AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1998

REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COUNTY SEAT STORES, INC.

(Exact Name of Registrant as Specified in its Charter)
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MINNESOTA 5651 41-1272706
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code No.) Identification No.)

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469 SEVENTH AVENUE, 11TH FLOOR
NEW YORK, NEW YORK 10018
(212) 714-4800

(Address, including Zip Code, and Telephone Number, including Area Code, of
Registrants' Principal Executive Offices)
------------------------------

BRETT D. FORMAN
EXECUTIVE VICE PRESIDENT
COUNTY SEAT STORES, INC.
469 SEVENTH AVENUE, 11TH FLOOR
NEW YORK, NEW YORK 10018
(212) 714-4800
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
------------------------------

WITH COPIES TO:

ROBERT M. MCLAUGHLIN, ESQ.
EATON & VAN WINKLE
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
(212) 867-0606

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.

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 of
1933, check the following box. /X/

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CALCULATION OF REGISTRATION FEE

PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER UNIT* OFFERING PRICE* REGISTRATION FEE

Common Stock, par value $.01 per share........... 10,000,000 $3.35 $33,500,000 $9,882

* Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.

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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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SUBJECT TO COMPLETION, DATED , 1998
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.

PROSPECTUS

10,000,000 SHARES

COUNTY SEAT STORES, INC.

COMMON STOCK

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

This Prospectus relates to the offering from time to time of up to
10,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), that were issued by County Seat Stores, Inc. (the "Company"), a
Minnesota corporation, to the general unsecured creditors of the Company
pursuant to the Company's Plan of Reorganization dated as of August 22, 1997,
("Plan of Reorganization") under Section 1121(a) of the United States Bankruptcy
Code (the "Bankruptcy Code").

The Plan of Reorganization became effective on October 29, 1997 (the
"Effective Date"). Pursuant to the Plan of Reorganization, 20,000,000 shares of
Common Stock (including the shares subject to this Prospectus) were issued
following the Effective Date. As of March 16, 1998, these 20,000,000 constituted
all of the shares of Common Stock outstanding. Under the terms of the Plan of
Reorganization, the shares were issued to a Disbursing Agent to be disbursed to
creditors upon final settlement of their respective claims. As of March ,
1998, shares have been disbursed to creditors who have settled their
claims.

This prospectus is being filed as part of a registration statement required
under a Registration Rights Agreement dated as of January 8, 1998 among the
Company and certain holders of the Common Stock (the "Selling Stockholders", and
the agreement referred to as the "Stock Registration Rights Agreement"). The
Shares of Common Stock held by the Selling Stockholders and covered by this
prospectus are referred to as the "Shares".

The Shares may be sold to the public from time to time by the Selling
Stockholders in the amount and the manner described herein or as may be set
forth in a Prospectus Supplement accompanying this Prospectus. The Company will
receive no proceeds from the sale of any of the Shares by any of the Selling
Stockholders. See "Plan of Distribution."

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

SEE "RISK FACTORS" COMMENCING ON PAGE FOR INFORMATION CONCERNING CERTAIN
RISKS ASSOCIATED WITH AN INVESTMENT IN ANY OF THE SHARES.
---------------------

Through the date hereof, there has been no established public trading market
for the Common Stock. Application will be made to list the Common Stock on the
NASDAQ National Market. There can be no assurance that any active trading market
will develop or will be sustained for the Common Stock or as to the price at
which the Common Stock may trade or that the market for the Common Stock will
not be subject to disruptions that will make it difficult or impossible for the
holders of the Common Stock to sell shares in a timely manner, if at all, or to
recoup their investment in the Common Stock. See "Risk Factors--Liquidity;
Absence of Market for Common Stock."

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, 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.

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

The date of this Prospectus is , 1998

NOTICE TO INVESTORS

The Selling Stockholders directly, through agents designated from time to
time, or through dealers or underwriters also to be designated, may sell the
Common Stock from time to time on terms to be determined at the time of sale. To
the extent required, the Common Stock to be sold, the names of the Selling
Stockholders, the respective purchase prices of public offering prices,
historical trading information for the Common Stock, the names of any such
agent, dealer or underwriter, and any applicable commissions or discounts with
respect to a particular offer will be set forth in an accompanying Prospectus
Supplement. See "Plan of Distribution." If the Company is advised that an
underwriter has been engaged with respect to the sale of any Shares offered
hereby, or in the event of any other material change in the plan of
distribution, the Company will cause an appropriate amendment to the
Registration Statement of which this Prospectus forms a part to be filed with
the Securities and Exchange Commission (the "Commission") reflecting such
engagement or other change. See "Additional Information."

The Company will not receive any proceeds from this offering, but has agreed
to pay substantially all of the expenses of this offering, including fees of one
counsel to the Selling Stockholders and fees and expenses of underwriters or
placement or sales agents (but excluding discounts and commissions). The Selling
Stockholders and any broker dealers, agents or underwriters that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), and any commissions received by them and any profit on
the resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Description of Capital
Stock--Stock Registration Rights Agreement" and "Plan of Distribution" for a
description of certain indemnification arrangements.

Until 90 days subsequent to the effective date of this filing, 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE EXCHANGE ACT.
DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN
"SUMMARY," "RECENT DEVELOPMENTS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS WITHIN
THIS PROSPECTUS GENERALLY AND IN DOCUMENTS INCORPORATED HEREIN BY REFERENCE. IN
ADDITION, WHEN USED IN THIS PROSPECTUS THE WORDS "BELIEVES," "ANTICIPATES,"
"EXPECTS," "MAY," "WILL," "SHOULD," AND SIMILAR EXPRESSIONS OR THE NEGATIVE
THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE
SUBJECT TO A NUMBER OF KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES.

