AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1998.

REGISTRATION NO. 333-62235
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

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CORNERSTONE BRANDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 5961 01-0520036
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)

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415 CONGRESS STREET, SUITE 600
PORTLAND, MAINE 04101
(207) 780-6585
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

----------------
WILLIAM T. END
CHIEF EXECUTIVE OFFICER
CORNERSTONE BRANDS, INC.
415 CONGRESS STREET, SUITE 600
PORTLAND, MAINE 04101
(207) 780-6585
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)

----------------
COPIES TO:

MARK G. BORDEN, ESQ. KEITH F. HIGGINS, ESQ.
PATRICK J. RONDEAU, ESQ. ROPES & GRAY
HALE AND DORR LLP ONE INTERNATIONAL PLACE
60 STATE STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 951-7000
TELEPHONE: (617) 526-6000 TELECOPY: (617) 951-7050
TELECOPY: (617) 526-5000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

----------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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- -------------------------------------------------------------------------------

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED OCTOBER 28, 1998

CORNERSTONE BRANDS, INC.

COMMON STOCK

Of the shares of Common Stock offered hereby, shares are being sold by
Cornerstone Brands, Inc. ("Cornerstone" or the "Company") and shares are
being sold by certain stockholders of the Company (the "Selling Stockholders").
The Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders."

Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $ and $ per share. See "Underwriting" for a
discussion of factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing on the New York
Stock Exchange (the "NYSE") under the symbol "CSB". At the request of the
Company, the Underwriters have reserved up to shares of the Common Stock
offered hereby for sale to certain employees of the Company and certain other
persons, at the initial public offering price.

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders(2)
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Per Share....... $ $ $ $
Total(3)........ $ $ $ $

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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting estimated expenses of $ payable by the Company.

(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to additional shares of
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Stockholders will total $ ,
$ , $ and $ , respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities LLC on or about , 1998.

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NATIONSBANC MONTGOMERY SECURITIES LLC

GOLDMAN, SACHS & CO.

MERRILL LYNCH & CO.

, 1998

[The front cover of the Prospectus opens out in a "double-gatefold"
arrangement. When opened fully, two pages of text and artwork adjoin the
outside of the front cover to the right and face outward with the front cover
and three pages of text and artwork face inward from the back sides of the
outward-facing pages. On the outward-facing adjoining page immediately to the
right of the outside front cover, the following text is located in a column
down the left side:]

CORNERSTONE BRANDS

Cornerstone was founded in 1995 to capitalize on the opportunity to build a
family of direct marketing brands which serve discriminating and well-
educated consumers in upscale households.

The Cornerstone family currently consists of seven direct marketing
companies that offer high-quality home, leisure and casual apparel
products, primarily through catalogs. These companies are Ballard Designs,
Frontgate, Garnet Hill, Smith+Noble, The Territory Ahead, TravelSmith
Outfitters and Whispering Pines. Each Cornerstone company is distinguished
by a strong brand image, a clearly focused merchandising concept, high-
quality creative execution and exceptional customer service.

[A panel on the right side of the page contains a photograph of catalog covers
from the seven companies that make up Cornerstone Brands, Inc. The following
text is located at the bottom of the page:]

----------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING TRANSACTIONS, THE PURCHASE OF COMMON
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

----------------

Certain trademarks and trade names referred to in this Prospectus are the
property of Cornerstone or a Cornerstone company. See "Business--Trademarks."

[The following text is located on the outward-facing adjoining page two to the
right of the outside front cover:]

A family of distinctive direct marketing brands
Cornerstone Brands

[The three inward-facing pages are divided into seven columnar panels, each
highlighting one of the Cornerstone companies. At the top of the leftmost
panel is a photograph of a Ballard Designs catalog cover. The following text
is located below the photograph:]

Ballard Designs

Accents for the home and garden

.Atlanta, Georgia

.Founded 1982

.Provides decorating ideas, furnishings and finishing touches

[At the bottom of the first panel are photographs of a clock with a moon face
and of a dining table with chairs, both of which are products from the Ballard
Designs catalog. At the top of the second panel from left is a photograph of a
Frontgate catalog cover. The following text is located below the photograph:]

Frontgate

Accessories and furnishings to enhance the quality of life at home

.Cincinnati, Ohio

.Founded 1991

.Focus on quality and service

[At the bottom of the second panel are photographs of an outdoor grill, of a
decorative glass bird and of an outdoor dining table with chairs, all of which
are products from the Frontgate catalog.]

[At the top of the third panel from left is a photograph of a Garnet Hill
catalog cover. The following text is located below the photograph:]

Garnet Hill

A source of natural fiber bedding, home furnishings, clothing and
accessories

.Franconia, New Hampshire

.Founded 1976

.Customers appreciate fresh designs and consistently high quality products

[At the bottom of the third panel are photographs of a bed with linens and of
a pile of linens, both of which are products from the Garnet Hill catalog. At
the top of the fourth panel from left is a photograph of a Smith+Noble catalog
cover. The following text is located below the photograph:]

Smith+Noble

Custom window treatments for customers who appreciate good design and
value

.Corona, California

.Founded 1992

.Provides design, selection and service at competitive prices

[At the bottom of the fourth panel are photographs of wooden blinds and of
fabric draperies, both of which are products from the Smith+Noble catalog. At
the top of the fifth panel from left is a photograph of a The Territory Ahead
catalog cover. The following text is located below the photograph:]

The Territory Ahead

Clothing and accessories for serious adventures or casual weekends

.Santa Barbara, California

.Founded 1988

.Inviting photographs and copy appeal to customers

[At the bottom of the fifth panel are photographs of a shirt and vest and of a
jacket, all of which are products from the The Territory Ahead catalog.]

[At the top of the sixth panel from left is a photograph of a TravelSmith
catalog cover. The following text is located below the photograph:]

TravelSmith Outfitters

Clothing and accessories for leisure and adventure travelers

.Novato, California

.Founded 1992

.Special fabrics, features and gear make TravelSmith a fine travel resource

[At the bottom of the sixth panel are photographs of a women at the helm of a
sailboat, of a shirt and of a camera, all of which are from the TravelSmith
catalog. At the top of the seventh panel from left is a photograph of a
Whispering Pines catalog cover. The following text is located below the
photograph:]

Whispering Pines

Casual apparel, decorative accessories and home furnishings for life in
the cabin

.Fairfield, Connecticut

.Founded 1993

.Product offerings help customers achieve a comfortable, nostalgic feeling
of family retreats

[At the bottom of the seventh panel are photographs of a woman in a sweater, of
two throw pillows and of a lamp and coffee mugs, all of which are from the
Whispering Pines catalog.]

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
contained elsewhere in this Prospectus. Except as otherwise indicated, all
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option. The Company's fiscal year ends on the Saturday closest to
January 31. Unless the context otherwise requires, any reference to the
Company's financial and operating data in a given year refers to the fiscal
year ended on the Saturday closest to January 31 of the following year (for
example, references to net sales in 1997 refer to net sales in the fiscal year
ended January 31, 1998).

THE COMPANY

Cornerstone is a family of seven direct marketing companies that offer high-
quality home, leisure and casual apparel products, primarily through catalogs.
Each Cornerstone company is distinguished by a strong brand image, a clearly
focused merchandising concept, high-quality creative execution and exceptional
customer service. The Cornerstone family of companies currently includes
Ballard Designs, Frontgate, Garnet Hill, Smith+Noble, The Territory Ahead,
TravelSmith and Whispering Pines. An important strategy of the Company is to
feature "branded" products (i.e., sold under a Cornerstone company's brand
name), many of which are designed by that company and not available in other
catalogs. All of the Cornerstone companies target the same customer segment,
comprised of affluent and well-educated consumers, generally age 35 to 54.
Management believes Cornerstone's focus on providing distinctive, high-quality
merchandise to the same target customer segment has contributed to the
Company's strong sales and earnings growth and to the growth in its customer
database. Cornerstone's highly experienced corporate management team and team
of talented catalog entrepreneurs have a successful track record of operating
and growing leading direct marketing companies. In 1997, the Company's net
sales, net income and pro forma net income (adjusted to include tax provisions
for non-taxed companies) were $216.3 million, $9.5 million and $7.4 million,
respectively. In the six months ended August 1, 1998, the Company's net sales,
net income and pro forma net income were $139.3 million, $5.7 million and $4.0
million, respectively.

Cornerstone was founded in 1995 to capitalize on the opportunity to build a
family of direct marketing companies targeting affluent and well-educated
consumers and on the growing popularity of purchasing merchandise through
direct channels such as catalog shopping and the Internet. Cornerstone has
achieved significant scale through its seven acquisitions and internal growth
by these companies. The Company has selectively pursued those strategic
acquisitions that satisfy its focused acquisition criteria, which include:
high-quality merchandise offerings in the home, leisure and casual apparel
markets; an affluent target customer base; a strong brand identity; exceptional
customer service; a talented and entrepreneurial management team; profitable
operations, high average order value and high net sales per catalog mailed; a
track record of growth; and substantial opportunity for future growth and
improved profitability. As a result of both acquisitions and internal growth,
Cornerstone's net sales increased 72% between the first six months of 1997 and
the first six months of 1998.

Cornerstone's operating model, which it believes is unique in the direct
marketing industry, enables each Cornerstone company to retain the creativity,
entrepreneurial spirit and responsiveness of a smaller company while also
realizing the benefits and efficiencies offered by a larger enterprise.
Cornerstone recognizes the importance of brand personality and vision in
maintaining differentiated brand images and places great emphasis on the
retention and preservation of the entrepreneurial spirit and management teams
of the individual Cornerstone companies. Rather than totally integrating the
acquired business into Cornerstone's existing operations, Cornerstone generally
leaves the management and headquarters of the acquired company intact and
allows the management team to retain responsibility for critical "front-end"
business functions such as merchandising, creative presentation, marketing and
catalog circulation, while assuming responsibility for certain "back-end"
services, such as order fulfillment, certain customer service operations,
customer database management and certain administrative functions, that can be
more efficiently performed in a centralized manner.

In recent years there has been a shift of retail market share from
traditional retail sales to direct marketing sales, which include the sale of
merchandise through catalogs, telemarketing, print media, radio and television
advertising and the Internet. Cornerstone believes that the trend toward non-
store retailing, and catalog shopping in particular, is being driven by a
number of factors, including: the ease and convenience of shopping at home,
which is particularly attractive to time-constrained families; increasing
dissatisfaction with the level of customer service from many retailers; and
increasing consumer confidence in and awareness of the quality of customer
service and reliability offered by leading direct marketers. The Internet is
also becoming an increasingly significant global medium for communication and
commerce, and management believes that international markets represent a
sizeable consumer base and growth opportunity for direct marketing sales.

COMPETITIVE STRENGTHS

The Cornerstone family of brands includes direct marketing companies in the
home, leisure and casual apparel markets. Cornerstone believes the competitive
strengths listed below are critical to its success. For a more detailed
description of these competitive strengths, see "Business--Competitive
Strengths."

. Unique Operating Model. Cornerstone's unique operating model allows the
management teams of the individual Cornerstone companies to retain
responsibility for critical front-end business functions and supports them
with certain back-end services more efficiently performed in a centralized
manner. This model enables each Cornerstone company to retain the
creativity, entrepreneurial spirit and responsiveness of a smaller company
while also realizing the benefits and efficiencies offered by a larger
enterprise.

. Well Known and Highly Regarded Brands. Each Cornerstone company emphasizes a
strong brand image with the goal of establishing its brand as the
authoritative source for its lifestyle products. Cornerstone believes that
its branded product offerings and its strong brand identities enhance the
performance of its catalogs, provide a competitive advantage by fostering
loyalty and long-term customer relationships and will position Cornerstone
to capitalize on other market opportunities such as the Internet,
international markets and retail.

. Distinctive, High-Quality Products. The Cornerstone companies offer
attractive, high-quality merchandise designed to appeal to the Company's
affluent target customers, at prices that provide them with significant
value. The Cornerstone companies devote substantial resources to the
development, design and sourcing of products that are consistent with and
enhance the brand image of that company and are not readily available from
other sources.

. Focus on Attractive Demographic Market. All of the Cornerstone companies
target their merchandise offerings primarily at affluent and well-educated
consumers, generally age 35 to 54. Cornerstone believes that focusing on a
single market segment enables it to understand and serve its customers
better and enhances the benefits that can be derived from sharing customer
databases and the results of various marketing initiatives among the
Cornerstone companies.

. Exceptional Customer Service. Each Cornerstone company maintains a customer-
focused approach at all stages of its business which is aimed at building
lifetime customer relationships. Cornerstone believes that offering truly
exceptional customer service through high in-stock positions, same-day
shipping, in-depth product knowledge and liberal return policies encourages
repeat purchases and enhances the brand identity and reputation of the
Cornerstone companies within their target customer market.

. Synergies and Efficiencies Resulting from Combined Enterprise. Cornerstone's
business structure is designed to enable each Cornerstone company to realize
sales growth, performance benefits and cost savings from the combined
enterprise. Cornerstone has been successful in improving the financial
results of each Cornerstone company since the time it was acquired, and
Cornerstone expects to realize further improvements as these initiatives
continue.

GROWTH INITIATIVES

Cornerstone's objective is to build the direct marketing industry's leading
family of brands offering high-quality home, leisure and casual apparel
products to affluent and well-educated consumers. Cornerstone's key growth
initiatives are listed below. For a more detailed description of these growth
initiatives, see "Business--Growth Initiatives."

. Build Existing Catalogs. Cornerstone's primary growth strategy is to build
aggressively the sales and productivity of its existing catalog titles. To
accomplish this, Cornerstone is focusing on increasing the size of its
customer database through initiatives such as increasing catalog circulation
to prospective customers and developing proprietary mailing lists; and
increasing the productivity of its customer database and mailings through
initiatives such as increasing the number of editions mailed, expanding
merchandise offerings, increasing page counts, reformatting the creative
presentation and increasing the proportion of branded products.

. Selectively Pursue Strategic Acquisitions. The Company intends to pursue
strategic acquisitions within the direct marketing industry that meet its
focused acquisition criteria. Cornerstone believes the experience gained
from the acquisitions it has made to date and its strategy of allowing the
management teams of the acquired companies to retain significant
responsibility make Cornerstone an attractive partner for many target
companies and facilitate the process of integrating acquired companies.

. Develop New Titles. The Company may introduce new catalog titles to serve
market niches that are not currently addressed effectively by the Company.
Cornerstone believes that new titles could capitalize on the brand identity
of a Cornerstone company, Cornerstone's operational infrastructure, the
customer databases of the various Cornerstone companies and the experience
accumulated by Cornerstone management in addressing its target market.

. Develop Additional Growth Opportunities. Cornerstone believes that, due to
its strong brand identities and its expertise in fulfillment, customer
service and marketing, it is well positioned to capitalize on additional
growth opportunities such as the Internet, international markets and retail.

The competitive strengths and growth initiatives listed above are subject to
a number of factors and risks that could impair the Company's competitive
position and hinder its growth initiatives. For a discussion of such issues,
please see "Risk Factors."

CORPORATE OVERVIEW

The Cornerstone Brands Group, Inc. was organized as a Delaware corporation in
June 1995. In August 1998, Cornerstone Brands, Inc. (the "Company") was
organized as a Delaware corporation to serve as a holding company for The
Cornerstone Brands Group, Inc. The Company's principal office is located at 415
Congress Street, Suite 600, Portland, Maine 04101, and its telephone number is
(207) 780-6585.

References in this Prospectus to the "Cornerstone companies" mean the
following subsidiaries of the Company: Ballard Designs, Inc., a Georgia
corporation ("Ballard Designs"); Cinmar, Inc., an Ohio corporation, which
operates the Frontgate catalog ("Frontgate"); Garnet Hill, Inc., a New
Hampshire corporation ("Garnet Hill"); Smith & Noble LLC, a Delaware limited
liability company ("Smith+Noble"); The Territory Ahead, Inc., a Delaware
corporation ("The Territory Ahead"); TravelSmith Outfitters, Inc., a California
corporation ("TravelSmith"); and Whispering Pines LLC, a Delaware limited
liability company ("Whispering Pines"). The Company owns (directly or through a
subsidiary) all of the outstanding capital stock of or membership interest in
Ballard Designs, Frontgate, Garnet Hill, Smith+Noble and The Territory Ahead;
owns approximately 60% of the outstanding capital stock of TravelSmith; and
owns 80% of the membership interest in Whispering Pines. As described further
in "Business," Cornerstone has control over the business strategy and
significant corporate decisions for each of the Cornerstone companies other
than TravelSmith. Cornerstone believes it exerts

significant influence over the business strategy and significant corporate
decisions for TravelSmith, but this control is limited by certain contractual
provisions. See "Certain Transactions--Contractual Arrangements with Other
Equityholders of Cornerstone Companies--TravelSmith."

The Company is a holding company without independent operations, although
certain subsidiaries of the Company (other than the seven Cornerstone
companies) support the front-end business functions of the Cornerstone
companies by providing certain back-end services, as described elsewhere in
this Prospectus. References in this Prospectus to "the Company" or
"Cornerstone" include, except where the context otherwise requires, Cornerstone
Brands, Inc. and its subsidiaries.

THE OFFERING

Common Stock offered by: The
Company.......................... shares
The Selling Stockholders.......... shares
Common Stock to be outstanding
after the offering............... shares(1)
Use of proceeds................... To repay bank debt, and for working capital
and other general corporate purposes,
including possible acquisitions. See "Use
of Proceeds."
NYSE symbol....................... CSB

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(1) Based on the number of shares of Common Stock outstanding on September 26,
1998. Excludes an aggregate of (i) 1,511,815 shares of Common Stock
issuable pursuant to options outstanding as of September 26, 1998 at a
weighted average exercise price of $4.35 per share and (ii) 31,000 shares
of Common Stock issuable upon the exercise of warrants outstanding as of
September 26, 1998 at an exercise price of $.01 per share.

SUMMARY FINANCIAL DATA

(AMOUNTS IN THOUSANDS, EXCEPT OPERATING DATA)

SIX MONTHS
YEAR ENDED ENDED
------------------------------------- --------------------------
JAN. 31, AUG. 2,
JAN. 27, JAN. 25, JAN. 31, 1998 (PRO AUG. 2, 1997 (PRO AUG. 1,
1996(1) 1997 1998 FORMA)(2) 1997 FORMA)(2) 1998
-------- -------- -------- --------- ------- --------- --------

STATEMENT OF OPERATIONS
DATA:
Net sales............... $82,412 $106,100 $216,335 $240,129 $80,807 $104,601 $139,269
Gross profit............ 38,721 51,350 104,084 115,472 38,398 49,785 68,253
General and
administrative......... 5,664 6,911 13,450 15,695 4,992 7,238 9,168
Restructuring charge.... -- -- 943 943 -- -- 2,838
Operating income........ 489 6,296 10,733 9,985 5,551 4,802 3,724
Equity in net income
(loss) of affiliate.... (20) 392 1,809 1,809 995 995 2,208
Net income.............. 167 6,070 9,506 9,024 4,983 4,500 5,653
Pro forma net
income(3).............. 111 4,600 7,381 6,899 3,854 3,371 4,007

AUG. 1, 1998
---------------------
PRO PRO FORMA AS
FORMA(4) ADJUSTED (5)
-------- ------------

BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,014 $
Working capital........................................... 1,188
Total assets.............................................. 149,314
Long-term debt (net of current maturities)................ 313
Stockholders' equity...................................... 90,754

YEAR ENDED
---------------------------------------
JAN. 25, JAN. 31,
JAN. 25, JAN. 31, 1997 (PRO 1998 (PRO
1997 1998 FORMA) FORMA)
-------- -------- --------- ---------

OPERATING DATA(6):
Net sales growth....................... 75% 104% 26% 34%
Total catalogs circulated (000s)....... 41,939 77,144 65,038 84,853
12-month buyers (000s) (7)............. 512 1,033 884 1,128
Average order value.................... $ 160 $ 170 $ 158 $ 169

- --------

(1) The statement of operations data for the year ended January 27, 1996
combine the Company's consolidated financial statements for the year ended
January 27, 1996 with those of Frontgate and Cornerstone Holdings Group,
Inc., a predecessor entity ("Cornerstone I"), for periods prior to their
acquisition by the Company. Frontgate and Cornerstone I are considered
predecessors of the Company for purposes of this presentation, but their
results are not included in the Company's results of operations for the
purpose of reporting under generally accepted accounting principles.
Accordingly, the statement of operations data for the year ended January
27, 1996 differ from the audited consolidated financial statements of the
Company for the same period included elsewhere in this Prospectus.

of operations that would have been achieved if such acquisitions had
occurred at the beginning of 1997. See Note 2 of Notes to Consolidated
Financial Statements. The Territory Ahead and Garnet Hill have historically
been more profitable in the second half of the year, so the inclusion of
first-half operating results of such companies in these pro forma operating
results has a negative impact on the Company's net income for the periods
shown.

(3) Pro forma net income has been computed by adjusting net income, as
reported, to record an income tax provision (or benefit) for Ballard
Designs and Smith+Noble, which were not subject to income tax at the entity
level prior to their acquisitions by the Company. See Note 3 of Notes to
Consolidated Financial Statements.

(4) Reflects conversion of all outstanding shares of Convertible Preferred
Stock into an aggregate of 14,148,786 shares of Common Stock as if it had
occurred on August 1, 1998. Such conversions occurred in August and
September 1998. See Notes 6 and 7 of Notes to Consolidated Financial
Statements.

(5) Adjusted to give effect to the sale by the Company of shares of Common
Stock at an assumed initial public offering price of $ per share, after
deducting the estimated underwriting discount and offering expenses payable
by the Company. See "Use of Proceeds" and "Capitalization."

(6) Pro forma operating data include data for The Territory Ahead, Garnet Hill
and Whispering Pines for all of the periods presented (including periods
prior to their acquisition by Cornerstone). Operating data do not include
data for TravelSmith, as TravelSmith financial results are not consolidated
with those of the Company.

(7) Represents the combined number of buyers who have purchased from the
Cornerstone companies in the preceding 12 months or since date of
acquisition, whichever is less, without deductions for persons who have
purchased from more than one Cornerstone company. Accordingly, the numbers
of individual names in the Cornerstone database are less than the numbers
indicated.

RISK FACTORS

Before purchasing the shares of Common Stock offered hereby, a prospective
investor should consider the specific factors set forth below as well as the
other information set forth elsewhere in this Prospectus.

LIMITED OPERATING HISTORY

The Company was incorporated in June 1995 and has a limited operating
history. Although many of the Cornerstone companies operated before 1995, they
have operated under the ownership of Cornerstone for much shorter periods of
time. In light of the Company's limited operating history, the significant
number of acquisitions Cornerstone has completed within the last 18 months,
and Cornerstone's strategy of continuing to pursue strategic acquisitions, the
Company's historical operating results are not an indicator of future
operating performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RISKS ASSOCIATED WITH NEW OPERATIONS CENTER

The Company is building a new operations center outside of Cincinnati, Ohio,
which has been designed to handle the fulfillment functions of all of the
Cornerstone companies, and certain other customer-related operations.
Cornerstone's current estimate of the total cost of the operations center,
including land, construction and equipment, is between $60 and $65 million.
Although Cornerstone expects to fund a majority of this cost by selling this
facility and leasing it back from the purchaser, there can be no assurance
that this sale-leaseback arrangement will be completed. In addition, the
actual cost of this facility may exceed Cornerstone's current estimate.
Cornerstone has completed the design of the facility, has purchased the land,
and has commenced construction. Cornerstone currently expects that the
operations center will be operational in the summer of 1999, and that it will
transition the fulfillment operations of the Cornerstone companies (other than
Smith+Noble, which relies on direct delivery by its contract manufacturers)
there during the balance of 1999 and 2000. However, Cornerstone may experience
delays in opening the operations center or in moving fulfillment operations to
this new facility. Although the Company believes that its current fulfillment
centers will be sufficient to meet its needs until the operations center
opens, several Cornerstone companies are currently using multiple fulfillment
centers, resulting in operational and economic inefficiencies. In addition,
Cornerstone intends to install a new computer system to manage the operations
center, which could further complicate the transition. Cornerstone has no
experience managing or operating the fulfillment services of all of the
Cornerstone companies on a combined basis. Any delays or problems in
transitioning to the new operations center or in the operation of this
facility could result in an interruption in the receipt and distribution of
merchandise, customer service problems and continued operational and economic
inefficiencies. Any of the foregoing problems could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Cornerstone Operations Center."

DEPENDENCE ON KEY PERSONNEL

The success of Cornerstone depends to a significant extent on its five
executive officers, William T. End, Donald J. Steiner, John A. O'Steen, Mark
Fasold and Paul D. Tarvin. In addition, Cornerstone's strategy of allowing the
management teams of acquired companies to continue to exercise significant
management responsibility for that company makes it especially important that
Cornerstone retain the top executives (including the chief executive officers,
merchants and creative teams) of the Cornerstone companies and of any
additional companies Cornerstone acquires in the future. Cornerstone's success
will also depend in significant part on the ability of both Cornerstone and
the Cornerstone companies to continue to attract and retain qualified
personnel. Competition for qualified personnel is intense, particularly given
the scarcity of qualified and experienced management in the direct marketing
industry. The loss of the services of one or more key employees, or the
inability to continue to attract and retain qualified personnel, could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Employees" and "Management."

RISKS ASSOCIATED WITH ACQUISITIONS

Cornerstone has built its family of companies entirely through acquisitions.
Five of these acquisitions (The Territory Ahead, Garnet Hill, Ballard Designs,
Whispering Pines and Smith+Noble) have occurred since the beginning of 1997.
In the six months ended August 1, 1998, these five companies represented 64%
of Cornerstone's net sales. The success of Cornerstone's business will be
largely dependent upon its ability to integrate certain operations of these
companies into Cornerstone's overall operations on a timely and economic
basis. This integration will require that Cornerstone, among other things,
integrate those business services (such as fulfillment) that can be more
efficiently performed in a centralized manner; integrate and coordinate
management information systems, financial reporting, employee benefits and
other administrative functions; retain key employees and assimilate diverse
corporate cultures; and effectively manage geographically dispersed
operations. Moreover, the presence of minority ownership interests in certain
Cornerstone companies and Cornerstone's strategy of allowing the executives of
the individual Cornerstone companies to retain significant autonomy in the
management and operation of those companies makes the integration process
somewhat more difficult and prevents Cornerstone from realizing certain cost
efficiencies that would be possible in a more centralized management
structure. Any difficulties encountered in the process of integrating these
companies, or any diversion of the attention of Cornerstone management
resulting from this process, could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Cornerstone Family of Brands."

Cornerstone plans to pursue additional acquisitions that are consistent with
its business strategy. Because competition for attractive acquisitions is
increasing and Cornerstone's acquisition strategy is specifically focused,
Cornerstone may not be able to identify additional acquisition candidates that
fit Cornerstone's acquisition criteria or consummate any desired acquisitions
on acceptable terms. Moreover, the Company's revolving credit agreement
contains certain restrictions on acquisitions by the Company. In addition,
Cornerstone may not be able to integrate successfully any acquired businesses
into Cornerstone's operations or derive the benefits expected from any
consummated acquisitions. Moreover, the investigation and negotiation of
acquisitions and the integration of acquired businesses require a significant
amount of management time, which may divert management attention from other
business issues. Acquisitions may also have an adverse effect on the Company's
results of operations due to non-recurring charges associated with the
acquisition (for example, the Smith+Noble acquisition resulted in transaction
expenses of approximately $3.8 million), or the amortization of goodwill and
other acquired intangible assets (as has been the case with five of the
Company's seven acquisitions to date), and may also result in dilutive equity
issuances or the use of cash reserves or the incurrence of debt to fund the
purchase price of such acquisitions. See "Business--Growth Initiatives--
Selectively Pursue Strategic Acquisitions."

RISKS INHERENT IN DIRECT MARKETING BUSINESS

Cornerstone's business involves a number of risks inherent in the operation
of a direct marketing business. The production and mailing of a particular
catalog edition involve significant expenses, which cannot be adjusted based
upon the actual performance of the catalog. In addition, direct marketing
operations involve relatively high costs, such as merchandise costs and the
expenses associated with order-processing, fulfillment, merchandise returns
and management information systems, which also are difficult to adjust in a
limited time period based upon the success of a particular catalog or group of
catalogs. Moreover, the successful operation of a direct marketing business is
dependent upon the timely and efficient preparation and distribution of
catalogs. In addition, in light of Cornerstone's emphasis on exceptional
customer service, the efficient and uninterrupted operation of order-
processing and fulfillment functions is critical to its business. These
aspects of the Company's operations rely heavily on a number of different
outside service providers, such as printers, telecommunications companies and
delivery companies. Any interruption in services from outside service
providers, including delays or disruptions resulting from labor disputes (such
as the 1997 UPS strike), power outages, human error, adverse weather
conditions or natural disasters, could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Merchandising" and "--Cornerstone Operations Center."

INABILITY TO CONTROL EXTERNAL COSTS

The Company's business is affected by a number of external costs that are
beyond Cornerstone's control and that have from time to time increased
significantly and unexpectedly. Examples of such costs include catalog paper
prices, which have historically been volatile and increased dramatically in
1995; postage rates, which have experienced significant increases, will
increase in January 1999 and can be expected to increase further in the
future; and commercial shipping rates. Another significant cost that the
Company has limited ability to control is labor, particularly in order-
processing and fulfillment operations, which are labor-intensive operations.
Although none of the Company's employees are represented by a union and the
Company is not aware of any union organizing activity, the unionization of a
group of Cornerstone employees (particularly at its new operations center)
could significantly increase the Company's labor costs. Any significant
increase in these costs, particularly an increase which was not anticipated by
the Company, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON SUPPLIERS; FOREIGN SOURCING

The successful operation of Cornerstone's business is dependent on the
timely delivery of merchandise from its vendors and suppliers. Smith+Noble has
all of its products made to order and delivered directly to the customer by
its contract manufacturers, and is therefore even more reliant upon successful
relationships with its suppliers. The Cornerstone companies have few exclusive
or long-term contracts with any suppliers, and typically purchase merchandise
on a purchase order basis. Certain vendors are especially important to the
Cornerstone companies and, in particular, Smith+Noble purchases a majority of
its products from a single vendor. The loss of Smith+Noble's primary vendor,
or the loss of several other principal vendors of other Cornerstone companies,
or any significant delay in the delivery of products by Cornerstone's vendors
could result in a loss of sales, increased fulfillment expenses, and damage to
Cornerstone's customer service reputation, and could therefore have a material
adverse effect on the Company's business, operating results and financial
condition.

CHANGING CONSUMER PREFERENCES; GENERAL ECONOMIC CONDITIONS

The Company believes that its merchandise appeals to consumers in its target
markets. However, there can be no assurance that consumer interest in the
Company's merchandise will continue. In addition, all of the Company's
merchandise is subject to changing consumer preferences. A shift in consumer
preferences away from the merchandise which the Company offers could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's future success depends in part on its
ability to anticipate and respond to changes in consumer preferences and there
can be no assurance that the Company will respond in a timely or commercially
appropriate manner to such changes. In addition, the Company's business is
sensitive to changes in customers' spending and discretionary income patterns
which, in turn, are controlled to a large extent by consumer confidence and
prevailing economic conditions, including movements

in the stock market, new home buying activity and levels of travel,
recreational and leisure activity. Failure to anticipate and respond to
changing consumer preferences or adverse economic conditions in one or more
regions could lead to, among other things, lower sales of the Company's
products, significant markdowns or write-offs of inventory, increased
merchandise returns, and lower margins, which would have a material adverse
effect on the Company's business, operating results and financial condition.

RISKS ASSOCIATED WITH BRANDED MERCHANDISE AND OVERSTOCKS

An important strategy of the Company is to feature branded products (i.e.,
products sold under a Cornerstone company's brand name), and the Company
expects that the percentage of branded merchandise will increase. The
Company's use of branded merchandise requires it to incur costs and risks
relating to the design and purchase of its products, including longer lead
times for orders and higher initial purchase commitments. In addition, the use
of branded merchandise has in the past limited, and is likely to continue to
limit, the Company's ability to return unsold products to vendors, which
results in higher markdowns in order to sell excess inventory. Cornerstone's
commitment to customer service typically results in more emphasis being placed
on a high in-stock position (and thus the ability to fulfill orders
immediately) than on minimizing the risk of excess inventory, which may also
contribute to higher markdowns. The Company's failure to successfully execute
its branded merchandise strategy or to achieve anticipated profit margins on
these goods, or a higher than anticipated level of overstocks, could have a
material adverse effect on its business, operating results and financial
condition. See "Business--Merchandising" and "--Purchasing and Inventory
Management."

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company's operating results have fluctuated significantly from quarter
to quarter, and the Company expects to continue to experience fluctuations in
its quarterly operating results. Factors such as timing and expense of catalog
mailings by the various Cornerstone companies, the level of customer response
to catalogs, changes in merchandise mix, the timing of and level of price
reductions in sale catalogs, delays in fulfillment, merchandise returns,
merchandise offerings by competitors, and general economic conditions could
contribute to this quarterly variability. In addition, Cornerstone's expense
levels are based in significant part on expectations of future sales levels,
and therefore a shortfall in expected sales is likely to have a
disproportionate adverse effect on net income. As a result of these and other
factors, it is possible that in some future quarter the Company's operating
results will fall below the expectations of investors, which would likely
result in a significant reduction in the market price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

RISKS ASSOCIATED WITH RIGHTS OF OTHER EQUITYHOLDERS OF CORNERSTONE COMPANIES

The Company wholly owns five of the seven Cornerstone companies (Ballard
Designs, Frontgate, Garnet Hill, Smith+Noble and The Territory Ahead).
Cornerstone owns approximately 60% of TravelSmith and 80% of Whispering Pines.
Because of the fiduciary duties that Cornerstone may owe to the minority
equityholders in these companies, and the contractual protections that some of
these equityholders have, Cornerstone may not always be able to manage and
operate these companies in the manner that is most advantageous to Cornerstone
and its stockholders. In addition, the other stockholders of TravelSmith have
the right, under certain circumstances, to require Cornerstone to purchase
their equity interests, for a purchase price that may consist of cash,
promissory notes or Cornerstone Common Stock. The amount of the purchase price
Cornerstone would be required to pay for the stock of Charles L. Slaughter or
Scott Sklar (who collectively own approximately 36% of the outstanding
TravelSmith stock), if such persons exercised such right, is likely to be
substantial. Moreover, Cornerstone may become obligated to effect such a
purchase at a time when it has little available cash or borrowing ability or
when the market price of its Common Stock is low, and such purchase obligation
could result in a diversion of capital from Cornerstone's business, a dilutive
equity issuance, or a contractual default by Cornerstone. Moreover, under
certain circumstances (such as a default by Cornerstone under its agreements
with such equityholders or the failure of Cornerstone to exercise its own
purchase rights) the other equityholders of these companies may have the right
to purchase Cornerstone's interest in these companies. In addition, under

the terms of a contract among Cornerstone, Mr. Slaughter, Mr. Sklar and
another stockholder of TravelSmith (collectively, the "TravelSmith
Stockholders"), Cornerstone has the right to designate only three of the seven
directors of TravelSmith (with three directors to be designated by Mr.
Slaughter and Mr. Sklar, and the seventh director to be mutually acceptable to
the other directors); the consent of at least two-thirds of the members of the
Board of Directors then in office, including the consent of one of the
directors designated by Messrs. Slaughter and Sklar, is required for certain
corporate actions by TravelSmith; and the TravelSmith Stockholders have
certain rights with respect to the registration of their shares of TravelSmith
common stock under the Securities Act for sale to the public. Although
Cornerstone's preference would normally be to acquire all of the equity
interest in any company that it acquires in the future, Cornerstone may
acquire only a majority of the equity interest in a company, which could
result in some of the problems described above with respect to such company.
See "Certain Transactions--Contractual Arrangements with Other Equityholders
of Cornerstone Companies."

COMPETITION

The markets for the merchandise offered by the Cornerstone companies are
highly competitive. Cornerstone believes that its principal sources of
competition are traditional department stores, such as Neiman Marcus, Saks
Fifth Avenue, Nordstrom and Bloomingdales, and specialty retailers, such as
The Gap, Banana Republic and Pottery Barn. The Cornerstone companies also
compete with a number of other direct marketers, such as Lands' End, L.L.
Bean, Williams Sonoma, Neiman Marcus Direct and Coldwater Creek. In addition,
the Company believes that increased popularity of catalog shopping and the
success of many direct marketing companies is encouraging a number of
traditional retailers, such as The Gap, Nordstrom, Macy's and Dayton Hudson,
to enter the direct marketing business. The emergence of the Internet and the
growing popularity of electronic commerce provides the Company's competitors
with an additional channel for direct marketing to consumers. Many of the
present and potential competitors of the Cornerstone companies are larger and
have substantially greater financial, marketing and other resources than
Cornerstone. The failure of any of the Cornerstone companies to compete
successfully against present and future sources of competition could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Competition."

DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS

Cornerstone's business is largely dependent upon effective information
systems that assist in processing orders, managing inventory, purchasing and
shipping merchandise on a timely basis, responding to customer service
inquiries, and gathering and analyzing data on the operation of the various
Cornerstone businesses. In connection with the opening of the new Cornerstone
operations center, Cornerstone intends to install a warehouse management
system at the operations center and combine the customer databases of all of
the Cornerstone companies into an integrated customer database that will be
stored and managed at this facility. In addition, four different front-end
systems are currently used by the Cornerstone companies, and the Company plans
to standardize on one of these systems and install it over the next several
years at each Cornerstone company (other than Smith+Noble) not currently using
it. It is possible that Cornerstone will experience delays or difficulties in
implementing its new information systems, that the existing information
systems in use at the various Cornerstone companies will not be adequate or
effective pending the implementation of such new systems, or that the
information system installed at the new Cornerstone operations center will not
be adequate to support future acquisitions made by Cornerstone. In addition,
it is possible that year 2000 problems could cause operational problems with
the Company's information systems. Any difficulties experienced by Cornerstone
in implementing or operating its management information systems could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Management Information Systems" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."

GOVERNMENT REGULATION; PENDING PERSONAL PRIVACY LEGISLATION

promulgated by the U.S. Postal Service and various state and local consumer
protection agencies relating to matters such as advertising, order
solicitation, shipment deadlines and customer refunds and returns. In
addition, merchandise imported by the Company is subject to import and customs
duties and, in some cases, import quotas. Moreover, Cornerstone's business
could be affected by regulations promulgated in the future. For example, there
are a number of different bills under consideration by Congress and various
state legislatures that would restrict disclosure of consumers' personal
information, which may make it more difficult for Cornerstone to generate
additional names for its mailing lists, and restrict a company's right to send
unsolicited electronic mail or printed catalogs. Although Cornerstone believes
it is generally in compliance with current laws and regulations and that such
laws and regulations have not had a significant impact on its business to
date, it is possible that existing or future regulatory requirements will
impose a significant burden or have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Regulatory
Matters."

MERCHANDISE RETURNS

All Cornerstone companies (other than Smith+Noble, whose products are made
to order) maintain liberal merchandise return policies. The Company's
financial statements include a reserve for anticipated merchandise returns,
which is based in part on historical return rates. It is possible that
Cornerstone's actual returns will increase as a result of factors such as the
introduction of new merchandise, new catalogs, changes in merchandise mix
(such as a shift to more women's apparel) or other factors, or that actual
returns will exceed Cornerstone's reserve. Any significant increase in
Cornerstone's merchandise returns could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Cornerstone Operations Center--Customer Service."

MANAGEMENT OF GROWTH

Cornerstone has experienced significant growth in recent years, as it has
consummated five acquisitions since the beginning of 1997 and its net sales
have increased approximately 72% between the first six months of 1997 and the
first six months of 1998. In addition, each of the Cornerstone companies has
grown over the last 12 months, in terms of both revenues and employees. This
growth places increased responsibilities on the management teams of
Cornerstone and the Cornerstone companies, as well as increased demands on
Cornerstone's management information systems and other centralized functions.
To manage its growth effectively, Cornerstone and each Cornerstone company
must continue to expand its management team, attract and retain qualified
employees and upgrade its information systems and other administrative
functions, and there can be no assurance that either Cornerstone or the
Cornerstone companies will be successful in doing so. Any failure to address
these issues effectively could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management--
Executive Officers and Directors" and "Business--Management Information
Systems."

