##### Table of Contents











SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934


|                                               |  |                                   
|---------------------------------------------- |  | ----------------------------------
|For the Fiscal Year Ended
    January 31, 2004 |  | Commission File Number
    1-12552



---

THE TALBOTS, INC.

One Talbots Drive

Hingham, MA 02043


(781) 749-7600


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



---

Securities registered pursuant to
Section 12b) 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                  



---

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

None.


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months 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. o

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 2, 2003 based on the closing sale price on the New
York Stock Exchange composite tape on August 2, 2003 was
approximately $759 million.

Number of shares outstanding of the
registrants common stock as of March 25, 2004:
56,997,407

Documents Incorporated by Reference:

Portions of the Proxy Statement for the 2004
Annual Meeting of Shareholders are incorporated by reference
into Part III.



---






---










The Talbots, Inc.

Annual Report on Form 10-K for the Fiscal
Year Ended January 31, 2004

|                                               |  |                                                                                                        |  |      |    | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                               |  |                                                                                                        |  | 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                                         |  |      | 25 | 
|Item 8.                                        |  | Financial Statements and
    Supplementary Data                                                        |  |      | 25 | 
|Item 9.                                        |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 25 | 
|Item 9A.                                       |  | Controls and Procedures                                                                                |  |      | 25 | 
|                                              
|PART III                                      
|Item 10.                                       |  | Directors and Executive
    Officers of the Registrant                                                 |  |      | 26 | 
|Item 11.                                       |  | Executive Compensation                                                                                 |  |      | 26 | 
|Item 12.                                       |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |      | 26 | 
|Item 13.                                       |  | Certain Relationships and
    Related Transactions                                                     |  |      | 26 | 
|Item 14.                                       |  | Principal Accountant Fees
    and Services                                                             |  |      | 27 | 
|                                              
|PART IV                                       
|Item 15.                                       |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |  |      | 27 | 
|EX-23.1 CONSENT OF DELOITTE AND TOUCHE LLP    
|EX-31.1 SECTION 302 CERTIFICATION OF C.E.O.   
|EX-31.2 SECTION 302 CERTIFICATION OF C.F.O.   
|EX-32 CERTIFICATION OF CEO AND CFO SECTION 906



1



---



##### Table of Contents



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. The Company
has grown significantly over the past ten years, with the number
of stores increasing from 339 stores at the end of 1993 to 977
stores at the end of 2003. During 2003, Talbots issued 26
separate catalogs with a combined circulation of approximately
47.1 million compared to circulation of 59.5 million
in 1993. In 1999, the Company began offering its merchandise
online at www.talbots.com. Sales through the Companys
website are reported with catalog sales. Total Company net sales
were approximately $1,624.3 million in 2003, of which
retail store sales were approximately $1,384.9 million and
catalog sales were approximately $239.4 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. For example, 2003 refers to
the 52-week fiscal year ended January 31, 2004;
2002 refers to the 52-week fiscal year ended
February 1, 2003 and 2001 refers to the 52-week
ending February 2, 2002.

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 new test concept, Talbots Mens, which offers a
distinguished line of classic mens sportswear and dress
furnishings.

Talbots merchandising strategy focuses on
achieving a classic look that emphasizes timeless
styles and quality. Talbots stores, catalogs and 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 2003, over 98% 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 online.
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 1988. In
1988, AEON (U.S.A.), Inc. (AEON U.S.A.), acquired
Talbots (the Acquisition). AEON U.S.A. is a wholly
owned subsidiary of AEON Co., Ltd. (AEON), a
Japanese retail conglomerate. In 1993, the Company effected an
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

2



---



##### Table of Contents



Companys majority shareholder, and at
January 31, 2004 owned approximately 57.7% 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 January 31, 2004, the
number of stores increased to 977 and were located in 47 states,
the District of Columbia, Canada and the United Kingdom. This
included 492 Talbots Misses stores (including 20 Misses stores
in Canada and five Misses stores in the United Kingdom), 266
Talbots Petites stores (including two Petites stores in Canada),
41 Talbots Accessories & Shoes stores, 68 Talbots Kids
stores, 79 Talbots Woman stores (including one Woman store in
Canada), six Talbots Mens stores, one Talbots Collection store
and 24 Talbots Outlet stores (including one Outlet store in
Canada and one Outlet store in the United Kingdom).

Talbots catalog business has also undergone
changes. The circulation of catalogs has been reduced by 21%
from 59.5 million catalogs in 1993 to 47.1 million catalogs
in 2003. This circulation reduction has been an integral part of
a strategy to better focus the distribution of catalogs to
proven customers.

In 1999, Talbots launched 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 online orders and complements this new
channel of distribution. In fiscal 2003, the website accounted
for approximately 30% of total catalog sales.

Information concerning the Companys retail
store business and the Companys catalog and online
business and certain geographic information is contained in Note
12 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 online 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 and dress furnishings 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 98% of
inventory purchased in 2003. 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.

3



---



##### Table of Contents



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
end-of-season clearance sales and two mid-season 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 complement 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 Online
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 2003, online sales accounted for
approximately 30% of total catalog sales compared to 24% in
fiscal 2002.

Customer Service.The Company believes that it provides store, catalog and online
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 January 31, 2004, the Company had 39% of its
stores in malls, 39% in specialty centers, 10% in village
locations, 7% as freestanding stores, 2% in outlet locations and
3% 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
womens and childrens classic sportswear, casual
wear, dresses, coats, sweaters, accessories and shoes, as well
as mens sportswear and dress furnishings, consisting
primarily

4



---



##### Table of Contents



of branded merchandise made exclusively for
Talbots. Talbots stores, catalogs and 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 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 for product
purchases made in Hong Kong, Macau, and Southern China.

Sourcing.In fiscal
2003, Talbots purchased approximately 73% of its merchandise
directly from offshore vendors, and the remaining 27% 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 2003, 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.

5



---



##### Table of Contents



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 appropriate
measures to minimize the impact of such occurrences.

On December 31, 2004, quota restrictions on
the import of foreign apparel from countries which are members
of the World Trade Organization are expected to end. The effect
this quota expiration will have on global sourcing patterns is
uncertain. The Company currently believes that its diversified
sourcing strategy and the long-term relationships it has with
its vendors will allow the Company to respond to potential
demand shifts following the elimination of these quotas so as
not to significantly interrupt the Companys flow of
product.

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 339 at the end
of 1993 to 977 at the end of 2003. During that time, store net
sales increased from approximately $582.8 million in 1993
to approximately $1,384.9 million in 2003. During fiscal
2003 Talbots opened a net of 91 new stores.

In addition to expanding its core Misses
business, the Company has introduced complementary new business
concepts, including Talbots Petites, Talbots Kids, Talbots
Accessories & Shoes, Talbots Woman, Talbots Woman Petites,
Talbots Collection and most recently 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 the end of fiscal 2003, 266 Talbots Petites
stores were open, including two stores in Canada. Virtually
every item of womens apparel in the Talbots 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. At the end of
fiscal 2003, 68 Talbots Kids stores were open. Also in 2003,
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 its first Talbots Accessories &
Shoes stores in 1995 and operated 41 stores at the end of fiscal
2003. A limited collection of this merchandise is offered in
each major catalog, in virtually all stores and, in 2003, 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

6



---



##### Table of Contents



Petites, which focuses on fuller-figured women
5 4 and under. At the end of fiscal 2003,
79 Woman stores were open including one store in Canada,
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, in catalogs and online.


Talbots Collection 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 separate department in 85 existing
Talbots Misses stores. During the fall of 2003, the Company
opened its first Collection store. 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 included items in
its 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 the spring
of 2003, the Company opened its first three Talbots Mens stores
and at the end of fiscal 2003, six Talbots Mens stores were
open. Merchandise was also presented in two separate catalogs
and on the Companys website. The Company believes this
test concept may represent a future growth opportunity for
Talbots.

The Company currently anticipates opening
approximately 75 new stores, with expansion in all concepts, in
2004. 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, the ability to negotiate
acceptable lease terms for new locations, and the performance of
its test concepts such as Talbots Mens.

Stores

Misses stores generally range in size from 3,500
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, 3,300 and 3,500 gross
square feet, respectively. Talbots Accessories & Shoes
stores generally measure 1,800 gross square feet. Talbots Mens
stores generally measure 4,400 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 adjacent 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
January 31, 2004, the Company operated 102 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 January 31, 2004, the
Company operated 24 Talbots Outlet stores, including one Outlet
store in Canada and one Outlet store in the United Kingdom.

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 & 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 warm shopping atmosphere
appropriate for both adults and children. Talbots Mens stores
are masculine yet complementary to the Companys Misses
stores. Talbots Mens interior design includes 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.

7



---



##### Table of Contents



Talbots Catalog and Online Business

Since 1948, the Company has used its catalog to
offer customers convenience in ordering Talbots merchandise. In
2003, the Company issued 26 separate catalogs with a combined
circulation of approximately 47.1 million, including
catalogs sent to stores for display and general distribution.
During 2003, the catalog sales segment represented approximately
14.7% of total Company sales. Catalog circulation has included:
base catalogs offering the broadest assortment of Talbots
merchandise; Talbots Kids catalogs; Talbots Accessories &
Shoes catalogs; Talbots Mens catalogs; and sale catalogs. In
addition to providing customers convenience in ordering Talbots
merchandise, the 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.
The Company routinely updates and refines this list prior to
individual catalog mailings by monitoring customer interest.
This includes the frequency and dollar amount of purchases as
well as the date of last purchase. 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 that 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 are 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.

Reported in catalog sales are online sales. 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 Rhode Island
chartered national bank subsidiary, and Talbots Classics Finance
Company, a wholly owned subsidiary. The Company has extended
credit to its customers since commencing business in 1947 and
believes that the Talbots charge card enhances customer loyalty,
produces finance charge revenue and decreases third-party
bankcard fees. During fiscal 2003, Talbots charge purchases
accounted for approximately 43% of total Company sales and at
January 31, 2004, outstanding balances on Talbots charge
purchases totaled $182.7 million, including an allowance for
doubtful accounts of $2.7 million. Bad debts have
historically been well below 1% of total Talbots charge card
sales.

8



---



##### Table of Contents



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 43% of total sales in 2003.

Inventory Control and Merchandise
Distribution

The Company uses a centralized distribution
system, under which all U.S. merchandise is received, processed
and distributed through its catalog and store distribution
center in Lakeville, Massachusetts. The Company also has smaller
distribution centers in both the United Kingdom and Canada to
process store inventory in those locations. Merchandise received
at the distribution centers 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 online 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 933,000 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 and at its
corporate facilities in Hingham, Massachusetts. These systems
consist of a full range of retail, financial and merchandising
systems, including credit, inventory distribution and control,
sales reporting, accounts payable, budgeting and forecasting,
financial reporting, 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 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
programs 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 conduct customer
searches for merchandise no longer available in their store
through the register or with a single phone call, 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.

9



---



##### Table of Contents



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 online.

Talbots mainly competes with certain departments
within national specialty department stores as well as strong
regional department store chains. Talbots also competes with
other specialty retailers and catalog companies. 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 multiple concepts, distinguish it from department
stores and other specialty retailers.

Employees

At January 31, 2004, Talbots had
approximately 11,000 employees, of whom approximately 3,100 were
full-time salaried employees, approximately 1,300 were full-time
hourly employees and approximately 6,600 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, 2004:

|                          |  |     |    |          |  |                                                                          
|------------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------
|Name                      |  | Age |    | Position
|                          |  |     |    |         
|Arnold B. Zetcher         |  |     | 63 |          |  | Chairman of the Board, President and Chief
    Executive Officer         
|Harold B. Bosworth, Jr.   |  |     | 54 |          |  | Executive Vice President, Chief Merchandising
    Officer                
|Michele M. Mandell        |  |     | 56 |          |  | Executive Vice President, Stores and Talbots Kids                        
|Paul V. Kastner           |  |     | 52 |          |  | Senior Vice President, International and
    Strategic Planning          
|Edward L. Larsen          |  |     | 59 |          |  | Senior Vice President, Finance, Chief Financial
    Officer and Treasurer
|Andrea M. McKenna         |  |     | 47 |          |  | Senior Vice President, Marketing and Catalog
    Development             
|Richard T. OConnell, Jr. |  |     | 53 |          |  | Senior Vice President, Legal and Real Estate and
    Secretary           
|Bruce Lee Prescott        |  |     | 48 |          |  | Senior Vice President, Direct Marketing and
    Customer Service         
|Randy Richardson          |  |     | 45 |          |  | Senior Vice President, Information Services                              
|Bruce C. Soderholm        |  |     | 61 |          |  | Senior Vice President, Operations                                        
|Stuart M. Stolper         |  |     | 64 |          |  | 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 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. Zetcher also serves as
Chairman of the Board of the National Retail Federation and
Chairman of its Executive Committee.

10



---



##### Table of Contents



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.

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
Manager of Accounting, was promoted to Director of Operations in
1978, and served as Vice President, Operations from 1979 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.

11



---



##### Table of Contents



Available Information

We make available free of charge through our
website, www.talbots.com, all materials that we file
electronically with the 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 its website, www.sec.gov, that contains reports, proxy
and information statements and other information which the
Company files electronically with the SEC.

A copy of the Companys Corporate Governance
Guidance, its Code of Business Conduct and Ethics, and the
charters of the Audit Committee, the Compensation Committee and
the Corporate Governance and Nominating Committee are posted on
the Companys website, www.talbots.com, under
Investor Relations, and are available in print to
any shareholder who requests copies by contacting Talbots
Investor Relations by calling (781) 741-4500, by writing to
Investor Relations Department, The Talbots, Inc., One Talbots
Drive, Hingham, MA, 02043 or by e-mail at
investor.relations@talbots.com. Information contained on the
website is not incorporated by reference or otherwise considered
part of this document.




Item
2.     Properties.

The table below presents certain information
relating to the Companys properties at January 31,
2004:

|                                               |  |             |           |                  |  |                               |  |                 
|---------------------------------------------- |  | ----------- | --------- | ---------------- |  | ----------------------------- |  | ----------------
|                                               |  | Gross       |           |                  |  |                              
|Location                                       |  | Square Feet |           | Primary Function |  | Interest                     
|                                               |  |             |           |                  |  |                              
|Hingham, Massachusetts                         |  |             | 313,000   |                  |  | Company headquarters          |  | Own (44 acres)  
|Lakeville, Massachusetts                       |  |             | 933,000   |                  |  | 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           
|977 Stores throughout the U.S., Canada and U.K |  |             | 3,930,510 |                  |  | Retail stores                 |  | Own and lease(a)



---



|    |                                                          
|--- | ---------------------------------------------------------
|(a) | Talbots owns the property for five of its 977
    stores.

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 relocate its existing
operation in Knoxville, Tennessee. The new lease covers 36,761
square feet and the relocation was completed in February 2004.
Talbots long-term expansion program, if successful, may require
additional office and distribution space to service its
operations in the future.

At January 31, 2004, Talbots operated 977
stores; all but five 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

12



---



##### Table of Contents



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 January 31, 2004, 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)(b)
|               |  |                   
|2004-2005      |  |                    | 58  | 
|2006-2008      |  |                    | 86  | 
|2009-2011      |  |                    | 148 | 
|2012 and later |  |                    | 451 | 



---



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(a) | Certain leases have more than one store included
    within the leased premises.            
|   
|(b) | Includes 43 executed leases related to future
    stores not yet opened at January 31, 2004.






|        |                   
|------- | ------------------
|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
are not expected to 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 year ended
January 31, 2004.

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 2003 and 2002 is
included in Note 16, 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. Information regarding
the Companys payment of dividends for fiscal 2003 and 2002
is included in Note 16, Quarterly Results, to the
Companys consolidated financial statements.

The number of holders of record of the
Companys common stock at March 25, 2004 was 536.

13



---



##### 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                           
|                                                                  |                   |                                      
|                                                                  |                   | January 31,                           |           | February 1, |  | February 2, |           | February 3, |  | January 29,
|                                                                  |                   | 2004                                  |           | 2003        |  | 2002        |           | 2001        |  | 2000       
|                                                                  |                   | (52 weeks)                            |           | (52 weeks)  |  | (52 weeks)  |           | (53 weeks)  |  | (52 weeks) 
|                                                                  |                   |                                       |           |             |  |             |           |             |  |            
|                                                                  |                   |                                      
|                                                                  |                   | (in thousands, except per share data)
|Statement of Earnings Information:                                |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|Net sales                                                         |                   | $                                     | 1,624,339 |             |  | $           | 1,595,325 |             |  | $           | 1,612,513 |        |  | $ | 1,594,996 |        |  | $ | 1,308,658 |       
|Net income                                                        |                   |                                       | 104,683   |             |  |             | 120,759   |             |  |             | 127,001   |        |  |   | 115,202   |        |  |   | 58,460    |       
|Net income per share                                              |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|                                                                  | Basic             |                                       | $         | 1.85        |  |             | $         | 2.06        |  |             | $         | 2.07   |  |   | $         | 1.86   |  |   | $         | 0.94   | 
|                                                                  | Assuming dilution |                                       | $         | 1.81        |  |             | $         | 2.01        |  |             | $         | 2.00   |  |   | $         | 1.80   |  |   | $         | 0.92   | 
|Weighted average number of shares of common stock
    outstanding |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|                                                                  | Basic             |                                       |           | 56,531      |  |             |           | 58,724      |  |             |           | 61,459 |  |   |           | 61,823 |  |   |           | 62,136 | 
|                                                                  | Assuming dilution |                                       |           | 57,901      |  |             |           | 60,191      |  |             |           | 63,439 |  |   |           | 63,995 |  |   |           | 63,368 | 
|Cash dividends per share                                          |                   | $                                     | 0.39      |             |  | $           | 0.35      |             |  | $           | 0.31      |        |  | $ | 0.27      |        |  | $ | 0.23      |       
|Balance Sheet Information:                                        |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|Working capital                                                   |                   | $                                     | 330,012   |             |  | $           | 287,957   |             |  | $           | 299,270   |        |  | $ | 325,455   |        |  | $ | 236,691   |       
|Total assets                                                      |                   |                                       | 958,392   |             |  |             | 871,925   |             |  |             | 831,064   |        |  |   | 858,596   |        |  |   | 693,904   |       
|Total long-term debt,                                             |                   |                                       |           |             |  |             |           |             |  |             |           |        |  |   |           |        |  |   |           |       
|including current portion                                         |                   |                                       | 100,000   |             |  |             | 100,000   |             |  |             | 100,000   |        |  |   | 100,000   |        |  |   | 100,000   |       
|Stockholders equity                                              |                   |                                       | 616,126   |             |  |             | 567,676   |             |  |             | 567,876   |        |  |   | 550,771   |        |  |   | 431,332   |       




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

This Report contains forward-looking information
within the meaning of The Private Securities Litigation Reform
Act of 1995. The statements may be identified by such
forward-looking terminology as expect,
look, believe, anticipate,
outlook, will, or similar statements or
variations of such terms. All information concerning future
financial performance results or conditions constitutes
forward-looking information. Our forward-looking statements are
based on our current expectations, assumptions, estimates and
projections about our Company. Our forward looking statements
involve material known and unknown risks and uncertainties as to
future events which may or may not occur, including, store
traffic, levels of store sales, effectiveness of the
Companys brand awareness and marketing programs,
effectiveness and profitability of new concepts including the
Mens concept, effectiveness of its online sales, acceptance of
Talbots fashions, the Companys ability to anticipate and
successfully respond to changing customer tastes and preferences
and to produce the 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 and a continued uncertain economy, and the impact of
a continued highly promotional retail environment, uncertainties
associated with the expected year end expiration of trade quotas
for member countries of the World Trade Organization and the
current and potential hostilities in the Middle East and other
geographic areas. 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

14



---



##### Table of Contents



by the Company with the Securities and Exchange
Commission and available on the Talbots website under
Investor Relations, and you are urged to carefully
consider all such factors. In light of the substantial
uncertainty inherent in such forward-looking statements, you
should not consider their inclusion to be a guarantee or
representation that such forward-looking matters will in fact be
achieved. The Company assumes no obligation for updating or
revising 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.