ACTUAL RESULTS IN THE FUTURE COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN
OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS, AS A RESULT OF MANY FACTORS
OUTSIDE THE CONTROL OF THE COMPANY, INCLUDING: CONTINUING SUCCESS WITH, AND
MARKET ACCEPTANCE OF, FUNDAMENTAL CHANGES IN THE COMPANY'S MERCHANDISING
STRATEGY DESCRIBED HEREIN; FLUCTUATIONS IN THE COST OF RAW MATERIALS AND
MERCHANDISE USED OR PURCHASED BY THE COMPANY; DEPENDENCE ON THIRD PARTY
SUPPLIERS; CHANGES IN CONSUMER PREFERENCES, IN

THE ADVERTISING MARKET FOR THE COMPANY'S PRODUCTS, IN THE APPAREL INDUSTRY OR
MARKET GENERALLY OR THAT SEGMENT OF WHICH THE COMPANY SPECIFICALLY TARGETS;
CHANGES IN THE FINANCIAL CONDITION OF THE COMPANY'S CUSTOMERS, IN THE GENERAL
CONDITION OF THE UNITED STATES ECONOMY, IN THE AVAILABILITY OF KEY PERSONNEL, IN
FOREIGN CURRENCY EXCHANGE RATES, IN INDUSTRY CAPACITY, AND IN BRAND AWARENESS;
AND THE OTHER MATTERS SET FORTH IN THIS PROSPECTUS AND DESCRIBED FROM TIME TO
TIME IN THE COMPANY'S ANNUAL OR QUARTERLY REPORTS FILED WITH THE COMMISSION.

CONSEQUENTLY, SUCH FORWARD-LOOKING STATEMENTS SHOULD BE VIEWED SOLELY AS THE
COMPANY'S CURRENT PLANS, ESTIMATES AND BELIEFS. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF OR THEREOF. THE COMPANY DOES NOT UNDERTAKE AND SPECIFICALLY
DECLINES ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES AFTER
THE DATE OF SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS.

AVAILABLE INFORMATION

The Company is filing concurrently a Registration Statement on Form S-1 (of
which this Prospectus forms part) and a Registration Statement on Form S-4
covering an exchange offer for its 12 3/4% Senior Notes. The Company has also
made a filing to register the Common Stock under the Exchange Act. When the
Commission declares effective any of (i) the Registration Statement on Form S-1,
(ii) the Company's Registration Statement on Form S-4 or (iii) the registration
of the Common Stock under the Exchange Act, the Company will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will be required to file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of the reports, proxy statements and other information can be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549, at prescribed rates. In addition, all reports filed by the Company via
the Commission's Electronic Data Gathering and Retrieval System (EDGAR) can be
obtained from the Commission's Internet Web Site located at http:\\www.sec.gov.

The Company has filed with the Commission a Registration Statement (which
term shall encompass any amendments and exhibits thereto) under the Securities
Act with respect of the Shares offered hereby. This Prospectus, which forms a
part of such Registration Statement, does not contain all the information set
forth in such Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. 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 such 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. Any interested parties may inspect such Registration Statement,
without charge, at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and may obtain copies of all
or any part of it from the Commission upon payment of the fees prescribed by the
Commission. Neither the delivery of this Prospectus or any Prospectus Supplement
nor any sales made hereunder or thereunder shall under any circumstances create
any implication that the information contained herein or therein is correct as
of any time subsequent to the date hereof or thereof or that there has been no
change in the affairs of the Company since the date hereof or thereof.

The Company was incorporated in Minnesota in 1976. The Company's principal
executive offices are located at 469 Seventh Avenue, 11th Floor, New York, New
York 10018.

SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements, including the notes thereto, included elsewhere in this Prospectus.
Unless otherwise indicated or the context clearly implies otherwise, all
references in this Prospectus to the "Company" refer to County Seat Stores, Inc.
and its subsidiaries. The Company's Plan of Reorganization was consummated on
October 29, 1997 (the "Plan" or "Plan of Reorganization"). The effects of the
Plan have been accounted for herein in the Company's balance sheet dated as of
November 1, 1997 using the principles of "fresh start" accounting as required by
the AICPA, Statement of Position 90-7, pursuant to which, in general, the
Company's assets and liabilities were revalued. The term "Predecessor Company"
refers to the Company prior to the consummation of the Plan of Reorganization
and the term "Reorganized Company" refers to the Company after the Plan of
Reorganization was consummated. Unless otherwise indicated or the context
otherwise requires, references to 1997, 1996, 1995, 1994, 1993, and 1992 relate
to the Company's fiscal years ended on January 31, 1998, February 1, 1997,
February 3, 1996, January 28, 1995, January 29, 1994, and January 30, 1993,
respectively. Each of these fiscal years includes 52 weeks, except for the year
ended February 3, 1996, which includes 53 weeks. Unless otherwise indicated or
the context otherwise requires, the information contained in this Prospectus
gives effect to the offering of Private Notes (the "Private Note Offering") (and
the application of the proceeds therefrom) and the Company's Plan of
Reorganization, pursuant to which the Company emerged from Chapter 11
concurrently with the closing of the Private Note Offering (the date of the
effectiveness of the Plan of Reorganization and the closing of the Private Note
Offering being herein referred to as the "Effective Date"). "Pro Forma" results
of operations have been described in the Company's Pro Forma Consolidated
Statement of Operations included herein, giving effect to (i) consummating the
Private Note Offering and entering into the Senior Credit Facility, (ii)
consummating the Plan of Reorganization, (iii) closing 341 stores, (iv)
obtaining rent concessions on existing stores, (v) consolidating certain of the
Company's corporate offices, and (vi) applying Fresh Start Accounting in
accordance with generally accepted accounting principles ("GAAP") as if each had
occurred on February 4, 1996 (with respect to the Pro Forma 1996 results).
References to the 413 stores operated by the Company give effect to the closing
of 67 stores between the Effective Date and the end of 1997. 375 of the
Company's stores are County Seat stores, 14 are County Seat Outlet stores, 22
are Levi's Outlet stores, and 2 are Old Farmer's Almanac General Stores.

