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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934


|                                               |  |                                   
|---------------------------------------------- |  | ----------------------------------
|For the Fiscal Year Ended
    February 1, 2003 |  | Commission File Number
    1-12552



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THE TALBOTS, INC.

One Talbots Drive

Hingham, MA 02043


(781) 749-7600


|                         |  |                      
|------------------------ |  | ---------------------
|Incorporated in Delaware |  | I.R.S. No. 41-1111318



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Securities registered pursuant to
Section 12(b) of the Act:

|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of each class                     |  | Name of each exchange on which registered
|                                        |  |                                          
|Common Stock, par value $0.01 per share |  | New York Stock Exchange                  



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Securities registered pursuant to
Section 12(g) of the Act:

None.


Indicate by check mark whether the registrant;
(1) has filed all required reports to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ     No o

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2). þ

The approximate aggregate market value of the
registrants common stock held by non-affiliates as of
August 3, 2002 (for this purpose, deemed to refer to all
persons and entities other than executive officers, directors
and 10% or more shareholders) based on the closing sale price on
the New York Stock Exchange composite tape on August 3,
2002 was approximately $617 million.

Number of shares outstanding of the
registrants common stock as of April 1, 2003:
57,215,650

Documents Incorporated by Reference:

Portions of the Proxy Statement for the 2003
Annual Meeting of Shareholders are incorporated by reference
into Part III.



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TABLE OF CONTENTS



|                                 |                                                                                                          |  |  |  |  |  |  | 
|-------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                          
|                                 | Item 1. Business.                                                                                       
|                                 | Item 2. Properties.                                                                                     
|                                 | Item 3. Legal Proceedings.                                                                              
|                                 | Item 4. Submission of Matters to a Vote of Security Holders.                                            
|PART II                         
|                                 | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters.                      
|                                 | Item 6. Selected Financial Data.                                                                        
|                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.          
|                                 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                                    
|                                 | Item 8. Financial Statements and Supplementary Data.                                                    
|                                 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.           
|PART III                        
|                                 | Item 10. Directors and Executive Officers of the Registrant.                                            
|                                 | Item 11. Executive Compensation.                                                                        
|                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|                                 | Item 13. Certain Relationships and Related Transactions.                                                
|                                 | Item 14. Controls and Procedures.                                                                       
|PART IV                         
|                                 | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.                              
|SIGNATURES                      
|Consent of Deloitte & Touche LLP



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##### Table of Contents



THE TALBOTS, INC.

Annual Report on Form 10-K for the Fiscal
Year Ended February 1, 2003

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | Business                                                                                           |  |      | 2  | 
|Item 2.  |  | Properties                                                                                         |  |      | 12 | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 13 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 13 | 
|        
|PART II 
|Item 5.  |  | Market for the Registrants Common Equity
    and Related Stockholder Matters                      |  |      | 13 | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 14 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 14 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |      | 23 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 24 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |      | 24 | 
|        
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 25 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 25 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 25 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 25 | 
|Item 14. |  | Controls and Procedures                                                                            |  |      | 25 | 
|        
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |  |      | 26 | 

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PART I




Item
1.     Business.

General

The Talbots, Inc., a Delaware corporation,
together with its wholly owned subsidiaries (Talbots
or the Company), is a leading national specialty
retailer and cataloger of womens, childrens and
mens classic apparel, accessories and shoes. Over the past
ten years, the Company has implemented an aggressive store
expansion program, with the number of stores increasing from 286
at the end of 1992 to 886 at the end of 2002. During 2002,
Talbots issued 25 separate catalogs with a combined circulation
of approximately 49.8 million. In 1999, the Company began
offering its merchandise on the Internet at www.talbots.com.
Sales through the Companys website are reported with
catalog sales. Total Company net sales were approximately
$1,595.3 million in 2002, of which retail store sales were
approximately $1,347.9 million and catalog sales were
approximately $247.4 million.

Talbots follows the National Retail
Federations fiscal calendar. Where a reference is made to
a particular year or years, it is a reference to Talbots 52-week
or 53-week fiscal year. Therefore, 2002 refers to
the 52-week fiscal year ended February 1, 2003,
2001 refers to the 52-week fiscal year ended
February 2, 2002 and 2000 refers to the 53-week
fiscal year ended February 3, 2001. Since Talbots fiscal
2002 and 2001 were 52-week years and fiscal 2000 was a 53-week
year, comparable store sales are reported in this Annual Report
on a 52-week basis.

Talbots offers a distinctive collection of
classic sportswear, casual wear, dresses, coats, sweaters,
accessories and shoes, consisting almost exclusively of Talbots
own branded merchandise in misses, petites, womans and
womans petite sizes. Talbots Kids offers an assortment of
high quality classic clothing and accessories for infants,
toddlers, boys and girls. In October 2002, the Company
introduced a test concept, Talbots Mens, through a catalog
launch, which offers a distinguished line of classic mens
sportswear.

Talbots merchandising strategy focuses on
achieving a classic look that emphasizes timeless
styles and quality. Talbots stores, catalogs and Internet
website offer a variety of key basic and fashion items and a
complementary assortment of accessories and shoes which enable
customers to assemble complete wardrobes. The consistency in
color, fabric and fit of Talbots merchandise allows a customer
to create wardrobes across seasons and years. The Company
believes that a majority of its customers are college-educated
and employed, primarily in professional and managerial
occupations, and are attracted to Talbots by its focused
merchandising strategy, personalized customer service and
continual flow of high quality, reasonably priced classic
merchandise.

Talbots has established a market niche as a brand
in womens and childrens classic apparel, accessories
and shoes. In 2002, over 99% of the Companys merchandise
consisted of styles that were sold exclusively under the Talbots
label. Most of this merchandise is manufactured to the
specifications of the Companys technical designers and
product developers, enabling Talbots to offer consistently high
quality merchandise that the Company believes differentiates
Talbots from its competitors.

The Company operates its stores, catalogs and
website as an integrated business and provides the same
personalized service to its customers regardless of whether
merchandise is purchased through its stores, catalogs or on the
Internet. The Company believes that the synergy across these
distribution channels offers an important convenience to its
customers and a competitive advantage to the Company in
identifying new store sites and testing new business concepts.

The first Talbots store was opened in 1947 in
Hingham, Massachusetts, by Rudolph and Nancy Talbot. The first
Talbots catalog was issued the following year with a circulation
of approximately 3,000. Additional stores were opened beginning
in 1955, and there were a total of five Talbots stores by 1973,
at which time the Company was acquired by General Mills, Inc.
Talbots continued to expand and grew to 126 stores by June 1988.
In June 1988, AEON (U.S.A.), Inc. (AEON U.S.A.),
formerly Jusco (U.S.A.), Inc., acquired Talbots (the
Acquisition). AEON U.S.A. is a wholly owned
subsidiary of AEON Co., Ltd. (AEON), formerly Jusco
Co., Ltd., a Japanese retail conglomerate. On November 18,
1993, the Company effected an

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initial public offering of its common stock (the
Offering), issuing approximately 25.2 million
shares of common stock. Subsequent to the Offering, AEON U.S.A.
has remained the Companys majority shareholder, and at
February 1, 2003 owned approximately 58.6% of the
outstanding common stock of the Company.


The Company has grown significantly since the
Acquisition by adding stores and developing new complementary
business concepts that capitalize on the strength of the Talbots
name and its loyal customer base. By February 1, 2003, the
number of stores increased to 886 and were located in
46 states, the District of Columbia, Canada and the United
Kingdom. This included 464 Talbots Misses stores (including 19
Misses stores in Canada and five Misses stores in the United
Kingdom), 236 Talbots Petites stores (including two Petites
stores in Canada), 41 Talbots Accessories & Shoes
stores, 63 Talbots Kids stores, 58 Talbots Woman stores and 24
Talbots Outlet stores.

Talbots catalog business has also undergone
changes. The circulation of catalogs has been reduced by 17%
from 60.2 million catalogs in 1992 to 49.8 million
catalogs in 2002. This circulation reduction has been an
integral part of a strategy to better focus the distribution of
catalogs to proven customers.

In 1999, Talbots went live with its website,
www.talbots.com. This distribution channel is a natural
extension of the Companys existing store and catalog
channels. The same broad assortment of Talbots existing store
and catalog classic merchandise is available online with
one-stop shopping for Talbots Misses, Petites, Woman,
Accessories & Shoes, Kids and Mens apparel. The
Companys existing catalog fulfillment and customer service
infrastructure manages orders taken over the Internet and
complements this new channel of distribution. In fiscal 2002,
approximately 24% of total catalog sales were attributed to the
website.

Information concerning the Companys retail
store business and the Companys catalog and Internet
business and certain geographic information is contained in Note
11 of the Companys consolidated financial statements
included in this Form 10-K and is incorporated in this
Item 1 by reference.

Strategy

The key elements of the Companys strategy
are to: (1) maintain its strong competitive position in the
classic niche by providing consistently classic womens,
childrens and mens apparel, accessories and shoes,
(2) continue to operate as a predominantly branded
merchandise retailer, (3) maintain its posture as a limited
promotion retailer, (4) continue to capitalize on its
complementary store, catalog and Internet operations,
(5) continue to provide superior customer service and
(6) offer a broad mix of store location types.

Market Niche in Classic
Apparel.Talbots offers a distinctive
collection of womens sportswear, casual wear, dresses,
coats, sweaters, accessories and shoes and kids apparel
consisting almost exclusively of the Companys own branded
merchandise. Talbots offers a variety of key basic and fashion
items and a complementary assortment of accessories and shoes to
enable customers to assemble complete outfits. In October 2002,
the Company began offering a limited assortment of mens
apparel featuring sportswear under the Talbots branded label. An
important aspect of the Companys marketing strategy is
wardrobing the customer from head-to-toe. The
Company believes that consistently emphasizing timeless styles
helps to create a loyal customer base and reduces the risk that
its apparel, accessories and shoes will be affected by sudden
changes in fashion trends.

Talbots Brand.The
clothing assortment under the Talbots brand exceeded 99% of
inventory in 2002. Sales of branded merchandise generally
provide the Company with a higher gross margin than it believes
would be obtained on other merchandise and establishes Talbots
identity as a brand of womens, childrens and,
beginning in 2002, mens classic apparel.

The Company believes that the quality and value
of its classic merchandise are key competitive factors. Talbots
merchandise is manufactured to the specifications of the
Companys technical designers and product developers,
enabling Talbots to offer consistently high quality merchandise
that the Company believes differentiates Talbots from its
competitors. The Company continually monitors its manufacturers
to ensure that apparel purchased by the Company is of consistent
fit and high quality.

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Limited Promotion
Retailer.The Company positions itself
as a limited-promotion retailer. Talbots typically holds only
four major sale events a year in its stores, consisting of two
mid-season and two end-of-season clearance sales. All mid-season
and end-of-season store sale events are held in conjunction with
catalog sales events. No other major promotional sale events are
typically held. However, the Company does offer a variety of
traffic and sales driving events through its stores, catalog and
website, which augment its traditional sale calendar. The
Company believes that its strategy of limiting its promotional
events reinforces the integrity of its regular prices.

Complementary Store, Catalog and Internet
Operations.The Companys
strategy is to operate its stores, catalogs and website as an
integrated business and to provide the same personalized service
to its customers regardless of whether merchandise is purchased
through its stores, catalogs or online. The Company believes
that the synergy across these distribution channels offers an
important convenience to its customers, provides a competitive
advantage to the Company and is an important element in
identifying new store sites.

Talbots catalogs and website provide customers
with a broader selection of sizes and colors than its stores. In
each of its United States stores, Talbots offers a Red
Line phone which connects the store customer directly to a
catalog telemarketing sales associate. This service can be used
by store customers to order a particular size or color of an
item that is not available or is sold out in the store. A
reduced shipping and handling charge is provided to customers
who use the Red Line phone service. In addition to
providing customers the convenience of ordering Talbots
merchandise, the Company generally uses its catalogs and website
to communicate its classic image, to provide customers with
fashion guidance in coordinating outfits and to generate store
traffic. Merchandise can be easily returned or exchanged at any
Talbots store or returned to the Company by mail.

The Company believes that its catalog operation
provides Talbots with a competitive advantage. The customer
database compiled through Talbots catalog operations provides
important demographic information and serves as an integral part
of the Companys expansion strategy by helping to identify
markets with the potential to support a new store. Although the
addition of stores in areas where the catalog has been
successful has resulted in slightly lower catalog sales in such
areas, such lower catalog sales have been more than offset by
the significantly higher sales generated in these areas by the
opening of new stores.

In conjunction with the Companys
well-established catalog operation, there is a strong
infrastructure in place to support its website, www.talbots.com,
including the Companys existing distribution and
fulfillment capabilities. As with catalog merchandise, items can
be easily returned or exchanged at any Talbots store or returned
to the Company by mail. The Company believes that this channel
of business is a natural complement to the store and catalog
operations, and has the potential to become a significant growth
opportunity. In fiscal 2002, Internet sales accounted for
approximately 24% of total catalog sales compared to 17% in
fiscal 2001.

Customer Service.The Company believes that it provides store, catalog and
Internet customers an extraordinarily high level of customer
service. The Company is committed to constantly improving
customer service by enhancing its training programs to ensure
that sales and customer service associates are knowledgeable
about all Talbots merchandise, that they are up to date with
fashion trends and are able to make appropriate wardrobing
suggestions to customers.

Broad Mix of Store
Locations.The Company believes that
providing a broad mix of store location types helps insulate it
from changes in customer shopping patterns and allows it to
offer locations that are convenient and consistent with its
image. As of February 1, 2003, the Company had 41% of its
stores in malls, 37% in specialty centers, 10% in village
locations, 7% as freestanding stores, 3% in outlet locations and
2% in urban locations.

Merchandising

The Companys merchandising strategy focuses
on achieving a classic look which emphasizes
timeless styles. Talbots offers a distinctive collection of
classic sportswear, casual wear, dresses, coats, sweaters,
accessories and shoes, consisting primarily of branded
merchandise made exclusively for Talbots. Talbots

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stores, catalogs and Internet website offer a
variety of key basic and fashion items and a complementary
assortment of accessories and shoes which enable customers to
assemble complete outfits. Sales associates are trained to
assist customers in merchandise selection and wardrobe
coordination, helping them achieve the Talbots look from
head-to-toe. The consistency in color, fabric and
fit of Talbots merchandise also allows a customer to create
wardrobes across seasons and years.


Branded Merchandise Design and
Purchasing.Talbots branded
merchandise is designed and produced through the coordinated
efforts of the Companys merchandising and manufacturing
teams. These teams consist of the New York-based Talbots product
development office, the Hingham-based buying and manufacturing
staff and the Hong Kong-based production office. Styles for
Talbots branded merchandise are developed based upon prior
years sales history and current fashion trends for each of
the Companys two main seasons, spring and fall.

The New York-based Talbots product development
office oversees the conceptualization of Talbots merchandise.
This initial product determination concerns styling, color, and
fabrication recommendations. The development process begins
approximately nine to twelve months before the expected in-house
delivery date of the merchandise.

In conjunction with the merchandise developed by
the product development team and quantified by the buying
organization, the Companys Hingham-based technical design
and performance testing staff work to determine the technical
specifications of virtually all of the Companys branded
merchandise. In addition to preparing the initial
specifications, this group also reviews the first fit sample
together with the product development team, ensuring that the
creative intent is preserved. Subsequent fit samples are
evaluated on fit and quality characteristics, ensuring that
specifications and quality standards are met.

The Companys Hingham-based buying staff is
responsible for the quantification of specific merchandise and
departmental needs and plans. These plans are used by the
sourcing staff to place specific item orders on styles developed
with the product development office and with the various
merchandise vendors. The Hong Kong-based production office
coordinates with the Hingham-based sourcing staff the product
purchases made in Hong Kong, Macau, and Southern China.

Sourcing.In 2002,
Talbots purchased approximately 72% of its merchandise directly
from offshore vendors, and the remaining 28% through
domestic-based vendors. During the year, the Companys Hong
Kong office accounted for approximately 46% of Talbots total
direct offshore sourcing, with the remaining 54% being handled
through various agents. In fiscal 2002, approximately 33% of
Talbots merchandise was sourced through Hong Kong.

In order to diversify the Companys sourcing
operations, additional exclusive overseas sourcing offices have
been established in Jakarta, Indonesia, in Bangkok, Thailand and
in Singapore. Under the terms of an agreement between the
Company and Eralda Industries (Eralda), a long-time
supplier of the Company, Eralda serves as the Companys
exclusive agent and has established these offices to serve the
Company in this capacity.

In addition to the Companys office in Hong
Kong, which deals with local manufacturers, and the sourcing
arrangement with Eralda, Talbots utilizes non-exclusive agents
in Japan, Korea, Italy, Portugal, Spain and Brazil plus domestic
resources to source its merchandise. The Company analyzes its
overall distribution of manufacturing to ensure that no one
company or country is responsible for a disproportionate amount
of Talbots merchandise. Directly sourced merchandise is
currently manufactured to the Companys specifications by
independent foreign factories located primarily in Hong Kong and
other provinces of China and in South Korea, in Asia, and
primarily Italy, in Europe.

The Companys domestic vendors include those
who either manufacture their own merchandise or supply
merchandise manufactured by others, as well as vendors that are
both manufacturers and suppliers. Most of Talbots Hong Kong and
other foreign vendors manufacture their own merchandise. The
Company believes that, consistent with the practices of the
retail apparel industry as a whole, many of its domestic
suppliers import a significant portion of their merchandise from
abroad.

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The Company typically transacts business on an
order-by-order basis; however, fabric and production projections
are placed with mills and vendors to better address fulfillment
and replenishment objectives. The Company does not maintain any
long-term or exclusive commitments or arrangements to purchase
from any vendor. The Company monitors its vendors for compliance
with the Fair Labor Standards Act and believes that it has good
relationships with its vendors. Additionally, as the number of
Talbots stores increases, the Company believes that there will
be adequate sources to produce a sufficient supply of quality
goods in a timely manner and on satisfactory economic terms. The
Company does business with virtually all of its vendors in
United States currency.*

In light of the current and potential hostilities
in the Middle East and other geographic areas, the
Companys sourcing operations may in the future be affected
from time to time in varying degrees. Both the likelihood of
such occurrences and their overall effect upon the Company are
difficult to predict and the Company will take all measures
possible to minimize the impact of such occurrences.*

Expansion

An important aspect of the Companys
business strategy has been an expansion program designed to
reach new and existing customers through the opening of new
stores. The Company has grown significantly over the past ten
years, with the number of stores increasing from 286 at the end
of 1992 to 886 at the end of 2002. During that time, store net
sales increased from approximately $495.0 million in 1992
to approximately $1,347.9 million in 2002. During fiscal
2002 Talbots opened a net of 86 new stores.

In addition to expanding its core Misses
business, the Company has introduced complementary new business
concepts, Talbots Petites, Talbots Kids, Talbots
Accessories & Shoes, Talbots Woman, Talbots Woman
Petites, Talbots Collection and in 2002, Talbots Mens.

In 1984 Talbots began offering merchandise in
petites sizes in its catalogs, and in 1985 opened its first
Talbots Petites store. During 1989, Talbots stores began to
carry a selection of Talbots Petites merchandise, and the
Company opened three additional Talbots Petites stores in 1990
as the beginning of its strategy to expand the Talbots Petites
business. At February 1, 2003, 236 Talbots Petites stores
were open, and virtually every item of womens apparel in
the catalog is offered in both misses and petites sizes.

In 1989, the Company presented Talbots Kids
merchandise in a separate catalog dedicated to apparel for boys
and girls. The first Talbots Kids store opened in 1990. During
1995, Talbots expanded the Talbots Kids merchandise by offering
an assortment of infants and toddlers apparel. By the end of
2002, 63 Talbots Kids stores were open. Also in 2002, four
separate Talbots Kids catalogs were circulated nationally. The
Company will continue to position Talbots Kids as a brand that
offers a complete assortment of high quality classic
childrens clothing and accessories.*

During 1994, Talbots introduced Talbots
Accessories & Shoes in two catalogs devoted to this
category. The Company opened five Talbots Accessories &
Shoes stores in September 1995 and operated 41 stores at the end
of 2002. A limited collection of this merchandise is offered in
each major catalog, in virtually all stores and, in 2002, in two
separate catalogs.

In 1998, the Company introduced two new concepts,
Talbots Woman and Talbots Collection. Talbots Woman was
developed for customers wearing sizes 12W to 24W who seek the
same classic styling, high quality and fit as the Companys
misses and petites customers. It was introduced as a department
in seven existing Misses stores, as one separate store adjacent
to other Talbots concept stores, and in two nationally
circulated catalogs. In 2001, the Company expanded the concept
with the introduction of Talbots Woman Petites, which focuses on
fuller-figured women 54 and under. In 2002, the
Company opened 23 new Talbots Woman stores and eliminated
separate catalogs in favor of incorporating Talbots Woman sizes
in all major catalogs. At February 1, 2003, 58 Woman stores
were open and an assortment of Talbots Woman apparel was offered
in nine additional Talbots stores. Additionally, Talbots Woman
Petites sizes are offered in most stores with a Talbots Woman
assortment.

Talbots Collection is a test concept that was
developed for those customers seeking an upper-tier,
well-defined selection of apparel featuring more luxurious
fabrics and sophisticated styling. It is presented as a

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separate department in 95 existing Talbots Misses
stores. The Company continues to use this concept to test new
fabrics and fashion trends which may be incorporated into the
core misses and petites lines.


In the fall of 2002, the Company introduced its
Talbots Mens concept in a separate catalog and also included
items in its annual holiday catalog. The line features classic
sportswear and dress furnishings with an emphasis on detail and
quality, consistent with the Companys other concepts. In
2003, the Company anticipates opening a total of six Talbots
Mens stores along with presenting merchandise in two separate
catalogs and on its Internet website.*

The Company currently anticipates opening
approximately 92 new stores (including Misses, Petites,
Accessories & Shoes, Kids, Woman and Mens stores) in fiscal
2003. The Companys ability to continue to expand its store
base will be dependent upon a number of factors, including its
overall sales performance, general economic and business
conditions affecting consumer confidence and spending, the
availability of desirable locations and the ability to negotiate
acceptable lease terms for new locations.*

Stores

Misses stores generally range in size from 3,700
to 6,500 gross square feet; with a typical store averaging
approximately 4,900 gross square feet. Talbots Petites, Woman
and Kids stores generally measure 2,600, 3,400 and 3,500 gross
square feet, respectively. Talbots Accessories & Shoes
stores generally measure 1,800 gross square feet. Talbots Mens
stores will generally measure 4,000 gross square feet.
Approximately 75%-80% of the floor area of all Talbots stores is
devoted to selling space (including fitting rooms), with the
balance allocated to stockroom and other non-selling space.

In certain markets, the Company has created
Talbots superstores by placing two or more other
Talbots concepts in close proximity to a Misses store. Together,
these stores feature at least three Talbots business
concepts  Misses, Petites, Kids, Woman and/or
Accessories & Shoes  in order to create a
one-stop shopping environment. At February 1, 2003, the
Company operated 88 superstores. Additionally Talbots
flagship stores are Misses stores which are operated
to generate greater awareness of Talbots merchandise in major
metropolitan locations, including Boston, New York City,
Chicago, San Francisco, London and Toronto, and are
significantly larger than the average Misses store.

The Company utilizes Talbots Outlet stores that
are separate from its retail stores to provide for the
controlled and effective clearance of store and catalog
merchandise remaining from each sale event. The Company uses
Talbots Outlet stores primarily for the sale of past season and
as is merchandise. At February 1, 2003, the
Company operated 24 Talbots Outlet stores.

Talbots stores, except Mens, are distinguished by
a signature red door. Each interior is designed to have a
gracious and comfortable residential feel. This interior design
theme is consistently used in all Talbots Misses, Petites, Woman
and Accessories and Shoes stores to promote familiarity, ease of
shopping and cost savings in the design and construction of new
stores. Talbots Kids stores also have the signature red doors
and are designed to create a light atmosphere. Talbots Mens
stores will be masculine yet complementary to the Companys
Misses stores. Talbots Mens interior design will include natural
woods, polished slate and granite tile, and stained wood doors
with glass center panels. Management provides guidelines for
merchandise display to the stores throughout the year.

