<PAGE>   1
EXHIBIT 13.1

FIVE YEAR FINANCIAL SUMMARY
Dollar amount in thousands except per share data

The following selected financial data have been derived from the Company's
consolidated financial statements. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>

                                                                                  YEAR ENDED
                                              ----------------------------------------------------------------------------------
                                              January 30,       January 31,      February 1,       February 3,       January 28,
                                                     1999              1998             1997              1996              1995
                                               (52 weeks)        (52 weeks)       (52 weeks)        (53 weeks)        (52 weeks)
                                              ----------------------------------------------------------------------------------
STATEMENT OF EARNINGS INFORMATION:
<S>                                            <C>               <C>              <C>                 <C>               <C>
Net sales                                      $1,142,246        $1,053,806       $1,018,801          $981,042          $879,585
Net income                                         36,668             5,838           63,621            62,600            54,457
Net income per share - basic                   $     1.15        $     0.18       $     1.92          $   1.82          $   1.56
Net income per share - assuming dilution       $     1.15        $     0.18       $     1.91          $   1.82          $   1.56
Weighted average number of shares of common
  stock outstanding (in thousands) - basic         31,878            32,386           33,185            34,395            34,908
Weighted average number of shares of common
  stock outstanding (in thousands) -
  assuming dilution                                31,933            32,436           33,283            34,471            34,949
Cash dividends per share                       $     0.44        $     0.42       $     0.34          $   0.26          $   0.18

BALANCE SHEET INFORMATION:
Working capital                                $  201,521        $  145,101       $  184,442          $161,361          $137,864
Total assets                                      657,064           676,433          621,789           572,111           532,514
Total long-term debt                              100,000            50,000           50,000            50,000            35,000
Stockholders' equity                              402,073           396,466          431,459           398,039           385,594
</TABLE>


                                       17
<PAGE>   2


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
consolidated financial statements of the Company and the notes accompanying the
consolidated financial statements. The 1998 fiscal year ended on January 30,
1999. The 1997 fiscal year ended on January 31, 1998. The 1996 fiscal year ended
on February 1, 1997. Each fiscal year had 52 weeks.


RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of earnings for the fiscal periods shown below:
<TABLE>
<CAPTION>

                                                             YEAR ENDED
                                              -------------------------------------
                                              January 30,  January 31, February 1,
                                                     1999         1998        1997
                                              -------------------------------------
<S>                                                 <C>          <C>         <C>
Net sales                                           100.0%       100.0%      100.0%
Cost of sales, buying and occupancy expenses         65.6%        70.3%       63.7%
Selling, general and administrative expenses         28.6%        28.1%       25.6%
Operating income                                      5.9%         1.6%       10.7%
Interest expense, net                                 0.6%         0.7%        0.5%
Income before taxes                                   5.2%         0.9%       10.2%
Income taxes                                          2.0%         0.3%        3.9%
Net income                                            3.2%         0.6%        6.2%
</TABLE>


FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased by $88.4 million, to $1,142.2 million, or 8.4% over 1997.
Operating income was $66.9 million in 1998 compared to $17.1 million in 1997.

Retail store sales in 1998 increased by $78.4 million, to $973.0 million, or
8.8% over 1997. The percentage of the Company's net sales derived from its
retail stores increased to 85.2% in 1998 from 84.9% in 1997. The increase in
retail store sales as a percentage of the Company's total net sales was due to
the growth in retail store sales. The increase in retail store sales was
attributable to the 35 net new stores opened in 1998, the first full year of
operation of the 68 non-comparable stores that opened in 1997, and a $26.5
million, or 3.6% increase in comparable store sales from the previous year.
Comparable stores are those which were open for at least one full fiscal year.
When a new Talbots Petites store or a new Talbots Accessories & Shoes store is
opened adjacent to or in close proximity to an existing comparable Misses store,
such Misses store is excluded from the computation of comparable store sales for
a period of 13 months so that the performance of the full Misses assortment may
be properly compared. The Company believes the increase in comparable store
sales can be attributed to improvements in its merchandise offerings which more
accurately reflect the styling, fit and colors which appeal to its core
customer.

Catalog sales in 1998 increased by $10.0 million, to $169.2 million, or 6.3%
over 1997. The percentage of the Company's total sales derived from its catalog
decreased to 14.8% in 1998 from 15.1% in 1997 due to retail sales increasing at
a higher rate than catalog sales. Catalog productivity, as measured by sales per
catalog, also improved over 1997. Sales per catalog increased 5.2%, to $3.22 in
1998 from $3.06 in 1997 on circulation of approximately 52.6 million catalogs in
1998 versus 52.0 million catalogs in 1997.

The Company believes that the increase in catalog sales was primarily due to
improvements in its merchandise offerings, which had a stronger appeal to its
core customers and more closely met their expectations. These improvements are
also believed to have contributed to a three percentage point decline in the
Company's catalog return rate. The Company attributes the improvement in catalog
productivity to its strategy of reducing catalog pages and eliminating certain
unproductive mailings.


                                       18
<PAGE>   3


Cost of sales, buying and occupancy expenses decreased as a percentage of net
sales to 65.6% from 70.3% in 1997 due to improved merchandise margins which
resulted from stronger full price selling and significantly reduced markdowns
resulting from dramatically reduced merchandise inventories over the previous
year.

Selling, general and administrative expenses increased as a percentage of net
sales to 28.6% in 1998 from 28.1% in 1997. The increase in selling, general and
administrative expenses as a percentage of net sales was mainly due to
incremental payroll and store operating costs to enhance customer service and to
provide additional product training for store associates. Also contributing to
the increase was higher spending on information systems, chiefly toward Year
2000 initiatives.

Interest expense, net, decreased by $0.3 million, to $7.3 million in 1998, due
to lower average debt levels partially offset by an increase in average
borrowing rates. The average total debt, including short-term and long-term bank
borrowings, was $125.9 million in 1998 compared to $134.4 million in 1997. The
decrease in borrowings was mainly due to improved operating cash flows resulting
from an increase in net income and the significant tightening of inventories.
The average interest rate, including interest on short-term and long-term bank
borrowings, was 6.58% in 1998 compared to 6.22% in 1997.

The effective tax rate for the Company was 38.5% in 1998, the same as in 1997.

FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased by $35.0 million, to $1,053.8 million, or 3.4% over 1996.
Operating income was $17.1 million in 1997 compared to $108.8 million in 1996.

Retail store sales in 1997 increased by $55.6 million, to $894.6 million, or
6.6% over 1996. The percentage of the Company's net sales derived from its
retail stores increased to 84.9% in 1997 from 82.4% in 1996. The increase in
retail store sales as a percentage of the Company's total net sales was due to
the growth in retail store sales and a decrease in catalog sales. The increase
in retail store sales was attributable to the 68 net new stores opened in 1997
and the first full year of operation of the 75 non-comparable stores that opened
in 1996, and was partially offset by a $12.1 million decline, or 1.8%, in
comparable store sales from the previous year. Comparable stores are those which
were open for at least one full fiscal year. The Company believes that the
decrease in comparable store sales was mainly the result of weak customer
response to changes in its traditional merchandise styling and fit, which were
not appropriate for the Company's core customer. The Company is addressing these
merchandise issues by developing merchandise with more classic styling, fit and
colors.

Catalog sales in 1997 decreased by $20.6 million, to $159.2 million, or 11.5%
less than 1996. The percentage of the Company's total sales derived from its
catalog decreased to 15.1% in 1997 from 17.6% in 1996. Catalog productivity, as
measured by sales per catalog, decreased 15.5% in 1997 to $3.06 from $3.62 in
1996. The decline in catalog sales and productivity was due both to presentation
changes in early spring and fall catalogs as well as weak customer response to
merchandise styling and fit. To address these issues, the Company changed
subsequent catalog formats back to what it believes are more successful
presentations and is developing merchandise with more classic styling, fit and
colors. Catalog circulation increased to approximately 52.0 million catalogs in
1997, from 49.7 million catalogs in 1996.

Cost of sales, buying and occupancy expenses increased as a percentage of net
sales to 70.3% from 63.7% in 1996 mainly due to lower merchandise margins, which
were negatively impacted by the liquidation of excess inventory accumulated
because of lower than anticipated sales. Also contributing to the increase were
higher store occupancy costs as a percentage of sales.

Selling, general and administrative expenses increased as a percentage of net
sales to 28.1% in 1997 from 25.6% in 1996. The increase in selling, general and
administrative expenses as a percentage of net sales was mainly due to
incremental payroll and store operating costs to provide increased customer
service and to support the fall introduction of the Company's "Brand Essence"
advertising campaign. Also contributing to the increase were higher marketing
expenses related to the advertising campaign and increased costs associated with
the recruitment and hiring as well as other costs related to certain key
executives.


                                       19
<PAGE>   4


Interest expense, net, increased by $2.3 million, to $7.6 million in 1997, due
to higher average debt levels and an increase in interest rates. The average
total debt, including short-term and long-term bank borrowings, was $134.4
million in 1997 compared to $109.3 million in 1996. The increase in borrowings
was mainly due to lower than anticipated net income, the build-up of inventories
in anticipation of improved sales trends and the funding of the Company's stock
repurchase program. The average interest rate, including interest on short-term
and long-term bank borrowings, was 6.22% in 1997 compared to 6.07% in 1996.

The effective tax rate for the Company remained at 38.5% in 1997.