Business Overview

Overall, fiscal 2003 was a challenging year for
the Company in terms of sales. As the Company entered 2003, the
retail economy remained soft, a war with Iraq was imminent, the
Companys sales trends from 2002 continued to be difficult,
and the Company made a significant change in its merchandising
organization with the appointment of a new Chief Merchandising
Officer. Given these factors, the Company continued to maintain
tight control over its expenses and for the third consecutive
year made further reductions in planned inventory levels to
protect gross margins. Total inventories at year-end were
$170.5 million versus $175.3 million at the end of
2002, and on a square foot basis fiscal 2003 year-end
inventories were down 9% in the Companys U.S. womens
apparel stores. At the same time, overall product gross margin
improved by approximately 30 basis points, due to an increase in
markon, offset partially by higher markdowns. This lean
inventory strategy, however, which protected the Company on the
downside, began to limit its ability to drive sales when the
economy began to recover in the second half of the year,
particularly impacting fourth quarter sales and net income.

Fourth quarter sales and net income were also
impacted by lower markdown selling. The Company believes this
was partially due to the Companys end of season sale event
having reduced levels of inventory available (on a square-foot
basis) and compounded by reduced customer demand for the goods
included in the sale event.

The Company ended the year with notes payable of
zero and long-term debt at $100.0 million. Cash flow from
operations was very strong, at $211.4 million for the year, or
13% of sales, compared to $222.4 million, or 14% of sales
in fiscal 2002.

One of the Companys key initiatives in
fiscal 2004 is to increase its inventory levels, reflecting its
plan for stronger demand. In fiscal 2004, the Company is also
increasing its investment in advertising over 2003 levels,
including national TV and print advertising, which is expected
to add to sales momentum during key selling periods.

The Company opened a total of 96 new stores in
fiscal 2003, with expansion in all concepts. Among these
openings was the retail launch of Talbots Mens, with three
stores opened in the spring and three stores opened in the fall.
The Company also opened its first Talbots Collection store,
which features a more fashion forward, upper-layer assortment.
The Company will move ahead cautiously in its evaluation of
these test concepts, but believes both may represent future
growth opportunities for Talbots. Looking at the full fiscal
year 2004, the Company is currently planning to open a total of
approximately 75 new stores, with growth planned in each
concept, which would represent approximately 6% square footage
growth.

The Company also updated many of its existing
stores in fiscal 2003. The Company believes that it is critical,
even in a soft economy, to maintain its stores at the highest
level, and the Company typically refurbishes each of its stores
every three to five years. The Companys capital
expenditures for fiscal 2003 totaled approximately
$89.5 million, with more than 85% of this capital spending
for store expansion and store renovations. The balance was for
various MIS initiatives and infrastructure upgrades.

Other areas of growth in fiscal 2003 included the
Companys online business, which increased 27% over fiscal
2003 and represented approximately 30% of total catalog sales,
up from 24% in fiscal 2002. Further, the

15



---



##### Table of Contents



percent of customer sales using Talbots
proprietary charge card increased to 43% in fiscal 2003, up from
41% in fiscal 2002, and finance charge revenue increased 3%.


Results of Operations

The 2003, 2002 and 2001 fiscal years all had
52 weeks and ended January 31, 2004, February 1, 2003
and February 2, 2002, respectively. Comparable stores are
those which were open for at least one full fiscal year. When a
new Talbots Petites, Woman 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 
|                                             |  |            
|                                             |  | January 31, |       | February 1, |  | February 2,
|                                             |  | 2004        |       | 2003        |  | 2002       
|                                             |  |             |       |             |  |            
|Net sales                                    |  |             | 100.0 | %           |  |             | 100.0 | % |  |  | 100.0 | %
|Cost of sales, buying and occupancy expenses |  |             | 61.7  | %           |  |             | 60.4  | % |  |  | 60.0  | %
|Selling, general and administrative expenses |  |             | 27.9  | %           |  |             | 27.3  | % |  |  | 27.0  | %
|Operating income                             |  |             | 10.4  | %           |  |             | 12.3  | % |  |  | 13.0  | %
|Interest expense, net                        |  |             | 0.1   | %           |  |             | 0.2   | % |  |  | 0.3   | %
|Income before taxes                          |  |             | 10.3  | %           |  |             | 12.1  | % |  |  | 12.7  | %
|Income taxes                                 |  |             | 3.9   | %           |  |             | 4.5   | % |  |  | 4.8   | %
|Net income                                   |  |             | 6.4   | %           |  |             | 7.6   | % |  |  | 7.9   | %

Fiscal 2003 Compared to Fiscal 2002

Net sales in 2003 were $1,624.3 million
compared to $1,595.3 million in 2002, an increase of
$29.0 million, or 1.8%. Operating income was $169.6 million
in 2003 compared to $196.1 million in 2002, a decrease of
$26.5 million, or 13.5%.

Retail store sales in 2003 were
$1,384.9 million compared to $1,347.9 million in 2002, an
increase of $37.0 million, or 2.7%. The Companys lean
inventory strategy effectively protected gross margin throughout
the year; however, it limited the Companys ability to
generate top line sales in the second half of the year. The
increase in retail store sales was attributable to the 91 net
new stores opened in 2003 and the first full year of operation
of the 86 net non-comparable stores that opened in 2002, offset
by a decrease of $43.5 million or 3.8% in comparable store
sales from the previous year. The percentage of the
Companys net sales derived from its retail stores in 2003
increased to 85.3% compared to 84.5% in 2002.

Catalog sales in 2003 were $239.4 million
compared to $247.4 million in 2002, a decrease of
$8.0 million or 3.2%. Included in catalog sales are online
sales generated from the Companys website,
www.talbots.com. In 2003, the Company anticipated softening
demand in catalog sales and reduced total circulation by 5.5%
from 49.8 million in 2002 to 47.1 million in 2003 and
continued to focus on distributing to proven customers. As with
store sales, lean inventory also impacted catalog sales,
particularly in the second half of the year. As a result, total
catalog sales were down, however catalog productivity, as
measured by both sales per catalog and sales per page
distributed, increased in comparison to 2002. Sales per catalog
distributed increased 1.9% to $4.61 in 2003 and sales per 100
pages distributed increased 7.3% to $5.61 in 2003. During 2003,
sales from the Companys website accounted for
approximately 30% of total catalog sales as compared to 24% in
2002.

Cost of sales, buying and occupancy expenses
increased as a percentage of net sales to 61.7% in 2003 from
60.4% in 2002. The decrease in comparable store sales created
negative leverage on store occupancy expenses as the Company
absorbed the occupancy costs of the 91 net new stores opened in
fiscal 2003 and recognized the full impact of the 86 net new
stores opened in fiscal 2002. This was partially offset by a 30
basis

16



---



##### Table of Contents



point improvement in merchandise gross margins.
The increase was due to an increase in initial markon, partially
offset by higher markdowns.


Selling, general and administrative expenses
increased as a percentage of net sales to 27.9% in 2003 from
27.3% in 2002. As a result of the decline in comparable store
sales, store overhead expenses increased as a percent of sales.
This was partially offset by savings in catalog production costs
related to planned decreased catalog circulation.

Interest expense, net, decreased by
$0.8 million to $2.1 million in 2003 compared to
$2.9 million in 2002. Interest expense decreased by
$0.9 million to $2.4 million in 2003 compared to
$3.3 million in 2002 due to lower borrowing rates. The
average interest rate, including interest on short-term and
long-term bank borrowings, was 2.03% in 2003 compared to 2.69%
in 2002. The average total debt, including short-term and
long-term bank borrowings, was $118.3 million in 2003
compared to $121.4 million in 2002.

The effective tax rate for the Company was 37.5%
in 2003 and in 2002.

Fiscal 2002 Compared to Fiscal 2001

Net sales 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 was 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 2001 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
continued 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.

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

17



---



##### Table of Contents



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.

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 are generally stronger in
the fourth quarter except in 2003 when the third quarter came in
stronger. This was partially due to weaker than anticipated
performance in the fourth quarter sale event from low inventory
levels. 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 3,               |       | August 2, |  | November 1, |       | January 31,
|                                             |  | 2003                 |       | 2003      |  | 2003        |       | 2004       
|                                             |  |                      |       |           |  |             |       |            
|Net sales                                    |  |                      | 100.0 | %         |  |             | 100.0 | %           |  |  | 100.0 | % |  |  | 100.0 | %
|Cost of sales, buying and occupancy expenses |  |                      | 58.3  | %         |  |             | 65.0  | %           |  |  | 57.3  | % |  |  | 65.9  | %
|Selling, general and administrative expenses |  |                      | 29.6  | %         |  |             | 27.3  | %           |  |  | 28.9  | % |  |  | 25.9  | %
|Operating income                             |  |                      | 12.1  | %         |  |             | 7.8   | %           |  |  | 13.7  | % |  |  | 8.2   | %

|                                             |  |                      |       |           |  |             |       |             |  |  |       |   |  |  |       |  
|-------------------------------------------- |  | -------------------- | ----- | --------- |  | ----------- | ----- | ----------- |  |  | ----- | - |  |  | ----- | -
|                                             |  |                     
|                                             |  | 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  | %

The Companys merchandising strategy focuses
on liquidating seasonal inventory at the end of each selling
season. Generally, the Company achieves this 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.

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, which
require additional store payroll and selling supplies. Another
factor is the store expansion

18



---



##### Table of Contents



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
January 31, 2004 and February 1, 2003, the Company had
no amounts outstanding under this facility. The Companys
working capital needs are typically at their lowest during the
spring season and peak during the fall selling season.

During 2003, cash balances increased by
$60.1 million compared to an increase in cash balances of
$7.3 million during 2002. Strong cash flows from operations
allowed the Company to continue investing in property and
equipment, to increase its dividend payment rate and continue
purchasing shares of the Companys stock.

Cash provided by operating activities totaled
$211.4 million in 2003 compared to $222.4 million in
2002. The decrease in cash provided by operating activities over
2002 was primarily attributable to a decrease in net income. Net
income in 2003 was $16.1 million lower than in 2002.
Additionally, operating cash flows were negatively impacted by
changes in income tax accruals and deferred income taxes, due to
the reduced level of net income and the timing of depreciation
deductions. This was partially offset by the change in customer
accounts receivable as the balance increased at a lower rate in
2003 compared to 2002. The Company recognized increased usage of
the Talbots charge card in 2003, however, it has also recognized
an increase in the rate of customer account repayments.

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 used in investing activities was
$88.6 million in 2003 compared to $99.1 million in
2002, consisting entirely of investments in property, plant and
equipment. In 2003, approximately $77.7 million was used
for leasehold improvements, furniture, fixtures and other
related expenditures for opening new stores and expanding,
renovating and relocating existing stores. In 2002,
approximately $77.9 million was used for leasehold
improvements, furniture, fixtures and other related expenditures
for opening new stores and expanding, renovating and relocating
existing stores.

Capital expenditures for 2004 are currently
expected to be approximately $89.0 million. The Company
currently plans to open 75 new stores in 2004. Approximately
$72.0 million is expected to be used for opening new stores
and expanding, renovating and relocating existing stores.
Approximately $10.0 million is expected to be used to enhance
the Companys computer information systems and
approximately $3.0 million is expected to be used for
renovating corporate facilities. This includes the relocation of
the Knoxville Telemarketing Center, which opened in February
2004. The remaining amount will be used for other capital needs
in the normal course of business. The actual amount of such
capital expenditures will depend on a

19



---



##### Table of Contents



number of factors, including the schedule of such
activity during 2004 and the number, type and timing of stores
being opened, expanded, renovated and relocated.


Cash used in financing activities totaled
$63.3 million in 2003. During 2003, the Company paid cash
dividends of $0.39 per share and repurchased 1,748,018 shares of
the Companys common stock under its repurchase program at
an average price per share of $28.60. This completed the
$50.0 million repurchase program voted by the Board of
Directors in October 2002. In total, the Company purchased
$51.3 million in treasury stock during 2003 compared to
$101.5 million in 2002. The payment of cash dividends and
the purchase of treasury stock in 2003 were funded through
operating cash flows and available cash balances.

On March 8, 2004, the Company announced that
its Board of Directors approved an additional 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.

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 program 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, which was completed in 2003. The payment of cash
dividends and the purchase of treasury stock in 2002 were funded
through operating cash flows and available cash balances.

In 2003 and 2002, cash from operating activities
and funds available to the Company under its credit facilities
were sufficient to meet cash requirements for capital
expenditures, the payment of dividends and the purchase of
treasury stock. The Companys usage of the line-of-credit
facility peaked at $50.0 million and $60.0 million in
2003 and 2002, respectively. The Companys primary on-going
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.

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.

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, retirement
plans, allowance for doubtful accounts 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.

The Company believes the following critical
accounting policies require its most significant judgments and
estimates used in the preparation of its consolidated financial
statements. However, there is no assurance that such judgments
and estimates will reflect actual results or that such estimates
or their underlying assumptions may not need to change
materially in the future to reflect actual experience.

Inventory Markdown Reserve.Merchandise inventory is a significant
portion of the Companys balance sheet, representing
approximately 18% of total assets at January 31, 2004.
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 remaining goods are transferred to

20



---



##### Table of Contents



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 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 on 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.

If market conditions were to decline or customer
acceptance of product is not favorable, Talbots might be
required to mark down inventory at a greater rate than
estimated, possibly resulting in an incremental charge to
earnings. Management believes that at January 31, 2004 and
February 1, 2003, the markdown reserve was reasonable 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 between the estimated returns
and actual returns 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 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 January 31, 2004
and February 1, 2003, the reserve was 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 online 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 2003 and 2002 the
Company ran two promotional events each year where the customer
was credited 2 points for each $1 purchased.

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. On-going analysis of issuances and
redemptions is performed to identify trends in the redemption
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 that
at January 31, 2004 and February 1, 2003, its current
accrual was sufficient based on recent purchase levels and
expected redemption levels.

21



---



##### Table of Contents



Retirement Plans.The Company sponsors a noncontributory
defined benefit pension plan (Pension Plan) covering
substantially all full-time employees; a non-qualified
supplemental executive retirement plan (SERP) for
certain key executives impacted by Internal Revenue Code limits;
and provides certain medical benefits for most retired employees
under a postretirement medical plan. In calculating its
retirement plan obligations and related expense, the Company
makes various assumptions and estimates. The annual
determination of expense involves calculating the estimated
total benefit ultimately payable to plan participants and
allocates this cost to the periods in which services are
expected to be rendered. The plans are valued annually as of
December 31st.

Significant assumptions related to the
calculation of the Companys obligations include the
discount rate used to calculate the actuarial present value of
benefit obligations to be paid in the future, the expected
long-term rate of return on assets held by the Pension Plan, the
average rate of compensation increase by certain plan
participants and the assumed healthcare trend rates on the
postretirement medical plan. These assumptions are reviewed
annually based upon currently available information.

The assumed discount rate utilized is based in
part on an analysis of corporate bonds with maturities matched
to the plans anticipated cash flows. The discount rate is
utilized principally in calculating the actuarial present value
of the Companys obligation and net expense. At
December 31, 2003 and 2002, the discount rate used was
6.25% and 6.75%, respectively. To the extent the discount rate
increases or decreases, the Companys obligations are
decreased or increased, accordingly.

The expected long-term rate of return on assets
is the weighted average rate of earnings expected on the funds
invested or to be invested to provide for the pension
obligation. The expected average long-term rate of return on
assets is based principally on an analysis using Ibbotson
Associates historical investment returns data for the two major
classes of investments in which the Company invests (debt and
equity securities). This rate is utilized primarily in
calculating the expected return on plan assets component of the
annual pension expense. To the extent the actual rate of return
on assets is less than or more than the assumed rate, that
years annual pension expense is not affected. Rather, this
loss or gain adjusts future pension expense over approximately
5 years. During 2003 and 2002, the Company utilized 9.0% as
the expected long-term rate of return on plan assets.

The assumed average rate of compensation increase
is the average annual compensation increase expected over the
remaining employment periods for the participating employees and
is based on historical and expected compensation increases. The
Company utilized a rate of 4.0% for the period beginning
December 31, 2003 and 4.5% for the period beginning
December 31, 2002. This rate is utilized principally in
calculating the retirement obligation and annual expense.

The assumed health care expense trend rates have
a significant effect on the amounts reported for the
postretirement medical plan. The healthcare cost escalation rate
is used to determine the postretirement obligation and annual
expense. At December 31, 2003 and 2002, the Company used
12.0% and 9.0% as initial cost escalation rates that gradually
trends down to 5.0%. To the extent that these rates increase or
decrease, the Companys obligation and associated expense
are decreased or increased, accordingly.