Talbots Catalog and Internet

Since 1948, the Company has used its catalog to
offer customers convenience in ordering Talbots merchandise. In
2002, the Company issued 25 separate catalogs with a combined
circulation of approximately 49.8 million, including
catalogs sent to stores for display and general distribution.
During 2002, the catalog sales segment represented approximately
15.5% of total Company sales. Catalog circulation has included:
base catalogs offering the broadest assortment of Talbots
merchandise; specialty catalogs such as the Classics That Work
series featuring career clothing; Talbots Kids catalogs; Talbots
Accessories & Shoes catalogs; Talbots Mens; and sale
catalogs. In addition to providing customers convenience in
ordering Talbots merchandise, the

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Company generally uses its catalogs to
communicate its classic image, to provide customers with fashion
guidance in coordinating outfits and to generate store traffic.


The Company utilizes computer applications, which
employ mathematical models to improve the efficiency of its
catalog mailings through refinement of its customer list. A
principal factor in improving customer response has been the
Companys development of its own list of active customers.
By monitoring customer interest, such as the frequency and
dollar amount of purchases and the date of last purchase, the
Company is able to update and refine this customer list,
improving the efficiency of catalog mailings. The Company
complies with the Direct Marketing Associations policy
recommendations insuring that customer privacy is not
compromised.

The Company attempts to make catalog shopping as
convenient as possible. It maintains a toll-free number,
accessible 24 hours a day, seven days a week (except Christmas
Day), to accept requests for catalogs and to take customer
orders. It maintains telemarketing centers in Knoxville,
Tennessee and Hingham, Massachusetts, which are linked by
computer and telephone and are designed to provide uninterrupted
service to customers. Telephone calls are answered by
knowledgeable sales associates located at the telemarketing
centers who utilize online computer terminals to enter customer
orders and to retrieve information about merchandise and its
availability. These sales associates also suggest and help to
select merchandise and can provide detailed information
regarding size, color, fit and other merchandise features. In
both the Hingham and Knoxville telemarketing centers, sales
associates are able to refer to current catalog items in a
sample store, allowing them access to merchandise as they assist
customers.

The Company employs advanced technology to
process orders. Sales associates enter orders online into a
computerized inventory control system, which systematically
updates Talbots customer database and permits the Company to
measure the response to individual merchandise and catalog
mailings. Sales and inventory information is available to the
Companys Hingham-based buying staff the next day. The
Company has achieved efficiencies in order entry and
fulfillment, which permit the shipment of most orders the
following day.

Included in catalog sales are sales from Talbots
Internet website. Sales orders from the website are merged into
the existing catalog fulfillment system, allowing efficient
shipping of merchandise. Customers can check the availability of
merchandise at the time of purchase and the website will provide
examples of alternative merchandise if items are unavailable.
Additionally, the websites online chat feature
allows customers to communicate with customer service
representatives. As with the catalog, customer online purchases
can be returned by mail or at any Talbots retail store.

Customer Credit

Customers may elect to pay for their purchases
using a proprietary Talbots charge card which is managed through
Talbots Classics National Bank, a wholly owned limited-purpose
bank subsidiary, and Talbots Classics Finance Company, a wholly
owned subsidiary. The Company believes that the Talbots charge
card enhances customer loyalty and it produces finance charge
revenue and decreases third-party bankcard fees. During fiscal
2002, Talbots charge purchases accounted for approximately 41%
of total Company sales and at February 1, 2003, outstanding
balances on Talbots charge purchases totaled
$181.2 million, including an allowance for doubtful
accounts of $2.6 million. Bad debts have historically been
well below 1% of total Talbots charge card sales.

In 1997, the Company began testing a customer
loyalty program in six states, which rewards customers with a
$25 appreciation award for every $500 in merchandise purchases
on their Talbots charge card. The award can be redeemed against
future charge card purchases. The award expires one year from
the date of issuance. The testing found that the program
increased customer usage of the Talbots charge (versus another
method of payment), and in the test states, overall sales levels
increased at a faster rate than other non-test states. In 2001,
the program was rolled out nationally. As with the test states,
the Company has seen increased usage of the Talbots charge card
since the national rollout as customer usage increased from 36%
of total sales in 2001 to 41% in 2002.

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Inventory Control and Merchandise
Distribution

The Company uses a centralized distribution
system, under which all merchandise is received, processed and
distributed, through its catalog and store distribution center
in Lakeville, Massachusetts. Merchandise received at the
distribution center is promptly inspected, assigned to
individual stores, packed for delivery and shipped to the
stores. Talbots ships merchandise to its stores virtually every
business day, with each store generally receiving merchandise
twice a week. The Company believes that its strong store,
catalog and Internet synergy, coupled with its central
distribution system, allows it to move merchandise efficiently
between its three distribution channels to take better advantage
of sales trends.

In 1995, the Company completed an expansion of
its distribution center in Lakeville, Massachusetts, by adding
an additional 124,260 square feet to support its growth plans.
Additional mezzanine level space was added in 1996 and 1997 to
further support the Companys growth. In 2001, an
additional 125,000 square foot expansion was completed, bringing
the facilitys gross square footage to 943,000 square feet.

Management Information Systems

Talbots management information systems and
electronic data processing systems are located at the
Companys Systems Center in Tampa, Florida. These systems
consist of a full range of retail, financial and merchandising
systems, including credit, inventory distribution and control,
sales reporting, accounts payable, merchandise reporting and
distribution. The Company protects company-sensitive information
on its servers from unauthorized access using industry standard
network security systems in addition to anti-virus and firewall
protection. The Internet website makes use of encryption
technology to protect sensitive customer information. The
Company complies with the Direct Marketing Associations
policy recommendations insuring that customer privacy is not
compromised.

All Talbots stores have point-of-sale terminals
that transmit information daily on sales by item, color and
size. Talbots stores are equipped with bar code scanning devices
for the recording of store sales, returns, inventories, price
changes, receipts and transfers. The Company evaluates this
information, together with weekly reports on merchandise
statistics, prior to making merchandising decisions regarding
reorders of fast-selling items and the allocation of merchandise.

Also, sales associates can locate, at any Talbots
location, merchandise no longer available in their store with a
single phone call to Customer Service, 24 hours a day,
seven days a week (except Christmas Day).

Seasonality

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.

Competition

The retail apparel industry is highly
competitive. The Company believes that the principal basis upon
which it competes are quality, value and service in offering
classic apparel to build head-to-toe wardrobes
through stores, catalogs and its Internet website.

Talbots mainly competes with certain departments
within national specialty department stores as well as strong
regional department store chains. The Company believes that it
competes with these department stores by offering a focused
merchandise selection, personalized service and convenience.
Talbots also competes with other specialty retailers and catalog
companies; however, the Company believes that its focused
merchandise selection in classic apparel, consistent branded
merchandise, superior customer service, store site selection
resulting from the synergy between its stores and catalog
operations, and the availability of its merchandise in Misses,
Petites, Woman, Woman Petites sizes and Kids merchandise,
distinguish it from other specialty retailers.

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Employees

At February 1, 2003, Talbots had
approximately 11,000 employees, of whom approximately 3,150 were
full-time salaried employees, approximately 1,350 were full-time
hourly employees and approximately 6,500 were part-time hourly
employees. The Company believes that its relationship with its
employees is good.

Executive Officers of the Company

The following table sets forth certain
information regarding the executive officers of the Company as
of April 1, 2003:

|                          |  |     |    |          |  |                                                                          
|------------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------
|Name                      |  | Age |    | Position
|                          |  |     |    |         
|Arnold B. Zetcher         |  |     | 62 |          |  | Chairman of the Board, President and Chief
    Executive Officer         
|Harold B. Bosworth, Jr.   |  |     | 53 |          |  | Executive Vice President, Chief Merchandising
    Officer                
|Michele M. Mandell        |  |     | 55 |          |  | Executive Vice President, Stores and Talbots Kids                        
|Paul V. Kastner           |  |     | 51 |          |  | Senior Vice President, International and
    Strategic Planning          
|Edward L. Larsen          |  |     | 58 |          |  | Senior Vice President, Finance, Chief Financial
    Officer and Treasurer
|Andrea M. McKenna         |  |     | 46 |          |  | Senior Vice President, Marketing and Catalog
    Development             
|Richard T. OConnell, Jr. |  |     | 52 |          |  | Senior Vice President, Legal and Real Estate and
    Secretary           
|Bruce Lee Prescott        |  |     | 47 |          |  | Senior Vice President, Direct Marketing and
    Customer Service         
|Randy Richardson          |  |     | 44 |          |  | Senior Vice President, Information Services                              
|Bruce C. Soderholm        |  |     | 60 |          |  | Senior Vice President, Operations                                        
|Stuart M. Stolper         |  |     | 63 |          |  | Senior Vice President, Human Resources                                   

Mr. Zetcher joined Talbots as President in
1987. He has been President and Chief Executive Officer and a
member of the Board of Directors since 1988 and assumed the
additional position of Chairman of the Board in 2000.
Mr. Zetcher was Chairman and Chief Executive Officer of
John Breuner Company, a home furnishings division of BATUS, and
prior to that, Chairman and Chief Executive Officer of
Kohls Food Stores, another BATUS division.
Mr. Zetcher also served as Chairman and Chief Executive
Officer of Bonwit Teller in New York and served in various
capacities during his ten years with Federated Department Stores.

Mr. Bosworth was promoted to the position of
Executive Vice President and Chief Merchandising Officer in
January 2003. He joined the Company in June 1997 as Senior Vice
President and General Manager for Talbots Kids and assumed the
additional position of General Manager for Talbots Mens in 2001.
From 1988 to 1997, Mr. Bosworth served as Senior Vice
President, Retail of Ermenegildo Zegna, and Senior Vice
President and General Merchandise Manager at the I. Magnin/
Bullocks Wilshire division of R.H. Macy, where he was
responsible for numerous merchandising areas. He also served in
various capacities at J.W. Robinsons, a division of
Associated Dry Goods; The Broadway, a division of Carter Hawley
Hale; and Jordan Marsh, a division of Allied Stores from 1972 to
1988.

Ms. Mandell was promoted to Executive Vice
President, Stores and Talbots Kids in January 2003. She joined
Talbots in 1983 as Store Manager, became District Manager in
1984, Regional Director in 1985 and was Senior Vice President,
Stores from 1992 until her recent promotion. From 1971 to 1983
she held various management and merchandising positions for
Prices of Oakland in Pittsburgh, Pennsylvania and
A.E. Troutman Co., a division of Allied Stores.

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Mr. Kastner joined Talbots in 1988 as
Director, Business Planning and Analysis and became Vice
President, New Business Ventures and Strategic Planning,
Assistant Treasurer and Assistant Secretary in 1989. In 1994,
Mr. Kastner was promoted to the position of Senior Vice
President, International and Strategic Planning. Prior to
joining Talbots, he was Director of Research and Merchandise
Information with John Breuner Company.

Mr. Larsen became Senior Vice President,
Finance, Chief Financial Officer and Treasurer of Talbots in
1991. From 1989 to 1991, Mr. Larsen was Vice President and
Chief Financial Officer of Lillian Vernon Corporation. From 1977
to 1988, he held various positions with General Mills, Inc.,
including, from 1985 to 1988, the position of Vice President and
Group Controller of the Specialty Retailing Group.

Ms. McKenna joined Talbots in 2000 as Senior
Vice President, Marketing and Catalog Development. Prior to
joining Talbots, she served as Senior Vice President and Group
Media Director at Hill, Holliday, Connors, Cosmopulos, Inc. From
1998 to 1999, she was Vice President at McKenna Associates
Corp., a consulting firm. From 1996 to 1998, Ms. McKenna
served as Vice President of Marketing and Advertising for Hoyts
Cinemas Corporation.

Mr. OConnell joined Talbots in 1988 as
Vice President, Legal and Real Estate and Secretary, and became
Senior Vice President, Legal and Real Estate and Secretary in
1989. Prior to joining Talbots, he served as Vice President,
Group Counsel of the Specialty Retailing Group at General Mills,
Inc.

Mr. Prescott became Senior Vice President,
Direct Marketing and Customer Service in 1998. He joined Talbots
in 1987 as Manager, Direct Marketing Fulfillment. In 1988, he
was promoted to the position of Director of Marketing
Fulfillment and in 1991 became Director, Customer Service and
Telemarketing. In 1994, he was promoted to the position of Vice
President, Customer Service and Telemarketing. From 1976 to
1987, he was employed by Johnny Appleseeds, serving as
manager of catalog operations and supervising retail
distribution and customer service.

Mr. Richardson joined Talbots in 1998 as
Senior Vice President, Information Services. From 1997 to 1998,
Mr. Richardson was Senior Vice President and Chief
Information Officer for Best Buy Company, Inc. From 1996 to
1997, Mr. Richardson was a Product Manager for Computer
Associates International, Inc. From 1992 to 1996, he was Senior
Vice President, Information Services for Ann Taylor, and spent
10 years with The Limited, Inc. in various positions at
Abercrombie and Fitch, Limited Stores and Lane Bryant.

Mr. Soderholm has been Senior Vice
President, Operations since 1989. He joined Talbots in 1976 as
Director of Operations and served as Vice President, Operations
from 1980 to 1989.

Mr. Stolper joined Talbots in 1989 as Vice
President, Human Resources and assumed the position of Senior
Vice President, Human Resources and Assistant Secretary later
that year. From 1988 to 1989, he served as Vice President,
Administration at AEON (U.S.A.), Inc. Prior to that time, he was
Vice President, Human Resources of the Specialty Retailing Group
at General Mills, Inc.

Available Information

We make available free of charge through our
website, www.talbots.com, all materials that we file
electronically with the Securities and Exchange Commission
(SEC), including our annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably
practicable after electronically filing such materials with, or
furnishing them to, the SEC. During the period covered by this
Form 10-K, we made all such materials available through our
website as soon as reasonably practicable after filing such
materials with the SEC.

You may also read and copy any materials filed by
the Company with the SEC at the SECs Public Reference Room
at 450 Fifth Street, NW, Washington, DC 20549, and you may
obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet website, www.sec.gov, that contains
reports, proxy and information statements and other information
which the Company files electronically with the SEC.

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Item
2.     Properties.

The table below presents certain information
relating to the Companys properties at February 1,
2003:

|                                                    |  |             |           |                  |  |                               |  |                 
|--------------------------------------------------- |  | ----------- | --------- | ---------------- |  | ----------------------------- |  | ----------------
|                                                    |  | Gross       |           |                  |  |                              
|Location                                            |  | Square Feet |           | Primary Function |  | Interest                     
|                                                    |  |             |           |                  |  |                              
|Hingham, Massachusetts                              |  |             | 313,000   |                  |  | Company headquarters          |  | Own (46 acres)  
|Lakeville, Massachusetts                            |  |             | 943,000   |                  |  | Distribution center           |  | Own (106 acres) 
|Tampa, Florida                                      |  |             | 38,437    |                  |  | Systems center                |  | Lease           
|Knoxville, Tennessee                                |  |             | 26,069    |                  |  | Telemarketing                 |  | Lease           
|New York, New York                                  |  |             | 41,462    |                  |  | Product development office    |  | Lease           
|Hong Kong                                           |  |             | 10,455    |                  |  | Merchandise production        |  | Lease           
|Lincoln, Rhode Island                               |  |             | 9,645     |                  |  | Credit and banking facilities |  | Lease           
|Ontario, Canada                                     |  |             | 1,350     |                  |  | Canadian regional office      |  | Lease           
|London, U.K.                                        |  |             | 1,093     |                  |  | U.K. management office        |  | Lease           
|886 Stores throughout the U.S., Canada and
    U.K. |  |             | 3,610,785 |                  |  | Retail stores                 |  | Own and lease(a)



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Talbots owns the property for six of its
    886 stores. As of February 1, 2003, one location was
    under agreement for sale and was subsequently sold in February
    2003.

Except for retail store space, the Company
believes that its operating facilities and sales offices are
adequate and suitable for its current needs. To address expected
future office and distribution space needs, in fiscal 1999 the
Company completed a 75,000 square foot expansion of its
Hingham, Massachusetts offices and in fiscal 2001 completed
construction on 125,000 square foot of additional space at
its Lakeville, Massachusetts distribution facility. In 2002, the
Company executed a lease for a new facility to replace its
existing telemarketing facility in Knoxville, Tennessee. The new
lease covers 35,961 square feet with expected occupancy in
early 2004. Talbots long-term expansion program, if successful,
may require additional office and distribution space to service
its operations in the future.

At February 1, 2003, Talbots operated 886
stores; all but six were leased. The leases typically provide
for an initial term between 10 and 15 years, with renewal
options permitting the Company to extend the term between five
and 10 years thereafter. The Company generally has been
successful in renewing its store leases as they expire. Under
most leases, the Company pays a fixed annual base rent plus a
contingent rent (percentage rent) based on the
stores annual sales in excess of specified levels. In a
majority of leases, Talbots has a right to terminate earlier
than the specified expiration date if certain sales levels are
not achieved; such right is usually exercisable after five years
of operation. Most leases also require Talbots to pay real
estate taxes, insurance and utilities and, in shopping center
locations, to make contributions toward the shopping
centers common area operating costs and marketing
programs. The Company has many lease arrangements that provide
for an increase in annual fixed rental payments during the lease
term.

At February 1, 2003, the current terms of
Talbots store leases (assuming solely for this purpose that the
Company exercises all lease renewal options) were as follows:

|               |  |                 |     | 
|-------------- |  | --------------- | --- | 
|Years Lease    |  | Number of      
|Terms Expire   |  | Store Leases(a)
|               |  |                
|2003-2004      |  |                 | 66  | 
|2005-2007      |  |                 | 84  | 
|2008-2010      |  |                 | 116 | 
|2011 and later |  |                 | 464 | 



---



|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(a) | Certain leases have more than one store included
    within the leased premises.

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##### Table of Contents






Item 3.     Legal
Proceedings.

Talbots is a party to certain legal actions
arising in the normal course of its business. Although the
amount of any liability that could arise with respect to these
actions cannot be accurately predicted, in the opinion of the
Company, any such liabilities individually and in the aggregate
will not have a material adverse effect on the financial
position, results of operations or liquidity of Talbots.




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

No matters were submitted to a vote of security
holders during the fourth quarter of fiscal 2002.




PART II




Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters.

The Companys common stock is traded on the
New York Stock Exchange under the trading symbol
TLB. Information regarding the high and low sales
prices per share of common stock in fiscal 2002 and 2001 is
included in Note 15 Quarterly Results to the
Companys consolidated financial statements.

The payment of dividends and the amount thereof
is determined by the Board of Directors and depends upon, among
other factors, 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 common stock will continue to be
declared on a quarterly basis. Information regarding the
Companys payment of dividends for fiscal 2002 and 2001 is
included in Note 15 Quarterly Results to the
Companys consolidated financial statements.*

The number of holders of record of the
Companys common stock at April 1, 2003 was 546.

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##### Table of Contents






Item
6.     Selected Financial
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, included
under Item 7 below and the consolidated financial
statements and notes thereto, included in Item 15 below.

|                                                                  |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |        | 
|----------------------------------------------------------------- | ----------------- | ------------------------------------- | --------- | ----------- |  | ----------- | --------- | ----------- |  | ----------- | --------- | ------ |  | - | --------- | ------ |  | - | --------- | ------ | 
|                                                                  |                   |                                      
|                                                                  |                   | Year Ended                           
|                                                                  |                   |                                      
|                                                                  |                   | February 1,                           |           | February 2, |  | February 3, |           | January 29, |  | January 30,
|                                                                  |                   | 2003                                  |           | 2002        |  | 2001        |           | 2000        |  | 1999       
|                                                                  |                   | (52 weeks)                            |           | (52 weeks)  |  | (53 weeks)  |           | (52 weeks)  |  | (52 weeks) 
|                                                                  |                   |                                       |           |             |  |             |           |             |  |            
|                                                                  |                   |                                      
|                                                                  |                   | (in thousands, except per share data)
|Statement of Earnings Information:                                |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|Net sales                                                         |                   | $                                     | 1,595,325 |             |  | $           | 1,612,513 |             |  | $           | 1,594,996 |        |  | $ | 1,308,658 |        |  | $ | 1,157,737 |       
|Net income                                                        |                   |                                       | 120,759   |             |  |             | 127,001   |             |  |             | 115,202   |        |  |   | 58,460    |        |  |   | 36,668    |       
|Net income per share                                              |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|                                                                  | Basic             |                                       | $         | 2.06        |  |             | $         | 2.07        |  |             | $         | 1.86   |  |   | $         | 0.94   |  |   | $         | 0.58   | 
|                                                                  | Assuming dilution |                                       | $         | 2.01        |  |             | $         | 2.00        |  |             | $         | 1.80   |  |   | $         | 0.92   |  |   | $         | 0.57   | 
|Weighted average number of shares of common stock
    outstanding |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|                                                                  | Basic             |                                       |           | 58,724      |  |             |           | 61,459      |  |             |           | 61,823 |  |   |           | 62,136 |  |   |           | 63,756 | 
|                                                                  | Assuming dilution |                                       |           | 60,191      |  |             |           | 63,439      |  |             |           | 63,995 |  |   |           | 63,368 |  |   |           | 63,866 | 
|Cash dividends per share                                          |                   | $                                     | 0.35      |             |  | $           | 0.31      |             |  | $           | 0.27      |        |  | $ | 0.23      |        |  | $ | 0.22      |       
|Balance Sheet Information:                                        |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|Working capital                                                   |                   | $                                     | 287,957   |             |  | $           | 299,270   |             |  | $           | 325,455   |        |  | $ | 236,691   |        |  | $ | 209,675   |       
|Total assets                                                      |                   |                                       | 871,925   |             |  |             | 831,064   |             |  |             | 858,596   |        |  |   | 693,904   |        |  |   | 661,219   |       
|Total long-term debt, including current portion                   |                   |                                       | 100,000   |             |  |             | 100,000   |             |  |             | 100,000   |        |  |   | 100,000   |        |  |   | 100,000   |       
|Stockholders equity                                              |                   |                                       | 567,676   |             |  |             | 567,876   |             |  |             | 550,771   |        |  |   | 431,332   |        |  |   | 402,073   |       






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

This report on Form 10-K contains
forward-looking information within the meaning of The Private
Securities Litigation Reform Act of 1995. The statements may be
identified by an asterisk (*) or such
forward-looking terminology as expect,
look, believe, anticipate,
plan, may, will, or similar
statements or variations of such terms. All of the
outlook information constitutes forward-looking
information. The specialty apparel retail business is an
evolving and highly competitive marketplace and such
forward-looking statements involve material known and unknown
risks and uncertainties as to future events which may or may not
occur, including levels of sales, effectiveness of the
Companys brand awareness and marketing programs,
effectiveness and profitability of new concepts, effectiveness
of its Internet site, store traffic, acceptance of Talbots
fashions, appropriate balance of merchandise offerings, the
Companys ability to sell its merchandise at regular prices
as well as its ability to successfully execute its major sale
events including the timing and levels of markdowns, retail
economic conditions including consumer spending, consumer
confidence, a continued highly uncertain economy and a volatile
stock market, the impact of the hostilities in the Middle East,
and other geographical areas, and the impact of a continued
highly promotional retail environment. In each case, actual
results may differ materially from such forward-looking
information. Certain other factors that may cause actual results
to differ from such forward-looking statements are included 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 also 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 and
you are urged to consider such factors. In light of the
uncertainty inherent in such forward-looking statements, you
should not consider their inclusion to be a representation that
such forward-looking matters will be achieved. The

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##### Table of Contents



Company assumes no obligation for updating any
such forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting
such forward-looking statements.


The following discussion and analysis of
financial condition and results of operations is based upon the
Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America and should be read in
conjunction with these statements and the notes thereto.