THE COMPANY

The Company is among the nation's largest mall-based specialty retailers of
casual apparel, operating 413 stores in 41 states in the midwestern, southern,
and eastern regions of the United States. Under the direction of a new
management team, the Company's merchandise mix has recently been updated to
consist of casual shirts, sweaters, knit tops, khakis, jeans, dresses and
accessories for men, women, and teens. The Company's products are now primarily
manufactured under private label, which, in the Company's view, offers customers
quality comparable to branded merchandise at significantly lower prices and
generates higher gross margins than the Company has historically achieved. For
the nine months ended November 1, 1997 (the "Pre-Emergence Period"), the Company
generated Pro Forma net sales and EBITDA of approximately $233.7 million and
$7.8 million, respectively. As described below, the Company has made several
fundamental changes in its merchandising strategy.

mall-based department stores; (iii) the Company failed to competitively source
merchandise for its private-label program; and (iv) apparel retailers generally
experienced weak sales. By 1996, in the wake of declining sales and
deteriorating EBITDA margins, the Company was unable to meet scheduled interest
payment obligations on its then outstanding subordinated indebtedness. As a
result of the foregoing, in October 1996, the Company filed a petition (the
"Chapter 11 Filing") for reorganization relief under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court").

In December 1996, the Company retained a new management team led by Sam
Forman, the Company's president, chief executive officer, and chairman of the
board of directors. In January and February 1997, the new management team
developed a business plan designed to enhance the Company's profitability and
increase gross margins by reducing costs, implementing a new merchandising
strategy that primarily emphasizes switching from branded to private label
apparel and offering more tops than bottoms, and capitalizing on the Company's
nationally recognized brand name and large store base.

Mr. Forman has over forty years of retailing and manufacturing experience in
the apparel industry and has been an innovator in manufacturing and retailing
value-priced private-label apparel, the cornerstone of the Company's new
merchandising strategy. Mr. Forman has implemented successful business
strategies for apparel retailers by maximizing profitability through direct
sourcing, value-oriented merchandising programs, and internal cost controls.
Most recently, Mr. Forman was president and chief operating officer of American
Eagle Outfitters, Inc. ("American Eagle"), a mall-based specialty retailer.

BUSINESS STRATEGY

The new management team has implemented a business strategy designed to
re-establish the Company as a leading national retailer of high-quality,
value-priced casual apparel and to restore its profitability and EBITDA to
historical levels. The principal elements of this business strategy are similar
to those implemented by Mr. Forman at American Eagle and include: (i) reducing
costs and closing unprofitable stores, (ii) implementing a new merchandising
strategy, and (iii) initiating a controlled expansion program.

PHASE ONE: COST REDUCTIONS

The Company has continued to implement a comprehensive cost control program
during the 39 weeks ended November 1, 1997, that includes five key components:
(i) closing approximately 330 unprofitable stores (137 of which closed in 1997),
which increased Pro Forma EBITDA before special charges for the Pre-Emergence
Period by approximately $16.5 million, (ii) obtaining rent concessions on
existing stores which would have decreased rent expense by approximately $3.6
million for the Pre-Emergence Period, (iii) reducing selling, general and
administrative expenses through personnel reductions associated with closed
stores and corporate consolidations, which would have increased EBITDA before
special charges by approximately $1.8 million for the Pro Forma Pre-Emergence
Period compared to the comparable nine-month period for 1996, (iv) consolidating
its corporate infrastructure by closing its Dallas and deciding to close
Minneapolis corporate offices, which the Company expects to result in
approximately $0.3 million in annual cost savings, and (v) establishing a new
corporate "culture" focused on cost controls.

PHASE TWO: NEW MERCHANDISING STRATEGY

Prior to December 1996, the Company sourced products primarily from Levi
Strauss and other branded apparel manufacturers. As the Company lowered retail
prices on branded jeans and other branded apparel to meet those offered by its
competitors, its profitability deteriorated. Utilizing its extensive apparel
manufacturing background and significant contacts with domestic and
international vendors, the Company's new management team has initiated a
merchandising strategy focused on (i) competitively sourcing private-label
rather than branded merchandise, (ii) offering high-quality, private-label
merchandise at value prices, and (iii) improving the Company's product mix by
expanding the offering of women's apparel and increasing the ratio of tops to
bottoms.

The new management team has aggressively sought to reduce merchandise unit
costs to increase gross margins and enable the Company to offer lower retail
prices consistent with its value-priced strategy. By reducing merchandise unit
costs, the Company has been able to lower retail prices and reposition itself as
a value-priced, private-label retailer, while improving gross margins. For
example, for the nine months ended November 1, 1997, the average retail price
per unit at the COUNTY SEAT stores was $14.40 compared to $19.65 for the nine
months ended November 2, 1996. For the nine months ended November 1, 1997, the
average cost per unit at the COUNTY SEAT stores was $7.53 compared to $11.27 for
the nine months ended November 2, 1996. For the nine months ended November 1,
1997, the retail gross margin before special charge at the COUNTY SEAT stores
was 45.2% compared to 40.4% for the nine months ended November 2, 1996. The
Company's new merchandising strategy has improved unit sales volume. For the
nine months ended November 1, 1997, merchandise sales at the COUNTY SEAT stores
totaled 13.7 million units compared to 11.7 million units for the nine months
ended November 2, 1996. In addition to its commitment to competitive sourcing,
the Company has been focusing on emphasizing tops relative to bottoms and on
expanding its women's apparel offering. By placing more emphasis on women's wear
and on tops, the Company expects to continue to improve unit sales and
profitability.

The new management team initiated its sourcing plan and other elements of
its merchandising strategy shortly after its arrival in December 1996. Although
the Company has experienced improved operating results as the new management
team began implementing the business strategy, the effects of the merchandising
strategy are not fully reflected in the operating results for the period ending
November 1, 1997 due to various factors, including (i) the inability to cancel
previously ordered merchandise, (ii) long lead times (between 120 and 150 days)
required for overseas merchandise deliveries, and (iii) the need to take
significant markdowns on prior management's merchandise, particularly in the
first quarter of 1997. Additionally, management recorded in the third quarter of
1997 a special charge in the amount of $12.0 million for excess markdowns
relating to closed stores. The table below shows the actual improvements in the
Company's performance with respect to unit sales and retail gross margin
resulting from the implementation of the new merchandising strategy.

