Actual results could differ from those estimates. Significant estimates within the  consolidated financial statements include sales return reserve, inventory reserve, allowance for doubtful accounts, and the lives of intangible assets.

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

Cash and Cash Equivalents - The Company considers all highly liquid debt instruments with a purchased maturity of three months or less to be cash equivalents.

Customer Accounts Receivable - Customer accounts receivable are amounts due from customers on the Company’s credit card, net of an allowance for doubtful accounts. Concentration of credit risk with respect to customer accounts receivable is limited due to the large number of customers to whom the Company extends credit. Ongoing credit evaluation of customers’ financial positions is performed. Collateral is not required as a condition of credit. At February 3, 2001 and January 29, 2000, allowances for doubtful accounts were $2,100 and $1,700, respectively.

Advertising - Advertising costs, which include media, production and catalogs totaled $88,866, $73,858 and $62,517 in the years ended February 3, 2001, January 29, 2000 and January 30, 1999, 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 three months.

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

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

Property and Equipment - Property and equipment is recorded at cost. Depreciation and amortization are pro-vided over the following estimated useful lives using the straight-line method:

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

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

Goodwill - The excess of purchase price over net assets acquired is being amortized over 40 years using the straight-line method. The recoverability of this intangible asset is assessed by determining whether the goodwill balance can be recovered over its remaining useful life through undiscounted future operating cash flows. The amount of goodwill impairment, if any, would be measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds. At February 3, 2001 and January 29, 2000, accumulated amortization of goodwill was $16,903 and $15,559, respectively.

Trademarks - In November 1993, the Company purchased certain trademarks, including the Talbots trade name, from JUSCO (Europe) B.V., a related party (see Note 5). The trademarks, which are registered with the U.S. Patent and Trademark Office and may be renewed indefinitely, are being amortized over 40 years using the straight-line method. At February 3, 2001 and January 29, 2000, accumulated amortization on the trademarks was $17,102 and $14,718, respectively.

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

Finance Charge Income - Finance charge income on customer accounts receivable is treated as a reduction of selling, general and administrative expense. For the years ended February 3, 2001, January 29, 2000 and January 30, 1999, the amounts were $19,031, $16,232 and $15,333, respectively.

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

Foreign Currency Translation - The functional currency of the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date, and for revenue and expense accounts using the average rates of exchange prevailing during the year. Adjustments resulting from such translation are included as a separate component of comprehensive income. Foreign currency transaction gains or losses, whether realized or unrealized, are recorded directly to the Consolidated Statement of Earnings.

Income Taxes - In accordance with Statement of Financial Accounting Standard ("SFAS") No. 109, deferred income taxes are provided to recognize the effect of temporary differences between tax and financial statement reporting. Such taxes are provided for at the anticipated tax rates that will be in place when such temporary differences arise.

Basic and Diluted Net Income Per Share - Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the effect of all dilutive potential common shares, including contingently returnable shares (as determined by the treasury stock method which may include the tax benefit on assumed stock option exercises and assumed vesting of restricted stock).

Comprehensive Income - The Company’s comprehensive net income is comprised of reported net income plus the impact of changes in the cumulative foreign currency translation adjustment. Comprehensive income is included in the Consolidated Balance Sheets and Statements of Stockholders’ Equity.

Revenue Recognition - The Company recognizes revenue at the point-of-sale or upon shipment. The Company provides for estimated returns. Finance charge revenue on customer accounts receivable is recognized in the period it is earned.

Supplemental Cash Flow Information - Interest paid on a cash basis for the years ended February 3, 2001, January 29, 2000 and January 30, 1999 was $7,557, $7,363 and $7,538, respectively. Income tax payments during the years ended February 3, 2001, January 29, 2000 and January 30, 1999 were $60,419, $33,418 and $19,457, respectively.

New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 significantly modifies accounting and reporting standards for derivatives and hedging activities. SFAS No. 137 and 138 delayed and modified the original pronouncement. These statements do not have a material impact on the Company’s consolidated financial statements.

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

Reclassifications - Certain reclassifications have been made to the January 29, 2000 and January 30, 1999 consolidated financial statements to conform with the February 3, 2001 presentation.