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 31, 1998
                                       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
     Series C Warrants                                  NASDAQ

      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 2, 1998,  the  aggregate  market value of voting stock held by
non-affiliates  of the  Registrant was  $364,694,352  based on the last reported
sale  price of the  Registrant's  Common  Stock on the  NASDAQ  National  Market
System.

      22,616,704 shares of Common Stock were outstanding on March 2, 1998.

      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.

47 pages to follow (including Exhibits)                 Exhibit Index on page 44

<PAGE>

                                     PART I

Item 1.  Description of Business.

(a)   General.

      Ames Department Stores, Inc. and its subsidiaries (collectively, "Ames" or
the "Company") are retail merchandisers.  As of March 1, 1998, Ames operated 296
discount  department  stores under the Ames name in 14 states in the  Northeast,
Mid-Atlantic  and Mid-West  regions and the District of Columbia.  The Company's
stores are located in rural  communities,  some of which are not served by other
large retail stores, high-traffic suburban sites, small cities and several major
metropolitan  areas.  The stores  largely serve middle and  lower-middle  income
customers.

      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  ("Chapter  11").  The
principal  executive  offices  are  located  at 2418 Main  Street,  Rocky  Hill,
Connecticut 06067, and the telephone number is (860) 257-2000.


Fiscal 1997

The  Company  continued  to improve  operations  and its  long-term  competitive
position  during the fiscal  year  ended  January  31,  1998  ("Fiscal  1997" or
"1997"):


  -  Cost-Reduction  Initiatives  to Pursue Growth  Opportunities:  The  Company
     continued  its  efforts to reduce  costs and  implement  growth  strategies
     during  Fiscal  1997.  The closing of twelve (12)  underperforming  stores,
     announced in December,  1996,  was  completed  in February,  1997,  and the
     closing of two (2) underperforming stores, announced in December, 1997, was
     completed in February,  1998. In addition,  significant  information system
     progress was made in 1997. The Company's $36 million project to replace its
     point-of-sale   and   back-office   hardware   and  systems  was   launched
     successfully  as ten (10) stores were  retrofitted  in 1997.  The remaining
     stores  will be  upgraded  in 1998.  The new system is  expected to improve
     customer  service  as well as  employee  productivity.  Electronic  Article
     Surveillance  (EAS),  which is an electronic sensor attached to merchandise
     that helps to detect shoplifters, was installed in 89 stores in 1997.

  -  Advertising  and  Marketing  Programs:  The  Ames  price-value  promotional
     strategies  continued to be a driving force behind the Company's success in
     1997. The Company's Special Buy program, which enables Ames to sell current
     close-out and  end-of-run  items for  significantly  less than the original
     retail  price,  was refined in 1997 to provide  customers  with an enhanced
     awareness of bargain  opportunities.  The 55 Gold(R)  Savings Card Program,
     which provides a 10% discount each Tuesday on all merchandise  purchased by
     customers aged 55 or older,  continued to experience  significant growth as
     the number of card holders expanded to 2.0 million in 1997 from 1.6 million
     in 1996.

  -  Remodeling and  New Stores:  The Company continued to strengthen its market
     presence  by  opening  nine (9) new  stores in Fiscal  1997.  These  stores
     feature an  easy-to-negotiate  open floor plan that allows customers to see
     the entire store at a glance. Bright, attractive signing and "soft corners"
     highlight key departments and make finding  the right  department  easy. In
     addition,  the Company  completed the remodel of eight (8) stores in Fiscal
     1997,  incorporating  many of the latest design formats featured in the new
     stores.  The Company expects to open or remodel up to twenty (20) stores in
     the fiscal year ending January 30, 1999 ("Fiscal 1998" or "1998").

The Company  believes its  operating  performance  and the  availability  of its
financing  facilities will provide sufficient  liquidity to allow the Company to
meet  its   financial   obligations.   The  Company   continually   reviews  the
profitability  of its stores in the  ordinary  course of business  and closes or
sells stores whose  performance  is thought to be  inadequate.  The Company will
consider  relocating  certain  stores and opening new  stores,  particularly  in
selected  markets  that  would  reinforce  marketing   programs,   enhance  name
recognition, and/or achieve market penetration.

<PAGE>

(b)   Financial Information about Industry Segments.

      Ames operates  self-service  retail discount  department  stores selling a
broad range of merchandise. There are no other reportable industry segments.


(c)   Narrative Description of Business.

      (i)    Services, Markets and Distribution.

           Ames sells primarily brand name general  merchandise,  including  the
      following  items:   family  apparel  and   accessories, shoes, housewares,
      home  furnishings,  crafts,  hardware and automotive accessories, sporting
      goods, toys, small appliances and consumer electronics, pre-recorded tapes
      and  compact  discs,  jewelry,  health  and  beauty  products,   household
      products, camera and photographic supplies, pet products,  party and paper
      products,  and school and  office  supplies.  Although Ames attempts to be
      competitive on everyday pricing,  the Company primarily employs a high/low
      promotional  pricing strategy with an emphasis on quality  weekly circular
      advertising.  The Company will continue to stress  breadth of  products in
      selected   merchandise  categories;   clean,   neat  and   well-maintained
      facilities; appealing merchandise presentation; and customer service.

           Merchandise  is purchased centrally for all stores by Ames associates
      at the Rocky  Hill,  CT  headquarters  and  is  shipped  by vendors either
      directly  to  individual  stores  or  to  Ames'  distribution  centers  in
      Massachusetts and Pennsylvania  which then make deliveries to stores.

           For the last three fiscal  years,  women's  apparel has been the only
      class of product that  exceeded  10% of total  sales,  accounting  for  an
      average of approximately  13% of total sales.  An average of approximately
      27% of sales for the last  three fiscal years were made using  third party
      credit cards and the remainder were made by cash or check.

<PAGE>

           The  table  below sets forth the number of retail stores in operation
      in each state at the end of each of the last three fiscal years.


                                   Stores  in  Operation  at Fiscal Year End
                                ----------------------------------------------- 
                                 1997(a)            1996(b)             1995(c)
                                --------           --------            --------

        Connecticut                15                 15                  15
        Delaware                    4                  4                   4
        District of Columbia        1                  1                   1
        Maine                      23                 23                  28
        Maryland                   23                 25                  25
        Massachusetts              33                 33                  32
        New Hampshire              19                 18                  18
        New Jersey                 11                  9                   6
        New York                   73                 75                  81
        Ohio                        7                 11                  11
        Pennsylvania               56                 56                  53
        Rhode Island                7                  7                   7
        Vermont                    13                 13                  13
        Virginia                    6                  6                   6
        West Virginia               7                  7                   7
                                 -----              -----               -----
           Total                  298                303                 307
                                 =====              =====               =====
----------------
(a)  Includes two (2) stores to be closed in  February,  1998:  New York (1) and
     Vermont  (1).  
(b)  Includes  twelve  (12)  stores in  the  process of closing at  year-end and
     one (1) Pennsylvania store closed as a result of flooding in January, 1996.
     In March, 1997,  it was determined that this store  would not be re-opened.
(c)  Includes seventeen (17) stores in the process of closing at year-end.


      (ii)   New Products.

           The  introduction of new products was not significant to the business
      of the Company for Fiscal 1997.


      (iii)  Raw Materials.

           The  Company  does  not  rely  on any  one or a few  suppliers  for a
      material portion of its purchases,  and there is no current or anticipated
      problem with respect to the availability of merchandise.

      (iv)   Patents, Trademarks and Licenses.

           The mark  "Ames"  is  registered  with the  United  States Patent and
      Trademark Office.  The Company considers this mark and the associated name
      recognition to be valuable to its business.  The Company has a significant
      number of other  trademarks,  trade names,  and service  marks,  including
      "Bargains  by the  Bagful(R)",  which has become a key  marketing  slogan.
      Other  trademarks,  such as "Crafts & More(R)"  "Pawsitively  Pets(R)" and
      "Party  Plaza(R)"  are used in  connection  with certain of the  Company's
      specialty  departments  within the stores.  Although the Company considers
      these  additional marks and its patents and licenses to be valuable in the
      aggregate,  none of them  individually  is currently  considered to have a
      material impact on the Company's business.

      (v)    Seasonality of Business.

           The Company's  sales are greater during the second half of the fiscal
      year as a result of the  back-to-school  and Christmas  shopping  seasons.
      Sales are highest in the last fiscal quarter.

<PAGE>

      (vi)   Working Capital.

           As of January 31, 1998, the Company's  current ratio (current  assets
      divided  by  current  liabilities)  was  1.5  to  1.0.  See  Item  7(b)  -
      Management's Discussion and Analysis - Liquidity and Capital Resources for
      discussion of liquidity and plans to meet future liquidity needs.

           The demand for working  capital is heaviest in May and June, and from
      August through November, when sufficient merchandise must be purchased for
      the spring, back-to-school and Christmas selling seasons, respectively.

      (vii)  Customers.

           No material part of the Company's business is dependent upon a single
      customer  or a few  customers.  During  Fiscal  1997,  Ames had no  single
      customer or  affiliated  group of  customers to whom sales were made in an
      amount which  accounted for 10% or more of the  Company's  total sales for
      such period.

           As is customary in the discount store industry,  the Company's retail
      operations allow merchandise to be returned by customers. In addition, the
      Company has a program  that allows for the matching of its sales prices to
      the advertised sales prices of its local  competitors upon presentation of
      proper  proof of the  competitor's  advertised  price  on the  same  item.
      Merchandise may also be purchased under the Ames layaway plan.

      (viii) Backlog.

           Backlog is not a significant factor in the Company's business.

      (ix)   Government Contracts.

           Ames has no material contracts with any government agency.

      (x)    Competition.

           Ames operates in a highly competitive environment. Ames competes with
      other  stores,  including  large  national  and  regional  chains,  in the
      purchase and sale of  merchandise,  as well as for store  locations.  Ames
      currently  anticipates  a  further  increase  in  competition  from  other
      national discount store chains.

           Many of the Company's  stores are located in smaller  communities and
      are, in some cases,  the largest  non-food  retail  store in their  market
      area. They compete,  however,  with many smaller stores offering a similar
      range of products.  The  Company's  stores  located in suburban  sites and
      urban  areas  are  in  direct  competition  with  other  discount  stores,
      including other large national and regional chains.

      (xi)   Research and Development.

           Research and development  activities are not a material aspect of the
      Company's business.
      
      (xii)  Environmental Matters.

           To  date,   compliance  with  federal,   state  and  local  laws  and
      regulations  enacted to  regulate  the  discharge  of  materials  into the
      environment  has not had, and is not  expected to have, a material  effect
      upon the Company's  business.  See Note 12 to the  Consolidated  Financial
      Statements   included  in  this  Form  10-K  for  further   discussion  on
      environmental matters.

      (xiii) Employees.

           At March 1, 1998, Ames employed approximately 20,500 people.


(d)   Foreign and Domestic Operations and Export Sales.

      The  information  called for by this item is not relevant to the Company's
business.

<PAGE>

Item 2.  Properties.

      As of January 31, 1998, the Company's  store lease  obligations  covered a
total of 17.6 million square feet,  including  approximately  0.1 million square
feet for stores to be closed in 1998.  The average  store size is  approximately
60,000 square feet, of which approximately 82% is selling area.

      The  construction of one store,  located in Monroeville,  PA, 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. The
Company owns the building and leases the land of the Mercerville,  NJ store. The
land and  buildings  for four  other  store  locations  are  owned by Ames.  The
remainder  of the  Company's  stores are  leased,  with the leases  expiring  at
various times between 1998 and 2018. The leases  generally have renewal  options
permitting extensions 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.  Except for  certain  point-of-sale  equipment  that is
leased,  vendor-owned  greeting card equipment and leased department  equipment,
Ames owns the fixtures and equipment in its stores, some of which are subject to
various financing arrangements.

      The Company's warehouse and distribution  facilities in Leesport,  PA, and
Mansfield,  MA are owned and occupy approximately 1.7 million square feet in the
aggregate. The Mansfield, MA facility is subject to a mortgage.

      Ames leases  approximately  386,000 square feet of space in Rochester,  NY
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, CT. The Company has a lease for 11,000 square feet for  plan-o-gramming in
Rocky Hill, CT, which expires in November,  2001, and a lease,  which expires in
April,  2006,  for  33,000  square  feet  in  Rocky  Hill,  CT for  an  in-house
photography studio and print shop.


Item 3.  Legal Proceedings.

      Ames is  involved  in various  litigation  as  detailed  in Note 12 to the
Consolidated Financial Statements included in this Form 10-K.


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

      There were no matters  submitted  during the fourth quarter of Fiscal 1997
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.

      The Company's  common stock is listed on the NASDAQ National Market System
("NASDAQ";  symbol:  AMES).  As of March 2,  1998,  Ames  had  8,274  registered
stockholders  of record.  Low and high prices of the Company's  common stock for
Fiscal 1997 and for the fiscal year ended  January  25, 1997  ("Fiscal  1996" or
"1996"), as reported on NASDAQ, are shown in the table below:


                                Fiscal 1997                 Fiscal 1996
                           ----------------------     ----------------------- 
                             Low          High           Low           High
                           --------    ----------     ---------     ---------
         1st Quarter       $6  1/4     $10  1/4       $1  1/4       $2  7/16

         2nd Quarter        6  3/4      12  13/16      1  7/8        3  5/8

         3rd Quarter       12  5/8      18             2  1/8        5  3/16

         4th Quarter       12  3/8      19  5/8        3  11/16      6  1/2

<PAGE>

      There  were no  quarterly  dividends  paid by Ames to the  holders  of its
common stock during these periods.  Dividends cannot be declared under the terms
of the Company's  revolving credit  facility.  On November 30, 1994, the Company
adopted  a  Stock  Purchase  Rights  Agreement  as  described  in  Note 7 to the
Consolidated Financial Statements.