COLLECTION OF STATE SALES TAXES

expensive to purchase that company's products and would increase Cornerstone's
administrative costs and therefore could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
although Cornerstone believes it has complied with all applicable tax laws,
there can be no assurance that state tax authorities will not choose to
conduct a nexus audit of the Company, which could give rise to a retroactive
assessment for tax liabilities. State sales tax laws typically provide for a
lengthy statute of limitations, and if the Company were retroactively assessed
for taxes, such assessment could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Regulatory Matters."

CONTROL BY EXISTING STOCKHOLDERS

Upon the consummation of the offering, the Company's executive officers and
directors and their affiliates will beneficially own approximately % of the
outstanding shares of Common Stock of the Company ( % if the over-allotment
option is exercised in full). As a result, these stockholders, if acting
together, would be able to exert substantial influence over the Company and to
effectively control most matters requiring approval by the stockholders of the
Company, including the election of directors. The voting power of these
stockholders under certain circumstances could have the effect of delaying or
preventing a change in control of the Company. See "Principal and Selling
Stockholders."

NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that a regular trading market for the
Common Stock will develop after this offering or that, if developed, it will
be sustained. The initial public offering price of the Common Stock will be
determined by negotiation among the Company, the Selling Stockholders and the
Representatives based on several factors and will not necessarily reflect the
market price of the Common Stock after this offering or the price at which the
Common Stock may be sold in the public market after this offering. See
"Underwriting."

Many factors may cause the market price of the Common Stock to fluctuate
significantly, including factors such as variations in the Company's quarterly
operating results, the hiring or departure of key personnel, the entry of new
competitors into Cornerstone's markets, the financial performance of existing
competitors, changes in general economic conditions, and changes in financial
performance estimates or recommendations by securities analysts. In addition,
the stock market in general has recently experienced extreme price and volume
fluctuations, which could have a material adverse effect on the market price
of the Common Stock irrespective of factors directly concerning Cornerstone.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Of the shares of Common Stock to be outstanding after this offering,
based upon the number of shares outstanding at September 30, 1998,
approximately shares (including the shares to be sold in this offering)
will be available for resale in the public market immediately following this
offering. In addition, approximately additional shares will become
available for resale in the public market following the expiration of lock-up
agreements with the Representatives of the Underwriters, pursuant to which the
parties signing such agreements have agreed not to sell or otherwise dispose
of any shares of Common Stock for a period of 180 days after the date of this
Prospectus. Moreover, immediately following the closing of this offering, the
Company intends to register under the Securities Act of 1933, as amended (the
"Securities Act"), approximately 5,251,815 shares of Common Stock reserved for
issuance under the Company's stock option and stock purchase plans, which
would permit persons acquiring such shares (other than persons who have
entered into the lock-up agreements referred to above) to immediately sell
such shares in the public market. In addition, the holders of substantially
all of the shares of Common Stock outstanding prior to this offering are party
to a Registration Agreement with the Company under which they may, under
certain circumstances, require the Company to register their shares of Common
Stock under the Securities Act for sales to the public and include their
shares of Common Stock in a Registration Statement under the Securities Act
filed by the Company. Sales of a substantial

number of shares of Common Stock in the public market could have a material
adverse effect on the market price of the Common Stock and could impair the
Company's ability to raise capital through a sale of its equity securities.
See "Shares Eligible for Future Sale."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company's Certificate of Incorporation and By-laws contain provisions
permitting the Board of Directors to issue Preferred Stock with rights
superior to those of the Common Stock, establishing a classified Board of
Directors, limiting the right of stockholders to act by written consent,
requiring that special meetings of stockholders be called only by the Board of
Directors or the President or Chief Executive Officer, and requiring advance
notice regarding proposals brought by a stockholder before a stockholders
meeting. Such provisions could make it more difficult for a third party to
acquire, or discourage a third-party from attempting to acquire, control of
the Company at a price which many stockholders may find attractive. The
existence of such provisions could also limit the price that investors might
be willing to pay in the future for shares of Common Stock. See "Description
of Capital Stock--Preferred Stock" and "--Delaware Law and Certain Charter and
By-law Provisions."

USE OF PROCEEDS

The net proceeds to the Company from its sale of shares of Common Stock
in this offering are estimated to be $ ($ if the Underwriters' over-
allotment option is exercised in full), after deducting the estimated
underwriting discount and offering expenses payable by the Company and
assuming an initial public offering price of $ per share. The Company will
not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholders.

The Company expects to use approximately $ of the net proceeds to repay,
promptly following the closing of this offering, outstanding indebtedness
under its revolving credit agreement with Fleet National Bank and certain
other participating lenders. As of September 26, 1998, there was $47.9 million
of outstanding indebtedness, which bore interest at the rate of 6.6% per year
and matures on July 22, 2002. Of this outstanding indebtedness, approximately
$13.2 million was incurred to fund acquisitions by the Company, approximately
$4.8 million was used to fund the purchase by the Company of the minority
interest in The Territory Ahead, and the balance was incurred for general
corporate purposes. This credit agreement would not be terminated by the
repayment of such borrowings and would remain available for future borrowings
by Cornerstone. In addition, the Company may use a portion of the net proceeds
to acquire direct marketing companies that address the home, leisure and
casual apparel markets and that target an affluent customer base; however, the
Company has no commitments or understandings relating to any such acquisition.
The Company expects to use the balance of the net proceeds from this offering
for working capital and other general corporate purposes. Cornerstone cannot
determine at this time the amount of net proceeds that will actually be
expended by the Company for acquisitions and for working capital purposes, or
the specific working capital needs for which the net proceeds will be used;
this will depend upon the number and size of the acquisitions consummated by
the Company, its future revenue growth, the amount of cash generated by its
operations, and other factors which may affect the Company's business. Pending
the uses described above, the Company intends to invest the net proceeds in
investment-grade, short-term, interest-bearing instruments.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support
its growth strategy and does not anticipate paying cash dividends in the
foreseeable future. The Company's bank credit agreement prohibits the Company
from paying dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
August 1, 1998 (i) on an actual basis, (ii) on a pro forma basis giving effect
to the conversion of all outstanding shares of the Convertible Preferred Stock
into an aggregate of 14,148,786 shares of Common Stock and the filing of the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock, eliminate the terms of the Company's
existing series of Convertible Preferred Stock and create a class of
authorized but undesignated Preferred Stock and (iii) on a pro forma basis, as
adjusted to reflect the sale by the Company of shares of Common Stock in
this offering at an assumed initial public offering price of $ per share,
after deducting the estimated underwriting discount and offering expenses
payable by the Company. The capitalization information set forth in the table
below should be read in conjunction with the Company's consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus.

AUGUST 1, 1998
-------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------- --------- ------------
(IN THOUSANDS)

Long-term debt and capital leases, less current
portion....................................... $ 313 $ 313 $ 313
Redeemable convertible preferred stock, $.01
par value; 56,500 shares authorized and 56,385
shares issued and outstanding (actual); no
shares authorized, issued or outstanding (pro
forma and pro forma as adjusted).............. 60,332 -- --
Stockholders' equity:
Preferred stock, $.01 par value; no shares
authorized, issued or outstanding (actual);
5,000,000 shares authorized, no shares
issued or outstanding (pro forma and pro
forma as adjusted).......................... -- -- --
Series B and C convertible preferred stock,
$.01 par value; 11,250 shares authorized,
7,992 shares issued and outstanding (actu-
al), no shares authorized, issued or out-
standing (pro forma and pro forma adjust-
ed)......................................... -- -- --
Common stock, $.001 par value; 28,499,400
shares authorized and 14,619,285 shares
issued and outstanding (actual); 150,000,000
shares authorized and 28,768,071 shares
issued and outstanding (pro forma);
150,000,000 shares authorized and shares
issued and outstanding (pro forma as
adjusted)(1)................................ 15 29
Treasury stock, 330,000 shares of common
stock......................................... -- -- --
Additional paid-in-capital..................... 42,968 103,286
Unrealized gains on available for sale securi-
ties.......................................... 29 29 29
Accumulated deficit............................ (12,590) (12,590) (12,590)
------- ------- -------
Total stockholders' equity (deficit)......... 30,422 90,754
------- ------- -------
Total capitalization......................... $91,067 $91,067 $
======= ======= =======

- --------
(1) Based on the number of shares of Common Stock outstanding on August 1,
1998. Excludes an aggregate of (i)1,472,192 shares of Common Stock
issuable pursuant to options outstanding as of August 1, 1998 and (ii)
315,000 shares of Common Stock issuable upon the exercise of warrants
outstanding as of August 1, 1998. See "Management--Stock Plans" and Note 9
of Notes to Consolidated Financial Statements.

DILUTION

The pro forma net tangible book value of the Company as of August 1, 1998
was $28,612,000 or $0.99 per share of Common Stock. Pro forma net tangible
book value per share is determined by dividing the Company's tangible net
worth (tangible assets less liabilities) by the number of shares of Common
Stock outstanding, after giving effect to the conversion of all outstanding
shares of the Company's Convertible Preferred Stock into an aggregate of
14,148,786 shares of Common Stock. After giving effect to the sale of the
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $ per share, after deducting the estimated
underwriting discount and offering expenses payable by the Company, the pro
forma net tangible book value of the Company as of August 1, 1998 would have
been $ , or $ per share. This represents an immediate increase in pro forma
net tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to new investors purchasing shares in this
offering. If the initial public offering price is higher or lower, the
dilution to the new investors will be greater or less, respectively. The
following table illustrates the per share dilution:

Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share as of August 1,
1998.......................................................... $0.99
Increase per share attributable to new investors...............
-----
Pro forma net tangible book value per share after this
offering(1).....................................................
---
Dilution per share to new investors.............................. $
===

- --------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value would be approximately $ per share,
resulting in dilution to new investors in this offering of $ per share.
See "Underwriting."

The following table summarizes, on a pro forma basis (giving effect to the
conversion of all outstanding shares of Convertible Preferred Stock into
Common Stock) as of August 1, 1998, the total number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and by new investors at an assumed
initial public offering price of $ per share (before deducting the estimated
underwriting discount and offering expenses):

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------

Existing stockholders...... 28,438,071 % $81,748,000 % $2.87
New investors.............. $
---------- ----- ----------- -----
Total.................... 100.0% $ 100.0%
========== ===== =========== =====

Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to shares or % of the total number
of shares of Common Stock outstanding after this offering, and will increase
the number of shares held by new investors to shares or % of the total
number of shares of Common Stock outstanding after this offering. See
"Principal and Selling Stockholders." The foregoing table does not give effect
to the exercise of any outstanding stock options or warrants or the
Underwriters' over-allotment option.

SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

The selected statement of operations (other than certain pro forma data) and
balance sheet data set forth below for the years ended January 25, 1997 and
January 31, 1998, and as of January 25, 1997 and January 31, 1998, are derived
from the Company's audited consolidated financial statements, which appear
elsewhere in this Prospectus. The selected balance sheet data set forth below
as of January 27, 1996 are derived from the Company's unaudited consolidated
financial statements. The selected statement of operations data for the year
ended January 27, 1996 combine the Company's audited consolidated financial
statements for the year ended January 27, 1996, presented elsewhere in this
Prospectus, with the audited financial statements of Frontgate, a predecessor
entity, for the period from January 1, 1995 to September 12, 1995, also
presented elsewhere in this Prospectus, and the unaudited financial statements
of Cornerstone Holdings Group, Inc., a predecessor entity, for the period from
January 1, 1995 to September 12, 1995. The selected statement of operations
and balance sheet data for the years ended and as of December 31, 1993 and
1994 combine the Company's unaudited consolidated financial statements
(consisting of the financial statements of Ballard Designs and Smith+Noble)
with the unaudited financial statements of the Company's predecessors. The
selected statement of operations and balance sheet data for the six month
periods ended and as of August 2, 1997 and August 1, 1998 are derived from the
Company's unaudited consolidated financial statements, which appear elsewhere
in this Prospectus. In the opinion of management, the unaudited consolidated
financial statements have been prepared on a basis consistent with the audited
consolidated financial statements which appear elsewhere in this Prospectus
and include all adjustments, consisting solely of normal recurring accruals
and adjustments, necessary for a fair presentation of the financial position
and results of operations for these unaudited periods. The operating results
for the six months ended August 1, 1998 are not necessarily indicative of the
results to be expected for any other period. The data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements, including the notes thereto, included elsewhere in this
Prospectus.

YEAR ENDED SIX MONTHS ENDED
----------------------------------------------------------- ----------------------------
JAN. 31, AUG. 2,
DEC. 31, DEC. 31, JAN. 27, JAN. 25, JAN. 31, 1998 (PRO AUG. 2, 1997 (PRO AUG. 1,
1993 1994 1996(1) 1997 1998 FORMA)(2) 1997 FORMA)(2) 1998
-------- -------- -------- -------- -------- --------- ------- --------- --------

STATEMENT OF OPERATIONS DATA:
Net sales............... $40,524 $63,016 $82,412 $106,100 $216,335 $240,129 $80,807 $104,601 $139,269
Cost of sales........... 21,153 32,500 43,691 54,750 112,251 124,657 42,409 54,816 71,016
------- ------- ------- -------- -------- -------- ------- -------- --------
Gross profit............ 19,371 30,516 38,721 51,350 104,084 115,472 38,398 49,785 68,253
------- ------- ------- -------- -------- -------- ------- -------- --------
Operating expenses:
Selling, catalog and
fulfillment expenses.. 14,892 24,266 31,624 36,408 73,249 82,366 25,873 34,989 49,288
General and
administrative........ 2,032 3,118 5,664 6,911 15,636 17,881 5,570 7,816 9,964
Amortization and
depreciation.......... 223 497 944 1,735 3,523 4,297 1,404 2,178 2,439
Restructuring charge... -- -- -- -- 943 943 -- -- 2,838
------- ------- ------- -------- -------- -------- ------- -------- --------
Total operating
expenses............... 17,147 27,881 38,232 45,054 93,351 105,487 32,847 44,983 64,529
------- ------- ------- -------- -------- -------- ------- -------- --------
Operating income........ 2,224 2,635 489 6,296 10,733 9,985 5,551 4,802 3,724
Investment income
(expense), net......... (83) (42) (144) 367 (208) (73) 78 213 (199)
------- ------- ------- -------- -------- -------- ------- -------- --------
Income before income
taxes, equity income in
affiliate and minority
interest............... 2,141 2,593 345 6,663 10,525 9,912 5,629 5,015 3,525
Income taxes............ -- -- 158 985 3,103 2,972 1,723 1,592 324
Equity in net income
(loss) of affiliate.... -- (154) (20) 392 1,809 1,809 995 995 2,208
Minority interest....... -- -- -- -- 275 275 82 82 244
------- ------- ------- -------- -------- -------- ------- -------- --------
Net income.............. 2,141 2,439 167 6,070 9,506 9,024 4,983 4,500 5,653
Deemed dividend on
redeemable convertible
preferred stock........ -- -- -- -- (21,069) (21,069) (3,718) (3,718) --
Accretion of redeemable
convertible preferred
stock.................. -- -- (360) (1,309) (2,301) (2,301) (938) (938) (1,517)
------- ------- ------- -------- -------- -------- ------- -------- --------
Net income (loss)
available to common
stockholders........... $ 2,141 $ 2,439 $ (193) $ 4,761 $(13,864) $(14,346) $ 326 $ (156) $ 4,136
======= ======= ======= ======== ======== ======== ======= ======== ========
Pro forma net
income(3).............. $ 1,350 $ 1,879 $ 111 $ 4,600 $ 7,381 $ 6,899 $ 3,854 $ 3,371 $ 4,007
Net income (loss) per
share(4)............... $ 0.24 $ 0.27 $ (0.02) $ 0.39 $ (1.08) $ (1.08) $ 0.03 $ (0.01) $ 0.29
Pro forma net income
(loss) per
share(3)(4)............ $ 0.15 $ 0.21 $ (0.02) $ 0.27 $ (1.24) $ (1.24) $ (0.06) $ (0.10) $ 0.18
Weighted average shares
outstanding(4)......... 8,895 8,895 10,495 12,342 12,871 13,246 12,408 13,158 14,221
Net income (loss) per
share, assuming
dilution(4)............ $ 0.20 $ 0.23 $ (0.02) $ 0.31 $ (1.08) $ (1.08) $ 0.03 $ (0.01) $ 0.19
Pro forma net income
(loss) per share,
assuming
dilution(3)(4)......... $ 0.13 $ 0.18 $ (0.02) $ 0.23 $ (1.24) $ (1.24) $ (0.06) $ (0.10) $ 0.13
Weighted average shares
outstanding, assuming
dilution(4)............ 10,653 10,653 10,495 19,789 12,871 13,246 12,408 13,158 29,812

AS OF
-----------------------------------------------------
DEC. 31, DEC. 31, JAN. 27, JAN. 25, JAN. 31, AUG. 1,
1993 1994 1996 1997 1998 1998
-------- -------- -------- -------- -------- --------

BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 103 $ 460 $ 9,071 $11,236 $ 4,870 $ 2,014
Working capital......... (244) (228) 15,012 16,806 9,623 1,188
Total assets............ 2,748 6,515 45,412 55,313 133,646 149,314
Long-term debt (net of
current maturities).... 26 56 4,288 2,047 332 313
Stockholders' equity.... 346 1,174 11,129 14,811 30,968 30,422

YEAR ENDED
-----------------------------------
JAN. 25, JAN. 31,
1997 1998
JAN. 25, JAN. 31, (PRO (PRO
1997 1998 FORMA) FORMA)
-------- -------- -------- --------

OPERATING DATA(5):
Net sales growth............................ 75% 104% 26% 34%
Total catalogs circulated(000s)............. 41,939 77,144 65,038 84,853
12-month buyers(000s)(6).................... 512 1,033 884 1,128
Average order value......................... $ 160 $ 170 $ 158 $ 169

- --------

(1) The selected statement of operations data for the year ended January 27,
1996 combine the Company's consolidated financial statements for the year
ended January 27, 1996 with those of Frontgate and Cornerstone Holdings
Group, Inc., a predecessor entity ("Cornerstone I"), for periods prior to
their acquisition by the Company. Frontgate and Cornerstone I are
considered predecessors of the Company for purposes of this presentation,
but their results are not included in the Company's results of operations
for the purpose of reporting under generally accepted accounting
principles. Accordingly, the statement of operations data for the year
ended January 27, 1996 differ from the audited consolidated financial
statements of the Company for the same period included elsewhere in this
Prospectus.

(2) Gives effect to the acquisitions of The Territory Ahead, Garnet Hill and
Whispering Pines as if they had occurred on January 26, 1997. In addition
to combining historical results of operations, the unaudited pro forma
amounts shown include adjustments for the estimated effect of amortization
associated with the acquisitions of these companies. The unaudited pro
forma amounts shown are not indicative of the results of operations that
would have been achieved if such acquisitions had occurred at the
beginning of 1997. See Note 2 of Notes to Consolidated Financial
Statements. The Territory Ahead and Garnet Hill have historically been
more profitable in the second half of the year, so the inclusion of first-
half operating results of such companies in these pro forma operating
results has a negative impact on the Company's net income for the periods
shown.

(3) Pro forma net income, pro forma net income per share and pro forma net
income per share, assuming dilution, have been computed by adjusting net
income, as reported, to record an income tax provision (or benefit) for
Ballard Designs and Smith+Noble, which were not subject to income tax at
the entity level prior to their acquisitions by the Company. See Note 3 of
Notes to Consolidated Financial Statements.

(4) See Note 16 of Notes to Consolidated Financial Statements. Dilutive
securities have been excluded from weighted average shares outstanding,
assuming dilution for the years ended January 27, 1996 and January 31,
1998 (actual and pro forma) and the six months ended August 2, 1997
(actual and pro forma) because the inclusion of such securities for
purposes of calculating net income (loss) per share, assuming dilution and
pro forma net income (loss) per share, assuming dilution for such periods
would be anti-dilutive.

(5) Pro forma operating data include data for The Territory Ahead, Garnet Hill
and Whispering Pines for all of the periods presented (including periods
prior to their acquisition by Cornerstone). Operating data do not include
data for TravelSmith, as TravelSmith financial results are not
consolidated with those of the Company.

(6) Represents the combined number of buyers who have purchased from the
Cornerstone companies in the preceding 12 months or since date of
acquisition, whichever is less, without deductions for persons who have
purchased from more than one Cornerstone company. Accordingly, the numbers
of individual names in the Cornerstone database are less than the numbers
indicated.

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

The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements, including the Notes thereto, included elsewhere in this
Prospectus. Certain of the statements contained in this section and elsewhere
in this Prospectus that are not purely historical, such as statements
regarding the Company's expectations, beliefs, intentions, plans and
strategies, are forward-looking statements that involve risks and
uncertainties. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by the
forward-looking statements, including those discussed under "Risk Factors" and
elsewhere in this Prospectus. All forward-looking statements are based on
information available to the Company on the date hereof and the Company
assumes no obligation to update any forward-looking statement.

OVERVIEW

Acquisition History

Since its founding in June 1995, Cornerstone has achieved significant scale
through its seven acquisitions and internal growth by these acquired
companies. Although Cornerstone generally seeks to acquire 100% of the equity
interest in companies it acquires, this has not always been practicable and as
a result two of the seven Cornerstone companies are not 100% owned by
Cornerstone.

Two of Cornerstone's acquisitions--Ballard Designs in August 1997 and
Smith+Noble in August 1998--were accounted for as pooling of interests.
Accordingly, the consolidated financial statements of Cornerstone include the
operating results of these companies for all periods presented. Cornerstone's
other five acquisitions, which are described below, were accounted for under
the purchase method of accounting and Cornerstone's consolidated financial
statements therefore include the results of these companies since the date of
acquisition.

On September 12, 1995, Cornerstone acquired an entity which owned securities
representing approximately 48% of the outstanding capital stock of
TravelSmith. In 1996, Cornerstone increased its ownership position to
approximately 60% of the outstanding capital stock of TravelSmith. Cornerstone
accounts for its investment in TravelSmith under the equity method.
Accordingly, TravelSmith's operating results and financial position are not
consolidated with Cornerstone's financial statements, and Cornerstone records
its share of the net income or loss of TravelSmith in the line item entitled
"Equity in net income (loss) of affiliate" on its consolidated financial
statements.

On September 12, 1995, Cornerstone acquired all of the equity interest in
Frontgate for a purchase price consisting of a combination of cash, stock and
promissory notes. On March 31, 1997, Cornerstone purchased, for cash, 80% of
the outstanding capital stock of The Territory Ahead; Cornerstone purchased
the remaining 20%, for cash and a promissory note, in September 1998. On July
28, 1997, Cornerstone acquired all of the outstanding capital stock of Garnet
Hill, for a combination of cash, Cornerstone Common Stock and promissory
notes. On September 4, 1997, Cornerstone acquired, for cash, a 51% interest in
Whispering Pines; Cornerstone purchased an additional 29% interest in
Whispering Pines in September 1998 for a combination of cash, Common Stock and
a contingent payment obligation. For financial reporting purposes, the
operating results of The Territory Ahead and Whispering Pines are consolidated
with Cornerstone's operating results; the portion of the net income or loss of
such companies allocable to the minority interest is deducted from or added
to, respectively, Cornerstone's consolidated operating results through the
line item entitled "Minority interest." For all periods following the purchase
by Cornerstone of the remaining minority interest in The Territory Ahead in
September 1998, the "Minority Interest" line item will not include any portion
of The Territory Ahead's operating results.

As a result of the acquisitions made by the Company, period-to-period
comparisons of Cornerstone's operating results may not be meaningful. In the
first six months of 1998, each Cornerstone company other than Whispering Pines
(which is a smaller and earlier stage business than the other Cornerstone
companies) generated positive operating income. The Company intends to
continue to pursue attractive strategic acquisitions of direct marketing
companies that meet its focused acquisition criteria.

Selected Operating Principles

The Company's net sales are generated primarily through its catalog
operations. Catalog sales accounted for approximately 98% of net sales for
each of 1995, 1996, 1997 and the first six months of 1998. The balance of the
Company's net sales is derived from outlet and retail stores. As of August 31,
1998, the Cornerstone companies operated six outlet stores and one retail
store.

Expenses related to the development, production and mailing of a catalog are
capitalized and amortized over the period in which that catalog generates
revenues (generally three months or less) in order to match the recognition of
these expenses with the revenues they generate. As a result, when the Company
recognizes revenues and certain expenses depends largely on the timing of the
mailing of catalogs. The timing of the mailing of a particular catalog may
vary from year to year, and may result in the shifting of certain revenues and
expenses from a particular quarter of one year to a different quarter of the
subsequent year. Additionally, inventory levels may experience fluctuations
due to variability in the timing of catalog mailings and merchandise receipt.

In support of Cornerstone's strategy to reinforce the brand identity of the
Cornerstone companies, Cornerstone features branded products (i.e., sold under
the name of a Cornerstone company), and Cornerstone expects that the
proportion of net sales derived from branded products will increase in the
future. Branded product offerings generally provide higher profit margins than
other merchandise because they are generally purchased directly from the
manufacturer, thus avoiding the mark-ups that result from additional
distribution tiers. However, this strategy also requires Cornerstone to incur
additional costs relating to the design and purchase of those products which
might otherwise be assumed by a wholesaler or distributor of such products,
may entail larger initial purchase commitments, and may limit the Company's
ability to return unsold merchandise to vendors, thus resulting in more excess
inventory and markdowns.

While many direct marketing companies consider merchandise shipped within 24
hours of receipt of the order as "same-day" shipment, Cornerstone considers
only products shipped on the same day as the order is received to be same-day
shipment, and strives for a high same-day shipment rate. This results in
higher fulfillment costs (as a result of reduced ability to pick and fill
orders for similar products on a batch basis), but Cornerstone believes this
practice lessens the need for customers to incur extra costs for expedited
shipment, enhances customer satisfaction and contributes to a higher order
frequency and repeat business from its customers.

As part of Cornerstone's strategy of providing each Cornerstone company with
both the performance benefits and cost savings that can be realized from the
combined enterprise and in order to support the Company's growth initiatives,
Cornerstone has begun construction of a new 800,000 square foot operations
center outside of Cincinnati, Ohio, which it expects will be operational in
the summer of 1999. Cornerstone's current estimate of the total cost of this
new facility, including land, construction and equipment, is between $60 and
$65 million. Cornerstone expects to fund a majority of this cost pursuant to a
sale-leaseback arrangement. See "--Liquidity and Capital Resources." The
Company recorded a restructuring charge of $943,000 in the fourth quarter of
1997 relating to assets impaired as a result of the decision to proceed with
the construction of the operations center. The Company has incurred $2,838,000
of restructuring charges in the first six months of 1998, of which $1,485,000
related to employee termination costs, $1,257,000 related to incremental
consulting and $96,000 related to other costs associated with the design and
construction of the operations center. Cornerstone expects that it will incur
between $4,000,000 and $6,000,000 of additional restructuring charges over the
next 12 to 18 months relating to the transition to the new facility.
Cornerstone believes that the efficiencies expected from the consolidation of
certain functions at this facility will help reduce operating expenses as a
percentage of net sales, but the Company does not expect to realize such
benefits fully until 2001. In addition, the use of temporary additional
fulfillment facilities pending the transfer of fulfillment operations to the
new facility during 1999 and 2000 is likely to create certain economic and
operational inefficiencies during that period.

As a result of the acquisitions by Cornerstone which have been accounted for
as purchases, Cornerstone has recorded a significant amount of goodwill, which
represents the excess of the purchase price over the fair value of the net
assets acquired. This goodwill is primarily attributable to the acquisitions
of Frontgate, The Territory

Ahead and Garnet Hill, which resulted in goodwill of $12,219,000, $9,997,000
and $23,007,000, respectively. The Company amortizes goodwill over a 40-year
period. Goodwill amortization expense totalled $101,000, $322,000, $1,036,000,
$295,000 and $783,000 in 1995, 1996, 1997, the first six months of 1997 and
the first six months of 1998, respectively, and will continue to represent a
significant expense in the future. The value of mailing lists obtained by
Cornerstone through its business acquisitions is recorded in other assets and
amortized over their economic life (four years). Mailing list amortization
totaled $185,000, $590,000, $855,000, $317,000 and $538,000 in 1995, 1996,
1997, the first six months of 1997 and the first six months of 1998,
respectively.

Key Operating Metrics

There are a number of key operating measures that management uses to analyze
the results of operations of the Company, including the following:

. Response rates, catalog circulation and customer database growth. Because a
significant portion of Cornerstone's expense structure is selling or
catalog printing and mailing costs, response rates (which are measured by
the number of orders for merchandise as a percentage of total catalogs
circulated) are a key indicator of the productivity of these expenses.
Higher response rates typically not only result in higher net sales but
also have a disproportionate positive impact on net income. Concentrating
circulation on recent purchasers results in higher response rates and more
profitable operations (in the short term), but negatively affects the
growth of the customer database. The growth of the business is dependent
upon both keeping current customers active and increasing the overall list
of names in the customer file by converting prospective customers to active
customers. The total number of catalogs circulated by the Company during
1996 and 1997 (excluding TravelSmith, whose financial results are not
consolidated with those of the Company) was 41,939,000 and 77,144,000,
respectively. These catalog circulation figures would have been 65,038,000
and 84,853,000, respectively, if data for The Territory Ahead, Garnet Hill
and Whispering Pines had been included for the entirety of both periods
(i.e., including circulation prior to their acquisition by Cornerstone).
The combined customer database of all Cornerstone companies as of
January 25, 1997, January 31, 1998 and August 1, 1998 included the names of
approximately 884,000 customers, 1,028,000 customers and 1,575,000
customers, respectively, who had purchased goods within the previous 12
months. See "Business--Customer Database Management and Marketing--Customer
Databases."

. Average order value. A higher average order value means that fewer orders
have to be processed and filled to generate each dollar of net sales.
Accordingly, a higher average order value not only generally has a positive
effect on net sales, but also reduces fulfillment and other expenses as a
percentage of net sales. The Company's average order value for 1997 and
1998 was $160 and $170, respectively.

. In-stock position. This is measured by the percentage of products ordered
for which there is in-stock inventory at the time of order and which can be
shipped at once. A high in-stock rate can have a positive impact on
operating results by reducing order cancellations, by increasing customer
satisfaction and repeat business and by reducing the expenses associated
with having to process and fill a single order multiple times (because
certain items ordered are in-stock while other items are out-of-stock and
must be shipped later at the Company's expense). However, ensuring a high
in-stock rate may result in excess inventory which must be sold at
discounted prices. In striving to balance these two considerations,
Cornerstone's commitment to customer service typically results in more
emphasis being placed on the ability to fulfill orders immediately than on
minimizing the risk of excess inventory, and Cornerstone uses inventory
management techniques to help reduce the risk of overstocks.

. Page productivity. This is measured by dividing net sales for a particular
period by the total number of pages circulated. While growth in net sales
may result simply from an increased number of catalogs circulated or larger
catalogs, comparisons of page productivity eliminate the impact of such
variables. Page productivity measurements help Cornerstone to evaluate its
merchandise and creative presentation and its circulation mix of active
customers and prospective customers for each catalog.

RESULTS OF OPERATIONS

The following table sets forth certain financial data as a percentage of net
sales for the periods indicated.

YEAR ENDED SIX MONTHS ENDED
-------------------------- -------------------
JAN. 27, JAN. 25, JAN. 31, AUG. 2, AUG. 1,
1996 1997 1998 1997 1998
-------- -------- -------- -------- --------

Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of sales............... 54.2 51.6 51.9 52.5 51.0
----- ----- ----- -------- --------
Gross profit................. 45.8 48.4 48.1 47.5 49.0
Operating expenses:
Selling, catalog and
fulfillment expenses...... 37.8 34.3 33.9 32.0 35.4
General and
administrative............ 5.8 6.5 7.2 6.9 7.2
Amortization and
depreciation.............. 1.2 1.7 1.6 1.7 1.8
Restructuring charge....... -- -- 0.4 -- 2.0
----- ----- ----- -------- --------
Total operating expenses..... 44.8 42.5 43.1 40.6 46.4
Operating income............. 1.0 5.9 5.0 6.9 2.6
Net investment income
(expense)................... (0.2) 0.3 (0.1) 0.1 (0.1)
----- ----- ----- -------- --------
Income before equity in net
income of affiliate,
minority interest and income
taxes....................... 0.8 6.2 4.9 7.0 2.5
Income taxes................. 0.3 0.9 1.4 2.1 0.2
----- ----- ----- -------- --------
Income before equity in net
income of affiliate and
minority interest........... 0.5 5.3 3.5 4.9 2.3
Equity in net income of
affiliate................... -- 0.4 0.8 1.2 1.6
Minority interest............ -- -- 0.1 0.1 0.2
----- ----- ----- -------- --------
Net income................... 0.5% 5.7% 4.4% 6.2% 4.1%
===== ===== ===== ======== ========

Six Months Ended August 1, 1998 Compared to Six Months Ended August 2, 1997

Net sales increased 72% from $80,807,000 in the first six months of 1997 to
$139,269,000 in the first six months of 1998. This increase was primarily
attributable to the acquisitions of The Territory Ahead on March 31, 1997 and
Garnet Hill on July 28, 1997, which companies represented approximately 31% of
the Company's net sales during the first six months of 1998. In addition, the
net sales of Ballard Designs, Frontgate and Smith+Noble (which were included
in the entire first six months of both 1997 and 1998) increased 34% between
these periods. This increase was primarily attributable to increased catalog
circulation (including the introduction of new catalogs), higher average order
value, higher average page counts per catalog, changes in the creative
presentation and a more successful merchandise mix.

Gross profit, which consists of net sales less cost of sales (primarily
merchandise acquisition costs, in-bound freight and inventory reserves),
increased 78% from $38,398,000 in the first six months of 1997 to $68,253,000
in the first six months of 1998. As a percentage of net sales, gross profit
increased from 47.5% to 49.0% between these periods. This increase was
primarily attributable to an increase in the percentage of net sales
represented by casual apparel products (comprised largely of branded goods
from Garnet Hill and The Territory Ahead), which generally have higher margins
than the merchandise offerings of Ballard Designs and Frontgate.

Selling, catalog and fulfillment expenses, which consist primarily of the
cost of producing and mailing catalogs, marketing expenses and fulfillment
costs (offset by list rental income), increased 90% from $25,873,000 in the
first six months of 1997 to $49,288,000 in the first six months of 1998. As a
percentage of net sales, selling, catalog and fulfillment expenses increased
from 32.0% to 35.4% between these periods. This increase as a percentage of
net sales was primarily due to increased catalog circulation (including the
introduction of new catalogs), higher average page counts per catalog, and a
lower in-stock position in the first six months of 1998. In addition, because
The Territory Ahead and Garnet Hill generally have higher net sales and net
income in the second half of the year, the inclusion of their operating
results in all of the first six months of 1998 but in only a portion of the
first six months of 1997 has the effect of increasing the Company's expenses
as a percentage of net sales in the first six months of 1998 as compared to
the first six months of 1997. The use of temporary

fulfillment facilities has also resulted in increased costs and inefficiencies
during the first six months of 1998. These factors were partially offset by an
increase in average order value, particularly in the home category, and a
higher response rate for catalogs mailed during the first six months of 1998.
Because selling, catalog and fulfillment expenses are tied so closely to
customers' response to product offerings, Cornerstone cannot predict if these
costs will vary from their current level.

General and administrative expenses increased 79% from $5,571,000 in the
first six months of 1997 to $9,964,000 in the first six months of 1998. As a
percentage of net sales, general and administrative expenses increased from
6.9% to 7.2% between these periods. The overall increase in general and
administrative expenses was due to various initiatives undertaken to prepare
for and support future growth by the Company (including the leasing of
additional space, the hiring of additional personnel and the purchase of
additional assets) and to the growth in the Company's business, through both
acquisitions and internal growth. In addition, the inclusion of the operating
results of The Territory Ahead and Garnet Hill in all of the first six months
of 1998 but in only a portion of the first six months of 1997 has the effect
of increasing the Company's expenses as a percentage of net sales in the first
six months of 1998 as compared to the first six months of 1997.

Amortization and depreciation, which is comprised of amortization of
goodwill and acquired mailing lists (arising from the acquisition of
businesses) and depreciation of fixed assets, increased from $1,404,000 in the
first six months of 1997 to $2,439,000 in the first six months of 1998. This
increase is primarily attributable to increased goodwill and mailing list
amortization resulting from acquisitions made by the Company in 1997.

The Company recorded a restructuring charge of $2,838,000 in the first six
months of 1998 relating to employee termination costs and incremental
consulting and other costs associated with the design and construction of its
new operations center.

Cornerstone recorded net investment income, which is comprised of interest
income, interest expense, dividends received and realized gains and losses on
securities, of $78,000 in the first six months of 1997, as compared to net
investment expense of $199,000 in the first six months of 1998. This change
was primarily attributable to a decrease in available cash balances due to the
use of cash in connection with the acquisitions of The Territory Ahead, Garnet
Hill and Whispering Pines, as well as increased borrowings under its bank
credit agreement to fund the growth and working capital needs of Cornerstone.

Equity in net income of affiliate, which is comprised of Cornerstone's
proportionate share of the net income of TravelSmith, increased 122% from
$995,000 in the first six months of 1997 to $2,208,000 in the first six months
of 1998. This increase was due to the increased profitability of TravelSmith,
which was primarily the result of increased catalog circulation, higher
average order value and growth of the customer database.

Minority interest, which is comprised of the portion of the net income or
loss of The Territory Ahead and Whispering Pines which must be deducted from
or added to the Company's consolidated operating results to account for the
minority interest in such companies, was a $82,000 gain in the first six
months of 1997 and a $244,000 gain in the first six months of 1998. The gain
in the first six months of 1997 is attributable to the net loss of The
Territory Ahead during that period. The gain in the first six months of 1998
was due to the combined net loss of these two companies during that period.

The Company recorded an income tax provision representing 26% of its pre-tax
net income in the first six months of 1997, as compared to an income tax
provision representing 5% of its pre-tax net income in the first six months of
1998. The decrease in the Company's effective tax rate was primarily due to
the increase in the net income of Smith+Noble, which was not subject to income
tax at the entity level prior to its acquisition by the Company.

As a result of the factors described above, Cornerstone's net income
increased from $4,983,000, or 6.2% of net sales, in the first six months of
1997 to $5,653,000, or 4.1% of net sales, in the first six months of 1998.

1997 Compared to 1996

Net sales increased 104% from $106,100,000 in 1996 to $216,335,000 in 1997.
This increase was primarily attributable to the acquisitions of The Territory
Ahead in March 1997 and Garnet Hill in July 1997 and, to a

lesser extent, the acquisition of Whispering Pines in September 1997. In
addition, the net sales of Ballard Designs, Frontgate and Smith+Noble (which
were included for all of both 1997 and 1996) increased 41% between these
periods. This increase was primarily attributable to increased catalog
circulation, higher average order value, higher average page counts per
catalog and a more successful merchandise mix. There were 52 weeks in fiscal
1996 and 53 weeks in fiscal 1997.

Gross profit increased 103% from $51,350,000 in 1996 to $104,084,000 in
1997. As a percentage of net sales, gross profit decreased slightly from 48.4%
to 48.1% between these periods. Gross profit was positively impacted in 1997
by the acquisitions of The Territory Ahead and Garnet Hill, whose gross profit
margins are slightly higher than Cornerstone's historical average. At the time
of the acquisition of The Territory Ahead and Garnet Hill, $4,900,000 of the
purchase price, representing the excess of the fair market value of inventory
over its historical cost, was allocated to inventory and then charged to cost
of sales as the inventory was sold. Excluding that charge, gross profit in
1997 would have been 50.4% of net sales.

Selling, catalog and fulfillment expenses increased 101% from $36,408,000 in
1996 to $73,249,000 in 1997. As a percentage of net sales, selling, catalog
and fulfillment expenses decreased slightly from 34.3% to 33.9% between these
periods. This decrease as a percentage of net sales was primarily due to the
impact of companies acquired during 1997 and to an increase in the average
order value between 1996 and 1997. These factors were partially offset by an
increase in catalog circulation and higher average page counts per catalog.