At December 31, 2003 and 2002, the Company
believes that the assumptions used in the calculation of its
retirement plans and postretirement medical plan liabilities
were reasonable based on current market conditions.

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. Increases
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.

22



---



##### Table of Contents



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.
Existing accounts are reviewed twice a year using standard
industry credit score models by an independent credit scoring
agency. 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 January 31, 2004 and
February 1, 2003, the allowance for doubtful accounts
balance was reasonable in light of portfolio balance, portfolio
quality, historical charge-offs and reasonable charge-off
forecasts.

Income Taxes.The
Company is routinely under audit by various domestic and foreign
tax jurisdictions. In response to this, management records
accruals for estimates of audit adjustments by the taxing
authorities. The eventual resolution of these audits might
include increases or decreases in liabilities. Management
believes that at January 31, 2004, the accruals for income
taxes are reasonable based on current audit activity.

Contractual Commitments

Below is a summary of the Companys on-going
significant contractual commitments (in thousands) as of
January 31, 2004:

|                              |                                |       |           |           |  |       |         |         |  |           |         |         |  |   |         |         |  |   |         |         | 
|----------------------------- | ------------------------------ | ----- | --------- | --------- |  | ----- | ------- | ------- |  | --------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                                |       |           | Less than |  | 1  3 |         | 3  5   |  | More than
|Contractual Obligations       |                                | Total |           | 1 Year    |  | Years |         | Years   |  | 5 Years  
|                              |                                |       |           |           |  |       |         |         |  |          
|Long-term debt                |                                | $     | 100,000   |           |  | $     |        |         |  | $         | 100,000 |         |  | $ |        |         |  | $ |        |        
|Letter-of-credit agreements   |                                |       | 102,757   |           |  |       | 102,757 |         |  |           |        |         |  |   |        |         |  |   |        |        
|Operating Leases:             |                                |       |           |           |  |       |         |         |  |           |         |         |  |   |         |         |  |   |         |        
|                              | Real estate                    |       |           | 958,249   |  |       |         | 119,451 |  |           |         | 238,605 |  |   |         | 208,366 |  |   |         | 391,827 | 
|                              | Equipment                      |       |           | 11,777    |  |       |         | 5,293   |  |           |         | 6,367   |  |   |         | 117     |  |   |         |        | 
|Merchandise purchases         |                                |       | 453,082   |           |  |       | 453,082 |         |  |           |        |         |  |   |        |         |  |   |        |        
|Construction contracts        |                                |       | 12,132    |           |  |       | 12,132  |         |  |           |        |         |  |   |        |         |  |   |        |        
|Other contractual commitments |                                |       | 33,660    |           |  |       | 12,886  |         |  |           | 14,559  |         |  |   | 6,215   |         |  |   |        |        
|Long-term obligations:        |                                |       |           |           |  |       |         |         |  |           |         |         |  |   |         |         |  |   |         |        
|                              | Non qualified retirement plans |       |           | 25,579    |  |       |         | 637     |  |           |         | 3,556   |  |   |         | 6,400   |  |   |         | 14,986  | 
|                              |                                |       |           |           |  |       |         |         |  |           |         |         |  |   |         |         |  |   |         |        
|Total Commitments             |                                | $     | 1,697,236 |           |  | $     | 706,238 |         |  | $         | 363,087 |         |  | $ | 221,098 |         |  | $ | 406,813 |        
|                              |                                |       |           |           |  |       |         |         |  |           |         |         |  |   |         |         |  |   |         |        

Long-Term Debt and Letters of Credit.The Company has a revolving credit
facility with four banks totaling $100.0 million (the
Facility). As shown in the table above, at
January 31, 2004, the Companys outstanding borrowings
under the Facility were $100.0 million. Borrowings under the
Facility are due at various dates between April 2005 and January
2006, subject to annual extensions. Additionally, the Company
has two letter-of-credit agreements used primarily for the
purchase of merchandise inventories totaling
$200.0 million. As noted in the table above,
$102.8 million was outstanding at January 31, 2004.

Operating Leases.The Company conducts the major part of
its operations in leased premises with lease terms expiring at
various dates through 2020. Most store leases provide for base
rentals plus contingent rentals which are a function of sales
volume and provide that the Company pay real estate taxes,
maintenance and other operating expenses applicable to the
leased premises. Included in the schedule above are 43 executed
leases related to future new stores not yet opened at
January 31, 2004. Additionally, included in table above are
leases for both store equipment and other corporate equipment
with lease terms between three and five years.

23



---



##### Table of Contents



Merchandise Purchases.The Company generally makes
merchandise purchase commitments up to six to twelve months in
advance of its selling season. The Company does not maintain any
long-term or exclusive commitments or arrangements to purchase
from any vendor. The table above includes all merchandise
commitments outstanding as of January 31, 2004.

Construction Contracts.The Company enters into contracts to
facilitate the construction and renovations to its stores. The
table above summarizes commitments as of January 31, 2004.
These include contracts with developers for construction and
with suppliers for materials and fixtures. Total capital
expenditures for fiscal 2004 are currently expected to be
approximately $89.0 million, of which $72.0 million is
allocated for store construction and renovation.

Other Contractual Commitments.The Company routinely enters into
contracts with vendors for products and services in the normal
course of operation. These include contracts for maintenance on
equipment, software licenses, services contracts and advertising
contracts. These contracts vary in their terms but generally
carry 30 day to three year terms.

Long-Term Obligations.The Company sponsors non-qualified
retirement benefit plans for certain employees. This includes a
supplemental executive retirement plan (SERP) and a
supplemental 401(k) plan for certain executives impacted by
Internal Revenue Code limits on benefits and compensation.
Additionally, the Company sponsors a deferred compensation plan
that allows members of the Companys management group to
defer a portion of their salary. The Company also provides a
post retirement medical plan, which is available to all
employees. Included in this table are estimates of annual cash
payments under these non-qualified retirement plans.

The Companys pension plan obligations are
excluded from the contractual obligation table above because the
Company has no current requirement under the Employee Retirement
Security Act (ERISA) to contribute to the Plan as
the Company has prepaid its liability for the 2003 and 2004 Plan
years. The Company intends to make a voluntary contribution
during fiscal 2004. The Company believes that the assumptions
used in the calculation of its pension plan obligations, as of
January 31, 2004, are reasonable based on current market
conditions.

Inflation and Changing Prices

The Company believes changes in revenues and net
earnings that have resulted from inflation or deflation have not
been material during the periods presented. There is no
assurance, however, that inflation or deflation will not
materially affect the Company in the future.

Exchange Rates

Most foreign purchase orders are denominated in
U.S. dollars. However, the Company operates 24 stores in Canada
and six stores in the United Kingdom. Each operation generates
sales and incurs expenses in its local currency, however, each
currency is generally stable and these operations represent only
a small portion of total Company operations. Accordingly, the
Company has not experienced any significant impact from changes
in exchange rates.

New Accounting Pronouncements

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46) and its revision FIN 46-R issued in
December 2003. FIN 46 and FIN 46-R address the consolidation of
entities whose equity holders have either not provided
sufficient equity at risk to allow the entity to finance its own
activities or do not possess certain characteristics of a
controlling financial interest. FIN 46 and FIN 46-R require the
consolidation of these entities, known as variable interest
entities (VIEs), by the primary beneficiary of the entity.
The primary beneficiary is the entity, if any, that is subject
to a majority of the risk of loss from the VIEs
activities, entitled to receive a majority of the VIEs
residual returns, or both. FIN 46 and FIN 46-R are applicable
for financial statements of public entities that have interests
in VIEs or potential VIEs referred to as special
purpose entities for periods ending after December 15,
2003, of which the Company had none.

24



---



##### Table of Contents








|         |                                                                
|-------- | ---------------------------------------------------------------
|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 January 31, 2004 and February 1,
2003, the Company had $100.0 million of variable rate
borrowings outstanding under its revolving credit facilities,
which approximate fair market value. At January 31, 2004
and February 1, 2003, the impact of a hypothetical 10%
adverse change in interest rates for this variable rate debt
would not materially affect the Companys results of
operations or cash flow.

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 not material. In addition,
the Company operated 24 stores in Canada and six stores in the
United Kingdom as of the fiscal year end 2003. 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.






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

The report of independent auditors, the
consolidated financial statements of Talbots and the notes to
consolidated financial statements, and the supplementary
financial information called for by this Item 8, are set
forth on pages F-3 to F-28 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 January 31, 2004, February 1, 2003 and
    February 2, 2002             |  |      | F-4 | 
|Consolidated Balance Sheets at January 31,
    2004 and February 1, 2003                                                               |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the 52
    Weeks Ended January 31, 2004, February 1, 2003 and
    February 2, 2002           |  |      | F-6 | 
|Consolidated Statements of Stockholders
    Equity for the 52 Weeks Ended January 31, 2004,
    February 1, 2003 and February 2, 2002 |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                                             |  |      | F-8 | 






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

Not applicable.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

The Companys principal executive officer
and principal financial officer, with the assistance of other
members of the Companys management, have evaluated the
Companys disclosure controls and procedures as of the end
of the period covered by this Annual Report on Form 10-K.
Based on such evaluation, the Companys principal executive
officer and principal financial officer have concluded that the
Companys disclosure controls and procedures are effective.

The Companys principal executive officer
and principal financial officer have concluded that there have
been no changes in the Companys internal control over
financial reporting during the quarter ended January 31,
2004 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting.

25



---



##### Table of Contents



PART III






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

Information concerning Talbots directors under
the caption Election of Directors and information
concerning the Audit Committee and the audit committee
financial expert under the caption Corporate
Governance in Talbots Proxy Statement for Talbots 2004
Annual Meeting of Shareholders, information concerning Talbots
executive officers set forth in Part I, Item 1 above under
the caption Executive Officers of the Company, and
information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in Talbots Proxy
Statement for Talbots 2004 Annual Meeting of Shareholders, are
incorporated herein by reference.

The Company has adopted a Code of Business
Conduct and Ethics (the Code of Ethics) that applies
to the Companys chief executive officer, senior financial
officers and all other Company employees, officers and Board
members. The Code of Ethics is available on the Companys
website, www.talbots.com, under Investor Relations,
and is available in print to any shareholder who requests it.
Any substantive amendment to the Code of Ethics and any waiver
in favor of a Board member or an executive officer will be
publicly disclosed on the Companys website,
www.talbots.com, under Investor Relations.






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

The information set forth under the caption
Executive Compensation, the information concerning
director compensation under the caption Director
Compensation, and the information under the caption
Executive Compensation-Compensation Committee Interlocks
and Insider Participation in Talbots Proxy Statement for
Talbots 2004 Annual Meeting of Shareholders, are each
incorporated herein by reference. The information included under
Report on Compensation of Executive Officers and
Executive Compensation-Performance Graph is not
incorporated by reference 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 in Talbots
Proxy Statement for Talbots 2004 Annual Meeting of Shareholders
is incorporated herein by reference.

The following table sets forth certain
information about the Companys 2003 and 1993 Executive
Stock Based Incentive Plans and the Restated Directors Stock
plan as of January 31, 2004. These plans are the
Companys only equity compensation plans and were all
previously approved by the Companys shareholders.

|                                                               |       |                   |           |                   |  |                      |       |       |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ----------------- | --------- | ----------------- |  | -------------------- | ----- | ----- |  |  | --------- | --------- | 
|                                                               |       | (a)               |           | (b)               |  | (c)                 
|                                                               |       |                   |           |                   |  |                     
|                                                               |       |                   |           |                   |  | Number of Securities
|                                                               |       | Number of         |           |                   |  | Remaining Available 
|                                                               |       | Securities to be  |           | Weighted-Average  |  | for Further Issuance
|                                                               |       | Issued Upon       |           | Exercise Price of |  | Under Equity        
|                                                               |       | Exercise of       |           | Outstanding       |  | Compensation Plans  
|                                                               |       | Outstanding       |           | Options,          |  | (Excluding          
|                                                               |       | Options, Warrants |           | Warrants and      |  | Securities Reflected
|Plan Category                                                  |       | and Rights        |           | Rights            |  | in Column (a))      
|                                                               |       |                   |           |                   |  |                     
|Equity compensation plans approved by security
    holders     |       |                   | 7,111,071 |                   |  | $                    | 25.97 |       |  |  | 6,575,715 |          
|Equity compensation plans not approved by
    security holders |       |                   |          |                   |  |                      |      |       |  |  |          |          
|                                                               |       |                   |           |                   |  |                      |       |       |  |  |           |          
|                                                               | Total |                   |           | 7,111,071         |  |                      | $     | 25.97 |  |  |           | 6,575,715 | 
|                                                               |       |                   |           |                   |  |                      |       |       |  |  |           |          




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 2004 Annual
Meeting of Shareholders is incorporated herein by reference.

26



---



##### Table of Contents








|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information regarding auditors fees and
services and the Companys pre-approval policies and
procedures for audit and non-audit services to be provided by
the Companys independent auditors are set forth under the
heading Ratification of Appointment of Independent
Auditors  in the Companys Proxy Statement for the
2004 Annual Meeting of Shareholders is incorporated herein by
reference.

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 January 31, 2004, February 1, 2003 and
    February 2, 2002            
|
| | Consolidated Balance Sheets at January 31,
    2004 and February 1, 2003                                                              
|
| | Consolidated Statements of Cash Flows for the 52
    Weeks Ended January 31, 2004, February 1, 2003 and
    February 2, 2002          
|
| | Consolidated Statements of Stockholders
    Equity for the 52 Weeks Ended January 31, 2004,
    February 1, 2003 and February 2, 2002
|
| | 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)(11)(13)
| | 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., Inc.(2)                                                                                             
| | 10.2 |  |  | Revolving Credit Agreement, dated as of January
    25, 1994, between Talbots and The Bank of Tokyo-Mitsubishi Trust
    Company, as amended.(2)(4)(7)(18)                                      
| | 10.3 |  |  | Revolving Credit Agreement, dated as of January
    25, 1994, between Talbots and The Norinchukin Bank, as
    amended.(2)(6)(7)(16)                                                            
| | 10.4 |  |  | Revolving Credit Agreement, dated as of January
    25, 1994, between Talbots and Sumitomo Mitsui Banking
    Corporation (formerly The Sakura Bank, Limited), as
    amended.(2)(6)(10)(14)(18)
| | 10.5 |  |  | Credit Agreement between Talbots and The Bank of
    Tokyo-Mitsubishi, Ltd., dated as of April 17, 1998, as
    amended.(6)(16)                                                                 

27



---



##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                            
| | -- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .6  |  | Letter Agreement, dated as of March 1, 2004,
    concerning credit facilities, between Talbots and Fleet National
    Bank.(19)                                                                                            
| | 10 | .7  |  | Letter Agreement, dated August 11, 1998,
    concerning credit facilities, between HSBC Corporate Banking,
    Marine Midland Bank and Talbots.(17)                                                                        
| | 10 | .8  |  | 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 | .9  |  | Services Agreement, dated as of November 18,
    1993, between Talbots Japan Co., Ltd. and Talbots.(2)                                                                                                                     
| | 10 | .10 |  | Stock Purchase Agreement, dated as of November
    26, 1993, between Talbots and AEON U.S.A.(2)                                                                                                                            
| | 10 | .11 |  | 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 | .12 |  | 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 | .13 |  | The Talbots, Inc. Pension Plan for Salaried
    Employees, as amended and restated January 1, 1989, including
    amendments through January 1, 1994.(3)*                                                                  
| | 10 | .14 |  | The Talbots, Inc. Retirement Savings Voluntary
    Plan, as amended and restated, effective as of November 1,
    1993.(2)(3)(10)*                                                                                         
| | 10 | .15 |  | Services Agreement, dated as of October 29, 1989,
    between Talbots and AEON U.S.A.(3)                                                                                                                                   
| | 10 | .16 |  | 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 | .17 |  | The Talbots, Inc. Supplemental Retirement Plan,
    as amended.(1)(2)(12)*                                                                                                                                                 
| | 10 | .18 |  | The Talbots, Inc. Supplemental Savings Plan, as
    amended.(1)(2)(12)*                                                                                                                                                    
| | 10 | .19 |  | The Talbots, Inc. Deferred Compensation Plan, as
    amended.(1)(2)(12)*                                                                                                                                                   
| | 10 | .20 |  | The Talbots, Inc. Amended and Restated 1993
    Executive Stock Based Incentive Plan.(13)*                                                                                                                                 
| | 10 | .21 |  | 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 | .22 |  | Change in Control Agreements between Talbots and
    certain officers of Talbots.(2)(3)*                                                                                                                                   
| | 10 | .23 |  | Consulting and Advisory Services Contract between
    AEON (U.S.A.), Inc. and Talbots dated as of November 1, 1999.(8)                                                                                                     
| | 10 | .24 |  | The Talbots, Inc. Restated Directors Stock Plan
    dated May 25, 2000.(11)*                                                                                                                                               
| | 10 | .25 |  | Revolving Loan Credit Agreement, dated April 17,
    2003, between Mizuho Corporate Bank, Ltd. and Talbots.(16)                                                                                                            
| | 10 | .26 |  | Employment Agreement, dated January 30, 2003,
    between Harold B. Bosworth and Talbots.(16)                                                                                                                              
| | 10 | .27 |  | The Talbots, Inc. 2003 Executive Stock Based
    Incentive Plan.(15)                                                                                                                                                       
| | 10 | .28 |  | Revolving Loan Credit Agreement, dated January
    28, 2004, between Talbots and Mizuho Corporate Bank, Ltd.(18)                                                                                                           
| | 10 | .29 |  | Amended Share Repurchase Program, dated as of
    March 31, 2004, between Talbots and AEON (U.S.A.), Inc.(19)                                                                                                              



---



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

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

| |    |    |  |                                                                                                                                                                                            
| | -- | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 11 | .1 |  | Incorporated by reference to Note 15, Net
    Income Per Share, of Talbots consolidated financial
    statements for the fiscal year ended January 31, 2004, included
    in this Report.