SEASONALITY AND QUARTERLY FLUCTUATIONS
The nature of the Company's business is to have two distinct selling seasons,
spring and fall. The first and second quarters make up the spring season and the
third and fourth quarters make up the fall season. Within the spring season,
catalog sales are stronger in the first quarter while retail store sales are
slightly stronger in the second quarter. Within the fall season, catalog sales
and retail store sales are the strongest in the fourth quarter. Historically,
catalog sales had been higher during the first and third quarters due to the
timing of catalog circulation and the placement of customer orders early in the
season. However, as shopping patterns have changed and customers are buying
closer to time of need, catalog sales have been their strongest in the fourth
quarter. Retail store sales typically peak in the fourth quarter due to the
holiday season and the impact of new stores opened during the year.

The following table sets forth certain items in the Company's unaudited
quarterly consolidated statements of earnings as a percentage of net sales. The
information as to any one quarter is not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
                                                                      FISCAL QUARTER ENDED
                                                   -----------------------------------------------------------
                                                   May 2,         August 1,      October 31,       January 30,
                                                     1998              1998             1998              1999
                                                   -----------------------------------------------------------
<S>                                                 <C>               <C>              <C>               <C>
Net sales                                           100.0%            100.0%           100.0%            100.0%
Cost of sales, buying and occupancy expenses         60.1%             71.9%            60.1%             69.3%
Selling, general and administrative expenses         30.2%             26.8%            31.6%             26.2%
Operating income                                      9.6%              1.4%             8.3%              4.4%

                                                   -----------------------------------------------------------
                                                   May 3,         August 2,      November 1,       January 31,
                                                     1997              1997             1997              1998
                                                   -----------------------------------------------------------
Net sales                                           100.0%            100.0%           100.0%            100.0%
Cost of sales, buying and occupancy expenses         59.9%             80.2%            61.5%             77.9%
Selling, general and administrative expenses         28.5%             26.8%            30.5%             26.7%
Operating income (loss)                              11.6%             (6.9)%            8.0%             (4.6)%
</TABLE>

The Company's merchandising strategy focuses on liquidating seasonal inventory
at the end of each selling season. Generally, the Company achieves this goal by
conducting major sale events at the end of the second and fourth quarters. These
events sharply accelerate the rate of units sold and are effective in
liquidating season-end inventories. However, selling this clearance inventory at
marked down retail values has the effect of increasing the Company's cost of
sales, buying and occupancy expenses as a percentage of net sales in these
periods.

The Company's selling, general and administrative expenses are strongly affected
by the seasonality of sales. The two key elements of this seasonality are (1)
the catalog circulation strategy, which affects catalog sales volume and
produces commensurately high catalog production costs and (2) the major
semiannual sale events in the second quarter and the fourth quarter, which
require additional store payroll and supplies. An additional factor is the store
expansion program, which results in having more stores open in the fall than at
the beginning of the year and therefore results in higher store payroll and
operations-related expenses.

The combined effect of the patterns of net sales, cost of sales, buying and
occupancy expenses and selling, general and administrative expenses, described
above, has produced higher operating income margins in the first and third
quarters.


                                       20
<PAGE>   5


LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flows from operating
activities and a line of credit facility from five banks, with maximum available
short-term borrowings of $125.0 million. At January 30, 1999, the Company had no
amounts outstanding under the line of credit facility. At January 31, 1998, the
Company had $100.0 million outstanding under this facility. Additionally, the
Company has a revolving credit facility with four banks (the "Facility"). In
April 1998, the Company entered into new agreements with these banks to increase
the Facility from $50.0 million to $100.0 million. At January 30, 1999 and
January 31, 1998 the Company's outstanding borrowings under the Facility were
$100.0 million and $50.0 million, respectively. Notes under the Facility
currently extend variously between February 2000 and January 2001, subject to
annual extensions. The Company's working capital needs are typically at their
lowest during the spring season and peak during the fall selling season.

Cash provided by operating activities totaled $136.4 million in 1998. The
increase in cash provided by operating activities from the prior year is mainly
due to higher net income, and the tight control of inventories in the current
year.

Cash provided by operating activities totaled $12.8 million in 1997. The
decrease in cash provided by operating activities from the prior year is mainly
due to lower net income, higher levels of inventory, higher prepaid income taxes
caused by an overestimation of taxable income and a smaller increase in accounts
payable, partially offset by the lack of growth in accounts receivable compared
to the prior year.

Cash used in investing activities for 1998 was $45.1 million. Of this amount,
approximately $31.7 million was used for leasehold improvements, furniture,
fixtures and other related expenditures for opening new stores and expanding,
renovating and relocating existing stores. Cash used in investing activities for
1997 was $49.5 million. Of this amount, approximately $42.8 million was used for
leasehold improvements, furniture, fixtures and other related expenditures for
opening new stores and expanding, renovating and relocating existing stores.

Capital expenditures for 1999 are currently expected to be approximately $55.0
million. The Company currently plans to open between 35 and 40 new stores during
1999. Approximately $30.4 million is expected to be used for opening new stores
and expanding, renovating and relocating existing stores. Approximately $9.0
million is expected to be used to enhance the Company's computer information
systems, and $11.1 million is expected to be used for the expansion of the
Company's Hingham and Lakeville, Massachusetts corporate facilities. The
remaining amount will be used for other capital needs in the normal course of
business. The actual amount of such capital expenditures will depend on a number
of factors, including the schedule of such activity during 1999, and the number,
type and timing of stores being opened, expanded, renovated and relocated.

Cash used in financing activities totaled $81.8 million in 1998. During fiscal
1998 the Company paid cash dividends of $0.44 per share and repurchased 912,878
shares of Company common stock at an average price per share of $21.96. The
payment of cash dividends and the purchase of treasury stock in 1998 were funded
through operating cash flows.

Cash provided by financing activities totaled $35.2 million in 1997. During
fiscal 1997, the Company paid cash dividends of $0.42 per share and repurchased
1,137,929 shares of Company common stock at an average price per share of
$24.18. The payment of cash dividends and the purchase of treasury stock in 1997
were funded through borrowings under the Company's existing credit facilities.

In 1998 and 1997 cash from operating activities and funds available to the
Company under its line of credit facility and its revolving credit facility were
sufficient to meet cash required for capital expenditures, dividends and the
purchase of treasury stock. The Company's usage of the line of credit facility
peaked at $120.0 million in both 1998 in 1997. The Company's primary ongoing
cash requirements will be to fund new stores and the expansions, renovations and
relocations of existing stores, to finance working capital build-ups during peak
selling seasons, enhancements to the Company's information systems, expansion of
its Hingham and Lakeville facilities and payment of cash dividends that may be
declared from time to time.


                                       21
<PAGE>   6


For the current fiscal year and next fiscal year, the Company currently believes
its cash flows from operating activities and funds available to it under its
credit facilities will be sufficient to meet its planned capital expenditure and
working capital requirements, including its debt service payments.

INFLATION AND CHANGING PRICES
Because the Company sells a wide range of products which by their nature are
subject to constantly changing business strategies and competitive positioning,
it is not possible to attribute increases in retail sales or catalog sales to
specific changes in prices, changes in volume or changes in product mix.

The Company has not experienced any significant impact from inflationary
factors.

EXCHANGE RATES
Most foreign purchase orders are denominated in U.S. dollars. Accordingly, the
Company has not experienced any significant impact from changes in exchange
rates.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and in its
financial position is the potential for loss arising from adverse changes in
interest rates. The Company does not enter into financial instruments for
trading purposes.

At January 30, 1999, the Company has $100.0 million of variable rate borrowings
outstanding under its revolving credit facility, which approximate fair market
value. A hypothetical 10% adverse change in current interest rates for this
variable rate debt would have an approximate $0.4 million negative impact on the
Company's earnings and cash flows.

NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for the
Company's quarter ended May 1, 1999. SOP 98-1 establishes accounting standards
for costs incurred in the development or implementation of computer software.
These new standards require the capitalization of certain software
implementation costs and provide guidance on those costs which should be
expensed as incurred. The impact of SOP 98-1, if any, on the Company has not yet
been determined.

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for the Company's quarter ended May 1, 1999. SOP
98-5 requires that start-up activities be expensed as incurred. The application
of SOP 98-5 is not expected to have a material impact on the Company's financial
position or results of operations.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the Company's
quarter ended April 29, 2000. SFAS No. 133 significantly modifies accounting and
reporting standards for derivatives and hedging activities. The impact of SFAS
No. 133, if any, on the Company has not yet been determined.

YEAR 2000
Most computer programs have historically been written using two digits rather
than four to define the applicable year. These programs were written without
considering the impact of the upcoming change in the century and may experience
problems handling dates beyond the year 1999. This could cause computer
applications to fail or to create erroneous results unless corrective measures
are taken. Incomplete or untimely resolution of the Year 2000 ("Y2K") issue
could have a material adverse impact on the Company's business, operations and
financial condition in the future.

The Company has conducted a comprehensive review of (1) its information systems
software and hardware, (2) its facilities and distribution equipment and (3) its
third party relationships to identify


                                       22
<PAGE>   7


material systems that could be affected by the Y2K issue and has developed an
implementation plan intended to address this issue.

The Company has adopted a five-phase Y2K program consisting of:

Phase I:       Identification and ranking of material components of the
               Company's systems and equipment, and material suppliers and
               vendors that may be vulnerable to Y2K problems

Phase II:      Assessment of items identified in Phase I

Phase III:     Remediation or replacement of non-compliant internal systems and
               components and determination of solutions for non-compliant
               suppliers and vendors

Phase IV:      Testing of such internal systems and components following
               remediation

Phase V:       Developing contingency plans to address the most reasonably
               likely worst case Y2K scenarios

The identification, assessment and remediation phases of the Y2K program have
been substantially completed and these phases included both the Company's
material information technology systems and hardware ("IT Systems") and the
Company's significant non-information technology equipment known to have
microchips or other embedded technology ("non-IT Equipment"). The Company
currently expects to complete the testing phase, including installation and
testing of Year 2000 versions, by approximately fall 1999. Subsequent to
preliminary testing, the Company expects to continue periodic testing for new
installations, versions or changes. Virtually all the compliance has been
performed and is currently expected to be performed using internal and external
resources.