General and administrative expenses increased 126% from $6,911,000 in 1996
to $15,636,000 in 1997. As a percentage of net sales, general and
administrative expenses increased from 6.5% to 7.2% between these periods. The
overall increase in general and administrative expenses was due to the growth
in the Company's business, through both acquisitions and internal growth.

Amortization and depreciation increased from $1,735,000 in 1996 to
$3,523,000 in 1997. This increase is primarily attributable to acquisitions
made by the Company in 1997.

The Company recorded a restructuring charge of $943,000 in the fourth
quarter of 1997 relating to assets impaired as a result of the decision to
proceed with the construction of the Company's new operations center.

Cornerstone recorded net investment income of $367,000 in 1996, as compared
to net investment expense of $208,000 in 1997. This change was due to the
decrease in available cash balances, resulting primarily from the use of cash
in connection with the acquisitions of The Territory Ahead, Garnet Hill and
Whispering Pines, as well as increased borrowings under the Company's bank
credit agreement to fund the growth and working capital needs of Cornerstone.

Equity in net income of affiliate increased from $392,000 in 1996 to
$1,809,000 in 1997. This increase was due to the increased profitability of
TravelSmith, which was primarily the result of increased product offerings,
increased circulation and increased page counts.

The Company recorded a $275,000 gain for minority interest in 1997. This
gain was the result of the fact that the net loss incurred by Whispering Pines
in 1997 exceeded the net income of The Territory Ahead. No minority interest
was recorded in 1996.

The Company recorded an income tax provision representing 14% of its pre-tax
income in 1996, as compared to an income tax provision representing 25% of its
pre-tax income in 1997. The increase in the Company's effective tax rate was
primarily due to the inclusion of a tax provision for the net income of
Ballard Designs after its acquisition by Cornerstone and the inclusion of an
increased percentage of taxable income of The Territory Ahead and Garnet Hill,
during 1997. These factors were partially offset by the increase in equity in
net income of affiliate as a percentage of pre-tax net income. Smith+Noble was
a non-taxable entity at the corporate level in both years with no reportable
tax expense.

As a result of the factors described above, Cornerstone's net income
increased from $6,070,000, or 5.7% of net sales, in 1996 to $9,506,000, or
4.4% of net sales, in 1997.

1996 Compared to 1995

Net sales increased 75% from $60,536,000 in 1995 to $106,100,000 in 1996.
This increase was primarily attributable to the inclusion of the operating
results of Frontgate for all of 1996, as compared to only a portion of 1995.
In addition, the net sales of Ballard Designs and Smith+Noble (which were
included for all of both 1995 and 1996) increased 20% between these periods,
primarily due to an increase in catalog circulation and higher average page
counts per catalog.

Gross profit increased 85% from $27,719,000 in 1995 to $51,350,000 in 1996.
As a percentage of net sales, gross profit increased from 45.8% to 48.4%
between these periods. This increase was primarily attributable to the
inclusion of a full year of operating results of Frontgate, which has
historically had higher gross profit margins than Ballard Designs, and
improved gross profit margins at Smith+Noble.

Selling, catalog and fulfillment expenses increased 59% from $22,873,000 in
1995 to $36,408,000 in 1996. As a percentage of net sales, selling, catalog
and fulfillment expenses decreased from 37.8% to 34.3% between these periods.
The decrease in these expenses as a percentage of net sales was primarily due
to decreased selling expenses at Ballard Designs, Frontgate and Smith+Noble as
a percentage of net sales.

General and administrative expenses increased 97% from $3,509,000 in 1995 to
$6,911,000 in 1996. As a percentage of net sales, general and administrative
expenses increased from 5.8% to 6.5% between these periods. This increase was
primarily due to the added costs necessary to support the growth of the
business.

Amortization and depreciation increased from $759,000 in 1995 to $1,735,000
in 1996. This increase is primarily attributable to the amortization of the
goodwill from the Frontgate acquisition in September 1995 over all of 1996.

Cornerstone recorded net investment expense of $95,000 in 1995, as compared
to net investment income of $367,000 in 1996. This change was primarily
attributable to the increase in cash balances available for investment as a
result of Cornerstone's preferred stock financings between September 1995 and
January 1996.

Equity in net income of affiliate increased from a $5,000 loss in 1995 to a
$392,000 gain in 1996. This increase was due to the increased profitability of
TravelSmith (resulting primarily from increased net sales and gross profit
margin) and the increase in Cornerstone's stock ownership percentage in
TravelSmith from approximately 48% as of the end of 1995 to approximately 61%
by July 1996.

The Company recorded an income tax provision representing 33% of its pre-tax
net income for 1995, as compared to an income tax provision representing 14%
of its pre-tax net income for 1996. The decrease is primarily attributable to
an increase in the percentage of taxable income represented by Ballard Designs
and Smith+Noble, which were not taxable at the entity level, as a percentage
of overall net income.

As a result of the factors described above, Cornerstone's net income
increased from $320,000, or 0.5% of net sales, in 1995 to $6,070,000, or 5.7%
of net sales, in 1996.

SEASONALITY

The Cornerstone companies have varying degrees of seasonality in their
businesses, and the peak buying seasons tend to vary among the Cornerstone
companies. On an aggregate basis, the majority of Cornerstone's net sales
occur in the third and fourth quarters, and net income is generally higher in
the fourth quarter than the other quarters.

SELECTED QUARTERLY OPERATING RESULTS

The following table sets forth unaudited quarterly results of operations of
the Company for each of the quarters in 1997 and the first two quarters of
1998. In management's opinion, this unaudited financial information has been
prepared on a basis consistent with the audited Consolidated Financial
Statements which appear elsewhere in this Prospectus and include all
adjustments, consisting solely of normal recurring accruals and adjustments,
necessary for a fair presentation of the results of operations for the
quarters presented. This financial

information should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The results of operations for any quarter are not necessarily indicative of
future results of operations.

QUARTER ENDED
--------------------------------------------------
MAY 3, AUG. 2, NOV. 1, JAN. 31, MAY 2, AUG. 1,
1997 1997 1997 1998 1998 1998
------- ------- ------- -------- ------- -------
(IN THOUSANDS)

Net sales.................. $35,073 $45,734 $57,796 $77,732 $64,907 $74,362
Gross profit............... 16,737 21,660 26,914 38,773 32,679 35,574
Operating income........... 1,930 3,619 1,208 3,976 2,940 784
Equity in net income of
affiliate................. 561 434 297 517 1,269 939
Net income................. 1,754 3,227 1,072 3,453 3,374 2,279
Pro forma net income(1) ... 1,377 2,475 807 2,722 2,877 1,130
Net income (loss) per
share..................... (0.20) 0.22 (1.28) 0.20 0.18 0.11
Pro forma net income (loss)
per share................. (0.23) 0.16 (1.30) 0.15 0.15 0.03
Weighted average shares
outstanding............... 12,405 12,409 13,159 13,509 14,209 14,234
Net income (loss) per
share, assuming dilution.. (0.20) 0.14 (1.28) 0.12 0.11 0.08
Pro forma net income (loss)
per share assuming
dilution.................. (0.23) 0.11 (1.30) 0.09 0.10 0.03
Weighted average shares
outstanding............... 12,408 22,888 13,159 29,694 29,792 29,832

(1) Computed by adjusting net income to record an income tax provision for
Ballard Designs and Smith+Noble, which were not subject to income tax at
the entity level prior to their acquisitions by the Company.

LIQUIDITY AND CAPITAL RESOURCES

Cornerstone's principal capital needs arise from working capital required to
fund the operation of the Cornerstone businesses, capital expenditures related
to expansions and improvements to the Company's infrastructure, and funds
required in connection with the acquisition of new businesses. The Company's
working capital needs relate primarily to the production, printing and mailing
of catalogs, the purchase of inventory, the operation of the Company's
fulfillment centers and other facilities and offices, and the expansion and
upgrade of its facilities and systems to support its recent acquisitions and
its anticipated future growth.

To date, Cornerstone has funded its operations primarily through preferred
stock financings, which have generated net proceeds totaling approximately
$55,000,000, and its bank credit agreement. See Notes 6 and 7 of Notes to
Consolidated Financial Statements of the Company for a description of the
preferred stock issued in such financings; all of such preferred stock has
been converted into Common Stock. In addition, Cornerstone has paid some or
all of the purchase price for certain of its acquisitions using Cornerstone
Common Stock and debt instruments.

The Company is party to a revolving credit agreement with Fleet Bank and
certain other participating lenders, which extends through August 2003. The
credit agreement permits borrowings of up to the lesser of $135,000,000 or
Cornerstone's trailing 12 months' EBITDA (as defined in the agreement)
multiplied by four (subject to reduction to 3.25 in August 2000). Up to
$35,000,000 of borrowings may be used for construction of the Company's new
operations center. Borrowings are also permitted for acquisitions, subject to
various restrictions on acquisitions contained in the credit agreement,
including requirements that the acquired business be engaged in catalog sales
or a related business, that Cornerstone acquire 100% of the business, that the
acquired business satisfy certain financial standards, and that the amount of
borrowed funds used for business acquisitions by Cornerstone be limited to
$35,000,000 for any single acquisition and an aggregate of $50,000,000 for
acquisitions during any 12-month period. Borrowings under the credit agreement
bear interest at the prime rate of Fleet National Bank or an optional LIBOR-
based rate on funded debt. The credit agreement is secured by a pledge of the
capital stock of each of the Cornerstone companies owned by Cornerstone as
well as a mortgage on the Company's new operations center; in addition,
Cornerstone has agreed that it will not (except in certain

limited circumstances) incur any liens on any of its assets. The agreement
contains various financial covenants and also prohibits the Company from
paying dividends. Cornerstone paid initial fees totaling approximately
$607,000 in connection with the execution of this agreement in August 1998,
and is required to pay minimum fees totaling approximately $145,000 from
August 1998 through the end of fiscal 1998 under this revolving credit
agreement. Each of the Cornerstone companies has guaranteed the Company's
borrowings under this credit agreement, although the liability of TravelSmith
and Whispering Pines is limited to any borrowings made directly by such
company under the credit agreement. As of August 1, 1998, Cornerstone had
approximately $30,235,000 of outstanding borrowings under this credit
agreement. This revolving credit agreement will remain in effect following
this offering.

The Company's operating activities provided net cash of $2,786,000
$7,936,000 and $3,452,000 in 1995, 1996 and 1997 and used cash of $3,992,000
in the first six months of 1998. Net cash provided by operating activities in
1995, 1996 and 1997 was primarily a result of Cornerstone's net income during
such periods, as well as amortization and depreciation and increases in
accounts payable and other liabilities. These sources of funds were partially
offset by equity in net income of affiliate and increases in accounts
receivable and inventory. Net cash used in operating activities in the first
six months of 1998 was primarily the result of significant increases in
inventory and prepaid capital costs, partially offset by net income and
amortization and depreciation during that period. Inventory increased
significantly during 1997 and the first six months of 1998, primarily due to
acquisitions by the Company and to ensure an adequate in-stock level as the
Company increased catalog circulation and average page counts per catalog for
many of the Cornerstone companies following acquisition. Prepaid catalog costs
also increased significantly in the first six months of 1998, due to the
Company's acquisitions and increases in catalog circulation and page counts.
Cornerstone's operations generally require significant working capital
funding, even if they provide positive cash flow, because the production and
mailing of catalogs and the purchase of inventory involve significant
expenditures in advance of the generation of revenues from such catalogs.

The Company's investing activities used cash of $6,279,000 $4,541,000,
$47,110,000 and $6,886,000 in 1995, 1996, 1997 and the first six months of
1998, respectively. The significant use of cash for investing activities in
1997 was primarily attributable to the businesses acquired by Cornerstone
during that year. The Company made capital expenditures totaling $1,441,000,
$1,647,000, $3,497,000 and $8,440,000 during 1995, 1996, 1997 and the first
six months of 1998, respectively. The significant increase during the first
six months of 1998 relates primarily to costs associated with the new
operations center currently under construction. Funds used for acquisitions
totaled $1,047,000 and $48,735,000 during 1996 and 1997, respectively.

Cornerstone's financing activities generated $7,000,000 in 1995, used
$1,230,000 in 1996 and generated $37,292,000 and $8,023,000 in 1997 and the
first six months of 1998, respectively. Cash generated by financing activities
in 1997 was primarily the result of the sale of preferred stock (which
resulted in net proceeds of $33,676,000) and borrowings under the Company's
bank credit agreement (which generated $15,450,000).

During the last three quarters of 1998 and in 1999, the Company anticipates
that it will make capital expenditures totaling between $65 million and $75
million. These capital expenditures primarily relate to the Company's new
operations center. Cornerstone currently estimates the total cost of the new
operations center, including land, construction and equipment, is between $60
and $65 million. Cornerstone intends to finance approximately $42 million of
this cost by selling this facility and leasing it back from the purchaser.
Cornerstone expects that such sale will take place upon completion of
construction in the spring of 1999. Cornerstone plans to use its revolving
credit facility to fund the costs associated with the construction of this
facility pending receipt of this purchase price for the facility, as well as
to fund the facility costs in excess of the purchase price.

The Company believes that the proceeds of this offering, together with its
available cash, cash expected to be generated from operations and borrowings
under its bank credit agreement, will be sufficient to fund the operations of
the Company for at least one year. However, the Company's projected cash needs
may change as a result of acquisitions, unforeseen operational difficulties or
other factors. As a result, the Company may be required to seek additional
sources of funding sooner than anticipated, and there can be no assurance that
such funding will be available to the Company on satisfactory terms.

RECENT ACCOUNTING STANDARD

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in fair value of the hedged assets, liabilities, or firm
commitments will either be immediately recognized in earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings. The Company has not yet determined what
the effect of Statement 133 will be on the earnings and financial position of
the Company.

YEAR 2000

The year 2000 issue relates to computer programs and systems that recognize
dates using two digit year data rather than four digit year data. As a result,
such programs and systems may fail or provide incorrect information when using
dates after December 31, 1999. If the year 2000 issue were to cause
disruptions to Cornerstone's internal information technology systems or to the
information technology systems of entities with whom Cornerstone has
commercial relationships, material adverse effects to Cornerstone's operations
could result.

Cornerstone's internal computer programs and operating systems consist of
programs and systems relating to virtually all segments of Cornerstone's
business, including merchandising, customer database management and marketing,
order-processing, fulfillment, inventory management, customer service and
financial reporting. These programs and systems are primarily comprised of:

. "Front-end" systems. These systems automate and manage business functions
such as order-taking and order-processing, inventory management and
financial reporting.

. Warehouse management systems. These systems manage and automate fulfillment
operations at the warehouses that service each of the Cornerstone companies
(except for Smith+Noble and Whispering Pines, which outsource their
warehouse management functions to product vendors and external service
providers). Currently each of Cornerstone's internal warehouse management
systems is integrated with the internal front-end system of its respective
Cornerstone company.

. Customer database management systems. These systems facilitate the storage
of customer data and catalog mailings for each of the Cornerstone companies
(except for Whispering Pines, which outsources its customer database and
mailing functions to an external service provider). Currently each of
Cornerstone's internal customer database management systems is integrated
with the existing front-end system of its respective Cornerstone company.

. Telecommunications systems. These systems enable the Cornerstone companies
to manage their order-taking and customer service functions.

. Personal computers and local area networks. These systems are used for word
processing and other administrative purposes at individual Cornerstone
companies.

. Voicemail systems. These systems are used for receiving and storing
messages to employees at individual Cornerstone companies.

. Ancillary services systems. These include such systems as heating,
ventilation and air conditioning control systems and security systems.

Cornerstone has completed reviews of its internal front-end systems, its
internal warehouse management systems, its customer database management
systems, its internal telecommunications systems and its personal computers
and local area networks, to assess the potential impact of the year 2000
issue. These reviews were completed by Cornerstone's existing workforce at no
identifiable incremental cost. Based upon these reviews, Cornerstone believes
that these systems and equipment will operate correctly when processing data
that include

dates after December 31, 1999. Although Cornerstone believes that no specific
remediation or expenditures are required to ensure continued proper operation
of such systems and equipment notwithstanding the year 2000 issue, Cornerstone
estimates that approximately $4 million of the $60 to $65 million budgeted for
its new operations center will be spent on information technology
infrastructure, all of which will be year 2000 compliant. These expenditures
will eventually facilitate the consolidation of warehouse management functions
at the new operations center and the expansion of the Cornerstone companies'
capabilities with respect to analyzing, merging and purging their customer
databases. See "Business -- Management Information Systems."

Cornerstone has not yet completed reviews of its internal voicemail and
ancillary services systems, but does not expect that any remediation relating
to such systems that might be necessary following such reviews will cause
Cornerstone to incur material costs or present implementation challenges that
cannot be addressed prior to the end of calendar year 1999. Cornerstone
expects to complete its reviews of these systems in the first half of calendar
year 1999.

The computer programs and operating systems used by entities with whom
Cornerstone has commercial relationships also pose potential problems relating
to the year 2000 issue, which may affect Cornerstone's operations in a variety
of ways. These risks are more difficult to assess than those posed by internal
programs and systems and Cornerstone has not yet completed the process of
formulating a plan for assessing them. Cornerstone believes that the programs
and operating systems used by entities with whom it has commercial
relationships generally fall into two categories:

First, all of the Cornerstone companies rely upon programs and systems used
by providers of services necessary to enable the Cornerstone companies to
reach and communicate with their customers. Examples of such providers include
the United States Postal Service, UPS, telephone companies and banks. Services
provided by such entities affect almost all facets of Cornerstone's
operations, including processing of orders, printing and mailing of catalogs,
shipping of goods and certain financial services (e.g., credit card
processing). Programs and services in this first category generally are not
specific to Cornerstone's business and disruptions in their availability would
likely have a negative impact on most enterprises within the direct marketing
industry and on many enterprises outside the direct marketing industry.
Cornerstone believes that all of the most reasonably likely worst case
scenarios involving disruptions to its operations stemming from the year 2000
issue relate to programs and systems in this first category. Cornerstone
intends to include an evaluation such scenarios in its plan for assessing the
programs and systems of the entities with whom it has commercial
relationships.

Second, all of the Cornerstone companies rely upon programs and systems used
by a variety of vendors of the products they market (in 1997, the Cornerstone
companies purchased goods from over 2000 such vendors, none of which accounted
for more than 4% of the aggregate purchases by Cornerstone for the year) and
some of the Cornerstone companies rely upon the programs and systems of
entities that provide front-end services (i.e., Whispering Pines) and
warehouse management services (i.e., Whispering Pines and Smith+Noble). In the
case of risks posed by the year 2000 issue relating to programs and systems in
this second category that are used by product vendors, such risks are well
diversified. In the case of risks posed by the year 2000 issue relating to
programs and systems in this second category that are used by entities who
provide front-end and warehouse management services, such risks have already
been assessed and determined not to require remediation. Cornerstone intends
to include in its plan for assessing the programs and systems of the entities
with whom it has commercial relationships the solicitation of assurances of
year 2000 compliance from each product vendor that accounts for more than
approximately 1% of the aggregate purchases by Cornerstone on an annual basis
and from other significant vendors and service providers.

Cornerstone expects to complete the formulation of its plan for assessing
the programs and systems of the entities with whom it has commercial
relationships by the end of fiscal 1998 and the identification of related
risks and uncertainties by the end of the first quarter of fiscal 1999. Once
such identification has been completed, Cornerstone intends to resolve any
material risks and uncertainties that are identified by communicating further
with the relevant vendors and providers, by working internally to identify
alternative sourcing and by formulating contingency plans to deal with such
material risks and uncertainties. Cornerstone expects the resolution of such
material risks and uncertainties to be an ongoing process until all year 2000
problems are satisfactorily resolved.

BUSINESS

Cornerstone is a family of seven direct marketing companies that offer high-
quality home, leisure and casual apparel products, primarily through catalogs.
Each Cornerstone company is distinguished by a strong brand image, a clearly
focused merchandising concept, high-quality creative execution and exceptional
customer service. The Cornerstone family of companies currently includes
Ballard Designs, Frontgate, Garnet Hill, Smith+Noble, The Territory Ahead,
TravelSmith and Whispering Pines. An important strategy of the Company is to
feature branded products (i.e., sold under a Cornerstone company's brand
name), many of which are designed by that company and not available in other
catalogs. All of the Cornerstone companies target the same customer segment,
comprised of affluent and well-educated consumers, generally age 35 to 54.
Management believes Cornerstone's focus on providing distinctive, high-quality
merchandise to the same target customer segment has contributed to the
Company's strong sales and earnings growth and to the growth in its customer
database. Cornerstone's highly experienced corporate management team and team
of talented catalog entrepreneurs have a successful track record of operating
and growing leading direct marketing companies. In 1997, the Company's net
sales, net income and pro forma net income (adjusted to include tax provisions
for non-taxed companies) were $216.3 million, $9.5 million and $7.4 million,
respectively. In the six months ended August 1, 1998, the Company's net sales,
net income and pro forma net income were $139.3 million, $5.7 million and $4.0
million, respectively.

Cornerstone was founded in 1995 to capitalize on the opportunity to build a
family of direct marketing companies targeting affluent and well-educated
consumers and on the growing popularity of purchasing merchandise through
direct channels such as catalog shopping and the Internet. Cornerstone has
achieved significant scale through its seven acquisitions and internal growth
by these companies. The Company has selectively pursued those strategic
acquisitions that satisfy its focused acquisition criteria, which include:
high-quality merchandise offerings in the home, leisure and casual apparel
markets; an affluent target customer base; a strong brand identity;
exceptional customer service; a talented and entrepreneurial management team;
profitable operations, high average order value and high net sales per catalog
mailed; a track record of growth; and substantial opportunity for future
growth and improved profitability. As a result of both acquisitions and
internal growth, Cornerstone's net sales increased 72% between the first six
months of 1997 and the first six months of 1998.

Cornerstone's operating model, which it believes is unique in the direct
marketing industry, enables each Cornerstone company to retain the creativity,
entrepreneurial spirit and responsiveness of a smaller company while also
realizing the benefits and efficiencies offered by a larger enterprise.
Cornerstone recognizes the importance of brand personality and vision in
maintaining differentiated brand images and places great emphasis on the
retention and preservation of the entrepreneurial spirit and management teams
of the individual Cornerstone companies. Rather than totally integrating the
acquired business into Cornerstone's existing operations, Cornerstone
generally leaves the management and headquarters of the acquired company
intact and allows the management team to retain responsibility for critical
front-end business functions such as merchandising, creative presentation,
marketing and catalog circulation. The Company is committed to enhancing the
brand equity, growth and profitability of the Cornerstone companies by:
providing full access to the customer databases and the results of various
marketing initiatives of the other Cornerstone companies; assuming
responsibility for certain back-end services, such as order fulfillment,
certain customer service operations, customer database management and certain
administrative functions, that can be more efficiently performed in a
centralized manner; providing the financial resources necessary to support the
growth of the business; and providing the increased purchasing power and other
economies of scale offered by the combined Cornerstone companies.

INDUSTRY OVERVIEW

advertising and the Internet. Cornerstone believes that the trend toward non-
store retailing, and catalog shopping in particular, is being driven by a
number of factors, including: the ease and convenience of shopping at home,
which is particularly attractive to time-constrained families; increasing
dissatisfaction with the level of customer service from many retailers; and
increasing consumer confidence in and awareness of the quality of customer
service and reliability offered by leading direct marketers. These alternative
forms of non- store retailing, which in 1997 accounted for approximately
$382.0 billion in sales, are expected to grow approximately 8.0% per annum for
the next five years. Cornerstone's primary focus is on catalog retailing to
consumers, which represented approximately $49.7 billion of sales in 1997 and
which the Direct Marketing Association estimates is increasing at an annual
rate of 6.1%. These growth rates, however, do not necessarily reflect the
rates at which the Company's business will grow. The Internet is also becoming
an increasingly significant global medium for communication and commerce, and
direct marketers with the infrastructure to process and fulfill orders should
be well positioned to handle increasing business over the Internet. Jupiter
Communications, an industry analyst, has estimated that the number of
households using e-mail, the Internet or a consumer on-line service will grow
from an estimated 15.2 million households in 1996 to 57.0 million households,
representing over 50% of U.S. households, by the year 2002. Management
believes that international markets also represent a sizeable consumer base
and growth opportunity for direct marketing sales.

Cornerstone's target customer base, which is comprised of affluent and well-
educated consumers, generally age 35 to 54, is also experiencing significant
growth as a result of a number of favorable demographic trends. Due in large
part to the aging of the "baby boomer" generation, Cornerstone's target market
is growing at a faster rate than the population as a whole. The increase in
recent decades in the percentage of people attending college and graduate
school and the increasing number of affluent American households (i.e.,
households with annual income in excess of $75,000) have also contributed to
the growth of Cornerstone's target market. Another favorable demographic trend
has been the increase in the number of dual income families, which has risen
nearly 50% since 1980. Dual income families not only tend to have more
disposable income, but also are generally more time-constrained and therefore
more responsive to catalog shopping. Industry data also indicate that
individuals in the 35 to 54 age group, households with annual income above
$75,000 and persons with college or graduate degrees are more likely than
persons in other age brackets, households in lower income brackets or persons
without college degrees to buy from catalogs.

The overall catalog industry is highly fragmented. Cornerstone estimates
there are currently over 7,000 companies offering between 10,000 and 12,000
titles. Many catalog companies are facing significant challenges as a result
of the increasingly competitive direct marketing environment. In addition, the
capital-intensive nature of the catalog business, which requires significant
expenditures in advance of revenue generation, and the inability of many
smaller companies to achieve economies of scale or to finance the technology
required in a rapidly evolving industry, place additional restraints on the
profitability and growth of many smaller catalog companies. In order to
succeed in this increasingly competitive market, catalog operators require
access to capital and significant management expertise. Moreover, Cornerstone
believes that the owners of many catalog companies are seeking partial or
complete liquidity of their investment through partnering with a larger
catalog retailer. As a result of all these factors, Cornerstone believes that
significant acquisition opportunities exist and that its unique operating
model positions it as a differentiated and attractive partner in a
consolidating industry.

COMPETITIVE STRENGTHS

The Cornerstone family of brands includes direct marketing companies in the
home, leisure and casual apparel markets. Cornerstone believes the following
competitive strengths are critical to its success:

Unique Operating Model. Cornerstone's unique operating model allows the
management teams of the individual Cornerstone companies to retain
responsibility for critical front-end business functions such as
merchandising, creative presentation, marketing and catalog circulation, and
complements the talents of those management teams with the experience,
strategic insights and administrative skills provided by the Cornerstone
management team. This model recognizes the importance of "personality" and
vision in maintaining distinctive

brand images and places great emphasis on the retention and preservation of
the founding spirit and management teams of its acquired companies.
Cornerstone has retained the key executives of each Cornerstone company (who
in many cases were the original founder or co-founders of that company), and
Cornerstone believes that the executives of the Cornerstone companies include
some of the top merchandising and creative talents in the direct marketing
industry. The Company complements the talents and entrepreneurial spirit of
these management teams with Cornerstone's corporate-level management, which
helps establish and implement the business strategy of each Cornerstone
company. The Cornerstone management team, which is one of the most experienced
management teams in the industry, is comprised of five individuals who have a
combined experience of approximately 100 years at direct marketing companies
such as L.L. Bean, Lands' End, Smith & Hawken, Cincinnati Microwave and
Sportsman's Market. Cornerstone's corporate management assumes responsibility
for certain back-end services, thereby permitting the Cornerstone company
management teams to devote their full time and attention to merchandising,
creative presentation and marketing. This model enables each Cornerstone
company to retain the creativity, entrepreneurial spirit and responsiveness of
a smaller company while also realizing the benefits and efficiencies offered
by a larger enterprise.

Well Known and Highly Regarded Brands. Each Cornerstone company emphasizes a
strong brand image with the goal of establishing a leading position in its
market segment. Management believes that the brand identities of the
Cornerstone companies are among the most recognizable and highly regarded in
the direct marketing industry. To enhance their brand awareness, the
Cornerstone companies offer high-quality merchandise with a consistent point-
of-view in distinctive, tasteful catalog presentation formats. An important
strategy of the Company is to feature branded products (i.e., sold under a
Cornerstone company's brand name), many of which are designed by that company
and not available in other catalogs. Branded product offerings reinforce a
differentiated brand image and generally provide higher profit margins than
other merchandise. The Company seeks to establish each Cornerstone brand as
the authoritative source for its lifestyle products. Cornerstone believes that
its strong brand identities enhance the performance of its catalogs, provide a
competitive advantage by fostering loyalty and long-term customer
relationships, and will position Cornerstone to capitalize on other market
opportunities such as the Internet, international markets and retail.

Distinctive, High-Quality Products. The Cornerstone companies offer
attractive, high-quality merchandise designed to appeal to the Company's
affluent target customers, at prices that provide them with significant value.
These products are intended to enhance customers' enjoyment of their leisure
time by improving their home decor and comfort and by enhancing their hobbies,
travel and other recreational activities. By offering multiple titles focusing
on various product segments to the same target customer base, Cornerstone is
able to surround its customers with its merchandise offerings and satisfy many
of their purchasing needs. The Cornerstone companies devote substantial
resources to the development, design and sourcing of products which are
consistent with and enhance the brand image of that company and which are not
readily available from other sources. Merchandise is presented in tastefully
designed catalogs, printed on high-quality paper with effective photography
and editorial detail in an appealing setting.

Focus on Attractive Demographic Market. All of the Cornerstone companies
target their merchandise offerings primarily at consumers whose income and
education levels are in the top 15% of the population and who are generally in
the 35 to 54 age bracket. Cornerstone believes that focusing on a single
market segment enables it to understand and serve its customers better and
enhances the benefits that can be derived from sharing customer databases and
the results of various marketing initiatives among the Cornerstone companies.
The market segment targeted by Cornerstone is particularly attractive because
it is expected to increase in size over the next several years and because
Cornerstone believes that the affluence and time-constrained lifestyles of
this group increase the likelihood that they will respond to the convenience
and efficiency offered by home shopping. Cornerstone believes that its
customer demographics contribute significantly to its high average order
value.

Exceptional Customer Service. Each Cornerstone company maintains a customer-
focused approach at all stages of its business which is aimed at building
lifetime customer relationships. Cornerstone devotes significant resources to
ensuring that a substantial majority of in-stock orders are shipped on the day
the order is received;

while this practice results in higher costs, the Company believes that it
enhances customer satisfaction and loyalty. Several Cornerstone companies
employ product specialists, who assist customers in selecting products that
meet their particular design or style criteria. The Cornerstone companies also
enhance their customer service through initiatives such as extensive training
of customer service representatives; toll-free telephone ordering; and liberal
return policies. Cornerstone believes that offering exceptional customer
service encourages repeat purchases by its customers and enhances the brand
identity and reputation of the Cornerstone companies within their target
market.

Synergies and Efficiencies Resulting from Combined Enterprise. Cornerstone's
business structure is designed to enable each Cornerstone company to realize
sales growth, performance benefits and cost savings from the combined
enterprise. Among the benefits enjoyed by Cornerstone companies are the
exchange of customer databases with proprietary purchase histories, the
sharing of "best practices" among Cornerstone companies (such as inventory
management techniques and customer database analyses), and access to the
technology, financial resources and capital-raising ability of Cornerstone.
Cornerstone is in the process of consolidating certain business functions at
the Cornerstone level, including the purchasing of certain goods and services
(such as catalog paper, printing, shipping and telecommunications services),
fulfillment, sourcing and certain other administrative functions, which
provides efficiencies and economies of scale that the individual companies
could not achieve separately. As part of this strategy, Cornerstone is
currently building a new operations center, which is scheduled to open in the
summer of 1999. Cornerstone has been successful in improving the financial
results of each Cornerstone company since the time it was acquired, and
Cornerstone expects to realize further improvements as these initiatives
continue.

GROWTH INITIATIVES

Build Existing Catalogs. Cornerstone's primary growth strategy is to build
aggressively the sales and productivity of its existing catalog titles. The
net sales of each Cornerstone company which has been operated by the Company
for at least 12 months were higher in the 12 months immediately following
acquisition than in the 12 months immediately preceding acquisition, and the
net sales of Frontgate and TravelSmith, which were each acquired before 1997,
increased 51% between the first six months of 1997 and the first six months of
1998. Cornerstone is focusing on two principal themes in building its existing
catalog titles. First, the Company is striving to increase the size of each
Cornerstone company's customer database (comprised of both existing customers
and prospective customers). Initiatives in support of this goal include
increasing catalog circulation to prospective customers (using successful
mailing lists from other catalogs, subscription lists or compiled lists), and
developing proprietary mailing lists through magazine advertising and other
creative means of identifying likely customers. In 1997 and the first six
months of 1998, over 65% of the catalogs circulated by the Cornerstone
companies were mailed to prospective customers. Second, Cornerstone is
committed to increasing the productivity of its customer database and catalog
mailings. To accomplish this objective, Cornerstone is pursuing initiatives
such as increasing the number of editions of certain catalogs, expanding
merchandise offerings by increasing product breadth and assortment in certain
successful categories, increasing the page counts of certain catalogs,
reformatting the creative presentation of certain catalogs to make it more
appealing to customers, and increasing the proportion of branded products.

Selectively Pursue Strategic Acquisitions. Cornerstone intends to pursue
attractive strategic acquisitions of direct marketing companies that meet its
focused criteria, which include: high-quality merchandise offerings in the
home, leisure and casual apparel markets; an affluent target customer base; a
strong brand identity; exceptional customer service; a talented and
entrepreneurial management team; profitable operations, high average order
value and high net sales per catalog mailed; a track record of growth; and
substantial opportunity

for future growth and improved profitability. Cornerstone may also pursue
acquisitions of direct marketing companies that would be folded into an
existing Cornerstone company. Cornerstone believes the experience gained from
the acquisitions it has made to date and its strategy of allowing the
management teams of the acquired companies to retain significant
responsibility make Cornerstone an attractive partner for many target
companies and facilitate the process of integrating acquired companies. The
Company's acquisition strategy also involves certain risks, including an
inability to identify suitable acquisition candidates, problems in
successfully integrating acquired businesses, and the diversion of management
attention from operational issues. See "Risk Factors--Risks Associated With
Acquisitions."

Develop New Titles. The Company may introduce new catalog titles to serve
market niches that it does not currently address. Cornerstone believes that
new titles could capitalize on the brand identity of a Cornerstone company,
Cornerstone's operational infrastructure, the customer databases of the
various Cornerstone companies and the experience accumulated by Cornerstone
management in addressing its target market. New titles developed by
Cornerstone may expand Cornerstone's offerings in home, leisure and casual
apparel products or may serve the lifestyle interests and leisure activities
of Cornerstone's target market segment. The Company may elect to introduce new
titles either as part of an existing Cornerstone company (which may involve an
extension or a spin-off of an existing catalog) or as a new company within the
Cornerstone family of brands. Examples of titles introduced by Cornerstone
companies are Splash and The Ultimate Grill, offered by Frontgate, and
Isabella Bird, introduced by The Territory Ahead.

Develop Additional Market Opportunities. Cornerstone believes that there are
a number of additional market opportunities available to it. For example,
Cornerstone believes that, due to its strong brand identities and its
expertise in fulfillment, customer service and marketing, it is well
positioned to capitalize on the expected growth in electronic commerce.
Cornerstone is developing a strategic plan for building the Internet business
of each of its companies and is currently making investments to develop this
channel. In addition, Cornerstone believes international markets represent
significant future growth potential for several of the Cornerstone brands, and
is exploring the introduction of certain catalogs in various foreign
countries. Retail stores are another example of an alternative channel that
could promote sales growth for Cornerstone, and Cornerstone may test this
concept further over the next several years.

The growth initiative on which Cornerstone places the highest priority is
building the sales and productivity of its existing catalog titles. This is an
ongoing initiative which management of Cornerstone and the Cornerstone
companies attends to on a continuous basis. The pursuit of strategic
acquisitions and the development of additional market opportunities are next
in order of importance to Cornerstone management. Cornerstone continuously
monitors acquisition opportunities and may make an acquisition at any time,
although it currently has no commitments or understandings for an acquisition.
The status of Cornerstone's efforts to develop additional market opportunities
are described below under "--Additional Market Opportunities." The development
of new titles, while an important growth initiative, is not currently as high
a priority to management as the other growth initiatives, although this is
reviewed by management on a regular basis.

CORNERSTONE FAMILY OF BRANDS

The Cornerstone family of brands consists of seven acquired companies that
share the following characteristics: high-quality merchandise offerings in the
home, leisure and casual apparel markets; an affluent target customer base; a
strong brand identity; exceptional customer service; a talented and
entrepreneurial management team; and high average order value and high net
sales per catalog mailed. The Company seeks to establish each Cornerstone
brand as the authoritative source for its lifestyle products.

Set forth below is a table summarizing certain key attributes of each
Cornerstone brand.

PRIMARY
COMPANY TITLES OFFERED DATE ACQUIRED MERCHANDISE CATEGORIES
- ----------- ------------------------------- -------------- ------------------------

Ballard August 1997
Designs Ballard Designs Home
Frontgate Frontgate September 1995 Home and leisure
The Ultimate Grill
Splash
The Search for the Perfect Gift
Garnet Hill Garnet Hill July 1997 Home and casual apparel
Smith+Noble Windoware August 1998 Home
Window Elements
Windoware Sourcebook
The March 1997 Casual apparel
Territory The Territory Ahead
Ahead Isabella Bird
TravelSmith TravelSmith July 1996* Casual apparel
Whispering Whispering Pines September 1997 Home, leisure and casual
Pines apparel

- --------
* represents date on which Cornerstone acquired a majority interest.

Ballard Designs

Ballard Designs provides home decorating solutions for aspiring "do-it-
yourself" interior designers. The company offers interior furnishings,
architectural accents and decorative accessories, with a focus on products
that are "updated traditional," frequently with a European flair. Merchandise
is often developed based on an original antique or architectural designs, and
many of the products offered by Ballard Designs are not available from other
catalogs. Because many of the company's products are designed with a classic,
enduring theme, the company has a core of basic products that are consistently
strong sellers. Basic products are often enhanced by updating fabrics, colors
and accessories. The Ballard Designs brand is positioned to provide high-
quality and originally designed merchandise at more reasonable prices than
exclusive original dealers.

Ballard Designs' catalogs present the company's merchandise in attractive
room settings that enhance its appeal and help build Ballard Designs' brand
identity. The company provides "swatches" of materials to assist customers in
product selection and offers a customer advice program to maximize customer
satisfaction. Ballard Designs targets customers who are homeowners between the
age of 35 and 54 with a high income and education level. The company believes
its customers are attracted to Ballard Designs by its fresh decorating ideas,
its selection of hard-to-find products and its exceptional customer service.

The Ballard Designs management team is led by Helen Ballard Weeks, Chief
Executive Officer and founder, and Stewart W. Tarkington, President. Ms. Weeks
has been Chief Executive Officer of Ballard Designs for 16 years, and Mr.
Tarkington was an executive at Avon Products and Spiegel before joining
Ballard Designs in 1994. Prior industry experience of other top Ballard
Designs executives includes Neiman Marcus Direct, Coldwater Creek, Spiegel, DM
Management and Talbots.

Ballard Designs was founded in 1982. Cornerstone acquired all of the
outstanding capital stock of Ballard Designs in August 1997. Ballard Designs
is located in Atlanta, Georgia. Its toll-free number for product orders is
(800) 367-2775 and its World-Wide Web address is http://www.ballard-
designs.com.

Frontgate

Frontgate offers a wide selection of functional products focused on
enhancing the quality of life at home. The Frontgate catalog is the company's
primary catalog. In addition, the company mails the following three speciality
titles on a seasonal basis: The Ultimate Grill (which offers a full range of
stainless steel grills and other outdoor cooking equipment and accessories),
Splash (which is targeted at owners of in-ground swimming pools or waterfront
homes) and The Search for the Perfect Gift (which offers tasteful, high-
quality gifts). Frontgate focuses on unique products for both the indoor and
outdoor home environment. Major product categories include outdoor furnishings
and accessories, barbecue grills and outdoor cooking equipment, pool products,
bed and bath accessories, indoor cooking and entertainment products,
electronics, and storage and organization products. Many of Frontgate's
products (such as its "hotel quality" showerheads) are difficult to find
through traditional retail channels. Other products, such as stainless steel
outdoor grills, are designed by the company and available exclusively in
Frontgate's catalogs. The company strives to offer the highest quality
merchandise while still providing good value.