28



---



##### 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 January 31, 2004,
    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 (File No. 001-12552)
    dated April 26, 1994.                                                          
|
| | 3 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K (File No. 001-12552)
    dated April 27, 1995.                                                          
|
| | 4 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K (File No. 001-12552)
    dated December 23, 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 29, 1999.                                                                                   
|
| | 8 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated July 1, 1999.                                                                                     
|
| | 9 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated November 24,
    1999.                                                                            



|   |                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------
|10 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated April 25, 2000.       
|  
|11 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated June 12, 2000.        
|  
|12 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated April 12, 2001.       
|  
|13 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated September 6,
    2001.
|  
|14 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated March 13, 2003.       
|  
|15 | Incorporated by reference to the exhibits filed
    with Talbots 2003 Proxy Statement dated April 22, 2003.     
|  
|16 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated July 24, 2003.        
|  
|17 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated December 19,
    2003.
|  
|18 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated February 24,
    2004.
|  
|19 | Incorporated by reference to the exhibits filed
    with Current Report on Form 8-K dated April 1, 2004.        

(b) Reports on Form 8-K:



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. The Company furnished a Current Report on
    Form 8-K on November 6, 2003, relating to its sales
    results for October 2003. *                  
|
| | 2. The Company furnished a Current Report on
    Form 8-K on November 19, 2003, relating to its
    financial results for the third quarter of 2003. *

29



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. The Company filed a Current Report on
    Form 8-K on December 19, 2003, relating to a renewal
    of its Letter of Credit Facility with The Hongkong and Shanghai
    Banking Corporation Limited dated October 9, 2003.                                                                                                                                                                
|
| | 4. The Company furnished a Current Report on
    Form 8-K on January 8, 2004, relating to its sales
    results for December 2003.*                                                                                                                                                                                                                                                         
|
| | 5. The Company furnished a Current Report on
    Form 8-K on February 5, 2004, relating to its sales
    results for January 2004.*                                                                                                                                                                                                                                                         
|
| | 6. The Company filed a Current Report on
    Form 8-K on February 24, 2004, relating to an
    extension of its Revolving Credit Agreement with the Bank of
    Tokyo-Mitsubishi Trust Company, an amendment to its Revolving
    Credit Agreement with Sumitomo Mitsui Banking Corporation and
    its entering into a Revolving Loan Credit Agreement with Mizuho
    Corporate Bank, Ltd.
|
| | 7. The Company furnished a Current Report on
    Form 8-K on March 10, 2004, relating to its financial
    results for the fourth quarter and full fiscal year of 2003.*                                                                                                                                                                                                                    
|
| | 8. The Company filed a Current Report on
    Form 8-K on April 1, 2004, relating to the renewal of
    a Letter Agreement with Fleet National Bank and an Amended Share
    Repurchase Program Agreement with Aeon U.S.A.                                                                                                                                                                   



---



|  |                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Information furnished with a
    Form 8-K is not incorporated by reference, is not deemed
    filed and is not subject to liability under Section 11 of
    the Securities Act of 1933 or Section 18 of the Securities
    Exchange Act of 1934.

30



---



##### 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 14, 2004



| |                  
| | -----------------
| | 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 14, 2004.

|                                                                                                                                                                                                        |  |  |  |                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | -------------------------------------------------------------------------------------------------------
|/s/ ARNOLD B. ZETCHER
    -----------------------------------------------------
    Arnold B. ZetcherChairman of the Board, President
    and Chief Executive Officer
    (Principal Executive Officer) |  |  |  | -----------------------------------------------------
    Gary M. PfeifferDirector                     
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|-----------------------------------------------------
    John W. GleesonDirector                                                                                                                       |  |  |  | /s/ SUSAN M. SWAIN
    -----------------------------------------------------
    Susan M. SwainDirector
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|/s/ ELIZABETH T. KENNAN
    -----------------------------------------------------
    Elizabeth T. KennanDirector                                                                                       |  |  |  | -----------------------------------------------------
    Toshiji TokiwaDirector                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|/s/ YOICHI KIMURA
    -----------------------------------------------------
    Yoichi KimuraDirector                                                                                                   |  |  |  | /s/ ISAO TSURUTA
    -----------------------------------------------------
    Isao TsurutaDirector    
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|-----------------------------------------------------
    Motoya OkadaDirector                                                                                                                          |  |  |  |                                                                                                        

31



---



##### 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 January 31, 2004, February 1, 2003 and
    February 2, 2002             |  |      | F-4 | 
|Consolidated Balance Sheets at January 31,
    2004 and February 1, 2003                                                               |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the 52
    Weeks Ended January 31, 2004, February 1, 2003 and
    February 2, 2002           |  |      | F-6 | 
|Consolidated Statements of Stockholders
    Equity for the 52 Weeks Ended January 31, 2004, February 1,
    2003 and February 2, 2002 |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                                             |  |      | F-8 | 

F-1



---



##### 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. The Companys control system is enhanced by a
formal Code of Business Conduct and Ethics that establishes
standards for professional conduct and integrity for all Talbots
employees. These policies demand high ethical conduct from all
employees. We also maintain an internal audit program that
independently evaluates and reports to management and the Audit
Committee on the adequacy and effectiveness of our internal
controls.

The Audit Committee of the Board of Directors,
consisting entirely 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.

It is managements opinion that the
Companys policies and procedures and the system of
internal controls currently in place provide reasonable
assurance that operations are managed in a reasonable and
professional manner and with the highest standard of business
conduct.

|                                                                                                                         |  |                                                                                                                   
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------
|                                                                                                                        
|-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



---



##### 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
January 31, 2004 and February 1, 2003, and the related
consolidated statements of earnings, stockholders equity,
and cash flows for each of the three years in the period ended
January 31, 2004. 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 January 31, 2004 and February 1, 2003 and the
results of their operations and their cash flows for each of the
three years in the period ended January 31, 2004, 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

April 14, 2004


Boston, Massachusetts


F-3



---



##### Table of Contents



THE TALBOTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Dollar amounts in thousands except per share
data


|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |         | 
|-------------------------------------------------------------------------------- | ----------------------------------- | ----------- | --------- | ----------- |  | ----------- | --------- | ------- |  | - | --------- | ------- | 
|                                                                                 |                                     |            
|                                                                                 |                                     | Year Ended 
|                                                                                 |                                     |            
|                                                                                 |                                     | January 31, |           | February 1, |  | February 2,
|                                                                                 |                                     | 2004        |           | 2003        |  | 2002       
|                                                                                 |                                     |             |           |             |  |            
|Net Sales                                                                        |                                     | $           | 1,624,339 |             |  | $           | 1,595,325 |         |  | $ | 1,612,513 |        
|Costs and Expenses                                                               |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                 | Cost of sales, buying and occupancy |             |           | 1,001,684   |  |             |           | 963,501 |  |   |           | 967,163 | 
|                                                                                 | Selling, general and administrative |             |           | 453,067     |  |             |           | 435,757 |  |   |           | 435,334 | 
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        
|Operating Income                                                                 |                                     |             | 169,588   |             |  |             | 196,067   |         |  |   | 210,016   |        
|Interest                                                                         |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                 | Interest expense                    |             |           | 2,402       |  |             |           | 3,262   |  |   |           | 6,102   | 
|                                                                                 | Interest income                     |             |           | 307         |  |             |           | 409     |  |   |           | 927     | 
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        
|Interest Expense  net                                                           |                                     |             | 2,095     |             |  |             | 2,853     |         |  |   | 5,175     |        
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        
|Income Before Taxes                                                              |                                     |             | 167,493   |             |  |             | 193,214   |         |  |   | 204,841   |        
|Income Taxes                                                                     |                                     |             | 62,810    |             |  |             | 72,455    |         |  |   | 77,840    |        
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        
|Net Income                                                                       |                                     | $           | 104,683   |             |  | $           | 120,759   |         |  | $ | 127,001   |        
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        
|Net Income Per Share                                                             |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                 | Basic                               |             | $         | 1.85        |  |             | $         | 2.06    |  |   | $         | 2.07    | 
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                 | Assuming Dilution                   |             | $         | 1.81        |  |             | $         | 2.01    |  |   | $         | 2.00    | 
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        
|Weighted Average Number of Shares of Common Stock
    Outstanding (in thousands) |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                 | Basic                               |             |           | 56,531      |  |             |           | 58,724  |  |   |           | 61,459  | 
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        
|                                                                                 | Assuming Dilution                   |             |           | 57,901      |  |             |           | 60,191  |  |   |           | 63,439  | 
|                                                                                 |                                     |             |           |             |  |             |           |         |  |   |           |        

See notes to consolidated financial statements.

F-4



---



##### Table of Contents



THE TALBOTS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Dollar amounts in thousands except share
data


|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |          |         | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | ----------- | ------- | - | ------- | -------- | ------- | 
|                                           |                                                                                                                                                                                                        | January 31,                |         | February 1,
|                                           |                                                                                                                                                                                                        | 2004                       |         | 2003       
|                                           |                                                                                                                                                                                                        |                            |         |            
|ASSETS                                    
|Current Assets:                            |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           | Cash and cash equivalents                                                                                                                                                                              |                            | $       | 85,655      |         |   | $       | 25,566   |        
|                                           | Customer accounts receivable  net                                                                                                                                                                     |                            |         | 182,686     |         |   |         | 181,189  |        
|                                           | Merchandise inventories                                                                                                                                                                                |                            |         | 170,447     |         |   |         | 175,289  |        
|                                           | Deferred catalog costs                                                                                                                                                                                 |                            |         | 4,449       |         |   |         | 5,877    |        
|                                           | Due from affiliates                                                                                                                                                                                    |                            |         | 10,046      |         |   |         | 8,793    |        
|                                           | Deferred income taxes                                                                                                                                                                                  |                            |         | 13,664      |         |   |         | 10,255   |        
|                                           | Prepaid and other current assets                                                                                                                                                                       |                            |         | 29,207      |         |   |         | 28,929   |        
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           |                                                                                                                                                                                                        | Total current assets       |         |             | 496,154 |   |         |          | 435,898 | 
|Property and Equipment  net               |                                                                                                                                                                                                        |                            | 337,417 |             |         |   | 315,227 |         
|Goodwill  net                             |                                                                                                                                                                                                        |                            | 35,513  |             |         |   | 35,513  |         
|Trademarks  net                           |                                                                                                                                                                                                        |                            | 75,884  |             |         |   | 75,884  |         
|Other Assets                               |                                                                                                                                                                                                        |                            | 13,424  |             |         |   | 9,403   |         
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|Total Assets                               |                                                                                                                                                                                                        | $                          | 958,392 |             |         | $ | 871,925 |         
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current Liabilities:                       |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           | Accounts payable                                                                                                                                                                                       |                            | $       | 50,058      |         |   | $       | 48,365   |        
|                                           | Accrued income taxes                                                                                                                                                                                   |                            |         | 15,043      |         |   |         | 11,590   |        
|                                           | Accrued liabilities                                                                                                                                                                                    |                            |         | 101,041     |         |   |         | 87,986   |        
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           |                                                                                                                                                                                                        | Total current liabilities  |         |             | 166,142 |   |         |          | 147,941 | 
|Long-term debt                             |                                                                                                                                                                                                        |                            | 100,000 |             |         |   | 100,000 |         
|Deferred rent under lease commitments      |                                                                                                                                                                                                        |                            | 23,897  |             |         |   | 20,688  |         
|Deferred income taxes                      |                                                                                                                                                                                                        |                            | 10,540  |             |         |   | 2,921   |         
|Other liabilities                          |                                                                                                                                                                                                        |                            | 41,687  |             |         |   | 32,699  |         
|Commitments                                |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|Stockholders Equity:                      |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           | Common stock, $0.01 par value; 200,000,000
    authorized; 76,245,075 shares and 75,270,013 shares issued,
    respectively, and 56,675,506 shares and 57,505,802 shares
    outstanding, respectively |                            |         | 762         |         |   |         | 753      |        
|                                           | Additional paid-in capital                                                                                                                                                                             |                            |         | 411,874     |         |   |         | 389,402  |        
|                                           | Retained earnings                                                                                                                                                                                      |                            |         | 655,288     |         |   |         | 572,741  |        
|                                           | Accumulated other comprehensive loss                                                                                                                                                                   |                            |         | (14,601     | )       |   |         | (15,437  | )      
|                                           | Restricted stock awards                                                                                                                                                                                |                            |         | (6,154      | )       |   |         | (78      | )      
|                                           | Treasury stock, at cost: 19,569,569 shares and
    17,764,211 shares, respectively                                                                                                                     |                            |         | (431,043    | )       |   |         | (379,705 | )      
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|                                           |                                                                                                                                                                                                        | Total stockholders equity |         |             | 616,126 |   |         |          | 567,676 | 
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         
|Total Liabilities and Stockholders Equity |                                                                                                                                                                                                        | $                          | 958,392 |             |         | $ | 871,925 |         
|                                           |                                                                                                                                                                                                        |                            |         |             |         |   |         |         

See notes to consolidated financial statements.

F-5



---



##### Table of Contents



THE TALBOTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Dollar amounts in thousands


|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |          |         |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------- | ------- | ----------- | ------ | ----------- | -------- | -------- | ------ | - | -------- | -------- | ------- | -
|                                                                                      |                                                                          |                                 
|                                                                                      |                                                                          | Year Ended                      
|                                                                                      |                                                                          |                                 
|                                                                                      |                                                                          | January 31,                      |         | February 1, |        | February 2,
|                                                                                      |                                                                          | 2004                             |         | 2003        |        | 2002       
|                                                                                      |                                                                          |                                  |         |             |        |            
|CASH FLOWS FROM OPERATING
    ACTIVITIES:                                             |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|Net income                                                                            |                                                                          | $                                | 104,683 |             |        | $           | 120,759  |          |        | $ | 127,001  |         
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|                                                                                      | Depreciation and amortization                                            |                                  |         | 65,893      |        |             |          | 59,113   |        |   |          | 53,461   |        
|                                                                                      | Deferred rent                                                            |                                  |         | 3,170       |        |             |          | 1,136    |        |   |          | (218     | )      
|                                                                                      | Amortization of restricted stock awards and other
    stock transactions |                                  |         | 1,616       |        |             |          | 634      |        |   |          | 634      |        
|                                                                                      | Loss on disposal of property and equipment                               |                                  |         | 1,615       |        |             |          | 3,021    |        |   |          | 3,795    |        
|                                                                                      | Tax benefit from options exercised                                       |                                  |         | 4,658       |        |             |          | 4,870    |        |   |          | 5,498    |        
|                                                                                      | Deferred income taxes                                                    |                                  |         | 5,519       |        |             |          | 11,901   |        |   |          | 4,170    |        
|                                                                                      | Changes in other assets                                                  |                                  |         | (4,021      | )      |             |          | (469     | )      |   |          | (2,691   | )      
|                                                                                      | Change in other liabilities                                              |                                  |         | 6,086       |        |             |          | 728      |        |   |          | 21       |        
|                                                                                      | Changes in current assets and liabilities:                               |                                  |         |             |        |             |          |          |        |   |          |          |        
|                                                                                      |                                                                          | Customer accounts receivable     |         |             | (1,373 | )           |          |          | (8,938 | ) |          |          | (36,703 | )
|                                                                                      |                                                                          | Merchandise inventories          |         |             | 5,403  |             |          |          | 8,913  |   |          |          | 49,837  |  
|                                                                                      |                                                                          | Deferred catalog costs           |         |             | 1,428  |             |          |          | 2,464  |   |          |          | 895     |  
|                                                                                      |                                                                          | Due from affiliates              |         |             | (1,253 | )           |          |          | 825    |   |          |          | (740    | )
|                                                                                      |                                                                          | Prepaid and other current assets |         |             | 95     |             |          |          | (712   | ) |          |          | (1,072  | )
|                                                                                      |                                                                          | Accounts payable                 |         |             | 1,654  |             |          |          | (569   | ) |          |          | (33,330 | )
|                                                                                      |                                                                          | Income taxes payable             |         |             | 3,458  |             |          |          | 10,569 |   |          |          | 1,019   |  
|                                                                                      |                                                                          | Accrued liabilities              |         |             | 12,730 |             |          |          | 8,138  |   |          |          | (12,270 | )
|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|                                                                                      | Net cash provided by operating
    activities                            |                                  |         | 211,361     |        |             |          | 222,383  |        |   |          | 159,307  |        
|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|CASH FLOWS FROM INVESTING
    ACTIVITIES:                                             |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|Additions to property and equipment                                                   |                                                                          |                                  | (89,505 | )           |        |             | (99,155  | )        |        |   | (97,445  | )       
|Proceeds from disposal of property and equipment                                      |                                                                          |                                  | 900     |             |        |             | 6        |          |        |   | 895      |         
|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|                                                                                      | Net cash used in investing
    activities                                |                                  |         | (88,605     | )      |             |          | (99,149  | )      |   |          | (96,550  | )      
|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                                             |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|Proceeds from options exercised                                                       |                                                                          |                                  | 10,132  |             |        |             | 5,567    |          |        |   | 7,143    |         
|Cash dividends                                                                        |                                                                          |                                  | (22,136 | )           |        |             | (20,612  | )        |        |   | (19,207  | )       
|Purchase of treasury stock                                                            |                                                                          |                                  | (51,338 | )           |        |             | (101,488 | )        |        |   | (102,113 | )       
|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|                                                                                      | Net cash used in financing
    activities                                |                                  |         | (63,342     | )      |             |          | (116,533 | )      |   |          | (114,177 | )      
|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|EFFECT OF EXCHANGE RATE CHANGES ON
    CASH                                           |                                                                          |                                  | 675     |             |        |             | 559      |          |        |   | (260     | )       
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                              |                                                                          |                                  | 60,089  |             |        |             | 7,260    |          |        |   | (51,680  | )       
|CASH AND CASH EQUIVALENTS, BEGINNING OF
    YEAR                                      |                                                                          |                                  | 25,566  |             |        |             | 18,306   |          |        |   | 69,986   |         
|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         
|CASH AND CASH EQUIVALENTS, END OF
    YEAR                                            |                                                                          | $                                | 85,655  |             |        | $           | 25,566   |          |        | $ | 18,306   |         
|                                                                                      |                                                                          |                                  |         |             |        |             |          |          |        |   |          |         