Item 6.  Selected Financial Data.

      The  following   selected  financial  data  of  Ames  should  be  read  in
conjunction  with  the  Consolidated  Financial  Statements  and  related  Notes
appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                               (in thousands except per share data)
                    ----------------------------------------------------------------------------------------
                      Fiscal Year        Fiscal Year       Fiscal Year       Fiscal Year       Fiscal Year
                         Ended              Ended             Ended             Ended             Ended 
                    Jan. 31, 1998(g)    Jan. 25, 1997     Jan. 27, 1996     Jan. 28, 1995     Jan. 29, 1994
                    ----------------   ---------------   ---------------   ---------------   ---------------
<S>                 <C>                <C>               <C>               <C>               <C>              
Net sales             $2,233,118         $2,161,680        $2,104,231        $2,142,827        $2,123,527
Net income(loss)         $34,546(a)         $17,301(b)        $(1,618)(c)       $17,026(d)        $10,823(e)
Net income(loss)per
  common share (f)         $1.46(a)            $.79(b)          $(.08)(c)          $.79(d)           $.51(e)
Total assets            $610,042           $536,793          $502,582          $533,388          $567,131
Long-term debt &
  capital leases         $35,733            $38,220           $52,531           $77,095           $93,309

---------------------------
<FN>
(a) Includes  charges of $1.6 million for the costs  associated with the closing
    of two (2) stores. 
(b) 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.
(c) Includes charges of $20.9 million for the costs associated with the  closing
    of seventeen (17) stores and property gains of $9.1 million.
(d) Includes an  extraordinary  loss,  net of tax, of $1.5 million for the early
    extinguishment of debt;  property gains of $7.5 million; and a non-recurring
    gain of $12.0 million for a litigation settlement.
(e) Includes an extraordinary  gain,  net of tax,  of $0.9 million for the early
    extinguishment of debt and property gains of $1.3 million.
(f) 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.
(g) Fiscal year ended  January 31, 1998  consisted of 53 weeks;  all other years
    presented  consisted of 52 weeks.
</FN>
</TABLE>

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


(a)   Results of Operations.


      The  following  table sets forth the number of stores in operation  during
each fiscal year:

                                             Fiscal Year Ended
                            ----------------------------------------------------
                            January 31, 1998  January 25, 1997  January 27, 1996
                            ----------------  ----------------  ----------------


Stores, beginning of period        303               307               306
New stores                           9                13                 2
Closed stores                      (14) (a)          (17) (b)           (1) (c)
                                  -----             -----             -----
Stores, end of period              298               303               307
                                  =====             =====             =====


(a)   Excludes  two (2) stores to be closed in 1998 and  includes  one (1) store
      closed as a result of flooding (see below).
(b)   Excludes  (i) twelve (12) stores in the process of closing at year-end and
      (ii) one (1) store closed as a  result of  flooding in  January,  1996. In
      March, 1997, it was determined that this store would not be re-opened.
(c)   Excludes (i) two (2) stores temporarily  closed as a result of flooding in
      January,  1996 and (ii) seventeen (17) stores in the process of closing at
      year-end.

<PAGE>

      The  following  discussion  and  analysis  is  based  on  the  results  of
operations of the Company for Fiscal 1997 and 1996 and for the fiscal year ended
January 27, 1996 ("Fiscal 1995" or "1995"). The financial  information set forth
below should be read in conjunction with the Consolidated  Financial  Statements
of Ames Department Stores, Inc. and its subsidiaries  included elsewhere in this
filing.

      The Company's business is seasonal in nature,  with a large portion (34.5%
in Fiscal 1997) of its net sales occurring in the fourth quarter, which includes
the  Christmas  selling  season.  Total  sales,   including  sales  from  leased
departments,  for the last three  fiscal  years and the  respective  total sales
percentage   increases/decreases   and   comparable   store   sales   percentage
increases/decreases  over the  prior  year for  stores  that  have been open and
operated by Ames for at least the prior full fiscal year were:

                       (000's omitted)          Percentage Increases (Decreases)
                       ---------------          --------------------------------
Fiscal Year Ended        Total Sales            Total Sales    Comparable Stores
-------------------    ---------------          -----------    -----------------
January 31, 1998(a)       $2,325,295                3.1%             2.1% (b)

January 25, 1997          $2,255,749                2.6%             1.0%

January 27, 1996          $2,199,409               (1.9)%           (1.0)%

(a)   Fiscal year ended January 31, 1998  consisted of 53 weeks; all other years
      presented consisted of 52 weeks.
(b)   Comparable store sales was calculated using the fifty-two (52) weeks ended
      January 24, 1998 and January 25, 1997.

      The rate of inflation  did not have a  significant  effect on sales during
these periods.


Results of Operations for Fiscal 1997 Compared to Fiscal 1996
-------------------------------------------------------------

      The  Company  reported  improvements  in sales  and net  earnings  for the
fifty-three  (53) weeks ended January 31, 1998 as compared to the fifty-two (52)
weeks ended January 25, 1997. The Company  achieved this  improvement due to the
favorable impact of twenty-one (21) new stores opened in the last two (2) fiscal
years, the closing of twelve (12) underperforming stores at the beginning of the
year in addition to continued improvement in the Company's gross margin rate.

<PAGE>

      Net  sales  increased  3.3%  from  1996  due to an  increase  of  2.1%  in
comparable store sales,  the  addition  of  the 53rd week and the opening of new
stores cited above,  partially  offset by the closing of the stores cited above.
The following  table sets forth the results of  operations  for 1997 and 1996 in
millions and as a percentage of net sales:
<TABLE>
<CAPTION>
                                                      Fifty-three weeks ended            Fifty-two weeks ended
                                                          January 31, 1998                 January 25,  1997
                                                      ------------------------         ------------------------
                                                       $ mil.       % of Sales          $ mil.       % of Sales
                                                      ---------     ----------         ---------     ----------
<S>                                                   <C>           <C>                <C>           <C>
Net sales                                             $2,233.1        100.0%           $2,161.7        100.0%
Costs, expenses and (income):

  Cost of merchandise sold                             1,604.4         71.8             1,569.0         72.6
  Selling, general and administrative expenses           580.9         26.0               563.4         26.1
  Leased department and other operating income           (26.5)        (1.2)              (29.3)        (1.4)
  Depreciation and amortization expense                   14.3          0.7                12.5          0.6
  Amortization of the excess of revalued net assets
    over equity under fresh-start reporting               (6.2)        (0.3)               (6.2)        (0.3)
  Interest and debt expense, net                          11.6          0.5                19.0          0.9
  Gain on disposition of properties                         -            -                 (0.4)          -
  Store closing charge                                     1.0           -                  6.9          0.3
                                                      ---------     ----------         ---------     ----------
  Income before income taxes   
    and extraordinary item                                53.6          2.5                26.8          1.2
Income tax provision                                      19.1          0.9                 8.1          0.4
                                                      ---------     ----------         ---------     ----------
Income before extraordinary item                          34.5          1.6                18.7          0.9
Extraordinary loss, net                                     -            -                  1.4          0.1
                                                      ---------     ----------         ---------     ----------
     Net income                                          $34.5          1.6%              $17.3          0.8%
                                                      =========     ==========         =========     ==========
</TABLE>

      Gross margin  increased $36.0 million or 0.8% as a percentage of net sales
in 1997  compared to 1996.  The gross  margin rate was  favorably  impacted by a
slightly higher markup on sales and a reduction in markdowns. These factors were
partially  offset  by higher  "55  Gold(R)"  senior  citizen  markdowns  in 1997
compared to 1996.  Cost of  merchandise  sold for 1997  included a $0.6  million
charge for the  inventory  write-down  incurred in  connection  with the two (2)
stores to be closed in 1998.  Cost of merchandise  sold for 1996 included a $2.8
million charge for the inventory  write-down recorded in 1996 in connection with
thirteen (13) stores closed in 1997.

      Selling,  general and administrative expenses increased $17.5 million, but
decreased by 0.1% as a  percentage  of net sales in 1997  compared to 1996.  The
increase in expenses was primarily due to higher payroll expenses, a substantial
portion of which  was related to the  additional  week in the fiscal year and to
the recent federal minimum wage increases.  Insurance expense increased due to a
greater loss experience in fiscal 1997 compared to 1996.

      Leased department and other operating income declined $2.8 million or 0.2%
as a  percentage  of net sales in 1997  compared to 1996.  This  decline was due
primarily to the reduction in recoveries from merchandise related claims.

      Depreciation and amortization expense increased by $1.8 million or 0.1% as
a  percentage  of  net  sales  in  1997  compared  to  1996.   Depreciation  and
amortization expense included impairment losses of $1.2 million and $2.2 million
in 1997 and 1996, respectively,  pursuant to the adoption of SFAS No. 121 in the
fourth quarter of 1995. Depreciation and amortization also included depreciation
on capital  additions  subsequent  to December 26,  1992,  the date on which the
Company wrote off all of the Company's non-current assets in connection with the
adoption of fresh-start  reporting.  The amortization of the excess of  revalued
net assets over equity under fresh-start  reporting remained the same in 1997 as
in 1996. The Company is amortizing this amount over a ten-year period.

      Interest and debt expense,  net of interest income,  declined $7.4 million
or 0.4% of net sales in 1997  compared to 1996.  The reduction was primarily due
to a reduction in the  amortization of deferred  financing costs, a reduction in
short-term interest expense as well as the favorable impact of lower outstanding
long-term debt and capital lease  balances.  The decrease in short-term interest
expense reflected a decrease in short-term borrowings (weighted average of $66.5
million in  1997 from $86.1  million in  1996)  and a decrease in interest rates
under  the   Company's   revolving  credit  agreement.   The  Company's  average
outstanding long-term debt and capital lease balances decreased to $41.3 million
in 1997 from $56.3 million in 1996.

<PAGE>

      During 1997, the Company  realized  proceeds of $1.9 million from the sale
of a lease which  resulted in a deferred  gain of $1.7 million to be  recognized
over a 20-year period.  During 1996, the Company sold several leases for a total
of $0.7 million in proceeds and recognized gains totaling $0.4 million.

      In the  fourth  quarter  of 1997,  the  Company  recorded  charges of $1.6
million in  connection  with the closing of two (2) 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.  Both of the  stores  closed  in
February,  1998. In the fourth quarter of 1996, the Company  recorded charges of
$9.7 million in connection  with the closing of thirteen  (13) stores.  The $9.7
million is  classified in two line items:  $6.9 million as store closing  charge
and $2.8 million as part of cost of merchandise sold.

      The  Company  recorded  a 1997  income tax  provision of $19.1 million, of
which approximately $0.3 million  will  be  paid  in cash.  In 1996, the Company
recorded a non-cash income  tax  provision  of  $8.1 million.  See  Note  9  for
further discussion of the impact of fresh-start reporting  and  SFAS  No. 109 on
the Company's accounting for income taxes.

      As a result of the termination of the Prior Credit  Agreement in December,
1996 (see "Liquidity and Capital Resources" below), the Company recorded in 1996
a non-cash  extraordinary  charge of $1.4  million,  net of tax  benefit of $0.6
million.  The tax benefit was  recorded as a  reduction  of  additional  paid-in
capital.  The charge  was for the  write-off  of the  deferred  financing  costs
related to the Prior Credit Agreement.


Results of Operations for Fiscal 1996 Compared to Fiscal 1995
-------------------------------------------------------------

      The Company reported  improvements in 1996 in sales and net earnings.  The
Company achieved this improvement principally because of the favorable impact of
thirteen (13) new stores, the closing of seventeen (17)  underperforming  stores
at the beginning of the year and an  improvement  in the control of  merchandise
inventories.

      Net  sales  increased  2.7%  from  1995  due to an  increase  of  1.0%  in
comparable  store  sales  and  the opening of new stores cited above,  partially
offset by the closing of the stores cited above.  Net sales for Fiscal 1995 have
been  restated to reflect the effect of recording  "55 Gold(R)"  senior  citizen
discounts as markdowns, which conforms with the 1996 treatment.

<PAGE>

      The  following  table  sets  forth the  results  of  operations  for  1996
and 1995 in millions and as a percentage of net sales:
 
<TABLE>
<CAPTION>
                                                       Fifty-two weeks ended             Fifty-two weeks ended
                                                          January 25, 1997                January 27,  1996
                                                      ------------------------         ------------------------
                                                       $ mil.       % of Sales          $ mil.       % of Sales
                                                      ---------     ----------         ---------     ----------
<S>                                                   <C>           <C>                <C>           <C>
Net sales                                             $2,161.7        100.0%           $2,104.2        100.0%
Costs, expenses and (income):

  Cost of merchandise sold                             1,569.0         72.6             1,544.0         73.4
  Selling, general and administrative expenses           563.4         26.1               552.7         26.3
  Leased department and other operating income           (29.3)        (1.4)              (29.7)        (1.4)
  Depreciation and amortization expense                   12.5          0.6                12.4          0.6
  Amortization of the excess of revalued net assets
    over equity under fresh-start reporting               (6.2)        (0.3)               (6.2)        (0.3)
  Interest and debt expense, net                          19.0          0.9                24.1          1.1
  Gain on disposition of properties                       (0.4)          -                 (9.1)        (0.4)
  Store closing charge                                     6.9          0.3                17.6          0.8
                                                      ---------     ----------         ---------     ----------
  Income (loss) before income taxes   
    and extraordinary item                                26.8          1.2                (1.6)        (0.1)
Income tax provision                                       8.1          0.4                  -            -
                                                      ---------     ----------         ---------     ----------
Income (loss) before extraordinary item                   18.7          0.9                (1.6)        (0.1)
Extraordinary loss, net                                    1.4          0.1                  -            -
                                                      ---------     ----------         ---------     ----------
     Net income (loss)                                   $17.3          0.8%              $(1.6)        (0.1)%
                                                      =========     ==========         =========     ==========
</TABLE>
       

      Gross margin  increased $32.5 million or 0.8% as a percentage of net sales
in 1996  compared to 1995.  The gross  margin rate was  favorably  impacted by a
higher  markup  on sales  and a  reduction  in  clearance  markdowns  due to the
improvement in controlling merchandise inventories. These factors were partially
offset by higher "55 Gold(R)" senior citizen markdowns in 1996 compared to 1995.
Cost of  merchandise  sold for  1996  includes  a $2.8  million  charge  for the
inventory  write-down  incurred in connection with the 13 stores to be closed in
1997.  Approximately $3.3 million for the inventory  write-down recorded in 1995
in connection with the 17-store  closing was reclassified to cost of merchandise
sold in order to conform to the 1996 presentation.  The inventory write-down had
been classified as part of the store closing charge in 1995.