Frontgate's catalogs present merchandise in real-life settings and are
designed to appeal to both men and women, particularly home owners between the
age of 35 and 54 with a high income and education level. Due to its
sophisticated customer base and the high-end nature of its product offerings,
Frontgate since its inception has placed an unusually high degree of emphasis
on exceptional customer service and satisfaction.

The Frontgate management team is led by John A. O'Steen, Chairman of the
Board, and Paul D. Tarvin, President and Chief Executive Officer, who co-
founded Frontgate. Mr. O'Steen's prior industry experience includes 17 years
at Procter & Gamble and five years as President and Chief Executive Officer of
Cincinnati Microwave. Mr. Tarvin was previously an executive at Sportsman's
Market, where he spent 12 years. Mr. O'Steen and Mr. Tarvin also serve as
executive officers of Cornerstone. Prior experience of other top Frontgate
executives includes Bear Creek Direct Marketing, Laura Ashley and Saks Fifth
Avenue.

Frontgate was founded in 1991. Cornerstone acquired all of the outstanding
capital stock of Frontgate in September 1995. Frontgate is located in Lebanon,
Ohio. Its toll-free number for product orders is (800) 626-6488 and its World-
Wide Web address is http://www.frontgate.com.

Garnet Hill

Garnet Hill offers a highly-edited selection of home and casual apparel
products, all of which convey a lifestyle image emphasizing taste, classic
looks and stylish flair. The company offers high-quality, natural-fiber
bedding, bath products and other fine home products, as well as sleepwear,
women's ready-to-wear clothing and children's clothing. Garnet Hill began
operations as an importer of English flannel sheets that were not commercially
available in the United States, and has expanded its business to focus on
other natural-fiber products. The company is committed to supplying hard-to-
find products that help define and differentiate its customers' lifestyles,
from the look of their bedrooms to the clothes they and their children wear.
Most of the company's product offerings are sold under the Garnet Hill brand
name, are designed by the company and are not available elsewhere. The company
believes that its customers view Garnet Hill as a design resource committed to
fresh interpretations, high-quality fabrics, and a viewpoint that provides new
twists on the familiar in home products and women's and children's apparel.

Garnet Hill enhances its brand identity with its sophisticated, high-quality
catalogs characterized by distinctive cover designs, excellent photography,
high-quality paper and fresh, open layouts. The Garnet Hill catalogs are
designed to appeal to female homeowners in the 35 to 54 age group,
particularly those with children, with a high household income and home value.
A typical Garnet Hill customer has tastes that are traditional and classic,
yet sophisticated, and is more attracted to classic merchandise than the
latest fashion trends.

The Garnet Hill management team is led by James B. Hamblin, President and
Chief Executive Officer, and Bradford C. Williams, Executive Vice President
and Chief Operating Officer. Mr. Hamblin and Mr. Williams have a combined 20
years experience at Garnet Hill. The backgrounds of the other top executives
at Garnet Hill include experience at L.L. Bean, Lands' End and Esprit.

Garnet Hill was founded in 1976. Cornerstone acquired all of the outstanding
capital stock of Garnet Hill in July 1997. Garnet Hill is located in
Franconia, New Hampshire. Its toll-free number for product orders is (800)
622-6216.

Smith+Noble

Smith+Noble offers custom-made window treatments for the home. The company
offers its merchandise through three catalogs: Windoware (the company's
flagship catalog), Window Elements (which offers a simplified collection of
custom window treatments) and Windoware Sourcebook (which offers a broader
selection of products to a more select group of current and potential
customers). Smith+Noble offers a full range of hard and soft window
treatments, including horizontal blinds, pleated shades, fabric treatments and
an assortment of other window products. Most of the company's products are
designed by Smith+Noble's product development team, are sold under the
Smith+Noble name and are available only through the company. Smith+Noble
believes its products are sold at prices which are generally less than prices
of comparable merchandise available in stores. Through its direct
relationships with contract manufacturers, Smith+Noble has products made to
order and shipped directly to the customer, generally within one to six days
after the order is accepted, which enables Smith+Noble to avoid stocking and
distributing inventory.

The company's catalogs present a broad selection of window treatments in a
convenient and easy-to-read format that simplifies the product selection
process. Smith+Noble's catalogs also provide customers with product
information and expert advice. The company's customer service representatives
receive extensive training and are able to guide customers through the product
selection, ordering and installation process. Customer service representatives
also provide customers with decorating ideas and fashion advice, which further
enhances Smith+Noble's reputation as a leading authority on window treatments.
Smith+Noble targets upscale customers with high income and education levels.
The company's target customer is a college-educated home owner with an annual
household income in excess of $60,000.

The Smith+Noble management team is led by Fred E. Kamgar, President and
Chief Executive Officer and the founder of the company, and Robert M.
Perkowitz, Chief Operating Officer. Prior to founding Smith+Noble, Mr. Kamgar
founded and operated Blinds Plus, a chain of window treatment retail stores.
Mr. Perkowitz previously served in various executive positions, including
chief executive officer, of home furnishings companies such as Home Fashions,
Joanna Window Decor and Artmaster Studios. Prior experience of other top
Smith+Noble executives includes Neiman Marcus Direct, Knight's Ltd. and Ross-
Simons of Warwick.

Smith+Noble was founded in 1993. Cornerstone acquired all of the outstanding
equity interest in Smith+Noble in August 1998. Smith+Noble is located in
Corona, California. Its toll-free number for product information is (800) 248-
8888 and its World-Wide Web address is http://www.smithandnoble.com.

The Territory Ahead

The Territory Ahead offers unique, high-quality men's and women's clothing,
accessories and other products distinguished by a craftsman-like approach to
material and detail and by a practical, rugged American styling. The company's
primary catalog is The Territory Ahead. In the spring of 1998, the company
introduced and tested the Isabella Bird catalog, which offers women's apparel
that is somewhat dressier than the offerings of The Territory Ahead. The
company's clothing is designed by The Territory Ahead sold under The Territory
Ahead brand name and available only from the company. Products are designed
using attractive fabric trims that are incorporated into classic, comfortable
styles. The merchandise is intended to have a distinctive casual style, which
combines elegant with rugged, dressy with casual, and classic with trendy.
Weathered finishes and dynamic colors are hallmarks of The Territory Ahead
products.

This weathered look extends to the company's catalogs, where products are
depicted next to striking outdoor photography accompanied by colorful
narration that suggests an adventuresome and active outdoor lifestyle. These
attractive outdoor settings are also designed to provide a more inviting
environment for men and women to browse for high-quality clothing. Like all
Cornerstone companies, The Territory Ahead targets upscale customers with high
income and education levels. More than half of the company's customers are
women. The Territory Ahead believes that customers are drawn to the company's
catalogs by the outdoor scenery, which evokes a sense of adventure and
freedom.

The Territory Ahead management team is led by Bruce A.L. Willard, the
President, Chief Executive Officer and founder of The Territory Ahead. Mr.
Willard spent eight years at L.L. Bean and two years at Esprit before founding
The Territory Ahead. Other top executives of The Territory Ahead have
backgrounds at companies such as Lands' End, Montgomery Ward and The Millard
Group.

The Territory Ahead was founded in 1988. Cornerstone acquired 80% of the
outstanding capital stock of The Territory Ahead in March 1997 and acquired
the remaining 20% in September 1998. See "Certain Transactions--Contractual
Arrangements with Other Equityholders of Cornerstone Companies--The Territory
Ahead" for a description of certain rights and obligations of Mr. Willard with
respect to his stock ownership of The Territory Ahead. The Territory Ahead is
located in Santa Barbara, California. Its toll-free number for product orders
is (800) 882-4323 and its World-Wide Web address is
http://www.territoryahead.com.

TravelSmith

TravelSmith provides a convenient source for its customers' varied travel
needs by offering clothing and accessories designed to make travel more
comfortable and convenient. The concept for the company resulted from the
world-wide travels of the company's founder, Charles L. Slaughter, who
recognized the need for more durable and convenient travel products and who
teamed with industry veteran Scott R. Sklar to found the company. Most
merchandise is sold under the TravelSmith brand name and is specially designed
by and available only from the company. All merchandise serves a travel-
related function. The company designs its products to be strong enough to be
completely reliable yet light enough to be conveniently packable. Apparel is
wrinkle- resistant, washable and suitable for multiple climates. Much of the
company's merchandise mix emphasizes basic functionality and a classic look
that makes such merchandise successful year after year.

TravelSmith emphasizes its travel theme by displaying products alongside
pictures of adventurous travel destinations, thereby enhancing the appeal of
the merchandise, and by offering practical travel advice. As an added
convenience for its customers, the TravelSmith call center is operated by
trained outfitters and the company offers a free outfitting guide to assist
customers in packing for their trips. TravelSmith has marketing alliances with
a number of adventure travel companies and tour operators. The company targets
both adventure and leisure travelers, particularly in the 35 to 64 age group.

The TravelSmith management team is led by Charles L. Slaughter and Scott R.
Sklar, who serve as Co-Presidents. In addition to extensive international
travel, Mr. Slaughter's prior experience includes management consulting in the
areas of finance, corporate strategy and marketing, and international economic
development. Mr. Sklar's prior experience incudes five years in product
management at L.L. Bean and two years at Smith & Hawken, where he was Vice
President of Merchandising. The backgrounds of the other top executives at
TravelSmith include experience at L.L. Bean, Hanover Direct, Smith & Hawken,
Old Navy and Macy's West.

TravelSmith was founded in 1992. Cornerstone acquired (through a predecessor
company) a minority interest in TravelSmith in July 1993 and in July 1996
increased its ownership position to approximately 60% of the outstanding
common stock (after giving effect to the conversion of all outstanding
convertible preferred stock); the balance is held by Messrs. Slaughter, Sklar
and certain other persons. See "Certain Transactions--Contractual Arrangements
with Other Equityholders of Cornerstone Companies--TravelSmith" for a
description of certain rights and obligations of the other TravelSmith
stockholders with respect to their stock ownership of TravelSmith. TravelSmith
is located in Novato, California. Its toll-free number for product orders is
(800) 950- 1600 and its World-Wide Web address is http://www.travelsmith.com.

Whispering Pines

Whispering Pines, which is a smaller and earlier stage business than the
other Cornerstone companies, offers a selection of high-quality, rustic home
products, casual apparel and accessories targeted at upscale consumers, many
of whom own second homes. The company's product offerings are designed to help
customers achieve the comfortable, nostalgic feeling of family retreats and a
rustic, simpler life. Whispering Pines' merchandise is nostalgic, fun-loving
and designed to withstand the trials of cabin life. A portion of the company's
products are designed by or available exclusively from Whispering Pines. The
company's merchandise selection is consistent with its lifestyle theme and
provides Whispering Pines with a distinctive merchandise assortment and unique
brand identity.

The layout and merchandise presentation of Whispering Pines catalogs
reinforce its brand positioning. Products are presented alongside authentic
photographs of cabin life, such as children carrying fishing poles, playing
board games around a wooden table or jumping into a lake for a swim. The use
of matte paper and subdued lighting adds to the casual, nostalgic feel of the
catalog. While the home products and apparel are designed to appeal to both
men and women, the company finds that the "family feel" of its catalogs is
particularly appealing to women.

The Whispering Pines management team is led by Susan Kelly Panian, President
and Chief Executive Officer, and Margaret Kelly Murray, General Merchandising
Manager, who co-founded the Company.

Whispering Pines was founded (through a predecessor entity) in 1993.
Cornerstone acquired a 51% interest in Whispering Pines in September 1997, at
which time the company was reorganized as a limited liability company, and
acquired an additional 29% interest in September 1998; the 20% interest in
Whispering Pines is held by a corporation owned by Ms. Panian, Ms. Kelly and
another executive of Whispering Pines. See "Certain Transactions--Contractual
Arrangements with Other Equityholders of Cornerstone Companies--Whispering
Pines" for a description of Cornerstone's right to increase its equity
interest in Whispering Pines and certain rights and obligations of the
minority member with respect to its interest in Whispering Pines. Whispering
Pines is located in Fairfield, Connecticut. Its toll-free number for product
orders is (800) 836-4662 and its World-Wide Web address is
http://www.whispering-pines.com.

MERCHANDISING

Each Cornerstone company is responsible for developing and implementing the
merchandising strategy for its catalogs. All Cornerstone companies offer high-
quality home, leisure and/or casual apparel products and emphasize a strong
brand image. The merchandising objective of each Cornerstone brand is to
position itself as the leading authority on the styles and assortment of
merchandise offered within its market segment. Cornerstone believes that the
brand identities of the Cornerstone companies are among the most recognizable
and highly regarded in the direct marketing industry. While the product
offerings and styles of each Cornerstone brand are different, the following
strategies underlie the merchandising programs of all Cornerstone brands:

. offering a high level of branded products (i.e., sold under that
Cornerstone company's brand name), many of which are designed by that
company and not available from other catalogs. Branded offerings are
central to Cornerstone's merchandise strategy both because they help
reinforce the brand identity of each catalog title and because they
generally offer higher profit margins than other merchandise because they
are generally purchased directly from the manufacturer, thus avoiding the
mark-ups that result from additional distribution tiers. Branded
merchandise also involves certain risks, as described under "Risk Factors--
Risks Associated with Branded Merchandise and Overstocks."

. developing a product assortment that is consistently styled and carefully
edited, yet exceptional in its breadth and depth. Cornerstone believes that
such a merchandise assortment is critical in establishing each Cornerstone
brand as the authoritative source within its merchandise categories.

. working directly with vendors to design and develop unique products for the
catalog. For example, Frontgate approached the Viking Range Company with
the idea of jointly developing a stainless steel

outdoor grill; this grill is not available through other catalogs and has
been a very successful item for the company.

. using creative and appealing photographs, high-grade catalog paper and
high-quality printing to create a vibrant, distinctive catalog presentation
that conveys an overall image of the catalog title and the merchandise
offered by it.

. offering products that provide its upscale target customers the best
quality available within that product category. These products may be more
expensive than lesser quality alternatives, but Cornerstone believes its
direct sourcing and other operational efficiencies enable it to offer these
products at prices that represent good value to the customer.

Each Cornerstone company has its own team of experienced merchants that
develops and selects products for its catalogs. Merchandising decisions are
made based upon management's extensive industry knowledge, attending industry
trade shows, visiting vendors and monitoring the merchandise offerings of
competitive direct marketers and traditional retailers. Merchants also have
available to them detailed sales and other data on the merchandise that
appeared in prior catalog editions. The strategy of Cornerstone is to
establish a series of successful "core" products which are repeated in
subsequent editions of a catalog (often in additional colors or with modest
variations) and to complement those products with an assortment of new
merchandise, consistent with that catalog's brand identity, that adds
freshness to the catalog.

CREATIVE PRESENTATION

Cornerstone believes that presenting merchandise in an attractive and
creative catalog setting is critical to reinforcing the brand identity of its
catalog titles and to stimulating interest in its products. Each Cornerstone
company is responsible for designing and producing its own catalogs. The
Cornerstone companies use on-location photography and real-life settings to
present merchandise in an appealing manner and to enhance the life-style theme
of the catalog. Cornerstone strives to balance the dual goals of maximizing
productivity by including a high concentration of merchandise per page, and
displaying merchandise in an attractive and tasteful setting. Cornerstone
catalogs typically contain substantial editorial content, which is targeted at
Cornerstone's upscale customer base and describes the merchandise and depicts
the situations in which it may be used. The Cornerstone companies view
editorial content as critical to developing the personality and lifestyle
theme of the particular brand and title. Catalogs are printed on high-quality
paper to enhance the presentation of the merchandise and the overall image of
the catalog.

The Cornerstone companies devote substantial resources to the design and
production of their catalogs. Much of this process is handled in-house to
enable the company's creative team to control the process as much as possible.
The merchandising and creative teams design the layout of each catalog and the
presentation of merchandise within the catalog. Photography is done under the
supervision of the company's merchandising and creative teams. Production of
the catalog and some of the color separation is handled by an in-house staff
using sophisticated desktop publishing and other computer systems. Cornerstone
assists the individual Cornerstone companies in the catalog production process
by, in many instances, purchasing catalog paper and contracting for printing
services on a consolidated basis, which typically results in cost savings for
the Cornerstone companies.

CUSTOMER DATABASE MANAGEMENT AND MARKETING

Cornerstone Strategy

Cornerstone's customer database management and marketing strategy seeks to
accomplish three primary goals: generating repeat business from those
customers who have purchased goods from a Cornerstone catalog in the past;
generating sales by a particular Cornerstone company to existing customers of
another Cornerstone company; and attracting new customers to the Cornerstone
family of brands. Cornerstone views each customer as a long-term asset and
devotes significant resources to servicing that individual's shopping needs
and generating repeat business over an extended period of time. Cornerstone's
strategy of acquiring only companies which target the same general demographic
market makes its customer database management and marketing efforts
significantly more efficient and productive.

Customer Databases

Cornerstone considers its customer database to be one of its principal
assets. The Company believes that its database of customers who have purchased
products from one of the Cornerstone companies is one of the largest among
direct marketing companies addressing Cornerstone's affluent target market
segment. In addition, Cornerstone has developed an extensive file of
prospective customers that should enable the Cornerstone companies to continue
to expand their active customer base.

As of August 1, 1998, the combined customer database of the Cornerstone
companies included the names of approximately 2,900,000 customers who had made
purchases within the previous three years and approximately 1,575,000
customers who have purchased goods within the previous 12 months. The number
of one-year buyers as of August 1, 1998 was approximately 24% greater than the
number of one-year buyers as of August 2, 1997. All buyer counts represent the
combined number of buyers at each of the Cornerstone companies, without
deducting the names of persons who appear on the customer lists of more than
one Cornerstone company. Accordingly, the number of individual names in the
Cornerstone database is less than the numbers set forth above.

Database Management Techniques

Cornerstone focuses significant resources on identifying and acquiring new
customers that fit Cornerstone's target customer profile. The best sources for
this prospecting activity are the customer databases of other Cornerstone
companies, all of which target the same customer segment. These customer
databases include not only customer names but also purchasing data (such as
recency, frequency and monetary value of purchases and items purchased) that
may not be available from rented lists. The Cornerstone companies use a
variety of techniques for acquiring mailing lists to supplement the customer
databases available within Cornerstone. Examples of some of the more
traditional list procurement techniques include rentals of mailing lists from
catalog companies addressing similar markets, rentals of compiled lists from
database companies such as Abacus, and rentals of subscription lists from
magazines. Several Cornerstone companies run advertisements in magazines
inviting readers to request a catalog, and persons who respond are then added
to the company's prospect list. The Cornerstone companies also use creative
strategies designed to identify individuals with a greater likelihood of
purchasing from a particular catalog. For example, TravelSmith has alliances
with a number of adventure travel companies and tour operators which provide
it with lists of persons who have recently booked trips, and Frontgate mails
its Splash catalog to lists of recent purchasers of swimming pools which it
obtains from pool companies. Certain proposed legislation that would restrict
disclosure of consumers' personal information may make it more difficult for
Cornerstone to generate additional names for its mailing lists and restrict
its right to send unsolicited electronic mail or printed catalogs. See
"Business--Regulatory Matters."

Each Cornerstone company selects the names of individuals who will receive a
particular catalog mailing by analyzing available purchasing data from both
its existing customer database and acquired mailing lists using sophisticated
computer modeling techniques. The Cornerstone companies typically mail several
different versions of a particular catalog edition, and determine which
persons receive which version based on prior purchasing history and other
data. Cornerstone believes that while concentrating catalog mailings on active
customers rather than prospective customers would result in higher response
rates and more profitable operations, the growth of its business is dependent
on a significant level of prospecting for new customers. In determining the
optimal level of prospecting for new customers, the Cornerstone companies
analyze detailed proprietary data relating to the average cost of generating a
new customer and the average profit realized from each new customer over a
period of years. In 1997 and the first two quarters of 1998, over 65% of the
catalogs circulated by the Cornerstone companies were mailed to prospective
customers.

Currently, most customer database management and marketing activities are
performed separately by the Cornerstone companies. Although the Cornerstone
companies share information such as customer names and data and the results of
various marketing initiatives, Cornerstone has not yet taken full advantage of
the synergies and efficiencies that it believes will result from more
centralized customer database management, such as regression modeling that
utilizes the customer names and purchasing data from all of the Cornerstone
companies.

In connection with the opening of its new operations center, Cornerstone
intends to combine the customer databases of all of the Cornerstone companies
into an integrated customer database that will be stored and managed at the
operations center. The Company currently estimates that this project will be
completed by the beginning of 2000. Cornerstone is currently developing a new
database management system which it will use to perform customer database
management functions on a centralized basis for all Cornerstone companies.
Each Cornerstone company will retain responsibility for decisions relating to
the size and composition of mailing lists and the factors to be considered in
sorting and analyzing available data. Cornerstone believes that, when
implemented, this centralization of database management activities will enable
Cornerstone to take full advantage of each Cornerstone company's customer
information and marketing data and to achieve efficiencies and cost savings in
list maintenance and database analysis, while also permitting the individual
Cornerstone companies to retain control over strategic marketing and
circulation decisions.

Each Cornerstone company currently provides its own customer lists to other
companies, including competitors, in exchange for either rental income or
mailing lists of such other companies. In addition to serving as a source of
revenue, Cornerstone believes that this practice is necessary to ensure that
Cornerstone will have access to rental lists from others in the industry.

CORNERSTONE OPERATIONS CENTER

Cornerstone believes that exceptional customer service at all stages of its
operations is a critical element of its strategy of developing strong brand
identities and growing its customer base. The Company is committed to making
the investments and expenditures necessary to ensure that its goal of high-
quality customer service is achieved throughout its operations.

As part of this commitment, the Company is in the process of building an
800,000 square foot operations center outside of Cincinnati, Ohio. This
facility will house the fulfillment functions of all of the Cornerstone
companies, the order-processing and customer service functions of certain but
not all of the Cornerstone companies, Cornerstone's new customer database
management system, the headquarters facility for Frontgate, and a retail
outlet facility for a number of Cornerstone brands. Cornerstone has completed
the design of the facility (with the assistance of an independent consultant),
has purchased the land, and has commenced construction. The Company currently
expects that the new facility will be operational in the summer of 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a discussion of the cost and
financing of this facility.

Customer Service

Each Cornerstone company is responsible for accepting and processing
merchandise orders, which are generally handled by a customer service center
located at or near the company's headquarters. Merchandise orders are accepted
364 days a year (and, in the case of most Cornerstone companies, 24 hours a
day), via a toll- free telephone number, telecopy (which is the sole means by
which Smith+Noble accepts orders) and, in the case of certain Cornerstone
companies, the Internet. Cornerstone customer service representatives are
knowledgeable about merchandise specifications, have access to merchandise
samples, and use computer systems that provides them with up-to-date
information about the customer, his or her purchasing history, merchandise
availability and shipment dates. Several Cornerstone companies use product
specialists to assist customers on matters such as home decorating, outdoor
cooking, fabric care, and packing for specific travel destinations.

Cornerstone intends to relocate the order-processing functions of several
(currently expected to be Ballard Designs, Frontgate and Whispering Pines),
but not all, of the Cornerstone companies to the new operations center after
its opening in 1999. In addition, back-up order-processing for all the
Cornerstone companies will be located at the operations center.

Most Cornerstone companies maintain a 24-hour, toll-free customer service
number (which in most cases is separate from the telephone number for
merchandise orders) intended to handle inquiries relating to matters such as
scheduled delivery dates, order status and product returns. Cornerstone
expects that the customer service operations of certain of the Cornerstone
companies (currently expected to be Ballard Designs, Frontgate and

Whispering Pines) will be transferred to the new operations center, while
others will maintain this function at their headquarters.

Each Cornerstone company (other than Smith+Noble, whose products are made to
order) permits, with limited exceptions, merchandise returns, for refund or
exchange, if a customer is not satisfied with a purchase for any reason.
Returns are processed using the same high customer service standards that
Cornerstone applies throughout its operations. The Cornerstone companies
closely monitor merchandise returns to determine whether any product quality
issues exist. Returned merchandise is inspected and, unless damaged or worn,
is recycled into inventory.

Fulfillment

Currently, fulfillment operations for Frontgate and TravelSmith are handled
at a 110,000 square foot facility owned by Frontgate and two leased facilities
totalling 124,000 square feet, all of which are located in the greater
Cincinnati, Ohio area. Each of the other Cornerstone companies leases or owns
its own distribution center or centers and handles fulfillment operations
itself, with the exception of Whispering Pines, which uses an independent
contractor, and Smith+Noble, which relies on direct delivery by its contract
manufacturers. Each fulfillment center receives orders through electronic
links to the company's order-processing operations. Cornerstone strives to
maintain high in-stock rates so that it is able to immediately fulfill the
substantial majority of orders. While many direct marketing companies consider
merchandise shipped within 24 hours of receipt of the order as "same day"
shipment, Cornerstone considers only products shipped on the same day as the
order is received to be "same day" shipment, and strives for a high same-day
shipment rate. Although this results in higher fulfillment costs (as a result
of reduced ability to pick and fill orders for similar products on a "batch"
basis), Cornerstone believes this practice enhances customer satisfaction and
contributes to a higher order frequency and repeat business from its
customers. Merchandise is generally delivered two to five business days after
shipping, through the U.S. Postal Service, UPS and other common carriers,
although overnight or expedited delivery is available for an additional
charge. Smith+Noble, which has products made to order and shipped directly to
the customer by the manufacturer, is generally able to ship products within
one to six days after an order is accepted.

Cornerstone is in the process of building a new operations center in the
greater Cincinnati, Ohio area, which is intended to handle the fulfillment
operations of all of the Cornerstone companies. Approximately 675,000 square
feet of the 800,000 square foot "footprint" will be devoted to fulfillment
operations, and a 150,000 square foot mezzanine level will also be used for
fulfillment. The Company currently expects that the new facility will be
operational in the summer of 1999, and that the fulfillment operations of the
Cornerstone companies (other than Smith+Noble) will be transitioned to the
facility during the balance of 1999 and 2000. The Company estimates that, if
it takes advantage of certain expansion opportunities, the operations center
will have sufficient capacity to handle order fulfillment for up to
approximately $1.2 billion in annual net sales. There are a number of risks
associated with the construction and transition to the new operations center,
including the risk of cost overruns, a delay in the completion of the
facility, delays or difficulties in implementing its new information systems,
disruptions in fulfillment services due to difficulties transitioning to the
new facility (although Cornerstone believes its planned gradual transition
should mitigate that risk to some extent) and economic inefficiencies
resulting from the operation of multiple fulfillment centers during the
transition period. See "Risk Factors--Risks Associated with New Operations
Center."

Cornerstone expects to realize a number of operational improvements and
efficiencies once the new operations center is fully functional. The facility
is located near the center of the country's population distribution and close
to several major interstate highways, which will result in cost savings on
both out-bound and in-bound merchandise shipments. For example, more than 50%
of the U.S. population can be reached within two days using UPS ground
shipment, which is significantly less expensive than air shipment. Cornerstone
also expects to realize cost savings from the design of the fulfillment
facility; the height of a portion of the facility (65 feet) is greater than a
typical distribution center and therefore enables a smaller "footprint" and
less land. In addition, the semi-automated equipment and conveyor systems and
consolidation of the warehouse management computer systems should result in
more productive and efficient operations.

The Company believes that the fulfillment centers currently used by the
Cornerstone companies will be sufficient to meet their needs until their
fulfillment operations are moved to the new operations center. After the
relocation of such fulfillment operations, Cornerstone intends to either sell
or sublease the fulfillment centers currently used by the Cornerstone
companies. (other than temporary fulfillment centers covered by short-term
leases).

ADDITIONAL MARKET OPPORTUNITIES

Cornerstone believes that its growth can be facilitated by a number of
additional market opportunities. For example, Cornerstone believes that its
strong brand identities and its expertise in fulfillment, customer service and
marketing will position it well for the expected growth in electronic
commerce. Currently, three Cornerstone companies (Frontgate, The Territory
Ahead and TravelSmith) accept orders via the Internet, while the other
Cornerstone companies use the Internet primarily for promotional purposes.
Although the sales generated by Cornerstone through the Internet have not been
significant to date, Cornerstone believes that the Internet represents a
significant business opportunity and is currently working on a strategic plan
to develop the Internet business of each of the Cornerstone companies.

Cornerstone currently generates very little sales outside of the United
States. Garnet Hill has been mailing catalogs in Japan since 1995, and
TravelSmith plans to test a catalog in England later in 1998. Cornerstone
believes international markets represent significant future growth potential
for several of the Cornerstone brands.

Retail stores are another example of an alternative distribution channel
that could promote sales growth for Cornerstone. The Cornerstone companies
currently use retail stores primarily as an outlet for excess inventory.
However, The Territory Ahead operates a full-price retail store in Santa
Barbara, California, and Frontgate operates a store through which both full-
price and overstock merchandise is sold. The Company believes that a limited
number of flagship retail stores may provide an opportunity both to generate
additional sales and to promote the brand identity of the Cornerstone
companies. Cornerstone intends to test this concept further over the next
several years.

PURCHASING AND INVENTORY MANAGEMENT

The Company believes that a majority of the merchandise purchased by the
Cornerstone companies is sourced from foreign suppliers, either directly by
Cornerstone or by domestic vendors who resell the goods to Cornerstone. While
certain Cornerstone companies rely very little on foreign goods, The Territory
Ahead purchases (directly or indirectly) substantially all, and Garnet Hill
purchases (directly or indirectly) a majority, of its merchandise from foreign
suppliers. Cornerstone believes that, on an aggregate basis, the percentage of
merchandise that it purchases (directly or indirectly) from foreign vendors is
likely to increase in the future. In 1997 the Cornerstone companies purchased
goods from over 2,000 different vendors, no one of which accounted for more
than 4% of the aggregate purchases by Cornerstone during that year. The
Cornerstone companies have few exclusive or long-term contracts with any
vendors, and typically purchase merchandise on a purchase order basis. Certain
vendors are especially important to the Cornerstone companies and, in
particular, Smith+Noble purchases a majority of its products from a single
vendor. Each Cornerstone company strives to develop long-term and close
working relationships with its own vendors, which Cornerstone believes
increases the quality and selection of merchandise available to it and enables
it to develop products which are not readily available from other sources.
Cornerstone believes that as it begins to purchase certain goods on a
consolidated basis on behalf of several Cornerstone companies, it will obtain
more favorable pricing through volume purchases and an increasing opportunity
to deal directly with manufacturers. Cornerstone's reliance on foreign
suppliers, and Smith+Noble's practice of purchasing a majority of its products
from a single vendor, subject the Company to certain risks generally
associated with foreign sourcing and reliance on a principal vendor. See "Risk
Factors--Dependance on Suppliers; Foreign Sourcing."

The Cornerstone companies use sophisticated inventory management systems to
maintain optimal in-stock positions. While high in-stock rates have a positive
impact on sales and customer satisfaction, they may also result in excess
inventory which must be sold at a markdown. In striving to balance these two
considerations, Cornerstone's commitment to customer service typically results
in more emphasis being placed on the ability to immediately fulfill orders
than on minimizing the risk of excess inventory and Cornerstone uses inventory
management techniques to help reduce the risk of overstocks. Merchandise
purchases are planned based upon historical sales rates, internal sales
forecasts and manufacturing and delivery lead times. Within two to three weeks
after the mailing of a catalog, the company can update sales forecasts based
on response to the catalog and adjust additional inventory purchases
accordingly. Excess inventory is disposed of primarily through sales catalogs,
sales inserts in both catalogs and outgoing packages, and its outlet stores.
The Cornerstone companies generally offer sales prices only to dispose of
excess inventory, and not as a promotional strategy. Cost recovery efforts for
excess inventory are continually monitored, and balance sheet reserves are
adjusted accordingly. Because only a small portion of the apparel offerings of
the Cornerstone companies is considered "fashion" apparel, Cornerstone has
less risk than many companies of inventory over-stocks due to changing fashion
trends. However, the Company's use of branded merchandise requires it to incur
costs and risks relating to the design and purchase of its products, including
longer lead times for orders and higher initial purchase commitments. In
addition, the use of branded merchandise limits the Company's ability to
return unsold products to vendors, which may result in higher markdowns in
order to sell excess inventory.

MANAGEMENT INFORMATION SYSTEMS

Cornerstone uses management information systems to support virtually all
segments of its business, including merchandising, customer database
management and marketing, order-processing, fulfillment, inventory management,
customer service and financial reporting. The Company believes that the
ability to efficiently access and analyze information about its business,
products and customers can improve performance and customer service and can
also result in cost savings.

Each Cornerstone company (other than Whispering Pines, which outsources
these functions to a management information systems service provider) utilizes
a "front-end" system that automates and manages business functions such as
order-taking and order-processing, inventory management and financial
reporting. These front-end systems (other than that of Smith+Noble, whose
products are made to order and delivered directly by the manufacturer to the
customer) are linked with inventory receipts and provide real-time information
on product availability. These systems also facilitate the updating of
customer databases to reflect purchase transactions. There are four different
commercially available front-end systems currently in use by the Cornerstone
companies. Cornerstone has completed an evaluation of these systems, and has
selected one system as best suited to manage Cornerstone's business and
accommodate its growth. Cornerstone plans to implement that system over the
next several years at each Cornerstone company (other than Smith+Noble) not
currently using it. Cornerstone believes the front-end systems currently in
use by the Cornerstone companies will be sufficient to meet their needs until
the new system is implemented.

The Company plans to introduce a commercially available warehouse management
system at the new operations center which will be used for managing and
automating its fulfillment operations. This system will operate on an IBM
AS/400. An interface between the new warehouse management system and the
front-end system on which Cornerstone will standardize is commercially
available.

As described above under "--Customer Database Management and Marketing,"
Cornerstone intends to implement a new customer database management system at
the operations center and to consolidate the storage and analysis of its
customer data at this facility.

Any difficulties experienced by the Company in operating its management
information systems or implementing its planned new systems could adversely
affect the Company's business. See "Risk Factors--Dependence on Management
Information Systems."

COMPETITION

The markets for the merchandise offered by the Cornerstone companies are
highly competitive. Cornerstone believes that, because over 90% of consumer
goods are sold in retail stores, its principal sources of competition are
traditional department stores, such as Neiman Marcus, Saks Fifth Avenue,
Nordstrom and Bloomingdale's, and speciality retailers, such as The Gap,
Banana Republic and Pottery Barn. The Cornerstone companies also compete with
a number of other direct marketers, such as Lands' End, L.L. Bean, Williams-
Sonoma, Neiman Marcus Direct and Coldwater Creek. In addition, the Company
believes that the increased popularity of catalog shopping and the success of
many direct marketing companies is encouraging a number of traditional
retailers, such as The Gap, Nordstrom, Macy's and Dayton Hudson, to enter the
direct marketing business.

The Company believes that the Cornerstone companies compete primarily on the
basis of the distinctiveness and quality of their merchandise, product
selection and style, brand name recognition, price and customer service. Many
of the present and potential competitors of the Cornerstone companies are
larger and have substantially greater financial, marketing and other resources
than Cornerstone.

REGULATORY MATTERS

The Cornerstone companies generally collect sales taxes only on sales to
residents of the state in which the company is headquartered, where orders are
fulfilled or where one of the companies has a retail outlet. Many states have
attempted to require that out-of-state direct marketers collect sales and use
taxes on the sale of merchandise shipped to its residents. In 1992, the United
States Supreme Court ruled that a state's imposition of use tax collection
obligations on an out-of-state mail order company, whose only contacts with
the state were the distribution of catalogs and other advertising materials
through the mail and subsequent delivery of purchase goods by parcel post and
interstate carriers, was unconstitutional, but stated that Congress could
enact legislation authorizing states to impose such obligations. However, in
November 1995, the United States Supreme Court let stand a decision of New
York's highest state court requiring an out-of-state catalog company, whose
reported contact with New York included a limited number of visits by sales
employees, to collect use tax (including a retroactive assessment, plus
interest) on its mail order sales in New York. If Congress enacts legislation
permitting states to impose sales or use tax obligations on out-of-state
catalog companies or if the Cornerstone companies are otherwise required to
collect additional sales or use taxes, such obligations would make it more
expensive to purchase that company's products and would increase Cornerstone's
administrative costs and therefore could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
although Cornerstone believes it has complied with all applicable tax laws,
there can be no assurance that state tax authorities will not choose to
conduct a nexus audit of the Company, which could give rise to a retroactive
assessment for tax liabilities. State sales tax laws typically provide for a
lengthy statute of limitations, and if the Company were retroactively assessed
for taxes, such assessment could have a material adverse effect on the
Company's business, operating results and financial condition.

Cornerstone's business is subject to a number of governmental regulations,
including the Mail or Telephone Order Merchandise Rule and related regulations
promulgated by the Federal Trade Commission (which prohibit unfair methods of
competition and unfair or deceptive acts or practices in connection with mail
and telephone order sales and require sellers of mail and telephone order
merchandise to conform to certain rules of conduct with respect to shipping
dates and shipping delays) and regulations promulgated by the U.S. Postal
Service and various state and local consumer protection agencies relating to
matters such as advertising, order solicitation, shipment deadlines and
customer refunds and returns. In addition, merchandise imported by the Company
is subject to import and customs duties and, in some cases, import quotas.
Moreover, Cornerstone's business could be affected by regulations promulgated
in the future. For example, there are a number of different bills under
consideration by Congress and various state legislatures that would restrict
disclosure of consumers' personal information, which may make it more
difficult for Cornerstone to generate additional names for its mailing lists,
and restrict a company's right to send unsolicited electronic mail or printed
catalogs. Although Cornerstone

believes it is generally in compliance with current laws and regulations and
that such laws and regulations have not had a significant impact on its
business to date, it is possible that existing or future regulatory
requirements will impose a significant burden on Cornerstone.

TRADEMARKS

Frontgate, Splash, The Search for the Perfect Gift, Garnet Hill, Smith &
Noble, Windoware, The Territory Ahead and TravelSmith are registered
trademarks, and Ballard Designs, Isabella Bird, The Ultimate Grill, Window
Elements, Whispering Pines and various product names are subject to pending
trademark applications, of Cornerstone or a Cornerstone company in the United
States and, for certain of such trademarks, in various foreign countries.

EMPLOYEES

As of July 31, 1998, Cornerstone and the Cornerstone companies employed
approximately 860 persons on a full-time basis and approximately 520 persons
on a part-time basis. The number of employees fluctuates on a seasonal basis.
None of these employees is currently covered by a collective bargaining
agreement.

PROPERTIES

The principal executive offices of the Company are located in a leased
facility in Portland, Maine. Cornerstone leases additional headquarters space
in Boston, Massachusetts. Cornerstone also owns approximately 57 acres of land
in the Cincinnati, Ohio area, which site will house the new operations center,
the headquarters facility for Frontgate and a retail outlet facility for a
number of Cornerstone brands.