NINE MONTHS ENDED
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NOVEMBER 1, NOVEMBER 2,
1997(1) 1996(1)
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Units sold (in millions)............................................................... 13.7 11.7
Average selling price per unit......................................................... $ 14.40 $ 19.65
Average cost per unit.................................................................. $ 7.53 $ 11.27
Retail gross profit ($ in millions).................................................... $ 113.4 $ 161.80
Retail gross profit before special charge(2)........................................... 45.2% 40.4%
Retail gross profit after special charge(2)............................................ 40.9% 40.4%

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(1) Represents only results at the 375 County Seat Stores open at the end of
1997.

(2) Retail gross margin is presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12.0
million was recorded within cost of goods sold and relates to the

liquidation of excess inventory from purchase commitments in early 1997 for
Fall 1997 merchandise based upon a chain of over 500 stores, of which 137
were closed by the time the merchandise was received. See Note 8 to the
consolidated balance sheet at November 1, 1997, for discussion of the
special charge.

PHASE THREE: CONTROLLED GROWTH

Upon the successful implementation of the Company's merchandising strategy,
the Company expects to commence a controlled program of opening between 15 to 20
new stores annually as well as to deploy capital expenditures toward the
remodeling of existing stores. Key factors to be considered prior to opening any
new store include store location, mall tenant mix, and mall sales productivity.

PLAN OF REORGANIZATION

On October 29, 1997, the Plan of Reorganization was consummated. As part of
the Plan, the Company issued 20,000,000 shares of Common Stock (including the
Shares covered by this Prospectus) to settle claims by general unsecured
creditors of the Company. In addition, the Company issued (i) Series A Warrants
to purchase up to 2,285,718 shares of Common Stock, (ii) Series B Warrants to
purchase up to an aggregate of 15% of Common Stock (subject to dilution), and
(iii) Series C Warrants to Mr. Sam Forman to purchase an aggregate of 15% of
Common Stock (subject to dilution). The Company also issued and sold in a
private placement 85,000 Units, each unit consisting of $1,000 principal amount
of Private Notes and one Series A Warrant to purchase 26.8908 shares of the
Company's common stock, par value $0.01 per share. The Private Notes will be the
subject of an Exchange Offer the terms of which are described in the prospectus
filed as part of the Registration Statement on Form S-4 filed concurrently with
the Registration Statement of which this Prospectus is part. See "Plan of
Reorganization."

RISK FACTORS

An investment in the Common Stock involves certain risks that a potential
investor should carefully evaluate prior to making the investment. See "Risk
Factors," immediately following this Summary, for a discussion of certain
factors to be considered in evaluating the Company, its business, and an
investment in the Common Stock.

SUMMARY PRO FORMA FINANCIAL DATA

The following table presents summary Pro Forma financial data for the
Company. The summary Pro Forma data for the Company include the effects of (i)
consummating the Private Note Offering and entering into the Senior Credit
Facility, (ii) consummating the Plan of Reorganization, (iii) closing 341
stores, (iv) obtaining rent concessions on existing stores, (v) consolidating
certain of the Company's corporate offices, and (vi) applying Fresh Start
Accounting under generally accepted accounting principles (GAAP) as if each had
occurred on February 4, 1996 (with respect to the Pro Forma 1996 and Pro Forma
results for the 39 weeks ended November 1, 1997). The information set forth
below should be read in conjunction with the discussion under "Pro Forma
Consolidated Statement of Operations." See the Company's Pro Forma Consolidated
Statement of Operations, "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Changes in Method of Accounting,"
"Selected Historical Financial Data."

COUNTY SEAT STORES, INC. AND SUBSIDIARY

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE 52 WEEKS ENDED FEBRUARY 1, 1997

(DOLLARS IN THOUSANDS)

PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------

Net sales............................................................... $ 538,260 $(156,741)(a) $ 381,519
Cost of sales, including buying and occupancy........................... 416,389 (132,651)(a) 283,738
---------- ----------- -----------
Gross profit........................................................ 121,871 (24,090) 97,781
Selling, general and administrative expenses............................ 126,561 (39,118)(a) 82,143
(400)(b)
(4,900)(c)
Depreciation and amortization........................................... 11,051 (3,444)(d) 12,212
4,605(e)
Reorganization costs.................................................... 43,752 (43,752)(f)
Interest expense, net................................................... 15,445 (2,557)(g) 12,888
---------- ----------- -----------
Loss before income taxes and extraordinary item..................... (74,938) (65,476) (9,462)
---------- ----------- -----------
Income taxes (benefit).................................................. (762) -- (762)
---------- ----------- -----------
Loss before extraordinary item...................................... $ (74,176) $ (65,476) $ (8,700)
---------- ----------- -----------
---------- ----------- -----------
Other Data:
EBITDA (h)............................................................
$ (4,490) $ 15,638
---------- -----------
---------- -----------

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(a) Reflects the elimination of results related to the 341 closed or decided to
be closed stores from the beginning of 1996 through the end of 1997 and the
consolidation of certain regional offices.
(b) Reflects the planned closing of the Dallas and the Minneapolis corporate
offices and the opening of the Company's new corporate headquarters in New
York.
(c) Reflects the adjustment to rent expense to reflect leases modified pursuant
to the Plan of Reorganization.
(d) Reflects the reduction in depreciation expense related to property and
equipment of closed stores and the write-off of assets recorded as a
component of reorganization costs associated with closed stores, assuming
closure occurred February 4, 1996.
(e) Reflects the amortization of the Reorganization Value in Excess of Amounts
Allocable to Identified Assets, over a 15 year period, assuming fresh start
accounting was recorded as of February 4, 1996.
(f) Reflects the elimination of the provision for reorganization costs
associated with store closures and professional fees and other expenses
associated with the Chapter 11 case, assuming the Plan of Reorganization was
implemented on February 4, 1996.
(g) Reflects the adjustment to interest expenses, amortization of debt issuance
costs, and amortization of the debt discount to reflect restructured
capitalization of the Company related to the Private Note Offering and the
Senior Credit Facility.
(h) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization and reorganization costs. EBITDA is presented here to
provide additional information about the Company's operations. EBITDA is not
a measure of financial performance in accordance with GAAP and should not be
considered as an alternative to (i) net income (loss) as a measure of
performance (or any other measure of performance under GAAP) or (ii) cash
flows from operating, investing, or financing activities as an indicator of
cash flow or as a measure of liquidity.