In addition to Y2K implementation for the Company's internal systems and
equipment, the Company is communicating with material suppliers and vendors to
determine their state of readiness with respect to Y2K. Assessment of material
third party Y2K readiness is currently expected to be substantially completed by
mid 1999. Failure of significant suppliers, vendors or other third parties to
timely address and remedy Y2K problems or to develop and effect appropriate
contingency plans could have a material adverse effect on the Company's business
and operations. The Company believes that the geographically dispersed nature of
its business and its diverse supplier and vendor base should minimize such
potential adverse effects.

The Company presently believes that with modifications to existing software and
conversions to new software for certain applications, the Y2K problem will not
cause a significant disruption of its operations. However, the Y2K problem is
unique and the Company's Y2K compliance program is based on various assumptions
and expectations which cannot be assured. Potential risks include loss of
electric power or certain communication links, other disruptions to its business
such as delayed deliveries from suppliers, as well as disruptions to
distribution channels, including ports, transportation services and the
Company's own Distribution Center. The Company is in the process of developing
contingency plans for critical systems and processes, which will be based on the
Company's continuing assessment of potential risks. The Company anticipates that
these contingency plans will be completed by approximately fall 1999.

Based on current information, the total estimated cost to address Y2K is $14.0
million; of this, approximately $6.0 million will be charged to expense as
incurred. Approximately $5.6 million has been incurred to date, of which $2.8
million was charged to expense as incurred, or approximately 12.1% of the
Company's fiscal 1998 IT budget. All costs incurred to date were budgeted
expenditures and were funded through operating cash flows. The costs associated
with completion of the Y2K program will be expensed as incurred or capitalized
in accordance with normal policy and are not currently expected to have a
material adverse impact on the Company's financial position or results of
operations. The Company has not deferred any material information technology
projects as a result of its Year 2000 program. The Company's cost estimates do
not include internal personnel costs (primarily salaries and benefits) which the
Company doesn't separately track, costs associated with any contingency plans or
costs for addressing and resolving issues as a result of the failure of third
parties to become Y2K compliant.


                                       23
<PAGE>   8


FORWARD-LOOKING INFORMATION
This Annual Report contains forward-looking information within the meaning of
The Private Securities Litigation Reform Act of 1995. The statements may be
identified by such forward-looking terminology as "expect", "look", "believe",
"anticipate", "may", "will", "plan", or similar statements or variations of such
terms. Such forward-looking statements involve certain risks and uncertainties
including levels of sales, effectiveness of the Company's brand awareness and
marketing programs, store traffic, acceptance of Talbots fashions, expansion
plans and schedule, appropriate balance of merchandise offerings and
responsiveness of the Company's core customers, timing and levels of markdowns,
and any potential disruptions to the Company's operations caused by failure of
any of the Company's IT systems, non-IT equipment or third party suppliers or
vendors to be Y2K ready, and, in each case, actual results may differ materially
from such forward-looking information. Certain factors that may cause actual
results to differ from such forward-looking statements are included in this
Annual Report and in the Company's Current Report on Form 8-K (dated October 30,
1996) filed with the Securities and Exchange Commission (a copy of which may be
obtained from the Company at 781-741-4500), as well as other periodic reports
filed by the Company with the Securities and Exchange Commission. You are urged
to consider such factors. The Company assumes no obligation for updating any
such forward-looking statements.







                                       24
<PAGE>   9


CONSOLIDATED STATEMENTS OF EARNINGS
Dollar amounts in thousands except per share data
<TABLE>
<CAPTION>

                                                                 YEAR ENDED
                                              ----------------------------------------------
                                              January 30,       January 31,      February 1,
                                                     1999              1998             1997
                                              ----------------------------------------------
<S>                                            <C>               <C>              <C>
NET SALES                                      $1,142,246        $1,053,806       $1,018,801

COSTS AND EXPENSES:
   Cost of sales, buying and occupancy            749,112           741,133          648,710
   Selling, general and administrative            326,203           295,620          261,319
                                               ---------------------------------------------

OPERATING INCOME                                   66,931            17,053          108,772

INTEREST EXPENSE - NET                              7,308             7,560            5,324
                                               ---------------------------------------------

INCOME BEFORE TAXES                                59,623             9,493          103,448

INCOME TAXES                                       22,955             3,655           39,827
                                               ---------------------------------------------

NET INCOME                                     $   36,668        $    5,838       $   63,621
                                               =============================================

NET INCOME PER SHARE - BASIC                   $     1.15        $     0.18       $     1.92
                                               =============================================

NET INCOME PER SHARE - ASSUMING DILUTION       $     1.15        $     0.18       $     1.91
                                               =============================================

WEIGHTED AVERAGE NUMBER OF SHARES OF
   COMMON STOCK OUTSTANDING -
   BASIC (in thousands)                            31,878            32,386           33,185
                                               =============================================

WEIGHTED AVERAGE NUMBER OF SHARES OF
   COMMON STOCK OUTSTANDING -
   ASSUMING DILUTION (in thousands)                31,933            32,436           33,283
                                               =============================================
</TABLE>


                See notes to consolidated financial statements.

                                       25
<PAGE>   10



CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands except per share data
<TABLE>
<CAPTION>

                                                      January 30,      January 31,
                                                             1999             1998
                                                      ----------------------------
<S>                                                      <C>              <C>
ASSETS
Current Assets:
     Cash and cash equivalents                           $ 20,195         $ 10,680
     Customer accounts receivable - net                   100,825           97,092
     Merchandise inventories                              175,678          195,078
     Deferred catalog costs                                 8,400           11,860
     Due from affiliates                                    6,653            8,568
     Deferred income taxes                                  7,139            6,862
     Prepaid and other current assets                      21,025           30,262
                                                         -------------------------
          Total current assets                            339,915          360,402

Property and Equipment - net                              189,510          182,610
Goodwill - net                                             39,544           40,888
Intangibles -  net                                             --              589
Trademarks - net                                           83,036           85,421
Deferred Income Taxes                                       5,059            6,523
                                                         -------------------------
Total Assets                                             $657,064         $676,433
                                                         =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Notes payable to banks                              $     --         $100,000
     Accounts payable                                      66,356           58,010
     Accrued liabilities                                   72,038           57,291
                                                         -------------------------
          Total current liabilities                       138,394          215,301

Long-Term Debt                                            100,000           50,000
Deferred Rent Under Lease Commitments                      16,597           14,666
Commitments
Stockholders' Equity:
     Common stock, $0.01 par value; 40,000,000
          authorized; 35,321,545 shares and
          34,955,179 shares issued, respectively,
          and 31,258,903 shares and 31,805,415
          shares outstanding, respectively                    353              350
     Additional paid-in capital                           294,089          287,407
     Retained earnings                                    222,318          199,657
     Accumulated other comprehensive income (loss)         (2,431)          (1,998)
     Restricted stock awards                               (3,157)            (529)
     Treasury stock, at cost                             (109,099)         (88,421)
                                                         -------------------------
          Total stockholders' equity                      402,073          396,466
                                                         -------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $657,064         $676,433
                                                         =========================
</TABLE>


                See notes to consolidated financial statements.

                                       26
<PAGE>   11


CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar amounts in thousands
<TABLE>
<CAPTION>

                                                                                 YEAR ENDED
                                                               -----------------------------------------------
                                                               January 30,       January 31,       February 1,
                                                                      1999              1998              1997
                                                               -----------------------------------------------
<S>                                                               <C>                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                        $ 36,668           $ 5,838           $63,621
Adjustments to reconcile net income to net cash
  provided by operating activities:
     Depreciation and amortization                                  40,035            40,392            35,095
     Deferred rent                                                   1,950             1,735             2,808
     Amortization of restricted stock awards                         1,137               780               637
     Forfeiture of restricted stock awards                            (223)               --                --
     Loss on disposal of property and equipment                      2,314             1,913               857
     Deferred income taxes                                           1,187            (2,713)           (2,835)
     Changes in current assets and liabilities:
         Customer accounts receivable                               (3,754)              137           (23,496)
         Merchandise inventories                                    19,238           (34,165)          (17,556)
         Deferred catalog costs                                      3,460            (2,294)            3,191
         Due from affiliates                                         1,915            (3,590)             (970)
         Prepaid and other current assets                            9,338            (7,346)               63
         Accounts payable                                            8,362             3,388            10,290
         Accrued liabilities                                        14,793             8,676             3,522
                                                                  --------------------------------------------
     Net cash provided by operating activities                     136,420            12,751            75,227
                                                                  --------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment                                (45,224)          (49,684)          (47,539)
Proceeds from disposal of property and equipment                       159               144             1,302
                                                                  --------------------------------------------
     Net cash used in investing activities                         (45,065)          (49,540)          (46,237)
                                                                  --------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings under notes payable to banks                (100,000)           76,000                --
Borrowings of long-term debt                                        50,000                --                --
Cash dividends                                                     (14,007)          (13,614)          (11,280)
Proceeds from options exercised and restricted stock issued          2,271               332               337
Purchase of treasury stock                                         (20,050)          (27,542)          (20,613)
                                                                  --------------------------------------------
     Net cash (used in) provided by financing activities           (81,786)           35,176           (31,556)
                                                                  --------------------------------------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                (54)              (55)               49
                                                                  --------------------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 9,515            (1,668)           (2,517)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                        10,680            12,348            14,865
                                                                  --------------------------------------------

CASH AND CASH EQUIVALENTS, END OF YEAR                            $ 20,195           $10,680           $12,348
                                                                  ============================================
</TABLE>


                See notes to consolidated financial statements.