The following table sets forth certain information relating to the
facilities of the Cornerstone companies:

COMPANY LOCATION SIZE USE OWNED/LEASED
- ------- ----------------- -------------- ------------------------- ------------

Ballard Designs Atlanta, GA 41,600 sq.ft. Headquarters/ Leased
outlet store
Kennesaw, GA 54,000 sq.ft. Fulfillment center Leased
Kennesaw, GA 16,000 sq.ft. Temporary fulfillment Leased
center
Kennesaw, GA 42,200 sq.ft. Temporary fulfillment Leased
center
Roswell, GA 18,000 sq.ft. Outlet store Leased
Frontgate Lebanon, OH 129,000 sq.ft. Headquarters/ fulfillment Owned
center
Lebanon, OH 45,000 sq.ft. Temporary fulfillment Leased
center
Lebanon, OH 82,500 sq.ft. Temporary fulfillment Leased
center
Cincinnati, OH 33,600 sq.ft. Store/phone center Leased
Garnet Hill Franconia, NH 25,000 sq.ft. Headquarters Owned
Bethlehem, NH 84,000 sq.ft. Fulfillment center Owned
Franconia, NH 6,000 sq.ft. Storage facility Owned
Manchester, VT 4,100 sq.ft. Outlet store Leased
Smith+Noble Corona, CA 12,600 sq.ft. Headquarters Leased
The Territory Ahead Santa Barbara, CA 24,000 sq.ft. Headquarters Leased
Santa Barbara, CA 31,800 sq.ft. Fulfillment center Leased
Santa Barbara, CA 3,700 sq.ft. Photo studio Leased
Santa Barbara, CA 4,300 sq.ft. Retail store Leased
Santa Barbara, CA 5,000 sq.ft. Outlet store Leased
San Leandro, CA 2,100 sq.ft. Outlet store Leased
Carlsbad, CA 2,500 sq.ft. Outlet store Leased
TravelSmith Novato, CA 15,700 sq.ft. Headquarters Leased
Whispering Pines Fairfield, CT 4,500 sq.ft. Headquarters Leased

The Company believes its facilities are adequate to meet its current needs,
and that suitable additional facilities will be available for lease or
purchase when and as needed by the Company. After the relocation of
fulfillment operations to the new Cornerstone operations center, Cornerstone
intends to sell those fulfillment centers currently used by the Cornerstone
companies (other than temporary fulfillment centers covered by short-term
leases). Cornerstone is currently engaged in discussions regarding a
transaction in which Cornerstone would sell its new operations center, as well
as its fulfillment centers in Lebanon, Ohio and Bethlehem, New Hampshire, and
lease them back (under a long-term lease in the case of the new operations
center and short-term leases in the case of the other two fulfillment centers)
from the purchaser.

LEGAL PROCEEDINGS

While Cornerstone and the Cornerstone companies are party to various claims
and legal proceedings that arise in the normal course of business, Cornerstone
management does not believe that any such matters will have a material adverse
effect on the business, operating results or financial condition of the
Company.

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, their respective ages
as of August 31, 1998 and their positions with the Company are as follows:

NAME AGE POSITION
---- --- --------

William T. End....................... 50 Chief Executive Officer, Chairman of
the Board and Director
Donald J. Steiner.................... 54 Founder, Vice Chairman of the Board
and Director
John A. O'Steen...................... 54 Executive Vice President, Operations
and Director
Mark Fasold.......................... 46 Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
Paul D. Tarvin....................... 41 Executive Vice President and President
and Chief Executive Officer of
Frontgate
Benjamin D. Chereskin................ 39 Director
William J. Hunckler, III(1).......... 45 Director
Stephen P. Murray(2)................. 36 Director
Thomas G. Stemberg(1)................ 49 Director
H.J. von der Goltz(2)................ 61 Director
John Walter(1)....................... 51 Director

- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

MR. END joined the Company in June 1995 as Executive Officer, Managing
Director and a member of the Board of Directors and has served as Chief
Executive Officer and Chairman of the Board of the Company since February
1998. Prior to joining the Company, Mr. End served as President, Chief
Executive Officer and a director of Lands' End, Inc., a direct marketing
company, from 1991 to 1995. Mr. End served as Executive Vice President, Chief
Marketing Officer and a director of L.L. Bean, Inc., a direct marketing
company, from 1975 to 1991. Mr. End started his career as an executive at The
Gillette Company from 1971 to 1975 in the marketing area. Mr. End currently
serves on the Board of Directors of Hannaford Bros. Co.

MR. STEINER founded the predecessor entity to the Company in March 1993,
joined the Company in June 1995 as Executive Officer, Managing Director and a
member of the Board of Directors and has served as Vice Chairman of the Board
of the Company since February 1998. Prior to founding Cornerstone, from 1983
to 1993 Mr. Steiner was a General Partner of Boston Capital Ventures, a
venture capital firm, which he co-founded in 1983. Mr. Steiner was previously
Vice President of Business Development at The Gillette Company, where he was
employed from 1973 to 1982.

MR. O'STEEN has been an executive officer and a director of the Company
since September 1995 and has served as Executive Vice President, Operations
(with responsibility for the new Cornerstone operations center), since August
1998. Mr. O'Steen co-founded Frontgate and was Chairman and Chief Executive
Officer of Frontgate from 1991 to 1998. Currently, Mr. O'Steen is devoting the
substantial majority of his time to matters relating to the Company's
operations center currently under construction while continuing to serve as
Chairman of Frontgate. From 1984 to 1990, Mr. O'Steen was the President and
Chief Executive Officer and a director of Cincinnati Microwave, Inc., a direct
marketer and manufacturer of radar warning receivers and other electronic
products and services. From 1967 to 1984, Mr. O'Steen served in various
management positions at The Procter & Gamble Company. Mr. O'Steen also serves
on the Board of Kulicke and Soffa Industries, Inc. and Bill's Dollar Stores,
Inc.

MR. FASOLD has served as Executive Vice President and Chief Financial
Officer of the Company since its inception and as Treasurer and Secretary of
the Company since August 1998. From 1993 to June 1995, Mr. Fasold was Vice
President of Cole Haan, Inc., a wholesaler and retailer of footwear and
accessories. From 1991 to 1993, Mr. Fasold was President of Smith & Hawken,
Ltd., a catalog marketer and retailer of home and garden products. From 1977
to 1991, Mr. Fasold was Vice President of L.L. Bean, Inc., serving in various
positions in merchandising and finance, with particular emphasis on strategic
planning and inventory management.

MR. TARVIN has been an executive officer of the Company since September 1995
and has served as Executive Vice President since August 1998. Mr. Tarvin co-
founded Frontgate and has been the President of Frontgate since 1991. In July
1998 Mr. Tarvin became Chief Executive Officer of Frontgate. Currently, Mr.
Tarvin is devoting the majority of his time to Frontgate while contributing to
the marketing efforts within Cornerstone. Mr. Tarvin was Vice President,
Marketing, of Sportsman's Market, Inc., a catalog company, from 1978 to 1990.

MR. CHERESKIN has served as a director of the Company since September 1995.
Mr. Chereskin is a Managing Director of Madison Dearborn Partners, Inc., which
he co-founded in January 1993 and where his responsibilities are related to
private equity investment. Mr. Chereskin is also a director of Carrols
Corporation and Tuesday Morning Corporation.

MR. HUNCKLER has served as a director of the Company since September 1995.
Mr. Hunckler is a Managing Director of Madison Dearborn Partners, Inc., which
he co-founded in January 1993 and where his responsibilities are related to
private equity investment. Mr. Hunckler is also a director of Tuesday Morning
Corporation.

MR. MURRAY has served as a director of the Company since November 1995.
Since June 1984, Mr. Murray has been an investment professional at Chase
Venture Capital Associates, L.P., where his responsibilities are related to
private equity investment. Mr. Murray is also a director of Home Products
International, Inc. and La Petite Academy, Inc.

MR. STEMBERG has served as a director of the Company since September 1995.
Since February 1988, Mr. Stemberg has been Chairman of the Board and Chief
Executive Officer of Staples, Inc., an office products retailer that he
founded in 1986. He is also a director of PETsMART, Inc.

MR. VON DER GOLTZ has served as a director of the Company since June 1995.
Mr. von der Goltz has been an Executive Officer of Boston Capital Ventures
Management, a venture capital firm that he co-founded, since September 1983.

MR. WALTER has served as a director of the Company since May 1998. From
October 1996 to July 1997, Mr. Walter served as President and Chief Operating
Officer of AT&T Corp. From May 1969 to October 1996, Mr. Walter served in
various capacities including Chairman and Chief Executive Officer at RR
Donnelley & Sons Co. Mr. Walter is also a director of Deere & Company, Abbott
Laboratories, LaSalle Partners Incorporated and Celestica Inc.

The Board of Directors of the Company is divided into three classes, each of
whose members serve for staggered three-year terms. The Board consists of
three Class I Directors (Messrs. Chereskin, End and Murray), three Class II
Directors (Messrs. Hunckler, O'Steen and Stemberg) and three Class III
Directors (Messrs. Steiner, Walter and von der Goltz). At each annual meeting
of stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring. The
initial terms of the Class I Directors, Class II Director and Class III
Directors expire upon the election and qualification of successor directors at
the annual meeting of stockholders held during the calendar years 1999, 2000
and 2001, respectively.

Each officer serves at the discretion of the Board of Directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal. There are no family relationships among any of
the directors or executive officers of the Company.

Messrs. End and Steiner were elected as directors upon the designation of
the Company's executive management team, Messrs. Chereskin and Hunckler were
elected as directors upon the designation of Madison Dearborn Capital
Partners, Mr. Murray was elected as a director upon the designation of Chase
Venture Capital Associates, Mr. von der Goltz was elected as a director upon
the designation of Boston Capital Ventures, Mr. O'Steen was elected as a
director upon the designation of certain former stockholders of Frontgate and
Messrs. Stemberg and Walter were elected as directors upon the designation of
certain other stockholder constituencies, respectively, pursuant to the terms
of a voting agreement among the Company and certain stockholders of the
Company, which agreement will terminate upon the closing of this offering.

The Company's success will depend to a significant extent on retaining the
services of its five executive officers and the management teams of the
Cornerstone companies, as well as on the ability of both Cornerstone and the
Cornerstone companies to continue to attract and retain qualified personnel.
See "Risks Factors-- Dependence on Key Personnel."

DIRECTOR COMPENSATION

Directors of the Corporation are not paid a retainer or other annual fee for
their services as directors, except that chairpersons of each standing
committee of the Board of Directors are paid an annual cash retainer of
$2,500. Non-employee directors are paid a fee of $1,000 for each Board of
Directors meeting attended and (with certain exceptions) $500 for each meeting
of a committee of the Board of Directors attended. All of the directors are
reimbursed for expenses incurred in connection with their attendance at Board
of Directors and committee meetings. In addition, certain directors of the
Company are eligible to receive stock options under the Company's 1998
Director Stock Option Plan. See "--Stock Plans--1998 Director Stock Option
Plan."

EXECUTIVE COMPENSATION

Summary Compensation

The following table sets forth certain information regarding the
compensation for the fiscal year ended January 31, 1998 of the Company's
executive officers as of January 31, 1998 ("Named Executive Officers"):

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION(2)
---------------
ANNUAL
COMPENSATION(1) AWARDS
----------------- ---------------
NUMBER OF
SHARES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- -------- -------- --------------- ------------

William T. End.................. $266,500 $120,000 -- $3,153
Chief Executive Officer and
Chairman of the Board
Donald J. Steiner............... 266,500 120,000 -- 740
Vice Chairman of the Board
John A. O'Steen................. 226,666 99,411 8,000 6,423
Executive Vice President,
Operations and Director
Mark Fasold..................... 175,900 80,000 -- 1,192
Executive Vice President, Chief
Financial Officer, Treasurer
and Secretary
Paul D. Tarvin.................. 226,666 109,411 8,000 4,366
Executive Vice President and
President and
Chief Executive Officer of
Frontgate

- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted, as such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total of annual
salary and bonus for each executive officer.

(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payouts during
the fiscal year ended January 31, 1998. As of January 31, 1998, Mr. End,
Mr. Steiner and Mr. Fasold held 1,300,000, 1,220,000 and 400,000 shares of
restricted Common Stock, respectively. Based upon an assumed initial
public offering price of $ per share, the aggregate value of such
shares, net of their aggregate original purchase price, was $ .

Option Grants

The following table sets forth certain information concerning grants of
stock options to each of the Named Executive Officers during the fiscal year
ended January 31, 1998.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
-------------------------------------------- -----------------
EXERCISE
NUMBER OF PERCENT OF OR BASE
SHARES TOTAL OPTIONS PRICE
UNDERLYING GRANTED TO PER
OPTIONS EMPLOYEES IN SHARE EXPIRATION
NAME GRANTED FISCAL YEAR ($)(1) DATE 5% 10%
- ---- ---------- ------------- -------- ---------- -------- --------

William T. End.......... -- -- -- -- -- --
Donald J. Steiner....... -- -- -- -- -- --
John A. O'Steen......... 8,000 1.7 6.00 3/26/04 $ 19,541 $ 45,538
Mark Fasold............. -- -- -- -- -- --
Paul D. Tarvin.......... 8,000 1.7 6.00 3/26/04 $ 19,541 $ 45,538

- --------
(1) Options are incentive stock options, become exercisable over a four-year
period and generally terminate three months following termination of the
executive officer's employment with the Company or seven years after the
date of grant, whichever occurs earlier. The exercise price of each option
was determined to be equal to the fair market value per share of Common
Stock on the date of grant.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) in
the market value of the Common Stock on the date of option grant over the
term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth. The gains shown are
net of the option exercise price, but do not include deductions for taxes
or other expenses associated with the exercise of the option or the sale
of the underlying shares. The actual gains, if any, on the exercises of
stock options will depend on the future performance of the Common Stock,
the optionholder's continued employment through the option period, and the
date on which the options are exercised. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that
the amounts reflected will be received by the individuals.

Year-End Option Values

The following table sets forth certain information concerning the number and
value of unexercised options held by each of the executive officers of the
Company on January 31, 1998. None of the Named Executive Officers exercised
any stock options during the fiscal year ended January 31, 1998.

VALUE OF UNEXERCISED IN-THE-
NUMBER OF SHARES UNDERLYING MONEY
UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END YEAR-END
----------------------------- ----------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ----------------------------- ----------------------------

William T. End.......... -- --
Donald J. Steiner....... -- --
Mark Fasold............. 106,250/168,750
John A. O'Steen......... 103,125/92,375
Paul D. Tarvin.......... 103,125/92,375

- --------
(1) There was no public trading market for the Common Stock as of January 31,
1998. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of per share, less the
applicable exercise price.

EMPLOYMENT AGREEMENTS

Each of Messrs. End, Steiner, Fasold, O'Steen and Tarvin is party to an
employment agreement with Cornerstone. The terms of the agreements of Messrs.
End, Steiner and Fasold extend through July 31, 2000 and the terms of the
agreements of Messrs. O'Steen and Tarvin extend through September 13, 2000.
Under these agreements, Mr. End and Mr. Steiner are entitled to an annual
salary of at least $250,000, subject to increase based on a consumer price
index, as well as an annual bonus in an amount determined by the Board of
Directors; Mr. Fasold is entitled to an annual salary of at least $150,000,
subject to increase based on a consumer price index, as well as an annual
bonus in an amount not less than 10% of his base salary; and Messrs. O'Steen
and Tarvin are entitled to an annual base salary of not less than $175,000.
Cornerstone may terminate the employment of any such executive only by the
vote of two-thirds of the members of the Board of Directors of Cornerstone
(excluding the employee, if he is a director). If the executive's employment
is terminated by the Company without cause (as defined in the agreements),
such executive shall receive a termination payment equal to one and one-half
times the greater of (i) the aggregate of his base salary, benefits and
bonuses due during the calendar year in which the termination occurs or (ii)
the aggregate of his compensation, benefits and bonuses actually received
during the preceding calendar year. The agreements of Messrs. O'Steen and
Tarvin provide that such executive shall serve as executive officers of both
Cornerstone and Frontgate.

Each of Messrs. End, Steiner, Fasold, O'Steen and Tarvin is party to an
agreement under which he is prohibited (subject to certain exceptions), for a
period of 18 months following the termination of his employment with the
Company, from engaging, directly or indirectly, in any business activity which
is directly competitive with and detrimental to the business of Cornerstone. A
catalog company with whose merchandise or target audience is substantially
different from those of any catalog company than operated by Cornerstone shall
not be considered directly competitive.

STOCK PLANS

1998 Director Stock Option Plan

In August 1998 the Company's Board of Directors adopted, and in October 1998
the Company's stockholders approved, the 1998 Director Stock Option Plan (the
"Director Plan"), which provides for the grant of options to purchase a
maximum of 200,000 shares of Common Stock of the Company to non-employee
directors of the Company. The Director Plan is administered by the Board of
Directors.

Under the Director Plan, each non-employee director of the Company will be
granted a nonstatutory stock option to purchase 12,000 shares of Common Stock
on the date such person is first elected to the Board of Directors, and each
non-employee director will be granted a nonstatutory stock option to purchase
6,000 shares

of Common Stock on the date of each Annual Meeting of the Stockholders of the
Company commencing with the 1999 Annual Meeting of Stockholders (other than
(i) any director who is first elected to the Board of Directors at such annual
meeting or at any time subsequent to the prior year's annual meeting and (ii)
any director who did not attend in the preceding fiscal year at least 75% of
all the regularly scheduled meetings of the Board of Directors and of any
committee of the Board of Directors on which the director served). The
exercise price per share for all options granted under the Director Plan will
be equal to the fair market value of the Common Stock on the date of grant.
The options granted will become exercisable in three equal annual installments
on each of the first three anniversaries of the date of grant, provided that
the optionee remains a director at such time, and will become exercisable in
full upon an acquisition of the Company. Each option will expire on the
earlier of seven years from the date of grant and 90 days after the optionee
ceases to be a director of the Company. No options to purchase shares have
been granted to date under the Director Plan.

1995 STOCK OPTION PLAN AND 1998 STOCK INCENTIVE PLAN

The Company has a 1995 Stock Option Plan (the "1995 Plan") under which an
aggregate of 1,463,534 shares of Common Stock were reserved for issuance to
officers, key employees and consultants of the Company and its subsidiaries.
No further options may be granted under the 1995 Plan after the date of this
Prospectus. As of September 30, 1998, options to purchase 1,251,815 shares of
Common Stock were outstanding under the 1995 Plan. The 1995 Plan is
administered by the Board of Directors. Options for an additional 260,000
shares of Common Stock, granted outside the 1995 Stock Option Plan, are also
outstanding.

The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors in August 1998 and approved by the stockholders of
the Company in October 1998. The Incentive Plan provides for the grant of
incentive stock options, nonstatutory stock options, restricted stock awards
and other stock-based awards (collectively "Awards"). The Incentive Plan
provides for the issuance of a maximum of 3,200,000 shares of Common Stock of
the Company in respect of Awards granted under the plan. The Incentive Plan is
administered by the Board of Directors. No stock options or other stock awards
have been granted to date under the Incentive Plan.

Incentive Stock Options and Nonstatutory Stock Options. Optionees receive
the right to purchase a specified number of shares of Common Stock at a
specified option price and subject to such other terms and conditions as are
specified in connection with the option grant. Options may be granted at an
exercise price which may be equal to or greater than, but not less than, the
fair market value of the Common Stock on the date of grant. Under present law,
however, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code of 1986, as amended, may not be granted at an exercise price less than
the fair market value of the Common Stock on the date of grant (or less than
110% of the fair market value in the case of incentive stock options granted
to optionees holding more than 10% of the voting power of the Company).
Options may not be granted for a term in excess of ten years. The Incentive
Plan permits the Board to determine the number of shares subject to each
option granted, the exercise price of the option, the vesting schedule of the
option, and the manner of payment of the exercise price of the option
(including through payment by cash, check or in connection with a "cashless
exercise" through a broker, by surrender to the Company of shares of Common
Stock, by delivery to the Company of a promissory note, or by any other lawful
means).

Restricted Stock Awards. Restricted stock awards entitle recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares from the recipient in the event that the
conditions specified in the applicable Award are not satisfied prior to the
end of the applicable restriction period established for such Award.

Other Stock-Based Awards. Under the Incentive Plan, the Board has the right
to grant other Awards based upon the Common Stock having such terms and
conditions as the Board may determine, including the grant of shares based
upon certain conditions and, the grant of securities convertible into Common
Stock.

Eligibility to Receive Awards. Officers, employees, directors, consultants
and advisors of the Company and its subsidiaries are eligible to be granted
Awards under the Incentive Plan. Under present law, however, incentive

stock options may only be granted to employees. The maximum number of shares
with respect to which an Award may be granted to any participant under the
Incentive Plan may not exceed 500,000 shares per calendar year. No Awards have
been granted to date to any participant under the Incentive Plan.

1998 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in August 1998 and approved by the
stockholders in October 1998. The Purchase Plan authorizes the issuance of up
to a total of 600,000 shares of Common Stock to participating employees. The
Purchase Plan is administered by the Board of Directors.

All full-time employees and certain part-time employees of the Company and
designated subsidiaries are eligible to participate in the Purchase Plan.
Employees who would immediately after the grant own 5% or more of the total
combined voting power or value of the stock of the Company are not eligible to
participate.

Common Stock will be offered under the Purchase Plan through a series of
offerings, generally six months in length. The first offering period will
commence upon the date of this Prospectus and terminate on June 30, 1999;
future offering periods will begin on each January 1 and July 1 and terminate
on the following June 30 and December 31, respectively. On the first day of an
offering period, the Company will grant to each eligible employee who has
elected to participate in that offering an option to purchase shares through
payroll deductions at a purchase price of 85% of the lesser of the market
value of a share of the Company's Common Stock on the first day of such
offering period and on the last day of such offering period. The employee may
authorize an amount to be deducted by the Company from his or her pay for the
purpose of purchasing such shares of up to 10% (or such lesser percentage as
the Compensation Committee may fix for a particular offering) of his or her
qualifying compensation. On the last day of the offering period, the employee
is deemed to have exercised the option, at the option exercise price, to the
extent of accumulated payroll deductions.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

In fiscal 1997, the Compensation Committee was comprised of Mr. Hunckler and
Mr. Stemberg, non-employee directors, and Mr. Steiner, an executive officer of
the Company. In May 1998, the Compensation Committee was reconstituted and is
now comprised of Messrs. Hunckler, Stemberg and Walter, three of the Company's
non-employee directors.

CERTAIN TRANSACTIONS

RELATED-PARTY TRANSACTIONS

On June 9, 1995, the Company sold 1,425,000, 1,425,000, 400,000, 200,000,
200,000 and 100,000 shares of its Common Stock, respectively, to Donald J.
Steiner, William T. End, Mark Fasold, John A. O'Steen, Paul D. Tarvin and H.
Johan von der Goltz, respectively, for a purchase price of $.01 per share, all
in connection with the founding of the Company. Also on June 9, 1995, the
Company granted warrants to purchase 80,000 and 30,000 shares of its Common
Stock at an exercise price of $.01 per share, respectively, to Mr. von der
Goltz and Thomas G. Stemberg, respectively, all in connection with the
founding of the Company.

Pursuant to a stock purchase agreement entered into on September 13, 1995,
and amended on November 15, 1995 and on January 31, 1996, among the Company
and certain other parties named therein, the Company issued an aggregate of
35,000 shares of its Series A-1 Preferred Stock to Madison Dearborn Capital
Partners, L.P. for an aggregate purchase price of $35,000,000, an aggregate of
20,000 shares of its Series A-2 Preferred Stock to Chase Venture Capital
Associates, L.P. for an aggregate purchase price of $20,000,000 and an
aggregate of 500 shares of its Series A-3 Preferred Stock to Boston Capital
Ventures III, L.P. for an aggregate purchase price of $500,000. The Series A-1
Preferred Stock sold to Madison Dearborn Capital Partners, L.P., the Series A-
2 Preferred Stock sold to Chase Venture Capital Associates, L.P. and the
Series A-3 Preferred Stock sold to Boston Capital Ventures III, L.P. were
converted into 7,692,308, 4,395,604 and 109,890 shares of the Company's Common
Stock in August 1998.

Pursuant to an exchange agreement dated September 13, 1995, among the
Company and certain other parties named therein, the Company issued 1,000,000
shares of its Common Stock to Boston Capital Ventures II, L.P., 737,500 shares
of its Common Stock to Boston Capital Ventures III, L.P., 232,030 shares of
its Common Stock to Mr. Steiner, 200,000 shares of its Common Stock to the
W.T.E. Family Limited Partnership (of which Mr. End is a general partner),
25,000 shares of its Common Stock to Mr. Fasold, 125,000 shares of its Common
Stock to Mr. Stemberg and 12,500 shares of its Common Stock to Ned Levine (a
former director of the Company), in exchange for certain shares of common
stock of The Cornerstone Holdings Group, Inc. held by such entities and
persons. Also pursuant to this exchange agreement, the Company granted options
to purchase 20,000 shares of its Common Stock at an exercise price of $1.00
per share to each of Mr. Stemberg, Mr. Levine and Mr. von der Goltz in
exchange for certain options to purchase shares of common stock of The
Cornerstone Holdings Group, Inc. held by such persons.

Pursuant to a purchase agreement entered into on September 13, 1995 among
the Company, Frontgate, John A. O'Steen, Paul D. Tarvin, and certain other
parties named therein, the Company issued 1,901 shares of its Series B
Convertible Preferred Stock, 744 shares of its Series C Convertible Preferred
Stock and 288 shares of its Tracking Stock--Series I, and paid $1,771,378, to
Mr. O'Steen, an executive officer and director of the Company, and issued
1,800 shares of its Series B Convertible Preferred Stock, 704 shares of its
Series C Convertible Preferred Stock and 278 shares of its Tracking Stock--
Series I, and paid $1,771,378, to Mr. Tarvin, an executive officer of the
Company, in exchange for their interests in Frontgate. The preferred and
tracking stock issued to Mr. O'Steen has been converted into an aggregate of
1,216,628 shares of Common Stock of the Company and the tracking stock was
redeemed for additional payments totalling $3,622,731 and the preferred and
tracking stock issued to Mr. Tarvin has been converted into an aggregate of
1,162,722 shares of Common Stock of the Company and the tracking stock was
redeemed for additional payments totalling $3,490,811. Approximately one-third
of the shares of tracking stock issued to Messrs. O'Steen and Tarvin was
converted into Common Stock and redeemed for cash in January 1997. The
remaining shares of tracking stock issued to Messrs. O'Steen and Tarvin were
converted into Common Stock and redeemed for cash in January 1998. A small
portion of the shares of Series B and Series C Convertible Preferred Stock
issued to Messrs. O'Steen and Tarvin was converted into an aggregate of 766
shares of Common Stock in October 1997; the remaining shares of Series B and
Series C Convertible Preferred Stock issued to Messrs. O'Steen and Tarvin were
converted into Common Stock in August and September of 1998.

On June 18, 1998, the Company sold 55,555 shares of its Common Stock to John
Walter, a director of the Company, for an aggregate purchase price of
$500,000, or $9.00 per share.

The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must be
approved by a majority of the members of the Company's Board of Directors and
by a majority of the disinterested members of the Company's Board of
Directors.

CONTRACTUAL ARRANGEMENTS WITH OTHER EQUITYHOLDERS OF CORNERSTONE COMPANIES

Cornerstone is party to certain agreements with the other parties that hold
equity interests in TravelSmith and Whispering Pines, which establish rights
and obligations of Cornerstone and such other parties with respect to their
equity interest in such companies. The principal provisions of such agreements
are summarized below. Although the Company believes these summaries cover all
provisions of such agreements which are material to the Company, these
summaries are not intended to be complete descriptions of such agreements and
are qualified by reference to such agreements, copies of which are included as
Exhibits to the Registration Statement of which this Prospectus is a part.

TravelSmith

Cornerstone acquired (through its predecessor company) a minority interest
in TravelSmith, a California corporation, in July 1993. In July 1996
Cornerstone increased its ownership position to approximately 60% of the
outstanding common stock (after giving effect to the conversion of all
outstanding Convertible Preferred Stock), which it holds in the form of common
stock and Convertible Preferred Stock. The balance of the outstanding common
stock of TravelSmith is held by Charles L. Slaughter, Scott Sklar (who
together own approximately 36% of the outstanding common stock on an as-
converted basis) and certain other persons.

Cornerstone and Mr. Slaughter, Mr. Sklar and another stockholder
(collectively, the "TravelSmith Stockholders") have agreed to elect the
following persons as directors of TravelSmith: Donald J. Steiner, William T.
End, a third individual designated by Cornerstone (together, the "Cornerstone
Directors"), Charles L. Slaughter, Scott Sklar, a third individual designated
by Messrs. Slaughter and Sklar (together, the "Management Directors"), and an
additional director mutually acceptable to the other directors. This agreement
regarding the election of directors would terminate in the event Cornerstone
owns less than 20% of the outstanding capital stock (including capital stock
issuable upon conversion of any securities convertible into capital stock) of
TravelSmith, the TravelSmith Stockholders collectively own less than 20% of
the outstanding capital stock (including capital stock issuable upon
conversion of any securities convertible into capital stock) of TravelSmith,
or neither Mr. Slaughter nor Mr. Sklar is employed by TravelSmith.

The consent of at least two-thirds of the members of the Board of Directors
then in office, including the consent of at least one Cornerstone Director and
one Management Director (a "Super-Majority Vote"), is required for certain
corporate actions by TravelSmith, including a merger, consolidation or sale of
substantially all of its assets, the issuance of capital stock (subject to
certain exceptions), the incurrence of certain indebtedness and the relocation
of TravelSmith's operations. In addition, TravelSmith is prohibited from
terminating the employment of Mr. Slaughter or Mr. Sklar, reducing his
compensation or benefits or otherwise adversely affecting his employment terms
and conditions without the consent of two-thirds of the members of the Board
of Directors (excluding Mr. Slaughter or Mr. Sklar, as the case may be).
Moreover, TravelSmith may not terminate (other than for "cause", as defined)
the employment of both Mr. Slaughter and Mr. Sklar prior to February 1, 2000.

During the period between February 1, 2000 and February 1, 2003, each of the
TravelSmith Stockholders has the right (exercisable not more than once), upon
60 days notice to Cornerstone, to require Cornerstone to purchase any or all
of his shares of capital stock of TravelSmith, at a purchase price equal to
the fair market value of such shares. The fair market value shall be
determined by a Super-Majority Vote of the Board of Directors of TravelSmith
or, absent such a determination, by an independent appraiser jointly selected
by Cornerstone and Messrs. Slaughter and Sklar. Cornerstone may pay up to 25%
of the purchase price in the form of Common Stock (provided the Common Stock
is then listed on the Nasdaq National Market or a national securities exchange
and is registered under the Securities Act) and up to 50% of the purchase
price in the form of a promissory note (which shall be payable no later than
one year from the date of such purchase, shall bear interest at the "prime"
rate of BankBoston plus 2%, and shall be secured by 50% of the shares of
TravelSmith purchased). If TravelSmith terminates the employment of either Mr.
Slaughter or Mr. Sklar without "cause" or if Mr. Slaughter or Mr. Sklar
terminates his employment with TravelSmith for "good reason" (each as defined
in such person's employment agreement), this put right would become
exercisable by such person for a period of 90 days after such employment
termination, and Cornerstone would be obligated to pay the entire purchase
price in cash. In addition, from and after the date of this Prospectus, any
stockholder of TravelSmith (other than the TravelSmith Stockholders) shall
have the right to exchange their shares of capital stock of TravelSmith for
shares of Common Stock of Cornerstone, with the exchange ratio to be based
upon the fair market value of the TravelSmith stock, as determined by a
majority of the Board of Directors of TravelSmith, and the fair market value
of the Common Stock of Cornerstone, based upon its public trading price. If
Cornerstone were to breach its obligation to purchase or exchange shares of
TravelSmith stock, as described in this paragraph, Cornerstone would be
obligated to consent to and otherwise cooperate with a sale of, or an initial
public offering by, TravelSmith, if Messrs. Slaughter and Sklar so elected,
and would forfeit its entitlement to representation on the Board of Directors
of TravelSmith.

Cornerstone and each of the TravelSmith Stockholders have certain rights
with respect to the registration of their shares of TravelSmith common stock
under the Securities Act for sale to the public. In particular, at any time
after the earlier of February 1, 2000 or six months after an initial public
offering by TravelSmith, Cornerstone or TravelSmith Stockholders holding at
least 20% of the outstanding common stock of TravelSmith (after giving effect
to the conversion of Convertible Preferred Stock into common stock) may
require TravelSmith to register such shares under the Securities Act.
Cornerstone and the TravelSmith Stockholders also have "piggyback" rights with
respect to certain registrations effected by TravelSmith. Cornerstone does not
intend to exercise any such registration rights.

Cornerstone has a right of first refusal with respect to future issuances of
capital stock by TravelSmith (subject to certain exceptions) until such time
as Cornerstone owns 80% of the outstanding capital stock of TravelSmith
(including capital stock issuable upon conversion of any securities
convertible into capital stock); thereafter, both Cornerstone and the
TravelSmith Stockholders have pro rata preemptive rights with respect to
capital stock issuances (subject to certain exceptions) by TravelSmith at a
price below fair market value. Both Cornerstone and the TravelSmith
Stockholders have rights of first refusal and co-sale rights with respect to
sales or transfers of TravelSmith capital stock by each other (subject to
certain exceptions).

Cornerstone's intention is to either acquire additional shares of capital
stock of TravelSmith (through the exercise of the rights described above or
otherwise) or restructure certain of its contractual obligations to the extent
required to permit Cornerstone to report the results of operations of
TravelSmith on a consolidated basis. However, no assurance can be given that
this will be achieved.

Whispering Pines

Cornerstone acquired a 51% interest in Whispering Pines, a Delaware limited
liability company, in September 1997, and acquired an additional 29% interest
in October 1998. Cabin Life Studies, Inc. ("CLI"), a corporation owned by
Susan Kelly Panian, Margaret Kelly Murray and Edward R. Panian, holds the
remaining 20% interest in Whispering Pines.

As a limited liability company, the business of Whispering Pines is operated
under the direction of a Board of Managers (rather than a Board of Directors).
The number of members of the Board of Managers shall be determined from time
to time by the Board of Managers and is currently five. CLI has the right to
elect two of the members of the Board of Managers; the remaining members are
elected by Cornerstone.

In October 1998, Cornerstone purchased from CLI an additional 29% membership
interest in Whispering Pines (bringing Cornerstone's total membership interest
in Whispering Pines to 80%). The purchase price paid by Cornerstone for such
interest consisted of $700,000 in cash, 17,647 shares of Common Stock of
Cornerstone, and an obligation to pay such additional amount (if any) as is
equal to (a) 29% of the greater of (i) Whispering Pines' earnings, before
deducting interest expense, taxes and amortization of goodwill ("EBIT"), for
fiscal 1999 multiplied by seven or (ii) the sum of (A) fiscal 1999 EBIT
multiplied by three and (B) 25% of Whispering Pines' net sales for fiscal
1999, less (b) $1,000,000. Such additional amount would be payable within
three months after the completion of fiscal 1999, and would be paid in the
form of cash, Common Stock or a combination of the two, at CLI's election. Any
shares of Common Stock issued in payment of such additional amount price shall
be listed on the Nasdaq National Market or such other national securities
exchange on which the Common Stock is then listed, and Cornerstone would be
required to either register such shares of Common Stock under the Securities
Act or grant CLI registration rights with respect to such shares substantially
equivalent to those described under "Shares Eligible for Future Sales--
Registration Rights."

Cornerstone has an additional option, exercisable during the 90 day period
beginning February 1, 2003, to purchase the remaining 20% interest in
Whispering Pines held by CLI. The purchase price for such interest would be
20% of the greater of (i) Whispering Pines' fiscal 2002 EBIT multiplied by
seven or (ii) the sum of (A) fiscal 2002 EBIT multiplied by three and (B) 25%
of Whispering Pines' net sales for fiscal 2002. The purchase price would be
paid in the form of cash, Common Stock or a combination of the two, at CLI's
election. Any shares of Common Stock issued in payment of such purchase price
shall be listed on the Nasdaq National Market or such other national
securities exchange on which the Common Stock is then listed, and Cornerstone
would be required to either register such shares of Common Stock under the
Securities Act or grant CLI registration rights with respect to such shares
substantially equivalent to those described under "Shares Eligible for Future
Sales--Registration Rights."

If Cornerstone fails to exercise the foregoing option to acquire the
remaining interest in Whispering Pines, CLI would have the right, during the
90 day period following the expiration of such option, to purchase all (but
not less than all) of Cornerstone's membership interest in Whispering Pines,
for a cash purchase price equal to the fair market value of such interest, as
determined by an appraiser jointly selected by Cornerstone and CLI.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of September 30, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially more than
5% of the Company's Common Stock, (ii) each of the directors of the Company,
(iii) each of the Named Executive Officers, (iv) all Selling Stockholders, and
(v) all directors and executive officers as a group.

SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED
OFFERING(1) AFTER OFFERING(1)(2)
----------------------- -----------------------
NUMBER OF
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE(3) SHARES OFFERED NUMBER PERCENTAGE(3)
- ------------------------ --------- ------------- -------------- --------- -------------

5% Stockholders
Madison Dearborn Capital 7,692,308 26.8%
Partners, L.P.......... -- 7,692,308
Suite 3800
Three First National
Plaza
Chicago, Illinois 60602
Chase Venture Capital
Associates, L.P........ 4,395,604 15.3% -- 4,395,604
380 Madison Avenue,
12th Floor
New York, New York
10017
Fred E. and Moira E. 2,916,277 10.1%
Kamgar (4)............. 1,029,412 1,886,865
c/o Smith & Noble LLC
1750 California Avenue
#201
Corona, California
91719
Boston Capital Ventures 2,047,390 7.1%
(5).................... -- 2,047,390
Old City Hall
45 School Street
Boston, Massachusetts
02108
A. Ray Weeks, Jr. and
Helen Ballard
Weeks (6).............. 1,777,084 6.2% 100,000 1,677,084
c/o Weeks Corporation
4497 Park Drive
Norcross, Georgia 30093
John A. O'Steen (7)..... 1,549,878 5.4% -- 1,549,878
c/o Cinmar, Inc.
2800 Henkle Drive
Lebanon, Ohio 45036
William T. End (8)...... 1,501,015 5.2% -- 1,501,015
c/o Cornerstone Brands,
Inc.
415 Congress Street,
Suite 600
Portland, Maine 04101
Paul D. Tarvin (9)...... 1,495,971 5.2% -- 1,495,971
c/o Cinmar, Inc.
2800 Henkle Drive
Lebanon, Ohio 45036
Donald J. Steiner (10).. 1,451,015 5.0% -- 1,451,015
c/o Cornerstone Brands,
Inc.
600 Atlantic Avenue,
Suite 2800
Boston, Massachusetts
02210

Other Directors
Benjamin D. Chereskin
(11)................... -- -- -- -- --
William J. Hunckler, III
(12)................... -- -- -- -- --
Stephen P. Murray (13).. -- -- -- -- --
Thomas G. Stemberg(14).. 175,000 * -- 175,000 *
H.J. von der Goltz(15).. -- -- -- -- --
John Walter............. 55,555 * -- 55,555 *
Other Named Executive
Officers
Mark Fasold(16)......... 587,500 2.0% -- 587,500
Other Selling
Stockholders
Robert M.
Perkowitz(17).......... 1,249,834 4.3% 441,176 808,658
Estate of Gladney
Heazel(18)............. 443,333 1.5% 83,333 360,000
All executive officers
and directors as a
group (11
persons)(19)........... 6,815,935 23.3% -- 6,815,935

- --------
*Less than 1%

(1) Each stockholder possesses sole voting and investment power with respect
to the shares listed, except as otherwise indicated. In accordance with
the rules of the Securities and Exchange Commission, each stockholder is
deemed to beneficially own any shares subject to stock options or
warrants which are currently exercisable or which become exercisable
within 60 days after September 30, 1998, and any reference in these
footnotes to shares subject to stock options or warrants held by the
person or entity in question refers to stock options or warrants which
are currently exercisable or which become exercisable within 60 days
after September 30, 1998. The inclusion herein of shares listed as
beneficially owned does not constitute an admission of beneficial
ownership. The number and percentage of shares owned after this offering
assumes none of the listed stockholders will purchase additional shares
in this offering.
(2) The above table assumes no exercise of the over-allotment option to
purchase up to an aggregate of shares of Common Stock from the
Company.

(3) Number of shares deemed outstanding includes 28,742,071 shares
outstanding as of September 30, 1998 and any shares subject to stock
options or warrants held by the person or entity in question. Number of
shares deemed outstanding after this offering includes the additional
shares of Common Stock which are being offered by the Company hereby.

(4) Consists of shares issued to the Kamgars in connection with the Company's
acquisition of Smith+Noble in August 1998. Mr. Kamgar is President and
Chief Executive Officer of Smith+Noble.

(5) Consists of shares held by two related entities, Boston Capital Ventures
II, L.P. and Boston Capital Ventures III, L.P. Boston Capital Ventures
II, L.P. holds 1,115,100 shares of Common Stock and Boston Capital
Ventures III, L.P. holds 932,290 shares of Common Stock.

(6) Includes 3,750 shares issuable pursuant to options held by Ms. Weeks, the
founder and Chief Executive officer of Ballard Designs, and 199,500
shares held in trust for certain family members.