      Selling,  general and administrative expenses increased $10.7 million, but
decreased by 0.2% as a  percentage  of net sales in 1996  compared to 1995.  The
increase in expenses was due  primarily to higher  expenses  recorded  under the
Company's  various  incentive  compensation  plans  (Note 10) and an increase in
pre-opening expenses resulting from the opening of the 13 new stores.  Partially
offsetting  these  increases  was a  decrease  in the  Company's  store  payroll
expense.

      Leased  department and other  operating  income  declined $0.4 million and
remained  flat as a  percentage  of net  sales in 1996  compared  to 1995.  This
decline was due primarily to the decline in leased department sales.

      Depreciation  and  amortization  expense  increased  by $0.1  million  and
remained  flat  as a  percentage  of  net  sales,  in  1996  compared  to  1995.
Depreciation and amortization expense includes impairment losses of $2.2 million
and $3.4  million in 1996 and 1995,  respectively,  pursuant to the  adoption of
SFAS No. 121 in the fourth quarter of 1995.  Depreciation and amortization  also
includes  depreciation on capital additions subsequent to December 26, 1992, the
date on which the Company wrote off all of the Company's  non-current  assets in
connection with the  adoption of fresh-start reporting.  The amortization of the
excess of revalued net assets over equity under fresh-start  reporting  remained
the same in 1996 as in 1995.  The  Company  is  amortizing  this  amount  over a
ten-year period.

<PAGE>

      Interest and debt expense,  net of interest income,  declined $5.1 million
or 0.3% of net sales in 1996  compared to 1995.  The reduction was primarily due
to a  significant  reduction  in  short-term  interest  expense  as  well as the
favorable impact of lower outstanding long-term debt and capital lease balances.
The decrease in short-term interest  expense  reflected a decrease in short-term
borrowings  (weighted  average of $86.1  million in 1996 from $101.7  million in
1995)  and a  decrease in  interest rates under the Company's  revolving  credit
agreement.  The Company's average  outstanding  long-term debt and capital lease
balances  decreased to $56.3  million in 1996 from $78.8  million in 1995 due to
certain  prepayments of debt made in connection  with the sales of properties in
1995 and payments made in the normal course of business.

      During 1996,  the Company sold several  leases for a total of $0.7 million
in proceeds and recognized gains totaling $0.4 million. During 1995, the Company
sold or assigned  several  properties  (Note 15) for a total of $11.6 million in
proceeds and recognized gains totaling $9.1 million.

      In the  fourth  quarter  of 1996,  the  Company  recorded  charges of $9.7
million in connection with the closing of thirteen (13) stores. The $9.7 million
is classified in two line items:  $6.9 million as store closing  charge and $2.8
million as part of cost of  merchandise  sold.  Twelve of the  stores  closed in
February, 1997, and the thirteenth store closed in July, 1997.

      In the  fourth  quarter of 1995,  the  Company  recorded  charges of $20.9
million  in  connection  with the  closing  of  seventeen  (17)  stores  and the
elimination of 71 positions in the corporate headquarters.  The $20.9 million is
now classified in two line items: $17.6 million as store closing charge and $3.3
million as part of cost of goods sold. The 17 stores closed in March,  1996. The
$3.3 million charge,  representing  the inventory  write-down for the 17 closing
stores,  had been classified as part of the store closing charge in the original
presentation of the results for 1995.

      The Company  recorded a non-cash  income tax provision of $8.1 million for
1996 with an associated increase in additional  paid-in capital.  See Note 9 for
further discussion of the impact of fresh-start reporting and  SFAS  No. 109  on
the Company's accounting for income taxes.

      As a result of the termination of the Prior Credit  Agreement in December,
1996 (see "Liquidity and Capital Resources" below), the Company recorded in 1996
a non-cash  extraordinary  charge of $1.4  million,  net of tax  benefit of $0.6
million.  The tax benefit was  recorded as a  reduction  of  additional  paid-in
capital.  The charge  was for the  write-off  of the  deferred  financing  costs
related to the Prior Credit Agreement.


(b)   Liquidity and Capital Resources.


Credit Facilities - Fiscal 1997 and Fiscal 1996
-----------------------------------------------

      The Company's  principal sources of liquidity are certain available credit
facilities,  cash from  operations,  and cash on hand. On December 27, 1996, the
Company entered into an agreement with  BankAmerica  Business  Credit,  Inc., as
agent,   and  a  syndicate   consisting  of  seven  other  banks  and  financial
institutions, for a secured revolving credit facility of up to $320 million (the
"Credit Agreement").  Prior to this date, the Company had a $300 million secured
revolving credit facility (the "Prior Credit  Agreement") in place with the same
financial  institutions.  The Prior Credit Agreement terminated on the effective
date of the Credit Agreement.

      The  Credit  Agreement  is in effect  until June 30,  2000,  is secured by
substantially all of the assets of the Company, and requires the Company to meet
certain financial covenants.  Ames is in compliance with the financial covenants
through the quarter ended January 31, 1998.  Reference can be made to Note 5 for
a further description of the Credit Agreement.

      The Company's peak borrowing level in 1997 under the Credit  Agreement was
$146.6 million. Ames repaid all such borrowings in December, 1997, and fulfilled
its "clean-up" requirement (Note 5) in January, 1998.


Review of Cash Flows, Liquidity and Financial Condition
-------------------------------------------------------

      The Company's  unrestricted  cash position  increased $11.7 million during
1997. This increase was primarily due to $56.8 million in cash from  operations,
partially offset by $32.9 million of capital  expenditures and payments of $15.7
million on debt and capital lease obligations.  The Company's  unrestricted cash
position increased $31.9 million during 1996. This increase was primarily due to
$78.0  million in cash from  operations,  partially  offset by $19.8  million of
capital  expenditures  and payments of $17.4  million on debt and capital  lease
obligations.

<PAGE>

      Merchandise  inventories increased by $32.8 million in 1997 as a result of
planned  increases as well as early  receipts of  merchandise  for the Company's
40th  anniversary  promotion  held in  March,  1998.  During  1996,  inventories
declined $7.9 million due to planned reductions. Effective October 25, 1997, the
Company changed from the retail last-in,  first-out  (LIFO) method of accounting
for inventories to the first-in,  first-out (FIFO) method and restated all prior
periods for the change.  The change had no impact on the  historical  results of
operations of the Company.

      Accounts  payable  increased  $34.2  million  during  1997 due to improved
payment  terms and an increase  in  merchandise  receipts in January,  1998 over
January,  1997.  Accounts  payable  increased  $32.6 million  during 1996 due to
improved payment terms and an increase in merchandise receipts in January,  1997
over January,  1996.  During 1997 and 1996,  the Company paid its trade payables
within the terms negotiated with vendors.

      The major component of the "Current  portion of long-term debt" at January
25, 1997  related  primarily  to a cash  distribution  of $7.5  million  paid on
January 31, 1997 pursuant to the Company's plan of reorganization.

      There were no  outstanding  borrowings  under the Credit  Agreement  as of
January 31, 1998 nor as of January 25, 1997. The  "Unfavorable  lease liability"
was recorded as part of fresh-start reporting.

      No  dividends  have been paid since Ames  emergence  from  Chapter 11. The
Company is restricted  from  declaring  dividends  under the terms of the Credit
Agreement.


Capital Expenditures
--------------------

      Capital expenditures for 1997 were $32.9 million and included, among other
items, the opening of nine (9) new stores,  the remodel of eight (8) stores, and
the upgrade of certain management information systems including the installation
of new point-of-sale  and back-office  hardware and software in ten (10) stores.
Capital  expenditures  for 1996 were $19.8  million  and  included,  among other
items,  the opening of thirteen (13) new stores,  the remodel of four (4) stores
and the opening of an in-house photo studio.

      Capital  spending is expected  to be  approximately  $85 million for 1998,
primarily  for the  opening or  remodeling  of up to twenty  (20) stores and the
upgrade of certain management  information systems,  including the completion of
the new point-of-sale  and back-office system roll-out.  The Company  expects to
finance a substantial  portion of the new point-of-sale and back-office  systems
through capital leases. The balance of equipment  purchases,  new store fixtures
and equipment,  and the remodeling of stores is expected to be financed  through
internally-generated  funds.  The  Company  adjusts  its plans for  making  such
expenditures  depending on the amount of  internally-generated  funds available.
Land,  buildings and improvements  are financed  principally  through  long-term
leases.


Summary
-------

      The Company  believes the ability to meet its  financial  obligations  and
make planned capital  expenditures will depend on the Company's future operating
performance,  which will be subject to  financial,  economic  and other  factors
affecting the industry and operations of the Company,  including  factors beyond
its control. The Company believes its operating performance and the availability
of its  financing  facilities  will  provide  sufficient  liquidity to allow the
Company to meet its financial obligations.

      Ames  currently   anticipates   the  following   investing  and  financing
activities  for  1998:  capital   expenditures  as  described  above,   seasonal
borrowings and payments under the Credit  Agreement and planned payments of debt
and capital lease obligations.

      The Company  believes the actions set forth above and the  availability of
its  financing  facilities,  together  with  the  Company's  available  cash and
expected cash flows from 1998  operations  and beyond,  will enable Ames to fund
its expected needs for working  capital,  capital  expenditures and debt service
requirements.  Achievement of expected cash flows from operations and compliance
with the EBITDA covenant (Note 5) is dependent upon the Company's  attainment of
sales, gross profit, and expense levels that are reasonably  consistent with its
financial projections.

<PAGE>

      The Company expects from time to time to consider  possible capital market
transactions,  debt refinancing,  and other  transactions to further enhance the
Company's financial flexibility.

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

      The Company has initiated a comprehensive  program to prepare its computer
systems and  applications  for the year 2000.  This program also includes formal
communications  with  all of its  significant vendors and  suppliers  requesting
information regarding  their  efforts to remediate the  Year 2000 issue.  During
1997, the Company  spent approximately $1.7 million on its Year 2000 initiatives
and  expects  to  spend  $2.0 to $3.0  million  over  the  next  two  years  for
conversion  and  testing of  systems.  These  costs  include  software,  outside
consulting  and other expenses.  Although the  Company expects to be "Year 2000"
compliant  by  mid-1999  and does not  expect  to  be materially impacted by the
external environment, such future events cannot be known with certainty.

      When used in this Form 10-K, in any future filings by the Company with the
Securities and Exchange Commission, in the Company's press  releases and in oral
statements made with the approval of an authorized  executive officer, the words
or phrases  "will  likely  result,"  "are  expected  to," "will  continue,"  "is
anticipated,"  "estimate,"  "projected,"   "projections,"  "plans,"  or  similar
expressions  are intended to identify  "forward-looking  statements"  within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and  uncertainties  that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected.  The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made.


Item 8.  Financial Statements and Supplementary Data.

        See Index to Consolidated Financial Statements.

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

        None.


                                    PART III


Item 10. Officers and Directors of the Registrant.


      Information as to the directors of the  registrant  required by Item 10 is
incorporated  herein by  reference  from the  information  set  forth  under the
caption  "ELECTION OF DIRECTORS" of the Company's  definitive proxy statement to
be filed  pursuant  to  Regulation  14A  within  120 days after the close of its
fiscal year.

<PAGE>

      The following table indicates the names of all executive  officers of Ames
and the offices held by each.  Other than  employment  contracts with Mr. Ettore
and  Mr. Lemire  (and  Mr. de Aguiar  as of April 14, 1998),  there are no other
arrangements or understandings  between any officer  below and any other  person
pursuant to which he was selected as an officer.

  Joseph R. Ettore .............President, Chief Executive Officer, and Director
  
  Denis T. Lemire ..............Executive Vice President, Merchandising

  Eugene E. Bankers.............Senior Vice President, Marketing

  Richard L. Carter ............Senior Vice President, Human Resources

  Gregory D. Lambert ...........Senior Vice President, Finance

  Paul C. Lanham ...............Senior Vice President, Management
                                   Information Systems
  David H. Lissy ...............Senior Vice President, General Counsel
                                   and Corporate Secretary
  Alfred B. Petrillo, Jr. ......Senior Vice President, Store Planning

  Grant C. Sanborn .............Senior Vice President, Store Operations

  James A. Varhol ..............Senior Vice President, Asset Protection


Joseph R. Ettore, age 58, joined Ames as President,  Chief Executive Officer and
                  Director  in  June,  1994.  Prior  to  joining  Ames,  he  was
                  President,   Chief  Executive Officer and Director of Jamesway
                  Corporation  ("Jamesway")  from  July,  1993  to  June,  1994;
                  President, Chief Operating Officer and Director of Jamesway in
                  June, 1993; Chairman of the Board and Chief Executive  Officer
                  of Stuarts Department Stores, Inc. ("Stuarts")  from  October,
                  1992 to June, 1993; and President, Chief Operating Officer and
                  Director  of  Stuarts  from October, 1989 to October, 1992. He
                  remained a Director of Stuarts until May, 1994. Jamesway filed
                  for  protection  under   Chapter  11 of  the  Bankruptcy  Code
                  ("Chapter 11") in July, 1993; emerged from the Chapter 11 case
                  in January, 1995; and re-filed for protection under Chapter 11
                  in October, 1995. Stuarts filed under Chapter 11  in December,
                  1990;  emerged from the Chapter 11 case in October,  1992; and
                  re-filed for protection under Chapter 11 in May, 1995.