                                       27
<PAGE>   12


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Dollar amounts in thousands except share data

<TABLE>
<CAPTION>
                                                                                                  Accumulated  
                                                       Common Stock      Additional                  Other     
                                                    ------------------    Paid-in     Retained   Comprehensive 
                                                      Shares    Amount    Capital     Earnings   Income (Loss) 
                                                    ----------------------------------------------------------

<S>                                                 <C>          <C>      <C>         <C>           <C>        
BALANCE AT FEBRUARY 3, 1996                         34,910,826   $349     $286,472    $155,092      $(1,807)   
                                                                                                               
   Cash dividends paid                                      --     --           --     (11,280)          --    
                                                                                                               
   Amortization of restricted stock award                   --     --           --          --           --    
                                                                                                               
   Stock options exercised, including tax benefit       17,266     --          402          --           --    
                                                                                                               
   Purchase of 738,835 shares of common stock               --     --           --          --           --    
                                                                                                               
   Comprehensive income:                                                                                       
      Net income                                            --     --           --      63,621           --    
      Translation adjustment                                --     --           --          --          183    
      Deferred pension cost                                 --     --           --          --          470    
                                                                                                               
   Comprehensive income                                     --     --           --          --           --    
                                                    ----------------------------------------------------------

BALANCE AT FEBRUARY 1, 1997                         34,928,092    349      286,874     207,433       (1,154)   
                                                                                                               
   Cash dividends paid                                      --     --           --     (13,614)          --    
                                                                                                               
   Common stock issued as restricted                                                                           
      stock award                                       12,000     --          299          --           --    
                                                                                                               
   Amortization of restricted stock award                   --     --           --          --           --    
                                                                                                               
   Stock options exercised, including tax benefit       15,087      1          388          --           --    
                                                                                                               
   Purchase of 1,137,929 shares of common stock             --     --           --          --           --    
                                                                                                               
   Other equity transactions                                --     --         (154)         --           --    
                                                                                                               
   Comprehensive income:                                                                                       
      Net income                                            --     --           --       5,838           --    
      Translation adjustment                                --     --           --          --         (844)   
                                                                                                               
   Comprehensive income                                     --     --           --          --           --    
                                                    ----------------------------------------------------------

BALANCE AT JANUARY 31, 1998                         34,955,179    350      287,407     199,657       (1,998)   
                                                                                                               
   Cash dividends paid                                      --     --           --     (14,007)          --    
                                                                                                               
   Common stock issued as restricted                                                                           
      stock award                                      256,500      2        4,015          --           --    
                                                                                                               
   Amortization of restricted stock awards                  --     --           --          --           --    
                                                                                                               
   Stock options exercised, including tax benefit      109,866      1        2,560          --           --    
                                                                                                               
   Purchase of 912,878 shares of common stock               --     --           --          --           --    
                                                                                                               
   Other equity transactions                                --     --          107          --           --    
                                                                                                               
   Comprehensive income:                                                                                       
      Net income                                            --     --           --      36,668           --    
      Translation adjustment                                --     --           --          --         (433)   
                                                                                                               
   Comprehensive income                                     --     --           --          --           --    
                                                    ----------------------------------------------------------

BALANCE AT JANUARY 30, 1999                         35,321,545   $353     $294,089    $222,318      $(2,431)   
                                                    ==========================================================

                                                                                                                 
<CAPTION>
                                                     Restricted                                     Total        
                                                       Stock        Treasury   Comprehensive    Stockholders'    
                                                       Awards         Stock        Income          Equity        
                                                     --------------------------------------------------------

<S>                                                   <C>          <C>            <C>             <C>            
BALANCE AT FEBRUARY 3, 1996                           $(1,801)     $ (40,266)                     $398,039       
                                                                                                                 
   Cash dividends paid                                     --             --                       (11,280)      
                                                                                                                 
   Amortization of restricted stock award                 637             --                           637       
                                                                                                                 
   Stock options exercised, including tax benefit          --             --                           402       
                                                                                                                 
   Purchase of 738,835 shares of common stock              --        (20,613)                      (20,613)      
                                                                                                                 
   Comprehensive income:                                                                                         
      Net income                                           --             --      $ 63,621          63,621       
      Translation adjustment                               --             --           183             183       
      Deferred pension cost                                --             --           470             470       
                                                                                  --------                       
   Comprehensive income                                    --             --        64,274              --       
                                                     --------------------------------------------------------

BALANCE AT FEBRUARY 1, 1997                            (1,164)       (60,879)                      431,459       
                                                                                                                 
   Cash dividends paid                                     --             --                       (13,614)      
                                                                                                                 
   Common stock issued as restricted                                                                             
      stock award                                        (299)            --                            --       
                                                                                                                 
   Amortization of restricted stock award                 780             --                           780       
                                                                                                                 
   Stock options exercised, including tax benefit          --             --                           389       
                                                                                                                 
   Purchase of 1,137,929 shares of common stock            --        (27,542)                      (27,542)      
                                                                                                                 
   Other equity transactions                              154             --                                     
                                                                                                                 
   Comprehensive income:                                                                                         
      Net income                                           --             --         5,838           5,838       
      Translation adjustment                               --             --          (844)           (844)      
                                                                                  --------                       
   Comprehensive income                                    --             --         4,994              --       
                                                     --------------------------------------------------------

BALANCE AT JANUARY 31, 1998                              (529)       (88,421)                      396,466       
                                                                                                                 
   Cash dividends paid                                     --             --                       (14,007)       
                                                                                                                 
   Common stock issued as restricted                                                                             
      stock award                                      (4,015)            --                             2       
                                                                                                                 
   Amortization of restricted stock awards              1,137             --                         1,137       
                                                                                                                 
   Stock options exercised, including tax benefit          --             --                         2,561       
                                                                                                                 
   Purchase of 912,878 shares of common stock              --        (20,050)                      (20,050)      
                                                                                                                 
   Other equity transactions                              250           (628)                         (271)      
                                                                                                                 
   Comprehensive income:                                                                                         
      Net income                                           --             --        36,668          36,668       
      Translation adjustment                               --             --          (433)           (433)      
                                                                                  --------                       
   Comprehensive income                                    --             --        36,235              --       
                                                     --------------------------------------------------------

BALANCE AT JANUARY 30, 1999                           $(3,157)     $(109,099)           --      $  402,073       
                                                     ========================================================
</TABLE>

                See notes to consolidated financial statements.

                                       28


<PAGE>   13

THE TALBOTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollar amounts in thousands except per share data

[1] DESCRIPTION OF BUSINESS

The Talbots, Inc. (together with its subsidiaries, the "Company") is a specialty
retailer with a direct marketing catalog operation. On November 18, 1993, the
Company effected an initial public offering of its common stock (the
"Offering"), issuing 12,621,594 shares of common stock. Prior to the Offering,
the Company was a wholly owned subsidiary of JUSCO (U.S.A.), Inc. ("JUSCO
(USA)"), which subsequent to the Offering, remains the Company's majority
shareholder, owning approximately 62.7% of the Company's outstanding common
stock. The Company had been acquired by JUSCO (USA) in 1988 from General Mills,
Inc. The acquisition was accounted for under the purchase method of accounting
for business combinations.

The years ended January 30, 1999, January 31, 1998 and February 1, 1997 were 52
week reporting periods. The Company conforms to the National Retail Federation's
fiscal calendar.

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES - The preparation of financial statements in conformity with
Generally Accepted Accounting Principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
included within the consolidated financial statements include sales return
reserve, inventory reserve, allowance for doubtful accounts, and the lives of
intangible assets.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments with a purchased maturity of three months or less to be cash
equivalents.

CUSTOMER ACCOUNTS RECEIVABLE - Customer accounts receivable are amounts due from
customers on the Company's credit card, net of an allowance for doubtful
accounts of $1,600 and $1,400 as of January 30, 1999 and January 31, 1998,
respectively.

ADVERTISING - Advertising costs, which include media, production and catalogs
totaled $62,517, $65,283 and $58,037 in the years ended January 30, 1999,
January 31, 1998 and February 1, 1997. Media and production costs are expensed
in the period in which the advertising first takes place, while catalog costs
are amortized over the estimated productive selling life of the catalog,
generally three to five months.

MERCHANDISE INVENTORIES - Inventories are stated at the lower of average cost or
market using the retail inventory method on a FIFO (first-in, first-out) basis.

PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation and amortization are provided over the following estimated useful
lives using the straight-line method:

         DESCRIPTION                YEARS
    ---------------------------------------------------------------------
         Buildings                 15-50
         Fixtures and equipment     2-10
         Software                      5
         Leasehold improvements     5-15 or term of lease, if shorter
         Leasehold interests        4-20



                                       29
<PAGE>   14


Leasehold interests were established in June 1988 and represent the present
value of the excess of market rental rates over actual rents payable over the
remaining lives of certain leases.

Expenditures for new properties and improvements to existing facilities are
capitalized, while the cost of maintenance is charged to expense. The cost of
property retired, or otherwise disposed of, and the accumulated depreciation are
eliminated from the related accounts, and the resulting gain or loss is
reflected in earnings.