(7) Includes 133,250 shares issuable pursuant to options held by Mr. O'Steen,
761,231 shares held in a trust of which Mr. O'Steen is a beneficiary and
20,000 shares held for the benefit of certain family members.

(8) Includes 750,000 shares held by a limited partnership for the benefit of
certain family members.

(9) Includes 133,250 shares issuable pursuant to options held by Mr. Tarvin.

(10) Includes 750,000 shares held in trust for certain family members.

(11) Excludes 7,692,308 shares held by Madison Dearborn Capital Partners, L.P.
Mr. Chereskin is a Managing Director and stockholder of Madison Dearborn,
Inc., the general partner of the general partner of Madison Dearborn
Capital Partners, L.P. Mr. Chereskin disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest in Madison
Dearborn Capital Partners, L.P.

(12) Excludes 7,692,308 shares held by Madison Dearborn Capital Partners, L.P.
Mr. Hunckler is a Managing Director and stockholder of Madison Dearborn,
Inc., the general partner of the general partner of Madison Dearborn
Capital Partners, L.P. Mr. Hunckler disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest in Madison
Dearborn Capital Partners, L.P.

(13) Excludes 4,395,604 shares held by Chase Venture Capital Associates, L.P.,
of which Mr. Murray is a general partner.
(14) Includes 30,000 shares issuable pursuant to warrants and 20,000 shares
issuable pursuant to options held by Mr. Stemberg.
(15) Excludes 2,047,390 shares held by Boston Capital Ventures, of which Mr.
von der Goltz is a general partner. Mr. von der Goltz disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest in Boston Capital Ventures.

(16) Includes 162,500 shares issuable pursuant to options held by Mr. Fasold
and 94,812 shares held in trust for the benefit of certain family
members.
(17) Consists of shares issued to Mr. Perkowitz, the Chief Operating Officer
of Smith+Noble, in connection with the Company's acquisition of
Smith+Noble in August 1998.
(18) Ms. Heazel was an employee of Ballard Designs.
(19) Includes 449,000 shares issuable pursuant to options and 30,000 shares
issuable pursuant to warrants.

DESCRIPTION OF CAPITAL STOCK

After the filing of the Company's Restated Certificate of Incorporation
immediately following the closing of this offering, the authorized capital
stock of the Company will consist of 150,000,000 shares of Common Stock, $.001
par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value
per share. As of September 30, 1998, there were outstanding (i) 28,742,071
shares of Common Stock held by 44 stockholders of record, (ii) options to
purchase an aggregate of 1,511,815 shares of Common Stock and (iii) warrants
to purchase an aggregate of 31,000 shares of Common Stock.

Although the Company believes the following summary of certain provisions of
the Company's Common Stock, Preferred Stock, warrants, Restated Certificate of
Incorporation and Amended and Restated By-laws (the "By-laws") covers all
material provisions affecting the rights of holders of capital stock of the
Company, such summary is not intended to be complete and is qualified by
reference to the provisions of applicable law and to the Company's Restated
Certificate of Incorporation and By-laws included as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for,
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future.

PREFERRED STOCK

Under the terms of the Restated Certificate of Incorporation, the Board of
Directors is authorized, subject to any limitations prescribed by law, without
stockholder approval, to issue from time to time up to an aggregate of
5,000,000 shares of Preferred Stock, in one or more series. Each such series
of Preferred Stock shall have such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by
the Board of Directors.

The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could adversely affect the rights
of the holders of Common Stock and could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of Preferred Stock.

WARRANTS

As of September 30, 1998, there were outstanding warrants for the purchase
of an aggregate of 31,000 shares of Common Stock, at an exercise price of $.01
per share. The warrants were issued in June 1995 to certain of the initial
investors in the Company and expire in June 2005.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to such
date, the Board of Directors approved the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction resulting in the
stockholder becoming an interested stockholder, the interested stockholder
owned not less than 85% of the corporation's voting stock outstanding at the
time such transaction commenced (excluding shares held by certain affiliates
of the corporation) or (iii) at or subsequent to the time the stockholder
became an interested stockholder, the business combination is approved both by
the Board of Directors and, at a meeting and not by written consent, by
holders of at least 66% of the outstanding voting stock not owned by the
interested stockholder. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.

The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes, as nearly equal in size as possible,
with staggered three-year terms of office. See "Management." In addition, the
Restated Certificate of Incorporation provides that, so long as the Board of
Directors remains so classified, directors may be removed only for cause. Any
vacancy on the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board of Directors, may be filled by vote
of a majority of the directors then in office. The classification of the Board
of Directors and the provisions governing the removal of directors and filling
of vacancies could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company.

The Restated Certificate of Incorporation and By-laws also provide that any
action required or permitted to be taken by the stockholders of the Company at
an annual meeting or special meeting of stockholders may be taken by written
consent in lieu of a meeting only if such written consent is executed by all
stockholders of the Company, and that special meetings of stockholders may be
called only by the President, Chief Executive Officer or Board of Directors of
the Company. The foregoing provisions could have the effect of delaying until
the next stockholders meeting stockholder actions which are favored by the
holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders' meeting, and not by
written consent.

The By-laws provide that nominations for directors may not be made by
stockholders at any annual or special meeting thereof unless the stockholder
intending to make a nomination notifies the Company of the nomination a
specified number of days in advance of the meeting and furnishes to the
Company certain information regarding such stockholder and the intended
nominee. The By-laws also require advance notice of any proposal to be brought
by a stockholder before any annual or special meeting of stockholders and the
provision of certain information to the Company regarding such stockholder and
any material interest such stockholder may have in the proposal. These
provisions could inhibit or prevent certain stockholder proposals, including
ones related to a possible acquisition of the Company, from being brought
before a meeting of stockholders.

The Restated Certificate of Incorporation and the By-laws require the
affirmative vote of the holders of at least 75% of the shares of capital stock
of the Company issued and outstanding and entitled to vote to amend or repeal
any of the provisions described in the prior two paragraphs.

The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability to
stockholders for monetary damages for a breach of fiduciary duty, except in
certain circumstances, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation
of law. Further, the Restated Certificate of Incorporation contains provisions
requiring that the Company indemnify the Company's directors and officers to
the fullest extent permitted by the General Corporation Law of Delaware. The
Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.

TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the securities
of the Company. Upon the closing of this offering, based upon the number of
shares outstanding at September 30, 1998, there will be shares of Common
Stock of the Company outstanding. Of these shares, the shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.

The remaining 27,088,150 shares (the "Restricted Shares") were issued and
sold by the Company in private transactions in reliance upon exemptions under
the Securities Act. Restricted Shares generally may be sold in the public
market only if registered under the Securities Act or sold in compliance with
Rule 144.

SALES OF RESTRICTED SHARES

Of the Restricted Shares, 791,353 shares will be eligible for sale in the
public market in reliance on Rule 144(k) as of the date of this Prospectus;
all of these shares are subject to the lock-up agreements described below. An
additional 23,216,719 Restricted Shares will be eligible for sale in the
public market pursuant to Rule 144 and Rule 701 under the Securities Act
beginning approximately 90 days after the date of this Prospectus; of these
shares are subject to the lock-up agreements described below. The remaining
3,080,078 Restricted Shares become eligible for sale in the public market
under Rule 144 at various dates thereafter; of these shares are subject to
the lock-up agreements described below.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates of the
Company, whose Restricted Shares have been fully paid for and held for at
least one year from the later of the date of issuance by the Company or
acquisition from an affiliate of the Company, may sell such shares in brokers'
transactions or directly to market makers beginning approximately 90 days
after the date of this Prospectus, provided the number of shares sold in any
three-month period does not exceed the greater of 1% of the then outstanding
shares of the Common Stock (approximately shares, based on the number of
shares to be outstanding after this offering) or the average weekly trading
volume in the public market during the four calendar weeks preceding the
filing of the seller's Form 144. Sales under Rule 144 are also subject to
certain notice of sale requirements and the availability of current public
information concerning the Company. After two years have elapsed from the
later of the issuance of Restricted Shares by the Company or their acquisition
from an affiliate of the Company, such shares may be sold without limitation,
pursuant to Rule 144(k), by persons who have not been affiliates of the
Company for at least three months. Rule 144 also provides that affiliates who
are selling shares that are not Restricted Shares must nonetheless comply with
the same restrictions applicable to Restricted Shares with the exception of
the holding period requirement.

Restricted Shares that have been issued in reliance on Rule 701 (such as
shares of Common Stock issued under the Company's stock option plans) may be
resold by persons other than affiliates of the Company, beginning
approximately 90 days after the date of this Prospectus, subject only to the
manner of sale provisions of Rule 144, and may be resold by affiliates of the
Company under Rule 144 without compliance with its one-year holding period
requirement.

Rule 144A under the Securities Act would permit, subject to certain
conditions, the sale by the current holders of Restricted Shares of all or a
portion of such shares to certain "qualified institutional buyers," as defined
in Rule 144A under the Securities Act.

The Company intends to file, shortly following the closing of this offering,
Form S-8 registration statements under the Securities Act to register all
shares of Common Stock issuable under its employee and director stock plans.
See "Management--Stock Plans." Those registration statements will become
effective immediately upon filing. Shares issued pursuant to those
registration statements will be eligible for resale in the public market,

subject to the Rule 144 limitations applicable to affiliates of the Company
and to the lock-up agreements described below, if applicable.

LOCK-UP AGREEMENTS

The holders of approximately % of the outstanding shares of Common Stock
have agreed that, subject to certain exceptions, for a period of 180 days
after the date of this Prospectus, they will not, without the prior written
consent of NationsBanc Montgomery Securities LLC, directly or indirectly,
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or securities exercisable for or convertible into Common Stock.

REGISTRATION RIGHTS

Pursuant to the terms of an Amended and Restated Registration Agreement,
(the "Registration Agreement") by and among the Company and certain
stockholders of the Company (the "Rightsholders"), the Rightsholders are
entitled to certain rights with respect to the registration under the
Securities Act of a total of approximately 26,759,150 shares of Common Stock
(the "Registrable Shares"). Rightsholders holding 12,392,307 shares of Common
Stock have the right under the Registration Agreement to require the Company
to prepare and file from time to time after this offering, up to four
registration statements on Form S-1, provided that the gross proceeds to the
Rightsholders requesting such registration equals at least $10,000,000 or the
registration covers at least one-third of the requesting Rightsholders'
Registrable Shares. Rightsholders holding 15,087,830 shares of Common Stock
have the right to request an unlimited number of registration statements on
Form S-2 or Form S-3, provided that the gross proceeds from such offering
equals at least $1,000,000. The Company is not required to file more than two
registration statements on behalf of the Rightsholders in any twelve month
period. The Registration Agreement also provides that in the event the Company
proposes to file a registration statement under the Securities Act with
respect to an offering by the Company for its own account or the account of
another person, or both, the Rightsholders shall be entitled to include
Registrable Shares in such registration. In the event that the former owners
of Smith+Noble (the "S+N Holders") sell shares of Common Stock in this
offering which results in gross proceeds of less than $25,000,000, the S+N
Holders will have a priority, before other holders of Registrable Securities,
to include shares in registrations for the Company's account, such that the
gross proceeds to the S+N Holders from the sale of shares of Common Stock in
this offering and any such subsequent offerings, equals $25,000,000 (the "S+N
Priority"). The ability of the Rightsholders to include shares in subsequent
offerings is subject to the right of the managing underwriter of any such
offering to exclude some or all of such Registrable Shares from such
registration if in the opinion of the underwriter the number of shares
requested to be included in such registration exceeds the number which may be
sold in an orderly manner within the applicable price range. In the event of
registrations for the account of the Company, where the S+N Priority is
applicable, the amount of Registrable Securities to be offered for the account
of the S+N Holders (up to the number of shares determined by the S+N Priority)
is subject to reduction, pro rata with the shares offered by the Company,
before other shares may be included in the registration. In the event of
registrations for the account of (i) a person other than the Company or (ii)
the Company, where the S+N Priority is not applicable, the amount of
Registrable Shares to be offered for the accounts of the Rightsholders shall
be reduced pro rata among all of the requesting Rightsholders based upon the
number of shares held by all requesting Rightsholders.

EFFECT OF SALES OF SHARES

Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of the Common Stock in
the public market could adversely affect the market price of the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities.

UNDERWRITING

The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, Goldman, Sachs & Co. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from the Company and the Selling Stockholders the
aggregate number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to
purchase all of the shares of Common Stock if they purchase any.

NUMBER OF
UNDERWRITERS SHARES
------------ ---------

NationsBanc Montgomery Securities LLC................................
Goldman, Sachs & Co. ................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated...................
-------
Total..........................................................
=======

The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow selected dealers
a concession of not more than $ per share; and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After this offering, the offering price and other
selling terms may be changed by the Representatives. The Common Stock is
offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.

The Company and certain Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of additional shares of Common
Stock, respectively, to cover over-allotments, if any, at the same price per
share as the initial shares to be purchased by the Underwriters. To the extent
the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.

The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.

At the request of the Company, the Underwriters have reserved for sale to
certain employees of the Company and certain other persons, at the initial
public offering price, up to of the shares of Common Stock offered hereby.
The number of shares available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.

written consent of NationsBanc Montgomery Securities LLC, directly or
indirectly, sell, offer, contract or grant any option to sell, pledge,
transfer, establish an open put equivalent position or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable or exercisable for or convertible into shares
of Common Stock. In addition, subject to certain exceptions (including without
limitation grants and issuances under employee and director stock plans), the
Company has agreed that, for a period of 180 days after the date of this
Prospectus, it will not, without the prior written consent of NationsBanc
Montgomery Securities LLC, directly or indirectly, sell, offer, contract or
grant any option to sell, pledge, transfer, establish an open put equivalent
position or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock.

The Underwriters are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock
in connection with this offering, i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus, the
Underwriters may reduce that short position by purchasing Common Stock in the
open market. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above. In
addition, the Representatives may impose "penalty bids" under contractual
arrangements with the Underwriters whereby they may reclaim from an
Underwriter (or dealer participating in this offering) for the account of the
other Underwriters, the selling concession with respect to the Common Stock
that is distributed in this offering but subsequently purchased for the
account of the Underwriters in the open market.

In general, purchases of Common Stock for the purpose of stabilization or to
reduce a short position could cause the price of the Common Stock to be higher
than it might be in the absence of such purchases. None of the Company, the
Selling Stockholders and the Underwriters makes any representation or
predictions as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, none of the Company, the Selling Stockholders and the Underwriters
makes any representation that the Representatives will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.

The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.

The Common Stock has been approved for listing on NYSE under the symbol
"CSB," subject to notification by the Company of the commencement of this
offering. In order to satisfy a condition to such approval, the Underwriters
have undertaken to sell the Common Stock offered hereby in round lots of 100
shares to a number of beneficial holders that meets NYSE's public distribution
requirements.

Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Stockholders and the
Representatives. Among the factors considered in such negotiations will be the
history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
earnings and the trend of such earnings, the prospects for future earnings of
the Company, the present state of the Company's business, the general
condition of the securities markets at the time of this offering and the
market prices of publicly traded stock of comparable companies in recent
periods.

LEGAL MATTERS

The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston,
Massachusetts. Certain legal matters will be passed upon for the Underwriters
by Ropes & Gray, Boston, Massachusetts.

EXPERTS

The consolidated financial statements of Cornerstone at January 31, 1998 and
January 25, 1997 and for each of the three years in the period ended January
31, 1998 appearing in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, which is based in part on the reports of BDO Seidman, LLP and Arthur
Andersen LLP, independent auditors. The financial statements referred to above
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.

The financial statements of Garnet Hill and for each of the three years in
the period ended July 31, 1997, and of Frontgate for the interim period ended
September 12, 1995, appearing in this Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all
amendments, exhibits, schedules and supplements thereto) on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission, to which Registration Statement reference is
hereby made. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto may be inspected and copied at
prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the
Company is required to file electronic versions to these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.

The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders, within 45 days after the end of each
fiscal quarter, reports for the first three quarters of each fiscal year
containing interim unaudited financial information.

INDEX TO FINANCIAL STATEMENTS

CORNERSTONE BRANDS, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Report of BDO Seidman, LLP, Independent Certified Public Accountants..... F-3
Report of Arthur Andersen LLP, Independent Auditors...................... F-4
Consolidated Balance Sheets as of January 25, 1997 and January 31, 1998
and August 1, 1998 (unaudited).......................................... F-5
Consolidated Statements of Operations for the years ended January 27,
1996, January 25, 1997 and January 31, 1998 and for the six months ended
August 2, 1997 (unaudited) and August 1, 1998 (unaudited)............... F-6
Consolidated Statements of Cash Flows for the years ended January 27,
1996, January 25, 1997 and January 31, 1998 and for the six months ended
August 2, 1997 (unaudited) and August 1, 1998 (unaudited)............... F-7
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity for the years ended January 27, 1996, January 25,
1997 and January 31, 1998 and for the six months ended August 1, 1998
(unaudited)............................................................. F-8
Notes to Consolidated Financial Statements............................... F-9
GARNET HILL, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-25
Statements of Income for the years ended July 29, 1995, July 26, 1996 and
July 25, 1997........................................................... F-26
Statements of Cash Flows for the years ended July 29, 1995, July 26, 1996
and July 25, 1997....................................................... F-27
Notes to Financial Statements............................................ F-28
CINMAR L.P.
Report of Ernst & Young LLP, Independent Auditors........................ F-31
Statement of Income for the period from January 1, 1995 to September 12,
1995.................................................................... F-32
Statement of Cash Flows for the period from January 1, 1995 to September
12, 1995................................................................ F-33
Notes to Financial Statements............................................ F-34
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Statements of Operations for the year ended
January 31, 1998........................................................ PF-2
Unaudited Pro Forma Combined Statements of Operations for the six months
ended August 2, 1997.................................................... PF-3
Unaudited Pro Forma Consolidated Balance Sheet as of August 1, 1998...... PF-4
Notes to Unaudited Pro Forma Financial Statements........................ PF-5

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Cornerstone Brands, Inc.

We have audited the accompanying consolidated balance sheets of Cornerstone
Brands, Inc. (formerly The International Cornerstone Group, Inc.) (the
Company) as of January 25, 1997 and January 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Ballard Designs, Inc. (Ballard), a wholly-owned subsidiary,
included in the consolidated financial statements as of January 25, 1997 and
for the years ended January 27, 1996 and January 25, 1997, which statements
reflect total assets constituting approximately 9% at January 25, 1997 and
revenues constituting approximately 44% and 29% for the years ended January
27, 1996 and January 25, 1997, respectively, of the related consolidated
totals and Smith & Noble LLC (Smith & Noble), a wholly owned subsidiary,
included in the consolidated financial statements as of January 25, 1997 and
January 31, 1998 and for each of the three years in the period ended January
31, 1998, which statements reflect total assets constituting approximately 5%
and 4% at January 25, 1997 and January 31, 1998, respectively, and revenues
constituting approximately 26%, 20% and 13% for fiscal years ended January 27,
1996, January 25, 1997 and January 31, 1998, respectively, of the related
consolidated totals. Those statements were audited by other auditors, whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for Ballard in the January 27, 1996 and January 25, 1997
financial statements and Smith & Noble in the January 27, 1996, January 25,
1997 and January 31, 1998 financial statements, is based solely on the reports
of the other auditors.

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

In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
January 25, 1997 and January 31, 1998, and the results of its operations and
its cash flows for each of the three years in the period ended January 31,
1998, in conformity with generally accepted accounting principles.

Ernst & Young LLP

Boston, Massachusetts
April 17, 1998, except as to Note 3, as to which the date is August 25, 1998

The foregoing report is in the form that will be signed to reflect the
merger of the Company and Smith & Noble LLC as described in Note 3 to the
financial statements and the inclusion, in an amendment to the Registration
Statement, of financial statements of the Company including the date of
consummation of the merger.

/s/ Ernst & Young LLP

Boston, Massachusetts
August 25, 1998

F-2

REPORT OF BDO SEIDMAN, LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders of Ballard Designs, Inc.

We have audited the balance sheet of Ballard Designs, Inc. as of December
31, 1996, and the related statements of operations and retained earnings, and
cash flows for the years ended December 31, 1996 and 1995 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ballard Designs, Inc. as
of December 31, 1996, and the results of its operations and cash flows for the
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.

/s/ BDO Seidman, LLP

Atlanta, Georgia
December 18, 1997

F-3

REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS

To the Members of Smith & Noble LLC:

We have audited the accompanying balance sheets of Smith & Noble LLC (a
California Limited Liability Company) as of December 31, 1996 and 1997, and
the related statements of operations, proprietors'/members' capital and cash
flows for each of the three years in the period ended December 31, 1997 (not
included herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standard 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith & Noble LLC as of
December 31, 1996 and 1997, the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.

/s/ Arthur Andersen LLP

Orange County, California
February 5, 1998

F-4

CORNERSTONE BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

JANUARY 25 JANUARY 31 AUGUST 1
1997 1998 1998
----------- ------------ ------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents............ $11,235,821 $ 4,869,505 $ 2,014,326
Investments.......................... 9,141,449 4,095,887 2,403,334
Accounts receivable.................. 1,129,478 3,787,044 4,682,432
Inventory............................ 6,214,876 29,272,128 34,702,768
Deferred income taxes................ -- 953,842 2,518,643
Prepaid expenses and other current
assets.............................. 3,157,764 8,920,532 12,102,192
----------- ------------ ------------
Total current assets.................. 30,879,388 51,898,938 58,423,695
Property and equipment, net........... 5,992,723 12,480,579 19,799,078
Investment in affiliate............... 2,033,469 3,842,411 6,050,187
Goodwill.............................. 14,831,010 59,897,954 59,136,375
Deferred income taxes................. 117,296 -- --
Other assets.......................... 1,458,691 5,525,984 5,904,881
----------- ------------ ------------
Total assets.......................... $55,312,577 $133,645,866 $149,314,216
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit...... $ -- $ 15,450,000 $ 30,235,000
Accounts payable..................... 6,153,632 15,943,805 16,722,813
Accrued expenses and other current
liabilities......................... 3,850,222 8,032,591 9,628,915
Payable to related parties........... 3,226,600 2,772,530 573,821
Deferred income taxes................ 339,207 -- --
Debt and capital leases maturing
within one year..................... 503,701 77,483 75,000
----------- ------------ ------------
Total current liabilities............. 14,073,362 42,276,409 57,235,549
Long term debt and capital leases..... 2,046,544 331,860 313,364
Deferred income taxes................. -- 735,781 735,781
Payable to related parties, less
current portion...................... 1,543,821 -- --
Minority interest..................... -- 518,760 275,042
Commitments and contingencies
Redeemable convertible preferred
stock:
Series A, $0.01 par value, 56,500
shares authorized; 22,554 shares
issued and outstanding at January
25, 1997 and 56,385 issued and
outstanding at January 31, 1998
($59,897,245 and $61,306,871
liquidation value at January 31,
1998 and August 1, 1998,
respectively)....................... 22,838,198 58,815,151 60,332,299
Stockholders' equity:
Series B convertible preferred stock,
$0.01 par value, 9,000 shares
authorized; 6,500 shares issued and
outstanding at January 25, 1997 and
7,242 issued and outstanding at
January 31, 1998 and August 1, 1998
($7,242,000 liquidation value at
January 31, 1998 and August 1,
1998)............................... 65 72 72
Series C convertible preferred stock,
$0.01 par value, 2,250 shares
authorized; 1,500 shares issued and
outstanding at January 25, 1997 and
750 issued and outstanding at
January 31, 1998 and August 1, 1998
($750,000 liquidation value at
January 31, 1998 and August 1,
1998)............................... 15 8 8
Common stock, $0.001 par value,
28,499,400 shares authorized;
12,465,408 shares issued and
outstanding at January 25,1997,
14,538,730 issued and outstanding at
January 31, 1998 and 14,619,266
issued and outstanding at August 1,
1998................................ 12,466 14,539 14,619
Additional paid-in capital............ 11,182,761 (13,199,653) 42,968,350
Retained earnings (accumulated
deficit)............................. 3,524,341 43,985,333 (12,589,582)
Unrealized gains on available for sale
securities........................... 91,334 167,936 29,044
Less: treasury stock--330,000 shares.. (330) (330) (330)
----------- ------------ ------------
Total stockholders' equity............ 14,810,652 30,967,905 30,422,181
----------- ------------ ------------
Total liabilities and stockholders'
equity............................... $55,312,577 $133,645,866 $149,314,216
=========== ============ ============

See accompanying notes.

F-5

CORNERSTONE BRANDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED SIX MONTHS ENDED
--------------------------------------- -------------------------
JANUARY 27 JANUARY 25 JANUARY 31 AUGUST 2 AUGUST 1
1996 1997 1998 1997 1998
----------- ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)

Net sales............... $60,535,799 $106,100,377 $216,334,704 $80,807,393 $139,268,557
Cost of sales........... 32,817,120 54,750,794 112,250,872 42,409,598 71,015,829
----------- ------------ ------------ ----------- ------------
Gross profit............ 27,718,679 51,349,583 104,083,832 38,397,795 68,252,728
----------- ------------ ------------ ----------- ------------
Operating expenses:
Selling, catalog and
fulfillment expenses.. 22,872,664 36,407,948 73,249,119 25,872,609 49,287,984
General and
administrative........ 3,508,435 6,910,994 15,636,186 5,570,637 9,963,837
Amortization and
depreciation.......... 759,195 1,734,953 3,522,884 1,403,794 2,438,867
Restructuring charge... -- -- 943,000 -- 2,837,781
----------- ------------ ------------ ----------- ------------
Total operating
expenses............... 27,140,294 45,053,895 93,351,189 32,847,040 64,528,469
----------- ------------ ------------ ----------- ------------
Operating income........ 578,385 6,295,688 10,732,643 5,550,755 3,724,259
Investment income
(expense), net......... (95,148) 367,141 (207,883) 78,588 (198,760)
----------- ------------ ------------ ----------- ------------
Income before equity in
net income (loss) of
affiliate, minority
interest and income
taxes.................. 483,237 6,662,829 10,524,760 5,629,343 3,525,499
----------- ------------ ------------ ----------- ------------
Income taxes............ 157,794 984,999 3,103,038 1,723,632 324,295
----------- ------------ ------------ ----------- ------------
Income before equity in
net income (loss) of
affiliate and minority
interest............... 325,443 5,677,830 7,421,722 3,905,711 3,201,204
Equity in net income
(loss) of affiliate.... (5,001) 391,825 1,808,942 995,000 2,207,776
Minority interest....... -- -- 275,199 81,882 243,718
Net income.............. 320,442 6,069,655 9,505,863 4,982,593 5,652,698
----------- ------------ ------------ ----------- ------------
Deemed dividend of
redeemable convertible
preferred stock........ -- -- (21,069,203) (3,718,453) --
Accretion of redeemable
convertible preferred
stock.................. (360,065) (1,308,685) (2,300,514) (938,512) (1,517,148)
----------- ------------ ------------ ----------- ------------
Net income (loss)
applicable to common
stock.................. $ (39,623) $ 4,760,970 $(13,863,854) $ 325,628 $ 4,135,550
=========== ============ ============ =========== ============
Net income (loss) per
share of common stock.. $ (0.003) $ 0.39 $ (1.08) $ 0.03 $ 0.29
=========== ============ ============ =========== ============
Net income (loss) per
share of common stock,
assuming dilution...... $ (0.003) $ 0.31 $ (1.08) $ 0.03 $ 0.19
=========== ============ ============ =========== ============
Pro forma:
Historical net income.. $ 320,442 $ 6,069,655 $ 9,505,863 $ 4,982,593 $ 5,652,698
Provision (benefit) for
income taxes on
previously untaxed
earnings of pooled S-
Corporation........... (326,641) 500,067 151,551 151,551 --
Provision for income
taxes on previously
untaxed earnings of
pooled limited
liability company..... 383,054 969,228 1,973,544 977,200 1,646,007
----------- ------------ ------------ ----------- ------------
Pro forma net income... $ 264,029 $ 4,600,360 $ 7,380,768 $ 3,853,842 $ 4,006,691
=========== ============ ============ =========== ============
Pro forma net income
per common share...... $ (0.01) $ 0.27 $ (1.24) $ (0.06) $ 0.18
=========== ============ ============ =========== ============
Pro forma net income
per common share,
assuming dilution..... $ (0.01) $ 0.23 $ (1.24) $ (0.06) $ 0.13
=========== ============ ============ =========== ============

See accompanying notes.

F-6

CORNERSTONE BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED SIX MONTHS ENDED
-------------------------------------- -------------------------
JANUARY 27 JANUARY 25 JANUARY 31 AUGUST 2 AUGUST 1
1996 1997 1998 1997 1998
----------- ----------- ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)

OPERATING ACTIVITIES
Net income.............. $ 320,442 $ 6,069,655 $ 9,505,863 $ 4,982,593 $ 5,652,698
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Amortization and
depreciation.......... 759,195 1,734,953 3,522,884 1,403,794 2,438,867
Minority interest...... -- -- (275,199) (81,882) (243,718)
Equity in net (income)
loss of affiliates.... 5,001 (391,825) (1,808,942) (995,000) (2,207,776)
Deferred income taxes.. (100,000) (100,000) (1,696,940) (857,538) (1,564,801)
Restructuring charge... -- -- 943,000 -- 2,837,781
Loss (gain) on disposal
of equipment.......... (3,494) 1,082 -- -- --
Changes in working
capital:
Receivables............ 213,885 (412,015) (2,174,875) (3,491,186) (895,388)
Inventory.............. (484,195) (658,530) (2,952,456) (1,628,268) (5,430,640)
Other assets........... 338,263 (1,128,699) (2,874,537) (2,014,467) (4,116,797)
Accounts payable,
accruals and other
liabilities........... 1,737,331 2,821,562 1,263,199 1,239,224 (462,449)
----------- ----------- ------------ ------------ -----------
Net cash provided (used)
by operating
activities............. 2,786,428 7,936,183 3,451,997 (1,442,730) (3,992,223)
INVESTING ACTIVITIES
Purchase of available
for sale securities.... (6,002,048) (9,824,052) (7,442,308) (5,221,154) (1,480,075)
Sale of available for
sale securities........ 1,150,000 7,975,985 12,564,472 8,293,786 3,033,736
Purchases of property
and equipment.......... (1,441,443) (1,646,660) (3,497,693) (1,097,382) (8,439,547)
Proceeds from sale of
equipment.............. 14,318 873 -- -- --
Acquisitions, net of
cash of acquired
companies.............. -- (1,047,000) (48,734,748) (41,196,420) --
----------- ----------- ------------ ------------ -----------
Net cash used in
investing activities... (6,279,173) (4,540,854) (47,110,277) (39,221,170) (6,885,886)
FINANCING ACTIVITIES
Cash received from
issuance of Series A
preferred stock, net of
issuance costs......... 7,735,574 2,459,298 33,676,439 22,222,076 --
Cash from sale of common
stock.................. -- -- -- -- 500,245
Contributions from
shareholders........... 265 870,325 -- -- --
Distributions to
shareholders........... (903,578) (2,040,561) (4,663,026) (2,858,552) (5,042,627)
Borrowings (repayments)
on line of credit...... (104,999) (1,070,000) 15,450,000 20,620,811 14,785,000
Payment of liabilities
to related parties..... -- (583,141) (3,731,891) (2,693,931) (2,198,709)
Payment of long-term
debt and capital
leases................. 272,359 (866,410) (3,439,558) (2,176,371) (20,979)
----------- ----------- ------------ ------------ -----------
Net cash provided (used)
by financing
activities............. 6,999,621 (1,230,489) 37,291,964 35,114,033 8,022,930
----------- ----------- ------------ ------------ -----------
Net increase (decrease)
in cash................ 3,506,876 2,164,840 (6,366,316) (5,549,867) (2,855,179)
Cash and cash
equivalents at
beginning of the
period................. 5,564,105 9,070,981 11,235,821 11,235,821 4,869,505
----------- ----------- ------------ ------------ -----------
Cash and cash
equivalents at end of
period................. $ 9,070,981 $11,235,821 $ 4,869,505 $ 5,685,954 $ 2,014,326
=========== =========== ============ ============ ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION
Cash paid for
interest.............. $ 353,360 $ 390,980 $ 1,473,957 $ 175,162 $ 848,829
=========== =========== ============ ============ ===========
Cash paid for income
taxes................. $ -- $ 920,000 $ 3,458,530 $ 654,500 $ 3,609,541
=========== =========== ============ ============ ===========

F-7

CORNERSTONE BRANDS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY

REDEEMABLE RETAINED
CONVERTIBLE ADDITIONAL EARNINGS AND
PREFERRED COMMON PREFERRED PAID-IN ACCUMULATED TREASURY UNREALIZED STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL DEFICIT STOCK GAINS EQUITY
----------- ------- --------- ----------- ------------ -------- ---------- -------------

Balance at January 28,
1995................... $ -- $ 6,383 $-- $ 7,283 $ 949,189 $ -- $ -- $ 962,855
Formation of the
Company................ 10,974,576 6,083 80 12,466,725 (1,364,223) 11,108,665
Issuance of Series A
preferred stock, net of
issuance costs of
$264,426............... 7,735,574 -- -- -- -- -- -- --
Contributions by owners
of Smith & Noble LLC... -- -- -- 265 -- -- -- 265
Distributions to owners
of Smith & Noble LLC... -- -- -- -- (903,578) -- -- (903,578)
Accretion of redeemable
convertible preferred
stock to redemption
value.................. 360,065 -- -- (360,065) -- -- -- (360,065)
Net income.............. -- -- -- -- 320,442 -- -- 320,442
----------- ------- ---- ----------- ------------ ----- --------- -----------
Balances at January 27,
1996................... 19,070,215 12,466 80 12,114,208 (998,170) -- -- 11,128,584
Issuance of Series A
preferred stock, net of
issuance costs of
$94,703................ 2,459,298 -- -- -- -- -- -- --
Contributions by owners
of Smith & Noble LLC... -- -- -- 870,325 -- -- -- 870,325
Distributions to
shareholders of the
Company................ -- -- -- (200,675) -- -- -- (200,675)
Distributions to
shareholders of Ballard
Designs, Inc........... -- -- -- (292,742) -- -- -- (292,742)
Distributions to owners
of Smith & Noble LLC... -- -- -- -- (1,547,144) -- -- (1,547,144)
Shares returned to
Company for no
consideration.......... -- -- -- 330 -- (330) -- --
Unrealized gain on
available for sale
securities............. -- -- -- -- -- -- 91,334 91,334
Accretion of redeemable
convertible preferred
stock to redemption
value.................. 1,308,685 -- -- (1,308,685) -- -- -- (1,308,685)
Net income.............. -- -- -- -- 6,069,655 -- -- 6,069,655
----------- ------- ---- ----------- ------------ ----- --------- -----------
Balances at January 25,
1997................... 22,838,198 12,466 80 11,182,761 3,524,341 (330) 91,334 14,810,652
Tracking stock
transactions........... -- 1,323 -- 7,537,005 -- -- -- 7,538,328
Shares issued in
conjunction with
purchase acquisitions.. -- 750 -- 5,999,250 -- -- -- 6,000,000
Issuance of Series A
preferred stock, net of
issuance costs of
$154,924............... 33,676,439 -- -- -- -- -- -- --
Distributions to
shareholders of Ballard
Designs, Inc........... -- -- -- -- (1,050,549) -- -- (1,050,549)
Undistributed earnings
reclassified to
additional paid-in-
capital due to the
termination of S
corporation status..... -- -- -- 497,628 (497,628) -- -- --
Distributions to members
of Smith & Noble LLC... -- -- -- -- (3,612,477) -- -- (3,612,477)
Unrealized gain on
available for sale
securities............. -- -- -- -- -- -- 76,602 76,602
Accretion of redeemable
convertible preferred
stock to redemption
value.................. 2,300,514 -- -- (2,300,514) -- -- -- (2,300,514)
Deemed dividend of
redeemable convertible
preferred stock........ -- -- -- 21,069,203 (21,069,203) -- -- --
Net income.............. -- -- -- -- 9,505,863 -- -- 9,505,863
----------- ------- ---- ----------- ------------ ----- --------- -----------
Balances at January 31,
1998................... 58,815,151 14,539 80 43,985,333 (13,199,653) (330) 167,936 30,967,905
Issuance of common stock
upon exercise of
warrants (unaudited)... -- 25 -- 225 -- -- -- 250
Sale of common stock
(unaudited)............ -- 55 -- 499,940 -- -- -- 499,995
Distributions to members
of Smith & Noble LLC
(unaudited)............ -- -- -- -- (5,042,627) -- -- (5,042,627)
Unrealized (loss) on
available for sale
securities
(unaudited)............ -- -- -- -- -- -- (138,892) (138,892)
Accretion of redeemable
convertible preferred
stock to redemption
value (unaudited)...... 1,517,148 -- -- (1,517,148) -- -- -- (1,517,148)
Net income (unaudited).. -- -- -- -- 5,652,698 -- -- 5,652,698
----------- ------- ---- ----------- ------------ ----- --------- -----------
Balances at August 1,
1998 (unaudited)....... $60,332,299 $14,619 $ 80 $42,968,350 $(12,589,582) $(330) $ 29,044 $30,422,181
=========== ======= ==== =========== ============ ===== ========= ===========

See accompanying notes.

F-8

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AUGUST 1, 1998 AND FOR THE SIX MONTHS ENDED AUGUST 2, 1997
AND AUGUST 1, 1998 ARE UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES

Organization

Cornerstone Brands, Inc. (the Company) was organized in August 1998 under
the laws of the State of Delaware to serve as a holding company for The
Cornerstone Brands Group, Inc., formerly The International Cornerstone Group,
Inc., which was organized in June 1995. In 1995, the Company acquired Cinmar,
Inc., Cinmar L.P. and related assets (collectively referred to as Frontgate).
In 1996, the Company acquired a majority interest in TravelSmith Outfitters,
Inc. (TravelSmith). In 1997, the Company acquired a majority ownership in The
Territory Ahead, Inc. (March 1997), and Whispering Pines LLC (September 1997),
and 100% ownership of Garnet Hill, Inc. (July 1997) and Ballard Designs, Inc.
(Ballard). Additionally, in August 1998, the Company acquired Smith & Noble
LLC (Smith & Noble).

The Company's primary business is direct mail specialty catalog retail, with
sales throughout the United States.

Fiscal Year End

Prior to the year ended January 31, 1998, the Company's fiscal year ended
the last Saturday in January. Beginning in the year ended January 31, 1998,
the Company adopted a fiscal year of 52- or 53-week periods that end on the
Saturday closest to January 31 of each year. For the purposes of these notes
to the consolidated financial statements, the fiscal years ended January 27,
1996, January 25, 1997 and January 31, 1998 are referred to as fiscal 1995,
1996 and 1997, respectively. Each of the fiscal years presented contains 52
weeks, except for 1997, which contains 53 weeks

Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries, except TravelSmith, which is accounted for on the equity
method (see Note 4). All significant intercompany transactions are eliminated.
The consolidated financial statements as of January 25, 1997 and for the years
ended January 25, 1997 and January 27, 1996 include the accounts of Ballard
and Smith & Noble as of December 31, 1996 and for the calendar years 1996 and
1995, respectively. The consolidated financial statements of the Company as of
and for the year ended January 31, 1998 include the accounts of Ballard for
the period from January 1, 1997 to January 31, 1998 (thirteen months) and the
accounts of Smith & Noble for the calendar year 1997. The effect on
consolidated revenues and net income for fiscal 1997 of including the extra
month of operations was not significant.

Unaudited Interim Information

In the opinion of management, the consolidated financial statements for the
unaudited periods presented include all adjustments necessary for a fair
presentation in accordance with generally accepted accounting principles,
consisting solely of normal recurring accruals and adjustments. The results of
operations for the six months ended August 1, 1998 are not necessarily
indicative of results which would be expected for a full fiscal year.

Risks and Uncertainties

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

F-9

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Smith+Noble purchases a majority of its products from a single vendor. The
Territory Ahead purchases (directly or indirectly) substantially all, and
Garnet Hill purchases (directly or indirectly) a majority, of its merchandise
from foreign suppliers.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Short-Term Investments

The Company accounts for its investment securities under the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Debt and Equity Securities. The Company's marketable debt and equity
securities are classified as "available for sale" and are reported at fair
market value with unrealized gains and losses included as a separate component
of stockholders' equity.