Critical Accounting Policies

The preparation of the Companys financial
statements require the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to inventories,
product returns, customer programs and incentives, bad debts and
income taxes. The estimates are based on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results would differ from these estimates if
actual events or experience were different from their
assumptions.

Talbots believes the following critical
accounting policies require more significant judgments and
estimates used in the preparation of its consolidated financial
statements:

Inventory Markdown Reserve.Merchandise inventory is a significant
portion of the Companys balance sheet, representing
approximately 20% of total assets at February 1, 2003.
Talbots manages its inventory levels by holding four major sale
events a year in its stores and catalog, consisting of two
mid-season sales and two end-of-season clearance sales. No other
major promotional sale events are typically held. These events
serve to liquidate remaining inventory at the end of each
selling season after which remainder goods are transferred to
the Companys 24 Outlet stores. At the end of each
reporting period reductions in gross margin and inventory are
recorded for estimated future markdowns necessary to liquidate
remaining markdown inventory. The reserve calculation uses
information related to markdown inventory levels, historical
markdown trends and forecasted sales and markdowns.

The key factors influencing the reserve
calculation are the overall level of markdown inventory at the
end of the reporting period and the expectation of future
markdowns for this same merchandise based on historical markdown
percentages. These percentages are reviewed regularly by
comparing actual markdowns taken against previous estimates.
These results are then factored into future estimates.
Throughout fiscal 2002, overall inventory levels were reduced as
part of an effort to maximize gross margin and cash flow during
the year and to minimize the overall level of markdowns.
Additionally, in 2002, actual markdowns were taken prior to year
end while in 2001 actual markdowns were not taken until after
year end and included in the fiscal 2001 reserve.

If market conditions were to decline, Talbots
might be required to mark down inventory at a greater rate than
estimated, possibly resulting in an incremental reduction in
earnings. Management believes that at February 1, 2003, the
markdown reserve is sufficient based on current markdown
inventory levels, historical markdown trends and reasonable
sales and markdown forecasts.

Sales Return Reserve.As part of the normal sales cycle, the
Company receives customer merchandise returns through both its
catalog and store locations. To account for the financial impact
of this process, management estimates future returns on
previously sold merchandise. Reductions in sales and gross
margin are recorded for estimated merchandise returns based on
return history, current sales levels and projected future return
levels.

The sales return reserve calculation consists of
two separate components. The stores component is
based on an analysis that tracks daily sales over the preceding
six months and actual returns processed against those sales. A
six month rolling average return rate is applied against the
actual sales and the difference is booked as a reserve. The
model also applies a component to reduce the reserve for returns
that result in merchandise exchanges. These types of returns are
tracked by the store systems and the estimate is applied

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against the return reserve. The
catalog component is based on a similar process
except that sales are tracked by catalog and return rates are
based on forecasted estimates for the entire life of the catalog
and are based on current and historical return experience.
Periodically both components of the calculation are validated by
comparing the assumptions used to the actual returns processed.


Management believes that at February 1,
2003, the reserve is sufficient based on current sales return
trends and reasonable return forecasts. The Company records
store generated revenue at the point-of-sale and catalog and
Internet revenue based on estimated receipt by the customer.

Customer Loyalty
Program.Talbots maintains a customer
loyalty program in which customers receive appreciation
awards based on reaching a specified purchase level on
their Talbots charge accounts. Customers may redeem their
appreciation awards toward future merchandise purchases on the
Talbots charge card. Appreciation awards, by their terms, expire
one year from the date of issuance. Typically, the customer
receives one point for each $1 of purchase. Each time a customer
reaches 500 points within the program year the customer is
issued a $25 appreciation award. In fiscal 2002 the Company ran
two promotional events where the customer was credited 2 points
for each $1 purchased. In fiscal 2001 only one such event was
held.

Appreciation award expense is calculated as a
percent of Talbots charge sales and is based on expected
redemption rates and is charged to selling, general and
administrative expense. Ongoing analysis of issuances and
redemptions is performed to identify trends in the expense rate.
A secondary analysis is performed that analyzes the accrual
account balance and factors in the outstanding unredeemed
awards, actual redemptions and the level of award points earned.
Adjustments are made to the accrual based on trends and changes
in the program. Several key statistics are monitored regularly,
including expense as a percent of sales, redemptions as a
percentage of sales and cumulative redemptions. Trends in these
statistics are then factored into both the initial expense and
the analysis of the liability account.

Actual award grants and redemptions may vary from
estimates based on actual customer responsiveness to the program
and could result in additional expense. Management believes at
February 1, 2003, its current allowance is sufficient based
on recent purchase levels and expected redemption levels.

Allowance for Doubtful Accounts.Customer accounts receivable consist
entirely of outstanding receivables from the Companys
customers for purchases made using the Companys
proprietary credit card. Talbots maintains an allowance for
doubtful accounts providing for estimated charge-offs resulting
from the inability of Talbots charge customers to make required
payments. Delinquent accounts are generally charged-off
automatically after a period of delinquency. Accounts are
written off sooner in the event of customer bankruptcy or other
circumstances that make further collection unlikely. Changes in
the allowance are charged to selling, general and administrative
expense. The likelihood of collectibility of accounts receivable
is evaluated based on a combination of factors including the
level of accounts receivable balances, overall credit quality of
the portfolio, historic charge-off levels and projected future
charge-off levels.

An analytical review of accounts receivable is
performed each reporting period, which categorizes delinquent
accounts based on the number of days overdue. Bad debt
estimates, by category, are then calculated based on historical
collection rates. For accounts that are not delinquent, a bad
debt rate is imputed based on historical delinquency and
collection rates. In addition, bad debts resulting from factors
other than delinquency, such as bankruptcy or fraud, are also
factored into the calculation based on historical experience.
Additionally, existing accounts are reviewed twice a year using
standard industry credit scores. An adjustment to the reserve is
calculated based on movement in the portfolios credit
scores and current aging trends.

If the creditworthiness of Talbots customers
deteriorates, resulting in an impairment of their ability to
make payments, additions to this reserve might be required.
Management believes that at February 1, 2003, the allowance
for doubtful accounts balance is sufficient in light of
portfolio balance, portfolio quality, historical charge-offs and
reasonable charge-off forecasts.

Income Taxes.The
Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be
realized. While the Company has considered future taxable income
and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, if the Company
determined that it would not be able to realize all or part of
its net deferred tax asset in the

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future, an adjustment to the deferred tax asset
would be charged to income in the period such determination was
made. Likewise, in the event it is determined that it would be
able to realize deferred tax assets in the future in excess of
its net recorded amount, an adjustment to the valuation
allowance would increase income in the period such determination
was made. Management believes that, at February 1, 2003, no
valuation allowance was needed based on assumptions regarding
future taxable income.


Results of Operations

The 2002 fiscal year had 52 weeks and ended
February 1, 2003. The 2001 fiscal year had 52 weeks
and ended February 2, 2002. The 2000 fiscal year had
53 weeks and ended on February 3, 2001. When making
comparable store sales comparisons between fiscal 2001 and
fiscal 2000, the comparable 52-week period for fiscal 2000
excludes the first week. Comparable stores are those which were
open for at least one full fiscal year. When a new Talbots
Petites, Woman, Mens, Kids or Accessories & Shoes store
is opened adjacent to or within the same center as 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 following table sets forth the percentage
relationship to net sales of certain items in the Companys
consolidated statements of earnings for the fiscal periods shown
below:

|                                             |  |             |       |             |  |             |       |   |  |  |       |  
|-------------------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | - |  |  | ----- | -
|                                             |  |            
|                                             |  | Year Ended 
|                                             |  |            
|                                             |  | February 1, |       | February 2, |  | February 3,
|                                             |  | 2003        |       | 2002        |  | 2001       
|                                             |  |             |       |             |  |            
|Net sales                                    |  |             | 100.0 | %           |  |             | 100.0 | % |  |  | 100.0 | %
|Cost of sales, buying and occupancy expenses |  |             | 60.4  | %           |  |             | 60.0  | % |  |  | 58.7  | %
|Selling, general and administrative expenses |  |             | 27.3  | %           |  |             | 27.0  | % |  |  | 29.3  | %
|Operating income                             |  |             | 12.3  | %           |  |             | 13.0  | % |  |  | 12.0  | %
|Interest expense, net                        |  |             | 0.2   | %           |  |             | 0.3   | % |  |  | 0.3   | %
|Income before taxes                          |  |             | 12.1  | %           |  |             | 12.7  | % |  |  | 11.7  | %
|Income taxes                                 |  |             | 4.5   | %           |  |             | 4.8   | % |  |  | 4.5   | %
|Net income                                   |  |             | 7.6   | %           |  |             | 7.9   | % |  |  | 7.2   | %

Fiscal 2002 Compared to Fiscal 2001

Net sales in 2002 decreased by $17.2 million
to $1,595.3 million, or 1.1% from 2001. Operating income
was $196.1 million in 2002 compared to $210.0 million
in 2001, a decrease of 6.6%.

Retail store sales in 2002 increased by
$1.9 million, to $1,347.9 million, or 0.1% over 2001.
The increase in retail store sales was attributable to the 86
net new stores opened in 2002 and the first full year of
operation of the 78 net non-comparable stores that opened in
2001, offset by a decrease of $74.8 million or 6.6% in
comparable store sales from the previous year. The Company
believes the decrease in comparable store sales is largely
attributable to the continued slow economy in fiscal 2002 and
the related difficult retail environment. The percentage of the
Companys net sales derived from its retail stores in 2002
increased to 84.5% compared to 83.5% in 2001 due to store sales
remaining relatively flat with last year while catalog sales
decreased.

Catalog sales in 2002 decreased by
$19.1 million to $247.4 million, or 7.2% from 2001.
Included in catalog sales are sales generated from the
Companys website, www.talbots.com. During 2002, the
Company anticipated softening demand in catalog sales and
reduced total circulation by 12.6% from 57.0 million in
2001 to 49.8 million in 2002. This included the elimination
of two less productive catalogs and eliminating the four
separate Talbots Woman catalogs in favor of line listing Womans
sizes in existing base catalogs. Additionally, the Company
continues to focus on distributing catalogs to proven customers.
As a result, while total sales were down, catalog productivity,
as measured by both sales per catalog and sales per page
distributed, increased in comparison to 2001. Sales per catalog
distributed increased 6.0% to $4.52 in 2002 and sales per 100
pages distributed increased 4.9% to $5.22 in 2002. During 2002,
sales from the Companys website accounted for
approximately 24% of total catalog sales in 2002 compared to 17%
in 2001.

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Cost of sales, buying and occupancy expenses
increased slightly as a percentage of net sales to 60.4% in 2002
from 60.0% in 2001. The decrease in comparable store sales
created negative leverage on store occupancy expenses as the
Company absorbed the occupancy costs of the 86 net new stores
opened in fiscal 2002 and recognized the full impact of the 78
net new stores opened in fiscal 2001. Additionally, the Company
saw increased buying expenses as a percent of sales due to
negative comparable store sales. These were almost entirely
offset by higher merchandise gross margins. Tighter inventory
management produced a higher level of full price selling in 2002
compared to 2001. Full price selling increased to 65.2% in 2002
compared to 63.9% in 2001. Additionally, improved merchandise
sourcing allowed increased product mark-on that generated higher
merchandise gross margin.

Selling, general and administrative expenses
increased as a percentage of net sales to 27.3% in 2002 from
27.0% in 2001. As a result of the decline in comparable store
sales, store overhead expenses increased as a percent of sales.
Additionally, expenses related to the Companys Classic
Awards customer loyalty program increased as a percent of sales.
In 2001, the Company ran a double points event in
the month of September; however, in 2002 two double
point events were conducted, one in March and one in
September. These increases were largely offset by reductions in
catalog production and circulation costs as part of the
Companys focus on reducing overall catalog circulation.
Additionally, the Company saw growth in finance charge income
associated with the increase in customer accounts receivable.

Interest expense, net, decreased by
$2.3 million to $2.9 million in 2002 compared to
$5.2 million in 2001. Interest expense decreased by
$2.8 million to $3.3 million in 2002 compared to
$6.1 million in 2001. This decrease is primarily due to a
combination of declining interest rates and slightly lower
borrowing levels. The average interest rate, including interest
on short-term and long-term bank borrowings, was 2.69% in 2002
compared to 4.85% in 2001. The average total debt, including
short-term and long-term bank borrowings, was
$121.4 million in 2002 compared to $125.7 million in
2001. Interest income decreased by $0.5 million due
primarily to lower interest rates earned on short-term overnight
deposits.

The effective tax rate for the Company was 37.5%
in 2002 compared to 38.0% in 2001. The rate change is due to the
recognition of the impact of a reorganization of the
Companys Canadian operations completed in the fourth
quarter of fiscal 2001, a decrease in the overall effective
state tax rate and the discontinuation of amortization of
non-deductible goodwill.

Fiscal 2001 Compared to Fiscal 2000

Net sales increased by $17.5 million to
$1,612.5 million, or 1.1% from 2000. Operating income was
$210.0 million in 2001 compared to $191.7 million in
2000, an increase of 9.5%.

Retail store sales in 2001 increased by
$20.0 million, to $1,346.0 million, or 1.5% over 2000.
The increase in retail store sales was attributable to the 78
net new stores opened in 2001, the first full year of operation
of the 49 net non-comparable stores that opened in 2000, offset
by a decrease of $28.1 million or 2.6% in comparable store
sales from the previous year as well as the additional 53rd week
in 2000 which accounted for approximately $17.2 million in
store sales compared to only 52 weeks in 2001. The Company
believes the decrease in comparable store sales can be
attributed to a slowing economy and a difficult retail
environment in fiscal 2001. The percentage of the Companys
net sales derived from its retail stores in 2001 increased to
83.5% compared to 83.1% in 2000 due to store sales increasing
while catalog sales decreased.

Catalog sales in 2001 decreased by
$2.5 million to $266.5 million, or 0.9% from 2000.
Catalog productivity, as measured by both sales per catalog and
sales per page distributed, was relatively flat in comparison to
2000. Sales per catalog distributed increased 0.7% from $4.24 in
2000 to $4.27 in 2001, while sales per page distributed declined
0.6% from $5.01 per hundred in 2000 to $4.98 per hundred in
2001. Total circulation was reduced, with approximately
57.0 million catalogs in 2001 from 58.2 million
catalogs in 2000. Overall, the reduction in circulation was
based on a continuing strategy to better focus the distribution
of catalogs to proven customers. During 2001, sales from the
Companys website accounted for approximately 17% of total
catalog sales compared to 10% in 2000.

Cost of sales, buying and occupancy expenses
increased as a percentage of net sales to 60.0% in 2001 from
58.7% in 2000. The increase in cost of sales, buying and
occupancy, as a percentage of net sales, is mainly due to
negative comparable store sales being insufficient to provide
leverage on occupancy costs. Additionally,

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merchandise margins declined as a percentage of
sales during 2001. Although the Company saw favorable increases
in markon throughout 2001, markdown selling late in the year
more than offset this increase.


Selling, general and administrative expenses
decreased as a percentage of net sales to 27.0% in 2001 from
29.3% in 2000. In an effort to control expenses, the Company
took advantage of opportunistic spending in 2000 that allowed it
to reduce spending to more traditional levels on store
maintenance, marketing and management information systems
expenses in 2001. Additionally, the Company realized the benefit
of increased Talbots proprietary charge card usage with
increased finance charge revenue and reduced bankcard fees. This
was largely offset with costs associated with the national
rollout of its Classic Awards customer loyalty program.

Interest expense, net, increased by
$0.9 million to $5.2 million in 2001 compared to
$4.3 million in 2000. Interest expense decreased to
$6.1 million in 2001 from $7.7 million in 2000
primarily due to a decline in interest rates and was partially
offset by an increase in average borrowing. The average interest
rate, including interest on short-term and long-term bank
borrowings, was 4.85% in 2001 compared to 7.46% in 2000. The
average total debt, including short-term and long-term bank
borrowings, was $125.7 million in 2001 compared to
$103.4 million in 2000.

The effective tax rate for the Company was 38.0%
in 2001 compared to 38.5% in 2000. The Company recognized tax
benefits in the fourth quarter of 2001 due to a restructuring of
foreign operations which resulted in the Companys
utilization of net operating loss being more likely than not and
due to a decrease in its overall effective state tax rate.

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.

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.

|                                             |  |                      |       |           |  |             |       |             |  |  |       |   |  |  |       |  
|-------------------------------------------- |  | -------------------- | ----- | --------- |  | ----------- | ----- | ----------- |  |  | ----- | - |  |  | ----- | -
|                                             |  |                     
|                                             |  | Fiscal Quarter Ended
|                                             |  |                     
|                                             |  | May 4,               |       | August 3, |  | November 2, |       | February 1,
|                                             |  | 2002                 |       | 2002      |  | 2002        |       | 2003       
|                                             |  |                      |       |           |  |             |       |            
|Net sales                                    |  |                      | 100.0 | %         |  |             | 100.0 | %           |  |  | 100.0 | % |  |  | 100.0 | %
|Cost of sales, buying and occupancy expenses |  |                      | 56.5  | %         |  |             | 63.6  | %           |  |  | 56.0  | % |  |  | 65.3  | %
|Selling, general and administrative expenses |  |                      | 29.0  | %         |  |             | 27.6  | %           |  |  | 29.0  | % |  |  | 24.0  | %
|Operating income                             |  |                      | 14.5  | %         |  |             | 8.8   | %           |  |  | 15.1  | % |  |  | 10.7  | %

|                                             |  |                      |       |           |  |             |       |             |  |  |       |   |  |  |       |  
|-------------------------------------------- |  | -------------------- | ----- | --------- |  | ----------- | ----- | ----------- |  |  | ----- | - |  |  | ----- | -
|                                             |  |                     
|                                             |  | Fiscal Quarter Ended
|                                             |  |                     
|                                             |  | May 5,               |       | August 4, |  | November 3, |       | February 2,
|                                             |  | 2001                 |       | 2001      |  | 2001        |       | 2002       
|                                             |  |                      |       |           |  |             |       |            
|Net sales                                    |  |                      | 100.0 | %         |  |             | 100.0 | %           |  |  | 100.0 | % |  |  | 100.0 | %
|Cost of sales, buying and occupancy expenses |  |                      | 54.4  | %         |  |             | 65.8  | %           |  |  | 55.8  | % |  |  | 63.8  | %
|Selling, general and administrative expenses |  |                      | 29.0  | %         |  |             | 26.3  | %           |  |  | 28.7  | % |  |  | 24.1  | %
|Operating income                             |  |                      | 16.6  | %         |  |             | 7.9   | %           |  |  | 15.5  | % |  |  | 12.1  | %

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 produce an increase in sales volume; however, since
marking down the value of inventory increases expense, the
Companys cost of sales, buying and occupancy expenses as a
percentage of net sales is increased. Merchandise inventories
typically peak in the third quarter.

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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 selling supplies. Another 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, as a percent of sales,
in the first and third quarters.

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
February 1, 2003 and February 2, 2002, the Company had
no amounts outstanding under this facility. Additionally, the
Company has a revolving credit facility with four banks totaling
$100.0 million (the Facility). At
February 1, 2003 and February 2, 2002, the
Companys outstanding borrowings under the Facility were
$100.0 million. Notes under the Facility currently extend
to various periods between April 2004 and January 2005, subject
to annual extensions. Additionally, the Company has two
letter-of-credit banking agreements totaling
$200.0 million, which it uses primarily for the purchase of
merchandise inventories. At February 1, 2003 and
February 2, 2002, the Company held $107.6 million and
$101.5 million, respectively, in purchase commitments under
the letter-of-credit agreements. The Companys working
capital needs are typically at their lowest during the spring
season and peak during the fall selling season.

During 2002, cash balances increased by
$7.3 million compared to a decrease in cash balances of
$51.7 million during 2001. Strong cash flows from
operations allowed the Company to increase its investment in
property and equipment, to increase its dividend payment rate
and continue purchasing additional treasury shares.

Cash provided by operating activities totaled
$222.4 million in 2002 compared to $159.3 million in
2001. The increase in cash provided by operating activities over
2001 was primarily attributable to the change in customer
accounts receivable and the timing of receipts and payments of
merchandise inventories. Customer accounts receivables increased
at a lower rate in 2002 than 2001. This was primarily due to the
national rollout of the Companys Classic Awards customer
loyalty program in early 2001, which was supported by in-store
promotion and advertising. The increase in cash provided by
operating activities was also due to the Companys
continued focus on managing inventory levels. Throughout 2002
inventory levels and accounts payable balances were maintained
at lower levels than previous years, benefiting cash flows.
Other positive adjustments to operating cash flow relate to the
increase in general accruals and liabilities booked in the
normal course of operations including accrued taxes, pension and
other retirement plan liabilities and general accruals.
Partially offsetting these positive trends was a decrease of
$6.2 million in net income.

Cash provided by operating activities totaled
$159.3 million in 2001 compared to $139.2 million in
2000. The increase in cash provided by operating activities over
2000 include an $11.8 million increase in net income in
2001. Other reasons for the increase in operating cash flows was
a decline in merchandise inventories in 2001 of
$49.8 million, partially offset by a decline in accounts
payable balances of $33.3 million and is a reflection of
the Companys efforts to tightly manage inventory levels in
the last half of fiscal 2001. Also offsetting the increase in
cash provided by operations in 2001 was the increase in accounts
receivables of $36.7 million due to initiatives taken by
the Company to expand its credit card portfolio including the
national rollout of its Classic Awards customer loyalty program.

Cash used in investing activities was
$99.1 million in 2002 compared to $96.6 million in
2001 and consisted entirely of net additions of property, plant
and equipment. Approximately $77.9 million and
$68.9 million in 2002 and 2001, respectively, was used for
leasehold improvements, furniture, fixtures and other related
expenditures for opening new stores and expanding, renovating
and relocating existing stores.

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Additionally, $2.8 million in 2002 and $13.0
million in 2001 was used for the expansion and renovation of the
Companys Hingham and Lakeville corporate facilities.


Capital expenditures for fiscal 2003 are
currently expected to be approximately $103 million. The
Company currently plans to open at least 92 new stores during
fiscal year 2003. Approximately $82 million is expected to
be used for opening new stores and expanding, renovating and
relocating existing stores. Approximately $9 million is
expected to be used to enhance the Companys computer
information systems, and $6 million is expected to be used
for the continued renovation of the Companys 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 the number and type of
stores being opened, expanded, renovated and relocated, and the
schedule for such activity during fiscal 2003.*

Cash used in financing activities totaled
$116.5 million in 2002. During 2002, the Company paid cash
dividends of $0.35 per share and repurchased 3,165,697 shares of
the Companys common stock under its repurchase programs at
an average price per share of $31.59. This completed two
$50.0 million repurchase programs that were approved in
October 2001 and July 2002. On October 31, 2002, the Board
of Directors approved a further stock repurchase program which
allowed the Company to purchase an additional $50.0 million
in stock, from time to time, over the next two years. Through
February 1, 2003, no purchases have been made under this
plan. The payment of cash dividends and the purchase of treasury
stock in 2002 were funded through operating cash flows and
available cash balances.

Cash used in financing activities totaled
$114.2 million in 2001. During 2001, the Company paid cash
dividends of $0.31 per share and repurchased
3,209,008 shares of the Companys common stock under
its repurchase program at an average price per share of $31.16.
This completed a $100.0 million repurchase program that was
approved in March 2001. In October 2001, the Board of Directors
approved a further stock repurchase program which allows the
Company to purchase an additional $50.0 million in stock.
The Companys majority shareholder, AEON (U.S.A.), elected
not to participate in this program. No purchases were made under
this program during 2001. The payment of cash dividends and the
purchase of treasury stock in 2001 were funded through operating
cash flows and available cash balances.