COUNTY SEAT STORES, INC. AND SUBSIDIARY

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE 39 WEEKS ENDED NOVEMBER 1, 1997

(DOLLARS IN THOUSANDS)

PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ----------

Net sales................................................................. $ 277,137 $ (43,427)(a) $ 233,710
Cost of sales, including buying and occupancy............................. 202,824 (35,725)(a) 167,099
Cost of sales, special charge............................................. 11,975 (11,975) --
---------- ----------- ----------
Gross profit.......................................................... 62,338 4,273 66,611
Selling, general and administrative expenses.............................. 71,465 (8,762)(a) 58,803
(300)(b)
(3,600)(c)
Depreciation and amortization............................................. 6,136 (3,150)(d) 6,468
3,482(e)
Reorganization costs...................................................... 38,405 (38,405)(f) --
Interest expense, net..................................................... 4,019 5,647(g) 9,666
---------- ----------- ----------
Loss before income taxes.............................................. (57,687) (49,361) (8,326)
---------- ----------- ----------
---------- ----------- ----------
Income taxes (benefit).................................................... -- -- --
---------- ----------- ----------
Net loss.............................................................. $ (57,687) $ (49,361) $ (8,326)
---------- ----------- ----------
---------- ----------- ----------
Other Data:
EBITDA (h).............................................................. $ (9,127) $ 7,808
---------- ----------
---------- ----------

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

(a) Reflects the elimination of results related to the 137 closed or decided to
be closed stores during the 39-week period and the consolidation of certain
regional offices.

(b) Reflects the planned closing of the Dallas and the Minneapolis corporate
offices and the opening of the Company's new corporate headquarters in New
York.

(d) Reflects the reduction in depreciation expense related to property and
equipment of closed stores and the write-off of assets recorded as a
component of reorganization costs associated with closed stores, assuming
closure occurred February 2, 1997.

(e) Reflects the amortization of the Reorganization Value in Excess of Amounts
Allocated to Identified Assets over a 15 year period, assuming fresh start
accounting was recorded as of February 2, 1997.

(f) Reflects the elimination of the provision for reorganization costs
associated with store closures and professional fees and other expenses
associated with the Chapter 11 case, assuming the Plan of Reorganization was
implemented on February 2, 1997.

(g) Reflects the adjustment to interest expense, amortization of debt issuance
costs, and amortization of the debt discount, to reflect restructured
capitalization of the Company related to the Private Note Offering and the
Senior Credit Facility.

(h) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization and reorganization costs. EBITDA is presented here to
provide additional information about the Company's operations. EBITDA is not
a measure of financial performance in accordance with GAAP and should not be
considered as an alternative to (i) net income (loss) as a measure of
performance (or any other measure of performance under GAAP) or (ii) cash
flows from operating, investing, or financing activities as an indicator of
cash flows or as a measure of liquidity.

SUMMARY HISTORICAL FINANCIAL DATA

The following table presents summary historical financial data for the
Company. The historical financial data of the Company for each of the fiscal
years in the three-year period ended February 1, 1997 have been derived from the
historical audited consolidated financial statements of the Company. The
statements of operations data for the nine months ended November 1, 1997 has
been derived from the unaudited consolidated statement of operations. The
November 1, 1997 balance sheet has been derived from the Company's audited
consolidated balance sheet. From October 17, 1996 until October 29, 1997 the
Company operated as a debtor-in-possession under Chapter 11 of the Bankruptcy
Code, which caused the Company to incur certain bankruptcy-related expenses. As
a result, the Company does not believe that its historical results of operations
are necessarily indicative of its results of operations as an ongoing entity
after the consummation of the Plan of Reorganization. The information set forth
below should be read in conjunction with the discussion under "Selected
Historical Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Risk Factors--Risks Related to
Projections," the Company's Audited and Unaudited Consolidated Financial
Statements, and the Company's Unaudited Pro Forma Statements of Operations.

NINE NINE
MONTHS MONTHS
ENDED ENDED
NOVEMBER NOVEMBER
2, 1996 1, 1997
1994 1995 1996 (UNAUDITED) (UNAUDITED)
--------- --------- --------- ----------- -------------

(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $ 588.3 $ 619.2 $ 538.3 $ 400.4 $ 277.1
Gross profit before special charge(1).............. 167.8 167.2 121.9 87.7 74.3
Gross profit after special charge(2)............... 167.8 167.2 121.9 87.7 62.3
Income (loss) from operations...................... 31.5 21.3 (15.7) (18.8) (15.3)
Reorganization expense............................. 43.8 42.4 38.4
Store Data:
Number of stores at end of period.................. 701 745 537 692 413
Increase (decrease) in same store sales(2)......... 7.4% (4.0)% (8.7)% (7.3 )% (12.2 )%
Other Data: Gross profit % before special
charge(1)........................................ 28.5% 27.0% 22.6% 21.9% 26.8%
Gross profit % after special charge(1)............. 28.5% 27.0% 22.6% 21.9% 22.5%
Total capital expenditures......................... $ 14.8 $ 13.1 $ 1.8 $ 1.8 $ 1.4
Depreciation and amortization...................... 16.7 13.2 11.1 8.8 6.1
EBITDA before special charge(1)(3)................. 48.2 34.5 (4.7) (9.9 ) 2.9
EBITDA after special charge(1)(3).................. 48.2 34.5 (4.7) (9.9 ) (9.1 )
BALANCE SHEET DATA:
Cash and cash equivalents (excludes restricted cash
in the Security Account)......................... $ 9.4
Restricted Cash in Security Account................ 17.0
Inventories........................................ 74.7
Total assets....................................... 220.6
Total Long-Term Debt (including current
maturities....................................... 99.0 (4)
Total shareholders' equity (deficit)............... 78.1

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

Fall merchandise based upon a chain of over 500 stores, of which 137 stores
were closed by the time the merchandise was received. See Note 8 to the
consolidated balance sheet at November 1, 1997 for a discussion of the
special charge.

