D i s c o n t i n u e d  O p e r a t i o n s  a n d  N e t  I n c o m e : Net income for fiscal 1997 includes a gain on the sale of the Chadwick's discontinued operation, net of income taxes, of $125.6 million. Net income for fiscal 1996 includes a loss on the disposal of the Hit or Miss discontinued operation, net of income taxes, of $31.7 million. The operating results of both of these divisions prior to their respective sale measurement dates have been reclassified as net income from discontinued operations, net of income taxes, which amounted to income of $29.4 million in fiscal 1997 and $9.7 million in fiscal 1996. In addition, in each of the fiscal years 1998, 1997 and 1996, the Company retired certain long-term debt instruments prior to scheduled maturities, resulting in extraordinary losses, net of income taxes, of $1.8 million, $5.6 million and $3.3 million, respectively.
  Net income, after reflecting the above items, was $304.8 million, or $1.74 per share, in fiscal 1998, $363.1 million, or $2.07 per share, in fiscal 1997 and $26.3 million, or $.12 per share, in fiscal 1996.

O p e r a t i n g  A c t i v i t i e s : Net cash provided by operating activities was $385.5 million, $664.5 million and $254.6 million in fiscal 1998, 1997 and 1996, respectively. The decrease in cash provided by operating activities in fiscal 1998 is primarily the result of an increase in merchandise inventories versus a decrease in fiscal 1997. The increase in cash provided by operating activities in fiscal 1997 versus that of fiscal 1996 reflects the increased earnings attributable to the Marshalls acquisition, as well as the Company's movement to a leaner inventory position as compared to fiscal 1996 year-end levels. Inventories as a percentage of net sales were 16.1% in fiscal 1998, 15.8% in fiscal 1997 and 31.6% in fiscal 1996. The fiscal 1996 percentage is not comparable since Marshalls' net sales are included only from November 18, 1995. Using unaudited pro forma net sales for fiscal 1996 (see Note A to the consolidated financial statements), which assumes Marshalls was acquired at the beginning of the fiscal year, inventories as a percentage of net sales in fiscal 1996 would be 20.7%. The strong sales volume, coupled with tight inventory control, resulted in faster inventory turns, all of which were favorable to cash flows and the inventory ratios for fiscal 1998 and 1997. Working capital was $465.0 million in fiscal 1998, $425.6 million in fiscal 1997 and $332.9 million in fiscal 1996. The increase in both years reflects the acquisition of Marshalls and the benefits of strong operating cash flows.
  The cash flows from operating activities for fiscal 1998 and 1997 have been reduced by $23.2 million and $63.0 million, respectively for cash expenditures associated with the Company's store closing and restructuring reserves, which relate primarily to the Marshalls acquisition, and for obligations relating to the Company's discontinued operations.
  The initial reserve established in the acquisition of Marshalls for the fiscal year ended January 26, 1996 was estimated at $244.1 million and was accounted for in the allocation of purchase price under the purchase accounting method. The initial reserve included $44.1 million for inventory markdowns and $200 million for a store closing and restructuring program. The plan included the closing of 170 Marshalls stores during fiscal 1997 and fiscal 1998. The Company reduced the total reserve by $85.9 million in fiscal 1997 and by an additional $15.8 million in fiscal 1998, primarily due to fewer store closings and a reduction in the estimated cost of settling the related lease obligations. These reserve reductions were accounted for as adjustments to the purchase price allocation of Marshalls and resulted in a corresponding reduction in the value assigned to the long-term assets acquired. The adjusted final reserve balance includes $70.8 million for lease related obligations for 70 store and other facility closings, $9.6 million for property write-offs, $44.1 million for inventory markdowns and $17.9 million for severance, professional fees and all other costs associated with the restructuring plan. Property write-offs were the only non-cash charge to the reserve.
  In connection with the Marshalls acquisition, the Company also established a reserve for the closing of certain T.J. Maxx stores. The Company recorded an initial pre-tax charge to income from continuing operations of $35 million in fiscal 1996 and a pre-tax credit to income from continuing operations of $8 million in fiscal 1997 to reflect a lower than anticipated cost of the T.J. Maxx closings. An additional charge to continuing operations of $700,000 was recorded in fiscal 1998. The adjusted reserve balance includes $15.6 million for lease related obligations of 32 store closings, non-cash charges of $9.8 million for property write-offs and $2.3 million for severance, professional fees and all other costs associated with the closings.
  As of January 31, 1998, all of the Marshalls and T.J. Maxx properties reserved for have been closed. The reserve also includes some activity relating to several HomeGoods store closings, the impact of which is immaterial. Actual spending and charges against the reserve are summarized below:

	Fiscal Year Ended
	January	January	January
	1998	1997	1996
Cash charges:
Lease related obligations	$13,593	$21,277	$307
Inventory markdowns	-	15,886	28,209
Severance and other costs	3,763	13,572	650
Subtotal cash charges	17,356	50,735	29,166
Non-cash charges:
Property write-offs	5,402	11,064	-
Total reserve spending	$22,758	$61,799	$29,166

The remaining reserve balance as of January 31, 1998 of $58 million is virtually all for the estimated cost of future lease obligations of the closed stores and other facilities. It includes estimates and assumptions as to how the leases will be disposed of, which could change, but the Company believes it has adequate reserves to deal with these obligations. The spending of the reserve will reduce operating cash flows in varying amounts over the next ten to fifteen years as the leases expire or are settled. The remaining reserve balance will not have a material impact on future cash flows or the Company's financial condition.
  The Company also has a reserve for future obligations relating to its discontinued operations. Reductions to the reserve in fiscal 1998 of $5.8 million are primarily for settlement costs associated with Chadwick's and for lease related costs associated with the former Zayre stores and Hit or Miss properties. During fiscal 1997, the Company added $10.7 million to the reserve relating to anticipated costs associated with the sale of Chadwick's. Reductions to the reserve in fiscal 1997 of $12.3 million primarily relate to lease obligations. The remaining reserve balance of $17.8 million as of January 31, 1998 is for lease related obligations, primarily for the former Zayre stores, which is expected to reduce operating cash flows in varying amounts over the next ten to fifteen years, as leases are settled or terminated. The remaining reserve balance will not have a material impact on future cash flows or the Company's financial condition. The Company is also contingently liable on certain leases of its discontinued operations. See Note K to the consolidated financial statements for further information.
  The Company has developed plans to address issues related to the impact on its computer systems of the year 2000. Financial and operational systems have been assessed and plans have been developed to address systems modification requirements. The Company expects to spend the aggregate of approximately $10 million on conversion costs, primarily in fiscal years 1998 and 1999. There can be no guarantee that a failure to resolve a year 2000 issue by the Company or a third party whose systems may interface with the Company, would not have a material effect on the Company.