In 2002 and 2001, cash from operating activities
and funds available to the Company under its credit facilities
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
$60.0 million and $90.0 million in 2002 and 2001,
respectively. The Companys primary ongoing cash
requirements will be to fund new stores and the expansions,
renovations and relocations of existing stores, expansion of the
Companys corporate facility, to finance working capital
build-ups during peak selling seasons, to pay cash dividends
that may be declared from time to time and to repurchase the
Companys common stock. *

The combination of a low interest rate
environment and the continued poor performance of the equity
markets adversely impacted the funded status of the
Companys non-contributory defined benefit pension plan
(the Plan). At February 1, 2003, the Company
used a discount rate of 6.75% compared to 7.50% at
February 2, 2002 to value the Plans liabilities.
While the Company had no requirement under the Employee
Retirement Income Security Act (ERISA) to contribute to the
Plan in 2002, $8.0 million in cash was contributed to the
Plan in fiscal 2002. Under current accounting requirements, when
the Plans accumulated benefit obligation liability exceeds
the current market value of the Plans assets, the excess
is recorded as a charge to shareholders equity. In fiscal
2002, the Company recognized an $18.2 million increase in
its pension liability and booked a charge to equity, net of tax,
for $11.2 million. Management continues to monitor interest
rates and Plan asset returns and anticipates adjusting plan
assumptions accordingly. If interest rates continue to decline,
additional charges to equity and expense may be required along
with additional cash funding.

The Company conducts the major part of its
operations in leased premises with lease terms expiring at
various dates through 2025. 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

21



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##### Table of Contents



expenses applicable to the leased premises. The
aggregate minimum future annual rental commitments under
noncancelable operating leases at February 1, 2003 are as
follows (in thousands):


|            |  |   |         | 
|----------- |  | - | ------- | 
|2003        |  | $ | 107,472 | 
|2004  2005 |  |   | 219,967 | 
|2006  2007 |  |   | 196,586 | 
|Thereafter  |  |   | 373,943 | 

For the current fiscal year and next fiscal year,
the Company believes its cash flows from operating activities
and funds available to it under credit facilities will be
sufficient to meet its planned capital expenditures 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.

New Accounting Pronouncements

On February 3, 2002, the Company adopted the
Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 changed the accounting for goodwill and
certain other intangible assets (including trademarks) from an
amortization method to an impairment-only approach. Upon
adoption, the Company ceased amortization of goodwill and the
trademarks and the assets fair values were reviewed for
impairment. The initial impairment test noted no impairment of
the recorded goodwill or trademarks. Below is a summary of the
Companys goodwill and trademarks (in thousands):

|                               |  |             |        |             |  |             |        |  |  |   |        | 
|------------------------------ |  | ----------- | ------ | ----------- |  | ----------- | ------ |  |  | - | ------ | 
|                               |  | February 1, |        | February 2, |  | February 3,
|                               |  | 2003        |        | 2002        |  | 2001       
|                               |  |             |        |             |  |            
|Goodwill                       |  | $           | 53,760 |             |  | $           | 53,760 |  |  | $ | 53,760 | 
|Less: accumulated amortization |  |             | 18,247 |             |  |             | 18,247 |  |  |   | 16,903 | 
|                               |  |             |        |             |  |             |        |  |  |   |        | 
|                               |  | $           | 35,513 |             |  | $           | 35,513 |  |  | $ | 36,857 | 
|                               |  |             |        |             |  |             |        |  |  |   |        | 
|Trademark                      |  | $           | 95,371 |             |  | $           | 95,371 |  |  | $ | 95,371 | 
|Less: accumulated amortization |  |             | 19,487 |             |  |             | 19,487 |  |  |   | 17,103 | 
|                               |  |             |        |             |  |             |        |  |  |   |        | 
|                               |  | $           | 75,884 |             |  | $           | 75,884 |  |  | $ | 78,268 | 
|                               |  |             |        |             |  |             |        |  |  |   |        | 

22



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##### Table of Contents



Below is a reconciliation of previously reported
net income and earnings per share to the amounts reported in the
current year excluding the amortization of goodwill and
trademarks (in thousands):

|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 
|-------------------------------------------------------- |  | ----------------- | ------- | ----------- |  | ----------- | ------- |  |  | - | ------- | 
|                                                         |  |                  
|                                                         |  | Fiscal Year Ended
|                                                         |  |                  
|                                                         |  | February 1,       |         | February 2, |  | February 3,
|                                                         |  | 2003              |         | 2002        |  | 2001       
|                                                         |  |                   |         |             |  |            
|Reported net income                                      |  | $                 | 120,759 |             |  | $           | 127,001 |  |  | $ | 115,202 | 
|Add: goodwill and trademark amortization, net of
    tax |  |                   |        |             |  |             | 2,822   |  |  |   | 2,810   | 
|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted net income                                      |  | $                 | 120,759 |             |  | $           | 129,823 |  |  | $ | 118,012 | 
|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 
|Reported diluted earnings per share                      |  | $                 | 2.01    |             |  | $           | 2.00    |  |  | $ | 1.80    | 
|Add: goodwill and trademark amortization, net of
    tax |  |                   |        |             |  |             | 0.04    |  |  |   | 0.04    | 
|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted diluted earnings per share                      |  | $                 | 2.01    |             |  | $           | 2.04    |  |  | $ | 1.84    | 
|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of and
replaces SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and Accounting Principles Board Opinion No. 30,
Reporting Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business. As of
February 3, 2002, the Company adopted SFAS No. 144
which did not have a significant impact on the Companys
financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Cost Associated with Exit or Disposal
Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of
SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of
SFAS No. 146 did not have a material impact on the
Companys fiscal 2002 financial statements and is not
expected to have a material impact in the future.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk.

The market risk inherent in the Companys
financial instruments and in its financial position represents
the potential loss arising from adverse changes in interest
rates. The Company does not enter into financial instruments for
trading purposes.

At February 1, 2003, the Company has
$100.0 million of variable rate borrowings outstanding
under its revolving credit facilities, which approximate fair
market value. A hypothetical 10% adverse change in interest
rates for this variable rate debt would have an approximate $73
thousand negative impact on the Companys earnings and cash
flows.

The Company enters into certain purchase
obligations outside the United States which are predominately
settled in U.S. dollars and, therefore, the Company has only
minimal exposure to foreign currency exchange risks. The Company
does not hedge against foreign currency risks and believes that
the foreign currency exchange risk is immaterial. In addition,
the Company operated 22 stores in Canada and six stores in
the United Kingdom as of the fiscal year end 2002. The Company
believes its foreign currency translation risk is minimal, as a
hypothetical 10% strengthening or weakening of the
U.S. dollar relative to the applicable foreign currency
would not materially affect the Companys results of
operations or cash flow.

23



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##### Table of Contents








|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

The report of independent auditors, the
consolidated financial statements of Talbots, the notes to
consolidated financial statements, and the supplementary
financial information called for by this Item 8 are set
forth on F-3 to F-27 of this report. Specific financial
statements and supplementary data can be found and the pages
listed in the following index:

INDEX

|                                                                                                                                                                 |  |      |     | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                                                 |  | Page
|                                                                                                                                                                 |  |     
|Report of Management Responsibility                                                                                                                              |  |      | F-2 | 
|Independent Auditors Report                                                                                                                                     |  |      | F-3 | 
|Consolidated Statements of Earnings for the 52
    Weeks Ended February 1, 2003 and February 2, 2002 and
    the 53 Weeks Ended February 3, 2001                 |  |      | F-4 | 
|Consolidated Balance Sheets at February 1,
    2003 and February 2, 2002                                                                                         |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the 52
    Weeks Ended February 1, 2003 and February 2, 2002 and
    the 53 Weeks Ended February 3, 2001               |  |      | F-6 | 
|Consolidated Statements of Stockholders
    Equity for the 52 Weeks Ended February 1, 2003 and
    February 2, 2002 and the 53 Weeks Ended February 3,
    2001 |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                                                                       |  |      | F-8 | 






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

Not applicable.

24



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##### Table of Contents






PART III






|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant.

Information concerning Talbots directors under
the caption Election of Directors in Talbots Proxy
Statement for Talbots 2003 Annual Meeting of Shareholders, the
information concerning Talbots executive officers set forth in
Part I, Item 1 above under the caption Executive
Officers of the Company, and the information under the
caption Section 16(a) Beneficial Ownership Reporting
Compliance in Talbots Proxy Statement for Talbots 2003
Annual Meeting of Shareholders, are incorporated herein by
reference.






|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

The information set forth under the caption
Executive Compensation, the information concerning
director compensation under the caption Director
Compensation; Attendance; Committees, and the information
under the caption Compensation Committee Interlocks and
Insider Participation in Talbots Proxy Statement for
Talbots 2003 Annual Meeting of Shareholders, are each
incorporated herein by reference. The information included under
Executive Compensation Report on Compensation of Executive
Officers and Executive Compensation-Performance
Graph is not incorporated in this Item 11.






|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters.

The information set forth under the captions
Beneficial Ownership of Common Stock and
Summary of Existing Equity Compensation Plans in
Talbots Proxy Statement for Talbots 2003 Annual Meeting of
Shareholders is incorporated herein by reference.






|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

The information set forth under the caption
Executive Compensation  Certain Transactions
with Related Parties in Talbots Proxy Statement for
Talbots 2003 Annual Meeting of Shareholders is incorporated
herein by reference.






|         |                         
|-------- | ------------------------
|Item 14. | Controls and Procedures.

The Companys principal executive officer
and principal financial officer have evaluated the
Companys disclosure controls and procedures as of a date
within 90 days of the filing date of this Form 10-K
and have found the disclosure controls and procedures to be
effective. Except as noted below, there have been no significant
changes in the Companys internal controls or in other
factors that could significantly affect these internal controls
subsequent to the date of their evaluation, nor were any
significant deficiencies or material weaknesses in the
Companys internal controls found.

In November 2002, the Company converted to new
Oracle based financial systems. The conversion was made to
improve the Companys internal and external reporting
systems. Reported information for the year ended
February 1, 2003 was prepared with the new system while the
years ended February 2, 2002 and February 3, 2001 were
prepared under the legacy systems. Management has conducted
detailed testing of the new systems and believes that the
conversion was successful.

25



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##### Table of Contents






PART IV






|         |                                                                      
|-------- | ---------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K.

(a)(1) Financial Statements:The
following Independent Auditors Report and Consolidated
Financial Statements of Talbots are included in this Report:



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Earnings for the 52
    Weeks Ended February 1, 2003 and February 2, 2002 and
    the 53 Weeks Ended February 3, 2001                                
|
| | Consolidated Balance Sheets at February 1,
    2003 and February 2, 2002                                                                                                        
|
| | Consolidated Statements of Cash Flows for the 52
    Weeks Ended February 1, 2003, the 52 Weeks Ended
    February 2, 2002 and the 53 Weeks Ended February 3,
    2001          
|
| | Consolidated Statements of Stockholders
    Equity for the 52 Weeks Ended February 1, 2003, the 52
    Weeks Ended February 2, 2002 and the 53 Weeks Ended
    February 3, 2001
|
| | Notes to Consolidated Financial Statements                                                                                                                                      
|
| | Independent Auditors Report                                                                                                                                                    

(a)(2) Financial Statement Schedules:

All financial statement schedules have been
omitted because the required information is either presented in
the consolidated financial statements or the notes thereto or is
not applicable or required.

(a)(3) Exhibits:

The following exhibits are filed herewith or
incorporated by reference:

(3) Articles of Incorporation and
By-laws.

| |   |    |  |                                                                    
| | - | -- |  | -------------------------------------------------------------------
| | 3 | .1 |  | Certificate of Incorporation, as amended, of
    Talbots.(1)(13)18)
| | 3 | .2 |  | By-laws of Talbots.(1)                                             

(4) Instruments Defining the Rights of
Security Holders, including Indentures.

| |   |    |  |                                                
| | - | -- |  | -----------------------------------------------
| | 4 | .1 |  | Form of Common Stock Certificate of Talbots.(1)

(10) Material Contracts.

| |    |    |  |                                                                                                                                                                                                                    
| | -- | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .1 |  | Stockholders Agreement, dated as of
    November 18, 1993, between Talbots and AEON U.S.A.(2)                                                                                                                      
| | 10 | .2 |  | Revolving Credit Agreement, dated as of
    January 25, 1994, between Talbots and Mizuho Corporate
    Bank, Ltd. (formerly The Dai-Ichi Kangyo Bank, Limited), as
    amended.(2)(3)(4)(5)(6)(7)(11)(15)(19)(24)  
| | 10 | .3 |  | Revolving Credit Agreement, dated as of
    January 25, 1994, between Talbots and The Bank of
    Tokyo-Mitsubishi Trust Company, as
    amended.(2)(3)(4)(5)(7)(10)(11)(15)(19)(24)                               
| | 10 | .4 |  | Revolving Credit Agreement, dated as of
    January 25, 1994, between Talbots and The Norinchukin Bank,
    as amended.(2)(3)(4)(5)(6)(7)(12)(17)(20)                                                              
| | 10 | .5 |  | Revolving Credit Agreement, dated as of
    January 25, 1994, between Talbots and Sumitomo Mitsui
    Banking Corporation (formerly The Sakura Bank, Limited), as
    amended.(2)(3)(4)(5)(6)(7)(8)(11)(15)(19)(24)
| | 10 | .6 |  | Revolving Credit Agreement between Talbots and
    Mizuho Corporate Bank, Ltd., (formerly The Dai-Ichi Kangyo Bank,
    Limited), dated as of April 14, 1998, as
    amended.(6)(10)(12)(17)(20)                   
| | 10 | .7 |  | Credit Agreement between Talbots and The Bank of
    Tokyo-Mitsubishi, Ltd., dated as of April 17, 1998, as
    amended.(6)(7)(10)(12)(17)(20)                                                                     
| | 10 | .8 |  | Letter of Credit Agreement, dated as of
    August 10, 1993, between Talbots and Fleet National Bank.(1)                                                                                                           

26



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                            
| | -- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .9  |  | Letter Agreement, dated as of June 1, 1998,
    concerning credit facilities, between Talbots and Fleet National
    Bank.(7)(18)(22)                                                                                      
| | 10 | .10 |  | Letter Agreement, dated August 11, 1998,
    concerning credit facilities, between HSBC Corporate Banking,
    Marine Midland Bank and Talbots.(7)(13)(18)(22)                                                             
| | 10 | .11 |  | Trademark Purchase and License Agreement, dated
    as of November 26, 1993, between AEON Co. Ltd., (as
    successor in interest to JUSCO (Europe) B.V.) and The Classics
    Chicago, Inc.(2)                            
| | 10 | .12 |  | Services Agreement, dated as of November 18,
    1993, between Talbots Japan Co., Ltd. and Talbots.(2)                                                                                                                     
| | 10 | .13 |  | Stock Purchase Agreement, dated as of
    November 26, 1993, between Talbots and AEON U.S.A.(2)                                                                                                                            
| | 10 | .14 |  | License Agreement, dated as of November 26,
    1993, between The Classics Chicago, Inc., Talbots, Talbots
    International Retailing Limited, Inc., Talbots (Canada), Inc.
    and Talbots (U.K.) Retailing Limited.(2)  
| | 10 | .15 |  | Tax Allocation Agreement, dated as of
    November 18, 1993, between AEON U.S.A., Talbots, Talbots
    International Retailing Limited, Inc., Talbots (U.K.) Retailing
    Limited and The Classics Chicago, Inc.(2)       
| | 10 | .16 |  | The Talbots, Inc. Pension Plan for Salaried
    Employees, as amended and restated January 1, 1989,
    including amendments through January 1, 1994.(3)*                                                                  
| | 10 | .17 |  | The Talbots, Inc. Retirement Savings Voluntary
    Plan, as amended and restated, effective as of November 1,
    1993.(2)(3)(11)*                                                                                         
| | 10 | .18 |  | Services Agreement, dated as of October 29,
    1989, between Talbots and AEON U.S.A.(3)                                                                                                                                   
| | 10 | .19 |  | Amendment to License Agreement, dated
    January 29, 1997, among The Classics Chicago, Inc.,
    Talbots, Talbots International Retailing Limited, Inc., Talbots
    (Canada), Inc., and Talbots (U.K.) Retailing, Ltd.(5)
| | 10 | .20 |  | Money Market Line Commercial Promissory Note,
    dated August 20, 1999, from Talbots to BankBoston, N.A.(10)                                                                                                              
| | 10 | .21 |  | The Talbots, Inc. Supplemental Retirement Plan,
    as amended.(1)(2)(16)*                                                                                                                                                 
| | 10 | .22 |  | The Talbots, Inc. Supplemental Savings Plan, as
    amended.(1)(2)(16)*                                                                                                                                                    
| | 10 | .23 |  | The Talbots, Inc. Deferred Compensation Plan, as
    amended.(1)(2)(16)*                                                                                                                                                   
| | 10 | .24 |  | The Talbots, Inc. Amended and Restated 1993
    Executive Stock Based Incentive Plan.(2)(7)(18)*                                                                                                                           
| | 10 | .25 |  | Employment Agreement, dated as of
    October 22, 1993, between Arnold B. Zetcher and Talbots, as
    amended by Amendment No. 1, dated May 11, 1994.(2)(3)*                                                               
| | 10 | .26 |  | Change in Control Agreements between Talbots and
    certain officers of Talbots.(2)(3)*                                                                                                                                   
| | 10 | .27 |  | Employment Agreement, dated as of
    November 23, 1998, between the Company and H. James
    Metscher.(7)*                                                                                                                
| | 10 | .28 |  | Consulting and Advisory Services Contract between
    AEON (U.S.A.), Inc. and Talbots dated as of November 1,
    1999.(9)                                                                                                 
| | 10 | .29 |  | The Talbots, Inc. Restated Directors Stock Plan
    dated May 25, 2000.(13)*                                                                                                                                               
| | 10 | .30 |  | Amended Share Repurchase Program, dated as of
    July 23, 2002, between Talbots and AEON (U.S.A.),
    Inc.(21)(23)                                                                                                       
| | 10 | .31 |  | Amended Share Repurchase Program, dated as of
    October 31, 2002, between Talbots and AEON U.S.A.(24)                                                                                                                    



---



|  |                                                              
|- | -------------------------------------------------------------
|* | Management contract and compensatory plan or
    arrangement.

(11) Statement re: Computation of Per
Share Earnings.

| |    |    |  |                                                                                                                                                                                            
| | -- | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 11 | .1 |  | Incorporated by reference to note 13, Net
    Income Per Share, of Talbots consolidated financial
    statements for the fiscal year ended February 1, 2003,
    included in this Report.

27



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##### Table of Contents



(21) Subsidiaries.

| |    |    |  |                                                                                                                                                                                                                                                   
| | -- | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 21 | .1 |  | Incorporated by reference to Note 2,
    Summary of Significant Accounting Policies 
    Principals of Consolidation, of Talbots consolidated
    financial statements for the fiscal year ended February 1,
    2003, included in this report.

(23) Consents of Experts and Counsel.

| |    |    |  |                                                            
| | -- | -- |  | -----------------------------------------------------------
| | 23 | .1 |  | Independent Auditors Consent of Deloitte
    & Touche LLP.



---



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1 | Incorporated by reference to the exhibits filed
    with Talbots Registration Statement on Form S-1
    (No. 33-69082), which Registration Statement became
    effective November 18, 1993.
|
| | 2 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated April 25, 1994.                                                                                   
|
| | 3 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated April 27, 1995.                                                                                   
|
| | 4 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated November 21,
    1995.                                                                            
|
| | 5 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated May 1, 1997.                                                                                      
|
| | 6 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated May 1, 1998.                                                                                      
|
| | 7 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated April 28, 1999.                                                                                   
|
| | 8 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated May 25, 1999.                                                                                     
|
| | 9 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated July 1, 1999.                                                                                     



|   |                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------
|10 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated November 24,
    1999.
|  
|11 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated April 25, 2000.       
|  
|12 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated May 18, 2000.         
|  
|13 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated June 12, 2000.        
|  
|14 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated June 30, 2000.        
|  
|15 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated February 28,
    2001.
|  
|16 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated April 3, 2001.        
|  
|17 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated May 25, 2001.         
|  
|18 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated September 6,
    2001.
|  
|19 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated February 19,
    2002.
|  
|20 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated May 20, 2002.         
|  
|21 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated August 1, 2002.       
|  
|22 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated August 20, 2002.      
|  
|23 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated December 13,
    2002.
|  
|24 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated March 17, 2003.       

(b) Report on Form 8-K:

The Company filed a Current Report on
Form 8-K on March 17, 2003, pursuant to which various
agreements and documents were filed by the Company, as
identified therein.

28



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##### Table of Contents






SIGNATURES

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

Dated: April 22, 2003



| |                  
| | -----------------
| | THE TALBOTS, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ EDWARD L. LARSEN

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Edward L. Larsen                                
| | Senior Vice President, Finance,                 
| | Chief Financial Officer and
    Treasurer       
| | (Principal Financial and Accounting
    Officer)

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated as of April 22, 2003.

|                                                                                                                                                                                                        |  |  |  |                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | -------------------------------------------------------------------------------------------------------
|/s/ ARNOLD B. ZETCHER
    -----------------------------------------------------
    Arnold B. ZetcherChairman of the Board, President
    and Chief Executive Officer
    (Principal Executive Officer) |  |  |  | -----------------------------------------------------
    Yoichi KimuraDirector                        
|                                                                                                                                                                                                       
|-----------------------------------------------------
    Toshiji TokiwaDirector                                                                                                                        |  |  |  | -----------------------------------------------------
    Motoya OkadaDirector                         
|                                                                                                                                                                                                       
|/s/ PETER B. HAMILTON
    -----------------------------------------------------
    Peter B. HamiltonDirector                                                                                           |  |  |  | /s/ SUSAN M. SWAIN
    -----------------------------------------------------
    Susan M. SwainDirector
|                                                                                                                                                                                                       
|/s/ ELIZABETH T. KENNAN
    -----------------------------------------------------
    Elizabeth T. KennanDirector                                                                                       |  |  |  | /s/ ISAO TSURUTA
    -----------------------------------------------------
    Isao TsurutaDirector    

29



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##### Table of Contents



I, Arnold B. Zetcher, certify that:

1.     I have reviewed
this annual report on Form 10-K of The Talbots, Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a)     Designed such
    disclosure controls and procedures to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    annual report is being prepared;
|
| | b)     Evaluated the
    effectiveness of the registrants disclosure controls and
    procedures as of a date within 90 days prior to the filing
    date of this annual report (the Evaluation Date); and                                                                                                          
|
| | c)     Presented in this
    annual report our conclusions about the effectiveness of the
    disclosure controls and procedures based on our evaluation as of
    the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a)     All significant
    deficiencies in the design or operation of internal controls
    which could adversely affect the registrants ability to
    record, process, summarize and report financial data and have
    identified for the registrants auditors any material
    weaknesses in internal controls; and
|
| | b)     Any fraud,
    whether or not material, that involves management or other
    employees who have a significant role in the registrants
    internal controls; and                                                                                                                                                

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | /s/ ARNOLD B. ZETCHER 
     _______________________________________ 
    Arnold B. Zetcher
| | Chairman of the Board, President                                                          
| | and Chief Financial Officer                                                               

Date: April 22, 2003

30



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##### Table of Contents



I, Edward L. Larsen, certify that:

1.     I have reviewed
this annual report on Form 10-K of The Talbots, Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a)     Designed such
    disclosure controls and procedures to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    annual report is being prepared;
|
| | b)     Evaluated the
    effectiveness of the registrants disclosure controls and
    procedures as of a date within 90 days prior to the filing
    date of this annual report (the Evaluation Date); and                                                                                                          
|
| | c)     Presented in this
    annual report our conclusions about the effectiveness of the
    disclosure controls and procedures based on our evaluation as of
    the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a)     All significant
    deficiencies in the design or operation of internal controls
    which could adversely affect the registrants ability to
    record, process, summarize and report financial data and have
    identified for the registrants auditors any material
    weaknesses in internal controls; and
|
| | b)     Any fraud,
    whether or not material, that involves management or other
    employees who have a significant role in the registrants
    internal controls; and                                                                                                                                                

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | /s/ EDWARD L. LARSEN 
     _______________________________________ 
     Edward L. Larsen
| | Senior Vice President, Finance,                                                          
| | Chief Financial Officer                                                                  
| | and Treasurer                                                                            

Date:April 22, 2003

31



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                                                  |  |      |     | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                                                  |  | Page
|                                                                                                                                                                  |  |     
|Report of Management Responsibility                                                                                                                               |  |      | F-2 | 
|Independent Auditors Report                                                                                                                                      |  |      | F-3 | 
|Consolidated Statements of Earnings for the
    52 Weeks Ended February 1, 2003, and February 2,
    2002 and the 53 Weeks Ended February 3, 2001                 |  |      | F-4 | 
|Consolidated Balance Sheets at February 1,
    2003 and February 2, 2002                                                                                          |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    52 Weeks Ended February 1, 2003 and February 2,
    2002, and the 53 Weeks Ended February 3, 2001               |  |      | F-6 | 
|Consolidated Statements of Stockholders
    Equity for the 52 Weeks Ended February 1, 2003 and
    February 2, 2002, and the 53 Weeks Ended
    February 3, 2001 |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                                                                        |  |      | F-8 | 

F-1



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##### Table of Contents



REPORT OF MANAGEMENT RESPONSIBILITY

The management of The Talbots, Inc. is
responsible for the fairness and accuracy of our financial
reporting.

The consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America, using
managements best estimates and informed judgments where
necessary and appropriate. Management is responsible for the
integrity of the information and the representations contained
in our Annual Report.

We have established a system of internal
accounting controls that provides reasonable assurance that, in
all material respects, assets are adequately safeguarded and
accounted for in accordance with managements authorization
and transactions are properly and accurately recorded. Our
internal controls provide for appropriate separation of duties
and responsibilities, and there are documented policies
regarding the use of Company assets and proper financial
reporting. These policies demand high ethical conduct from all
employees. We also maintain an internal audit program that
independently evaluates and reports on the adequacy and
effectiveness of our internal controls.

The Audit Committee of the Board of Directors,
consisting of outside, independent Directors, meets periodically
to assess that our management, internal auditors and independent
auditors are properly fulfilling their duties regarding internal
controls and financial reporting. Our independent auditors,
internal auditors and financial managers have full and free
access to the Audit Committee at any time.

Deloitte & Touche LLP, independent auditors,
are retained to perform audits of our consolidated financial
statements.

|                                                                                                                         |  |                                                                                                                   
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------
|                                                                                                                        
|-s- Arnold B. ZetcherArnold B. Zetcher
    Chairman of the Board of Directors,
    President and Chief Executive Officer |  | -s- Edward L. LarsenEdward L. Larsen
    Senior Vice President, Finance,
    Chief Financial Officer and Treasurer

F-2



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##### Table of Contents



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
February 1, 2003 and February 2, 2002, and the related
consolidated statements of earnings, stockholders equity,
and cash flows for each of the three years in the period ended
February 1, 2003. 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
auditing standards generally accepted in the United States of
America. 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 Talbots, Inc. and its subsidiaries as
of February 1, 2003 and February 2, 2002, and the
results of their operations and their cash flows for each of the
three years in the period ended February 1, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 2 to the consolidated
financial statements, on February 3, 2002 the Company
changed its method of accounting for goodwill and other
intangible assets to conform to the provisions of Statement of
Accounting Standards No. 142.

Deloitte & Touche LLP Signature

March 11, 2003


Boston, Massachusetts


F-3



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##### Table of Contents



THE TALBOTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Dollar amounts in thousands except per share
data


|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |         | 
|---------------------------------------------------------------------------------- | ----------------------------------- | ----------- | --------- | ----------- |  | ----------- | --------- | ------- |  | - | --------- | ------- | 
|                                                                                   |                                     |            
|                                                                                   |                                     | Year Ended 
|                                                                                   |                                     |            
|                                                                                   |                                     | February 1, |           | February 2, |  | February 3,
|                                                                                   |                                     | 2003        |           | 2002        |  | 2001       
|                                                                                   |                                     | (52-weeks)  |           | (52-weeks)  |  | (53-weeks) 
|                                                                                   |                                     |             |           |             |  |            
|Net sales                                                                          |                                     | $           | 1,595,325 |             |  | $           | 1,612,513 |         |  | $ | 1,594,996 |        
|Costs and expenses                                                                |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                   | Cost of sales, buying and occupancy |             |           | 963,501     |  |             |           | 967,163 |  |   |           | 936,009 | 
|                                                                                   | Selling, general and administrative |             |           | 435,757     |  |             |           | 435,334 |  |   |           | 467,324 | 
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        
|Operating Income                                                                   |                                     |             | 196,067   |             |  |             | 210,016   |         |  |   | 191,663   |        
|Interest                                                                          |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                   | Interest expense                    |             |           | 3,262       |  |             |           | 6,102   |  |   |           | 7,706   | 
|                                                                                   | Interest income                     |             |           | 409         |  |             |           | 927     |  |   |           | 3,364   | 
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        
|Interest Expense  net                                                             |                                     |             | 2,853     |             |  |             | 5,175     |         |  |   | 4,342     |        
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        
|Income before taxes                                                                |                                     |             | 193,214   |             |  |             | 204,841   |         |  |   | 187,321   |        
|Income taxes                                                                       |                                     |             | 72,455    |             |  |             | 77,840    |         |  |   | 72,119    |        
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        
|Net Income                                                                         |                                     | $           | 120,759   |             |  | $           | 127,001   |         |  | $ | 115,202   |        
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        
|Net Income Per Share                                                              |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                   | Basic                               |             | $         | 2.06        |  |             | $         | 2.07    |  |   | $         | 1.86    | 
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                   | Assuming Dilution                   |             | $         | 2.01        |  |             | $         | 2.00    |  |   | $         | 1.80    | 
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        
|Weighted Average Number of Shares of Common Stock
    Outstanding (in thousands)  |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                   | Basic                               |             |           | 58,724      |  |             |           | 61,459  |  |   |           | 61,823  | 
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                   | Assuming Dilution                   |             |           | 60,191      |  |             |           | 63,439  |  |   |           | 63,995  | 
|                                                                                   |                                     |             |           |             |  |             |           |         |  |   |           |        

See notes to consolidated financial statements.

F-4



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##### Table of Contents



THE TALBOTS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollar amounts in thousands except per share
data


|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |          |         | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | ----------- | ------- | - | ------- | -------- | ------- | 
|                                           |                                                                                                                                                                                                        | February 1,                |         | February 2,
|                                           |                                                                                                                                                                                                        | 2003                       |         | 2002       
|                                           |                                                                                                                                                                                                        |                            |         |            
|ASSETS                                    
|Current Assets:                            |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           | Cash and cash equivalents                                                                                                                                                                              |                            | $       | 25,566      |         |   | $       | 18,306   |        
|                                           | Customer accounts receivable  net                                                                                                                                                                     |                            |         | 181,189     |         |   |         | 172,183  |        
|                                           | Merchandise inventories                                                                                                                                                                                |                            |         | 175,289     |         |   |         | 183,803  |        
|                                           | Deferred catalog costs                                                                                                                                                                                 |                            |         | 5,877       |         |   |         | 8,341    |        
|                                           | Due from affiliates                                                                                                                                                                                    |                            |         | 8,793       |         |   |         | 9,618    |        
|                                           | Deferred income taxes                                                                                                                                                                                  |                            |         | 10,255      |         |   |         | 8,222    |        
|                                           | Prepaid and other current assets                                                                                                                                                                       |                            |         | 28,929      |         |   |         | 29,089   |        
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           |                                                                                                                                                                                                        | Total current assets       |         |             | 435,898 |   |         |          | 429,562 | 
|Property and equipment  net               |                                                                                                                                                                                                        |                            | 315,227 |             |         |   | 277,576 |         
|Goodwill  net                             |                                                                                                                                                                                                        |                            | 35,513  |             |         |   | 35,513  |         
|Trademarks  net                           |                                                                                                                                                                                                        |                            | 75,884  |             |         |   | 75,884  |         
|Deferred income taxes                      |                                                                                                                                                                                                        |                            |        |             |         |   | 3,595   |         
|Other assets                               |                                                                                                                                                                                                        |                            | 9,403   |             |         |   | 8,934   |         
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|Total Assets                               |                                                                                                                                                                                                        | $                          | 871,925 |             |         | $ | 831,064 |         
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current Liabilities:                       |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           | Accounts payable                                                                                                                                                                                       |                            | $       | 48,365      |         |   | $       | 49,645   |        
|                                           | Accrued income taxes                                                                                                                                                                                   |                            |         | 11,590      |         |   |         | 1,019    |        
|                                           | Accrued liabilities                                                                                                                                                                                    |                            |         | 87,986      |         |   |         | 79,628   |        
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           |                                                                                                                                                                                                        | Total Current Liabilities  |         |             | 147,941 |   |         |          | 130,292 | 
|Long-term debt                             |                                                                                                                                                                                                        |                            | 100,000 |             |         |   | 100,000 |         
|Deferred rent under lease commitments      |                                                                                                                                                                                                        |                            | 20,688  |             |         |   | 19,542  |         
|Deferred income taxes                      |                                                                                                                                                                                                        |                            | 2,921   |             |         |   |        |         
|Other liabilities                          |                                                                                                                                                                                                        |                            | 32,699  |             |         |   | 13,354  |         
|Commitments                                |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|Stockholders Equity:                      |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           | Common stock, $0.01 par value; 200,000,000
    authorized; 75,270,013 shares and 74,935,856 shares
    issued, respectively, and 57,505,802 shares and 60,382,406
    shares outstanding, respectively |                            |         | 753         |         |   |         | 749      |        
|                                           | Additional paid-in capital                                                                                                                                                                             |                            |         | 389,402     |         |   |         | 378,955  |        
|                                           | Retained earnings                                                                                                                                                                                      |                            |         | 572,741     |         |   |         | 472,594  |        
|                                           | Accumulated other comprehensive income (loss)                                                                                                                                                          |                            |         | (15,437     | )       |   |         | (5,508   | )      
|                                           | Restricted stock awards                                                                                                                                                                                |                            |         | (78         | )       |   |         | (697     | )      
|                                           | Treasury stock, at cost: 17,764,211 shares and
    14,553,450 shares, respectively                                                                                                                     |                            |         | (379,705    | )       |   |         | (278,217 | )      
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           |                                                                                                                                                                                                        | Total stockholders equity |         |             | 567,676 |   |         |          | 567,876 | 
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|Total Liabilities and Stockholders Equity |                                                                                                                                                                                                        | $                          | 871,925 |             |         | $ | 831,064 |         
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         

See notes to consolidated financial statements.

F-5



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##### Table of Contents



THE TALBOTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Dollar amounts in thousands


|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |         |         |  
|------------------------------------------------------------------------------------- | --------------------------------------------- | ---------------------------------- | -------- | ----------- | ------ | ----------- | -------- | -------- | ------- | - | ------- | ------- | ------- | -
|                                                                                      |                                               |                                   
|                                                                                      |                                               | Year Ended                        
|                                                                                      |                                               |                                   
|                                                                                      |                                               | February 1,                        |          | February 2, |        | February 3,
|                                                                                      |                                               | 2003                               |          | 2002        |        | 2001       
|                                                                                      |                                               | (52-weeks)                         |          | (52-weeks)  |        | (53-weeks) 
|                                                                                      |                                               |                                    |          |             |        |            
|CASH FLOWS FROM OPERATING
    ACTIVITIES:                                             |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|Net income                                                                            |                                               | $                                  | 120,759  |             |        | $           | 127,001  |          |         | $ | 115,202 |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|                                                                                      | Depreciation and amortization                 |                                    |          | 59,113      |        |             |          | 53,461   |         |   |         | 45,830  |        
|                                                                                      | Deferred rent                                 |                                    |          | 1,136       |        |             |          | (218     | )       |   |         | 1,170   |        
|                                                                                      | Net non-cash compensation activity            |                                    |          | 634         |        |             |          | 634      |         |   |         | 705     |        
|                                                                                      | Loss on disposal of property and equipment    |                                    |          | 3,021       |        |             |          | 3,795    |         |   |         | 3,514   |        
|                                                                                      | Deferred income taxes                         |                                    |          | 11,901      |        |             |          | 4,170    |         |   |         | (4,488  | )      
|                                                                                      | Changes in other assets                       |                                    |          | (469        | )      |             |          | (2,691   | )       |   |         | (6,243  | )      
|                                                                                      | Change in other liabilities                   |                                    |          | 728         |        |             |          | 21       |         |   |         | 2,498   |        
|                                                                                      | Changes in current assets and liabilities:    |                                    |          |             |        |             |          |          |         |   |         |         |        
|                                                                                      |                                               | Customer accounts receivable       |          |             | (8,938 | )           |          |          | (36,703 | ) |         |         | (18,845 | )
|                                                                                      |                                               | Merchandise inventories            |          |             | 8,913  |             |          |          | 49,837  |   |         |         | (50,615 | )
|                                                                                      |                                               | Deferred catalog costs             |          |             | 2,464  |             |          |          | 895     |   |         |         | (876    | )
|                                                                                      |                                               | Due from affiliates                |          |             | 825    |             |          |          | (740    | ) |         |         | (433    | )
|                                                                                      |                                               | Tax benefit from options exercised |          |             | 4,870  |             |          |          | 5,498   |   |         |         | 18,210  |  
|                                                                                      |                                               | Prepaid and other current assets   |          |             | (712   | )           |          |          | (1,072  | ) |         |         | (7,979  | )
|                                                                                      |                                               | Accounts payable                   |          |             | (569   | )           |          |          | (33,330 | ) |         |         | 25,721  |  
|                                                                                      |                                               | Accrued income taxes               |          |             | 10,569 |             |          |          | 1,019   |   |         |         |        |  
|                                                                                      |                                               | Accrued liabilities                |          |             | 8,138  |             |          |          | (12,270 | ) |         |         | 15,803  |  
|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|                                                                                      | Net cash provided by operating
    activities |                                    |          | 222,383     |        |             |          | 159,307  |         |   |         | 139,174 |        
|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|CASH FLOWS FROM INVESTING
    ACTIVITIES:                                             |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|Additions to property and equipment                                                   |                                               |                                    | (99,149  | )           |        |             | (96,550  | )        |         |   | (77,756 | )      
|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|                                                                                      | Net cash used in investing
    activities     |                                    |          | (99,149     | )      |             |          | (96,550  | )       |   |         | (77,756 | )      
|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                                             |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|Proceeds from options exercised                                                       |                                               |                                    | 5,567    |             |        |             | 7,143    |          |         |   | 33,624  |        
|Cash dividends                                                                        |                                               |                                    | (20,612  | )           |        |             | (19,207  | )        |         |   | (16,792 | )      
|Purchase of treasury stock                                                            |                                               |                                    | (101,488 | )           |        |             | (102,113 | )        |         |   | (29,880 | )      
|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|                                                                                      | Net cash used in financing
    activities     |                                    |          | (116,533    | )      |             |          | (114,177 | )       |   |         | (13,048 | )      
|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|EFFECT OF EXCHANGE RATE CHANGES ON
    CASH                                           |                                               |                                    | 559      |             |        |             | (260     | )        |         |   | (385    | )      
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                              |                                               |                                    | 7,260    |             |        |             | (51,680  | )        |         |   | 47,985  |        
|CASH AND CASH EQUIVALENTS, BEGINNING OF
    YEAR                                      |                                               |                                    | 18,306   |             |        |             | 69,986   |          |         |   | 22,001  |        
|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |        
|CASH AND CASH EQUIVALENTS, END OF
    YEAR                                            |                                               | $                                  | 25,566   |             |        | $           | 18,306   |          |         | $ | 69,986  |        
|                                                                                      |                                               |                                    |          |             |        |             |          |          |         |   |         |        

See notes to consolidated financial statements.

F-6



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

Dollar amounts in thousands except share
data


|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |          |         |  
|--------------------------- | ---------------------------------------------- | ----------------------------------- | ---------- | ---------- | - | -------- | --- | ------------- | - | ----------- | ------- | -------- | - | ------------- | ------- | ------------- | ------- | ------ | ------- | - | ------- | - | ------ | --- | - | - | -------- | -------- | - |  | - | ------- | ------- | - | ------- | -------- | ------- | -
|                            |                                                |                                     |            |            |   |          |     |               |   | Accumulated |         |          |   |               |         |               |         |       
|                            |                                                |                                     |            |            |   |          |     | Other         |   |             |         |          |   |               |         |              
|                            |                                                | Common Stock                        |            | Additional |   |          |     | Comprehensive |   | Restricted  |         |          |   |               |         | Total        
|                            |                                                |                                     |            | Paid-in    |   | Retained |     | Income        |   | Stock       |         | Treasury |   | Comprehensive |         | Stockholders
|                            |                                                | Shares                              |            | Amount     |   | Capital  |     | Earnings      |   | (Loss)      |         | Awards   |   | Stock         |         | Income        |         | Equity
|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |       
|Balance at January 29, 2000 |                                                |                                     | 72,015,946 |            |   | $        | 720 |               |   | $           | 314,378 |          |   | $             | 266,390 |               |         | $      | (2,037  | ) |         | $ | (2,140 | )   |   | $ | (145,979 | )        |   |  |   |         |         | $ | 431,332 |         
|                            | Cash dividends paid                            |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         | (16,792       | )       |        |         |  |         |   |        |    |   |   |          |         |   |  |   |         |         |   |         | (16,792  | )      
|                            | Amortization of restricted stock awards        |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        | 594 |   |   |          |         |   |  |   |         |         |   |         | 594      |        
|                            | Stock options exercised, including tax benefit |                                     |            | 2,380,110  |   |          |     | 24            |   |             |         | 51,834   |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          |         |   |  |   |         |         |   |         | 51,858   |        
|                            | Purchase of 1,135,234 shares of common stock   |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          | (29,880  | ) |  |   |         |         |   |         | (29,880  | )      
|                            | Other equity transactions                      |                                     |            | 828        |   |          |     |              |   |             |         | 78       |   |               |         |              |         |        |         |  |         |   |        | 174 |   |   |          | (174     | ) |  |   |         |         |   |         | 78       |        
|                            | Comprehensive income:                          |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |          |        
|                            |                                                | Net income                          |            |            |  |          |     |               |  |             |         |          |  |               |         |               | 115,202 |        |         |   |        |   |        |     |  |   |          |          |  |  |   | $       | 115,202 |   |         |          | 115,202 |  
|                            |                                                | Translation adjustment              |            |            |  |          |     |               |  |             |         |          |  |               |         |               |        |        |         |   | (1,621  | ) |        |     |  |   |          |          |  |  |   |         | (1,621  | ) |         |          | (1,621  | )
|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |         
|                            | Comprehensive income                           |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          |         |   |  |   | 113,581 |         |   |         |         |        
|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |         
|Balance at February 3, 2001 |                                                |                                     | 74,396,884 |            |   |          | 744 |               |   |             | 366,290 |          |   |               | 364,800 |               |         |        | (3,658  | ) |         |   | (1,372 | )   |   |   | (176,033 | )        |   |  |   |         |         |   | 550,771 |         
|                            | Cash dividends paid                            |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         | (19,207       | )       |        |         |  |         |   |        |    |   |   |          |         |   |  |   |         |         |   |         | (19,207  | )      
|                            | Amortization of restricted stock awards        |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        | 604 |   |   |          |         |   |  |   |         |         |   |         | 604      |        
|                            | Stock options exercised, including tax benefit |                                     |            | 538,144    |   |          |     | 5             |   |             |         | 12,635   |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          |         |   |  |   |         |         |   |         | 12,640   |        
|                            | Purchase of 3,255,772 shares of common stock   |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          | (102,113 | ) |  |   |         |         |   |         | (102,113 | )      
|                            | Other equity transactions                      |                                     |            | 828        |   |          |     |              |   |             |         | 30       |   |               |         |              |         |        |         |  |         |   |        | 71  |   |   |          | (71      | ) |  |   |         |         |   |         | 30       |        
|                            | Comprehensive income:                          |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |          |        
|                            |                                                | Net income                          |            |            |  |          |     |               |  |             |         |          |  |               |         |               | 127,001 |        |         |   |        |   |        |     |  |   |          |          |  |  |   |         | 127,001 |   |         |          | 127,001 |  
|                            |                                                | Translation adjustment              |            |            |  |          |     |               |  |             |         |          |  |               |         |               |        |        |         |   | (1,850  | ) |        |     |  |   |          |          |  |  |   |         | (1,850  | ) |         |          | (1,850  | )
|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |         
|                            | Comprehensive income                           |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          |         |   |  |   | 125,151 |         |   |         |         |        
|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |         
|Balance at February 2, 2002 |                                                |                                     | 74,935,856 |            |   |          | 749 |               |   |             | 378,955 |          |   |               | 472,594 |               |         |        | (5,508  | ) |         |   | (697   | )   |   |   | (278,217 | )        |   |  |   |         |         |   | 567,876 |         
|                            | Cash dividends paid                            |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         | (20,612       | )       |        |         |  |         |   |        |    |   |   |          |         |   |  |   |         |         |   |         | (20,612  | )      
|                            | Amortization of restricted stock awards        |                                     |            |           |   |          |     |               |   |             |         |          |   |               |         |              |         |        |         |  |         |   |        | 619 |   |   |          |         |   |  |   |         |         |   |         | 619      |        
|                            | Stock options exercised, including tax benefit |                                     |            | 333,743    |   |          |     | 4             |   |             |         | 10,432   |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          |         |   |  |   |         |         |   |         | 10,436   |        
|                            | Purchase of 3,210,761 shares of common stock   |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        |     |   |   |          | (101,488 | ) |  |   |         |         |   |         | (101,488 | )      
|                            | Other equity transactions                      |                                     |            | 414        |   |          |     |              |   |             |         | 15       |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          |         |   |  |   |         |         |   |         | 15       |        
|                            | Comprehensive income:                          |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |          |        
|                            |                                                | Net income                          |            |            |  |          |     |               |  |             |         |          |  |               |         |               | 120,759 |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         | 120,759 |   |         |          | 120,759 |  
|                            |                                                | Translation adjustment              |            |            |  |          |     |               |  |             |         |          |  |               |         |               |        |        |         |   | 1,347   |   |        |     |   |   |          |          |   |  |   |         | 1,347   |   |         |          | 1,347   |  
|                            |                                                | Change in minimum pension liability |            |            |  |          |     |               |  |             |         |          |  |               |         |               |        |        |         |   | (11,276 | ) |        |     |  |   |          |          |  |  |   |         | (11,276 | ) |         |          | (11,276 | )
|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |         
|                            | Comprehensive income                           |                                     |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        |    |   |   |          |         |   |  | $ | 110,830 |         |   |         |          |        
|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |         
|Balance at February 1, 2003 |                                                |                                     | 75,270,013 |            |   | $        | 753 |               |   | $           | 389,402 |          |   | $             | 572,741 |               |         | $      | (15,437 | ) |         | $ | (78    | )   |   | $ | (379,705 | )        |   |  |   |         |         | $ | 567,676 |         
|                            |                                                |                                     |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |     |   |   |          |          |   |  |   |         |         |   |         |         

See notes to consolidated financial statements.

F-7



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##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Dollar amounts in thousands except share
data


1.     Description of
Business

The Talbots, Inc., together with its subsidiaries
(Talbots or the Company), is a specialty
retailer with a direct marketing catalog operation and Internet
website, www.talbots.com. AEON (U.S.A.), Inc. (AEON
U.S.A.), formerly Jusco (U.S.A.), Inc., is the
Companys majority shareholder, owning approximately 58.6%
of the Companys outstanding common stock at
February 1, 2003.

The years ended February 1, 2003 and
February 2, 2002 were fifty-two week reporting periods, and
the year ended February 3, 2001 was a fifty-three week
reporting period. The Company conforms to the National Retail
Federations fiscal calendar.