(2) Income (loss) from operations does not give effect to reorganization costs
of $43.8 million for 1996, $42.4 million and $38.4 million for the 39 weeks
ended November 2, 1996 and November 1, 1997, respectively.

(3) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization, write-off of certain long-lived assets, and reorganization
costs. EBITDA is presented here to provide additional information about the
Company's operations. EBITDA is not a measure of financial performance under
generally accepted accounting principles (GAAP) and should not be considered
as an alternative to (i) net income (loss) as a measure of performance (or
any other measure of performance in accordance with GAAP) or (ii) cash flows
from operating, investing, or financing activities as an indicator of cash
flows or as a measure of liquidity. EBITDA is presented before and after
special charge.

(4) Total long-term debt (including current maturities) includes borrowings of
$12.3 million under the Senior Credit Facility, $1.7 million in notes
payable to various taxing authorities as provided for in the Plan of
Reorganization and $85.0 million of Senior Debt. This presentation differs
from that of the Consolidated Balance Sheet at November 1, 1997 as a result
of the recognition of $7.6 million of Series A Warrants attached to the debt
which is presented as a discount to the Senior Notes in accordance with
GAAP.

RECENT DEVELOPMENTS

The Company's preliminary results, which are subject to adjustment, indicate
that net sales for the thirteen weeks of November 1997, December 1997 and
January 1998 are approximately $117.4 million, representing a 3.0% decline in
same store sales relative to the comparable period of the prior year. The
Company believes that the decline in same store sales is primarily due to a
decline in Levi's apparel sales.

RISK FACTORS

THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION APPEARING
IN THIS PROSPECTUS SHOULD BE CAREFULLY CONSIDERED BEFORE MAKING AN INVESTMENT IN
THE COMMON STOCK. CERTAIN STATEMENTS IN THIS PROSPECTUS, INCLUDING STATEMENTS
RELATING TO THE COMPANY'S EXPECTED OPERATIONS AND FINANCING ACTIVITIES, ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THESE
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, (I) CONTINUING
SUCCESS WITH, AND MARKET ACCEPTANCE OF, FUNDAMENTAL CHANGES IN THE COMPANY'S
MERCHANDISING STRATEGY DESCRIBED HEREIN; (II) CHANGES IN CONSUMER PREFERENCES,
IN THE ADVERTISING MARKET FOR THE COMPANY'S PRODUCTS, IN THE APPAREL INDUSTRY OR
MARKET GENERALLY OR THAT SEGMENT OF WHICH THE COMPANY SPECIFICALLY TARGETS;
(III) CHANGES IN THE FINANCIAL CONDITION OF THE COMPANY'S CUSTOMERS, IN THE
GENERAL CONDITION OF THE UNITED STATES ECONOMY, IN THE AVAILABILITY OF KEY
PERSONNEL, IN FOREIGN CURRENCY EXCHANGE RATES, IN INDUSTRY CAPACITY, AND IN
BRAND AWARENESS; AND THE OTHER MATTERS SET FORTH IN THIS PROSPECTUS AND
DESCRIBED FROM TIME TO TIME IN THE COMPANY'S ANNUAL OR QUARTERLY REPORTS FILED
WITH THE COMMISSION. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
NUMEROUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE REFERRED TO ABOVE AND,
AMONG OTHERS, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS."

SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT

Since the consummation of the Private Note Offering, the Senior Credit
Facility and the Plan of Reorganization, the Company has remained highly
leveraged and has indebtedness that is substantial in relation to shareholders'
equity. As of November 1, 1997, the Company has an aggregate of $99.0 million of
outstanding indebtedness (excluding approximately $37.0 million of letters of
credit and bankers' acceptances). Presentation of total debt differs from that
of the Consolidated Balance Sheet at November 1, 1997 as a result of the
recognition of $7.6 million of Series A warrants attached to the debt, which is
presented as a discount to the Senior Notes in accordance with generally
accepted accounting principles.

The Company's high leverage could have important consequences to the holders
of the Common Stock, including the following: (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, or general corporate or other purposes may be impaired in the
future; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for other purposes; (iii)
the Company may be substantially more leveraged than certain of its competitors
and therefore may be at a competitive disadvantage; and (iv) the Company's
ability to adjust rapidly to changing market conditions may be hindered and
could make the Company more vulnerable in the event of a downturn in its
business or general economic conditions.

The Company's ability to make scheduled payments of principal and interest
or to refinance its obligations with respect to its indebtedness will depend on
its financial and operating performance, which, in turn, will be subject to
prevailing economic conditions and to certain financial, business, and other
factors beyond its control. For the 39 weeks ended November 2, 1996 and the 39
weeks ended November 1, 1997, the Company had net losses of $77.1 million and
$57.7 million, respectively. If the Company's cash flow and capital resources
are insufficient to fund its debt service obligations, the Company may be forced
to reduce or delay planned expansion and capital expenditures, sell assets,
obtain additional equity capital, or restructure its indebtedness. There can be
no assurance that the Company's operating results, cash flow, and capital
resources will be sufficient for payment of its indebtedness in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on its indebtedness or if the
Company otherwise fails to comply with the various covenants in agreements
governing its indebtedness, the Company will be in default under the terms

thereof, which would permit the holders of such indebtedness to accelerate the
maturity of such indebtedness and could cause defaults under other indebtedness
of the Company or result in the bankruptcy of the Company. Any such default
could have a significant adverse effect on the market value and the
marketability of the Common Stock.