Denis T. Lemire,  age 50, joined Ames as Executive Vice President, Merchandising
                  in August, 1994.  Prior to joining Ames,  he was President and
                  Chief Operating Officer of  Stuarts  from  November,  1993  to
                  August,  1994  and  Senior Vice President,  Merchandising  for
                  Stuarts from April, 1990 to November, 1993. Stuarts  filed for
                  protection under Chapter 11 in December,  1990;  emerged  from
                  the  Chapter  11  case  in October,  1992;  and  re-filed  for
                  protection under Chapter 11 in May, 1995.

Rolando de Aguiar,  age 49,  will join Ames as  Executive Vice President,  Chief
                  Financial Officer on April 14, 1998. Prior to joining Ames, he
                  was President of Aguiar Associates from March, 1997 to  March,
                  1998.   He  served  as  Executive  Vice  President  and  Chief
                  Administrative  Officer  for  Gruma  from  October,   1994  to
                  January, 1997,  and from September,  1991 to August,  1994  he
                  held senior financial positions at Sears,  Roebuck & Co.,  the
                  most  recent  of  which  was  Vice  President  and Controller-
                  Merchandise Group.

Eugene E. Bankers, age 58,  joined Ames as  Senior Vice President,  Marketing in
                  December, 1993. Prior to joining Ames, he was Vice  President,
                  Communications and Investor Relations  at Shopko Stores,  Inc.
                  from  1991 to 1993,  and Vice President of Advertising,  Sales
                  Promotions,  Special  Events and Public Relations from 1982 to
                  1991.

Richard L. Carter, age 49, joined Ames as Senior Vice President, Human Resources
                  in February, 1993.  Prior to joining Ames,  he was Senior Vice
                  President,  Human Resources at the G. Fox division  of The May
                  Department Stores Company from 1989 to 1993.

Gregory D. Lambert,  age 46,  joined  Ames as Senior Vice President,  Finance in
                  September,  1996.  Prior to joining Ames,  he was  employed at
                  Homart  Development  as  Vice President-Strategy  from 1994 to
                  1996 and was  employed  at The May  Department  Stores Company
                  as Director of Strategic Planning from 1989 to 1994.

Paul C. Lanham, age 40, became Senior  Vice  President,  Management  Information
                  Systems, in  March,  1996.  He joined Ames in October, 1994 as
                  Vice  President,  Allocation  and  Planning.  Prior to joining
                  Ames,  he  was  employed  at  Brookstone  Stores  from 1989 in
                  various capacities related to inventory systems and  inventory
                  planning  and   allocation,   most  recently  as  Director  of
                  Inventory Management.

David H. Lissy,  age 54,  became  Senior  Vice  President,  General  Counsel and
                  Corporate  Secretary in  December, 1992.  He began work on the
                  Ames Chapter 11  cases in June,  1990,  and in July, 1990  was
                  named  Vice  President, Legal Services. He was appointed  Vice
                  President, General Counsel and Corporate Secretary in October,
                  1991.  He  has  been  owner  of  Samuel Lehrer & Co., Inc.,  a
                  wholesaler of fine quality fabrics, since 1988.

<PAGE>

Alfred B. Petrillo, Jr.,  age 55,  joined Ames as Senior  Vice President,  Store
                  Planning  in  October,  1995.  Prior  to  joining Ames, he was
                  employed  at  Jamesway  as  Vice  President,  Store  Planning,
                  Construction, Maintenance and Energy from 1976 to 1995 when he
                  was appointed Senior Vice President, Store Planning, Construc-
                  tion, Visual Merchandising,  Plan-o-gramming,  Maintenance and
                  Energy.

Grant C. Sanborn,  age 46,  became  Senior Vice President,  Store Operations  in
                  January,  1995.  Since joining Ames in 1971, he has served  in
                  a  number  of store operations positions, including  Assistant
                  Regional  Manager  from  July,  1989 to May,  1991;   Regional
                  Director  from  May,  1991  to  July,  1991;  Director,  Store
                  Operations  from  July,  1991  to  October,  1993;   and  Vice
                  President,  Store  Operations  from October,  1993 to January,
                  1995.

James A. Varhol, age 42, joined Ames as Senior Vice President,  Asset Protection
                  in August,  1995.  Prior to joining Ames,  he was employed  at
                  Jamesway where  he  held  a  number  of   increasingly  senior
                  positions from  1977 to 1995;  the most recent  of which being
                  Vice President,  Loss  Prevention from  June,  1987 to August,
                  1995.


Item 11. Executive Compensation.

      The information  required by Item 11 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 "Performance
Graph" of the  Company's  definitive  proxy  statement  to be filed  pursuant to
Regulation 14A within 120 days after the close of its fiscal year.


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

      The information  required by Item 12 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
within 120 days after the close of its fiscal year.


Item 13. Certain Relationships and Related Transactions.

      The information  required by Item 13 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 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.

<PAGE>

           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)  Reports on Form 8-K

           Reports  on Form 8-K were  filed  with the  Securities  and  Exchange
           Commission during the fourth quarter as follows:



    Date of Report      Date of Filing    Item #            Description
   ----------------    ----------------   ------   -----------------------------
   November 6, 1997    November 6, 1997     5      Disclosure of fiscal October
                                                      1997 results.
   December 4, 1997    December 4, 1997     5      Disclosure of fiscal November
                                                      1997 results.
   January 8, 1998     January 8, 1998      5      Disclosure of fiscal December
                                                      1997 results.

<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 8, 1998             /s/  Joseph R. Ettore
                                 ------------------------
                                 Joseph R. Ettore,
                                 President, Chief Executive Officer and Director



Dated: April 8, 1998             /s/  Gregory D. Lambert
                                 ------------------------ 
                                 Gregory D. Lambert,
                                 Senior Vice President, Finance



Dated: April 8, 1998             /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 8, 1998             /s/  Paul M. Buxbaum
                                 -----------------------
                                 Paul M. Buxbaum, Director and Chairman


Dated: April 8, 1998             /s/  Francis X. Basile
                                 -----------------------
                                 Francis X. Basile, Director


Dated: April 8, 1998             /s/  Alan Cohen
                                 -----------------------                     
                                 Alan Cohen, Director


Dated: April 8, 1998             /s/  Richard M. Felner
                                 -----------------------
                                 Richard M. Felner, Director


Dated: April 8, 1998             /s/  Sidney S. Pearlman
                                 -----------------------
                                 Sidney S. Pearlman, Director


Dated: April 8, 1998             /s/  Laurie M. Shahon
                                 -----------------------
                                 Laurie M. Shahon, Director

<PAGE>









                          AMES DEPARTMENT STORES, INC.
                                AND SUBSIDIARIES


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




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


                                    EXHIBITS

                  For the Fiscal Years Ended January 31, 1998,
                      January 25, 1997 and January 27, 1996


                 (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 31, 1998, January 25, 1997 and January 27, 1996




Financial Statements:
---------------------

      Report of Independent Public Accountants.

      Consolidated  Statements of Operations  for the fiscal years ended January
           31, 1998, January 25, 1997 and January 27, 1996.

      Consolidated Balance Sheets as of January 31, 1998 and January 25, 1997.

      Consolidated Statements of Changes in Stockholders'  Equity for the fiscal
           years ended January 31, 1998, January 25, 1997 and January 27, 1996.

      Consolidated  Statements  of Cash Flows for the fiscal years ended January
           31, 1998, January 25, 1997 and January 27, 1996.

      Notes to Consolidated Financial Statements.


Schedule:
---------

      II.  Valuation and Qualifying  Accounts for the fiscal years ended January
           31, 1998, January 25, 1997 and January 27, 1996.



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
31, 1998 and January  25,  1997,  and the  related  consolidated  statements  of
operations,  changes in stockholders'  equity and cash flows for the fifty-three
weeks ended January 31, 1998, and the fifty-two weeks ended January 25, 1997 and
January 27,  1996.  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  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, 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 31, 1998 and January 25, 1997, and the results of
their  operations and their cash flows for the  fifty-three  weeks ended January
31, 1998, and the fifty-two weeks ended January 25, 1997 and January 27, 1996 in
conformity with generally accepted accounting principles.

      As discussed in Note 19 to the consolidated financial  statements,  in the
quarter ended January 27, 1996,  the Company  changed their method of accounting
for long-lived assets to conform with SFAS No. 121, and in connection therewith,
recorded an impairment loss of $3.4 million for long-lived assets to be held and
used.

      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 6, 1998

<PAGE>

                                 AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
                                                            53 Weeks             52 Weeks             52 Weeks
                                                             Ended                Ended                Ended
                                                           January 31,          January 25,          January 27,
                                                              1998                 1997                 1996
                                                        ----------------     ----------------     ----------------
<S>                                                     <C>                  <C>                  <C> 
TOTAL SALES                                                $2,325,295           $2,255,749           $2,199,409
Less: Leased department sales                                  92,177               94,069               95,178
                                                        ----------------     ----------------     ----------------
NET SALES                                                   2,233,118            2,161,680            2,104,231

COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold                                    1,604,364            1,568,974            1,543,989
Selling, general and administrative expenses                  580,918              563,344              552,729
Leased department and other operating income                  (26,494)             (29,284)             (29,677)
Depreciation and amortization expense                          14,250               12,489               12,360
Amortization of the excess of revalued net assets
     over equity under fresh-start reporting                   (6,153)              (6,153)              (6,153)
Interest and debt expense, net                                 11,600               19,043               24,116
Gain on disposition of properties                                 -                   (395)              (9,136)
Store closing charge                                            1,000                6,858               17,621
                                                        ----------------     ----------------     ----------------
INCOME (LOSS) BEFORE INCOME TAXES
     AND EXTRAORDINARY ITEM                                    53,633               26,804               (1,618)
Income tax  provision                                         (19,087)              (8,149)                 -
                                                        ----------------     ----------------     ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                        34,546               18,655               (1,618)
Extraordinary item - loss on early extinguishment
     of debt (net of tax benefit of $571)                         -                 (1,354)                   -
                                                        ----------------     ----------------     ----------------
NET INCOME (LOSS)                                             $34,546              $17,301              ($1,618)
                                                        ================     ================     ================

BASIC NET INCOME (LOSS) PER COMMON SHARE

     Income (loss) before extraordinary item                    $1.59                $0.91               ($0.08)

     Extraordinary item                                           -                  (0.06)                -
                                                        ----------------     ----------------     ----------------
     Net income (loss)                                          $1.59                $0.85               ($0.08)
                                                        ================     ================     ================
     Weighted average common shares                            21,723               20,467               20,127
                                                        ================     ================     ================
      
      
DILUTED NET INCOME (LOSS) PER COMMON SHARE

     Income (loss) before extraordinary item                    $1.46                $0.85               ($0.08)

     Extraordinary item                                           -                   (0.06)                -
                                                        ----------------     ----------------     ----------------
     Net income (loss)                                          $1.46                $0.79               ($0.08)
                                                        ================     ================     ================
     Weighted average common and common equivalent shares      23,649               21,812               20,127
                                                        ================     ================     ================


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

                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
                                                                                                  January 31,          January 25,
                                                                                                     1998                 1997
                                                                                               ----------------     ----------------
<S>                                                                                            <C>                  <C>            
                                     ASSETS
Current Assets:
       Cash and short-term investments                                                              $57,828              $46,119
       Receivables:
          Trade                                                                                       8,977                7,521
          Other                                                                                       9,945               11,550
                                                                                               ----------------     ----------------
              Total receivables                                                                      18,922               19,071
       Merchandise inventories                                                                      423,836              391,076
       Prepaid expenses and other current assets                                                     12,060               12,169
                                                                                               ----------------     ----------------
              Total current assets                                                                  512,646              468,435
Fixed Assets:
       Land and buildings                                                                             3,694                1,293
       Property under capital leases                                                                  7,115                4,185
       Fixtures and equipment                                                                        83,335               63,474
       Leasehold improvements                                                                        34,646               27,162
                                                                                               ----------------     ----------------
                                                                                                    128,790               96,114
       Less - Accumulated depreciation and amortization                                             (45,457)             (32,529)
                                                                                               ----------------     ----------------
              Net fixed assets                                                                       83,333               63,585

Other assets and deferred charges                                                                    14,063                4,773
                                                                                               ----------------     ----------------
                                                                                                   $610,042             $536,793
                                                                                               ================     ================


                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
       Accounts payable:
          Trade                                                                                    $180,971             $145,737
          Other                                                                                      42,185               43,180
                                                                                               ----------------     ----------------
              Total accounts payable                                                                223,156              188,917
       Current portion of long-term debt                                                              2,000               12,884
       Current portion of capital lease obligations                                                   2,177                2,694
       Self-insurance reserves                                                                       31,657               34,177
       Accrued compensation                                                                          31,789               29,366
       Accrued expenses                                                                              41,648               36,990
       Store closing reserve                                                                         12,050               24,438
                                                                                               ----------------     ----------------
          Total current liabilities                                                                 344,477              329,466

Long-term debt                                                                                        9,340               11,134
Capital lease obligations                                                                            26,393               27,086
Other long-term liabilities                                                                          10,943                7,565
Unfavorable lease liability                                                                          15,333               17,029
Excess of revalued net assets over equity under fresh-start reporting                                30,174               36,327