2.     Summary of
Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

The financial statements were prepared in
conformity with accounting principles generally accepted in the
United States of America that require 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 within the consolidated financial
statements include sales return reserve, inventory reserves,
allowance for doubtful accounts, accruals for customer loyalty
program and the valuation allowance for deferred tax assets.



| |  |                            
| |  | ---------------------------
| |  | Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
Talbots Classics National Bank (a Rhode Island chartered
national bank), Talbots Classics Finance Company, Inc. (a
Delaware corporation), Talbots Canada Corporation (a Nova
Scotia, Canada corporation), Talbots Canada, Inc. (a Delaware
corporation), Talbots (U.K.) Retailing Ltd. (a Delaware
corporation), Talbots International Retailing Limited, Inc. (a
Delaware corporation) and The Classics Chicago, Inc. (a Delaware
corporation). All material intercompany accounts and
transactions have been eliminated in consolidation.



| |  |                          
| |  | -------------------------
| |  | Cash and Cash Equivalents

The Company considers all highly liquid
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. The Talbots charge card program is
administered through Talbots Classics National Bank, a wholly
owned, special-purpose bank, and Talbots Classics Finance
Company, Inc., a wholly owned subsidiary. Concentration of
credit risk with respect to customer accounts receivable is
limited due to the large number of customers to whom the Company
extends credit. Ongoing credit evaluation of customers
financial positions are performed and collateral is not required
as a condition of credit. The allowance for doubtful accounts is
maintained for estimated losses from the inability of customers
to make required payments and is based on a percentage of
outstanding balances, historical charge-offs and charge-off
forecasts. The collectibility of accounts receivable is
evaluated based on a combination of factors. Delinquent accounts
are generally written off automatically after a period of
delinquency. Accounts are written off sooner in the event of
customer bankruptcy or other circumstances that make
collectibility unlikely.

F-8



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##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data




| |                         
| | ------------------------
| | Customer Loyalty Program

The Company maintains a customer loyalty program
in which customers receive appreciation awards based
on reaching a certain purchase level on their Talbots credit
card. Appreciation awards may be applied to future Talbots
charge card merchandise purchases and expire one year after
issuance. Expense associated with the accrued award is
recognized at the time of the initial customer purchase and is
charged to selling, general and administrative expenses based on
purchase levels, actual awards issued and historical redemption
rates.



| |            
| | -----------
| | Advertising

Advertising costs, which include media,
production and catalogs, totaled $62,286, $70,807 and $88,866
for the years ended February 1, 2003, February 2, 2002
and February 3, 2001, respectively. Media and production
costs are expensed in the period in which the advertising first
takes place. Catalog costs are amortized over the estimated
productive selling life of the catalog, which is generally three
months.



| |                    
| | -------------------
| | Preopening Expenses

Costs associated with the opening of new stores
are expensed as incurred.



| |                        
| | -----------------------
| | 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. Reductions in gross margin and
inventory are recorded for adjustments to inventory balances
based on estimated markdowns, using current information related
to inventory levels and historical markdown trends and
forecasted markdown levels.



| |                       
| | ----------------------
| | 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 |  |       | 310                              | 
|Software               |  |       | 37                               | 
|Leasehold improvements |  |       | 515 or term of lease, if shorter | 

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 the
related leases (420 years).

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 through fiscal 2001 was being amortized over
40 years under the straight-line method and reviewed for
impairment under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. On February 3,
2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets and ceased amortizing goodwill as
outlined in Note 2, New

F-9



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##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


Accounting Pronouncements. At February 1,
2003 and February 2, 2002, accumulated amortization of
goodwill was $18,247.



| |           
| | ----------
| | Trademarks

In November 1993, the Company purchased certain
trademarks, including the Talbots trade name, from JUSCO
(Europe) B.V. In 2001, JUSCO (Europe) B.V., which retained
rights to certain trademarks in specified Asian territories, was
dissolved and its Asian trademark rights were transferred to
AEON Co., Ltd. The Companys trademarks are registered with
the U.S. Patent and Trademark Office and may be renewed
indefinitely. Through 2001, the trademarks were being amortized
over 40 years and reviewed for impairment under the
provisions of SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets to be disposed of. On
February 3, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets and ceased
amortizing trademarks as outlined in note 2, New Accounting
Pronouncements. At February 1, 2003 and February 2,
2002, accumulated amortization on the Companys trademarks
was $19,487.



| |                                        
| | ---------------------------------------
| | 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,
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.



| |                         
| | ------------------------
| | 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. Had the
Company used the fair value method to value compensation, as set
forth in SFAS No. 123, Accounting for Stock-Based
Compensation, the Companys net income and net income
per share would have been reported as follows:

|                                      |  |                   |         |             |  |             |         |  |  |   |         | 
|------------------------------------- |  | ----------------- | ------- | ----------- |  | ----------- | ------- |  |  | - | ------- | 
|                                      |  |                  
|                                      |  | Fiscal Year Ended
|                                      |  |                  
|                                      |  | February 1,       |         | February 2, |  | February 3,
|                                      |  | 2003              |         | 2002        |  | 2001       
|                                      |  |                   |         |             |  |            
|Reported net income                   |  | $                 | 120,759 |             |  | $           | 127,001 |  |  | $ | 115,202 | 
|Less: Impact of stock options expense |  |                   | 18,659  |             |  |             | 15,061  |  |  |   | 8,383   | 
|                                      |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted net income                   |  | $                 | 102,100 |             |  | $           | 111,940 |  |  | $ | 106,819 | 
|                                      |  |                   |         |             |  |             |         |  |  |   |         | 
|Reported earnings per share  basic   |  | $                 | 2.06    |             |  | $           | 2.07    |  |  | $ | 1.86    | 
|Less: Impact of stock options expense |  |                   | 0.32    |             |  |             | 0.25    |  |  |   | 0.13    | 
|                                      |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted earnings per share  basic   |  | $                 | 1.74    |             |  | $           | 1.82    |  |  | $ | 1.73    | 
|                                      |  |                   |         |             |  |             |         |  |  |   |         | 
|Reported diluted earnings per share   |  | $                 | 2.01    |             |  | $           | 2.00    |  |  | $ | 1.80    | 
|Add: Impact of stock options expense  |  |                   | 0.31    |             |  |             | 0.24    |  |  |   | 0.13    | 
|                                      |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted diluted earnings per share   |  | $                 | 1.70    |             |  | $           | 1.76    |  |  | $ | 1.67    | 
|                                      |  |                   |         |             |  |             |         |  |  |   |         | 

F-10



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


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
2002, 2001 and 2000 were $19.69, $28.97 and $9.80 per option,
respectively. Key assumptions used to apply this pricing model
are as follows:

|                                                                                                             |  |             |            |             |  |             |            |  |  |  |            | 
|------------------------------------------------------------------------------------------------------------ |  | ----------- | ---------- | ----------- |  | ----------- | ---------- |  |  |  | ---------- | 
|                                                                                                             |  | February 1, |            | February 2, |  | February 3,
|                                                                                                             |  | 2003        |            | 2002        |  | 2001       
|                                                                                                             |  |             |            |             |  |            
|Weighted average risk free interest rate                                                                     |  |             | 5.2%       |             |  |             | 5.0%       |  |  |  | 6.3%       | 
|Weighted average expected life of option grants                                                              |  |             | 6.25 years |             |  |             | 6.25 years |  |  |  | 5.25 years | 
|Weighted average expected volatility of
    underlying stock                                                 |  |             | 58.0%      |             |  |             | 67.5%      |  |  |  | 54.0%      | 
|Weighted average expected dividend payment rate,
    as a percentage of the stock price on the date of grant |  |             | 1.0%       |             |  |             | 0.7%       |  |  |  | 1.4%       | 

The option pricing model used was designed to
value readily tradable stock options with relatively short lives
and no vesting restrictions. In addition, option valuation
models require the input of highly subjective assumptions
including the expected price volatility. Because the options
granted to employees are not tradable, have contractual lives of
ten years and changes in the subjective input assumptions can
materially affect the fair value estimate, in managements
opinion, the models do not necessarily provide a reliable
measure of fair value of the options issued under the
Companys stock plans.



| |  |              
| |  | -------------
| |  | Grantor Trust

The Company maintains an irrevocable
grantors trust (Rabbi Trust) to hold assets
that fund benefit obligations under the Companys
Supplemental Retirement Savings Plan and Deferred Compensation
Plan. The assets held in the Rabbi Trust consist of money market
and insurance investments (in which the Company is the
designated beneficiary) and are designated as trading securities
under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which requires
securities to be recorded at fair value with any changes charged
to current earnings.



| |  |                             
| |  | ----------------------------
| |  | 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. Foreign currency transaction gains or
losses, whether realized or unrealized, are recorded directly to
earnings.



| |  |             
| |  | ------------
| |  | Income Taxes

In accordance with SFAS No. 109, deferred
income taxes are provided to recognize the effect of temporary
differences between tax and financial statement reporting. Such
taxes are provided for at the tax rates that are expected when
such temporary differences will be realized. A valuation
allowance is recorded to reduce deferred tax assets if it is
determined that it is more likely than not that the full
deferred tax asset would not be realized. If it is subsequently
determined that a deferred tax asset will more likely than not
be realized, an adjustment to earnings is recorded to reduce the
allowance.



| |  |                                           
| |  | ------------------------------------------
| |  | 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, including contingently
returnable shares (as determined by the treasury stock method,
which may include the tax benefit on assumed stock option
exercises and assumed vesting of restricted stock).

F-11



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data




| |  |                     
| |  | --------------------
| |  | Comprehensive Income

The Companys comprehensive net income is
comprised of reported net income plus the impact of changes in
the cumulative foreign currency translation adjustment and the
change in the minimum pension liability (net of tax).
Comprehensive income is included in the Consolidated Balance
Sheets and Consolidated Statements of Stockholders Equity.
At February 1, 2003, the balance of comprehensive net
income included cumulative foreign currency translation loss of
$4,161 and the cumulative minimum pension liability (net of tax)
of $11,276. At February 2, 2002 and February 3, 2001,
the balance consisted of $5,508 and $3,658, respectively, of
cumulative foreign currency translation.



| |  |                    
| |  | -------------------
| |  | Revenue Recognition

The Company recognizes revenue at the
point-of-sale or, in the case of catalog and Internet sales,
upon estimated receipt by the customer. The Company provides for
estimated returns based on return history and sales levels.



| |  |                                       
| |  | --------------------------------------
| |  | Supplemental Cash Flow
    Information

Interest paid for the years ended
February 1, 2003, February 2, 2002 and
February 3, 2001 was $3,360, $6,787 and $7,557,
respectively. Income tax payments during the years ended
February 1, 2003, February 2, 2002 and
February 3, 2001 were $45,566, $68,626 and $60,419,
respectively. At February 1, 2003, the Company booked an
additional minimum pension liability of $18,617, offset by a
charge to equity, net of tax, for $11,276. No charge was
necessary at February 2, 2002 and February 3, 2001.



| |  |                              
| |  | -----------------------------
| |  | New Accounting Pronouncements

Effective October 29, 2000, the Company
adopted the Emerging Issues Task Force (EITF) Issue
No. 00-10, Accounting for Shipping and Handling Fees
and Costs. The EITF stated that a seller of goods should
classify amounts billed to the customer for shipping and
handling as revenue and the costs incurred by the seller for
performing such services as an element of expense. To comply
with the consensus, shipping and handling fees and costs, which
were previously reported net in selling, general and
administrative expenses, were reclassified to net sales and to
cost of sales, buying and occupancy expense, respectively. All
prior periods were restated to comply with the consensus. Such
restatements had no impact on previously reported operating
earnings, net earnings, stockholders equity or cash flows.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of and
replaces SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and Accounting Principles Board Opinion No. 30,
Reporting Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business. SFAS
No. 144 is effective for the Companys 2002 fiscal
year. The Companys adoption of this statement did not have
a material impact on its financial statements.

On February 3, 2002, the Company adopted the
Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 changed the accounting for goodwill and
certain other intangible assets (including trademarks) with
indefinite lives from an amortization method to an
impairment-only approach. Upon adoption, the Company ceased
amortization of goodwill and the trademarks and the assets
fair values were reviewed for

F-12



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


impairment. The initial impairment test noted no
impairment of the recorded goodwill or trademarks. Below is a
summary of the Companys goodwill and trademarks:

|                               |  |             |        |             |  |             |        |  |  |   |        | 
|------------------------------ |  | ----------- | ------ | ----------- |  | ----------- | ------ |  |  | - | ------ | 
|                               |  | February 1, |        | February 2, |  | February 3,
|                               |  | 2003        |        | 2002        |  | 2001       
|                               |  |             |        |             |  |            
|Goodwill                       |  | $           | 53,760 |             |  | $           | 53,760 |  |  | $ | 53,760 | 
|Less: accumulated amortization |  |             | 18,247 |             |  |             | 18,247 |  |  |   | 16,903 | 
|                               |  |             |        |             |  |             |        |  |  |   |        | 
|                               |  | $           | 35,513 |             |  | $           | 35,513 |  |  | $ | 36,857 | 
|                               |  |             |        |             |  |             |        |  |  |   |        | 
|Trademark                      |  | $           | 95,371 |             |  | $           | 95,371 |  |  | $ | 95,371 | 
|Less: accumulated amortization |  |             | 19,487 |             |  |             | 19,487 |  |  |   | 17,103 | 
|                               |  |             |        |             |  |             |        |  |  |   |        | 
|                               |  | $           | 75,884 |             |  | $           | 75,884 |  |  | $ | 78,268 | 
|                               |  |             |        |             |  |             |        |  |  |   |        | 

Below is a reconciliation of previously reported
net income and earnings per share to the amounts reported in the
current year excluding the amortization of goodwill and
trademarks:

|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 
|-------------------------------------------------------- |  | ----------------- | ------- | ----------- |  | ----------- | ------- |  |  | - | ------- | 
|                                                         |  |                  
|                                                         |  | Fiscal Year Ended
|                                                         |  |                  
|                                                         |  | February 1,       |         | February 2, |  | February 3,
|                                                         |  | 2003              |         | 2002        |  | 2001       
|                                                         |  |                   |         |             |  |            
|Reported net income                                      |  | $                 | 120,759 |             |  | $           | 127,001 |  |  | $ | 115,202 | 
|Add: goodwill and trademark amortization, net of
    tax |  |                   |        |             |  |             | 2,822   |  |  |   | 2,810   | 
|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted net income                                      |  | $                 | 120,759 |             |  | $           | 129,823 |  |  |   | 118,012 | 
|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 
|Reported diluted earnings per share                      |  | $                 | 2.01    |             |  | $           | 2.00    |  |  | $ | 1.80    | 
|Add: goodwill and trademark amortization, net of
    tax |  |                   |        |             |  |             | 0.04    |  |  |   | 0.04    | 
|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted diluted earnings per share                      |  | $                 | 2.01    |             |  | $           | 2.04    |  |  | $ | 1.84    | 
|                                                         |  |                   |         |             |  |             |         |  |  |   |         | 

In July 2002, the FASB issued SFAS No. 146,
Accounting for Cost Associated with Exit or Disposal
Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The
provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a material
impact on the Companys fiscal 2002 financial statements
and is not expected to have a material ongoing impact.

Reclassifications

Certain reclassifications have been made to the
February 2, 2002 and February 3, 2001 financial
statements to conform with the February 1, 2003
presentation.

3.     Equity
Transactions

During the years ended February 1, 2003,
February 2, 2002 and February 3, 2001, the Company
declared and paid dividends totaling $0.35 per share, $0.31 per
share and $0.27 per share, respectively.

On October 10, 2000, the Companys
Board of Directors authorized a two-for-one stock split of its
common stock. The stock split was effected by issuing one
additional share of common stock for each outstanding share of
common stock and each treasury share of common stock. The stock
split was effective as

F-13



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


of the close of business on November 7, 2000
to shareholders of record on October 25, 2000. All share
information contained in this report reflects the impact of the
stock split.

In 1995, the Company adopted a stock repurchase
plan authorizing the purchase of shares of its common stock.
Subsequently, the Companys Board of Directors approved
extensions to the original plan. During 2001, the Company
repurchased 3,209,008 shares under its repurchase program at an
average price of $31.16. During 2002, the Company repurchased
3,165,697 shares of the Companys common stock under its
repurchase programs at an average price per share of $31.59.
This completed a $50.0 million repurchase program approved
by the Board of Directors in October 2001 and a subsequent $50.0
million plan that was approved by the Board of Directors in July
2002. In October 2002, the Board of Directors approved a further
stock repurchase program which allows the Company to purchase an
additional $50.0 million in stock from time to time over
the next two years. Through February 1, 2003, no purchases
have been made under this plan. At February 1, 2003 and
February 2, 2002, the Company held 17,764,211 and
14,553,450 shares, respectively, as treasury shares. Treasury
shares also include shares forfeited under the Companys
restricted stock grants under the 1993 Executive Stock Based
Incentive Plan (the Plan).

4.     Stock
Options

In 1993, the Company reserved 5,300,000 shares of
common stock for issuance pursuant to the Plan. In 1998 and
2002, the Plan was amended and approved by stockholders to
increase the number of shares of common stock authorized
thereunder by 6,620,000 and 300,000 shares, respectively, to
12,220,000 shares. In accordance with the Plan, the Company
issued stock options that vest over a three-year period and
expire no later than ten years from the grant date. These stock
options have been granted at fair market value at the date of
grant.

In 1995, the Company implemented a stock option
plan for its non-employee members of its Board of Directors. In
2000, the Companys Board of Directors and shareholders
approved a Restated Directors Plan (the Restated Directors
Plan) which increased the shares reserved for issuance by
800,000 shares. Stock options granted under the Restated
Directors Plan generally vest over a three-year period and
expire no later than 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.

The following table summarizes information
regarding stock options outstanding under the Plan and the
Restated Directors Plan at February 1, 2003.

|                |  |                     |           |                     |  |                |           |             |  |                |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------------- | --------- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | 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
|                |  |                     |           |                     |  |                |           |             |  |               
|$ 7.40  $10.22 |  |                     | 452,474   |                     |  |                | 5.0 years |             |  | $              | 7.42  |  |  |  | 452,474   |  |  | $ | 7.42  | 
|$10.23  $15.33 |  |                     | 1,128,858 |                     |  |                | 5.2 years |             |  | $              | 12.83 |  |  |  | 1,128,858 |  |  | $ | 12.83 | 
|$15.34  $20.45 |  |                     | 2,723,447 |                     |  |                | 7.0 years |             |  | $              | 18.95 |  |  |  | 1,784,761 |  |  | $ | 18.92 | 
|$20.46  $25.56 |  |                     | 13,667    |                     |  |                | 7.2 years |             |  | $              | 23.64 |  |  |  | 11,000    |  |  | $ | 23.28 | 
|$25.57  $30.67 |  |                     | 131,333   |                     |  |                | 8.6 years |             |  | $              | 27.92 |  |  |  | 40,997    |  |  | $ | 29.28 | 
|$30.68  $35.79 |  |                     | 71,000    |                     |  |                | 8.9 years |             |  | $              | 33.98 |  |  |  | 10,666    |  |  | $ | 33.09 | 
|$35.80  $40.90 |  |                     | 1,320,000 |                     |  |                | 9.1 years |             |  | $              | 35.91 |  |  |  | 22,996    |  |  | $ | 36.50 | 
|$40.91  $46.01 |  |                     | 2,000     |                     |  |                | 8.2 years |             |  | $              | 41.85 |  |  |  | 666       |  |  | $ | 41.85 | 
|$46.02  $51.13 |  |                     | 1,151,332 |                     |  |                | 8.1 years |             |  | $              | 47.01 |  |  |  | 391,302   |  |  | $ | 47.08 | 
|                |  |                     |           |                     |  |                |           |             |  |                |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 6,994,111 |                     |  |                | 7.2 years |             |  | $              | 25.37 |  |  |  | 3,843,720 |  |  | $ | 18.92 | 
|                |  |                     |           |                     |  |                |           |             |  |                |       |  |  |  |           |  |  |   |       | 

F-14



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


A summary of stock option activity under the Plan
and the Restated Directors Plan during the years ended
February 1, 2003, February 2, 2002 and
February 3, 2001 is presented below.

|                                 |  |                  |           |                  |  |                  |       |                |  |           |           |                |  |   |       |  |  |  |            |   |  |   |       | 
|-------------------------------- |  | ---------------- | --------- | ---------------- |  | ---------------- | ----- | -------------- |  | --------- | --------- | -------------- |  | - | ----- |  |  |  | ---------- | - |  | - | ----- | 
|                                 |  |                 
|                                 |  | Year Ended      
|                                 |  |                 
|                                 |  |                  |           |                  |  |                 
|                                 |  | February 1, 2003 |           | February 2, 2002 |  | February 3, 2001
|                                 |  |                  |           |                  |  |                 
|                                 |  |                  |           | Weighted         |  |                  |       | Weighted       |  |           |           | Weighted      
|                                 |  |                  |           | average option   |  |                  |       | average option |  |           |           | average option
|                                 |  | Number of        |           | price per        |  | Number of        |       | price per      |  | Number of |           | price per     
|                                 |  | shares           |           | share            |  | shares           |       | share          |  | shares    |           | share         
|                                 |  |                  |           |                  |  |                  |       |                |  |           |           |               
|Outstanding at beginning of year |  |                  | 6,002,857 |                  |  | $                | 22.72 |                |  |           | 5,328,336 |                |  | $ | 16.25 |  |  |  | 4,757,982  |   |  | $ | 12.96 | 
|Granted                          |  |                  | 1,391,000 |                  |  |                  | 35.36 |                |  |           | 1,291,000 |                |  |   | 46.24 |  |  |  | 3,062,000  |   |  |   | 19.64 | 
|Exercised                        |  |                  | (333,743  | )                |  |                  | 16.68 |                |  |           | (538,144  | )              |  |   | 13.27 |  |  |  | (2,380,110 | ) |  |   | 14.12 | 
|Forfeited                        |  |                  | (66,003   | )                |  |                  | 38.40 |                |  |           | (78,335   | )              |  |   | 35.31 |  |  |  | (111,536   | ) |  |   | 14.49 | 
|                                 |  |                  |           |                  |  |                  |       |                |  |           |           |                |  |   |       |  |  |  |            |   |  |   |       | 
|Outstanding at end of year       |  |                  | 6,994,111 |                  |  | $                | 25.37 |                |  |           | 6,002,857 |                |  | $ | 22.72 |  |  |  | 5,328,336  |   |  | $ | 16.25 | 
|                                 |  |                  |           |                  |  |                  |       |                |  |           |           |                |  |   |       |  |  |  |            |   |  |   |       | 
|Exercisable at end of year       |  |                  | 3,843,720 |                  |  | $                | 18.92 |                |  |           | 2,465,794 |                |  | $ | 14.78 |  |  |  | 1,338,622  |   |  | $ | 12.06 | 
|                                 |  |                  |           |                  |  |                  |       |                |  |           |           |                |  |   |       |  |  |  |            |   |  |   |       | 

Under the provisions of the Plan, the Company has
issued to certain key members of management shares of restricted
stock. The purchase price of the restricted stock is $0.01 per
share. The difference between the market price of the shares on
the date of grant and managements cost of $0.01 per share
is recorded as deferred compensation and is amortized over a
five-year service period. Such shares are contingently
returnable, at the $0.01 par value, if the employee does not
fulfill their service obligation.