LIQUIDITY; ABSENCE OF MARKET FOR COMMON STOCK

There is no currently existing formal trading market for the Common Stock.
Pursuant to the Plan of Reorganization, the Shares were issued to a limited
number of holders. Application will be made to list the Common Stock on NASDAQ
National Market. There can be no assurance that any active trading market will
develop or will be sustained for the Common Stock or as to the price at which
the Common Stock may trade or that the market for the Common Stock will not be
subject to disruptions that will make it difficult or impossible for the holders
of the Common Stock to sell shares in a timely manner, if at all. In addition,
if such markets develop, the trading markets for the The Company Common Stock
may be unstable and illiquid for an indeterminate period of time. In addition,
holders of the Common Stock who are deemed to be "underwriters" as defined in
subsection 1145(b) of the Bankruptcy Code, or who are otherwise deemed to be
"affiliates" or "control persons" of the Company within the meaning of the
Securities Act, will be unable to freely transfer or sell their respective
securities (which securities will be "restricted securities" within the meaning
of the Securities Act), except pursuant to an available exemption from
registration under the Securities Act and under equivalent state securities or
"blue sky" laws. However, as described below, certain holders of Common Stock
have certain registration rights.

SUCCESSFUL EXECUTION OF BUSINESS STRATEGY

The Company is currently implementing a new business strategy, which
consists of a number of cost-cutting and revenue-enhancing initiatives including
a change in merchandising strategy to focus on private-label apparel. There can
be no assurance that the merchandising, operating and other business strategies
implemented by the Company's new management team will continue to be successful
or that the Company will continue to increase revenue, improve its operations,
and remain profitable. Moreover, if the implementation of the new business
strategy is not successful and the Company is unable to generate sufficient
operating funds to pay interest on the indebtedness of the Company, there can be
no assurance that alternative sources of financing will be available to the
Company or, if available, that such financing will be on commercially reasonable
terms. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "Business."

NONCOMPARABILITY OF FINANCIAL INFORMATION

Information reflecting the results of operations and financial condition of
the Company subsequent to the Chapter 11 Filing are not comparable to prior
periods due to (i) store closings undertaken during the Company's
reorganization; (ii) the replacement of the management team and the
restructuring of the Company's store operations and general and administrative
activities; (iii) the Company's Chapter 11 case, including the costs and
expenses relating thereto, and the effect of the settlement of certain related
liabilities; and (iv) the application of Fresh Start Accounting, pursuant to
which the Company's assets are stated at "reorganization value," which is
defined as the value of the entity (before considering liabilities) on a
going-concern basis following the reorganization and represents an estimate of
the amount a willing buyer would pay for the assets of the Company immediately
after the reorganization. In addition, because the Company has been in a
restructuring phase and has continued to incur costs and expenses relating to
its Chapter 11 case, the results of operations since October 1996 may not be
indicative of the Company's future performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

RESTRICTIVE DEBT COVENANTS

The Indenture (as defined below in "Description of Certain
Indebtedness--Private Notes") covering the Private Notes contains a number of
covenants that will impose significant operating and financial restrictions on
the Company and its subsidiary. Such restrictions affect, and in many respects
significantly limit or prohibit, among other things, the ability of the Company
and its subsidiary to incur additional indebtedness, pay dividends, repay other
indebtedness prior to stated maturities, create liens on assets, make
investments or acquisitions, engage in mergers or consolidations, or engage in
certain transactions with affiliates. These restrictions could limit the ability
of the Company in the future to effect financings, make needed capital
expenditures, withstand a downturn in the Company's business or the economy in
general, or otherwise conduct necessary corporate activities. A failure by the
Company or its subsidiary to comply with these restrictions could lead to a
default under the terms of the Indenture and the Private Notes, notwithstanding
the ability of the Company to meet its debt service obligations. Upon the
occurrence of an Event of Default, the holders of the Private Notes could elect
to declare all such indebtedness, together with accrued and unpaid interest
thereon, to be immediately due and payable, and there can be no assurance that
the Company would be able to make such payments or borrow sufficient funds from
alternative sources to make any such payments. Even if additional financing
could be obtained, there can be no assurance that it would be obtainable on
commercially reasonable terms. See "Description of Certain Indebtedness--Private
Notes."

In addition, the Senior Credit Facility contains covenants that are more
restrictive than those contained in the Indenture. Such covenants include
covenants related to the financial performance of the Company. The Company's
ability to comply with such covenants may be affected by events beyond its
control. There can be no assurance that the Company will be able to comply with
such covenants. A breach of any of the covenants under the Senior Credit
Facility could result in an event of default under the Senior Credit Facility.
Upon the occurrence of an event of default under the Senior Credit Facility, the
lenders under the Senior Credit Facility could elect to declare all obligations
to be immediately due and payable and terminate all commitments under the Senior
Credit Facility. If the lenders under the Senior Credit Facility took such
action, it would result in an Event of Default under the Indenture.

If the Company were unable to pay such amounts, the lenders under the Senior
Credit Facility could foreclose on the collateral securing the Company's
obligations thereunder. Such collateral consists of substantially all assets of
the Company. The Private Notes are unsecured and are effectively subordinated to
the Senior Credit Facility to the extent of the assets securing such facility.
See "Description of Certain Indebtedness--Senior Credit Facility."

DEPENDENCE ON KEY PERSONNEL

The Company's success will be highly dependent upon the new management team,
including Mr. Sam Forman. The loss of Mr. Forman's services could have a
material adverse effect upon the implementation of the Company's business
strategy and on the Company in general. Mr. Forman has the right to terminate
his employment agreement with the Company at any time on sixty days' notice;
however, unless such termination results from certain specified actions or
events, any unvested Series C Warrants (as defined herein) distributed to Mr.
Forman will not vest unless they have already vested, and Mr. Forman will be
prevented from being employed by competitors of the Company (other than Forman
Enterprises, Inc.) for a period of one year. See "Management--Forman Employment
Agreement."

The Company's success also depends upon other senior executives. No other
person employed by the Company is subject to an employment agreement. While the
Company believes that no other executive is as important to the success of the
Company as Mr. Forman, the loss of the services of a significant number of
senior executives could have a material adverse effect on the Company.

Certain important merchandising and sourcing activities of the Company are
performed by consultants who are employees and owners of Forman Enterprises,
Inc. ("Forman Enterprises"), which operates

factory outlet stores that sell casual apparel. Seventy percent of the common
stock of Forman Enterprises is owned by Mr. Forman and his family. The loss of
the services of such consultants could have an adverse effect on the Company.
See "Certain Relationships."