GOODWILL - The excess of purchase price over net assets acquired is being
amortized over 40 years using the straight-line method. At January 30, 1999 and
January 31, 1998 accumulated amortization on goodwill was $14,215 and $12,871,
respectively.

INTANGIBLES - Intangibles consist of the fair market value of existing customer
relationships established in June 1988 and are being amortized using a surviving
curve lifing analysis, which approximates straight-line, over their lives of
approximately nine years. At January 30, 1999 and January 31, 1998 accumulated
amortization on intangibles was $32,002 and $31,413, respectively.

TRADEMARKS - In November 1993 the Company purchased certain trademarks,
including the Talbots trade name, from JUSCO (Europe) B.V., a related party (see
Note 5). The trademarks, which are registered in the U.S. Patent and Trademark
Office and may be renewed indefinitely, are being amortized over 40 years using
the straight-line method. At January 30, 1999 and January 31, 1998 accumulated
amortization on the trademarks was $12,334 and $9,950, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of current assets (except inventories), current liabilities
and long-term debt. The carrying value of current assets and current liabilities
approximates their fair market values; long-term debt, which has variable
interest rate terms, is therefore at current market interest rates, and its
carrying value approximates its fair market value.

FINANCE CHARGE INCOME - Finance charge income on customer accounts receivable is
treated as a reduction of selling, general and administrative expense. For the
years ended January 30, 1999, January 31, 1998 and February 1, 1997, the amounts
were $15,333, $14,701 and $12,921, respectively.

STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation
awards to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (see Note 4).

FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's foreign
operations is the applicable local currency. The translation of the applicable
foreign currency into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date, and for revenue and
expense accounts using the average rates of exchange prevailing during the year.
Adjustments resulting from such translation are included as a separate component
of comprehensive income.

INCOME TAXES - In accordance with Statement of Financial Accounting Standard
("SFAS") No. 109, deferred income taxes are provided to recognize the effect of
temporary differences between tax and financial statement reporting.

BASIC AND DILUTED NET INCOME PER SHARE - Basic net income per share is computed
by dividing net income by the weighted average number of shares of common stock
outstanding. Diluted net income per share is computed by dividing net income by
the weighted average number of shares of common stock outstanding plus the
effect of all dilutive potential common shares (as determined by the treasury
stock method which includes the tax benefit on assumed stock option exercises).

COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires that certain components of stockholders' equity from nonowner sources
be identified as "other comprehensive income." For the years 



                                       30
<PAGE>   15

ended January 30, 1999 and January 31, 1998, the Company's comprehensive net
income was comprised of the impact of changes in the cumulative foreign currency
translation adjustment. For the year ended February 1, 1997, comprehensive net
income was comprised of the impact of changes in the cumulative foreign currency
translation adjustment and the reversal of a deferred pension debit.
Comprehensive income is included in the consolidated statements of stockholders'
equity.

SUPPLEMENTAL CASH FLOW INFORMATION - Interest paid on a cash basis for the years
ended January 30, 1999, January 31, 1998 and February 1, 1997 was $7,538, $8,207
and $6,659, respectively. Income tax payments during the years ended January 30,
1999, January 31, 1998 and February 1, 1997 were $19,457, $14,517 and $42,609,
respectively.

NEW ACCOUNTING PRONOUNCEMENTS - In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for the Company's quarter ended May 1, 1999.
SOP 98-1 establishes accounting standards for costs incurred in the development
or implementation of computer software. These new standards require the
capitalization of certain software implementation costs and provide guidance on
those costs which should be expensed as incurred. The impact of SOP 98-1, if
any, on the Company has not yet been determined.

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for the Company's quarter ended May 1, 1999. SOP
98-5 requires that start-up activities be expensed as incurred. The application
of SOP 98-5 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the Company's
quarter ended April 29, 2000. SFAS No. 133 significantly modifies accounting and
reporting standards for derivatives and hedging activities. The impact of SFAS
No. 133, if any, on the Company has not yet been determined.

RECLASSIFICATIONS - Certain reclassifications have been made to the February 1,
1997 and January 31, 1998 consolidated financial statements to conform with the
January 30, 1999 presentation.

[3] EQUITY TRANSACTIONS

During the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
the Company declared and paid dividends totaling $0.44 per share, $0.42 per
share, and $0.34 per share, respectively.

On February 21, 1995, the Company adopted a stock repurchase plan authorizing
the purchase of up to one million shares of its common stock outstanding over a
two-year period. The plan was completed in October 1995. In November 1995, the
plan was extended, authorizing the Company to purchase up to an additional
$40,000 of outstanding stock from time to time over a two-year period. In May
1997, this extended plan was completed and a second extension of the Plan was
authorized, allowing the Company to purchase up to an additional $40,000 of
outstanding stock from time to time over a two-year period. As of January 30,
1999, $33,766 of outstanding stock had been purchased under the second
extension. At January 30, 1999 and January 31, 1998, the Company held 4,062,642
and 3,149,764 shares, respectively, as treasury shares. Treasury shares also
include shares forfeited under the Company's restricted stock plan.


[4] STOCK OPTIONS

Effective June 1, 1995, the Company implemented a stock option plan for members
of its Board of Directors who do not qualify under other Company option plans.
The Company has reserved 130,000 shares of common stock for issuance under the
plan. The stock options vest over a three-year period and expire within ten
years from the grant date. The stock options are granted at a price equal to the
fair market value of the Company's common stock at the date of grant. 



                                       31
<PAGE>   16

On November 18, 1993, the Company reserved 2,650,000 shares of common stock for
issuance pursuant to the Company's 1993 Executive Stock Based Incentive Plan
(the "Plan"). In February 1998, the Company's Board of Directors amended the
Plan to increase the number of shares of common stock authorized thereunder by
an additional 3,310,000 shares. This increase in authorized shares was approved
by the Company's shareholders at the Company's Annual Meeting in May 1998.

Under the provisions of the Plan, the Company has issued to certain key
management personnel shares of restricted stock. The purchase price of the
restricted stock is $.01 per share. The difference between the market price of
the shares on the date of grant and the individual's cost of $.01 per share is
recorded as deferred compensation and is amortized over a five-year service
period. At January 30, 1999, 250,800 shares of restricted stock were
outstanding.

A summary of the changes in restricted shares outstanding for the years ended
January 30, 1999, January 31, 1998 and February 1, 1997 is presented below.


<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                       ------------------------------------------------------------------------
                                          January 30, 1999          January 31, 1998         February 1, 1997
                                       ------------------------------------------------------------------------
                                                      Weighted                  Weighted               Weighted
                                                       average                   average                average
                                                        market                    market                 market
                                                      price of                  price of               price of
                                                     shares on                 shares on              shares on
                                          Number       date of      Number       date of      Number    date of
                                       of shares         grant   of shares         grant   of shares      grant
                                       ------------------------------------------------------------------------

<S>                                      <C>            <C>        <C>            <C>        <C>         <C>   
Outstanding at beginning of year          56,533        $20.08     108,973        $19.50     163,450     $19.50
Granted                                  256,500        $15.66      12,000        $24.94          --         --
Vested                                   (45,342)       $19.50     (56,532)       $19.50     (54,477)    $19.50
Forfeited                                (16,891)       $16.25      (7,908)       $19.50          --         --
                                       ------------------------------------------------------------------------
Outstanding at end of year               250,800        $15.92      56,533        $20.08     108,973     $19.50
                                       ========================================================================
</TABLE>


In accordance with the Plan, the Company has issued stock options which vest
over a three-year period and expire not later than ten years from the grant
date. These stock options have been granted at fair market value at the date of
grant.

A summary of activity in the Company's option plans during the years ended
January 30, 1999, January 31, 1998 and February 1, 1997 is presented below.

<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                       ------------------------------------------------------------------------
                                          January 30, 1999          January 31, 1998         February 1, 1997
                                       ------------------------------------------------------------------------
                                                      Weighted                  Weighted               Weighted
                                                       average                   average                average
                                                        option                    option                 option
                                          Number     price per      Number     price per      Number  price per
                                       of shares         share   of shares         share   of shares      share
                                       ------------------------------------------------------------------------

<S>                                    <C>              <C>      <C>              <C>      <C>            <C>   
Outstanding at beginning of year       2,406,693        $27.24   2,019,525        $27.85   1,511,292      $27.41
Granted                                  549,000        $16.29     516,425        $24.99     531,500      $28.89
Exercised                               (109,866)       $20.67     (15,087)       $19.72     (17,266)     $19.50
Forfeited                               (244,315)       $27.64    (114,170)       $29.44      (6,001)     $31.95
                                       ------------------------------------------------------------------------
Outstanding at end of year             2,601,512        $25.17   2,406,693        $27.24   2,019,525      $27.85
                                       ========================================================================
Exercisable at end of year             1,636,639        $27.69   1,470,231        $27.48   1,026,821      $25.83
                                       ========================================================================
</TABLE>


                                       32
<PAGE>   17

The following table summarizes information regarding stock options outstanding
at January 30, 1999.