A summary of the changes in restricted shares
outstanding for the years ended February 1, 2003,
February 2, 2002, and February 3, 2001 is presented
below.

|                                 |  |                  |          |                  |  |                  |      |                 |  |           |          |                 |  |   |      |  |  |  |         |   |  |   |      | 
|-------------------------------- |  | ---------------- | -------- | ---------------- |  | ---------------- | ---- | --------------- |  | --------- | -------- | --------------- |  | - | ---- |  |  |  | ------- | - |  | - | ---- | 
|                                 |  |                 
|                                 |  | Year Ended      
|                                 |  |                 
|                                 |  |                  |          |                  |  |                 
|                                 |  | February 1, 2003 |          | February 2, 2002 |  | February 3, 2001
|                                 |  |                  |          |                  |  |                 
|                                 |  |                  |          | Weighted         |  |                  |      | Weighted        |  |           |          | Weighted       
|                                 |  | Number of        |          | average market   |  | Number of        |      | average market  |  | Number of |          | average market 
|                                 |  | shares           |          | price per share  |  | shares           |      | price per share |  | shares    |          | price per share
|                                 |  |                  |          |                  |  |                  |      |                 |  |           |          |                
|Outstanding at beginning of year |  |                  | 265,867  |                  |  | $                | 7.89 |                 |  |           | 410,200  |                 |  | $ | 7.93 |  |  |  | 433,600 |   |  | $ | 7.91 | 
|Granted                          |  |                  |         |                  |  |                  |     |                 |  |           |         |                 |  |   |     |  |  |  |        |   |  |   |     | 
|Vested                           |  |                  | (132,933 | )                |  |                  | 7.89 |                 |  |           | (136,733 | )               |  |   | 7.93 |  |  |  |        |   |  |   |     | 
|Forfeited                        |  |                  |          |                  |  |                  |      |                 |  |           | (7,600   | )               |  |   | 9.40 |  |  |  | (23,400 | ) |  |   | 7.40 | 
|                                 |  |                  |          |                  |  |                  |      |                 |  |           |          |                 |  |   |      |  |  |  |         |   |  |   |      | 
|Outstanding at end of year       |  |                  | 132,934  |                  |  | $                | 7.89 |                 |  |           | 265,867  |                 |  | $ | 7.89 |  |  |  | 410,200 |   |  | $ | 7.93 | 
|                                 |  |                  |          |                  |  |                  |      |                 |  |           |          |                 |  |   |      |  |  |  |         |   |  |   |      | 

The Company uses the intrinsic value method to
measure compensation expense associated with grants of stock
options to employees.

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. In 2001, JUSCO (Europe) B.V.,
which retained rights to certain trademarks in specified Asian
territories, was dissolved and these Asian trademark rights were
transferred to AEON Co., Ltd.

AEON Co. Ltd., owns and operates stores in Japan
through its wholly owned subsidiary Talbots Japan Co., Ltd.
(Talbots Japan). The Company provides certain
services for Talbots Japan and is reimbursed for expenses
incurred. At February 1, 2003 and February 2, 2002,
the Company was owed $8,759 and $9,605 respectively, for these
service costs and for merchandise inventory purchases made on
behalf of Talbots Japan.

F-15



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


Talbots has an advisory services agreement with
AEON U.S.A. under which AEON U.S.A. provides advice and services
to Talbots with respect to strategic planning and other related
issues concerning the Company and maintains on behalf of the
Company a working relationship with banks and other financial
institution, in particular, Japanese banks, for which AEON
U.S.A. receives an annual fee of $250 plus any expenses incurred.

Under the Companys established stock
repurchase programs, shares are repurchased from the open market
from time to time. Concurrently with such open market purchases,
the Company has generally purchased a pro rata number of shares
from Aeon USA so as to maintain substantially the same
percentage stock ownership of the Company between Aeon USA and
the public shareholders. During fiscal 2002, a total of
1,054,936 shares were repurchased from Aeon USA. The price of
the shares purchased from Aeon USA was equal to the weighted
average price of the shares paid to the public shareholders and
for fiscal 2002 ranged from $25.03 to $30.15.

6.     Accounts
Receivable

Customer accounts receivable are as follows:

|                                     |  |             |         |             |  |   |         |  
|------------------------------------ |  | ----------- | ------- | ----------- |  | - | ------- | -
|                                     |  | February 1, |         | February 2,
|                                     |  | 2003        |         | 2002       
|                                     |  |             |         |            
|Due from customers                   |  | $           | 183,789 |             |  | $ | 174,483 |  
|Less allowance for doubtful accounts |  |             | (2,600  | )           |  |   | (2,300  | )
|                                     |  |             |         |             |  |   |         |  
|Customer accounts receivable, net    |  | $           | 181,189 |             |  | $ | 172,183 |  
|                                     |  |             |         |             |  |   |         |  

Finance charge income (including interest and
late fee income) amounted to $36.0 million,
$27.4 million and $20.1 million for the 52 weeks
ended February 1, 2003 and February 2, 2002 and for
the 53 weeks ended February 3, 2001, respectively.

Changes in the allowance for doubtful accounts
are as follows:

|                               |  |             |        |             |  |             |        |   |  |   |        |  
|------------------------------ |  | ----------- | ------ | ----------- |  | ----------- | ------ | - |  | - | ------ | -
|                               |  |            
|                               |  | Year Ended 
|                               |  |            
|                               |  | February 1, |        | February 2, |  | February 3,
|                               |  | 2003        |        | 2002        |  | 2001       
|                               |  |             |        |             |  |            
|Balance, beginning of year     |  | $           | 2,300  |             |  | $           | 2,100  |   |  | $ | 1,700  |  
|Charges to costs and expenses  |  |             | 3,416  |             |  |             | 2,766  |   |  |   | 2,210  |  
|Charge-offs, net of recoveries |  |             | (3,116 | )           |  |             | (2,566 | ) |  |   | (1,810 | )
|                               |  |             |        |             |  |             |        |   |  |   |        |  
|Balance, end of year           |  | $           | 2,600  |             |  | $           | 2,300  |   |  | $ | 2,100  |  
|                               |  |             |        |             |  |             |        |   |  |   |        |  

F-16



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


7.     Property and
Equipment

Property and equipment consists of the following:

|                                               |  |             |          |             |  |   |          |  
|---------------------------------------------- |  | ----------- | -------- | ----------- |  | - | -------- | -
|                                               |  | February 1, |          | February 2,
|                                               |  | 2003        |          | 2002       
|                                               |  |             |          |            
|Land                                           |  | $           | 10,940   |             |  | $ | 10,940   |  
|Buildings                                      |  |             | 68,042   |             |  |   | 64,632   |  
|Fixtures and equipment                         |  |             | 267,998  |             |  |   | 224,854  |  
|Software                                       |  |             | 35,193   |             |  |   | 19,820   |  
|Leasehold improvements                         |  |             | 135,452  |             |  |   | 120,294  |  
|Leasehold interests                            |  |             | 2,074    |             |  |   | 2,358    |  
|Construction in progress                       |  |             | 20,435   |             |  |   | 23,035   |  
|                                               |  |             |          |             |  |   |          |  
|Property and equipment  gross                 |  |             | 540,134  |             |  |   | 465,933  |  
|Less accumulated depreciation and amortization |  |             | (224,907 | )           |  |   | (188,357 | )
|                                               |  |             |          |             |  |   |          |  
|Property and equipment  net                   |  | $           | 315,227  |             |  | $ | 277,576  |  
|                                               |  |             |          |             |  |   |          |  

Depreciation expense for the years ended
February 1, 2003, February 2, 2002 and
February 3, 2001 was $58.5 million, $50.0 million
and $42.6 million, respectively.

8.     Accrued
Liabilities

Accrued liabilities consist of the following:

|                                                                                                   |  |             |        |             |  |   |        | 
|-------------------------------------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | - | ------ | 
|                                                                                                   |  | February 1, |        | February 2,
|                                                                                                   |  | 2003        |        | 2002       
|                                                                                                   |  |             |        |            
|Gift certificates, merchandise credits, return
    reserve, and other customer related liabilities |  | $           | 38,582 |             |  | $ | 33,925 | 
|Employee compensation, related taxes and benefits                                                  |  |             | 25,791 |             |  |   | 26,366 | 
|Taxes other than income and withholding                                                            |  |             | 8,009  |             |  |   | 7,022  | 
|Other accrued liabilities                                                                          |  |             | 15,604 |             |  |   | 12,315 | 
|                                                                                                   |  |             |        |             |  |   |        | 
|Total accrued liabilities                                                                          |  | $           | 87,986 |             |  | $ | 79,628 | 
|                                                                                                   |  |             |        |             |  |   |        | 

9.     Debt

Revolving
Credit

The revolving credit agreements with four banks
have maximum available borrowings of $100,000, have two-year
terms and can be extended annually upon mutual agreement.
Interest terms on the unsecured revolving credit agreements are
fixed, at the Companys option, for periods of one, three
or six months. At February 1, 2003 and February 2,
2002, the Company had $100,000 outstanding under its revolving
credit agreements. None of the outstanding balance is currently
payable.

F-17



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##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


A summary of the amounts outstanding, the current
interest terms and the loan maturities under the revolving
credit agreements at February 1, 2003 follows:

|            |         |               |  |          |      |   |  |  |              | 
|----------- | ------- | ------------- |  | -------- | ---- | - |  |  | ------------ | 
|Outstanding |         | Interest rate |  | Maturity
|            |         |               |  |         
|$           | 18,000  |               |  |          | 2.43 | % |  |  | April 2004   | 
|            | 14,000  |               |  |          | 2.47 | % |  |  | April 2004   | 
|            | 14,000  |               |  |          | 2.02 | % |  |  | April 2004   | 
|            | 12,000  |               |  |          | 2.68 | % |  |  | April 2004   | 
|            | 6,000   |               |  |          | 2.65 | % |  |  | January 2005 | 
|            | 18,000  |               |  |          | 2.04 | % |  |  | January 2005 | 
|            | 10,000  |               |  |          | 2.19 | % |  |  | January 2005 | 
|            | 8,000   |               |  |          | 2.25 | % |  |  | January 2005 | 
|            |         |               |  |          |      |   |  |  |              | 
|$           | 100,000 |               |  |          |      |   |  |  |              | 
|            |         |               |  |          |      |   |  |  |              | 

Notes Payable
to Banks

The Company also has available a $125,000
unsecured line-of-credit facility with five banks. At
February 1, 2003 and February 2, 2002, no amounts were
outstanding on this facility. The weighted average interest rate
for the years ended February 1, 2003 and February 2,
2002 was 2.32% and 3.33%, respectively.

Letters of
Credit

The Company has two letter-of-credit banking
agreements totaling $200,000 which it uses primarily for the
purchase of merchandise inventories. At February 1, 2003
and February 2, 2002, the Company held $107,558 and
$101,455, respectively, in purchase commitments.

10.     Income
Taxes

The provision for income taxes for the years
ended February 1, 2003, February 2, 2002 and
February 3, 2001, consists of the following:

|                         |         |                  |        |                  |  |                  |        |        |   |   |        |        |  
|------------------------ | ------- | ---------------- | ------ | ---------------- |  | ---------------- | ------ | ------ | - | - | ------ | ------ | -
|                         |         |                 
|                         |         | Year Ended      
|                         |         |                 
|                         |         | February 1, 2003 |        | February 2, 2002 |  | February 3, 2001
|                         |         |                  |        |                  |  |                 
|Currently payable:       |         |                  |        |                  |  |                  |        |        |   |   |        |       
|                         | Federal |                  | $      | 54,547           |  |                  | $      | 65,968 |   |   | $      | 67,600 |  
|                         | State   |                  |        | 5,907            |  |                  |        | 7,236  |   |   |        | 8,957  |  
|                         | Foreign |                  |        |                 |  |                  |        | 440    |   |   |        |       |  
|                         |         |                  |        |                  |  |                  |        |        |   |   |        |       
|Total currently payable  |         |                  | 60,454 |                  |  |                  | 73,644 |        |   |   | 76,557 |       
|                         |         |                  |        |                  |  |                  |        |        |   |   |        |       
|Deferred:                |         |                  |        |                  |  |                  |        |        |   |   |        |       
|                         | Federal |                  |        | 9,408            |  |                  |        | 4,939  |   |   |        | (3,896 | )
|                         | State   |                  |        | 1,226            |  |                  |        | 1,245  |   |   |        | (542   | )
|                         | Foreign |                  |        | 1,367            |  |                  |        | (1,988 | ) |   |        |       |  
|                         |         |                  |        |                  |  |                  |        |        |   |   |        |       
|Total deferred           |         |                  | 12,001 |                  |  |                  | 4,196  |        |   |   | (4,438 | )     
|                         |         |                  |        |                  |  |                  |        |        |   |   |        |       
|Total income tax expense |         | $                | 72,455 |                  |  | $                | 77,840 |        |   | $ | 72,119 |       
|                         |         |                  |        |                  |  |                  |        |        |   |   |        |       

F-18



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


Components of the net deferred tax asset or
liability recognized in the consolidated balance sheets at
February 1, 2003 and February 2, 2002, respectively,
are as follows:

|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |         |  
|--------------------------- | --------------------------------- | ---------------- | ------ | ---------------- |  | ----- | ------- | ------- | - | ----------- | ------ | ------- | - | - | ------ | ----- |  | - | ------- | ------- | - | - | ------ | ------- | -
|                            |                                   |                  |        |                 
|                            |                                   | February 1, 2003 |        | February 2, 2002
|                            |                                   |                  |        |                 
|                            |                                   | Assets           |        | Liabilities      |  | Total |         | Assets  |   | Liabilities |        | Total  
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |        
|United States:              |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Current:                    |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|                            | Merchandise inventories           |                  | $      | 4,609            |  |       | $       |        |   |             | $      | 4,609   |   |   | $      | 4,481 |  |   | $       |        |   |   | $      | 4,481   |  
|                            | Deferred catalog costs            |                  |        |                 |  |       |         | (791    | ) |             |        | (791    | ) |   |        |      |  |   |         | (895    | ) |   |        | (895    | )
|                            | Accrued vacation pay              |                  |        | 3,807            |  |       |         |        |   |             |        | 3,807   |   |   |        | 3,222 |  |   |         |        |   |   |        | 3,222   |  
|                            | Other                             |                  |        | 1,322            |  |       |         | (472    | ) |             |        | 850     |   |   |        | 686   |  |   |         | (639    | ) |   |        | 47      |  
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total current               |                                   |                  | 9,738  |                  |  |       | (1,263  | )       |   |             | 8,475  |         |   |   | 8,389  |       |  |   | (1,534  | )       |   |   | 6,855  |        
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Noncurrent:                 |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|                            | Depreciation & amortization       |                  |        |                 |  |       |         | (23,861 | ) |             |        | (23,861 | ) |   |        |      |  |   |         | (11,037 | ) |   |        | (11,037 | )
|                            | Lease commitments                 |                  |        | 7,117            |  |       |         |        |   |             |        | 7,117   |   |   |        | 6,520 |  |   |         |        |   |   |        | 6,520   |  
|                            | Deferred compensation             |                  |        | 4,841            |  |       |         |        |   |             |        | 4,841   |   |   |        | 4,574 |  |   |         |        |   |   |        | 4,574   |  
|                            | Minimum Pension Liability         |                  |        | 7,518            |  |       |         |        |   |             |        | 7,518   |   |   |        |      |  |   |         |        |   |   |        |        |  
|                            | Other                             |                  |        | 1,464            |  |       |         |        |   |             |        | 1,464   |   |   |        | 1,758 |  |   |         |        |   |   |        | 1,758   |  
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total noncurrent            |                                   |                  | 20,940 |                  |  |       | (23,861 | )       |   |             | (2,921 | )       |   |   | 12,852 |       |  |   | (11,037 | )       |   |   | 1,815  |        
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Foreign:                    |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Current:                    |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|                            | Subsidiary tax loss carryfowards  |                  |        | 1,780            |  |       |         |        |   |             |        | 1,780   |   |   |        | 1,367 |  |   |         |        |   |   |        | 1,367   |  
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total current               |                                   |                  | 1,780  |                  |  |       |        |         |   |             | 1,780  |         |   |   | 1,367  |       |  |   |        |         |   |   | 1,367  |        
|Noncurrent:                 |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|                            | Subsidiary tax loss carryforwards |                  |        |                 |  |       |         |        |   |             |        |        |   |   |        | 1,780 |  |   |         |        |   |   |        | 1,780   |  
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total noncurrent            |                                   |                  |       |                  |  |       |        |         |   |             |       |         |   |   | 1,780  |       |  |   |        |         |   |   | 1,780  |        
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total deferred income taxes |                                   | $                | 32,458 |                  |  | $     | (25,124 | )       |   | $           | 7,334  |         |   | $ | 24,388 |       |  | $ | (12,571 | )       |   | $ | 11,817 |        
|                            |                                   |                  |        |                  |  |       |         |         |   |             |        |         |   |   |        |       |  |   |         |         |   |   |        |        

At February 1, 2003, a consolidated foreign
subsidiary of the Company had net operating loss carryforwards
of $4,238 which are expected to be utilized in 2003.

For the fiscal year ended February 1, 2003,
the effective tax rate decreased to 37.5% compared to 38.0% for
the year ended February 2, 2002.

F-19



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##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


For the years ended February 1, 2003,
February 2, 2002 and February 3, 2001, total income
tax expense differs from that computed by multiplying income
before taxes by the United States federal income tax rates as
follows:

|                            |                                                |                  |        |                  |  |                  |      |      |  |     |        |       |  |  |      |     |  |   |        |       |  |  |      |     | 
|--------------------------- | ---------------------------------------------- | ---------------- | ------ | ---------------- |  | ---------------- | ---- | ---- |  | --- | ------ | ----- |  |  | ---- | --- |  | - | ------ | ----- |  |  | ---- | --- | 
|                            |                                                |                 
|                            |                                                | Year Ended      
|                            |                                                |                 
|                            |                                                |                  |        |                  |  |                 
|                            |                                                | February 1, 2003 |        | February 2, 2002 |  | February 3, 2001
|                            |                                                |                  |        |                  |  |                 
|                            |                                                | Tax              |        | Rate             |  | Tax              |      | Rate |  | Tax |        | Rate 
|                            |                                                |                  |        |                  |  |                  |      |      |  |     |        |      
|Expected tax expense        |                                                | $                | 67,625 |                  |  |                  | 35.0 | %    |  | $   | 71,694 |       |  |  | 35.0 | %   |  | $ | 65,562 |       |  |  | 35.0 | %  
|Adjustments resulting from: |                                                |                  |        |                  |  |                  |      |      |  |     |        |       |  |  |      |     |  |   |        |       |  |  |      |    
|                            | State income taxes, net of federal tax benefit |                  |        | 4,636            |  |                  |      | 2.4  |  |     |        | 5,513 |  |  |      | 2.7 |  |   |        | 5,469 |  |  |      | 2.9 | 
|                            | Goodwill amortization                          |                  |        |                 |  |                  |      |     |  |     |        | 470   |  |  |      | 0.2 |  |   |        | 470   |  |  |      | 0.3 | 
|                            | Other                                          |                  |        | 194              |  |                  |      | 0.1  |  |     |        | 163   |  |  |      | 0.1 |  |   |        | 618   |  |  |      | 0.3 | 
|                            |                                                |                  |        |                  |  |                  |      |      |  |     |        |       |  |  |      |     |  |   |        |       |  |  |      |    
|Actual tax expense          |                                                | $                | 72,455 |                  |  |                  | 37.5 | %    |  | $   | 77,840 |       |  |  | 38.0 | %   |  | $ | 72,119 |       |  |  | 38.5 | %  
|                            |                                                |                  |        |                  |  |                  |      |      |  |     |        |       |  |  |      |     |  |   |        |       |  |  |      |    

11.     Segment and
Geographic Information

The Company 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 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), which includes both catalog and
internet operations.

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 and
through its e-commerce site at www.talbots.com.

The Company evaluates the operating performance
of its identified segments based on a direct profit measure. 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.

Historically, the Company does not allocate
assets by segment, however, SFAS 142 requires goodwill and
other intangible assets to be allocated to specific reporting
segments. For analysis of impairment under FASB 142,
Talbots allocated goodwill for $35.5 million and $0 to the
stores and catalog segment, respectively, at February 1,
2003 February 2, 2002. The trademark was allocated as
$64.5 million and $11.4 million to the stores and
catalog segment, respectively, at February 1, 2003 and
February 2, 2002.

F-20



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##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


The following is segment information as of and
for the years ended February 1, 2003, February 2, 2002
and February 3, 2001:

|              |  |                  |           |         |  |       |         |  |  |   |           | 
|------------- |  | ---------------- | --------- | ------- |  | ----- | ------- |  |  | - | --------- | 
|              |  |                 
|              |  | February 1, 2003
|              |  |                 
|              |  | Stores           |           | Catalog |  | Total
|              |  |                  |           |         |  |      
|Net sales     |  | $                | 1,347,941 |         |  | $     | 247,384 |  |  | $ | 1,595,325 | 
|Direct profit |  |                  | 257,729   |         |  |       | 48,965  |  |  |   | 306,694   | 

|              |  |                  |           |         |  |       |         |  |  |   |           | 
|------------- |  | ---------------- | --------- | ------- |  | ----- | ------- |  |  | - | --------- | 
|              |  |                 
|              |  | February 2, 2002
|              |  |                 
|              |  | Stores           |           | Catalog |  | Total
|              |  |                  |           |         |  |      
|Net sales     |  | $                | 1,346,029 |         |  | $     | 266,484 |  |  | $ | 1,612,513 | 
|Direct profit |  |                  | 271,696   |         |  |       | 48,763  |  |  |   | 320,459   | 

|              |  |                  |           |         |  |       |         |  |  |   |           | 
|------------- |  | ---------------- | --------- | ------- |  | ----- | ------- |  |  | - | --------- | 
|              |  |                 
|              |  | February 3, 2001
|              |  |                 
|              |  | Stores           |           | Catalog |  | Total
|              |  |                  |           |         |  |      
|Net sales     |  | $                | 1,325,961 |         |  | $     | 269,035 |  |  | $ | 1,594,996 | 
|Direct profit |  |                  | 262,133   |         |  |       | 49,422  |  |  |   | 311,555   | 

The following reconciles direct profit to
consolidated net income before taxes as of and for the years
ended February 1, 2003, February 2, 2002 and
February 3, 2001:

|                                                        |  |                  |          |                  |  |                  |          |   |  |   |          |  
|------------------------------------------------------- |  | ---------------- | -------- | ---------------- |  | ---------------- | -------- | - |  | - | -------- | -
|                                                        |  | February 1, 2003 |          | February 2, 2002 |  | February 3, 2001
|                                                        |  |                  |          |                  |  |                 
|Total direct profit or loss for reportable
    segments |  | $                | 306,694  |                  |  | $                | 320,459  |   |  | $ | 311,555  |  
|Less: indirect expenses                                 |  |                  | (113,480 | )                |  |                  | (115,618 | ) |  |   | (124,234 | )
|                                                        |  |                  |          |                  |  |                  |          |   |  |   |          |  
|Consolidated income before taxes                        |  | $                | 193,214  |                  |  | $                | 204,841  |   |  | $ | 187,321  |  
|                                                        |  |                  |          |                  |  |                  |          |   |  |   |          |  

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 consolidated net sales.

The following is geographical information as of
and for the years ended February 1, 2003, February 2,
2002 and February 3, 2001:

|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 
|--------------------------- |  | ---------------- | --------- | ---------------- |  | ---------------- | --------- |  |  | - | --------- | 
|                            |  | February 1, 2003 |           | February 2, 2002 |  | February 3, 2001
|                            |  |                  |           |                  |  |                 
|Sales:                      |  |                  |           |                  |  |                  |           |  |  |   |           | 
|United States               |  | $                | 1,546,006 |                  |  | $                | 1,561,520 |  |  | $ | 1,544,258 | 
|Foreign                     |  |                  | 49,319    |                  |  |                  | 50,993    |  |  |   | 50,738    | 
|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 
|Total consolidated revenues |  | $                | 1,595,325 |                  |  | $                | 1,612,513 |  |  | $ | 1,594,996 | 
|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 
|Long-Lived Assets:          |  |                  |           |                  |  |                  |           |  |  |   |           | 
|United States               |  | $                | 420,056   |                  |  | $                | 383,563   |  |  | $ | 344,171   | 
|Foreign                     |  |                  | 6,567     |                  |  |                  | 5,410     |  |  |   | 5,756     | 
|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 
|Total long-lived assets     |  | $                | 426,623   |                  |  | $                | 388,973   |  |  | $ | 349,927   | 
|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 

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.