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 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, net of tax |            |            |  |          |     |               |  |             |         |          |  |               |         |               |        |        |         |   | (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 |         
|                            | Cash dividends paid                            |                                                 |            |           |   |          |     |              |   |             |         |         |   |               |         | (22,136       | )       |        |         |  |         |   |        |       |   |   |          |         |   |  |   |         |         |   |         | (22,136  | )      
|                            | Common stock issued as restricted stock award  |                                                 |            | 307,125    |   |          |     | 3             |   |             |         | 7,677    |   |               |         |              |         |        |         |  |         |   |        | (7,677 | ) |   |          |         |   |  |   |         |         |   |         | 3        |        
|                            | Amortization of restricted stock awards        |                                                 |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        | 1,601  |   |   |          |         |   |  |   |         |         |   |         | 1,601    |        
|                            | Stock options exercised, including tax benefit |                                                 |            | 667,523    |   |          |     | 6             |   |             |         | 14,783   |   |               |         |              |         |        |         |  |         |   |        |       |   |   |          |         |   |  |   |         |         |   |         | 14,789   |        
|                            | Purchase of 1,805,358 shares of common stock   |                                                 |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        |       |   |   |          | (51,338  | ) |  |   |         |         |   |         | (51,338  | )      
|                            | Other equity transactions                      |                                                 |            | 414        |   |          |     |              |   |             |         | 12       |   |               |         |              |         |        |         |  |         |   |        |       |   |   |          |         |   |  |   |         |         |   |         | 12       |        
|                            | Comprehensive income:                          |                                                 |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |        |   |   |          |          |   |  |   |         |         |   |         |          |        
|                            |                                                | Net income                                      |            |            |  |          |     |               |  |             |         |          |  |               |         |               | 104,683 |        |         |   |        |   |        |        |  |   |          |          |  |  |   |         | 104,683 |   |         |          | 104,683 |  
|                            |                                                | Translation adjustment                          |            |            |  |          |     |               |  |             |         |          |  |               |         |               |        |        |         |   | 2,577   |   |        |        |  |   |          |          |  |  |   |         | 2,577   |   |         |          | 2,577   |  
|                            |                                                | Change in minimum pension liability, net of tax |            |            |  |          |     |               |  |             |         |          |  |               |         |               |        |        |         |   | (1,741  | ) |        |        |  |   |          |          |  |  |   |         | (1,741  | ) |         |          | (1,741  | )
|                            |                                                |                                                 |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |        |   |   |          |          |   |  |   |         |         |   |         |         
|                            | Comprehensive income                           |                                                 |            |           |   |          |     |              |   |             |         |         |   |               |         |              |         |        |         |  |         |   |        |       |   |   |          |         |   |  | $ | 105,519 |         |   |         |          |        
|                            |                                                |                                                 |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |        |   |   |          |          |   |  |   |         |         |   |         |         
|Balance at January 31, 2004 |                                                |                                                 | 76,245,075 |            |   | $        | 762 |               |   | $           | 411,874 |          |   | $             | 655,288 |               |         | $      | (14,601 | ) |         | $ | (6,154 | )      |   | $ | (431,043 | )        |   |  |   |         |         | $ | 616,126 |         
|                            |                                                |                                                 |            |            |   |          |     |               |   |             |         |          |   |               |         |               |         |        |         |   |         |   |        |        |   |   |          |          |   |  |   |         |         |   |         |         

See notes to consolidated financial statements.

F-7



---



##### 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., 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. The
Companys products are sold through its 977 retail stores,
its 26 catalogs and online through its website, www.talbots.com.
AEON (U.S.A.), Inc. (AEON U.S.A.), is the
Companys majority shareholder, owning approximately 57.7%
of the Companys outstanding common stock at
January 31, 2004.

The years ended January 31, 2004,
February 1, 2003 and February 2, 2002 were fifty-two
week reporting periods. 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 inventory markdown
reserve, sales return reserve, accruals for customer loyalty
program, retirement plan obligations, allowance for doubtful
accounts and income tax accruals.

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 proprietary credit card, net of an allowance for
doubtful accounts. The Talbots charge card program is
administered through Talbots Classics National Bank and Talbots
Classics Finance Company, Inc., both wholly owned subsidiaries.
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. On-going credit evaluation of
each cardholders financial position is 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.

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.

F-8



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


Advertising Advertising
costs, which include media, production and catalogs, totaled
$62,138, $62,286 and $70,807 for the years ended January 31,
2004, February 1, 2003 and February 2, 2002,
respectively. Media and production costs are expensed in the
period in which the advertising first takes place, while catalog
costs are amortized over the estimated productive selling life
of the catalog, which is generally one to five 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    |  |       | 420                              | 

Leasehold interests were established in 1988 in
connection with the acquisition of the Company and represent the
present value of the excess of market rental rates over actual
rents payable over the remaining lives of the related leases.

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

Deferred Rent
Obligations Rent
expense under non-cancelable operating leases with scheduled
rent increases and landlord incentives are accounted for on a
straight-line basis over the lease term. The excess of
straight-line rent expense over scheduled payment amounts and
landlord incentives is recorded as a deferred liability.

Goodwill Goodwill
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.

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.

Fair Value of Financial
Instruments The
Companys financial instruments consist primarily of cash,
accounts receivable, accounts payable and long-term debt. The
carrying value of current assets and current

F-9



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


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 record 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
|                                                                                                                            |  |                  
|                                                                                                                            |  | January 31,       |         | February 2, |  | February 1,
|                                                                                                                            |  | 2004              |         | 2002        |  | 2003       
|                                                                                                                            |  |                   |         |             |  |            
|Reported net income                                                                                                         |  | $                 | 104,683 |             |  | $           | 120,759 |   |  | $ | 127,001 |  
|Add: stock-based compensation expense included in
    reported net income, net of related tax effects                       |  |                   | 880     |             |  |             | 345     |   |  |   | 378     |  
|Deduct: total stock-based compensation expense
    determined under fair value based method, net of related tax
    effects |  |                   | (13,707 | )           |  |             | (19,004 | ) |  |   | (15,439 | )
|                                                                                                                            |  |                   |         |             |  |             |         |   |  |   |         |  
|Proforma net income                                                                                                         |  | $                 | 91,856  |             |  | $           | 102,100 |   |  | $ | 111,940 |  
|                                                                                                                            |  |                   |         |             |  |             |         |   |  |   |         |  
|Earnings per share:                                                                                                         |  |                   |         |             |  |             |         |   |  |   |         |  
|Basic-as reported                                                                                                           |  | $                 | 1.85    |             |  | $           | 2.06    |   |  | $ | 2.07    |  
|                                                                                                                            |  |                   |         |             |  |             |         |   |  |   |         |  
|Basic-pro forma                                                                                                             |  | $                 | 1.62    |             |  | $           | 1.74    |   |  | $ | 1.82    |  
|                                                                                                                            |  |                   |         |             |  |             |         |   |  |   |         |  
|Diluted-as reported                                                                                                         |  | $                 | 1.81    |             |  | $           | 2.01    |   |  | $ | 2.00    |  
|                                                                                                                            |  |                   |         |             |  |             |         |   |  |   |         |  
|Diluted-pro forma                                                                                                           |  | $                 | 1.59    |             |  | $           | 1.70    |   |  | $ | 1.76    |  
|                                                                                                                            |  |                   |         |             |  |             |         |   |  |   |         |  

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
2003, 2002 and 2001 were $11.59, $19.69 and $28.97 per option,
respectively. Key assumptions used to apply this pricing model
are as follows:

|                                                                                                             |  |             |            |             |  |             |            |  |  |  |            | 
|------------------------------------------------------------------------------------------------------------ |  | ----------- | ---------- | ----------- |  | ----------- | ---------- |  |  |  | ---------- | 
|                                                                                                             |  | January 31, |            | February 1, |  | February 2,
|                                                                                                             |  | 2004        |            | 2003        |  | 2002       
|                                                                                                             |  |             |            |             |  |            
|Weighted average risk free interest rate                                                                     |  |             | 4.0%       |             |  |             | 5.2%       |  |  |  | 5.0%       | 
|Weighted average expected life of option grants                                                              |  |             | 6.15 years |             |  |             | 6.25 years |  |  |  | 6.25 years | 
|Weighted average expected volatility of
    underlying stock                                                 |  |             | 50.0%      |             |  |             | 58.0%      |  |  |  | 67.5%      | 
|Weighted average expected dividend payment rate,
    as a percentage of the stock price on the date of grant |  |             | 1.5%       |             |  |             | 1.0%       |  |  |  | 0.7%       | 

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. At January 31, 2004 and
February 1, 2003, the market value was $13.4 million,
and $9.4 million, respectively, and is included in Other
Assets on the Consolidated Balance Sheet.

F-10



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


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 exchange rates throughout 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, Accounting for Income
Taxes, 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
anticipated tax rates that will be in place when such temporary
differences are 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, a credit 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 includes the tax benefit on
assumed stock option exercises and assumed vesting of restricted
stock).

Comprehensive
Income The
Companys accumulated comprehensive 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). Accumulated
comprehensive income is included in the Consolidated Balance
Sheets and Consolidated Statements of Stockholders Equity.
At January 31, 2004, the balance of accumulated
comprehensive income included cumulative foreign currency
translation gains of $1,583 and a cumulative minimum pension
liability (net of tax) of $13,018. At February 1, 2003, the
balance of accumulated comprehensive income included cumulative
foreign currency translation loss of $4,161 and the cumulative
minimum pension liability (net of tax) of $11,276.

Revenue Recognition The Company recognizes revenue at
the point-of-sale or, in the case of catalog and online 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 January 31, 2004, February 1,
2003 and February 2, 2002 was $2,498, $3,360 and $6,787,
respectively. Income tax payments during the years ended
January 31, 2004, February 1, 2003 and
February 2, 2002 were $48,115, $45,566 and $68,626,
respectively. At January 31, 2004, the Company recorded an
additional minimum pension liability of $2,902, offset by a
charge to equity of $1,741, net of tax. At February 1,
2003, the Company recorded an additional minimum pension
liability of $18,617, offset by a charge to equity, net of tax,
of $11,276. No charge was necessary at February 2, 2002.

New Accounting
Pronouncements The
Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), in January 2003, and its
revision FIN 46-R in December 2003. FIN 46 and FIN 46-R address
the consolidation of entities whose equity holders have either
not provided sufficient equity at risk to allow the entity to
finance its own activities or do not possess certain
characteristics of a controlling financial interest. FIN 46 and
FIN 46-R require the consolidation of these entities, known as
variable interest entities (VIEs), by the primary
beneficiary of the entity. The primary beneficiary is the
entity, if any, that is subject to a majority of the risk of
loss from the VIEs activities, entitled to receive a
majority of the VIEs residual returns, or both. FIN 46 and
FIN 46-R are

F-11



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


applicable for financial statements of public
entities that have interests in VIEs or potential
VIEs referred to as special purpose entities for periods
ending after December 15, 2003, of which the Company had
none.

Reclassifications Certain
reclassifications have been made to the February 1, 2003
and February 2, 2002 financial statements to conform with
the January 31, 2004 presentation.

3.     Goodwill and
Other Intangible Assets

On February 3, 2002, the Company adopted
Financial Accounting Standards Board (FASB) 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 trademarks and the assets
fair values were reviewed for impairment. The transition and
annual impairment test noted no impairment of the recorded
goodwill or trademarks. The balance of the Companys
goodwill and trademark assets at January 31, 2004 and
February 1, 2003 were $35,513 and $75,884, respectively.
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
|                                                                           |  |                  
|                                                                           |  | January 31,       |         | February 1, |  | February 2,
|                                                                           |  | 2004              |         | 2003        |  | 2002       
|                                                                           |  |                   |         |             |  |            
|Reported net income                                                        |  | $                 | 104,683 |             |  | $           | 120,759 |  |  | $ | 127,001 | 
|Add: goodwill and trademark amortization, net of
    tax                   |  |                   |        |             |  |             |        |  |  |   | 2,822   | 
|                                                                           |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted net income                                                        |  | $                 | 104,683 |             |  | $           | 120,759 |  |  | $ | 129,823 | 
|                                                                           |  |                   |         |             |  |             |         |  |  |   |         | 
|Reported diluted earnings per share                                        |  | $                 | 1.81    |             |  | $           | 2.01    |  |  | $ | 2.00    | 
|Add: goodwill and trademark amortization, net of
    tax per diluted share |  |                   |        |             |  |             |        |  |  |   | .04     | 
|                                                                           |  |                   |         |             |  |             |         |  |  |   |         | 
|Adjusted diluted earnings per share                                        |  | $                 | 1.81    |             |  | $           | 2.01    |  |  | $ | 2.04    | 
|                                                                           |  |                   |         |             |  |             |         |  |  |   |         | 

4.     Equity
Transactions

During the years ended January 31, 2004,
February 1, 2003 and February 2, 2002, the Company
declared and paid dividends totaling $0.39 per share, $0.35 per
share and $0.31 per share, respectively.

In 2000, the Companys Board of Directors
authorized and effected 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.

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 2003, the Company
repurchased 1,748,018 shares of the Companys common stock
under its repurchase program at an average price per share of
$28.60. This completed the $50.0 million repurchase program
authorized by the Board of Directors in October 2002. During
2002, the Company repurchased 3,165,697 shares of the
Companys common stock under its repurchase program at an
average price per share of $31.59. On March 8, 2004, the
Company announced that its Board of Directors approved an
additional 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. At January 31, 2004 and
February 1, 2003, the Company held 19,569,569 and
17,764,211 shares, respectively, as treasury shares. Treasury
shares also include shares forfeited under the Companys
restricted stock grants under its 1993 and 2003 executive stock
based incentive plans (the Plans).

F-12



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


5.     Stock
Options

In 1993, the Company reserved 5,300,000 shares of
common stock for issuance pursuant to the 1993 Executive Stock
Based Incentive Plan (the 1993 Plan). In 1998 and
2002, the 1993 Plan was amended with shareholder approval to
increase the number of authorized shares of common stock by
6,620,000 and 300,000 shares, respectively, to 12,220,000
shares. In 2003, the Companys Board of Directors and
shareholders approved the adoption of the 2003 Executive Based
Incentive Plan (the 2003 Plan). In accordance with
the 2003 Plan, the maximum number of shares of common stock that
may be issued may be not more than 7,000,000 shares of common
stock; any authorized but unissued shares of common stock
available for future awards under the 1993 Plan were added to
the 2003 Plan and any shares under outstanding awards under the
1993 Plan which may be forfeited, settled in cash, expired,
canceled or otherwise become available to the Company. In
accordance with the 1993 Plan and the 2003 Plan (the
Plans), the Company issued stock options which
generally 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. At
January 31, 2004 and February 1, 2003, there were
6,006,199 shares and 60,632 shares, respectively, available for
grant under these Plans.

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 which have been 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.
At January 31, 2004 and February 1, 2003, there were
569,516 shares and 591,930 shares, respectively, available for
grant under these Plans.

The following table summarizes information
regarding stock options outstanding under the Plans and the
Restated Directors Plan at January 31, 2004.

|                |  |                     |           |                     |  |                |           |             |  |                |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------------- | --------- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | 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
|                |  |                     |           |                     |  |                |           |             |  |               
|$ 7.41  $10.22 |  |                     | 359,004   |                     |  |                | 4.0 years |             |  | $              | 7.43  |  |  |  | 359,004   |  |  | $ | 7.43  | 
|$10.23  $15.33 |  |                     | 874,778   |                     |  |                | 4.2 years |             |  | $              | 12.92 |  |  |  | 874,778   |  |  | $ | 12.92 | 
|$15.34  $20.45 |  |                     | 2,424,140 |                     |  |                | 5.9 years |             |  | $              | 18.95 |  |  |  | 2,424,140 |  |  | $ | 18.95 | 
|$20.46  $25.56 |  |                     | 925,067   |                     |  |                | 9.1 years |             |  | $              | 24.98 |  |  |  | 11,667    |  |  | $ | 23.37 | 
|$25.57  $30.67 |  |                     | 166,734   |                     |  |                | 8.3 years |             |  | $              | 28.10 |  |  |  | 65,666    |  |  | $ | 28.42 | 
|$30.68  $35.79 |  |                     | 62,350    |                     |  |                | 8.1 years |             |  | $              | 34.10 |  |  |  | 27,662    |  |  | $ | 33.63 | 
|$35.80  $40.90 |  |                     | 1,190,999 |                     |  |                | 7.9 years |             |  | $              | 35.88 |  |  |  | 438,961   |  |  | $ | 35.89 | 
|$40.91  $46.01 |  |                     | 2,000     |                     |  |                | 7.2 years |             |  | $              | 41.85 |  |  |  | 1,333     |  |  | $ | 41.85 | 
|$46.02  $51.13 |  |                     | 1,105,999 |                     |  |                | 6.8 years |             |  | $              | 47.02 |  |  |  | 768,645   |  |  | $ | 47.05 | 
|                |  |                     |           |                     |  |                |           |             |  |                |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 7,111,071 |                     |  |                | 6.5 years |             |  | $              | 25.97 |  |  |  | 4,971,856 |  |  | $ | 23.12 | 
|                |  |                     |           |                     |  |                |           |             |  |                |       |  |  |  |           |  |  |   |       | 

A summary of stock option activity under the
Plans and the Restated Directors Plan during the years ended
January 31, 2004, February 1, 2003 and
February 2, 2002 is presented below.