<TABLE>
<CAPTION>
                              Options Outstanding                      Options Exercisable
-------------------------------------------------------------------------------------------------
                     Number of      Weighted         Weighted        Number of       Weighted
     Range of         options        average          average         options         average
  exercise prices   outstanding   remaining life   exercise price   exercisable   exercise price
-------------------------------------------------------------------------------------------------
  <S>                 <C>           <C>               <C>             <C>             <C>
      $14.81          425,500       9.0 years         $14.81                0         $14.81
  $18.38 - $20.31     459,823       4.9 years         $19.48          425,823         $19.50
      $22.75            8,500       9.6 years         $22.75                0         $22.75
  $24.94 - $26.81     473,025       8.8 years         $25.05          135,668         $25.01
  $28.19 - $29.50     793,998       7.0 years         $28.98          641,817         $29.10
  $32.13 - $34.63     440,666       5.4 years         $34.44          433,331         $34.47
</TABLE>

The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees. Had compensation cost for
the Company's stock option plans been determined based on the fair value method
at the grant date for awards in 1998, 1997 and 1996, consistent with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and basic and diluted net income per share would have been
reported as follows:

                                                       YEAR ENDED
                                          -------------------------------------
                                          January 30,  January 31,  February 1,
                                                 1999         1998         1997
                                          -------------------------------------
Net income                                    $33,058       $1,427      $60,435
Net income per share - basic                  $  1.04       $ 0.04      $  1.82
Net income per share - assuming dilution      $  1.04       $ 0.04      $  1.82


The fair value of options on their grant date is measured using the
Black/Scholes option pricing model. The estimated weighted average fair value of
options granted during 1998, 1997 and 1996 was $7.33, $11.58, and $15.05 per
option, respectively. Key assumptions used to apply this pricing model are as
follows:

<TABLE>
<CAPTION>
                                                             January 30,   January 31,   February 1,
                                                                    1999          1998          1997
                                                             ---------------------------------------
<S>                                                              <C>           <C>           <C>    
Weighted average risk free interest rate                            5.5%          6.0%          6.2% 
Weighted average expected life of option grants                  8 years       8 years       8 years 
Weighted average expected volatility of underlying stock           47.4%         42.7%         46.2% 
Weighted average expected dividend payment rate,
    as a percentage of the stock price on the date of grant         2.8%          2.0%          1.2%
</TABLE>


The option pricing model used was designed to value readily tradable stock
options with relatively short lives. The options granted to employees are not
tradable and have contractual lives of ten years. The Company believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances.

[5] RELATED PARTY AND AFFILIATES

In November 1993, the Company purchased certain trademarks, including the
Talbots trade name, from JUSCO (Europe) B.V., a related party. JUSCO (Europe)
B.V. has retained rights to certain trademarks in specified Asian territories.

JUSCO Company, Ltd. owns and operates stores in Japan under the name of Talbots
Japan Co., Ltd. ("Talbots Japan"). The Company provides certain services for
Talbots Japan and is reimbursed for expenses incurred. At January 30, 1999 and
January 31, 1998 the Company was owed $6,641 and $8,534, respectively, for these
costs and for merchandise inventory purchases made on behalf of Talbots Japan.



                                       33
<PAGE>   18

[6] PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                                     January 30,    January 31,
                                                            1999           1998
                                                     ---------------------------
Land                                                   $  12,081      $  11,011
Buildings                                                 39,667         38,956
Fixtures and equipment                                   196,443        181,794
Software                                                   5,040          4,717
Leasehold improvements                                   107,886        101,117
Leasehold interests                                        6,445          7,477
Construction in progress                                  15,092          9,555
                                                     ---------------------------
Property and equipment - gross                           382,654        354,627
Less accumulated depreciation and amortization          (193,144)      (172,017)
                                                     ---------------------------
Property and equipment - net                           $ 189,510      $ 182,610
                                                     ==========================

[7] DEBT

Revolving Credit - The revolving credit agreements with four banks have maximum
available borrowings of $100,000, have two-year terms, are due between February
2000 and January 2001, and can be extended annually. Interest terms on the
revolving credit agreements are negotiable, at the Company's option, for periods
of one, three or six months. At January 30, 1999 the Company had $100,000
outstanding under its revolving credit agreements. None of the outstanding
balance is currently payable.

A summary of the amounts outstanding, the current interest terms and the loan
maturities under the revolving credit agreements at January 30, 1999 follows.

       Outstanding     Interest rate         Maturity
       ------------------------------------------------
        $ 14,000           5.75%             April 2000
           8,000           6.13%           January 2001
          18,000           6.16%           January 2001
          14,000           6.25%             April 2000
          10,000           6.31%          February 2000
          12,000           6.37%             April 2000
          18,000           6.69%             April 2000
           6,000           7.13%          February 2000
        --------
        $100,000
        ========


At January 31, 1998, the Company had $50,000 outstanding under its revolving
credit agreements. Interest terms were fixed at 6.47% until July 28, 1998. In
April 1998, the Company obtained an increase in the maximum available borrowings
under the revolving credit agreements from $50,000 to $100,000.

NOTES PAYABLE TO BANKS - The Company also has available an unsecured
line-of-credit facility of $125,000 with five banks. At January 30, 1999 no
amounts were outstanding on this facility. At January 31, 1998, $100,000 was
outstanding on this facility. The weighted average interest rate for the years
ended January 30, 1999 and January 31, 1998 was 6.41% and 6.13%, respectively.

LETTERS OF CREDIT - The Company has two letter-of-credit banking agreements
totaling $100,000, which it uses primarily for the purchase of merchandise
inventories. At January 30, 1999 and January 31, 1998, the Company held $50,482
and $38,324, respectively, in purchase commitments.

INTEREST EXPENSE - Interest expense for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997, was $8,281, $8,366 and $6,636,
respectively.


                                       34
<PAGE>   19

[8] INCOME TAXES

The provision for income taxes for the years ended January 30, 1999, January 31,
1998 and February 1, 1997, consists of the following:

                                                   YEAR ENDED
                                     ---------------------------------------
                                     January 30,   January 31,   February 1,
                                            1999          1998          1997
                                     ---------------------------------------
Currently payable:
   Federal                               $20,088       $ 7,290       $37,089
   State                                   1,680          (923)        5,579
                                     ---------------------------------------
Total currently payable                   21,768         6,367        42,668
                                     ---------------------------------------
Deferred:
   Federal                                 1,374        (1,288)       (1,508)
   State                                    (187)       (1,424)         (174)
   Foreign                                    --            --        (1,159)
                                     ---------------------------------------
Total deferred                             1,187        (2,712)       (2,841)
                                     ---------------------------------------
Total income tax expense                 $22,955       $ 3,655       $39,827
                                     =======================================


The effect of temporary differences which gives rise to deferred income tax
balances at January 30, 1999 and January 31, 1998, respectively, are as follows:


<TABLE>
<CAPTION>
                                                     January 30, 1999                         January 31, 1998
                                            ----------------------------------------------------------------------------
                                             Assets    Liabilities        Total       Assets    Liabilities        Total
                                            ----------------------------------------------------------------------------
<S>                                         <C>            <C>          <C>          <C>            <C>          <C>    
UNITED STATES:                                                                                 
Current:                                                                                       
   Merchandise inventories                  $ 2,587        $    --      $ 2,587      $ 2,684        $    --      $ 2,684
   Deferred catalog costs                        --         (1,059)      (1,059)          --         (1,259)      (1,259)
   Accrued vacation pay                       2,191             --        2,191        1,840             --        1,840
   Deferred compensation                      2,826             --        2,826        3,094             --        3,094
   Other                                      1,964         (1,370)         594        2,177         (1,674)         503
                                            ----------------------------------------------------------------------------
Total current                                 9,568         (2,429)       7,139        9,795         (2,933)       6,862
                                            ----------------------------------------------------------------------------
Noncurrent:                                                                                    
   Depreciation & amortization                   --         (4,386)      (4,386)          --         (1,512)      (1,512)
   Lease commitments                          5,490             --        5,490        4,693             --        4,693
   Other                                      3,585           (789)       2,796        2,972           (789)       2,183
                                            ----------------------------------------------------------------------------
Total noncurrent                              9,075         (5,175)       3,900        7,665         (2,301)       5,364
                                            ----------------------------------------------------------------------------

FOREIGN:                                                                                       
Noncurrent:                                                                                    
   Subsidiary tax loss carryforwards          4,042             --        4,042        4,378             --        4,378
   Less: valuation allowance                 (2,883)            --       (2,883)      (3,219)            --       (3,219)
                                            ----------------------------------------------------------------------------
Total noncurrent                              1,159             --        1,159        1,159             --        1,159
                                            ----------------------------------------------------------------------------
Total deferred income taxes                 $19,802        $(7,604)     $12,198      $18,619        $(5,234)     $13,385
                                            ============================================================================
</TABLE>

At January 30, 1999, a consolidated foreign subsidiary of the Company had a net
operating loss carryforward which began to expire in fiscal year 1998.
Management records a valuation allowance each year reflecting the likelihood of
the realization of the related deferred tax asset. For the year ended January
30, 1999, the valuation allowance was reduced by $336. For the year ended
January 31, 1998, the valuation allowance was increased by $954. The valuation
allowance was reduced by $458 for the year ended February 1, 1997.

At January 30, 1999, the Company had a federal charitable contribution
carryforward of $2,406 that expires in year 2003. Also at January 30, 1999, the
Company had state net operating loss and charitable contribution carryforwards
of $1,317 that expire in years 2001 through 2012.