Commitments and contingencies

Stockholders' Equity:
       Common Stock (40,000,000 shares authorized; 22,506,108 and 20,474,469
          shares outstanding at January 31, 1998 and January 25, 1997, 
          respectively; par value per share $.01)                                                       225                  205
       Additional paid-in capital                                                                   118,971               88,341
       Retained earnings                                                                             54,186               19,640
                                                                                               ----------------     ----------------
          Total stockholders' equity                                                                173,382              108,186
                                                                                               ----------------     ----------------
                                                                                                   $610,042             $536,793
                                                                                               ================     ================
<FN>

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

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




<TABLE>
<CAPTION>
                                                                                 
                                                       Common Stock              Additional                     
                                                   ---------------------          Paid-In             Retained            Total
                                                    Shares      Amount            Capital             Earnings            Equity
                                                   --------  -----------       --------------       ------------       ------------
              <S>                                  <C>       <C>               <C>                  <C>                <C>        

              Balance, January 28, 1995             20,127         $201              $80,759             $3,957            $84,917 

              Issuance of Common Stock under
                1995 Long Term Incentive Plan          345            4                                                          4
              Net Loss                                                                                   (1,618)            (1,618)

                                                   --------  -----------       --------------       ------------       ------------
              Balance, January 27, 1996             20,472         $205              $80,759             $2,339            $83,303 

              Exercise of Stock Options                  2            -                    4                                     4
              Utilization of Tax Attributes                                            7,578                                 7,578
              Net Income                                                                                 17,301             17,301

                                                   --------  -----------       --------------       ------------       ------------
              Balance, January 25, 1997             20,474         $205              $88,341            $19,640           $108,186 

              Exercise of Stock Options              2,032           20                4,460                                 4,480
              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 
                                                   ========  ===========       ==============       ============       ============


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

</FN>
</TABLE>
<PAGE>

                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)
<TABLE>
<CAPTION>

                                                                                   53 Weeks          52 Weeks          52 Weeks
                                                                                    Ended             Ended              Ended
                                                                                  January 31,       January 25,       January 27,
                                                                                     1998              1997               1996
                                                                                --------------    --------------    ---------------
<S>                                                                             <C>               <C>               <C>       
Cash flows from operating activities:
         Net income (loss)                                                          $34,546           $17,301           ($1,618)
         Expenses not requiring the outlay of cash:
            Extraordinary loss on early extinguishment of debt                          -               1,354               -
            Income tax provision                                                     18,764             8,149               -
            Depreciation and amortization of fixed and other assets                  14,475            12,989            12,713
            Amortization of the excess of revalued net assets over equity            (6,153)           (6,153)           (6,153)
            Amortization of unfavorable lease liability                              (1,438)           (1,635)           (1,884)
            Amortization of debt discounts and deferred financing costs                 861             3,037             4,755
            Gain on disposition of properties                                           -                (395)           (9,136)
            Other, net                                                                1,834             1,141              (315)
                                                                                --------------    ---------------    ---------------
Cash provided by (used for) operations before changes
         in working capital and store closing activities                             62,889            35,788            (1,638)

Changes in working capital:
         Decrease (increase) in  receivables                                            149            (4,593)            2,329
         (Increase) decrease in merchandise inventories                             (32,760)            7,857            31,219
         Decrease (increase) in prepaid expenses and other current assets               109               624            (3,794)
         Increase (decrease) in accounts payable                                     34,239            32,599            (8,213)
         Increase (decrease) in accrued expenses and other current liabilities        5,033             6,516           (16,790)
Changes due to store closing activities:
         Payments of store closing costs                                            (13,907)           (7,621)           (1,498)
         Store closing charge                                                         1,000             6,858            17,621
                                                                                --------------    ---------------    ---------------
Net cash provided by operating activities                                            56,752            78,028            19,236
                                                                                --------------    ---------------    ---------------

Cash flows from investing activities:
         Proceeds from the disposition of properties                                  1,900               690            11,634
         Purchases of fixed assets                                                  (32,875)          (19,805)          (27,152)
         Purchases of leases                                                         (2,801)           (3,211)              -
         Decrease in restricted cash                                                    -                 -               2,047
                                                                                --------------    ---------------    ---------------
Net cash used for investing activities                                              (33,776)          (22,326)          (13,471)
                                                                                --------------    ---------------    ---------------

Cash flows from financing activities:
         (Payments) borrowings under the revolving credit facilities, net               -              (4,284)            4,284
         Proceeds from option exercises                                               4,480                 4               -
         Payments on debt and capital lease obligations                             (15,747)          (17,388)          (23,766)
         Deferred financing costs                                                       -              (2,100)             (500)
                                                                                --------------    ---------------    ---------------
Net cash used for financing activities                                              (11,267)          (23,768)          (19,982)
                                                                                --------------    ---------------    ---------------

Increase (decrease) in unrestricted cash and short-term investments                  11,709            31,934           (14,217)
Unrestricted cash and short-term investments, beginning of period                    46,119            14,185            28,402
                                                                                --------------    ---------------    ---------------
Unrestricted cash and short-term investments, end of period                         $57,828           $46,119           $14,185
                                                                                ==============    ===============    ===============
                                                                                            
                                                                                            
                                                                                                                           

<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 1,
1998,  Ames  operated 296 discount  department  stores under the Ames name in 14
states in the Northeast,  Mid-Atlantic  and Mid-West regions and the District of
Columbia.  The Company's stores are located in rural communities,  some of which
are not served by other large retail stores,  high-traffic suburban sites, small
cities and several major metropolitan areas. The stores largely serve middle and
lower-middle income customers.

      The Company filed petitions  under Chapter 11 of the U.S.  Bankruptcy Code
("Chapter 11") on April 25, 1990.  From that time until December 30, 1992,  Ames
operated its business as a  debtor-in-possession  subject to the jurisdiction of
the United States  Bankruptcy  Court for the Southern  District of New York (the
"Bankruptcy  Court").  On December 30, 1992, Ames emerged from bankruptcy  (Note
2).
 

(b)   Basis of presentation:

      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.

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


(c)   Fiscal year:

      The Company's fiscal year ends on the last Saturday in January. The fiscal
year ended January 31, 1998  ("Fiscal  1997" or "1997")  included 53 weeks.  The
fiscal years ended  January 25, 1997  ("Fiscal  1996" or "1996") and January 27,
1996 ("Fiscal 1995" or "1995") each included 52 weeks.


(d)   Principles of consolidation:

      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.


(e)   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.


(f)   Inventory valuation:

      All  periods  are  stated at the lower of cost or market and  include  the
capitalization  of  transportation  and  distribution  center  costs.  Effective
October 25,  1997,  the Company  changed from the  last-in,  first-out  ("LIFO")
method of accounting of inventories to the first-in,  first-out  ("FIFO") method
and restated all prior  periods for the change.  The change had no impact on the
historical results of operations of the Company.


(g)   Fixed assets:

      Land and buildings, fixtures and equipment, and leasehold improvements are
recorded at cost. All fixed assets at December 26, 1992 were  written-off  under
fresh-start   reporting  (Note  2).  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.

<PAGE>

(h)   Depreciation and amortization:

      Land and  buildings,  fixtures and  equipment are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives. Property
under capital leases and leasehold improvements are depreciated over the shorter
of their estimated useful lives or their related lease terms.

      The unfavorable lease liability (recorded under fresh-start  reporting) is
being amortized on a straight-line basis over the applicable lease terms.

      The excess of revalued net assets over equity under fresh-start  reporting
is being amortized over a 10 year period (Note 2).


(i)   Deferred charges:

      Expenses  related to new store openings are expensed in the fiscal year in
which the store opens.

      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.


(j)   Income taxes:

      Ames  files  a  consolidated  Federal  income  tax  return.  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  enacted  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.


(k)   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 each individual  claim's  circumstances and estimates its liability for
claims  incurred  but not yet reported  based on  historical  experience.  As of
January  31,  1998 and January 25,  1997,  Ames had  established  self-insurance
reserves of $31.7 million and $34.2  million,  respectively.  Major  portions of
these  reserves  may not be paid  within a year and are  subject  to  changes in
estimates as claims are settled or continue to remain outstanding.


(l)   Leased department sales and 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.


(m)   Earnings per common share:

      In  February,   1997  the  Financial  Accounting  Standards  Board  issued
Statement of 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.

<PAGE>

      Net  income  (loss) per common  share for Fiscal  1997,  1996 and 1995 was
determined by using the weighted average number of common and common  equivalent
shares outstanding during each fiscal year. Common equivalent shares represented
the assumed exercise of the outstanding Series B and Series C Warrants and stock
options.


(n)   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  Option  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.


2.    Reorganization Case and Fresh-Start Reporting:
      ----------------------------------------------

Reorganization Case

      As  discussed in Note 1, Ames and its  subsidiaries  filed  petitions  for
reorganization  under  Chapter 11 on April 25,  1990 (the  "Filing  Date").  The
Company's  disclosure statement relating to its Third Amended and Restated Joint
Plan of Reorganization  dated October 23, 1992 (the "Amended Plan") was approved
by the  Bankruptcy  Court on October 29, 1992. The Amended Plan was confirmed by
the Bankruptcy  Court on December 18, 1992 and  consummated on December 30, 1992
(the "Consummation Date").

Fresh-Start Reporting

      Pursuant to the guidance  provided by the American  Institute of Certified
Public  Accountants  in  Statement  of Position  90-7,  "Financial  Reporting by
Entities in Reorganization  Under the Bankruptcy Code" ("SOP 90-7"), the Company
adopted  fresh-start  reporting and reflected the consummation  distributions in
the consolidated balance sheet as of December 26, 1992 (the fiscal month-end for
December,  1992). Under fresh-start  reporting,  the reorganization value of the
Company was  allocated to the emerging  Company's net assets on the basis of the
purchase method of accounting.

      The  Company's  reorganization  value was less than the fair  value of the
current assets at the Consummation  Date. In accordance with the purchase method
of accounting,  the excess of book value over fair value was allocated to reduce
proportionately  the values assigned to non-current  assets in determining their
fair values.  Because this  allocation  reduced the  non-current  assets to zero
value,  the remainder was classified as a deferred  credit  ("Excess of revalued
net assets over equity under fresh-start  reporting" or "negative goodwill") and
is being  amortized  systematically  to income over the period  estimated  to be
benefited  (ten years).  Depreciation  and  amortization  of fixed assets is for
capital additions after December 26, 1992.


3.    Cash and Short-Term Investments:
      --------------------------------

      As of January 31, 1998 and January 25, 1997 short-term investments totaled
$37.9 million and $31.1 million,  respectively.  These investments  consisted of
time  deposits,   certificates  of  deposit,  bankers  acceptances,   repurchase
agreements and high grade commercial paper.


4.    Inventories:
      ------------

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

<PAGE>

5.    Debt:
      -----

The Credit Agreement

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

      Prior to this date,  the  Company  had a $300  million  secured  revolving
credit facility (the "Prior Credit  Agreement") in place with the same financial
institutions. The Prior Credit Agreement terminated on the effective date of the
Credit Agreement.

      The  Credit  Agreement  is in effect  until June 30,  2000,  is secured by
substantially all of the assets of the Company, and requires the Company to meet
certain financial covenants. The interest rate per annum on the Credit Agreement
is equal to the Reference Rate (as defined in the Credit  Agreement)  plus 0.75%
(subject to downward  adjustments).  Alternatively,  the interest rate per annum
may be equal to the Eurodollar  Rate (as defined in the Credit  Agreement)  plus
2.25% (subject to downward adjustments).

      Fees required under the Credit Agreement include: (1) quarterly commitment
fees on the unused portion of the facility,  (2) an initial closing fee, (3) two
quarterly  facility fee payments due under the Prior Credit Agreement and (4) an
annual syndication fee to the agents.

      For Fiscal 1997,  the weighted  average  interest  rate on the  Company's
revolving credit  facilities was 8.2%. The peak borrowing level under the Credit
Agreement  during Fiscal 1997 was $146.6  million.  As of January 31, 1998, $2.7
and $21.6  million  was  outstanding  in trade and  standby  letters  of credit,
respectively.

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

      The financial covenants under the Credit Agreement are limited to: capital
expenditure and lease obligation limits;  minimum EBITDA (as defined below); and
minimum  EBITDA to cash interest  expense.  The  definition of EBITDA is: income
before (a) interest expense, (b) income tax expense or benefit, (c) depreciation
and amortization  expense,  LIFO expense,  stock  appreciation  rights accruals,
certain  restructuring  charges and other noncash charges, (d) gain or losses on
sale of properties.

      In addition,  each year outstanding  borrowings under the Credit Agreement
may not  exceed  any  balance  due under the term  loan  portion  plus up to $20
million in revolver loans for a consecutive  30-day period between November 15th
and  February  15th of the  following  year (the  "clean-up"  requirement).  The
Company is in compliance with the financial  covenants through the quarter ended
January 31, 1998.


Other Debt

      The Company's outstanding debt as of January 31, 1998 and January 25, 1997
is listed and described below. Pursuant to the Amended Plan, the Company and its
lenders agreed to a restructuring  of the Company's  obligations at December 26,
1992.

<PAGE>

      New and  reinstated  debt  obligations  that carried face  interest  rates
significantly  lower than market rates (for financing of a similar nature) as of
the  Consummation  Date were  discounted to their present values using estimated
market rates.  The discount amounts are being amortized to interest expense over
the terms of the related  obligations using the effective  interest method.  The
market  interest rates used to determine the present values at December 26, 1992
are shown in the table below.

