.10           Employment  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).

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

11              Schedule of  computation of  basic and  diluted net earnings per
                share.                                                                                      55

12              Ratio of Earnings to Fixed Charges                                                          56

21              Subsidiaries of the Registrant.                                                             57

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