                                       35
<PAGE>   20

For the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
total income tax expense differs from that computed by multiplying income before
taxes by the United States federal income tax rates as follows:


<TABLE>
<CAPTION>
                                                                        YEAR ENDED
                                               ------------------------------------------------------------
                                                   January 30,          January 31,           February 1,
                                                      1999                 1998                  1997
                                               ------------------------------------------------------------
                                                   Tax    Rate         Tax      Rate          Tax     Rate
                                               ------------------------------------------------------------
<S>                                            <C>        <C>      <C>          <C>       <C>         <C>  
Expected tax expense                           $20,868    35.0%    $ 3,323      35.0%     $36,207     35.0%
Adjustments resulting from:
   State income taxes, net of federal
      tax benefit                                  970     1.6      (1,525)    (16.1)       3,513      3.4
   Goodwill amortization                           470     0.8         470       5.0          470      0.5
   Other                                           647     1.1       1,387      14.6         (363)    (0.4)
                                               ------------------------------------------------------------
Actual tax expense                             $22,955    38.5%    $ 3,655      38.5%     $39,827     38.5%
                                               ============================================================
</TABLE>


[9] SEGMENT INFORMATION

The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" in 1998.
Accordingly, it has segmented its operations in a manner that reflects how its
chief operating decision-maker reviews the results of the operating segments
that make up the consolidated entity.

The Company evaluates the operating performance of its identified segments based
on a direct profit measure. Direct profit is calculated as net sales less cost
of goods sold and direct expenses, such as payroll, occupancy and other direct
costs. Indirect expenses are not allocated on a segment basis. Such indirect
expenses include corporate overhead expenses, finance charge income, and
amortization. Assets are not allocated between segments, therefore no measure of
segment assets is available.

The Company has two reportable segments, its retail stores (the "Stores 
Segment"), which include the Company's United States, Canada and United Kingdom
retail store operations, and its catalog operations (the "Catalog Segment").

The Company's reportable segments offer similar products, however, each segment
requires different marketing and management strategies. The Stores Segment
derives its revenues from the sale of women's and children's classic apparel,
accessories and shoes, through its retail stores, while the Catalog Segment
derives its revenues through its approximately 25 distinct catalog mailings per
year.

The following is segment information as of and for the years ended January 30,
1999, January 31, 1998 and February 1, 1997:

                                                 January 30, 1999
                                        ------------------------------------
                                          Stores      Catalog          Total
                                        ------------------------------------
Sales to external customers             $972,974     $169,272     $1,142,246
Direct profit                            134,258       18,644        152,902

                                                 January 31, 1998
                                        ------------------------------------
                                          Stores      Catalog          Total
                                        ------------------------------------
Sales to external customers             $894,620     $159,186     $1,053,806
Direct profit                             83,236        4,151         87,387

                                                 February 1, 1997
                                        ------------------------------------
                                          Stores      Catalog          Total
                                        ------------------------------------
Sales to external customers             $838,992     $179,809     $1,018,801
Direct profit                            152,642       22,396        175,038


                                       36
<PAGE>   21

The accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies, except as follows:
direct profit is calculated as net sales less cost of goods sold and direct
expenses, such as payroll, occupancy and other direct costs. Indirect expenses
are not allocated on a segment basis, therefore no measure of segment net income
or loss is available. Assets are not allocated between segments, therefore no
measure of segment assets is available.

The following reconciles direct profit to consolidated operating income as of
and for the years ended January 30, 1999, January 31, 1998 and February 1, 1997:

<TABLE>
<CAPTION>
                                                       January 30,     January 31,     February 1,
                                                              1999            1998            1997
                                                       -------------------------------------------
<S>                                                       <C>             <C>             <C>     
Total direct profit or loss for reportable segments       $152,902        $ 87,387        $175,038
Less: indirect expenses                                     85,971          70,334          66,266
                                                       -------------------------------------------
Consolidated operating income                             $ 66,931        $ 17,053        $108,772
                                                       ===========================================
</TABLE>

As a retailer that sells to the general public, the Company has no single
customer who accounts for greater than 10% of the Company's sales.

The following is geographical information as of and for the years ended January
30, 1999, January 31, 1998 and February 1, 1997:

<TABLE>
<CAPTION>
                                                       January 30,     January 31,     February 1,
                                                              1999            1998            1997
                                                       -------------------------------------------
<S>                                                     <C>             <C>             <C>       
SALES
United States                                           $1,101,135      $1,016,439      $  979,548
Foreign                                                     41,111          37,367          39,253
                                                       -------------------------------------------
Total consolidated revenues                             $1,142,246      $1,053,806      $1,018,801
                                                       ===========================================

LONG-LIVED ASSETS
United States                                           $  302,607      $  300,068      $  292,758
Foreign                                                      9,483           9,440           9,874
                                                       -------------------------------------------
Total long-lived assets                                 $  312,090      $  309,508      $  302,632
                                                       ===========================================
</TABLE>

The classification "Foreign" is comprised of the Company's Canada and United
Kingdom retail store operations and the classification "United States" is
comprised of the Company's United States retail store operations and the
Company's catalog operations.

[10] BENEFIT PLANS

The Company sponsors a non-contributory defined benefit pension plan covering
substantially all salaried and hourly employees. The plan provides retirement
benefits for employees who have attained age 21 and completed one year of
service. Effective December 31, 1996, the salaried and hourly pension plans were
merged and the benefit formulas modified. The benefit formula for salaried and
hourly corporate employees is a final average pay benefit formula and the
benefit formula for store employees is a career pay formula. The prior plan for
hourly employees was a flat dollar plan. The Company's general funding policy is
to contribute the greater of amounts that are deductible for federal income tax
purposes or required by law.



                                       37
<PAGE>   22

During 1998, the Company adopted the provisions of SFAS No. 132 "Employer's
Disclosures About Pensions and Other Postretirement Benefits." The following
sets forth the funded status and prepaid pension cost for the Company's pension
plan:

                                                     January 30,    January 31,
                                                            1999           1998
                                                     ---------------------------
CHANGE IN BENEFIT OBLIGATION:                                        
   Projected benefit obligation at beginning of year    $(24,197)      ($17,955)
      Service cost                                        (2,489)        (2,150)
      Interest cost                                       (2,034)        (1,703)
      Actuarial loss                                      (4,940)        (2,688)
      Benefits paid                                          934            299
                                                     ---------------------------
   Projected benefit obligation at end of year          $(32,726)      ($24,197)
                                                     ==========================

CHANGE IN ASSETS:                                                    
   Fair value at the beginning of year                  $ 21,772       $ 16,461
      Actual return on plan assets                         3,954          3,051
      Employer contributions                               3,000          2,559
      Benefits paid                                         (934)          (299)
                                                     ---------------------------
   Fair value at end of year                            $ 27,792       $ 21,772
                                                     ==========================

FUNDED STATUS:                                                       
   Projected benefit obligation                         $(32,726)      $(24,197)
      Fair value of plan assets                           27,792         21,772
                                                     ---------------------------
   Funded status                                          (4,934)        (2,425)
      Unrecognized prior service cost                      1,179          1,342
      Unrecognized net loss                                4,160          1,147
                                                     ---------------------------
   Prepaid pension asset                                $    405       $     64
                                                     ==========================

Net pension cost for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997 included the following components:

<TABLE>
<CAPTION>
                                                                              YEAR ENDED
                                                            -----------------------------------------------
                                                            January 30,       January 31,       February 1,
                                                                   1999              1998              1997
                                                            -----------------------------------------------
<S>                                                             <C>               <C>               <C>    
Service cost - benefits earned during the period                $ 2,489           $ 2,150           $ 1,763
Interest cost on projected benefit obligation                     2,034             1,703             1,246
Expected return on plan assets                                   (2,041)           (1,562)           (1,122)
Net amortization and deferral                                       176               162               236
                                                            -----------------------------------------------
Net pension expense                                             $ 2,658           $ 2,453           $ 2,123
                                                            ===============================================
</TABLE>

The Company also has a non-qualified supplemental executive retirement plan
("SERP") for key executives impacted by Internal Revenue Code limits on benefits
and compensation. The plan is currently unfunded.



                                       38
<PAGE>   23

The following sets forth the funded status and accrued benefit cost for the
Company's SERP plan.

<TABLE>
<CAPTION>
                                                         January 30,      January 31,
                                                                1999             1998
                                                         -----------------------------
<S>                                                          <C>              <C>     
CHANGE IN BENEFIT OBLIGATION:
   Projected benefit obligation at beginning of year         $(2,537)         $(2,121)
      Service cost                                              (176)            (195)
      Interest cost                                             (195)            (171)
      Actuarial loss                                            (215)             (50)
      Benefits paid                                               --               --
                                                         -----------------------------
   Projected benefit obligation at end of year               $(3,123)         $(2,537)
                                                         =============================

FUNDED STATUS:
   Projected benefit obligation                              $(3,123)         $(2,537)
      Fair value of plan assets                                   --               --
                                                         -----------------------------
   Funded status                                              (3,123)          (2,537)
      Unrecognized prior service cost                            228              273
      Unrecognized net loss                                      561              356
                                                         -----------------------------
   Accrued pension liability                                 $(2,334)         $(1,908)
                                                         =============================
</TABLE>

Net SERP cost for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997 included the following components:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED
                                                      ---------------------------------------
                                                      January 30,   January 31,   February 1,
                                                             1999          1998          1997
                                                      ---------------------------------------
<S>                                                          <C>           <C>           <C> 
Service cost - benefits earned during the period             $176          $195          $195
Interest cost on projected benefit obligation                 195           171           156
Net amortization and deferral                                  56            46            78
                                                      ---------------------------------------
Net SERP expense                                             $427          $412          $429
                                                      =======================================
</TABLE>

As of January 30, 1999, January 31, 1998 and February 1, 1997, the discount rate
used in determining both the net pension and SERP expense was 7.25%, 7.75%, and
7.25%, respectively. For the years ended January 30, 1999, January 31, 1998 and
February 1, 1997, the discount rate used in determining the actuarial present
value of the projected benefit obligation was 6.75%, 7.25% and 7.75%,
respectively. The rate of increase in future compensation levels was 4.0% for
the years ended January 30, 1999 and January 31, 1998 and 4.75% for the year
ended February 1, 1997. The expected rate of return on pension plan assets was
9.0% in all three years. Plan assets for the pension plan consist principally of
fixed income and equity securities.