F-13



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


|                                 |  |                  |           |                  |  |                  |       |                 |  |           |           |                 |  |   |       |  |  |  |           |   |  |   |       | 
|-------------------------------- |  | ---------------- | --------- | ---------------- |  | ---------------- | ----- | --------------- |  | --------- | --------- | --------------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                 |  |                 
|                                 |  | Year Ended      
|                                 |  |                 
|                                 |  |                  |           |                  |  |                 
|                                 |  | January 31, 2004 |           | February 1, 2003 |  | February 2, 2002
|                                 |  |                  |           |                  |  |                 
|                                 |  |                  |           | Weighted         |  |                  |       | Weighted        |  |           |           | Weighted       
|                                 |  | Number of        |           | average option   |  | Number of        |       | average option  |  | Number of |           | average option 
|                                 |  | shares           |           | price per share  |  | shares           |       | price per share |  | shares    |           | price per share
|                                 |  |                  |           |                  |  |                  |       |                 |  |           |           |                
|Outstanding at beginning of year |  |                  | 6,994,111 |                  |  | $                | 25.37 |                 |  |           | 6,002,857 |                 |  | $ | 22.72 |  |  |  | 5,328,336 |   |  | $ | 16.25 | 
|Granted                          |  |                  | 1,011,100 |                  |  |                  | 25.37 |                 |  |           | 1,391,000 |                 |  |   | 35.36 |  |  |  | 1,291,000 |   |  |   | 46.24 | 
|Exercised                        |  |                  | (667,523  | )                |  |                  | 15.18 |                 |  |           | (333,743  | )               |  |   | 16.68 |  |  |  | (538,144  | ) |  |   | 13.27 | 
|Forfeited                        |  |                  | (226,617  | )                |  |                  | 36.71 |                 |  |           | (66,003   | )               |  |   | 38.40 |  |  |  | (78,335   | ) |  |   | 35.31 | 
|                                 |  |                  |           |                  |  |                  |       |                 |  |           |           |                 |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding at end of year       |  |                  | 7,111,071 |                  |  | $                | 25.97 |                 |  |           | 6,994,111 |                 |  | $ | 25.37 |  |  |  | 6,002,857 |   |  | $ | 22.72 | 
|                                 |  |                  |           |                  |  |                  |       |                 |  |           |           |                 |  |   |       |  |  |  |           |   |  |   |       | 
|Exercisable at end of year       |  |                  | 4,971,856 |                  |  | $                | 23.12 |                 |  |           | 3,843,720 |                 |  | $ | 18.92 |  |  |  | 2,465,794 |   |  | $ | 14.78 | 
|                                 |  |                  |           |                  |  |                  |       |                 |  |           |           |                 |  |   |       |  |  |  |           |   |  |   |       | 

Under the provisions of the 2003 Plan, the
Company has issued to certain key members of management shares
of restricted stock. Upon grant of restricted stock the
recipient is required to pay the par value of such shares, $0.01
per share. The difference between the market price of the shares
on the date of grant and recipients cost of $0.01 per
share is recorded as deferred compensation and is being
amortized over a five-year service period. The shares vest at
the end of the five-year service period. However, all or a
portion of the vesting may be accelerated to three years after
the grant date depending on the achievement of certain corporate
performance goals. In such a case, if it is determined that the
early vesting will most likely occur, the amortization period
will be adjusted accordingly. Such shares are forfeited to the
Company, at the $0.01 par value, if the employee terminates
his/her employment prior to the vesting date.

A summary of the changes in restricted shares
outstanding for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002 is presented
below.

|                                 |  |                  |          |                  |  |                  |       |                  |  |           |          |                  |  |   |      |  |  |  |          |   |  |   |      | 
|-------------------------------- |  | ---------------- | -------- | ---------------- |  | ---------------- | ----- | ---------------- |  | --------- | -------- | ---------------- |  | - | ---- |  |  |  | -------- | - |  | - | ---- | 
|                                 |  |                 
|                                 |  | Year Ended      
|                                 |  |                 
|                                 |  |                  |          |                  |  |                 
|                                 |  | January 31, 2004 |          | February 1, 2003 |  | February 2, 2002
|                                 |  |                  |          |                  |  |                 
|                                 |  |                  |          | Weighted         |  |                  |       | Weighted         |  |           |          | Weighted        
|                                 |  | Number of        |          | average market   |  | Number of        |       | average market   |  | Number of |          | average market  
|                                 |  | shares           |          | price per shares |  | shares           |       | price per shares |  | shares    |          | price per shares
|                                 |  |                  |          |                  |  |                  |       |                  |  |           |          |                 
|Outstanding at beginning of year |  |                  | 132,934  |                  |  | $                | 7.89  |                  |  |           | 265,867  |                  |  | $ | 7.89 |  |  |  | 410,200  |   |  | $ | 7.93 | 
|Granted                          |  |                  | 307,125  |                  |  |                  | 25.00 |                  |  |           |         |                  |  |   |     |  |  |  |         |   |  |   |     | 
|Vested                           |  |                  | (122,934 | )                |  |                  | 7.48  |                  |  |           | (132,933 | )                |  |   | 7.89 |  |  |  | (136,733 | ) |  |   | 7.93 | 
|Forfeited                        |  |                  | (15,175  | )                |  |                  | 12.90 |                  |  |           |         |                  |  |   |     |  |  |  | (7,600   | ) |  |   | 9.40 | 
|                                 |  |                  |          |                  |  |                  |       |                  |  |           |          |                  |  |   |      |  |  |  |          |   |  |   |      | 
|Outstanding at end of year       |  |                  | 301,950  |                  |  | $                | 17.02 |                  |  |           | 132,934  |                  |  | $ | 7.89 |  |  |  | 265,867  |   |  | $ | 7.89 | 
|                                 |  |                  |          |                  |  |                  |       |                  |  |           |          |                  |  |   |      |  |  |  |          |   |  |   |      | 

6.     Related Party
and Affiliates

The Company owns certain trademarks through its
wholly owned subsidiary, The Classics Chicago, Inc. including
the Talbots trade name that was purchased from AEON Co. Ltd., a
related party in 1993.

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 and purchases merchandise for Talbots Japan. The
Company is reimbursed for expenses incurred and the cost of
merchandise. For fiscal 2003, 2002 and 2001 total charges for
services and merchandise purchases were $16.4 million,
$14.1 million and $15.6 million, respectively. At
January 31, 2004 and February 1, 2003, the Company was
owed $10,035 and $8,759 respectively, for these service costs
and for merchandise inventory purchases made on behalf of
Talbots Japan.

F-14



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


The Company has an advisory services agreement
with AEON USA under which AEON USA 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 Japanese banks and other
financial institutions, for which AEON USA receives an annual
fee of $250 plus any expenses incurred, which are not material.
At January 31, 2004 and February 1, 2003, there were
no amounts owed under this contract.

Under the Companys 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 2003, a total of 1,020,718 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
2003 ranged from $25.74 to $32.39. During fiscal 2002, a total
of 1,054,936 shares were repurchased from AEON USA with a
weighted average price of the shares ranging from $25.03 to
$30.15, respectively.

7.     Accounts
Receivable

Customer accounts receivable are as follows:

|                                     |  |             |         |             |  |   |         |  
|------------------------------------ |  | ----------- | ------- | ----------- |  | - | ------- | -
|                                     |  | January 31, |         | February 1,
|                                     |  | 2004        |         | 2003       
|                                     |  |             |         |            
|Due from customers                   |  | $           | 185,386 |             |  | $ | 183,789 |  
|Less allowance for doubtful accounts |  |             | (2,700  | )           |  |   | (2,600  | )
|                                     |  |             |         |             |  |   |         |  
|Customer accounts receivable, net    |  | $           | 182,686 |             |  | $ | 181,189 |  
|                                     |  |             |         |             |  |   |         |  

Finance charge income (including interest and
late fee income) amounted to $37.1 million,
$36.0 million and $27.1 million for the 52 weeks
ended January 31, 2004, February 1, 2003 and
February 2, 2002.

Changes in the allowance for doubtful accounts
are as follows:

|                               |  |             |        |             |  |             |        |   |  |   |        |  
|------------------------------ |  | ----------- | ------ | ----------- |  | ----------- | ------ | - |  | - | ------ | -
|                               |  |            
|                               |  | Year Ended 
|                               |  |            
|                               |  | January 31, |        | February 1, |  | February 2,
|                               |  | 2004        |        | 2003        |  | 2002       
|                               |  |             |        |             |  |            
|Balance, beginning of year     |  | $           | 2,600  |             |  | $           | 2,300  |   |  | $ | 2,100  |  
|Charges to costs and expenses  |  |             | 3,202  |             |  |             | 3,416  |   |  |   | 2,766  |  
|Charge-offs, net of recoveries |  |             | (3,102 | )           |  |             | (3,116 | ) |  |   | (2,566 | )
|                               |  |             |        |             |  |             |        |   |  |   |        |  
|Balance, end of year           |  | $           | 2,700  |             |  | $           | 2,600  |   |  | $ | 2,300  |  
|                               |  |             |        |             |  |             |        |   |  |   |        |  

F-15



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


8.     Property and
Equipment

Property and equipment consists of the following:

|                                               |  |             |          |             |  |   |          |  
|---------------------------------------------- |  | ----------- | -------- | ----------- |  | - | -------- | -
|                                               |  | January 31, |          | February 1,
|                                               |  | 2004        |          | 2003       
|                                               |  |             |          |            
|Land                                           |  | $           | 10,561   |             |  | $ | 10,940   |  
|Buildings                                      |  |             | 68,318   |             |  |   | 68,042   |  
|Fixtures and equipment                         |  |             | 318,354  |             |  |   | 267,998  |  
|Software                                       |  |             | 39,746   |             |  |   | 35,193   |  
|Leasehold improvements                         |  |             | 152,737  |             |  |   | 135,452  |  
|Leasehold interests                            |  |             | 969      |             |  |   | 2,074    |  
|Construction in progress                       |  |             | 15,774   |             |  |   | 20,435   |  
|                                               |  |             |          |             |  |   |          |  
|Property and equipment  gross                 |  |             | 606,459  |             |  |   | 540,134  |  
|Less accumulated depreciation and amortization |  |             | (269,042 | )           |  |   | (224,907 | )
|                                               |  |             |          |             |  |   |          |  
|Property and equipment  net                   |  | $           | 337,417  |             |  | $ | 315,227  |  
|                                               |  |             |          |             |  |   |          |  

Depreciation expense for the years ended
January 31, 2004, February 1, 2003 and
February 2, 2002 was $64.8 million, $58.5 million
and $50.0 million, respectively.

9.     Accrued
Liabilities

Accrued liabilities consist of the following:

|                                                                                                   |  |             |         |             |  |   |        | 
|-------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ----------- |  | - | ------ | 
|                                                                                                   |  | January 31, |         | February 1,
|                                                                                                   |  | 2004        |         | 2003       
|                                                                                                   |  |             |         |            
|Gift certificates, merchandise credits, return
    reserve, and other customer related liabilities |  | $           | 46,911  |             |  | $ | 38,582 | 
|Employee compensation, related taxes and benefits                                                  |  |             | 29,496  |             |  |   | 25,791 | 
|Taxes other than income and withholding                                                            |  |             | 8,223   |             |  |   | 8,009  | 
|Other accrued liabilities                                                                          |  |             | 16,411  |             |  |   | 15,604 | 
|                                                                                                   |  |             |         |             |  |   |        | 
|Total accrued liabilities                                                                          |  | $           | 101,041 |             |  | $ | 87,986 | 
|                                                                                                   |  |             |         |             |  |   |        | 

10.     Debt

Long-Term
Debt

The Company has revolving credit agreements with
four banks that provide for 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 January 31, 2004 and
February 1, 2003, the Company had $100,000 outstanding
under its revolving credit agreements. None of the outstanding
balance is currently payable.

F-16



---



##### 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 rates and the loan maturities under the revolving
credit agreements at January 31, 2004 follows:

|            |         |               |  |          |      |   |  |  |              | 
|----------- | ------- | ------------- |  | -------- | ---- | - |  |  | ------------ | 
|Outstanding |         | Interest rate |  | Maturity
|            |         |               |  |         
|$           | 18,000  |               |  |          | 1.84 | % |  |  | April 2005   | 
|            | 14,000  |               |  |          | 1.86 | % |  |  | April 2005   | 
|            | 14,000  |               |  |          | 1.83 | % |  |  | April 2005   | 
|            | 12,000  |               |  |          | 2.08 | % |  |  | April 2005   | 
|            | 18,000  |               |  |          | 1.83 | % |  |  | January 2006 | 
|            | 10,000  |               |  |          | 2.00 | % |  |  | January 2006 | 
|            | 8,000   |               |  |          | 2.06 | % |  |  | January 2006 | 
|            | 6,000   |               |  |          | 2.02 | % |  |  | January 2006 | 
|            |         |               |  |          |      |   |  |  |              | 
|$           | 100,000 |               |  |          |      |   |  |  |              | 
|            |         |               |  |          |      |   |  |  |              | 

Line of Credit
Facility The
Company also has available a $125,000 unsecured line-of-credit
facility with five banks. At January 31, 2004 and
February 1, 2003, no amounts were outstanding on this
facility.

The weighted average interest rate for both
long-term debt and its line of credit facility, for the years
ended January 31, 2004 and February 1, 2003, was 2.03%
and 2.32%, 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 January 31, 2004 and
February 1, 2003, the Company held $102,757 and $107,558,
respectively, in outstanding letters of credit for purchase
commitments.

11.     Income
Taxes

Income before income tax provision for the years
ended January 31, 2004, February 1, 2003 and
February 2, 2002 consists of the following:

|         |  |             |         |             |  |             |         |  |  |   |         | 
|-------- |  | ----------- | ------- | ----------- |  | ----------- | ------- |  |  | - | ------- | 
|         |  |            
|         |  | Year Ended 
|         |  |            
|         |  | January 31, |         | February 1, |  | February 2,
|         |  | 2004        |         | 2003        |  | 2002       
|         |  |             |         |             |  |            
|Domestic |  | $           | 161,418 |             |  | $           | 189,290 |  |  | $ | 204,177 | 
|Foreign  |  |             | 6,075   |             |  |             | 3,924   |  |  |   | 664     | 
|         |  |             |         |             |  |             |         |  |  |   |         | 
|Total    |  | $           | 167,493 |             |  | $           | 193,214 |  |  | $ | 204,841 | 
|         |  |             |         |             |  |             |         |  |  |   |         | 

F-17



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


The provision for income taxes for the years
ended January 31, 2004, February 1, 2003 and
February 2, 2002, consists of the following:

|                         |         |             |        |             |   |             |        |        |  |   |        |        |  
|------------------------ | ------- | ----------- | ------ | ----------- | - | ----------- | ------ | ------ |  | - | ------ | ------ | -
|                         |         |            
|                         |         | Year Ended 
|                         |         |            
|                         |         | January 31, |        | February 1, |   | February 2,
|                         |         | 2004        |        | 2003        |   | 2002       
|                         |         |             |        |             |   |            
|Currently payable:       |         |             |        |             |   |             |        |        |  |   |        |       
|                         | Federal |             | $      | 51,747      |   |             | $      | 54,547 |  |   | $      | 65,968 |  
|                         | State   |             |        | 5,585       |   |             |        | 5,907  |  |   |        | 7,236  |  
|                         | Foreign |             |        | 107         |   |             |        |       |  |   |        | 440    |  
|                         |         |             |        |             |   |             |        |        |  |   |        |       
|Total currently payable  |         |             | 57,439 |             |   |             | 60,454 |        |  |   | 73,644 |       
|                         |         |             |        |             |   |             |        |        |  |   |        |       
|Deferred:                |         |             |        |             |   |             |        |        |  |   |        |       
|                         | Federal |             |        | 7,930       |   |             |        | 9,408  |  |   |        | 4,939  |  
|                         | State   |             |        | (779        | ) |             |        | 1,226  |  |   |        | 1,245  |  
|                         | Foreign |             |        | (1,780      | ) |             |        | 1,367  |  |   |        | (1,988 | )
|                         |         |             |        |             |   |             |        |        |  |   |        |       
|Total deferred           |         |             | 5,371  |             |   |             | 12,001 |        |  |   | 4,196  |       
|                         |         |             |        |             |   |             |        |        |  |   |        |       
|Total income tax expense |         | $           | 62,810 |             |   | $           | 72,455 |        |  | $ | 77,840 |       
|                         |         |             |        |             |   |             |        |        |  |   |        |       

Components of the net deferred tax asset or
liability recognized in the Consolidated Balance Sheets at
January 31, 2004 and February 1, 2003, respectively,
are as follows:

|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |         |  
|--------------------------- | -------------------------------- | ---------------- | ------ | ---------------- |  | ----- | ------- | ------- | - | ----------- | ------- | ------- | - | - | ------ | ----- |  | - | ------- | ------- | - | - | ------ | ------- | -
|                            |                                  |                  |        |                 
|                            |                                  | January 31, 2004 |        | February 1, 2003
|                            |                                  |                  |        |                 
|                            |                                  | Assets           |        | Liabilities      |  | Total |         | Assets  |   | Liabilities |         | Total  
|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |        
|United States:              |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|Current:                    |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|                            | Merchandise inventories          |                  | $      | 8,094            |  |       | $       |        |   |             | $       | 8,094   |   |   | $      | 4,609 |  |   | $       |        |   |   | $      | 4,609   |  
|                            | Deferred catalog costs           |                  |        |                 |  |       |         | (664    | ) |             |         | (664    | ) |   |        |      |  |   |         | (791    | ) |   |        | (791    | )
|                            | Accrued vacation pay             |                  |        | 4,350            |  |       |         |        |   |             |         | 4,350   |   |   |        | 3,807 |  |   |         |        |   |   |        | 3,807   |  
|                            | Other                            |                  |        | 2,138            |  |       |         | (254    | ) |             |         | 1,884   |   |   |        | 1,322 |  |   |         | (472    | ) |   |        | 850     |  
|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total current               |                                  |                  | 14,582 |                  |  |       | (918    | )       |   |             | 13,664  |         |   |   | 9,738  |       |  |   | (1,263  | )       |   |   | 8,475  |        
|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|Noncurrent:                 |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|                            | Depreciation & amortization      |                  |        |                 |  |       |         | (34,158 | ) |             |         | (34,158 | ) |   |        |      |  |   |         | (23,861 | ) |   |        | (23,861 | )
|                            | Lease commitments                |                  |        | 8,724            |  |       |         |        |   |             |         | 8,724   |   |   |        | 7,117 |  |   |         |        |   |   |        | 7,117   |  
|                            | Deferred compensation            |                  |        | 5,208            |  |       |         |        |   |             |         | 5,208   |   |   |        | 4,841 |  |   |         |        |   |   |        | 4,841   |  
|                            | Minimum Pension Liability        |                  |        | 8,679            |  |       |         |        |   |             |         | 8,679   |   |   |        | 7,518 |  |   |         |        |   |   |        | 7,518   |  
|                            | Other                            |                  |        | 1,007            |  |       |         |        |   |             |         | 1,007   |   |   |        | 1,464 |  |   |         |        |   |   |        | 1,464   |  
|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total noncurrent            |                                  |                  | 23,618 |                  |  |       | (34,158 | )       |   |             | (10,540 | )       |   |   | 20,940 |       |  |   | (23,861 | )       |   |   | (2,921 | )      
|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|Foreign:                    |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|Current:                    |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|                            | Subsidiary tax loss Carryfowards |                  |        |                 |  |       |         |        |   |             |         |        |   |   |        | 1,780 |  |   |         |        |   |   |        | 1,780   |  
|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total current               |                                  |                  |       |                  |  |       |        |         |   |             |        |         |   |   | 1,780  |       |  |   |        |         |   |   | 1,780  |        
|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        
|Total deferred income taxes |                                  | $                | 38,200 |                  |  | $     | (35,076 | )       |   | $           | 3,124   |         |   | $ | 32,458 |       |  | $ | (25,124 | )       |   | $ | 7,334  |        
|                            |                                  |                  |        |                  |  |       |         |         |   |             |         |         |   |   |        |       |  |   |         |         |   |   |        |        

F-18



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


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

For the fiscal years ended January 31, 2004
and February 1, 2003, the effective federal tax rate was
37.5%.