Smith & Noble has held options to purchase equity securities, which are
considered to be derivatives. Smith & Noble's objective for holding these
derivatives is current and future income. The derivatives are reported in the
financial statements as equity securities available for sale. Accordingly, the
options are reported at fair market value with unrealized gains and losses
included as a separate component of stockholders' equity.

Realized gains and losses, interest and dividends on all securities are
included in investment income.

Inventory

Inventories, which consist principally of goods available for sale, are
stated at the lower of cost or market, including provisions for obsolescence
commensurate with known or estimated exposures. The reserve for obsolescence
was $496,000 and $2,235,000 as of January 25, 1997 and January 31, 1998,
respectively. The principal basis of determining cost is the first-in, first-
out (FIFO) method.

Catalog Costs

Prepaid expenses consist primarily of costs associated with the production
and mailing of the Company's direct mail catalogs. At January 25, 1997 and
January 31, 1998, the Company capitalized approximately $2,076,000 and
$7,404,000 of catalog costs, respectively. These costs are amortized over the
estimated periods in which the related revenues are generated, generally three
months or less. Total advertising and catalog expense for fiscal 1995, 1996
and 1997 was approximately $17,150,000, $27,335,000 and $52,785,000,
respectively.

Property and Equipment

Property and equipment are stated at cost or, for assets acquired through
business combinations, at fair value at the dates of the respective
acquisitions. For financial reporting purposes, depreciation is generally
determined on the straight-line method using estimated useful lives of the
assets. Depreciation expense was $473,000, $852,000 and $1,567,000 for fiscal
1995, 1996 and 1997, respectively. Estimated useful lives are as follows:

YEARS
-----

Building........................................................... 40
Equipment.......................................................... 3-7
Furniture and fixtures............................................. 5-10

F-10

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Other Assets

Other assets consist primarily of mailing lists acquired through business
combinations and are recorded at fair market value at date of acquisition and
amortized on a straight-line basis over four years. The total amount of
mailing list amortization charged to expense for fiscal 1995, 1996 and 1997
was approximately $185,000, $590,000, and $855,000 respectively. Accumulated
amortization on the Company's mailing lists was $1,625,000 as of January 31,
1998.

Other assets at January 31, 1998 also include a $1,728,000 loan receivable
from a former stockholder of The Territory Ahead (see Note 14--Related-Party
Transactions).

Goodwill

Goodwill arises from the excess of the cost of the purchase of a business
over the value of the underlying net assets and is being amortized by the
straight-line method over 40 years. The amount of amortization charged to
expense for fiscal 1995, 1996 and 1997 was $101,000, $322,000 and $1,036,000,
respectively. Accumulated amortization was $423,000 at January 25, 1997 and
$1,459,000 at January 31, 1998. At each balance sheet date, management
assesses whether there has been a permanent impairment in the value of
goodwill by comparing anticipated undiscounted future cash flows from
operating activities with the carrying value of the goodwill. The amount of
any resulting impairment is calculated using the same undiscounted cash flows
from operating activities. The factors considered by management in this
assessment include operating and economic factors. If this review indicates
that goodwill will not be recoverable, as determined based on the undiscounted
cash flows of the acquired businesses over the remaining amortization period,
the carrying value of goodwill would be reduced by the estimated shortfall of
cash flows.

Income Taxes

The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
Tax provisions and credits are recorded at statutory rates for taxable items
included in the consolidated statements of income regardless of the period in
which such items are reported for tax purposes. Deferred income taxes are
recognized for temporary differences between financial statement and income
tax bases of assets and liabilities.

Revenue Recognition

Inventory sales are recorded as revenue when products are shipped. For
inventory drop shipped by vendors, the Company records prepayments by
customers as customer deposits, which are included in accrued expenses on the
accompanying consolidated balance sheets. Revenue is recognized for drop
shipped sales when the goods are shipped by the vendor to the customer.

Customer Returns

The Company provides a reserve for customer returns, which approximates the
gross profit on projected merchandise returns. The reserve balance at January
25, 1997 and January 31, 1998 was $487,000 and $2,453,000, respectively, and
is included in accrued liabilities.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-
Based Compensation" (FAS 123). As permitted by Statement 123, the Company
continues to account for its stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and provides pro forma

F-11

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

disclosures of the compensation expense determined under the fair value
provisions of FAS 123. No stock-based compensation expense has been recognized
in the consolidated financial statements.

Earnings per Share

The Company has presented earnings per share for all periods under Financial
Accounting Standards Board Statement No. 128, "Earnings per Share" (FAS 128).
Basic earnings per share is computed using net income (loss) applicable to
common stock and the weighted average number of common shares outstanding and
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is computed using net income (loss) applicable to
common stock and the weighted average number of outstanding shares of common
stock and common stock equivalents, assuming the conversion of preferred stock
and the exercise of stock options and warrants (using the treasury stock
method). Common stock equivalents are excluded from the computation when their
effect is anti-dilutive.

Defined Contribution Plans

Most of the Company's subsidiaries sponsor defined contribution retirement
plans covering most employees. Expenses related to these plans were $0,
$75,000 and $112,000 for fiscal 1995, 1996 and 1997, respectively.

Comprehensive Income

In June 1997, the Financial Accounting Standards Board issued Statement 130,
"Reporting Comprehensive Income" (FAS 130). FAS 130 establishes new rules for
the reporting and display of comprehensive income and its components. Adoption
in 1998 has not had a material impact on the Company's financial statements.

Segment Reporting

The Company reports segment information under Financial Accounting Standards
Board issued Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (FAS 131). This statement, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the major countries in which
the Company holds assets and reports revenues. The Company holds assets and
reports revenues in one operating segment.

Recent Accounting Standard

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in fair value of the hedged assets, liabilities, or firm
commitments will either be immediately recognized in earnings, or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings. The Company has not yet determined what
the effect of Statement 133 will be on the earnings and financial position of
the Company.

2. ACQUISITIONS

On September 12, 1995, the Company acquired all of the business assets of
Frontgate for an aggregate purchase price of approximately $16 million,
including related fees and expenses. For financial reporting purposes, the
acquisition was accounted for under the purchase method. The operating results
of the acquired business have been included in the Company's consolidated
operating results since the date of acquisition.

F-12

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In conjunction with the acquisition of Frontgate, the Company issued 600
shares of Tracking Stock to the former owners of Frontgate, entitling them to
additional consideration contingent on the earnings of Frontgate. During
fiscal 1997, the Company bought the Tracking Stock for approximately $15
million of cash and common stock of the Company, which resulted in an increase
to goodwill.

On March 31, 1997, the Company purchased 80% of the outstanding shares of
The Territory Ahead, Inc. (Territory Ahead) located in Santa Barbara,
California. Territory Ahead is a catalog company that specializes in casual
apparel. The Company's share of the assets and business of Territory Ahead was
acquired for an aggregate purchase price of $12,350,000 in the form of cash
payments, including related fees and expenses.

On July 28, 1997, the Company acquired 100% of the outstanding shares of
Garnet Hill, Inc. (Garnet Hill). Garnet Hill is a catalog company that
specializes in home and casual apparel products. The assets and business were
acquired for an aggregate purchase price of approximately $38 million,
including related fees and expenses. The total consideration includes cash
payments aggregating $30 million, issuance of 750,000 shares of Company common
stock valued at $6 million and issuance of notes to the shareholders of
approximately $1,700,000.

On September 4, 1997, the Company acquired a 51% ownership interest in
Whispering Pines LLC (Whispering Pines). Whispering Pines is a catalog company
that specializes in home, leisure and casual apparel products. The Company
paid $1 million in cash for its share of Whispering Pines.

For financial reporting purposes, these acquisitions were accounted for
under the purchase method. The operating results of the acquired businesses
have been included in consolidated operating results since the dates of
acquisition. The acquisitions, which resulted in a new basis of accounting
reflecting the fair values of the assets at the acquisition date, have been
summarized as follows:

THE
TERRITORY WHISPERING
GARNET HILL AHEAD PINES
----------- ----------- ----------

Historical basis of net assets ac-
quired............................. $12,024,474 $ 893,296 $1,010,000
Fair value and other adjustments:
Customer master file.............. 921,000 612,000 --
Inventory valuation adjustment.... 1,510,737 1,435,460 --
Fixed asset valuation adjustment.. 266,312 -- --
----------- ----------- ----------
Fair value of net assets............ 14,722,523 2,940,756 1,010,000
Ownership percentage................ 100% 80% 51%
Fair value of net assets purchased.. 14,722,523 2,352,605 515,100
Goodwill............................ 23,007,281 9,997,395 484,900
----------- ----------- ----------
Total purchase price................ $37,729,804 $12,350,000 $1,000,000
=========== =========== ==========

The following unaudited pro forma results of operations assume that the
fiscal 1997 purchase transactions described above occurred on January 26,
1997. In addition to combining historical results of operations, the unaudited
pro forma amounts shown include adjustments for the estimated effect of
amortization associated with such transactions. The unaudited pro forma
information below does not purport to be indicative of the results of
operations that would have been achieved if the transactions described above
had been consummated as of the beginning of fiscal 1997. In addition, the
unaudited pro forma information below does not purport to be indicative of the
results of operations which may be achieved in the future.

F-13

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Revenues................................................... $240,129,274
============
Net income................................................. $ 9,024,028
============
Pro forma net income per common share...................... $ (1.08)
============
Pro forma net income per common share, assuming dilution... $ (1.08)
============

3. POOLINGS OF INTERESTS

In fiscal 1997, the Company acquired Ballard Designs, Inc. (Ballard).
Ballard is a catalog company that specializes in home products. The Company
exchanged 2,216,667 shares of common stock for all outstanding shares of
Ballard's common stock. On August 25, 1998, the Company acquired Smith & Noble
LLC (Smith & Noble). Smith & Noble is a catalog company that specializes in
home products. The Company exchanged 4,166,111 shares of common stock for all
outstanding membership interests of Smith & Noble. These acquisitions were
accounted for as poolings of interests, and, accordingly, the accompanying
consolidated financial statements include the financial position, results of
operations and cash flows of Ballard and Smith & Noble for all periods.

The statements of income combine Cornerstone's historical operating results
for the fiscal years ended January 27, 1996, January 25, 1997 and January 31,
1998 with the corresponding Ballard operating results for the years ended
December 31, 1995, 1996 and thirteen months ended January 31, 1998,
respectively and Smith & Noble operating results for the years ended December
31, 1995, 1996 and 1997, respectively. The inclusion of the extra month
(January 1997) in the fiscal year ended January 31, 1998 for Ballard did not
have a significant effect on reported results of operations. Prior to the
acquisitions, Ballard and Smith & Noble elected to be taxed as an
S Corporation and limited liability company taxed as a partnership,
respectively, under the Internal Revenue Code. Accordingly, the current
taxable income of Ballard and Smith & Noble was taxable to its shareholders,
who were responsible for the payment of taxes thereon. Ballard and Smith &
Noble are included in the Company's U.S. federal income tax return subsequent
to the date of the acquisition. Pro forma adjustments have been made to the
consolidated statements of operations to reflect the income taxes that would
have been provided had Ballard and Smith & Noble been subject to income taxes.

Separate net sales and net income of the merged entities are presented in
the following table:

YEARS ENDED SIX MONTHS ENDED
------------------------------------- ------------------------
JANUARY 27, JANUARY 25, JANUARY 31, AUGUST 2, AUGUST 1,
1996 1997 1998 1997 1998
----------- ------------ ------------ ----------- ------------

Net sales:
Net sales of
Cornerstone(1)....... $18,006,434 $ 54,853,505 $147,282,844 $48,720,986 $119,822,002
Net sales of Smith &
Noble................ 15,690,384 20,927,758 27,996,960 13,011,000 19,446,555
Net sales of Ballard.. 26,838,981 30,319,114 41,054,900 19,075,407 --
----------- ------------ ------------ ----------- ------------
Net sales as
reported........... $60,535,799 $106,100,377 $216,334,704 $80,807,393 $139,268,557
=========== ============ ============ =========== ============

- --------
(1) Net sales of Cornerstone for the six months ended August 1, 1998 includes
the results of Ballard.

F-14

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED SIX MONTHS ENDED
-------------------------------- ---------------------
JANUARY JANUARY JANUARY AUGUST 2, AUGUST 1,
27, 1996 25, 1997 31, 1998 1997 1998
--------- ---------- ---------- ---------- ----------

Net income:
Net income of
Cornerstone(1)....... $ 179,410 $2,396,417 $3,924,188 $1,739,795 $1,537,197
Net income of Smith &
Noble................ 957,635 2,423,070 4,933,857 2,443,000 4,115,501
Net income (loss) of
Ballard.............. (816,603) 1,250,168 647,818 799,798 --
--------- ---------- ---------- ---------- ----------
Net income as
reported........... $ 320,442 $6,069,655 $9,505,863 $4,982,593 $5,652,698
========= ========== ========== ========== ==========
Pro forma net income:
Net income as
reported(2).......... $ 320,442 $6,069,655 $9,505,863 $4,982,593 $5,652,698
Pro forma tax
provision of
Smith & Noble........ 383,054 969,228 1,973,544 977,200 1,646,007
Pro forma tax
provision (benefit)
of Ballard........... (326,641) 500,067 151,551 151,551 --
--------- ---------- ---------- ---------- ----------
Pro forma net
income............. $ 264,029 $4,600,360 $7,380,768 $3,853,842 $4,006,691
========= ========== ========== ========== ==========

- --------
(1) Net income of Cornerstone for the six months ended August 1, 1998 includes
the results of Ballard.
(2) Net income as reported for the six months ended August 1, 1998 includes
net income and tax provision of Ballard.

4. TRAVELSMITH

On July 17, 1996, the Company increased its ownership in TravelSmith to
60.8% in a transaction accounted for as a purchase. The Company is party to a
stockholders agreement with certain stockholders of TravelSmith (the
"TravelSmith Stockholders") under which the Company has the right to designate
three of the seven directors of TravelSmith (the "Cornerstone Directors") and
two of the TravelSmith Stockholders have the right to designate three of the
seven directors (the "TravelSmith Directors"), with the seventh director to be
an individual mutually acceptable to the other directors. The Company reflects
its investment in TravelSmith under the equity method of accounting in order
to comply with EITF Issue 96-16, Investor's Accounting for an Investee When
the Shareholder Has a Majority Voting Interest but the Minority Shareholder or
Shareholders Have Certain Approval or Veto Rights.

The table below represents a summary of TravelSmith's financial position as
of, and results of operations for the years ended, January 25, 1997 and
January 31, 1998 and the six months ended August 1, 1998:

JANUARY 25, JANUARY 31, AUGUST 1,
1997 1998 1998
----------- ----------- -----------

Current assets......................... $4,558,000 $13,627,000 $14,831,000
Long-term assets....................... 473,000 559,000 731,000
Total assets........................... 5,031,000 14,186,000 15,562,000
Current liabilities.................... 2,824,000 8,770,000 6,415,000
Long-term liabilities.................. 102,000 49,000 21,000
Total liabilities...................... 2,926,000 8,819,000 6,436,000
Net sales.............................. 18,054,000 35,995,000 33,546,000
Gross profit........................... 9,043,000 18,150,000 16,932,000
Net income............................. 707,000 3,140,000 3,713,000

F-15

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The January 31, 1998 investment in affiliate balance shown in the
consolidated balance sheet includes approximately $580,000 of costs that
represent the excess of the recorded investment over the amount of underlying
equity in TravelSmith's net assets at date of acquisition. The difference is
subject to amortization, consistent with the goodwill and mailing list
amortization policies outlined in Note 1. The total consolidated retained
earnings which represent the undistributed earnings of TravelSmith as of
January 31, 1998 is approximately $1,946,000.

5. SHORT-TERM INVESTMENTS

The composition of short-term investments is as follows:

JANUARY 25, 1997
-----------------------
COST MARKET VALUE
---------- ------------

Equity investments................................. $ 345,177 $ 378,050
Bond investments................................... 188,301 187,919
Certificate of Deposit............................. 6,219,213 6,219,213
U.S. Government securities......................... 497,424 497,097
Mutual funds....................................... 1,800,000 1,859,170
---------- ----------
$9,050,115 $9,141,449
========== ==========

JANUARY 31, 1998
-----------------------
COST MARKET VALUE
---------- ------------

Equity investments................................. $ 922,319 $ 958,598
Bond investments................................... 192,255 193,326
Certificate of Deposit............................. 1,250,000 1,250,000
U.S. Government securities......................... 9,789 9,887
Mutual funds....................................... 1,424,999 1,538,276
Options to buy equity securities................... 135,000 145,800
---------- ----------
$3,934,362 $4,095,887
========== ==========

The contractual maturities of available for sale securities, which include
bond investments, certificate of deposits and U.S. government securities, at
January 31, 1998 is as follows:

Within one year................................................. $1,250,000
One year to five years.......................................... 101,216
Five years to ten years......................................... 72,757
Greater than ten years.......................................... 28,071

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK

Redeemable convertible preferred stock is included as a separate caption in
the consolidated balance sheets and was recorded upon issuance at fair value,
net of issuance costs. It is periodically accreted to redemption value
principally as a result of accrued and unpaid preferred stock dividends.
Redeemable convertible preferred shareholders are entitled to certain voting
rights.

Of the 56,500 shares of Series A preferred stock, 35,000 shares are
designated as Series A-1 (all of which are outstanding), 20,000 shares are
designated as Series A-2 (all of which are outstanding) and 1,500 as A-3
(1,385 shares of which are outstanding). The Series A-1 shares are convertible
at any time into a total of 7,692,308 shares of common stock. The Series A-2
shares are convertible into a total of 4,395,604 shares of

F-16

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

common stock, and Series A-3 shares are convertible into a total of 304,395
shares of common stock. The Series A shares have a liquidation value of $1,000
per share (aggregate of $56,385,000 as of January 31, 1998) and have
liquidation preference to all other securities. The Series A shares accrue
dividends at 5% per annum of the liquidation value from the date of issuance
to the date of liquidation or redemption. The 5% dividends accrue, for
liquidation or redemption, whether or not declared, provided, however, all
such accrued and unpaid 5% dividends are canceled as of any conversion of the
Series A preferred stock into common stock. At any time after June 30, 2002,
the holders of the majority of the outstanding Series A-1 preferred or a
majority of the outstanding Series A-2 preferred may request redemption, and
the Company is required to redeem all such requesting preferred shares at a
price equal to the liquidation value plus accrued and unpaid dividends. The
redemption payments would be made in four annual installment payments starting
30 days from the date of the redemption request. Upon a change in ownership of
more than 50% or other "fundamental change," as defined, the holders of the
majority of the outstanding Series A-1 preferred or a majority of the
outstanding Series A-2 preferred may request redemption sooner than June 30,
2002.

In accordance with the provisions of the Series A preferred stock, upon
liquidation or redemption of the Series A preferred stock, accrued 5%
dividends would be payable, whether or not declared by the Company. As of
January 25, 1997 and January 31, 1998, the accrued unpaid dividends on Series
A preferred stock amounted to $1,426,773 and $3,512,245, respectively.

7. CONVERTIBLE PREFERRED STOCK

All convertible preferred shareholders are entitled to certain voting
rights. Each share of Series B preferred stock is convertible into 219.78021
shares of common stock (1,591,646 shares as of January 31, 1998). In addition,
all Series B stock is required to be converted into common stock if the
Company requires the Series A stock to convert upon a qualified public
offering. The Series B shareholders are entitled to dividend rights based upon
those afforded common stockholders. The Series B stock has a liquidation value
of $1,000 per share (aggregate of $7,242,000 as of January 31, 1998) and a
liquidation preference over the common shareholders and the Series C
shareholders.

Each share of Series C preferred stock is convertible into one share of
Series B stock, which can then be converted into 219.78021 shares of common
stock (164,833 shares at January 31, 1998). One-third of the Series C stock
was converted to Series B on each of September 7, 1996 and 1997, and the
remaining one-third will convert automatically on September 7, 1998. All of
the shares of Series C stock are convertible into common stock prior to any
public offering, a change of ownership of more than 50% of the outstanding
common stock, or upon liquidation or dissolution. In addition, all Series C
stock is required to be converted into Series B stock upon a qualified public
offering. Shareholders of Series C stock are entitled to dividend rights based
upon those afforded common stockholders. The Series C stock has a liquidation
value of $1,000 per share (aggregate of $750,000 as of January 31, 1998) and
does not have any preferences as to dividends or liquidation rights over any
other shareholders.

8. COMMON STOCK

The Company has reserved 14,148,786 shares of common stock for the
conversion of the preferred stock.

On issuance in 1995, 600 shares of common stock were designated as Tracking
Stock--Series I (Tracking Stock). Owners of Tracking Stock were entitled to
dividend rights based upon those afforded common stockholders. Each share of
Tracking Stock was entitled to 1,300 votes per share. During the year ended
January 31, 1998, the holders of the Tracking Stock received $2,476,600
(included in payable to related parties at January 25, 1997), consisting of
cash and 272,160 shares of common stock, as a result of Frontgate's 1997
operating earnings, reducing the Tracking Stock shares to 400. Also during the
year ended January 31, 1998, the remaining shares of Tracking Stock were
redeemed for cash and 1,050,000 shares of common stock.

F-17

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. STOCK WARRANTS AND OPTIONS

The Company's 1995 Stock Option Plan permits the Company to grant options to
purchase common stock to certain officers and employees of the Company and its
subsidiaries. The options vest at such times as determined by the Board of
Directors at the time of grant. All options expire within ten years of the
grant date. The number of shares authorized for grants of options was
1,743,534, as of January 31, 1998.

At January 31, 1998 and August 1, 1998, warrants for 340,000 and 315,000
shares of Common Stock were outstanding, respectively. The exercise price of
warrants for 200,000 shares was $1.50 per share and the exercise price of
warrants for 140,000 shares was $.01 per share at January 31, 1998. The
exercise price of warrants for 200,000 shares was $1.50 per share and the
exercise price of warrants for 115,000 shares was $.01 per share at August 1,
1998.

The following table summarizes stock option activity to August 1, 1998:

WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------

Outstanding at January 28, 1995........................ --
Granted during the year................................ 280,000 $ .93
--------- -----
Outstanding at January 27, 1996........................ 280,000 .93
Granted during the year................................ 575,000 1.50
--------- -----
Outstanding at January 25, 1997........................ 855,000 1.31
Granted during the year................................ 457,342 6.92
--------- -----
Outstanding at January 31, 1998........................ 1,312,342 3.27
Granted during the period.............................. 159,850 8.14
--------- -----
Outstanding at August 1, 1998.......................... 1,472,192 $3.80
========= =====
Exercisable stock options
January 27, 1996..................................... 280,000
January 25, 1997..................................... 280,000
January 31, 1998..................................... 423,750
August 1, 1998....................................... 603,404

Pro forma information regarding net income is required by Financial
Accounting Standards Board Statement No. 123, which also requires that the
information be determined as if the Company has accounted for its employee
stock options granted subsequent to January 27, 1995 under the fair value
method of that Statement. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1995, 1996 and 1997: weighted
average risk free interest rate of 5%; no dividends; a near-zero volatility
factor of the expected market price of common stock; and an expected life of 5
to 10 years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

For the purposes of pro forma disclosure, the fair value of the option is
amortized to expense over the option's vesting period. Options that vest upon
the date of grant are expensed immediately. Pro forma information regarding
net income and earnings per share is required by FAS 123.

F-18

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table presents the Company's pro forma earnings information:

1995 1996 1997
--------- ---------- ----------

Net income.............................. $ 320,442 $6,069,655 $9,505,863
Amortization of stock options........... (201,000) (23,000) (720,528)
--------- ---------- ----------
Pro forma net income.................... $ 119,442 $6,046,655 $8,785,335
========= ========== ==========
Pro forma net income per common share... $ (0.02) $ 0.38 $ (1.13)
========= ========== ==========
Pro forma net income per common share,
assuming dilution...................... $ (0.02) $ 0.31 $ (1.13)
========= ========== ==========

The weighted-average fair market value per share of the options granted in
fiscal 1995, 1996 and 1997 was $0.48, $0.31 and $2.96, respectively.

The pro forma effects of applying Statement of Financial Accounting
Standards No. 123 presented above are not indicative of future amounts since
additional future awards are anticipated.

10. LEASES

The Company leases certain administrative office space, equipment and land
under lease agreements. Future minimum lease payments of all capital leases
(including principal and interest) and noncancelable operating leases for the
next five fiscal years are as follows:

CAPITAL OPERATING
LEASES LEASES
--------- ----------

1998.................................................. $ 81,025 $1,921,422
1999.................................................. 33,722 1,126,605
2000.................................................. 33,722 718,370
2001.................................................. 33,722 148,313
2002.................................................. 33,722 78,248
Thereafter............................................ 742,694 78,247
--------- ----------
958,607 4,071,205
Amount representing interest.......................... (549,264) --
--------- ----------
$ 409,343 $4,071,205
========= ==========

Rent expense for fiscal 1995, 1996 and 1997 was approximately $439,000,
$492,000 and $1,594,000, respectively.

11. LONG-TERM DEBT AND CREDIT AGREEMENTS

At January 31, 1998, the Company had outstanding borrowings of $15,450,000
under a revolving line of credit agreement with a bank. Borrowings under the
line of credit are limited to the lesser of $40 million or three times the
trailing 12 months' EBITDA, as defined. Borrowings under the line bear
interest at the bank's prime rate or an optional LIBOR-based rate on funded
debt. The weighted average interest rate on borrowings outstanding at January
31, 1998 was 6.72%. In addition, the Company pays a fee of 0.25% of the
unborrowed portion of the line of credit. The line is secured by the capital
stock of the Company's subsidiaries, contains financial covenants and
prohibits the payment of dividends.

Additional borrowings of approximately $23 million were permitted under the
line at January 31, 1998.

F-19

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Long-term debt consisted of the following at January 25, 1997 and January
31, 1998:

1996 1997
---------- --------

Notes payable in monthly installments through March
2000, secured by assets of Frontgate (repaid in year
ended January 31, 1998)............................. $ 682,705 $ --
Mortgage note, payable in monthly installments until
June 2005. Secured by first mortgage on land and
building of Frontgate (repaid in year ended January
31, 1998)........................................... 1,250,740 --
Note payable to bank for equipment, payable in
monthly installments through August 1997............ 65,985 --
Capital lease obligation for land, implicit interest
rate of 8.1%, payable in annual installments through
January 2025........................................ 369,264 365,455
Capital lease obligation for equipment, implicit
interest rate of 7%, payable in monthly installments
through January 1999................................ 151,021 41,405
Capital lease obligation for computer equipment,
implicit interest rate of 11.12%, payable in monthly
installments through January 1998................... 30,530 2,483
---------- --------
2,550,245 409,343
Less current portion................................. (503,701) (77,483)
---------- --------
$2,046,544 $331,860
========== ========

The carrying amount of the Company's notes payables approximate fair value,
which is determined using discounted cash flows based on the Company's
incremental borrowing rate for similar types of financing arrangements.

The assets recorded under capital leases ($376,083 of land, $50,000 of
equipment and $27,744 of computer equipment) are included with property and
equipment.

12. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

JANUARY 25, JANUARY 31,
1997 1998
----------- -----------

Land............................................... $ 376,083 $ 548,983
Building........................................... 3,375,404 8,625,034
Equipment.......................................... 2,932,920 8,107,520
Furniture and fixtures............................. 634,820 1,497,916
Construction in progress........................... 499,620 94,771
----------- -----------
7,818,847 18,874,224
Accumulated depreciation........................... (1,826,124) (5,541,645)
Provision for loss on disposal..................... -- (852,000)
----------- -----------
Net property and equipment......................... $ 5,992,723 $12,480,579
=========== ===========

F-20

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. INCOME TAXES

The provision for income taxes consisted of the following for fiscal 1995,
1996 and 1997:

1995 1996 1997
--------- ---------- -----------

Current:
Federal................................ $ 224,794 $ 954,999 $ 4,064,387
State.................................. 33,000 130,000 735,591
--------- ---------- -----------
257,794 1,084,999 4,799,978
Deferred:
Federal................................ (95,000) (95,000) (1,498,949)
State.................................. (5,000) (5,000) (197,991)
--------- ---------- -----------
(100,000) (100,000) (1,696,940)
--------- ---------- -----------
Total................................ $ 157,794 $ 984,999 $ 3,103,038
========= ========== ===========

The Company has net operating loss carryforwards of approximately $750,000
for income tax purposes that expire in 2008. These carryforwards resulted
primarily from the Company's acquisition of Cornerstone Holdings in 1995.
Utilization of net operating loss carryforwards are subject to limitations
under provisions of the Internal Revenue Code.

Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial statement
reporting purposes and the amounts used for income tax purposes.

The components of deferred tax assets and liabilities are as follows:

JANUARY JANUARY
25, 1997 31, 1998
--------- ----------

Deferred tax assets:
Inventory reserve................................... $ 132,745 $1,134,197
Warranty reserve.................................... 107,250 771,783
Accounts receivable allowance....................... 33,726 76,562
Restructuring charge................................ -- 377,000
Net operating loss and other items.................. 454,943 371,261
--------- ----------
Total............................................. 728,664 2,730,803
Deferred tax liabilities:
Depreciation costs.................................. 57,170 348,208
Catalog costs....................................... 612,928 1,028,700
Master file and other items......................... 280,477 1,135,834
--------- ----------
Total............................................. 950,575 2,512,742
--------- ----------
Net deferred tax asset (liability)................ $(221,911) $ 218,061
========= ==========

F-21

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:

1995 1996 1997
--------- ---------- -----------

Federal statutory rate................... $ 165,000 $2,266,000 $ 3,578,000
State taxes, net of federal benefit...... 20,000 203,000 438,000
Nondeductible goodwill................... 43,000 143,000 543,000
Untaxed earnings of LLC.................. (326,000) (824,000) (1,678,000)
Untaxed earnings of S-Corporation........ 278,000 (425,000) (125,000)
Change in valuation allowance............ -- (370,000) --
Other.................................... (22,000) (8,000) 347,000
--------- ---------- -----------
Effective tax rate....................... $ 158,000 $ 985,000 $ 3,103,000
========= ========== ===========

The low effective tax rate for the six months ended August 1, 1998 is due
principally to the untaxed earnings of Smith & Noble and the equity in net
income of affiliates.

14. RELATED-PARTY TRANSACTIONS

Included in other assets is a $1,728,000 loan receivable due from Bruce A.
L. Willard, the beneficial owner of the minority interest in The Territory
Ahead. The promissory note is payable on March 31, 2002.

The Company provides fulfillment services to TravelSmith, an affiliate that
is accounted for on the equity method. The billing for these services, which
amounted to $471,000 and $1,387,000 in 1996 and 1997, respectively, is offset
against the Company's operating expenses. Accounts receivable include amounts
due from the affiliate of $127,000 and $186,000 at January 25, 1997 and
January 31, 1998, respectively.

The Company has a $1,734,000 note payable to the former owners of Garnet
Hill due in July 1998 with a 6.07% interest rate. The Company has a $573,831
note payable to the former owners of Frontgate due in September 1998. At
January 25, 1997, the balance of this note was $1,323,821. The note bears
interest of 8.75%. The Company has a $450,000 note payable to an affiliate of
a former stockholder of Ballard, due on demand, with interest at the prime
rate plus 1/2%.

15. RESTRUCTURING

In January 1998, the Company formalized plans to build a centralized phone
and distribution center. The Company recorded a fourth quarter charge of
$943,000, consisting of the reduction in the net carrying value of certain
equipment that will be sold or disposed, as it was determined to be impaired,
and for the lease termination costs. The impairment loss is measured as the
amount by which the carrying amount of the assets exceed its fair value. The
Company generally measures fair value by obtaining market rates. Considerable
management judgment is necessary to estimate market rates and, accordingly,
actual results could vary significantly from such estimates. The charge is
included in operating expenses in the consolidated statement of income for the
year ended January 31, 1998.

During the six months ended August 1, 1998, the Company finalized plans for
the termination of certain employees and incurred other incremental costs in
connection with the centralized phone and distribution center. The
restructuring charge for the six months ended August 1, 1998 consisted of:

Severance benefits........................................... $1,485,000
Consulting on new center warehouse management system......... 1,257,000
Additional provisions for expected losses on disposal of
assets and other............................................ 96,000
----------
$2,838,000
==========

F-22

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

16. COMPUTATION OF EARNINGS PER COMMON SHARE

The computation of earnings per common share and earnings per common share--
assuming dilution shown for both historical and pro forma results, for the
fiscal years ended January 27, 1996, January 25, 1997 and January 31, 1998 is
as follows:

JANUARY JANUARY 25, JANUARY 31, AUGUST 2, AUGUST 1,
27, 1996 1997 1998 1997 1998
---------- ----------- ------------ ---------- -----------

HISTORICAL EARNINGS PER
SHARE
Numerator:
Historical net
income............... $ 320,442 $ 6,069,655 $ 9,505,863 $4,982,593 $ 5,652,698
Deemed dividend of
redeemable
convertible preferred
stock................ -- -- (21,069,203) (3,718,453) --
Accretion of
redeemable
convertible preferred
stock................ (360,065) (1,308,685) (2,300,514) (938,512) (1,517,148)
---------- ----------- ------------ ---------- -----------
Numerator for earnings
per common share--
income available to
common stockholders.. (39,623) 4,760,970 (13,863,854) 325,628 4,135,550
Accretion of
redeemable
convertible preferred
stock................ -- 1,308,685 -- -- 1,517,148
---------- ----------- ------------ ---------- -----------
Numerator for earnings
per common share,
assuming dilution--
income available to
common stockholders.. $ (39,623) $ 6,069,655 $(13,863,854) $ 325,628 $ 5,652,698
========== =========== ============ ========== ===========
Denominator:
Weighted-average
shares............... 12,465,408 12,341,658 12,825,676 12,317,623 14,221,153
Tracking stock........ -- 756 45,360 90,720 --
---------- ----------- ------------ ---------- -----------
Denominator for
earnings per common
share--weighted-
average shares....... 12,465,408 12,342,414 12,871,036 12,408,343 14,221,153
Effect of dilutive
securities(1)
Incremental shares.... -- 665,578 -- -- 1,442,388
Convertible preferred
stock................ -- 6,713,406 -- -- 14,148,786
Tracking stock........ -- 67,284 -- -- --
---------- ----------- ------------ ---------- -----------
Denominator for
earnings per common
share assuming
dilution--adjusted
weighted-average
shares and assumed
conversions.......... 12,465,408 19,788,682 12,871,036 12,408,343 29,812,327
========== =========== ============ ========== ===========
Earnings per common
share.................. $(0.003) $0.39 $(1.08) $0.03 $0.29
========== =========== ============ ========== ===========
Earnings per common
share--assuming
dilution............... $(0.003) $0.31 $(1.08) $0.03 $0.19
========== =========== ============ ========== ===========

- --------

(1) The impact of dilutive securities have been excluded from the calculation
of earnings per common share, assuming dilution for the years ended
January 27, 1996 and January 31, 1998 and the six months ended August 2,
1997 as the impact is anti-dilutive.

F-23

CORNERSTONE BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY JANUARY 25, JANUARY 31, AUGUST 2, AUGUST 1,
27, 1996 1997 1998 1997 1998
---------- ----------- ------------ ---------- -----------

PRO FORMA EARNINGS PER
SHARE
Numerator:
Pro forma net
income(1)............ $ 264,029 $ 4,600,360 $ 7,380,768 $3,853,842 $ 4,006,691
Deemed dividend of
redeemable
convertible preferred
stock................ -- -- (21,069,203) (3,718,453) --
Accretion of
redeemable
convertible preferred
stock................ (360,065) (1,308,685) (2,300,514) (938,512) (1,517,148)
---------- ----------- ------------ ---------- -----------
Numerator for earnings
per common share--
income available to
common stockholders.. (96,036) 3,291,675 (15,988,949) (803,123) 2,489,543
Accretion of
redeemable
convertible preferred
stock(2)............. -- 1,308,685 -- -- 1,517,148
---------- ----------- ------------ ---------- -----------
Numerator for earnings
per common share,
assuming dilution--
income available to
common stockholders.. $ (96,036) $ 4,600,360 $(15,988,949) $ (803,123) $ 4,006,691
========== =========== ============ ========== ===========
Denominator:
Weighted-average
shares............... 12,465,408 12,341,658 12,825,676 12,317,623 14,221,153
Tracking stock........ -- 756 45,360 90,720 --
---------- ----------- ------------ ---------- -----------
Denominator for
earnings per common
share--weighted-
average shares....... 12,465,408 12,342,414 12,871,036 12,408,343 14,221,153
Effect of dilutive
securities:(2)
Incremental shares.... -- 665,578 -- -- 1,442,388
Convertible preferred
stock................ -- 6,713,406 -- -- 14,148,786
Tracking stock........ -- 67,284 -- -- --
---------- ----------- ------------ ---------- -----------
Denominator for
earnings per common
share assuming
dilution--adjusted
weighted-average
shares and assumed
conversions.......... 12,465,408 19,788,682 12,871,036 12,408,343 29,812,327
========== =========== ============ ========== ===========
Pro forma earnings per
common share........... $(0.01) $0.27 $(1.24) $(0.06) $0.18
========== =========== ============ ========== ===========
Pro forma earnings per
common share--assuming
dilution............... $(0.01) $0.23 $(1.24) $(0.06) $0.13
========== =========== ============ ========== ===========

- --------
(1) Pro forma earnings reflect provision for income taxes on previously
untaxed earnings of Ballard and Smith & Noble.

(2) The impact of dilutive securities have been excluded from the calculation
of earnings per common share, assuming dilution for the years ended
January 27, 1996 and January 31, 1998 and the six months ended August 2,
1997 as the impact is anti-dilutive.

F-24

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Stockholders
Garnet Hill, Inc.

We have audited the accompanying statements of income, and cash flows for
each of the three years in the period ended July 25, 1997. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Garnet
Hill, Inc. for each of the three years in the period ended July 25, 1997, in
conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts
September 12, 1997

F-25

GARNET HILL, INC.

STATEMENTS OF INCOME

YEAR ENDED
------------------------------------
JULY 29 JULY 26 JULY 25
1995 1996 1997
----------- ----------- -----------

Net sales................................ $33,292,753 $37,646,448 $45,394,585
Cost of goods sold....................... 18,152,189 19,300,793 23,394,949
----------- ----------- -----------
Gross profit............................. 15,140,564 18,345,655 21,999,636
Marketing expenses....................... 7,569,399 10,396,349 10,368,510
Other operating expenses................. 6,466,824 7,205,667 8,326,130
----------- ----------- -----------
Operating Income......................... 1,104,341 743,639 3,304,996
Other income (expense):
Interest income, net................... 126,345 198,619 250,724
Loss on disposal of equipment.......... (19,810) -- --
----------- ----------- -----------
Income before provision for income tax-
es...................................... 1,210,876 942,258 3,555,720
Provision for income taxes:
Federal................................ 385,000 318,000 1,148,500
State.................................. 75,000 74,000 250,500
----------- ----------- -----------
460,000 392,000 1,399,000
----------- ----------- -----------
Net income............................... $ 750,876 $ 550,258 $ 2,156,720
=========== =========== ===========

See accompanying notes.