The Company has a qualified defined contribution 401(k) plan, which covers
substantially all employees. Employees make contributions to the plan, and the
Company makes a contribution which matches 50% of an employee's contribution up
to a maximum of 6% of the employee's actual compensation. Company contributions
for the years ended January 30, 1999, January 31, 1998 and February 1, 1997 were
$2,431, $2,321 and $2,252, respectively.



                                       39
<PAGE>   24

The Company provides certain medical benefits for most retired employees. The
following sets forth the funded status and accrued benefit cost for the plan.

<TABLE>
<CAPTION>
                                                         January 30,      January 31,
                                                                1999             1998
                                                         -----------------------------
<S>                                                          <C>              <C>     
CHANGE IN BENEFIT OBLIGATION:
   Projected benefit obligation at beginning of year         $(1,653)         $(1,351)
      Service cost                                              (224)            (162)
      Interest cost                                             (156)            (117)
      Actuarial loss                                            (398)             (33)
      Benefits paid                                               39               10
                                                         -----------------------------
   Projected benefit obligation at end of year               $(2,392)         $(1,653)
                                                         =============================

FUNDED STATUS:
   Projected benefit obligation                              $(2,392)         $(1,653)
      Fair value of plan assets                                   --               --
                                                         -----------------------------
   Funded status                                              (2,392)          (1,653)
      Unrecognized net loss (gain)                               177             (221)
                                                         -----------------------------
   Accrued postretirement liability                          $(2,215)         $(1,874)
                                                         =============================
</TABLE>

The net cost of the plan for the fiscal years ended January 30, 1999, January
31, 1998 and February 1, 1997 included the following components:

<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                    ------------------------------------------
                                                    January 30,    January 31,    February 1,
                                                           1999           1998           1997
                                                    ------------------------------------------
<S>                                                        <C>            <C>            <C> 
Service cost - benefits earned during the period           $224           $162           $157
Interest cost on projected benefit obligation               156            117             95
Net amortization and deferral                                --            (11)            (9)
                                                    ------------------------------------------
Net expense                                                $380           $268           $243
                                                    ==========================================
</TABLE>

A one percentage point increase in the assumed cost escalation rate would
increase the accumulated postretirement benefit obligation at January 30, 1999
by $216 and the total of the service cost and interest cost components of net
periodic postretirement cost for 1998 by $40. Similarly, decreasing the assumed
health care cost trend rate by one percentage point for all future years would
decrease the accumulated postretirement benefit obligation at January 30, 1999
by $234, and the total of the service cost and interest cost components of net
periodic postretirement cost by $44. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 6.75% at
January 30, 1999, 7.25% at January 31, 1998, and 7.75% at February 1, 1997.
Additionally, assumed cost escalation rates that start at 7% and grade down
gradually to 4.75% were used for the year ended January 30, 1999. Assumed cost
escalation rates that start at 9.4% and grade down gradually to 5.5% were used
for the years ended January 31, 1998 and February 1, 1997.

The Company provides postemployment benefits to certain employees on short-term
disability. The Company's obligation at January 30, 1999 and January 31, 1998
was $176 and $166, respectively.


[11] COMMITMENTS

The Company conducts the major part of its operations in leased premises with
lease terms expiring at various dates through 2020. Most store leases provide
for base rentals plus contingent rentals which are a function of sales volume
and provide that the Company pay real estate taxes, maintenance and other
operating expenses applicable to the leased premises. Additionally, most store
leases provide renewal options and contain rent



                                       40
<PAGE>   25

escalation clauses. These escalation clauses are factored into a calculation of
the future rental stream. This stream is recorded on a straight-line basis over
the life of the original lease. The "deferred rent under lease commitments"
caption represents rent expensed in excess of cash paid. Management expects that
in the normal course of business expiring leases will be renewed or replaced by
other leases.

The aggregate minimum future rental commitments under noncancelable operating
leases at January 30, 1999 are as follows:

              1999                   $ 65,582
              2000                     67,002
              2001                     66,398
              2002                     64,121
              2003                     60,276
              Thereafter              226,920

Rent expense for the years ended January 30, 1999, January 31, 1998 and February
1, 1997, was $67,316, $60,469 and $52,678, respectively, and includes $1,734,
$1,426 and $1,766, respectively, of contingent rental expense.


[12] NET INCOME PER SHARE

Pursuant to SFAS No. 128, the weighted average shares used in computing basic
and diluted net income per share are presented in the table below. Options to
purchase 1,707,689, 1,403,996 and 520,166 shares of common stock at prices
ranging from $24.94 to $34.63 per share were outstanding during the years ended
January 30, 1999, January 31, 1998 and February 1, 1997, respectively, but were
not included in the computation of diluted net income per share because the
options' exercise prices were greater than the average market prices of the
common shares.

<TABLE>
<CAPTION>
                                                                          YEAR ENDED
                                                          -----------------------------------------
                                                          January 30,    January 31,    February 1,
                                                                 1999           1998           1997
                                                          -----------------------------------------
<S>                                                            <C>            <C>            <C>   
Shares for computation of basic net income per share           31,878         32,386         33,185
Effect of assumed option exercises                                 55             50             98
                                                          -----------------------------------------
Shares for computation of diluted net income per share         31,933         32,436         33,283
                                                          =========================================
</TABLE>


                                       41
<PAGE>   26


INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of The Talbots, Inc.:

We have audited the accompanying consolidated balance sheets of The Talbots,
Inc. and its subsidiaries as of January 30, 1999 and January 31, 1998, and the
related consolidated statements of earnings, changes in stockholders' equity,
and cash flows for each of the three years in the period ended January 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies as of January 30,
1999 and January 31, 1998, and the results of their operations and their cash
flows for each of the three years in the period ended January 30, 1999, in
conformity with generally accepted accounting principles.


/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
March 17, 1999
Boston, Massachusetts



                                       42
<PAGE>   27

SELECTED QUARTERLY FINANCIAL DATA
Dollar amounts in thousands except per share data

The following table shows certain unaudited quarterly information for the
Company during fiscal 1998 and fiscal 1997. The unaudited quarterly information
includes all normal recurring adjustments which management considers necessary
for a fair presentation of the information shown. The operating results for any
quarter are not necessarily indicative of results for any future period.
Quarterly per share amounts may not total the full year amount due to changes in
the number of shares outstanding.

<TABLE>
<CAPTION>
                                                                 FISCAL 1998 QUARTER ENDED
                                                  --------------------------------------------------------
                                                   May 2,        August 1,      October 31,    January 30,
                                                    1998           1998            1998           1999
                                                  --------------------------------------------------------

<S>                                               <C>            <C>             <C>            <C>     
Net sales                                         $271,475       $267,687        $267,715       $335,369
Gross profit                                       108,189         75,295         106,838        102,812
Net income                                          14,536          1,285          12,730          8,117

Net income per share - basic                      $   0.45       $   0.04        $   0.40       $   0.26
Net income per share - assuming dilution          $   0.45       $   0.04        $   0.40       $   0.26
Weighted average common shares outstanding                                                 
 - basic (in thousands)                             32,014         32,062          31,986         31,450
Weighted average common shares outstanding
 - assuming dilution (in thousands)                 32,014         32,120          31,986         31,566

Cash dividends per share                          $   0.11       $   0.11        $   0.11       $   0.11

Market price data
     High                                         $ 20.938       $ 30.250        $ 26.625       $ 31.375
     Low                                          $ 14.000       $ 19.375        $ 13.938       $ 22.438
</TABLE>


<TABLE>
<CAPTION>
                                                                 FISCAL 1997 QUARTER ENDED
                                                  --------------------------------------------------------
                                                   May 3,        August 2,      November 1,    January 31,
                                                    1997           1997            1997           1998
                                                  --------------------------------------------------------

<S>                                               <C>            <C>             <C>            <C>     
Net sales                                         $240,742       $244,852        $255,968       $312,244
Gross profit                                        96,578         48,556          98,440         69,099
Net income (loss)                                   16,488        (11,461)         11,157        (10,346)

Net income (loss) per share - basic               $   0.50       $  (0.35)       $   0.35       $  (0.32)
Net income (loss) per share                                                                   
 - assuming dilution                              $   0.50       $  (0.35)       $   0.35       $  (0.32)
Weighted average common shares outstanding                                                 
 - basic (in thousands)                             32,902         32,407          32,201         32,033
Weighted average common shares outstanding
 - assuming dilution (in thousands)                 33,009         32,407          32,271         32,033

Cash dividends per share                          $   0.09       $   0.11        $   0.11       $   0.11

Market price data
     High                                         $ 33.875       $ 34.000        $ 31.125       $ 25.000
     Low                                          $ 26.000       $ 22.500        $ 23.625       $ 13.938
</TABLE>

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<PAGE>   28



MARKET FOR REGISTRANT'S COMMON STOCK
The Company's common stock is traded on the New York Stock Exchange under the
trading symbol "TLB." The number of holders of record of common stock at March
17, 1999 was 588. The common stock commenced public trading on November 19,
1993, at the time of the Company's initial public offering.

The payment of dividends and the amount thereof is determined by the Board of
Directors and depends, among other factors, upon the Company's earnings,
operations, financial condition, capital requirements and general business
outlook at the time payment is considered. The Company anticipates that
dividends on the common stock will continue to be declared on a quarterly basis.

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