For the years ended January 31, 2004,
February 1, 2003 and February 2, 2002, 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      
|                            |                                                |                 
|                            |                                                |                  |        |                  |   |                 
|                            |                                                | January 31, 2004 |        | February 1, 2003 |   | February 2, 2002
|                            |                                                |                  |        |                  |   |                 
|                            |                                                | Tax              |        | Rate             |   | Tax              |      | Rate |   | Tax |        | Rate 
|                            |                                                |                  |        |                  |   |                  |      |      |   |     |        |      
|Expected tax expense        |                                                | $                | 58,623 |                  |   |                  | 35.0 | %    |   | $   | 67,625 |       |  |  | 35.0 | %   |  | $ | 71,694 |       |  |  | 35.0 | %  
|Adjustments resulting from: |                                                |                  |        |                  |   |                  |      |      |   |     |        |       |  |  |      |     |  |   |        |       |  |  |      |    
|                            | State income taxes, net of federal tax benefit |                  |        | 4,303            |   |                  |      | 2.5  |   |     |        | 4,636 |  |  |      | 2.4 |  |   |        | 5,513 |  |  |      | 2.7 | 
|                            | Foreign tax                                    |                  |        | 107              |   |                  |      | 0.1  |   |     |        |      |  |  |      |    |  |   |        |      |  |  |      |    | 
|                            | Goodwill amortization                          |                  |        |                 |   |                  |      |     |   |     |        |      |  |  |      |    |  |   |        | 470   |  |  |      | 0.2 | 
|                            | Other                                          |                  |        | (223             | ) |                  |      | (0.1 | ) |     |        | 194   |  |  |      | 0.1 |  |   |        | 163   |  |  |      | 0.1 | 
|                            |                                                |                  |        |                  |   |                  |      |      |   |     |        |       |  |  |      |     |  |   |        |       |  |  |      |    
|Actual tax expense          |                                                | $                | 62,810 |                  |   |                  | 37.5 | %    |   | $   | 72,455 |       |  |  | 37.5 | %   |  | $ | 77,840 |       |  |  | 38.0 | %  
|                            |                                                |                  |        |                  |   |                  |      |      |   |     |        |       |  |  |      |     |  |   |        |       |  |  |      |    

12.     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
and mens classic apparel, accessories and shoes, through
its retail stores, while the Catalog Segment derives its
revenues through its approximately 26 distinct catalog mailings
per year and online 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, Goodwill and Other
Intangible Assets, 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 January 31, 2004 and
February 1, 2003. The trademark was allocated as
$64.5 million and $11.4 million to the stores and
catalog segment, respectively, at January 31, 2004 and
February 1, 2003.

F-19



---



##### 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 for the
years ended January 31, 2004, February 1, 2003 and
February 2, 2002:

|              |  |                  |           |         |  |       |         |  |  |   |           | 
|------------- |  | ---------------- | --------- | ------- |  | ----- | ------- |  |  | - | --------- | 
|              |  |                 
|              |  | January 31, 2004
|              |  |                 
|              |  | Stores           |           | Catalog |  | Total
|              |  |                  |           |         |  |      
|Net sales     |  | $                | 1,384,897 |         |  | $     | 239,442 |  |  | $ | 1,624,339 | 
|Direct profit |  |                  | 237,757   |         |  |       | 51,621  |  |  |   | 289,378   | 

|              |  |                  |           |         |  |       |         |  |  |   |           | 
|------------- |  | ---------------- | --------- | ------- |  | ----- | ------- |  |  | - | --------- | 
|              |  |                 
|              |  | 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   | 

The following reconciles direct profit to
consolidated net income as of and for the years ended
January 31, 2004, February 1, 2003 and
February 2, 2002:

|                                                        |  |                  |         |                  |  |                  |         |  |  |   |         | 
|------------------------------------------------------- |  | ---------------- | ------- | ---------------- |  | ---------------- | ------- |  |  | - | ------- | 
|                                                        |  | January 31, 2004 |         | February 1, 2003 |  | February 2, 2002
|                                                        |  |                  |         |                  |  |                 
|Total direct profit or loss for reportable
    segments |  | $                | 289,378 |                  |  | $                | 306,694 |  |  | $ | 320,459 | 
|Less: indirect expenses                                 |  |                  | 119,790 |                  |  |                  | 110,627 |  |  |   | 110,443 | 
|                                                        |  |                  |         |                  |  |                  |         |  |  |   |         | 
|Operating income                                        |  |                  | 169,588 |                  |  |                  | 196,067 |  |  |   | 210,016 | 
|Interest expense-net                                    |  |                  | 2,095   |                  |  |                  | 2,853   |  |  |   | 5,175   | 
|                                                        |  |                  |         |                  |  |                  |         |  |  |   |         | 
|Income before taxes                                     |  |                  | 167,493 |                  |  |                  | 193,214 |  |  |   | 204,841 | 
|Income taxes                                            |  |                  | 62,810  |                  |  |                  | 72,455  |  |  |   | 77,840  | 
|                                                        |  |                  |         |                  |  |                  |         |  |  |   |         | 
|Consolidated net income                                 |  | $                | 104,683 |                  |  | $                | 120,759 |  |  | $ | 127,001 | 
|                                                        |  |                  |         |                  |  |                  |         |  |  |   |         | 

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 January 31, 2004, February 1,
2003, and February 2, 2002:

|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 
|--------------------------- |  | ---------------- | --------- | ---------------- |  | ---------------- | --------- |  |  | - | --------- | 
|                            |  | January 31, 2004 |           | February 1, 2003 |  | February 2, 2002
|                            |  |                  |           |                  |  |                 
|Sales:                      |  |                  |           |                  |  |                  |           |  |  |   |           | 
|United States               |  | $                | 1,570,698 |                  |  | $                | 1,546,006 |  |  | $ | 1,561,520 | 
|Foreign                     |  |                  | 53,641    |                  |  |                  | 49,319    |  |  |   | 50,993    | 
|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 
|Total consolidated revenues |  | $                | 1,624,339 |                  |  | $                | 1,595,325 |  |  | $ | 1,612,513 | 
|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 
|Long-Lived Assets:          |  |                  |           |                  |  |                  |           |  |  |   |           | 
|United States               |  | $                | 441,215   |                  |  | $                | 420,056   |  |  | $ | 383,563   | 
|Foreign                     |  |                  | 7,599     |                  |  |                  | 6,567     |  |  |   | 5,410     | 
|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 
|Total long-lived assets     |  | $                | 448,814   |                  |  | $                | 426,623   |  |  | $ | 388,973   | 
|                            |  |                  |           |                  |  |                  |           |  |  |   |           | 

F-20



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


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.

13.     Benefit
Plans

The Company sponsors a non-contributory defined
benefit pension plan (Pension Plan) covering
substantially all salaried and hourly employees in the United
States of America. Employees are enrolled in the pension plan
after one year of service (with at least 1,000 hours worked) and
reaching age 21. Employee benefits vest in five years. 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 at least the amount
required by law up to the amount that is deductible for federal
income tax purposes. The Company uses December 31st as its
measurement date for obligation and asset calculations. Pension
Plan assets consist principally of equity and fixed income
equity securities.

The Company has an unfunded, non-qualified
supplemental executive retirement plan (SERP) for
certain key executives impacted by Internal Revenue Code limits
on benefits. The Company uses December 31st as its
measurement date for obligation calculations.

Retirees are eligible for certain limited
postretirement health care benefits (Postretirement
Medical Plan) if they have met certain service and minimum
age requirements. The cost of these benefits is accrued during
the years in which an employee provides service. The plan is not
funded. The Company uses December 31st as its measurement
date for obligation calculations.

F-21



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


The changes in the benefit obligations and funded
status of the Companys Pension Plan, SERP and
Postretirement Medical Plan are as follows:

|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |        |  
|------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------ | ------ | ----------- | - | ---------------------- | ------ | ----------- | - | ----------- | ------ | ----------- | - | - | ----- | ------ | - | - | ----- | ------ | - | - | ----- | ------ | -
|                                                        |                                                                                         |             
|                                                        |                                                                                         | Year Ended  
|                                                        |                                                                                         |             
|                                                        |                                                                                         |              |        |            
|                                                        |                                                                                         |              |        |             |   | Postretirement Medical
|                                                        |                                                                                         | Pension Plan |        | SERP        |   | Plan                  
|                                                        |                                                                                         |              |        |             |   |                       
|                                                        |                                                                                         | January 31,  |        | February 1, |   | January 31,            |        | February 1, |   | January 31, |        | February 1,
|                                                        |                                                                                         | 2004         |        | 2003        |   | 2004                   |        | 2003        |   | 2004        |        | 2003       
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |            
|Change in benefit obligation:                           |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|Projected benefit obligations at beginning of year      |                                                                                         | $            | 72,015 |             |   | $                      | 53,657 |             |   | $           | 9,306  |             |   | $ | 6,881 |        |   | $ | 3,622 |        |   | $ | 2,635 |       
|                                                        | Service cost                                                                            |              |        | 6,610       |   |                        |        | 5,151       |   |             |        | 630         |   |   |       | 516    |   |   |       | 453    |   |   |       | 358    |  
|                                                        | Interest cost                                                                           |              |        | 4,939       |   |                        |        | 4,125       |   |             |        | 641         |   |   |       | 557    |   |   |       | 253    |   |   |       | 217    |  
|                                                        | Plan amendments                                                                         |              |        |            |   |                        |        | 639         |   |             |        |            |   |   |       | (382   | ) |   |       |       |   |   |       |       |  
|                                                        | Actuarial loss                                                                          |              |        | 10,331      |   |                        |        | 9,342       |   |             |        | 924         |   |   |       | 1,738  |   |   |       | 507    |   |   |       | 536    |  
|                                                        | Benefits paid, net                                                                      |              |        | (1,009      | ) |                        |        | (899        | ) |             |        | (4          | ) |   |       | (4     | ) |   |       | (175   | ) |   |       | (124   | )
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|Projected benefit obligations at end of year            |                                                                                         | $            | 92,886 |             |   | $                      | 72,015 |             |   | $           | 11,497 |             |   | $ | 9,306 |        |   | $ | 4,660 |        |   | $ | 3,622 |       
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|Changes in assets:                                      |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|                                                        | Fair value at beginning of year                                                         |              | $      | 42,925      |   |                        | $      | 41,048      |   |             | $      |            |   |   | $     |       |   |   | $     |       |   |   | $     |       |  
|                                                        | Actual return on plan assets                                                            |              |        | 8,596       |   |                        |        | (5,224      | ) |             |        |            |   |   |       |       |   |   |       |       |   |   |       |       |  
|                                                        | Employer contributions                                                                  |              |        | 8,000       |   |                        |        | 8,000       |   |             |        |            |   |   |       |       |   |   |       |       |   |   |       |       |  
|                                                        | Benefits paid                                                                           |              |        | (1,009      | ) |                        |        | (899        | ) |             |        |            |   |   |       |       |   |   |       |       |   |   |       |       |  
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|                                                        | Fair value at end of year                                                               |              | $      | 58,512      |   |                        | $      | 42,925      |   |             | $      |            |   |   | $     |       |   |   | $     |       |   |   | $     |       |  
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|Funded Status:                                          |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|                                                        | Funded status                                                                           |              | $      | (34,374     | ) |                        | $      | (29,090     | ) |             | $      | (11,497     | ) |   | $     | (9,306 | ) |   | $     | (4,660 | ) |   | $     | (3,622 | )
|                                                        | Unrecognized prior service cost                                                         |              |        | 864         |   |                        |        | 1,097       |   |             |        | 175         |   |   |       | 203    |   |   |       |       |   |   |       |       |  
|                                                        | Unrecognized net loss/(gain)                                                            |              |        | 39,563      |   |                        |        | 34,451      |   |             |        | 3,752       |   |   |       | 3,071  |   |   |       | 380    |   |   |       | (128   | )
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|                                                        | Prepaid/(accrued) cost                                                                  |              | $      | 6,053       |   |                        | $      | 6,458       |   |             | $      | (7,570      | ) |   | $     | (6,032 | ) |   | $     | (4,280 | ) |   | $     | (3,750 | )
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|Amounts recognized on the balance sheet consist
    of: |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|                                                        | Accrued benefit cost                                                                    |              | $      | (15,203     | ) |                        | $      | (13,256     | ) |             | $      | (9,050      | ) |   | $     | (6,412 | ) |   | $     | (4,280 | ) |   | $     | (3,750 | )
|                                                        | Intangible asset                                                                        |              |        | 864         |   |                        |        | 1,097       |   |             |        | 175         |   |   |       | 203    |   |   |       |       |   |   |       |       |  
|                                                        | Additional minimum pension liability (reflected
    in shareholders equity, net of tax) |              |        | 20,392      |   |                        |        | 18,617      |   |             |        | 1,305       |   |   |       | 177    |   |   |       |       |   |   |       |       |  
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       
|                                                        | Prepaid/(accrued) cost                                                                  |              | $      | 6,053       |   |                        | $      | 6,458       |   |             | $      | (7,570      | ) |   | $     | (6,032 | ) |   | $     | (4,280 | ) |   | $     | (3,750 | )
|                                                        |                                                                                         |              |        |             |   |                        |        |             |   |             |        |             |   |   |       |        |   |   |       |        |   |   |       |       

In fiscal 2003 and 2002 the Company was required
to record additional minimum liabilities of $1.8 million
and $18.6 million related to its Pension Plan and
$1.1 million and $0.2 million to its SERP,

F-22



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


respectively. In recording the additional minimum
liabilities, the Company reduced stockholders equity, net
of tax, by $1.7 million at January 31, 2004 and
$11.3 million at February 1, 2003.

Below is a summary of the projected benefit
obligation, accumulated benefit obligation and the fair value of
plan assets for the Companys Pension Plan and SERP:

|                               |  |              |        |             |  |             |        |             |  |   |        |  |  |   |       | 
|------------------------------ |  | ------------ | ------ | ----------- |  | ----------- | ------ | ----------- |  | - | ------ |  |  | - | ----- | 
|                               |  |              |        |            
|                               |  | Pension Plan |        | SERP       
|                               |  |              |        |            
|                               |  | January 31,  |        | February 1, |  | January 31, |        | February 1,
|                               |  | 2004         |        | 2003        |  | 2004        |        | 2003       
|                               |  |              |        |             |  |             |        |            
|Projected benefit obligation   |  | $            | 92,886 |             |  | $           | 72,015 |             |  | $ | 11,497 |  |  | $ | 9,306 | 
|Accumulated benefit obligation |  | $            | 73,715 |             |  | $           | 56,181 |             |  | $ | 9,050  |  |  | $ | 6,412 | 
|Fair value of plan assets      |  | $            | 58,512 |             |  | $           | 42,925 |             |  | $ |       |  |  | $ |      | 

The components of pension expense for the Pension
Plan are as follows:

|                                                        |  |             |        |             |  |             |        |   |  |   |        |  
|------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | - |  | - | ------ | -
|                                                        |  |            
|                                                        |  | Year Ended 
|                                                        |  |            
|                                                        |  | January 31, |        | February 1, |  | February 2,
|                                                        |  | 2004        |        | 2003        |  | 2002       
|                                                        |  |             |        |             |  |            
|Service expense  benefits earned during the
    period |  | $           | 6,610  |             |  | $           | 5,151  |   |  | $ | 4,399  |  
|Interest expense on projected benefit obligation        |  |             | 4,939  |             |  |             | 4,125  |   |  |   | 3,469  |  
|Expected return on plan assets                          |  |             | (5,149 | )           |  |             | (4,294 | ) |  |   | (3,514 | )
|Net amortization and deferral                           |  |             | 2,005  |             |  |             | 735    |   |  |   | 448    |  
|                                                        |  |             |        |             |  |             |        |   |  |   |        |  
|Net pension expense                                     |  | $           | 8,405  |             |  | $           | 5,717  |   |  | $ | 4,802  |  
|                                                        |  |             |        |             |  |             |        |   |  |   |        |  

The components of net SERP expenses are as
follows:

|                                                        |  |             |       |             |  |             |       |  |  |   |       | 
|------------------------------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- |  |  | - | ----- | 
|                                                        |  |            
|                                                        |  | Year Ended 
|                                                        |  |            
|                                                        |  | January 31, |       | February 1, |  | February 2,
|                                                        |  | 2004        |       | 2003        |  | 2002       
|                                                        |  |             |       |             |  |            
|Service expense  benefits earned during the
    period |  | $           | 630   |             |  | $           | 516   |  |  | $ | 450   | 
|Interest expense on projected benefit obligation        |  |             | 641   |             |  |             | 557   |  |  |   | 450   | 
|Net amortization and deferral                           |  |             | 271   |             |  |             | 212   |  |  |   | 218   | 
|                                                        |  |             |       |             |  |             |       |  |  |   |       | 
|Net SERP expense                                        |  | $           | 1,542 |             |  | $           | 1,285 |  |  | $ | 1,118 | 
|                                                        |  |             |       |             |  |             |       |  |  |   |       | 

The components of postretirement medical expense
are as follows:

|                                                                      |  |             |     |             |  |             |     |   |  |   |     |  
|--------------------------------------------------------------------- |  | ----------- | --- | ----------- |  | ----------- | --- | - |  | - | --- | -
|                                                                      |  |            
|                                                                      |  | Year Ended 
|                                                                      |  |            
|                                                                      |  | January 31, |     | February 1, |  | February 2,
|                                                                      |  | 2004        |     | 2003        |  | 2002       
|                                                                      |  |             |     |             |  |            
|Service expense  benefits earned during the
    period               |  | $           | 453 |             |  | $           | 358 |   |  | $ | 266 |  
|Interest expense on accumulated postretirement
    benefit obligation |  |             | 252 |             |  |             | 217 |   |  |   | 158 |  
|Net amortization and deferral                                         |  |             |    |             |  |             | (7  | ) |  |   | (88 | )
|                                                                      |  |             |     |             |  |             |     |   |  |   |     |  
|Net postretirement medical expense                                    |  | $           | 705 |             |  | $           | 568 |   |  | $ | 336 |  
|                                                                      |  |             |     |             |  |             |     |   |  |   |     |  

The Company had cumulative unrecognized expense
for the Pension Plan of $40.4 million at January 31,
2004 and $35.5 million at February 1, 2003 primarily
related to the delayed recognition of differences between the
Companys actuarial assumptions and actual results, which
has contributed to the underfunded status of the Pension Plan.
In addition, the Company had cumulative unrecognized expense for
the SERP aggregating $3.9 million at January 31, 2004
and $3.3 million at February 1, 2003.