F-21



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##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data




|    |              
|--- | -------------
|12. | Benefit Plans

The Company sponsors a non-contributory defined
benefit pension plan covering substantially all domestic
salaried and hourly employees. The plan provides retirement
benefits for employees who have attained age 21 and
completed one year of service. 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 Companys general funding policy is to
contribute the greater of amounts that are deductible for
federal income tax purposes or required by law. Plan assets for
the pension plan consist principally of fixed income and equity
securities.

The following sets forth the funded status and
prepaid pension cost for the Companys pension plan:

|                                                        |                                                                                         |                              |   |                  |        |   |   |         |        |  
|------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------- | - | ---------------- | ------ | - | - | ------- | ------ | -
|                                                        |                                                                                         | February 1, 2003             |   | February 2, 2002
|                                                        |                                                                                         |                              |   |                 
|Change in benefit obligation:                           |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Projected benefit obligation at beginning of year                                       |                              | $ | 53,657           |        |   | $ | 43,751  |       
|                                                        |                                                                                         | Service expense              |   |                  | 5,151  |   |   |         | 4,399  |  
|                                                        |                                                                                         | Interest expense             |   |                  | 4,125  |   |   |         | 3,469  |  
|                                                        |                                                                                         | Actuarial loss               |   |                  | 9,342  |   |   |         | 2,857  |  
|                                                        |                                                                                         | Amendments                   |   |                  | 639    |   |   |         |       |  
|                                                        |                                                                                         | Benefits paid                |   |                  | (899   | ) |   |         | (819   | )
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Projected benefit obligation at end of year                                             |                              | $ | 72,015           |        |   | $ | 53,657  |       
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|Change in assets:                                       |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Fair value at the beginning of year                                                     |                              | $ | 41,048           |        |   | $ | 34,348  |       
|                                                        |                                                                                         | Actual return on plan assets |   |                  | (5,224 | ) |   |         | (1,789 | )
|                                                        |                                                                                         | Employer contributions       |   |                  | 8,000  |   |   |         | 9,308  |  
|                                                        |                                                                                         | Benefits paid                |   |                  | (899   | ) |   |         | (819   | )
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Fair value at end of year                                                               |                              | $ | 42,925           |        |   | $ | 41,048  |       
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|Funded status:                                          |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Accumulated benefit obligation                                                          |                              | $ | (56,181          | )      |   | $ | (40,182 | )     
|                                                        | Effect of projected salary increases                                                    |                              |   | (15,834          | )      |   |   | (13,475 | )     
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Projected benefit obligation                                                            |                              |   | (72,015          | )      |   |   | (53,657 | )     
|                                                        | Fair value of plan assets                                                               |                              |   | 42,925           |        |   |   | 41,048  |       
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Funded status                                                                           |                              |   | (29,090          | )      |   |   | (12,609 | )     
|                                                        | Unrecognized prior service cost                                                         |                              |   | 1,097            |        |   |   | 691     |       
|                                                        | Unrecognized net loss                                                                   |                              |   | 34,451           |        |   |   | 16,093  |       
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Prepaid pension cost                                                                    |                              | $ | 6,458            |        |   | $ | 4,175   |       
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|Amounts recognized in the balance sheet consist
    of: |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | (Accrued)/prepaid benefit cost                                                          |                              | $ | (13,256          | )      |   | $ | 4,175   |       
|                                                        | Intangible asset                                                                        |                              |   | 1,097            |        |   |   |        |       
|                                                        | Additional minimum pension liability (reflected
    in shareholders equity net of tax) |                              |   | 18,617           |        |   |   |        |       
|                                                        |                                                                                         |                              |   |                  |        |   |   |        
|                                                        | Prepaid pension cost                                                                    |                              | $ | 6,458            |        |   | $ | 4,175   |       
|                                                        |                                                                                         |                              |   |                  |        |   |   |        

F-22



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


Net pension expense for the fiscal years ended
February 1, 2003, February 2, 2002 and
February 3, 2001 included the following components:

|                                                        |  |             |        |             |  |             |        |   |  |   |        |  
|------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | - |  | - | ------ | -
|                                                        |  |            
|                                                        |  | Year Ended 
|                                                        |  |            
|                                                        |  | February 1, |        | February 2, |  | February 3,
|                                                        |  | 2003        |        | 2002        |  | 2001       
|                                                        |  |             |        |             |  |            
|Service expense  benefits earned
    during the period |  | $           | 5,151  |             |  | $           | 4,399  |   |  | $ | 3,471  |  
|Interest expense on projected benefit obligation        |  |             | 4,125  |             |  |             | 3,469  |   |  |   | 3,092  |  
|Expected return on plan assets                          |  |             | (4,294 | )           |  |             | (3,514 | ) |  |   | (3,072 | )
|Net amortization and deferral                           |  |             | 735    |             |  |             | 448    |   |  |   | 163    |  
|                                                        |  |             |        |             |  |             |        |   |  |   |        |  
|Net pension expense                                     |  | $           | 5,717  |             |  | $           | 4,802  |   |  | $ | 3,654  |  
|                                                        |  |             |        |             |  |             |        |   |  |   |        |  

The Company also has a non-qualified supplemental
executive retirement plan (SERP) for certain key
executives impacted by Internal Revenue Code limits on benefits
and compensation. The plan is not funded.

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

|                                                        |                                                                                      |                  |   |             |       |   |   |        |     |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------ | ---------------- | - | ----------- | ----- | - | - | ------ | --- | -
|                                                        |                                                                                      | February 1,      |   | February 2,
|                                                        |                                                                                      | 2003             |   | 2002       
|                                                        |                                                                                      |                  |   |            
|Change in benefit obligation:                           |                                                                                      |                  |   |             |       |   |   |       
|                                                        | Projected benefit obligation at beginning of year                                    |                  | $ | 6,881       |       |   | $ | 4,871  |    
|                                                        |                                                                                      | Service expense  |   |             | 516   |   |   |        | 450 |  
|                                                        |                                                                                      | Interest expense |   |             | 557   |   |   |        | 450 |  
|                                                        |                                                                                      | Actuarial loss   |   |             | 1,738 |   |   |        | 541 |  
|                                                        |                                                                                      | Plan changes     |   |             | (382  | ) |   |        | 583 |  
|                                                        |                                                                                      | Benefits paid    |   |             | (4    | ) |   |        | (14 | )
|                                                        |                                                                                      |                  |   |             |       |   |   |       
|                                                        | Projected benefit obligation at end of year                                          |                  | $ | 9,306       |       |   | $ | 6,881  |    
|                                                        |                                                                                      |                  |   |             |       |   |   |       
|Funded status:                                          |                                                                                      |                  |   |             |       |   |   |       
|                                                        | Projected benefit obligation                                                         |                  | $ | (9,306      | )     |   | $ | (6,881 | )  
|                                                        | Fair value of plan assets                                                            |                  |   |            |       |   |   |       |    
|                                                        |                                                                                      |                  |   |             |       |   |   |       
|                                                        | Funded status                                                                        |                  |   | (9,306      | )     |   |   | (6,881 | )  
|                                                        | Unrecognized prior service cost                                                      |                  |   | 203         |       |   |   | 612    |    
|                                                        | Unrecognized net loss                                                                |                  |   | 3,071       |       |   |   | 1,518  |    
|                                                        |                                                                                      |                  |   |             |       |   |   |       
|                                                        | Accrued SERP benefit cost                                                            |                  | $ | (6,032      | )     |   | $ | (4,751 | )  
|                                                        |                                                                                      |                  |   |             |       |   |   |       
|Amounts recognized in the balance sheet consist
    of: |                                                                                      |                  |   |             |       |   |   |       
|                                                        | Accrued benefit                                                                      |                  | $ | (6,412      | )     |   | $ | (4,751 | )  
|                                                        | Intangible asset                                                                     |                  |   | 203         |       |   |   |       |    
|                                                        | Additional minimum SERP liability (reflected in
    shareholders equity net of tax) |                  |   | 177         |       |   |   |       |    
|                                                        |                                                                                      |                  |   |             |       |   |   |       
|                                                        | Accrued SERP expense                                                                 |                  | $ | (6,032      | )     |   | $ | (4,751 | )  
|                                                        |                                                                                      |                  |   |             |       |   |   |       

F-23



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


Net SERP expenses for the fiscal years ended
February 1, 2003, February 2, 2002 and
February 3, 2001 included the following components:

|                                                        |  |             |       |             |  |             |       |  |  |   |     | 
|------------------------------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- |  |  | - | --- | 
|                                                        |  |            
|                                                        |  | Year Ended 
|                                                        |  |            
|                                                        |  | February 1, |       | February 2, |  | February 3,
|                                                        |  | 2003        |       | 2002        |  | 2001       
|                                                        |  |             |       |             |  |            
|Service expense  benefits earned
    during the period |  | $           | 516   |             |  | $           | 450   |  |  | $ | 273 | 
|Interest expense on projected benefit obligation        |  |             | 557   |             |  |             | 450   |  |  |   | 340 | 
|Net amortization and deferral                           |  |             | 212   |             |  |             | 218   |  |  |   | 128 | 
|                                                        |  |             |       |             |  |             |       |  |  |   |     | 
|Net SERP expense                                        |  | $           | 1,285 |             |  | $           | 1,118 |  |  | $ | 741 | 
|                                                        |  |             |       |             |  |             |       |  |  |   |     | 

The following summarizes the assumptions used in
determining both the net pension and SERP expense.

|                                                                                                        |  |             |      |             |  |             |      |   |  |  |      |  
|------------------------------------------------------------------------------------------------------- |  | ----------- | ---- | ----------- |  | ----------- | ---- | - |  |  | ---- | -
|                                                                                                        |  |            
|                                                                                                        |  | Year Ended 
|                                                                                                        |  |            
|                                                                                                        |  | February 1, |      | February 2, |  | February 3,
|                                                                                                        |  | 2003        |      | 2002        |  | 2001       
|                                                                                                        |  |             |      |             |  |            
|Discount rate                                                                                           |  |             | 7.50 | %           |  |             | 7.50 | % |  |  | 7.50 | %
|Discount rate used to determine projected benefit
    obligation at end of year                         |  |             | 6.75 | %           |  |             | 7.50 | % |  |  | 7.50 | %
|Expected long-term rate of return on plan assets                                                        |  |             | 9.00 | %           |  |             | 9.00 | % |  |  | 9.00 | %
|Rate of future compensation increases                                                                   |  |             | 4.50 | %           |  |             | 4.50 | % |  |  | 4.50 | %
|Rate of future compensation increases used to
    determine projected benefit obligation at end of year |  |             | 4.00 | %           |  |             | 4.50 | % |  |  | 4.50 | %

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 cash
contribution that matches 50% of an employees contribution
up to a maximum of 6% of the employees actual
compensation. Employees may elect to invest in the common stock
of the Company at their discretion. Company contributions for
the years ended February 1, 2003, February 2, 2002 and
February 3, 2001 were $3,318, $3,118 and $3,190,
respectively.

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

F-24



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


|                              |                                                                        |                       |   |             |      |   |   |        |      |  
|----------------------------- | ---------------------------------------------------------------------- | --------------------- | - | ----------- | ---- | - | - | ------ | ---- | -
|                              |                                                                        | February 1,           |   | February 2,
|                              |                                                                        | 2003                  |   | 2002       
|                              |                                                                        |                       |   |            
|Change in benefit obligation: |                                                                        |                       |   |             |      |   |   |       
|                              | Accumulated postretirement benefit obligation at
    beginning of year |                       | $ | 2,635       |      |   | $ | 2,989  |     
|                              |                                                                        | Service expense       |   |             | 358  |   |   |        | 266  |  
|                              |                                                                        | Interest expense      |   |             | 217  |   |   |        | 158  |  
|                              |                                                                        | Actuarial loss/(gain) |   |             | 536  |   |   |        | (665 | )
|                              |                                                                        | Benefits paid         |   |             | (124 | ) |   |        | (113 | )
|                              |                                                                        |                       |   |             |      |   |   |       
|                              | Projected benefit obligation at end of year                            |                       | $ | 3,622       |      |   | $ | 2,635  |     
|                              |                                                                        |                       |   |             |      |   |   |       
|Funded status:                |                                                                        |                       |   |             |      |   |   |       
|                              | Accumulated postretirement benefit obligation                          |                       | $ | (3,622      | )    |   | $ | (2,635 | )   
|                              | Fair value of plan assets                                              |                       |   |            |      |   |   |       |     
|                              |                                                                        |                       |   |             |      |   |   |       
|                              | Funded status                                                          |                       |   | (3,622      | )    |   |   | (2,635 | )   
|                              | Unrecognized actuarial gain                                            |                       |   | (128        | )    |   |   | (672   | )   
|                              |                                                                        |                       |   |             |      |   |   |       
|                              | Accrued postretirement benefit                                         |                       | $ | (3,750      | )    |   | $ | (3,307 | )   
|                              |                                                                        |                       |   |             |      |   |   |       

The net expense of the postretirement medical
plan for the fiscal years ended February 1, 2003,
February 2, 2002 and February 3, 2001 included the
following components:

|                                                                      |  |             |     |             |  |             |     |   |  |   |     | 
|--------------------------------------------------------------------- |  | ----------- | --- | ----------- |  | ----------- | --- | - |  | - | --- | 
|                                                                      |  |            
|                                                                      |  | Year Ended 
|                                                                      |  |            
|                                                                      |  | February 1, |     | February 2, |  | February 3,
|                                                                      |  | 2003        |     | 2002        |  | 2001       
|                                                                      |  |             |     |             |  |            
|Service expense  benefits earned
    during the period               |  | $           | 358 |             |  | $           | 266 |   |  | $ | 283 | 
|Interest expense on accumulated postretirement
    benefit obligation |  |             | 217 |             |  |             | 158 |   |  |   | 210 | 
|Net amortization and deferral                                         |  |             | (7  | )           |  |             | (88 | ) |  |   |    | 
|                                                                      |  |             |     |             |  |             |     |   |  |   |     | 
|Net postretirement medical expense                                    |  | $           | 568 |             |  | $           | 336 |   |  | $ | 493 | 
|                                                                      |  |             |     |             |  |             |     |   |  |   |     | 

Assumed health care expense trend rates have a
significant effect on the amounts reported for the health care
plan. A one-percentage-point change in assumed cost escalation
rate would have the following effects:

|                                                               |  |             |     |             |  |   |      |  
|-------------------------------------------------------------- |  | ----------- | --- | ----------- |  | - | ---- | -
|                                                               |  | 1% Increase |     | 1% Decrease
|                                                               |  |             |     |            
|Effect on total of service and interest expense
    components |  | $           | 62  |             |  | $ | (54  | )
|Effect on the postretirement benefit obligation                |  | $           | 342 |             |  | $ | (304 | )

The weighted average discount rate used in
determining the accumulated postretirement medical benefit
obligation was 6.75% at February 1, 2003 and 7.50% at
February 2, 2002 and February 3, 2001. Additionally,
assumed cost escalation rates that start at 9.00% and grade down
gradually to 5.00% were used for February 1, 2003. Assumed
cost escalation rates that start at 10.00% and grade down
gradually to 5.00% were used for February 2, 2002 and
assumed escalation rates that start at 8.10% and grade down
gradually to 5.00% were used for the year ended February 3,
2001.

The Company provides postemployment medical
benefits to certain employees on short-term disability. The
Companys obligation at February 1, 2003 and
February 2, 2002 was $880 and $634, respectively

F-25



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


13.     Commitments

The Company conducts the major part of its
operations in leased premises with lease terms expiring at
various dates through 2025. 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 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 annual rental
commitments under noncancelable operating leases at
February 1, 2003 are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 107,472 | 
|2004       |  |   | 111,040 | 
|2005       |  |   | 108,927 | 
|2006       |  |   | 103,351 | 
|2007       |  |   | 93,235  | 
|Thereafter |  |   | 373,943 | 

Rent expense for the years ended February 1,
2003, February 2, 2002 and February 3, 2001 was
$97,848, $84,375 and $78,467, respectively, and includes $1,920,
$2,250 and $3,629, respectively, of contingent rental expense.



|    |                     
|--- | --------------------
|14. | Net Income Per Share

The weighted average shares used in computing
basic and diluted net income per share are presented in the
table below. Options to purchase 2,544,000, 1,181,000 and 36,000
shares of common stock at prices ranging from $23.06 to $51.13
per share were outstanding during the years ended
February 1, 2003, February 2, 2002 and
February 3, 2001, 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.

|                                                           |  |             |        |             |  |             |        |  |  |  |        | 
|---------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ |  |  |  | ------ | 
|                                                           |  |            
|                                                           |  | Year Ended 
|                                                           |  |            
|                                                           |  | February 1, |        | February 2, |  | February 3,
|                                                           |  | 2003        |        | 2002        |  | 2001       
|                                                           |  |             |        |             |  |            
|Shares for computation of basic net income per
    share   |  |             | 58,724 |             |  |             | 61,459 |  |  |  | 61,823 | 
|Effect of stock compensation plans                         |  |             | 1,467  |             |  |             | 1,980  |  |  |  | 2,172  | 
|                                                           |  |             |        |             |  |             |        |  |  |  |        | 
|Shares for computation of diluted net income per
    share |  |             | 60,191 |             |  |             | 63,439 |  |  |  | 63,995 | 
|                                                           |  |             |        |             |  |             |        |  |  |  |        | 

F-26



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data




|    |                              
|--- | -----------------------------
|15. | Quarterly Results (unaudited)

The following table shows certain unaudited
quarterly information for the Company during fiscal 2002 and
fiscal 2001.

|                                                              |      |                           |         |           |        |             |         |             |        |   |         |       |        |   |         |       |        | 
|------------------------------------------------------------- | ---- | ------------------------- | ------- | --------- | ------ | ----------- | ------- | ----------- | ------ | - | ------- | ----- | ------ | - | ------- | ----- | ------ | 
|                                                              |      |                          
|                                                              |      | Fiscal 2002 quarter ended
|                                                              |      |                          
|                                                              |      | May 4,                    |         | August 3, |        | November 2, |         | February 1,
|                                                              |      | 2002                      |         | 2002      |        | 2002        |         | 2003       
|                                                              |      |                           |         |           |        |             |         |            
|Net sales                                                     |      | $                         | 391,328 |           |        | $           | 370,407 |             |        | $ | 401,789 |       |        | $ | 431,801 |      
|Gross profit                                                  |      |                           | 170,206 |           |        |             | 134,829 |             |        |   | 176,893 |       |        |   | 149,896 |      
|Net income                                                    |      |                           | 34,983  |           |        |             | 20,034  |             |        |   | 37,407  |       |        |   | 28,335  |      
|Net income per share                                          |      |                           |         |           |        |             |         |             |        |   |         |       |        |   |         |      
|                                                              |      | Basic                     |         | $         | 0.58   |             |         | $           | 0.34   |   |         | $     | 0.64   |   |         | $     | 0.50   | 
|                                                              |      | Assuming dilution         |         | $         | 0.57   |             |         | $           | 0.33   |   |         | $     | 0.63   |   |         | $     | 0.48   | 
|Weighted average common shares outstanding (in
    thousands) |      |                           |         |           |        |             |         |             |        |   |         |       |        |   |         |      
|                                                              |      | Basic                     |         |           | 59,957 |             |         |             | 59,468 |   |         |       | 58,100 |   |         |       | 57,370 | 
|                                                              |      | Assuming dilution         |         |           | 61,609 |             |         |             | 61,047 |   |         |       | 59,433 |   |         |       | 58,622 | 
|Cash dividends per share                                      |      | $                         | 0.08    |           |        | $           | 0.09    |             |        | $ | 0.09    |       |        | $ | 0.09    |      
|Market price data                                             |      |                           |         |           |        |             |         |             |        |   |         |       |        |   |         |      
|                                                              | High |                           | $       | 41.02     |        |             | $       | 38.95       |        |   | $       | 34.52 |        |   | $       | 30.67 |       
|                                                              | Low  |                           | $       | 31.45     |        |             | $       | 26.09       |        |   | $       | 22.90 |        |   | $       | 24.86 |       

|                                                              |                   |                           |         |           |  |             |         |             |  |   |         |        |  |   |         |        | 
|------------------------------------------------------------- | ----------------- | ------------------------- | ------- | --------- |  | ----------- | ------- | ----------- |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                                              |                   |                          
|                                                              |                   | Fiscal 2001 quarter ended
|                                                              |                   |                          
|                                                              |                   | May 5,                    |         | August 4, |  | November 3, |         | February 2,
|                                                              |                   | 2001                      |         | 2001      |  | 2001        |         | 2002       
|                                                              |                   |                           |         |           |  |             |         |            
|Net sales                                                     |                   | $                         | 401,072 |           |  | $           | 384,295 |             |  | $ | 393,966 |        |  | $ | 433,180 |       
|Gross profit                                                  |                   |                           | 182,824 |           |  |             | 131,316 |             |  |   | 174,226 |        |  |   | 156,984 |       
|Net income                                                    |                   |                           | 40,113  |           |  |             | 17,816  |             |  |   | 36,558  |        |  |   | 32,514  |       
|Net income per share                                          |                   |                           |         |           |  |             |         |             |  |   |         |        |  |   |         |       
|                                                              | Basic             |                           | $       | 0.64      |  |             | $       | 0.29        |  |   | $       | 0.60   |  |   | $       | 0.54   | 
|                                                              | Assuming dilution |                           | $       | 0.62      |  |             | $       | 0.28        |  |   | $       | 0.58   |  |   | $       | 0.53   | 
|Weighted average common shares outstanding (in
    thousands) |                   |                           |         |           |  |             |         |             |  |   |         |        |  |   |         |       
|                                                              | Basic             |                           |         | 62,756    |  |             |         | 62,009      |  |   |         | 61,100 |  |   |         | 59,972 | 
|                                                              | Assuming dilution |                           |         | 64,993    |  |             |         | 64,112      |  |   |         | 62,755 |  |   |         | 61,787 | 
|Cash dividends per share                                      |                   | $                         | 0.07    |           |  | $           | 0.08    |             |  | $ | 0.08    |        |  | $ | 0.08    |       
|Market price data                                             |                   |                           |         |           |  |             |         |             |  |   |         |        |  |   |         |       
|                                                              | High              |                           | $       | 53.75     |  |             | $       | 48.80       |  |   | $       | 40.65  |  |   | $       | 38.55  | 
|                                                              | Low               |                           | $       | 36.24     |  |             | $       | 35.23       |  |   | $       | 22.33  |  |   | $       | 30.80  | 

F-27



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##### Table of Contents



SHAREHOLDER INFORMATION

CORPORATE OFFICES

The Talbots, Inc.

One Talbots Drive


Hingham, MA 02043-1586


TALBOTS WEBSITE

www.talbots.com

TALBOTS CATALOG

To receive a free copy of our most recent Talbots
catalog, call 1-800-TALBOTS (1-800-825-2687)

ANNUAL MEETING

The Annual Meeting of Shareholders is scheduled
for 10 a.m. on May 22, 2003,

at the World Trade Center Boston,


200 Seaport Boulevard,


Boston, MA


Each shareholder is cordially invited to attend.


FORM 10-K

A copy of the Companys Annual Report on
Form 10-K for the fiscal year ended February 1, 2003
is available to each shareholder free of charge upon written
request to the Investor Relations Department at our corporate
offices.

SHAREHOLDER REPORTS/ INVESTOR
INQUIRIES

Shareholder inquiries, including requests for
quarterly and annual reports, may be made in writing to:

Investor Relations Department


The Talbots, Inc.


One Talbots Drive


Hingham, MA 02043-1586;


By calling 781-741-4500; or


by e-mail at investor.relations@talbots.com


STOCK EXCHANGE LISTING

New York Stock Exchange

(Trading Symbol: TLB)


REGISTRAR AND TRANSFER AGENT

EquiServe Trust Company, N.A.

Shareholder Services


P.O. Box 43010


Providence, RI 02940-3010


Telephone: 781-575-3120


Internet Address:


http://www.EquiServe.com


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 April 1, 2003 was 546.

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.