      As of January 31, 1998,  payments due on long-term  debt for the next five
years and thereafter were as follows:
                                                      
                                                      (000's Omitted)
      Fiscal Year Ending January                           Amount
      --------------------------                      --------------- 
                1999                                        2,000
                2000                                        9,500
                2001                                         -0-
                2002                                         -0-
                2003                                         -0-
                Thereafter                                   -0-


      Outstanding debt at January 31, 1998 and January 25, 1997 is listed below.
Further explanations of certain of the obligations follow the table.
<TABLE>
<CAPTION>
                                                                                          (000's omitted)
                                                                                      ------------------------
Secured Debt -                                                                        1/31/98          1/25/97
--------------                                                                        -------          -------
<S>                                                                                   <C>              <C> 
Senior Debt:
      Guaranteed First Mortgage Notes, interest rate of 9.5%, due through 3/99. 
         Discount rate 11%..........................................................  $11,500          $12,500

      Real Estate Mortgage, interest rate 6%, due 12/97.  Discount rate 12%.........      -              2,900

      Equipment Notes, interest rates at 9% to 10%, due through 12/97.
         Discount rate 11% to 12%...................................................      -                548
                                                                                      -------          -------

              Total Face Value of Secured Debt......................................  $11,500          $15,948
                                                                                      -------          -------

Unsecured Debt -
----------------
Senior Debt:
      Allowed Priority Tax Obligations, 5% interest rate.  Discount rate 9%.........  $   -            $   150


Subordinated Debt:
      Deferred Cash Distributions due through 1/31/97,
      5% interest rate beginning 2/94.  Discount rate 12%...........................      -              7,500
      TJX  Expense   Note,   10%  interest   rate,   due  1/98  (Note   11).........      -                786
                                                                                      -------          -------

         Total Face Value of Unsecured Debt.........................................  $   -            $ 8,436
                                                                                      -------          -------

Total Face Value of Debt............................................................   11,500           24,384
          Less:   Current Portion...................................................    2,000           12,884
                      Debt Discounts................................................      160              366
                                                                                      -------          ------- 
Amount Due After One Year...........................................................  $ 9,340          $11,134
                                                                                      =======          =======
</TABLE>
<PAGE>

Deferred Cash Distributions

      The  Amended  Plan  provided  that  approximately  $46.5  million  of cash
distributions  in respect to several  classes of claims would be paid subsequent
to the  Consummation  Date. On January 31, 1997,  January 31, 1996,  January 31,
1995, January 31, 1994 and January 31, 1993, $7.5,  $8.0,  $8.0,  $8.0 and $15.0
million,  respectively,  of  these  deferred  cash  distributions  were  paid as
scheduled.


6.    Lease Commitments and Unfavorable Lease Liability:
      --------------------------------------------------

      Ames is  committed  under  long-term  leases for  various  retail  stores,
warehouses  and  equipment  expiring at various  dates through 2018 with varying
renewal  options and  escalating  rent  clauses.  Some leases are  classified as
capital leases under Statement of Financial Accounting Standards No. 13. Capital
lease obligations were revalued under fresh-start reporting. 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
percentages of sales in excess of specified amounts.

      Future  minimum  lease  payments for leases as of January 31, 1998 were as
follows:
<TABLE>
<CAPTION>
                                                                                                 (000's Omitted)
                                                                                                  Lease Payments
                                                                                              -----------------------
        Fiscal Year                                                                            Capital      Operating
      Ending January                                                                            Leases        Leases
      --------------                                                                          ---------     --------- 
      <S>                                                                                     <C>           <C>       
           1999...........................................................................    $  5,291       $49,787
           2000...........................................................................       4,791        46,845
           2001...........................................................................       4,567        41,575
           2002...........................................................................       4,433        37,746
           2003...........................................................................       4,396        33,926
         Thereafter.......................................................................      31,265       184,866
                                                                                              ---------     ---------
      Total minimum lease payments........................................................      54,743      $394,745
                                                                                              =========     =========
      Less:  amount representing estimated executory costs................................         513
                                                                                              ---------
      Net minimum lease payments..........................................................      54,230
      Less:  amount representing interest.................................................      25,660
                                                                                              ---------
      Present value of net minimum lease payments.........................................      28,570
      Less:  currently payable............................................................       2,177
                                                                                              ---------
      Long-term capital lease obligations.................................................     $26,393
                                                                                              =========
</TABLE>

      Total  payments  have not been reduced by minimum  sublease  rentals to be
received in the aggregate under  noncancellable  subleases of capital leases and
operating leases of approximately  $0.1 and $10.9 million,  respectively,  as of
January 31, 1998.  Amortization of capital lease assets was approximately  $0.4,
$0.4  and  $0.2  million   for  Fiscal  1997,  Fiscal  1996   and  Fiscal  1995,
respectively. Rent expense (income), excluding the benefit from the amortization
of the unfavorable lease liability, was as follows:

                                                       (000's Omitted)
                                             -----------------------------------
                                              Fiscal       Fiscal       Fiscal
                                               1997         1996         1995
                                             ---------    ---------    ---------
        Minimum rent on operating leases      $48,577      $43,856      $42,751
        Contingent rental expense               6,651        5,768        5,873
        Sublease rental income                 (1,730)      (1,988)      (2,491)

<PAGE>

      The  unfavorable  lease liability in the  Consolidated  Balance Sheets was
recorded as part of fresh-start reporting and represents the estimated liability
related to lease  commitments that exceeded market rents for similar  locations.
This  liability  is  being  amortized  as a  reduction  of rent  expense  in the
Consolidated Statements of Operations over the remaining lease terms.


7.    Stockholders' Equity:
      ---------------------

Common Stock

      As  provided  under  the  Restated   Certificate  of  Incorporation,   the
authorized  capital stock of the reorganized Ames consisted of 40,000,000 shares
of common stock (22,506,108 and 20,474,469 shares  outstanding as of January 31,
1998 and January 25, 1997, respectively),  par value $.01 per share (the "Common
Stock").

      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.


Warrants

      An  aggregate of 200,000  Series B Warrants  were issued under the Amended
Plan. Each such warrant  entitles the holder to purchase one share of the Common
Stock at any time from June 30, 1993 through  December  30,  2000.  The exercise
price is $5.92 per share. No Series B Warrants have yet been exercised.

      An aggregate of 2,120,000  Series C Warrants were issued under the Amended
Plan. Each such warrant  entitles the holder to purchase one share of the Common
Stock at any time from June 30, 1993  through  January 31,  1999.  The  exercise
price is $1.11 per share. As of January 31, 1998, 732,502 Series C Warrants were
outstanding and during Fiscal 1997,  1,260,213 Series C Warrants were exercised.
There were no exercises of the Series C Warrants during Fiscal 1996.

      The exercise  prices of the above 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 the Common Stock of the Company.

      A  holder  of any of the  warrants  described  above  as such  will not be
entitled  to any rights as a  stockholder  of the  Company,  including,  without
limitation,  the right to vote with respect to the shares of Common Stock of the
Company, until such 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 the Company's 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.

<PAGE>

8.    Stock Options:
      --------------

      Pursuant to the 1994  Management  Stock  Option Plan (the  "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 will be granted an
option to purchase  2,500 shares,  with the date of grant to be the date of such
meeting.  As of January 31,  1998,  75,000  options had been  granted  under the
Non-Employee Plan; all were exercisable.

      The  following  table sets forth the stock option  activity for both stock
option plans for Fiscal 1997, Fiscal 1996 and Fiscal 1995 (shares in thousands):
<TABLE>
<CAPTION>
                                                      1997                       1996                       1995
                                              -----------------------   -----------------------    -----------------------
                                              Number      Weighted      Number      Weighted       Number      Weighted  
                                                of        Average         of        Average          of        Average
                                              Shares   Exercise Price   Shares   Exercise Price    Shares   Exercise Price   
                                              ------   --------------   ------   --------------    ------   --------------
<S>                                           <C>      <C>              <C>      <C>               <C>      <C>  
Outstanding at beginning of year..........     1,664        $3.73        1,320        $4.15         1,300        $4.63

        Granted...........................        76         9.43          538         2.82           275         2.40
        Exercised.........................      (775)        4.03           (2)        1.76            -            -
        Forfeited.........................       (51)        3.59         (192)        4.07          (255)        4.67
                                              ------                    ------                     ------
Outstanding at year-end...................       914         3.97        1,664         3.73         1,320         4.15
                                              ======                    ======                     ======

Options exercisable at year-end...........       640         3.77          691         4.27           375         4.45
                                              ======                    ======                     ======

Weighted average fair value of
        options granted...................     $7.09                     $1.80                      $1.44
                                              ======                    ======                     ======
</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 6.4%, 6.4% and
6.5% for 1997,  1996 and 1995,  respectively)  and an expected life from date of
grant until option  expiration date (weighted  average expected life of 6.0, 5.6
and 5.1 years for 1997, 1996 and 1995, respectively).

      Not  included  in the  538,000  options  granted  during  1996 are 300,000
options granted pursuant to an employment agreement.  The grant of these options
is subject to shareholder approval at its  annual  meeting to be held on May 27,
1998.  These  options have been  accounted  for on a  mark-to-market  basis  and
compensation expense of approximately $2.6 and $1.8 million was recorded in 1997
and 1996, respectively. If  shareholder  approval is not  obtained,  the granted
options will revert to stock appreciation rights.

<PAGE>

      Had the 300,000  options  been  included in the 1996  option  grants,  the
weighted average fair value of options granted in 1996 would have been $1.63 per
option.

      The  following  table  summarizes  information  about  the  stock  options
outstanding as of January 31, 1998:

                             Options Outstanding           Options Exercisable
                    -----------------------------------  -----------------------
                                 Weighted Avg. Weighted   Weighted    Weighted
       Range of        Number     Remaining    Average      Number     Average
       Exercise     Outstanding  Contractual   Exercise  Exercisable   Exercise
        Prices      at 1/31/98      Life        Price    at 1/31/98     Price
    --------------  -----------  ------------  --------  -----------  ----------
    $1.50 -  $3.00      322           4.1       $2.38        214        $2.50
    $3.13 -  $4.38      348           3.0        3.75        233         3.66
    $5.06 -  $5.12      177           1.1        5.06        178         5.06
    $6.31 - $15.56       67           4.8        9.82         15         8.44
                       -----                                ----- 
                        914           3.1        3.97        640         3.77
                       =====                                =====

        The Company  accounts  for its stock  option plans under APB Opinion No.
25. Had  compensation  cost for the Company's  1997,  1996 and 1995 stock option
grants been determined in accordance with the alternative fair value method SFAS
No. 123, the Company's net income (loss) and net  income (loss) per common share
for  Fiscal  1997,  Fiscal  1996  and  Fiscal  1995  would have approximated the
proforma amounts below:
<TABLE>
<CAPTION>
                                   Fiscal 1997            Fiscal 1996              Fiscal 1995
                             ----------------------  ----------------------  ----------------------
                             As Reported  Proforma   As Reported  Proforma   As Reported  Proforma
                             -----------  ---------  -----------  ---------  -----------  ---------
    <S>                      <C>          <C>        <C>          <C>        <C>          <C>
    Net income (loss)........  $34,546     $35,847     $17,301     $17,969     ($1,618)    ($1,686)
    Net income (loss) per
      common share
        -basic...............    $1.59       $1.65        $.85        $.88       ($.08)      ($.08)
        -diluted............     $1.46       $1.52        $.79        $.82       ($.08)      ($.08)
<FN>
      SFAS 123 does not apply to stock options granted prior to 1995.
</FN>
</TABLE>

9.    Income Taxes:
      -------------

      For Fiscal  1997,  the Company  recorded an income tax  provision of $19.1
million,  of which  approximately  $0.3 million will be paid in cash. For Fiscal
1996, the Company recorded a non-cash income tax provision of approximately $8.1
million. The Company had no income tax provision for Fiscal 1995.

      The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
                                                                       (In Millions)
                                                           -------------------------------------
                                                           Fiscal 1997  Fiscal 1996  Fiscal 1995
                                                           -----------  -----------  -----------
    <S>                                                    <C>          <C>          <C> 
    Currently Payable: Federal Alternative Minimum Tax...      $0.3          -            -

    Deferred Non-cash Pre-emergence Tax Provision........      26.2        $15.8          -

    Deferred Non-cash Post-emergence Tax Benefit.........      (7.4)        (7.7)         - 
                                                             --------     --------     --------
       Total Income Tax Provision........................     $19.1         $8.1          -
                                                             ========     ========     ========
</TABLE>

      The  Company  adopted  SFAS No. 109  in conjunction  with the  adoption of
fresh-start reporting.  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).

<PAGE>

      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.  However, the utilization of  post-consummation  deferred tax assets may
reduce future income tax  provisions.  Such income tax provisions have no impact
on the Company's taxes payable or cash flows.

      Ames   has  the   following   deferred   tax   assets/(liabilities)   from
pre-consummation  ("Pre")  and  post-consummation  ("Post")  periods,  as of the
following dates ($ in millions):
<TABLE>
<CAPTION>
                                          As of  January 31, 1998     As of  January 25, 1997
                                          -----------------------     -----------------------
                                           Pre     Post     Total      Pre     Post     Total
                                          -----    -----    -----     -----    -----    -----
    <S>                                   <C>      <C>      <C>       <C>      <C>      <C>
    Fixed assets......................     $34      ($3)     $31       $40      ($3)     $37
    Self insurance reserves...........       5        8       13         7        7       14
    Store closing reserves............       -        9        9         2       13       15
    Leases............................       -       15       15        11        7       18
    Vacation pay reserve and other....      (1)      17       16        (2)      14       12
    Net operating loss carryovers.....     172        -      172       179        -      179
                                          -----    -----    -----     -----    -----    -----
    Total deferred tax assets.........     210       46      256       237       38      275
    Valuation allowances..............    (210)     (39)    (249)     (237)     (38)    (275)
                                          -----    -----    -----     -----    -----    -----
       Net deferred tax assets........      $0       $7       $7        $0       $0       $0
                                          =====    =====    =====     =====    =====    =====
</TABLE>                  

      The Company has  reserved  for a  significant  portion of its deferred tax
assets  because of the current  uncertainty  of the future  recognition  of such
deductions.  In  subsequent  periods,  Ames may  further  reduce  the  valuation
allowances,  provided that the  possibility  of  utilization of the deferred tax
asset is more likely than not, as defined by SFAS No. 109. Any such reduction in
the  valuation  allowance  in the near  future  will  result in a  corresponding
addition to paid-in-capital.