F-23



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


When funding is required, the Companys
policy is to contribute amounts that are deductible for federal
income tax purposes. During fiscal 2003 and 2002, the Company
was not required to make any contributions but made voluntary
contributions of $8.0 million to the Pension Plan in each
year. Based upon currently available information, the Company
will not be required to make an additional contribution to the
Pension Plan for the plan year ending December 31, 2003.
The Company currently anticipates making a voluntary
contribution of $8.0 million in 2004, consistent with 2003.

Significant assumptions related to the
calculation of the Companys obligations pursuant to its
employee benefit plans include the discount rate used to
calculate the actuarial present value of benefit obligations to
be paid in the future, the expected long-term rate of return on
assets held by the Pension Plan, the average rate of
compensation increase by Pension Plan and SERP participants and
the health care cost trend annual rate for the Postretirement
Medical Plan. These actuarial assumptions are reviewed annually
based upon currently available information. The assumptions
utilized by the Company in calculating the projected benefit
obligations and periodic expense of its employee benefit plans
are as follows:

|                                                                                                        |  |             |        |             |  |             |       |  |  |  |        | 
|------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ----- |  |  |  | ------ | 
|                                                                                                        |  |            
|                                                                                                        |  | Year Ended 
|                                                                                                        |  |            
|                                                                                                        |  | January 31, |        | February 1, |  | February 2,
|                                                                                                        |  | 2004        |        | 2003        |  | 2002       
|                                                                                                        |  |             |        |             |  |            
|Pension Plan & SERP:                                                                                    |  |             |        |             |  |             |       |  |  |  |        | 
|Discount rate                                                                                           |  |             | 6.75%  |             |  |             | 7.50% |  |  |  | 7.50%  | 
|Discount rate used to determine projected                                                               |  |             |        |             |  |             |       |  |  |  |        | 
|benefit obligation at end of year                                                                       |  |             | 6.25%  |             |  |             | 6.75% |  |  |  | 7.50%  | 
|Expected long-term rate of return on Plan Assets                                                        |  |             | 9.00%  |             |  |             | 9.00% |  |  |  | 9.00%  | 
|Rate of future compensation increases                                                                   |  |             | 4.00%  |             |  |             | 4.50% |  |  |  | 4.50%  | 
|Rate of future compensation increases used to
    determine projected benefit obligation at end of year |  |             | 4.00%  |             |  |             | 4.00% |  |  |  | 4.50%  | 
|                                                                                                       
|Postretirement Medical Plan:                                                                            |  |             |        |             |  |             |       |  |  |  |        | 
|Discount rate                                                                                           |  |             | 6.25%  |             |  |             | 6.75% |  |  |  | 7.50%  | 
|Initial healthcare cost trend rate                                                                      |  |             | 12.00% |             |  |             | 9.00% |  |  |  | 10.00% | 
|Ultimate health care cost trend rate                                                                    |  |             | 5.00%  |             |  |             | 5.00% |  |  |  | 5.00%  | 

The assumed discount rate utilized is based, in
part, upon a discount rate modeling process that involves
selecting a portfolio of corporate bonds (rated AA or higher)
with maturities that match the cash flows of the plan. The
discount rate is utilized principally in calculating the
actuarial present value of the Companys obligation and
periodic expense pursuant to its employee benefits plans. To the
extent the discount rate increases or decreases, the
Companys Pension Plan and SERP obligation is decreased or
increased, accordingly.

The assumed expected long-term rate of return on
assets is the weighted average rate of earnings expected on the
funds invested or to be invested to provide for the pension
obligation. It is the Companys current target allocation
to invest the Pension Plan assets in equity securities
(approximately 70 percent) and in fixed income securities
(approximately 30 percent). The Company does not allow the plan
to invest in the Companys stock, AEONs stock or in
the stock of soft goods retailers. The Company periodically
evaluates the allocation between investment categories of the
assets held by the Pension Plan. The expected average long-term
rate of return on assets is based principally on an analysis
using Ibbotson Associates historical investment returns data for
the two major classes of investments. This rate is utilized
primarily in calculating the expected return on plan assets
component of the annual pension expense. To the extent the
actual rate of return on assets realized over the course of a
year is greater than the assumed rate, that years annual
pension expense is not affected. Rather this gain reduces future
pension expense over a period of approximately

F-24



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


5 years. To the extent the actual rate of
return on assets is less than the assumed rate, that years
annual pension expense is likewise not affected. Rather this
loss increases pension expense over approximately 5 years.

The assumed average rate of compensation increase
is the average annual compensation increase expected over the
remaining employment periods for the participating employees.
The Company utilized a rate of 4.0 percent for the periods
beginning December 31, 2003. This rate is utilized
principally in calculating the pension obligation and annual
pension expense.

Assumed healthcare trend rates have a significant
effect on the amounts reported for the Postretirement Medical
Plan. A one-percentage-point change in assumed healthcare trend
rate would have the following effects:

|                                                                |  |             |     |             |  |   |     | 
|--------------------------------------------------------------- |  | ----------- | --- | ----------- |  | - | --- | 
|                                                                |  | 1% Increase |     | 1% Decrease
|                                                                |  |             |     |            
|Effect on total of service and interest expense
    components  |  | $           | 78  |             |  | $ | 68  | 
|Effect on the accumulated postretirement benefit
    obligation |  | $           | 438 |             |  | $ | 390 | 

The Pension Plans weighted average asset
allocations at December 31, 2003 and December 31, 2002
by asset category are as follows:

|                      |       |            |    |                   |  |                   |        |        |  |         |    |     |   |   |        |        |  |  |    |     |  
|--------------------- | ----- | ---------- | -- | ----------------- |  | ----------------- | ------ | ------ |  | ------- | -- | --- | - | - | ------ | ------ |  |  | -- | --- | -
|                      |       |            |    |                   |  |                  
|                      |       |            |    | December 31, 2003 |  | December 31, 2002
|                      |       | Target     |    |                   |  |                  
|                      |       | allocation |    | Amount            |  | Percent           |        | Amount |  | Percent
|                      |       |            |    |                   |  |                   |        |        |  |        
|Equity Securities     |       |            | 70 | %                 |  | $                 | 42,966 |        |  |         | 73 | %   |   | $ | 21,424 |        |  |  | 50 | %  
|Debt Securities       |       |            | 30 | %                 |  |                   | 12,237 |        |  |         | 21 | %   |   |   | 11,542 |        |  |  | 27 | %  
|Cash and money market |       |            |    |                   |  |                   | 3,309  |        |  |         | 6  | %   |   |   | 9,959  |        |  |  | 23 | %  
|                      |       |            |    |                   |  |                   |        |        |  |         |    |     |   |   |        |        |  |  |    |    
|                      | Total |            |    |                   |  |                   | $      | 58,512 |  |         |    | 100 | % |   | $      | 42,925 |  |  |    | 100 | %
|                      |       |            |    |                   |  |                   |        |        |  |         |    |     |   |   |        |        |  |  |    |    



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Information about the expected cash flow for the
    Pension Plan, SERP and Postretirement Medical Plan follows:

|                               |              |              |   |        |  |                |   |       |  |  |   |       | 
|------------------------------ | ------------ | ------------ | - | ------ |  | -------------- | - | ----- |  |  | - | ----- | 
|                               |              |              |   |        |  | Postretirement
|                               |              | Pension Plan |   | SERP   |  | Medical Plan  
|                               |              |              |   |        |  |               
|Expected Company contributions |              |              |   |        |  |                |   |       |  |  |   |      
|                               | 2004         |              | $ | 8,000  |  |                | $ | 5     |  |  | $ | 234   | 
|                              
|Expected plan payments         |              |              |   |        |  |                |   |       |  |  |   |      
|                               | 2004         |              | $ | 1,208  |  |                | $ | 5     |  |  | $ | 234   | 
|                               | 2005         |              |   | 1,402  |  |                |   | 143   |  |  |   | 273   | 
|                               | 2006         |              |   | 1,658  |  |                |   | 657   |  |  |   | 326   | 
|                               | 2007         |              |   | 2,009  |  |                |   | 828   |  |  |   | 386   | 
|                               | 2008         |              |   | 2,334  |  |                |   | 813   |  |  |   | 447   | 
|                               | 2009 to 2013 |              | $ | 20,378 |  |                | $ | 4,665 |  |  | $ | 3,474 | 

The Company has a qualified defined contribution
401(k) plan, which covers substantially all employees. Employees
make contributions to the 401(k) 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
compensation. Employees may elect to invest in the common stock
of the Company at their discretion up to 50% of their total
investment. Company contributions for the years ended
January 31, 2004, February 1, 2003 and
February 2, 2002 were $3,189, $3,318 and $3,118,
respectively.

F-25



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


14.     Commitments

The table below is a summary of the
Companys contractual commitments under non-cancellable
operating leases, merchandise purchases, construction contracts
and service purchase contracts as of January 31, 2004.

|                        |             |             |           |         |        |      |         |         |        |      |         |         |       |            |         |         |       |   |         |         |       |   |        |        |     |   |         |         |   | 
|----------------------- | ----------- | ----------- | --------- | ------- | ------ | ---- | ------- | ------- | ------ | ---- | ------- | ------- | ----- | ---------- | ------- | ------- | ----- | - | ------- | ------- | ----- | - | ------ | ------ | --- | - | ------- | ------- | - | 
|Contractual Obligations |             | Total       |           | 2004    |        | 2005 |         | 2006    |        | 2007 |         | 2008    |       | Thereafter
|                        |             |             |           |         |        |      |         |         |        |      |         |         |       |           
|Operating Leases:       |             |             |           |         |        |      |         |         |        |      |         |         |       |            |         |         |       |   |         |         |       |   |        |        |     |   |         |        
|                        | Real estate |             | $         | 958,249 |        |      | $       | 119,451 |        |      | $       | 121,111 |       |            | $       | 117,494 |       |   | $       | 109,130 |       |   | $      | 99,236 |     |   | $       | 391,827 |  
|                        | Equipment   |             |           | 11,777  |        |      |         | 5,293   |        |      |         | 4,314   |       |            |         | 2,053   |       |   |         | 117     |       |   |        |       |     |   |         |        |  
|Merchandise purchases   |             |             | 453,082   |         |        |      | 453,082 |         |        |      |        |         |       |            |        |         |       |   |        |         |       |   |       |        |     |   |        |        
|Construction contracts  |             |             | 12,132    |         |        |      | 12,132  |         |        |      |        |         |       |            |        |         |       |   |        |         |       |   |       |        |     |   |        |        
|Other contractual       |             |             |           |         |        |      |         |         |        |      |         |         |       |            |         |         |       |   |         |         |       |   |        |        |     |   |         |        
|                        |             | commitments |           |         | 33,660 |      |         |         | 12,886 |      |         |         | 7,801 |            |         |         | 6,758 |   |         |         | 6,073 |   |        |        | 142 |   |         |         |  | 
|                        |             |             |           |         |        |      |         |         |        |      |         |         |       |            |         |         |       |   |         |         |       |   |        |        |     |   |         |        
|Total Commitments       |             | $           | 1,468,900 |         |        | $    | 602,844 |         |        | $    | 133,226 |         |       | $          | 126,305 |         |       | $ | 115,320 |         |       | $ | 99,378 |        |     | $ | 391,827 |        
|                        |             |             |           |         |        |      |         |         |        |      |         |         |       |            |         |         |       |   |         |         |       |   |        |        |     |   |         |        

Operating Leases.The Company conducts the major part of
its operations in leased premises with lease terms expiring at
various dates through 2020. Most store leases provide for base
rentals plus contingent rentals which are a function of sales
volume and provide that the Company pay real estate taxes,
maintenance and other operating expenses applicable to the
leased premises. Included in the schedule above are 43 executed
leases related to future stores not yet opened at
January 31, 2004. Rent expense for the years ended
January 31, 2004, February 1, 2003 and
February 2, 2002 was $112,576, $97,848, and $84,375,
respectively. This includes $1,659, $1,920 and $2,250
respectively, of contingent rental expense and $128, $55 and
$31, respectively of sublease rental income. Additionally, the
Company leases both store computer and other corporate computer
equipment with lease terms between three and five years.

Merchandise Purchases.The Company generally makes purchase
commitments up to six to twelve months in advance of its selling
season. The Company does not maintain any long-term or exclusive
commitments or arrangements to purchase from any vendor.

Construction Contracts.The Company enters into contracts to
facilitate the construction and renovations of its stores. These
contracts include contracts with developers for construction and
with suppliers for materials and fixtures. Total capital
expenditures for fiscal 2004 are currently expected to be
approximately $89.0 million, of which $72.0 million is
allocated to store construction and renovation.

Other Contractual Commitments.The Company routinely enters into
contracts with vendors for products and services in the normal
course of operation. These include contracts for maintenance on
equipment, software licenses, services contracts and advertising
contracts. These contracts vary in their terms but generally
carry 30 day to three year terms.

15.     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 2,377,680, 2,544,000 and
1,181,000 shares of common stock were outstanding during the
years ended January 31, 2004, February 1, 2003 and
February 2, 2002, 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.

F-26



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


|                                                           |  |             |        |             |  |             |        |  |  |  |        | 
|---------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ |  |  |  | ------ | 
|                                                           |  |            
|                                                           |  | Year Ended 
|                                                           |  |            
|                                                           |  | January 31, |        | February 1, |  | February 2,
|                                                           |  | 2004        |        | 2003        |  | 2002       
|                                                           |  |             |        |             |  |            
|Shares for computation of basic net income per
    share   |  |             | 56,531 |             |  |             | 58,724 |  |  |  | 61,459 | 
|Effect of stock compensation plans                         |  |             | 1,370  |             |  |             | 1,467  |  |  |  | 1,980  | 
|                                                           |  |             |        |             |  |             |        |  |  |  |        | 
|Shares for computation of diluted net income per
    share |  |             | 57,901 |             |  |             | 60,191 |  |  |  | 63,439 | 
|                                                           |  |             |        |             |  |             |        |  |  |  |        | 

16.     Quarterly
Results (unaudited)

The following table shows certain unaudited
quarterly information for the Company during fiscal 2003 and
fiscal 2002.

|                                                              |                   |                           |         |           |  |             |         |             |  |   |         |        |  |   |         |        | 
|------------------------------------------------------------- | ----------------- | ------------------------- | ------- | --------- |  | ----------- | ------- | ----------- |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                                              |                   |                          
|                                                              |                   | Fiscal 2003 quarter ended
|                                                              |                   |                          
|                                                              |                   | May 3,                    |         | August 2, |  | January 31, |         | November 1,
|                                                              |                   | 2003                      |         | 2003      |  | 2004        |         | 2003       
|                                                              |                   |                           |         |           |  |             |         |            
|Net sales                                                     |                   | $                         | 394,991 |           |  | $           | 389,624 |             |  | $ | 408,148 |        |  | $ | 431,576 |       
|Gross profit                                                  |                   |                           | 164,800 |           |  |             | 136,445 |             |  |   | 174,174 |        |  |   | 147,236 |       
|Net income                                                    |                   |                           | 29,400  |           |  |             | 18,519  |             |  |   | 34,794  |        |  |   | 21,970  |       
|Net income per share                                          |                   |                           |         |           |  |             |         |             |  |   |         |        |  |   |         |       
|                                                              | Basic             |                           | $       | 0.52      |  |             | $       | 0.33        |  |   | $       | 0.62   |  |   | $       | 0.39   | 
|                                                              | Assuming dilution |                           | $       | 0.51      |  |             | $       | 0.32        |  |   | $       | 0.60   |  |   | $       | 0.38   | 
|Weighted average common shares outstanding (in
    thousands) |                   |                           |         |           |  |             |         |             |  |   |         |        |  |   |         |       
|                                                              | Basic             |                           |         | 56,995    |  |             |         | 56,390      |  |   |         | 56,363 |  |   |         | 56,378 | 
|                                                              | Assuming dilution |                           |         | 58,074    |  |             |         | 57,746      |  |   |         | 57,966 |  |   |         | 57,771 | 
|Cash dividends paid per share                                 |                   | $                         | 0.09    |           |  | $           | 0.10    |             |  | $ | 0.10    |        |  | $ | 0.10    |       
|Market price data                                             |                   |                           |         |           |  |             |         |             |  |   |         |        |  |   |         |       
|                                                              | High              |                           | $       | 29.16     |  |             | $       | 33.65       |  |   | $       | 38.15  |  |   | $       | 33.10  | 
|                                                              | Low               |                           | $       | 23.02     |  |             | $       | 26.01       |  |   | $       | 31.97  |  |   | $       | 29.35  | 

F-27



---



##### Table of Contents



THE TALBOTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dollar amounts in thousands except share
data


|                                                              |                   |                           |         |           |  |             |         |          |  |   |         |        |  |   |         |        | 
|------------------------------------------------------------- | ----------------- | ------------------------- | ------- | --------- |  | ----------- | ------- | -------- |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                                              |                   |                          
|                                                              |                   | Fiscal 2002 quarter ended
|                                                              |                   |                          
|                                                              |                   | May 4,                    |         | August 3, |  | February 1, |         | November
|                                                              |                   | 2002                      |         | 2002      |  | 2003        |         | 2, 2002 
|                                                              |                   |                           |         |           |  |             |         |         
|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   |  |   | $       | 0.49   | 
|                                                              | 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 paid 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  | 

F-28



---



##### 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 9 a.m. on May 27, 2004,

at The John Hancock Hotel & Conference Center


40 Trinity Place


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 January 31, 2004
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 March 25, 2004 was 536.

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.