F-26

GARNET HILL, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED
-------------------------------------
JULY 29 JULY 26 JULY 25
1995 1996 1997
----------- ----------- -----------

Operating activities
Net income............................ $ 750,876 $ 550,258 $ 2,156,720
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... 282,791 302,243 319,644
Deferred income taxes............... (1,000) (25,700) (206,000)
Loss on disposal of assets.......... 19,810 -- --
Changes in operating assets and lia-
bilities:
Inventory......................... 1,679,200 (1,526,985) (2,779,583)
Prepaid expenses and other as-
sets............................. (127,721) (460,687) (934,471)
Income taxes receivable........... (287,216) 278,068 46,092
Accounts payable and accrued ex-
penses........................... (358,856) (640,667) 3,108,714
Deferred revenue.................. (40,064) 33,689 10,799
Income taxes payable.............. -- -- 395,050
----------- ----------- -----------
Net cash provided (used) by operating
activities............................. 1,917,820 (1,489,781) 2,116,965
Investing activities
Purchases of property and equipment... (280,200) (108,861) (652,779)
Issuance of note receivable........... (20,200) -- (273,947)
Payments on note receivable........... 501,082 61,066 68,372
----------- ----------- -----------
Net cash provided (used) by investing
activities............................. 200,682 (47,795) (858,354)
Financing activities
Principal payments on obligation under
capital lease........................ (64,444) (71,588) (72,573)
Borrowings line of credit............. 5,670,000 830,000 680,000
Repayments on line of credit.......... (5,670,000) (830,000) (680,000)
----------- ----------- -----------
Net cash used by financing activities... (64,444) (71,588) (72,573)
----------- ----------- -----------
Net increase (decrease) in cash......... 2,054,058 (1,609,164) 1,186,038
Cash and cash equivalents at beginning
of year................................ 93,406 2,147,464 538,300
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 2,147,464 $ 538,300 $ 1,724,338
=========== =========== ===========
Supplemental disclosures of cash flow
information
Cash paid for:
Interest............................ $ 58,812 $ 24,990 $ 19,759
Income taxes........................ 503,514 208,000 1,159,631

See accompanying notes.

F-27

GARNET HILL, INC.

NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Garnet Hill, Inc. (the Company) is a catalog company that sells natural
fiber products throughout the United States. The Company has operated on a
52/53 week fiscal year. The years ended July 25, 1997, July 26, 1996 and July
29, 1995 each contained 52 weeks.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Use of Estimates

Inventory

Inventory which consists principally of goods available for sale, is valued
at the lower of cost or market. Cost has been determined using the weighted
average method.

Leasehold improvements and Equipment

Depreciation and amortization has been computed using both straight-line and
accelerated methods over the estimated useful lives of the related assets.
Estimated useful lives are as follows:

YEARS
------

Leasehold improvements........................................... 7-31.5
Equipment........................................................ 3-7

Revenue Recognition and Customer Returns

Revenue is recognized when products are shipped. The Company accrues for
estimated customer returns based on actual information and historical trends
in returns by customers.

Foreign Exchange Contracts

The Company has entered into certain forward foreign exchange contracts to
hedge against firm foreign currency obligations. The gains and losses on these
forward contracts are included in the measurement of the gain and losses of
the related foreign currency transaction.

Income Taxes

The Company provides deferred taxes for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and income tax purposes. The principal temporary differences are related to
inventory, customer returns, accrued liabilities and depreciation on
equipment.

F-28

GARNET HILL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2. DEFINED CONTRIBUTION PLAN

The Company established a 401(k) retirement plan as of August 1, 1993. The
plan covers substantially all full-time employees who have completed one year
of service and are at least 21 years old. Contributions to the plan are
through salary reductions, which are considered tax deferred. The Company
matches 25% of the employee's contributions up to an annual maximum of $500
per employee. The Company match amount was $33,491, $29,175 and $29,400 for
the three years ended July 25, 1997, July 26, 1996 and July 29, 1995,
respectively.

3. INCOME TAXES

The provision for income taxes for the years ended July 25, 1997, July 26,
1996 and July 29, 1995 is as follows:

1997 1996 1995
---------- -------- --------

Current...................................... $1,605,000 $417,700 $461,000
Deferred..................................... (206,000) (25,700) (1,000)
---------- -------- --------
$1,399,000 $392,000 $460,000
========== ======== ========

Reconciliation of the U.S. Federal statutory income tax rate to the
effective income tax rate for the years ended July 25, 1997, July 26, 1996 and
July 29, 1995 is as follows:

1997 1996 1995
--------------- ------------- --------------

U.S. Federal statutory
income tax expense........ $1,208,945 34.0% $320,368 34.0% $411,698 34.0%
State income taxes, net of
federal income tax
benefit................... 165,330 4.6 48,840 5.2 49,500 4.1
Other...................... 24,725 .7 22,792 2.4 (1,198) (.1)
---------- ---- -------- ---- -------- ----
$1,399,000 39.3% $392,000 41.6% $460,000 38.0%
========== ==== ======== ==== ======== ====

4. COMMITMENTS AND CONTINGENT LIABILITIES

As of July 25, 1997, The Company leased its primary facilities under two
operating leases from two real estate companies controlled by officers of the
Company. The first lease expires August 31, 1999 and includes two five-year
renewal options. The second lease expires June 30, 1998 and also includes two
five-year renewal options. Rent expense under the two properties was $524,320,
$503,120 and $523,684 for the three years ended July 25, 1997, July 26, 1996
and July 29, 1995, respectively.

The Company was also obligated under operating leases for certain equipment
through July 2000.

Future minimum lease payments under all noncancelable operating leases at
July 25, 1997 are as follows:

1998............................................................. $615,829
1999............................................................. 595,204
2000............................................................. 96,320

F-29

GARNET HILL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

5. SUBSEQUENT EVENTS

On July 28, 1997, the stockholders of the Company sold all outstanding
shares of common stock to a subsidiary of Cornerstone Brands, Inc.
("Cornerstone") for cash and common stock of Cornerstone. As a result of this
transaction, the Company is now a wholly-owned subsidiary of Cornerstone.
Also, as part of this transaction, notes receivable from the related party
were settled, the real estate and facilities owned by the related party were
transferred to the Company and the Company assumed certain debt related to the
real estate.

F-30

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
Cornerstone Brands, Inc.

We have audited the statements of income and of cash flows of Cinmar L.P.
(the Partnership) for the period from January 1, 1995 to September 12, 1995.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Cinmar
L.P. for the period from January 1, 1995 to September 12, 1995, in conformity
with generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts
June 20, 1998

F-31

CINMAR L.P.

STATEMENT OF INCOME

PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 12, 1995

Net sales.......................................................... $21,876,146
Cost of sales...................................................... 10,873,759
-----------
Gross profit....................................................... 11,002,387
Operating expenses:
Selling, catalog and fullfillment................................ 8,751,227
General and administrative....................................... 1,400,440
Depreciation..................................................... 179,000
-----------
Total operating expenses........................................... 10,330,667
Operating income................................................... 671,720
Interest expense................................................... 157,198
-----------
Net income......................................................... $ 514,522
===========

See accompanying notes.

F-32

CINMAR L.P.

STATEMENT OF CASH FLOWS

PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 12, 1995

Cash flows from operating activities
Net income....................................................... $ 514,522
Depreciation..................................................... 179,000
Changes in working capital:
Accounts receivable............................................ (80,327)
Inventory...................................................... 295,954
Prepaid expenses and other..................................... (234,894)
Accounts payable............................................... (29,566)
Accrued liabilities and other, net............................. (46,958)
-----------
Net cash provided by operating activities.......................... 597,731
-----------
Cash flows from investing activities
Property and equipment purchases, net............................ (788,890)
-----------
Net cash used in investing activities.............................. (788,890)
-----------
Cash flows from financing activities
Borrowings under line of credit.................................. 455,000
Borrowings under long-term obligations, net...................... 827,674
Distributions to partners........................................ (1,284,961)
-----------
Net cash used in financing activities.............................. (2,287)
-----------
Net decrease in cash............................................... (193,446)
Cash at beginning of the period.................................... 193,446
-----------
Cash at end of the period.......................................... $ --
===========

See accompanying notes.

F-33

CINMAR L.P.

NOTES TO STATEMENTS OF INCOME AND CASH FLOWS

1. ORGANIZATION

Cinmar L.P. (the Partnership) was formed in September 1991, under the
Uniform Limited Partnership Act of the State of Delaware. Upon commencing
operations, the Partnership assumed the operating results of Cinmar, Inc. (an
Ohio corporation). Cinmar, Inc. was the general partner of the Partnership.

The Partnership is a direct merchant of high quality home and specialty
products offered through catalog mailings throughout the United States.

On September 12, 1995, the assets and liabilities of the Partnership were
acquired by a subsidiary of Cornerstone Brands, Inc. (Cornerstone).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Revenue Recognition

Sales are recorded when products are shipped.

Depreciation Expense

Depreciation is determined using accelerated methods over the following
useful lives:

Building....................................................... 31.5 years
Furniture and Equipment........................................ 5-7 years

Income Taxes

For income tax purposes, the profit/loss of the Partnership was allocated to
the Partners. Accordingly, no provision for income taxes has been reflected in
the accompanying financial statements.

Inventories

Inventories, which consist primarily of goods available for sale, are stated
at the lower of cost, determined on a first-in, first-out (FIFO) method, or
market.

3. LEASE EXPENSE

The Partnership leased certain office equipment and aircraft use under
operating lease agreements. Lease expense for the period from January 1, 1995
to September 12, 1995 was approximately $22,000.

4. ADVERTISING EXPENSE

Costs associated with the production and mailing of the Partnership's direct
mail catalogs (advertising expense) are amortized over the estimated periods
in which the related revenues are generated, generally three months or less.
Advertising expense for the period from January 1, 1995 to September 12, 1995
was approximately $7,550,000.

F-34

CORNERSTONE BRANDS, INC.

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The following Unaudited Pro Forma Financial Statements consist of unaudited
Pro Forma Combined Statements of Operations for the year ended January 31,
1998 and the six months ended August 2, 1997 and an unaudited Pro Forma
Consolidated Balance Sheet as of August 1, 1998.

The Unaudited Pro Forma Combined Statements of Operations give effect to the
Company's acquisitions of (i) 80% of the outstanding shares of The Territory
Ahead, Inc. ("Territory Ahead") on March 31, 1997, (ii) 100% of the
outstanding shares of Garnet Hill, Inc. ("Garnet Hill") on July 28, 1997 and
(iii) a 51% ownership interest in Whispering Pines LLC ("Whispering Pines") on
September 4, 1997. Territory Ahead, Garnet Hill and Whispering Pines are
referred collectively as the "Acquired Companies." Each of these acquisitions
was accounted for using the purchase method of accounting.

The Unaudited Pro Forma Consolidated Balance Sheet as of August 1, 1998
reflects the offering and the application of the net proceeds therefrom,
including the repayment of certain indebtedness, and the conversion of the
convertible preferred stock into common stock, as if such transactions had
occurred on August 1, 1998.

The Unaudited Pro Forma Financial Statements may not be indicative of the
results that would have been obtained if the transactions reflected therein
had occurred on the dates indicated or which may be realized in the future.
The Unaudited Pro Forma Financial Statements should be read in conjunction
with the Consolidated Financial Statements of the Company included elsewhere
in this Prospectus.

PF-1

CORNERSTONE BRANDS, INC.

UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED JANUARY 31, 1998

RESULTS OF ACQUIRED
COMPANIES PRIOR TO ACQUISITION
HISTORICAL(A) ACQUISITION(D) ADJUSTMENTS PRO FORMA
------------- ------------------- ----------- ------------

Net Sales............... $216,334,704 $23,794,472 $240,129,176
Cost of sales........... 112,250,872 12,406,375 124,657,247
------------ ----------- --------- ------------
Gross profit............ 104,083,832 11,388,097 115,471,929
------------ ----------- --------- ------------
Operating expenses:
Selling catalog and
fulfillment ex-
penses............... 73,249,119 9,116,587 82,365,706
General and adminis-
trative.............. 15,636,186 2,244,788 17,880,974
Amortization and de-
preciation........... 3,522,884 $774,541 (C) 4,297,425
Restructuring charge.. 943,000 943,000
------------ ----------- --------- ------------
Total operating
expenses............... 93,351,189 11,361,375 774,541 105,487,105
------------ ----------- --------- ------------
Operating income........ 10,732,643 26,722 (774,541) 9,984,824
Investment income (ex-
pense), net............ (207,883) 135,354 (72,529)
------------ ----------- --------- ------------
Income before equity in
net income (loss) of
affiliates, minority
interest and income
taxes.................. 10,524,760 162,076 (774,541) 9,912,295
Income taxes............ 3,103,038 (130,630) 2,972,408
------------ ----------- --------- ------------
Income before equity in
net income (loss) of
affiliate and minority
interest............... 7,421,722 292,706 (774,541) 6,939,887
Equity in net income
(loss) of affiliate ... 1,808,942 1,808,942
Minority interest....... 275,199 275,199
------------ ----------- --------- ------------
Net income.............. 9,505,863 292,706 (774,541) 9,024,028
Deemed dividend of re-
deemable convertible
preferred stock........ (21,069,203) (21,069,203)
Accretion of redeemable
convertible preferred
stock.................. (2,300,514) (2,300,514)
------------ ----------- --------- ------------
Net income (loss) appli-
cable to common stock.. $(13,863,854) $ 292,706 $(774,541) $(14,345,689)
============ =========== ========= ============
Net income (loss) per
share of common stock.. $ (1.08) $ (1.08)(D)
============ ============
Net income (loss) per
share of common stock
assuming dilution...... $ (1.08) $ (1.08)(D)
============ ============
Pro forma:
Historical net in-
come................. $ 9,505,863 $ 9,024,028
Provision for income
taxes on previously
untaxed earnings of
pooled S-Corpora-
tion................. 151,551 151,551
Provision for income
taxes on previously
untaxed earnings of
pooled limited lia-
bility company....... 1,973,544 1,973,544
------------ ------------
Pro forma net income.. $ 7,380,768 $ 6,898,933
============ ============
Pro forma net income
per common share..... $ (1.24) $ (1.24)(D)
============ ============
Pro forma net income
per common share, as-
suming dilution...... $ (1.24) $ (1.24)(D)
============ ============

See accompanying notes.

PF-2

CORNERSTONE BRANDS, INC.

UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED AUGUST 2, 1997

RESULTS OF ACQUIRED
COMPANIES PRIOR TO ACQUISITION
HISTORICAL(A) ACQUISITION(B) ADJUSTMENTS PRO FORMA
------------- ------------------- ----------- -----------

Net sales............... $80,807,393 $23,794,472 104,601,865
Cost of sales........... 42,409,598 12,406,375 54,815,973
----------- ----------- ---------- -----------
Gross profit............ 38,397,795 11,388,097 49,785,892
----------- ----------- ---------- -----------
Operating expenses:
Selling, catalog and
fulfillment
expenses............. 25,872,609 9,116,587 34,989,196
General and
administrative....... 5,570,637 2,244,788 7,815,425
Amortization and
depreciation......... 1,403,794 $ 774,541 (C) 2,178,335
----------- ----------- ---------- -----------
Total operating ex-
penses............. 32,847,040 11,361,375 774,541 44,982,956
----------- ----------- ---------- -----------
Operation income........ 5,550,755 26,722 (774,541) 4,802,936
Investment income
(expense), net......... 78,588 134,851 213,439
----------- ----------- ---------- -----------
Income before equity in
net income (loss) of
affiliates, minority
interest and income
taxes.................. 5,629,343 161,573 (774,541) 5,016,375
Income taxes............ 1,723,632 (130,630) 1,593,002
----------- ----------- ---------- -----------
Income before equity in
net income (loss) of
affiliate and minority
interest............... 3,905,711 292,203 (774,541) 3,423,373
Equity in net income
(loss) of affiliate.... 995,000 995,000
Minority interest....... 81,882 81,882
----------- ----------- ---------- -----------
Net income.............. 4,982,593 292,203 (774,541) 4,500,255
Deemed dividend of
redeemable convertible
preferred stock........ (3,718,453) (3,718,453)
Accretion of redeemable
convertible preferred
stock.................. (938,512) (938,512)
----------- ----------- ---------- -----------
Net income (loss)
applicable to common
stock.................. $ 325,628 $ 292,203 $ (774,541) $ (156,710)
=========== =========== ========== ===========
Net income (loss) per
share of common stock.. $ 0.03 $ (0.01)(D)
=========== ===========
Net income (loss) per
share of common stock,
assuming dilution...... $ 0.03 $ (0.01)(D)
=========== ===========
Pro forma:
Historical net
income............... $ 4,982,593 $ 4,500,255
Provision for income
taxes on previously
untaxed earnings of
pooled S-
Corporation.......... 151,551 151,551
Provision for income
taxes on previously
untaxed earnings of
pooled limited
liability company.... 977,200 977,200
----------- -----------
Pro forma net income.. $ 3,853,842 $ 3,371,504
=========== ===========
Pro forma net income
per common share..... $ (0.06) $ (0.10)(D)
=========== ===========
Pro forma net income
per common share,
assuming dilution.... $ (0.06) $ (0.10)(D)
=========== ===========

See accompanying notes.

PF-3

CORNERSTONE BRANDS, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AUGUST 1, 1998

PRO FORMA OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS(E) PRO FORMA ADJUSTMENTS AS ADJUSTED
------------ -------------- ------------ ----------- -----------

Assets
Current assets:
Cash and cash
equivalents.......... $ 2,014,326 $ 2,014,326 $ --
Investments........... 2,403,334 2,403,334
Accounts receivable... 4,682,432 4,682,432
Inventory............. 34,702,768 34,702,768
Deferred income
taxes................ 2,518,643 2,518,643
Prepaid expenses and
other current
assets............... 12,102,192 12,102,192
------------ ------------ ----
Total current assets.... 58,423,695 58,423,695
Property and equipment,
net.................... 19,799,078 19,799,078
Investment in
affiliate.............. 6,050,187 6,050,187
Goodwill................ 59,136,375 59,136,375
Deferred income taxes... -- --
Other assets............ 5,904,881 5,904,881
------------ ------------ ----
Total assets............ $149,314,216 $149,314,216
============ ============ ====
Liabilities and
stockholders' equity
Current liabilities:
Borrowings under line
of credit............ $ 30,235,000 $ 30,235,000
Accounts payable...... 16,722,813 16,722,813
Accrued expenses and
other current
liabilities.......... 9,628,915 9,628,915
Payable to related
parties.............. 573,821 573,821
Deferred income
taxes................ -- --
Debt and capital
losses maturing
within one year...... 75,000 75,000
------------ ------------ ----
Total current liabili-
ties................... 57,235,549 57,235,549
Long term debt and
capital leases......... 313,364 313,364
Deferred income taxes... 735,781 735,781
Payable to related
parties, less current
portion................ -- --
Minority interest....... 275,042 275,042
Commitments of
contingencies
Redeemable convertible
preferred stock:
Series A, $0.01 par
value, 56,500 shares
authorized, 16,385
issued and outstanding
(actual) and 0 shares
issued and outstanding
(pro forma and pro
forma as adjusted)..... 60,332,299 $(60,332,299) --
Stockholders' equity:
Series B convertible
preferred stock, $0.01
par value, 9,000 shares
authorized; 7,242
issued and outstanding
(actual) and 0 shares
issued and outstanding
(pro forma and pro
forma as adjusted)..... 72 (72) --
Series C convertible
preferred stock, $0.01
par value, 2,250 shares
authorized; 750 issued
and outstanding
(actual) and 0 shares
issued and outstanding
(pro forma and pro
forma as adjusted)..... 8 (8) --
Common stock, $0.001 par
value, 28,499,400
shares authorized;
14,619,266 issued and
outstanding (actual),
28,768,071 issued and
outstanding (pro forma)
and issued and
outstanding pro forma
as adjusted)........... 14,619 14,148 28,767 $ --
Additional paid-in
capital................ 42,968,350 60,318,231 103,286,581 --
Retained earnings....... (12,589,582) (12,589,582)
Unrealized gains on
available for sale
securities............. 29,044 29,044
Less; treasury stock-
330,000 shares......... (330) (330)
------------ ------------ ----
Total stockholders' eq-
uity................... 30,422,181 30,422,181
------------ ------------ ----
Total liabilities and
stockholders' equity... $149,314,216 $149,314,216
============ ============ ====

See accompanying notes.

PF-4

CORNERSTONE BRANDS, INC.

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

(A) Represents the historical consolidated statement of operations for the
year ended January 31, 1998 and for the six months ended August 2, 1997.

(B) Represents historical statements of operations of Garnet Hill for the six
months ended July 28, 1997 and the historical statements of operations of
Territory Ahead for the period from February 1, 1997 to March 31, 1997.
The operations of Whispering Pines prior to September 4, 1997 were not
significant.

(C) Reflects the adjustments to amortization expense to reflect the allocation
of the purchase price of Garnet Hill and Territory Ahead, in each case
using 4 years for amounts allocated to customer master file and 40 years
for goodwill.

(D) Reflects the issuance of 750,000 shares of common stock in connection with
the Garnet Hill acquisition.

(E) Reflects the conversion of the preferred stock into common stock. The
Series A preferred stock and B preferred stock was converted into common
stock on August 25, 1998, and the Series C preferred stock was converted
into common stock on September 7, 1998.

PF-5

[The inside of the back cover of the Prospectus reproduces on a larger scale
certain of the photographs from the inside of the front cover "gate-fold" and
labels each with the appropriate Cornerstone company's name. Clockwise from
top left: a photograph of a dining table with four chairs from the Ballard
Designs catalog; a photograph of a jacket from the The Territory Ahead
catalog; a photograph of a lamp and coffee mugs from the Whispering Pines
catalog; a photograph of draperies from the Smith+Noble catalog; a photograph
of outdoor dining furniture from the Frontgate catalog; a photograph of a bed
with linens from the Garnet Hill catalog; and a photograph of a woman at the
helm of a sailboat from the TravelSmith catalog.]

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with this offering and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company, any Selling Stockholder or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct
as of any time subsequent to the date hereof or that there has been no change
in the affairs of the Company since such date.

--------------------

TABLE OF CONTENTS

--------------------

Page
----

Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 33
Management............................................................... 52
Certain Transactions..................................................... 58
Principal and Selling Stockholders....................................... 62
Description of Capital Stock............................................. 65
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 70
Legal Matters............................................................ 71
Experts.................................................................. 72
Additional Information................................................... 72
Index to Consolidated Financial Statements............................... F-1

--------------------

Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

CORNERSTONE BRANDS, INC.

COMMON STOCK

----------------

PROSPECTUS

----------------

NationsBanc Montgomery Securities LLC

Goldman, Sachs & Co.

Merrill Lynch & Co.

, 1998

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.

SEC registration fee................................................. $ *
NASD filing fee...................................................... *
NYSE listing fee..................................................... *
Blue Sky fees and expenses........................................... *
Transfer agent and registrar fees.................................... *
Accounting fees and expenses......................................... *
Legal fees and expenses.............................................. *
Director and officer liability insurance............................. *
Printing and mailing expenses........................................ *
Miscellaneous........................................................ *
-----
Total............................................................ $ *
=====

- --------
* to be completed by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article SEVENTH of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable to stockholders for any
monetary damages for any breach of fiduciary duty as a director, except to the
extent that the Delaware General Corporation Law prohibits the elimination or
limitation of liability of directors for breach of fiduciary duty.

Article EIGHTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any
litigation or other legal proceeding (other than an action by or in the right
of the Registrant) brought against him by virtue of his position as a director
or officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the Registrant, except that no indemnification shall be made with respect
to any matter as to which such person shall have been adjudged to be liable to
the Registrant, unless a court determines that, despite such adjudication but
in view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.

Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the

II-1

director or officer did not meet the applicable standard of conduct required
for indemnification, or if the Registrant fails to make an indemnification
payment within 60 days after such payment is claimed by such person, such
person is permitted to petition the court to make an independent determination
as to whether such person is entitled to indemnification. As a condition
precedent to the right of indemnification, the director or officer must give
the Registrant notice of the action for which indemnity is sought and the
Registrant has the right to participate in such action or assume the defense
thereof.

Article EIGHTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive,
and provides that in the event that the Delaware General Corporation Law is
amended to expand the indemnification permitted to directors or officers the
Registrant must indemnify those persons to the fullest extent permitted by
such law as so amended.

Section 145 of the Delaware General Corporation Law provides a detailed
statutory framework covering indemnification of directors and officers of
liabilities and expenses arising out of legal proceedings brought against them
by reason of their status or service as directors or officers. This section
provides that a director or officer of a corporation (i) shall be indemnified
by the corporation for all expenses of such legal proceedings when he is
successful on the merits, (ii) may be indemnified by the corporation for the
expenses, judgments, fines and amounts paid in settlement of such proceedings
(other than a derivative suit), even if he is not successful on the merits, if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation (and, in the case of a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful), and (iii) may be indemnified by the corporation for expenses of a
derivative suit (a suit by a shareholder alleging a breach by a director or
officer of a duty owed to the corporation), even if he is not successful on
the merits, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation. No
indemnification may be made under clause (iii) above, however, if the director
or officer is adjudged liable for negligence or misconduct in the performance
of his duties to the corporation, unless a court determines that, despite such
adjudication and in view of all of the circumstances, he is entitled to
indemnification. The indemnification described in clauses (ii) and (iii) above
may be made only upon a determination that indemnification is proper because
the applicable standard of conduct has been met. Such a determination may be
made by a majority of a quorum of disinterested directors, independent legal
counsel or the stockholders. The board of directors may authorize advancing
litigation expenses to a director or officer upon receipt of an undertaking by
such director or officer to repay such expenses if it is ultimately determined
that he is not entitled to be indemnified for them.

As permitted by Section 145, the Company has purchased a general liability
insurance policy which covers certain liabilities of directors and officers of
the Company arising out of claims based on acts or omissions in their capacity
as directors or officers and for which they are not indemnified by the
Company.

Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed
as Exhibit 1.1 hereto.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information is furnished with regard to all securities sold by
the Registrant since September 30, 1995 which were not registered under the
Securities Act.

(a) Issuance of Capital Stock

(i) Common Stock

On July 28, 1997, the Company issued an aggregate of 750,000 shares of its
Common Stock to two former stockholders of Garnet Hill as partial
consideration for its purchase of all the outstanding stock of Garnet Hill.
The shares were valued at a price of $8.00 per share for purposes of
allocating the purchase price of the acquisition. The Company received
representations from these individuals as to their sophistication as investors
and as to their investment intent in connection with the acquisition
transaction and issued the securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.

II-2

On August 13, 1997, the Company issued 2,216,667 shares of its Common Stock
to four former stockholders of Ballard Designs in connection with the
acquisition of Ballard Designs by stock merger. The Company received
representations from these individuals as to their sophistication as investors
and as to their investment intent in connection with the merger transaction
and issued the securities in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.

In October of 1997, the Company issued an aggregate of 1,762 shares of its
Common Stock to five former stockholders of Frontgate in lieu of fractional
shares of its Series B Convertible Preferred Stock in connection with the
conversion into Series B Convertible Preferred Stock of certain shares of its
Series C Convertible Preferred Stock that were issued to them in connection
with the Company's acquisition of Frontgate. The Company received
representations from these individuals as to their sophistication as investors
in connection with the acquisition transaction and issued the securities in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act.

On January 12, 1998, the Company issued an aggregate of 1,050,000 shares of
its Common Stock and paid an aggregate of $6,300,000 to four former
stockholders of Frontgate in exchange for certain securities previously issued
to such stockholders by the Company in connection with the acquisition of
Frontgate. The Company received representations from these individuals as to
their sophistication as investors and as to their investment intent in
connection with the acquisition transaction and issued the securities in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act.

On May 19, 1998, the Company issued 25,000 shares of its Common Stock to
Nicolas A. Kensington for an aggregate purchase price of $250 upon the
exercise of a warrant granted in June 1995. Mr. Kensington was Secretary of
the Company and through its relationship with Mr. Kensington the Company had
acquired a reasonable basis for concluding that Mr. Kensington was a
sophisticated investor. The securities were issued in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act.

On July 6, 1998, the Company issued 55,555 shares of its Common Stock to
John Walter for an aggregate purchase price of $500,000. The Company received
representations from Mr. Walter as to his sophistication as an investor and as
to his investment intent in connection with the sale of the securities and
issued the securities in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.

On August 25, 1998, the Company issued 4,166,111 shares of its Common Stock
to two former members of Smith+Noble as consideration for its acquisition of
all the outstanding equity interests of Smith+Noble. The Company received
representations from these individuals as to their sophistication as investors
and as to their investment intent in connection with the acquisition
transaction and issued the securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.

On September 15, 1998, the Company (i) issued to Boston Capital Ventures II,
L.P. 46,040 shares of its Common Stock for an aggregate purchase price of
$460.40 upon exercise of a warrant issued in June 1995 and 11,510 shares of
its Common Stock for an aggregate purchase price of $11,510 upon exercise of
an option granted in September 1995 and (ii) issued to Boston Capital Ventures
III, L.P. 33,960 shares of its Common Stock for an aggregate purchase price of
$339.60 upon exercise of a warrant issued in June 1995 and 8,490 shares of its
Common Stock for an aggregate purchase price of $8,490 upon exercise of an
option granted in September 1995. The Company received representations from
Boston Capital Ventures II, L.P. and Boston Capital Ventures III, L.P. as to
their sophistication as investors in connection with the formation of the
Company and issued the securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.

On September 16, 1998, the Company issued 4,000 shares of its Common Stock
to Nicholas F. Kourtis for an aggregate purchase price of $40 upon exercise of
a warrant originally issued to Nicolas A. Kensington in June 1995 and
subsequently transferred to Mr. Kourtis, a law partner of Mr. Kensington. Mr.
Kourtis had served as one the Company's legal advisors and through its
relationship with Mr. Kourtis the Company had acquired a

II-3

reasonable basis for concluding that Mr. Kourtis was a sophisticated investor.
The securities were issued in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act.

On September 16, 1998, the Company issued 200,000 shares of its Common Stock
to Bruce Willard for an aggregate purchase price of $300,000 upon exercise of
a warrant issued in March 1997. The Company received representations from Mr.
Willard as to his sophistication as an investor and as to his investment
intent in connection with this transaction and issued the securities in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act.

On October 8, 1998, the Company issued 17,647 shares of its Common Stock to
Cabin Life Studios, Inc. in partial payment of the purchase price for the
acquisition of an additional 29% interest in Whispering Pines. The Company
received representations from Cabin Life Studios, Inc. as to its
sophistication as an investor and as to its investment intent in connection
with this transaction and issued the securities in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act.

(ii) Series A-1 Convertible Preferred Stock

On January 31, 1996, pursuant to commitments entered into in September 1995,
the Company issued 2,000 shares of its Series A-1 Preferred Stock (convertible
into 439,560 shares of Common Stock) to Madison Dearborn Capital Partners,
L.P. for an aggregate purchase price of $2,000,000 in connection with a
private placement transaction.

On March 20, 1997, pursuant to commitments entered into in September 1995,
the Company issued 7,000 shares of its Series A-1 Preferred Stock (convertible
into 1,538,461 shares of Common Stock) to Madison Dearborn Capital Partners,
L.P. for an aggregate purchase price of $7,000,000 in connection with a
private placement transaction.

On August 18, 1997, pursuant to commitments entered into in September 1995,
the Company issued 7,000 shares of its Series A-1 Preferred Stock (convertible
into 1,538,462 shares of Common Stock) to Madison Dearborn Capital Partners,
L.P. for an aggregate purchase price of $7,000,000 in connection with a
private placement transaction.

On October 16, 1997, pursuant to commitments entered into in September 1995,
the Company issued 7,000 shares of its Series A-1 Preferred Stock (convertible
into 1,538,462 shares of Common Stock) to Madison Dearborn Capital Partners,
L.P. for an aggregate purchase price of $7,000,000 in connection with a
private placement transaction.

The Company received representations from Madison Dearborn Capital Partners,
L.P. as to its investment intent in connection with the transactions referred
to above and issued such securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.

(iii) Series A-2 Convertible Preferred Stock

On November 15, 1995, the Company issued 8,000 shares of its Series A-2
Convertible Preferred Stock (convertible into 1,758,242 shares of Common
Stock) to Chase Venture Capital Associates for an aggregate purchase price of
$8,000,000 in connection with a private placement transaction.

On March 20, 1997, pursuant to commitments entered into in November 1995,
the Company issued 4,000 shares of its Series A-2 Preferred Stock (convertible
into 879,120 shares of Common Stock) to Chase Venture Capital Associates, L.P.
for an aggregate purchase price of $4,000,000 in connection with a private
placement transaction.

On August 18, 1997, pursuant to commitments entered into in November 1995,
the Company issued 4,000 shares of its Series A-2 Preferred Stock (convertible
into 879,121 shares of Common Stock) to Chase Venture

II-4

Capital Associates, L.P. for an aggregate purchase price of $4,000,000 in
connection with a private placement transaction.

On October 16, 1997, pursuant to commitments entered into in November 1995,
the Company issued 4,000 shares of its Series A-2 Preferred Stock (convertible
into 879,121 shares of Common Stock) to Chase Venture Capital Associates, L.P.
for an aggregate purchase price of $4,000,000 in connection with a private
placement transaction.

The Company received representations from Chase Venture Capital Associates,
L.P. as to its investment intent in connection with the transactions referred
to above and issued such securities in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.

(iv) Series A-3 Convertible Preferred Stock

On January 31, 1996, the Company issued an aggregate of 554 shares of its
Series A-3 Preferred Stock (convertible into an aggregate of 121,757 shares of
Common Stock) to five professional investors for an aggregate purchase price
of $554,000 in connection with a private placement transaction.

On March 20, 1997, pursuant to commitments entered into in January 1996, the
Company issued an aggregate of 277 shares of its Series A-3 Preferred Stock
(convertible into an aggregate of 60,880 shares of Common Stock) to the same
five professional investors for an aggregate purchase price of $277,000 in
connection with a private placement transaction.

On August 18, 1997, pursuant to commitments entered into in January 1996,
the Company issued an aggregate of 277 shares of its Series A-3 Preferred
Stock (convertible into an aggregate of 60,880 shares of Common Stock) to the
same five professional investors for an aggregate purchase price of $277,000
in connection with a private placement transaction.

On October 16, 1997, pursuant to commitments entered into in January 1996,
the Company issued an aggregate of 277 shares of its Series A-3 Preferred
Stock (convertible into an aggregate of 60,878 shares of Common Stock) to the
same five professional investors for an aggregate purchase price of $277,000
in connection with a private placement transaction.

The Company received representations from each of such investors as to their
investment intent in connection with such private placement transactions and
issued such securities in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.

(b) Certain Issuances of Warrants

On March 31, 1997, the Company issued a warrant to purchase 200,000 shares
of its Common Stock at an exercise price of $1.50 per share to Bruce A. L.
Willard as part of the acquisition of The Territory Ahead. The Company had
acquired a reasonable basis for concluding that Mr. Willard was a
sophisticated investor during the course of its dealings with Mr. Willard. The
securities were issued in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act.

No underwriters were involved in the foregoing sales of securities. All
stock certificates issued in connection with the foregoing sales of capital
stock were issued with a legend indicating the securities represented thereby
were restricted securities under the Securities Act.

II-5

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

EXHIBIT NO. DESCRIPTION
----------- -----------

1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization dated as of August 25, 1998
by and among the Registrant, Smith+Noble LLC, the Members of
Smith+Noble LLC and certain other parties named therein.
3.1* Certificate of Incorporation of the Registrant, as amended.
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant, to be filed prior to the effectiveness of this
Registration Statement.
3.3 Restated Certificate of Incorporation of the Registrant, to be
filed immediately following this offering.
3.4 By-Laws of the Registrant.
4.1 Specimen certificate for shares of Common Stock.
5.1** Opinion of Hale and Dorr LLP.
10.1* 1995 Stock Option Plan, as amended.
10.2 1998 Stock Incentive Plan.
10.3 1998 Director Stock Option Plan.
10.4* Executive Agreement dated August 1, 1995 between The Cornerstone
Brands Group, Inc. (the "Brands Group") and William T. End.
10.5* Amendment dated February 28, 1998 to Executive Agreement dated
August 1, 1995 between the Brands Group and William T. End.
10.6* Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and William T. End.
10.7* Executive Agreement dated August 1, 1995 between the Brands Group
and Donald J. Steiner.
10.8* Amendment dated February 28, 1998 to Executive Agreement dated
August 1, 1995 between the Brands Group and Donald J. Steiner.
10.9* Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and Donald J. Steiner.
10.10* Executive Agreement dated August 1, 1995 between the Brands Group
and Mark Fasold.
10.11* Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and Mark Fasold.
10.12* Executive Agreement dated September 13, 1995 between the Brands
Group and John A. O'Steen.
10.13* Noncompetition and Nondisclosure Agreement dated September 13,
1995 between the Brands Group and John A. O'Steen.
10.14* Executive Agreement dated September 13, 1995 between the Brands
Group and Paul D. Tarvin.
10.15* Noncompetition and Nondisclosure Agreement dated September 13,
1995 between the Brands Group and Paul D. Tarvin.
10.16 Amended and Restated Registration Agreement among the Registrant
and certain stockholders of the Registrant named therein.
10.17* Common Stock Purchase Agreement dated as of June 30, 1996 among
TravelSmith Outfitters, Inc., Charles L. Slaughter, Scott Sklar
and the Registrant.
10.18* Stockholder Rights Agreement dated as of July 17, 1996 among
TravelSmith Outfitters, Inc., Charles L. Slaughter, Scott Sklar,
Robert James Slaughter and the Brands Group.

II-6

EXHIBIT NO. DESCRIPTION
----------- -----------

10.19 Third Amended and Restated Loan Agreement dated August 24, 1998,
as amended, among Fleet National Bank, as agent and a Lender,
certain other Lenders named therein, the Registrant and the Brands
Group.
10.20* Limited Liability Company Agreement dated as of September 4, 1997
between the Brands Group and Cabin Life Studios, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of BDO Seidman, LLP.
23.4** Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1* Power of Attorney.
27* Financial Data Schedule.

- --------

* Previously filed.

**To be filed by amendment.

(B) FINANCIAL STATEMENT SCHEDULES

Schedule II -- Valuation and Qualifying Accounts is included.

All other schedules have been omitted because they are not required or
because the required information is given in the Registrant's Consolidated
Financial Statements or Notes thereto.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation of the Registrant and the laws of the State of Delaware, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-7

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN PORTLAND, MAINE, ON
THIS 28TH DAY OF OCTOBER, 1998.

Cornerstone Brands, Inc.

/s/ William T. End
By:__________________________________
WILLIAM T. END
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AS OF THIS 28TH DAY OF OCTOBER, 1998.

SIGNATURE TITLE
--------- -----

/s/ William T. End Chief Executive Officer and
___________________________________________ Chairman of the Board
WILLIAM T. END (Principal Executive
Officer)

Mark Fasold * Executive Vice President and
___________________________________________ Chief Financial Officer
MARK FASOLD (Principal Financial and
Accounting Officer)

Benjamin D. Chereskin* Director
___________________________________________
BENJAMIN D. CHERESKIN

William J. Hunckler, III* Director
___________________________________________
WILLIAM J. HUNCKLER, III

Stephen P. Murray* Director
___________________________________________
STEPHEN P. MURRAY

John A. O'Steen* Director
___________________________________________
JOHN A. O'STEEN

Donald J. Steiner* Director
___________________________________________
DONALD J. STEINER

Thomas G. Stemberg* Director
___________________________________________
THOMAS G. STEMBERG

II-8

SIGNATURE TITLE
--------- -----

H.J. von der Goltz* Director
___________________________________________
H.J. VON DER GOLTZ

John Walter* Director
___________________________________________
JOHN WALTER

/s/ William T. End

*By:____________________________

WILLIAM T. END
ATTORNEY-IN-FACT

II-9

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

CORNERSTONE BRANDS, INC.

JANUARY 31, 1998

BALANCE AT BEGINNING CHARGED TO COSTS BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES DEDUCTIONS OF PERIOD
- ----------- -------------------- ---------------- ---------- --------------

Year Ended January 31,
1998:
Deducted from assets
accounts:
Reserve for inventory
obsolescence........... $496,000 $1,739,000 $2,235,000
Year Ended January 25,
1997:
Deducted from assets
accounts:
Reserve for inventory
obsolescence........... $257,000 $ 239,000 $ 496,000
Year Ended January 25,
1996:
Deducted from assets
accounts:
Reserve for inventory
obsolescence........... $ 40,000 $ 217,000 $ 257,000

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
----------- -----------

10.19 Third Amended and Restated Loan Agreement dated August 24, 1998,
as amended among Fleet National Bank, as agent and a Lender,
certain other Lenders named therein, the Registrant and the Brands
Group.
10.20* Limited Liability Company Agreement dated as of September 4, 1997
between the Brands Group and Cabin Life Studios, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of BDO Seidman, LLP.
23.4** Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1* Power of Attorney.
27* Financial Data Schedule.

- --------

* Previously filed.

**To be filed by amendment.