      The Company has treated  "pre-emergence  net operating losses"  (qualified
losses incurred prior to the Consummation  Date) under Section  382(l)(5) of the
Internal  Revenue  Code  (hereafter  "L-5").  Under L-5, there is  approximately
$280  million in  pre-emergence  net  operating  losses  currently  available as
carryovers  without any annual  limitation.  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  will  reduce net
operating losses by approximately $47 million.

      Ames also has a  "post-emergence  net operating loss" carryover  (incurred
after  the  Consummation  Date) of  approximately  $151  million.  Both pre- and
post-emergence net operating loss carryovers, which together total $431 million,
will expire between 2007 and 2012, except in the event of a change in control of
the  Company.  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  $3.3  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 noted  above,  in the  event of a change  of  control,  there  could be
significant  limitations  on the  ability  of the  Company  to  utilize  the net
operating loss carryovers and other tax benefits.

      Ames has substantial potential state net operating loss carryovers.  It is
difficult,  however,  to quantify the utilizable amounts of such state operating
losses  because  of the  uncertainty  related  to the mix of future  profits  in
specific states.

<PAGE>

10.   Benefit and Compensation Plans:
      -------------------------------


Retirement and Savings Plan

      Ames  has  a  defined  contribution   retirement  and  savings  plan  (the
"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,
after one year of  service,  have  reached the age of 21 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 such contribution.  Ames funds all  administrative  costs incurred by the
plan. Ames' expense  associated with this plan amounted to  approximately  $3.0,
$2.9 and $3.0 million, in 1997, 1996 and 1995, respectively.


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 $6.3,  $7.9
and $1.5 million for Fiscal 1997, 1996 and 1995, respectively.


Long Term Incentive Plan

       Pursuant to the 1995 Long Term Incentive  Plan (the "LTIP"),  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  LTIP) of the  Common  Stock  awarded,
determined as of and paid on the vesting  date.  Each award under the LTIP 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 yet vested are forfeited  upon the  termination of the employment
of the executive.

<PAGE>

      As of January 31, 1998,  awards  aggregating  to 345,000  shares of Common
Stock had been made to  certain  executives  of the  Company,  310,000  of which
remain  outstanding.  The  Compensation  Committee  of the  Board  of  Directors
accelerated  the March 22, 1998 vesting date of 35,000 shares of Common Stock to
January 2, 1998 for the former Executive Vice President-Chief  Financial Officer
who had served until his resignation  effective  January 3, 1998. The shares for
the outstanding awards that have been issued, but have not yet vested, 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  31, 1998.  The  Company  recorded as
compensation expense for the LTIP $2.0,  $1.1 and $0.3 million during 1997, 1996
and 1995, respectively.


Stock Appreciation Rights

      In  connection  with  the Amended  Plan,  1.2 million  stock  appreciation
rights ("SARs"), exercisable only for cash, were granted to  certain  members of
management as compensation for their efforts in restructuring  Ames and enabling
it to emerge from  Chapter 11. All such SARs  expired as of December  30,  1997.
Each SAR entitled the  recipient  upon exercise to receive in cash the excess of
(a) the average  closing price of a share of Common Stock during the ten trading
days prior to the exercise  date over (b) $2.96.  During  Fiscal 1997 and Fiscal
1996,  a total of 166,683  and 16,667  SARs were  exercised,  respectively.  The
Company  recorded  a SARs  expense  of $0.1 and $0.8  million  in 1997 and 1996,
respectively. There was no SARs expense in 1995.


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 31,  1998,  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,  2 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.


11.   Commitments and Contingencies:
      ------------------------------

      As part of the Company's settlement with TJX Companies, Inc. ("TJX") under
the Amended Plan,  Ames must  reimburse TJX for various  obligations,  fees, and
expenses that may be paid by TJX relating to various  properties that were under
leases  rejected by Ames.  The  obligations,  fees,  and expenses are subject to
certain  maximum  amounts  and the total  reimbursement  could not  exceed  $2.7
million and was in the form of an unsecured note payable due on January 31, 1998
(the "TJX Expense  Note").  TJX  provided  Ames with the amounts  paid,  if any,
during each quarter and those  amounts,  after  appropriate  review,  become the
principal due under the TJX Expense Note. On January 30, 1998,  the Company paid
the TJX Expense Note in full,  including  interest  which had accrued at 10% per
annum.

<PAGE>

12.   Litigation:
      -----------


Wage and Hour Litigation

      On March 21, 1995, a Class Action  Complaint (the "Abrams  Complaint") was
filed against the Company in the Superior  Court  Department of the Trial Court,
Suffolk  County,  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 attorney's  fees. On April 21, 1995, the case was removed to
the United States District Court for the District of Massachusetts.  The Company
has  denied the claims on the basis  that  Abrams and other  similarly  situated
Assistant  Managers  were exempt  employees  not  entitled to overtime  pay. The
Company  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 of removal.  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 do not wish to  participate in the  litigation.  A trial date has
tentatively been set for June 22, 1998.

      On December 13, 1995,  a Class Action  Complaint  was filed and on January
23, 1996 an Amended Class Action Complaint was filed (the "Second Complaint") 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 Second Complaint
are  essentially  the same as those in the Abrams  Complaint  referenced  above.
However,  the Second  Complaint  also  includes  claims  against the Company 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 purports
to state claims on behalf of  Assistant  Managers in each of those  states.  The
Company believes, among other things, that the case is not properly maintainable
as  a  class  action  suit  and  that  the  plaintiff  is  not  a  proper  class
representative.  The Company 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 the Company's  motion to dismiss  the
ERISA  Count  and  denied  the remainder  of the motion.  Discovery  has not yet
commenced in this matter.

<PAGE>

      On  June  26,  1996,  a Class  Action  Complaint  was  filed  (the  "Third
Complaint")   in  the  United  States   District   Court  for  the  District  of
Massachusetts  entitled  David Root,  On Behalf of Himself and all Other Persons
Similarly  Situated v. Ames Department Stores,  Inc. The factual  allegations in
the  Third  Complaint  are  essentially  the  same  as in the  Abrams  Complaint
referenced above.  However,  the Third Complaint  pertains only to Replenishment
Assistant Managers who worked at any Ames Store throughout the United States and
is brought  solely  under the Fair Labor  Standards  Act. The  Complaint  sought
injunctive  relief,  damages,  costs and attorneys' fees. The Company denied the
claims  on the  basis  that  Root and  other  similarly  situated  Replenishment
Assistant  Managers were exempt  employees  and,  thus, not entitled to time and
one-half  pay for hours  worked in  excess  of 40 hours  per week.  The  Company
further denied that the action was properly  maintainable  as a class action and
that the plaintiff was a proper  representative  for the purported class. In the
Fall of 1996, the parties reached an agreement to settle the action whereby each
putative class member opting-in to the settlement would receive a calculated sum
based on the  number of weeks  worked and  individual  weekly  salary  levels in
exchange  for a release  of all claims  against  the  Company.  The total of the
settlement cannot exceed $1 million in cash and $500,000 in scrip usable in Ames
stores. The Court approved the settlement on January 31, 1997 and notices of the
class action  settlement were sent to all potential members on February 3, 1997.
Individuals  wishing  to  opt-in  to  the  settlement  did  so by April 4, 1997.
Payments have been made according to the terms of the settlement.

      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 (the "Fourth Complaint").
The Fourth 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  dismissed  the
action on behalf of himself and other similarly situated Replenishment Assistant
Managers  pursuant  to the  settlement  reached  between  Ames  and  David  Root
described  above.  Serrano and other former or current  Replenishment  Assistant
Managers  employed  by Ames in  Massachusetts  had the  option  to opt-in to the
settlement.

      On March 18, 1997,  the Fourth  Complaint was amended to add Kristen Gould
as a named  plaintiff to represent the putative class of Hardlines and Softlines
Assistant  Managers  employed by Ames in the Ames Store 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
currently pending in the Abrams case for  Massachusetts  Hardlines and Softlines
Assistants.  Also, on March 18, 1997, the Court  dismissed  Serrano's  action on
behalf of himself and other similar situated  Replenishment  Assistant  Managers
pursuant to the settlement  reached between Ames and David Root described above.
This case will  hereafter  go  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.  The  Company  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
Supreme 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.  Discovery  has not yet  commenced  in this
action.

      On February 18, 1997, a Class Action Complaint (the "Fifth Complaint") was
filed in the United States District Court for the Northern  District of New York
entitled Michelle Moschelle,  Individually,  and on Behalf of Herself and Others
Similarly Situated v. Ames Department Stores, Inc. et al. The Fifth Complaint is
substantially  identical  to the  Second  Complaint  except  for the name of the
plaintiff.  The Company  answered  the Fifth  Complaint,  and  asserted the same
defenses  as it did with  regard to the Second  Complaint  and moved to stay the
Moschelle  matter  pending a decision on the Company's  motion to dismiss in the
Austin matter. On August 7, 1997 the District Court allowed the motion to stay.

      As to the Abrams,  Austin,  Gould and Moschelle matters  referenced above,
the Company  intends to defend each of them  vigorously  and  believes it should
prevail.

<PAGE>

Other Matters

      Ames has owned  and/or  leased  current  and  former  facilities  that are
subject to several  environmental laws relating to the operation and maintenance
of those facilities,  particularly with respect to any underground storage tanks
currently or previously  located at those  facilities.  The Company believes the
vast  majority of those tanks have already been cleanly  removed.  Some residual
contamination exists at a limited number of facilities,  the extent of which has
not been  determined at this time.  Environmental  liabilities  associated  with
these facilities may be shared with facility landlords,  tenants, subtenants, or
other third  parties.  In some states,  clean-ups  may be eligible for financing
from state  funds.  Based on currently  available  information,  no  liabilities
material to the Company will result from any  underground  storage tank residual
contamination. The Company believes that adequate liabilities have been recorded
related to any potential costs.

      Under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 as amended by the Superfund  Amendments and  Reauthorization  Act of
1986  ("Superfund"),  liability may be imposed on waste generators,  site owners
and  operators,  and others  regardless of fault or the legality of the original
waste  disposal  activity.  Ames may be liable for costs at several  sites under
Superfund or similar state laws either for generating  wastes,  including  waste
oils disposed of at those sites, or in connection with the assumption by Ames of
certain  Zayre  Discount  Division  liabilities.  Ames believes that it has been
connected to most of these sites based on relatively small amounts of wastes and
that  many  other  parties  are  involved  at these  sites  and may share in the
ultimate liability.  Ames does not have sufficient  information to determine its
relative  responsibility for, or contribution to (if any), all of these sites at
this time.

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


13.   Supplemental Cash Flow Information:
      -----------------------------------

        Cash paid for interest and income taxes were as follows:

                                                    (000's Omitted)
                                            ---------------------------------
                                            Fiscal       Fiscal       Fiscal
                                             1997         1996         1995
                                            -------      -------      ------- 
        Interest.......................     $11,655      $15,149      $19,217
        Income taxes...................          73            2            2


        Ames entered into other non-cash  investing and financing  activities as
follows:

                                                    (000's Omitted)
                                            ---------------------------------
                                            Fiscal       Fiscal       Fiscal
                                             1997         1996         1995
                                            -------      -------      -------
        New capital lease obligations.....  $ 2,940       $  375       $3,203
        Issuance of Common Stock under
          1995 Long Term Incentive Plan...      -            -              4


14.   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"  ("SFAS No.
107").  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 31, 1998 and January 25,
1997 were cash and  short-term  investments,  long-term  debt,  and the Series C
Warrants. 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 fair value of the Series C Warrants was based on
the market trading price at year-end times the number of such warrants that were
outstanding.

<PAGE>

      The  carrying   amounts  and  fair  values  of  the  Company's   financial
instruments at January 31, 1998 and January 25, 1997 were as follows:


                                                   (000's Omitted)
                                     -------------------------------------------
                                      January 31, 1998        January 25, 1997
                                     -------------------     -------------------
                                     Carrying     Fair       Carrying     Fair
                                      Amount      Value       Amount      Value
                                     --------    -------     --------    -------
    Cash and short-term investments.  $57,828    $57,828      $46,119    $46,119
    Long-term debt:
         Secured debt...............   11,340     11,500       15,574     15,737
         Unsecured debt.............      -          -          8,444      8,442
    Series C Warrants...............      -        9,065          -       10,462


15.   Gain on Disposition of Properties:
      ----------------------------------

      The  following  is a  summary  of the  major  components  of the  "Gain on
disposition of properties":
  
                                                     (000's Omitted)
                                               ----------------------------
                                               Fiscal     Fiscal     Fiscal
                                                1997       1996       1995
                                               ------     ------     ------
    Gain on:

       Sales of closed distribution centers...  $  -       $  -      $5,099
       Sales/assignment of lease interests 
           at closed locations................     -         395        991
       Sales of shopping centers..............     -          -       3,046
                                               ------     ------     ------
                                                $  -       $ 395     $9,136
                                               ======     ======     ======


16.   Store Closing Charges:
      ----------------------

      In the  fourth  quarter  of 1997,  the  Company  recorded  charges of $1.6
million in  connection  with the closing of two (2) 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.  Both of the  stores  closed  in
February, 1998.

      In the  fourth  quarter  of 1996,  the  Company  recorded  charges of $9.7
million in connection with the closing of thirteen (13) stores. The $9.7 million
is classified in two line items:  $6.9 million as store closing  charge and $2.8
million as part of cost of merchandise sold.

      In the  fourth  quarter of 1995,  the  Company  recorded  charges of $20.9
million  in  connection  with the  closing  of  seventeen  (17)  stores  and the
elimination of 71 positions in the corporate headquarters.  The $20.9 million is
classified in two line items:  $17.6  million as store  closing  charge and $3.3
million  as  part  of  cost  of  merchandise  sold.  The  $3.3  million  charge,
representing  the  inventory  write-down for the seventeen (17) closing  stores,
had  been  classified  as  part  of  the  store  closing  charge in the original
presentation  of  the results for 1995 and was changed to conform to the current
presentations.

<PAGE>

        The following items represent the major  components of the total charges
recorded in January,  1998, January,  1997 and January,  1996 in connection with
store closings:


                                                    (000's Omitted)
                                           -----------------------------------
                                           Fiscal        Fiscal        Fiscal
       Item                                 1997          1996          1995
       ----                                ------        ------        -------
    Lease costs..........................  $  363        $3,535        $12,926
    Net fixed asset write-down...........     394         1,149          2,094
    Severance costs......................     113           773          1,857
    Other................................     130         1,401            744
                                           ------        ------        -------
        Store closing charge.............   1,000         6,858         17,621
        Inventory write-down.............     560         2,860          3,244
                                           ------        ------        -------
            Total charges................  $1,560        $9,718        $20,865
                                           ======        ======        =======

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


17.   Leased Department and Other Operating Income:
      ---------------------------------------------

      The  following  is a  summary  of the  major  components  of  the  "Leased
department and other operating income":

                                                    (000's Omitted)
                                           -----------------------------------
                                           Fiscal        Fiscal        Fiscal
                                            1997          1996          1995
                                           -------       -------       -------
    Leased department income...........    $16,592       $16,932       $17,132
    Concession and vending income......      1,252         1,148         1,291
    Layaway service fees...............      2,605         2,382         2,386
    Various other......................      6,045         8,822         8,868
                                           -------       -------       ------- 
                                           $26,494       $29,284       $29,677
                                           =======       =======       =======  


18.   Extraordinary Items:
      --------------------

      In December, 1996, the Company terminated the Prior Credit Agreement (Note
5) and  recorded a non-cash  extraordinary  charge of $1.4  million,  net of tax
benefit of $0.6 million, for the write-off of deferred financing costs.


19.   Accounting for Long-Lived Assets:
      ---------------------------------

      Effective  January 27, 1996,  the Company  adopted  Statement of Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for  Long-Lived  Assets to be Disposed Of." As a result,  the Company
recorded an  impairment  loss of $3.4 million in the quarter  ended  January 27,
1996.  During Fiscal 1997 and 1996, the Company recorded  additional  impairment
losses of $1.2 million and $2.2  million,  respectively.  The  impairment  loss,
classified as part of "Depreciation and amortization expense," was equivalent to
the current carrying value of fixtures and equipment and leasehold  improvements
for specific stores where  estimated  undiscounted  future  operating cash flows
were less than the current  carrying  value of  the  assets.  The  Company  will
continue to operate these stores until such time the estimated closing costs are
less than any projected cash losses.

<PAGE>

20.   Recently Issued Accounting Standards:
      -------------------------------------

      In June 1997, the Financial  Accounting Standards Board released Statement
No. 130, "Reporting  Comprehensive  Income", and Statement No. 131, "Disclosures
about  Segments of an  Enterprise  and Related  Information".  These statements,
which  are  effective  beginning in 1998,  expand  and  modify  disclosures  and
accordingly  will  have  no  impact  on  the  Company's  consolidated  financial
condition or results of operations.


21.   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.  The  quarterly
sales for Fiscal 1995 have been  restated to reflect the effect of recording "55
Gold(R)" senior citizen  discounts as markdowns,  which conforms with the Fiscal
1997 and Fiscal 1996 treatment.
<TABLE>
<CAPTION>
                                                             First      Second       Third      Fourth
                                                           ---------   ---------   ---------   ---------
<S>                                                        <C>         <C>         <C>         <C>
Fiscal 1997:
    Net sales..........................................    $432,601    $503,567    $527,573    $769,377
    Gross margin.......................................     118,366     146,348     148,231     215,809
    Income (loss) before extraordinary item............      (5,930)      7,378       3,519      29,579 (a)
    Income (loss) per share before extraordinary item..       (0.28)       0.31        0.15        1.23
    Net income (loss)..................................      (5,930)      7,378       3,519      29,579 (a)
    Net income (loss)per share - basic.................       (0.28)       0.34        0.16        1.32
                               - diluted...............       (0.28)       0.31        0.15        1.23

Fiscal 1996:
    Net sales..........................................     $438,667    $499,107    $516,876     707,030
    Gross margin.......................................      117,402     139,725     141,224     194,355
    Income (loss) before extraordinary item............      (6,998)      4,514         421      20,718 (b)
    Income (loss) per share before extraordinary item..       (0.34)       0.21        0.02        0.93
    Net income (loss)..................................      (6,998)      4,514         421      19,364 (b)
    Net income (loss)per share - basic.................       (0.34)       0.22        0.02        0.95
                               - diluted...............       (0.34)       0.21        0.02        0.87

Fiscal 1995:
    Net sales..........................................    $438,312    $500,188    $501,550     664,181
    Gross margin.......................................     115,345     136,000     134,137     174,760
    Income (loss) before extraordinary item............     (11,141)      3,188      (4,884)     11,219 (c)
    Income (loss) per share before extraordinary item..       (0.55)       0.15       (0.24)       0.54
    Net income (loss)..................................     (11,141)      3,188      (4,884)     11,219 (c)
    Net income (loss)per share - basic.................       (0.55)       0.16       (0.24)       0.56
                               - diluted...............       (0.55)       0.15       (0.24)       0.54
<FN>
--------------
(a) Includes  charges of $1.6  million  related to the closing of two (2) stores
    (Note 16).  
(b) Includes  charges of $9.7  million  related to the closing of  thirteen (13)
    stores (Note 16).
(c) Includes charges of $20.9 million  related to the closing of  seventeen (17)
    stores (Note 16).
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                     SCHEDULE II

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


                                       Balance at    Charged to                                        Balance at
                                      Beginning of    Cost and                                           End of
Description                              Period       Expense     Reclassifications(a)   Deductions      Period
-----------                           ------------   ----------   --------------------   ----------    ----------
<S>                                   <C>            <C>          <C>                    <C>           <C>   
Fiscal 1997

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


Fiscal 1996

   Store Closing Reserve.............    $27,379       $ 6,858         ($2,178)            ($7,621)      $24,438
   Distribution Center Closing
      Reserve included in Accrued
      Expenses.......................       $123           -            ($ 122)               ($ 1)          -


Fiscal 1995

   Store Closing Reserve.............   $  2,878       $17,621          $8,378             ($1,498)(b)   $27,379
   Distribution Center Closing
      Reserve included in Accrued
      Expenses.......................     $1,567           -            ($ 194)            ($1,250)(c)     $ 123
<FN>
--------------
(a)  Represents  reclassifications of liabilities  associated with closed stores
     and other reclassifications.
(b)  Represents payments of restructuring costs.
(c)  Represents payments related to the closing of the distribution center.
</FN>
</TABLE>
<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
-------                 -------                                  ---------------

2(a)      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 Company's Report on
          Form 8-K dated December 29, 1992 and filed
          December 31, 1992).

2(b)      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 Company's Report
          on Form 8-K dated December 29, 1992 and filed
          December 31, 1992).

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

3(a)      Amended and Restated Certificate of Incorporation
          of Ames Department Stores, Inc. (incorporated herein
          by reference to Form 8 dated and filed December 29,
          1992).

3(b)      Form of By-laws of Ames Department Stores, Inc. as 
          amended February 23, 1995 (incorporated herein by 
          reference to Exhibit 3(b) of the Company's Annual 
          Report on Form 10-K dated January 28, 1995 and filed
          on April 10, 1995).

4(a)      Series B Warrant Certificate for Purchase of New Common
          Stock of Ames Department Stores, Inc. (incorporated 
          herein by reference to Form 8-A dated and filed 
          December 11, 1992).

4(b)      Series C Warrant Certificate for Purchase of New
          Common Stock of Ames Department Stores, Inc.
          (incorporated herein by reference to Form 8-A
          dated and filed December 11, 1992).
          
4(c)      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 Company's Quarterly
          Report on Form 10-Q for the quarterly period ended
          October 29, 1994 filed on December 13, 1994).

10(a)     Retirement and Savings Plan as restated December 27,
          1984, and Amendment No. 1 (incorporated herein by
          reference to Exhibit 10(n) of the Company's Annual
          Report on Form 10-K dated January 26, 1985 and filed
          April 24, 1985).

10(b)     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 Company's Report on Form 8-K dated and
          filed April 8, 1994).

10(c)     1994 Management Stock Option Plan (incorporated herein
          by reference to the Company's definitive proxy statement
          filed on May 5, 1994).

10(d)     1994 Non-Employee Directors Stock Option Plan
          (incorporated by reference to the Company's
          definitive proxy statement filed April 10, 1995).

10(e)     1995 Long Term Incentive Plan (incorporated by
          reference to the Company's definitive proxy statement
          filed on April 10, 1995).

10(f)     Credit Agreement, dated as of December 27, 1996, among
          BankAmerica Business Credit, Inc., as Agent, the
          lenders party thereto and Ames Department Stores, Inc.
          (incorporated herein by reference to Exhibit 10 of the
          Company's Report on Form 8-K dated and filed
          January 14, 1997).

<PAGE>

10(g)     Employment Agreement, dated June 1, 1996, between Ames
          Department Stores, Inc. and Joseph Ettore (incorporated
          herein by reference to Exhibit 10(g) of the Company's
          Annual Report on Form 10-K dated January 25, 1997 and
          filed April 3, 1997).

10(h)     Employment Agreement, dated August 1, 1996, between Ames
          Department Stores, Inc. and Denis Lemire (incorporated
          herein by reference to Exhibit 10(h) of the Company's
          Annual Report on Form 10-K dated January 25, 1997 and
          filed April 3, 1997).

11        Schedule of computation of basic and diluted net                 46
          earnings per share.                                          

18        Letter of Preferability, dated November 21, 1997, 
          (incorporated herein by reference to Exhibit 12 of the
          Company's Quarterly Report on Form 10-Q for the
          quarterly period ended October 25, 1997 filed on
          November 27, 1997).

21        Subsidiaries of the Registrant.                                  47

<PAGE>
<TABLE>
                                                                      Exhibit 11

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

<CAPTION>
                                                                     53 Weeks      52 Weeks      52 Weeks
                                                                      Ended         Ended         Ended
                                                                    January 31,   January 25,   January 27,
                                                                       1998          1997          1996
                                                                    -----------   -----------   ---------
<S>                                                                 <C>           <C>           <C>        
Income (loss) before extraordinary item                               $34,546       $18,655      ($1,618)
Extraordinary loss, net                                                   -          (1,354)         -
                                                                    -----------   -----------   ---------

    Basic and diluted net income (loss)                               $34,546       $17,301      ($1,618)
                                                                    ===========   ===========   =========

For Basic Earnings Per Share:
-----------------------------

Weighted average number of common shares outstanding
    during the period                                                  21,723        20,467       20,127


Basic earnings per share:
Basic income (loss) per share before extraordinary item                 $1.59         $0.91       ($0.08)
Extraordinary loss                                                         -          (0.06)          -
                                                                    -----------   -----------   ---------          
    Basic net income (loss) per share                                   $1.59         $0.85       ($0.08)
                                                                    ===========   ===========   =========



For Diluted Earnings Per Share:
-------------------------------

Weighted average number of common shares outstanding
    during the period                                                  21,723        20,467       20,127

Add: Common stock equivalent shares represented by
        -    Series B Warrants                                             95           (a)          (b)
        -    Series C Warrants                                          1,018         1,191          (b)
        -    Options under 1994 Management Stock Option Plan               47           147          (b)
        -    Options under 1995 Non-Employee Director Stock                        
                 Option Plan                                              766             7          (b)

                                                                    -----------   -----------   ---------
Weighted average number of common and common equivalent
   shares used in the calculation of diluted earnings per share        23,649        21,812       20,127
                                                                    ===========   ===========   =========

Diluted earnings per share:
Diluted income (loss) per share before extraordinary item               $1.46         $0.85       ($0.08)
Extraordinary loss                                                         -          (0.06)          -
                                                                    -----------   -----------   ---------
    Diluted net income (loss) per share                                 $1.46         $0.79       ($0.08)
                                                                    ===========   ===========   =========
<FN>
------------
(a) These  options/warrants  were not  considered common stock equivalent shares
    because the exercise price exceeded the market price of the common stock for
    all or substantially all of the period.
(b) Common stock equivalents  have not been included because the effect would be
    anti-dilutive.
</FN>
</TABLE>
<PAGE>

                                                                      EXHIBIT 21

                  AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
                         Subsidiaries of the Registrant


     As of January 31, 1998, the subsidiaries of the Company were as follows:


        Name                                              State of Incorporation
----------------------                                    ----------------------
Ames Transportation Systems, Inc..........................       Delaware

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

Ames FS, Inc..............................................       Delaware

   AMD, Inc. a subsidiary of Ames FS, Inc.................       Delaware

      Zayre New England Corp. * a subsidiary of AMD, Inc..       Delaware

      Zayre Central Corp.* a subsidiary of AMD, Inc.......       Delaware


              *Holds a 50% interest in Ames Stores, a partnership.




     As of February 1, 1998, the  subsidiaries of the Company were  restructured
as follows:


        Name                                              State of Incorporation
----------------------                                    ----------------------
Ames Transportation Systems, Inc..........................       Delaware

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

Ames FS, Inc..............................................       Delaware

     AMD, Inc. a subsidiary of Ames FS, Inc...............       Delaware

        Zayre Central Corp. a subsidiary of AMD, Inc......       Delaware