COMPETITIVE NATURE OF THE COMPANY'S INDUSTRY

The retail apparel industry is highly competitive with price, selection,
quality, service, location, and store environment the principal competitive
factors. While the Company believes it is able to compete favorably as to each
of these factors, the Company believes it competes mainly on the basis of price,
merchandise selection, and customer service. Furthermore, the Company's success
largely depends upon its ability to gauge accurately the tastes of its customers
and provide merchandise that satisfies customer demand. Misjudgment of such
tastes could have a material and adverse effect on the Company's operations,
cash flows, and financial condition, it could also result in overstocked
inventory or lower profits due to markdowns. The Company competes with many
national and local retail stores, specialty apparel chains, department stores,
and mail order merchandisers. The Company also competes in certain locations
with retail and outlet stores operated by one of its suppliers, Levi Strauss &
Co. ("Levi Strauss"). Many of the Company's competitors have greater financial
and marketing resources than the Company. In addition, many of the Company's
competitors offer private-label merchandise that is comparable to the Company's
private-label merchandise.

IDENTIFYING CUSTOMER PREFERENCES

The Company's future success depends, in part, upon its ability to
anticipate and respond to customer preferences in a timely manner. Changes in
customer preferences for style, seasonal adaptation, adverse weather conditions,
or other reasons, if unsuccessfully identified, forecasted, or responded to by
the Company, could, among other things, lead to lower sales, excess inventories,
and higher markdowns. Those in turn could have a material adverse effect on the
Company's results of operations and financial condition.

IMPACT OF ECONOMIC CONDITIONS

Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, business
conditions, interest rates, taxation, and consumer confidence in future economic
conditions. If the demand for apparel and related merchandise were to decline,
the Company's business and results of operations would be materially and
adversely affected. The Company's stores rely principally on mall traffic for
customers. Therefore, the Company depends upon the continued popularity of malls
as a shopping destination and the ability of mall anchor tenants and other
attractions to generate customer traffic for its stores. In addition, a
significant number of the Company's stores are concentrated in the midwest,
southern, and eastern regions of the United States. A decrease in mall traffic
or a decline in economic conditions in the markets where the Company's stores
are located would materially and adversely affect the Company's growth, net
sales, results of operations, and profitability.

SEASONALITY

The Company, like most retailers, has a seasonal pattern of sales and
earnings. The Company has two major selling seasons: (i) back-to-school in the
third quarter and (ii) Christmas in the fourth quarter. Historically,
substantially all the Company's income from operations has been generated during
the third and fourth quarters. In addition, as is the case with other retailers,
the results of the Company's operations are subject to changes in consumer
demand associated with general economic conditions and to changes in consumer
preferences. The Company's results of operations may also fluctuate from quarter
to quarter in the future as a result of the amount and timing of sales
contributed by new stores and the integration of new stores into the operations
of the Company as well as other factors. An increase in the number of the
Company's stores can significantly affect results of operations on a
quarter-to-quarter basis.

INFORMATION SYSTEMS AND CONTROL PROCEDURES

Since the Chapter 11 Filing, the Company has taken steps to improve and,
where applicable, replace its management information systems to provide enhanced
support to all operating areas and currently anticipates aggregate expenditures
for hardware, software, labor, and compliance with year 2000 requirements of
approximately $6 million between 1997 and 1998. See "Business --Information
Systems." While the Company expects to continue to upgrade its management
information systems, there can be no assurance that the Company can successfully
implement such enhancements or that such enhancements will support the Company's
planned expansion strategy, or, if such upgrades and enhancements are not
successfully implemented, that the Company's current systems will continue to
support adequately its information requirements.

Moreover, while the Company believes its current management information
systems are generally adequate to support the Company's business operations,
certain deficiencies relating to the age and design of the systems, including,
without limitation, difficulties in planning, forecasting, allocating and
measuring performance through an integrated financial system, may adversely
affect the business operations of the Company in the near and long-term. There
can be no assurance that the Company's efforts to improve upon and enhance its
present management information systems will resolve or eliminate any such
existing or potential deficiencies.

As noted above, the Company has implemented a program designed to ensure
that all the Company's software will manage and manipulate data involving the
transition of dates from 1999 to 2000 without functional or data abnormality and
without inaccurate results related to such dates. Any failure on the part of the
Company to ensure that any such software complies with year 2000 requirements
could have a material adverse effect on the business, financial condition, and
results of operations of the Company.

RELIANCE ON KEY VENDORS

The Company's business is dependent upon its ability to purchase current
season apparel at competitive prices. The Company currently purchases inventory
primarily from foreign manufacturers and Levi Strauss. The Company owns no
manufacturing facilities.

Merchandise purchased from Levi Strauss represented approximately 30% of
total sales in 1996 and 26% for the nine months ended November 1, 1997. The
Company operates 22 LEVI'S OUTLET stores pursuant to a license agreement with
Levi Strauss, which license agreement requires the Company to sell only
merchandise manufactured by Levi Strauss in the LEVI'S OUTLET stores. The
Company's license agreement with Levi Strauss is scheduled to expire on July 31,
2000, although individual stores may continue to operate under the license until
the expiration of each such store's lease. There can be no assurance that the
Levi Strauss license for the LEVI'S OUTLETS will be renewed. A change in the
Company's relationship with Levi Strauss could have a material adverse effect on
the Company's business.

The Company has no long-term contracts with suppliers and transacts business
principally on an order-by-order basis. Although the Company's relationship with
its key vendors is satisfactory, there can be no assurance that the Company will
be able to acquire merchandise from such vendors on favorable terms in the
future.

Purchasing merchandise from foreign suppliers subjects the Company to the
general risks of doing business abroad. These risks include cancellations or
delays in shipments, work stoppages, increases in import duties and tariffs,
changes in foreign exchange rates, changes in foreign laws and regulations, and
political instability. The Company believes that the loss of one or more of
these foreign suppliers would not have a long-term material adverse effect on
the Company, because merchandise purchased from foreign suppliers can be
obtained from other sources. However, the loss of certain foreign suppliers
could, in the short term, adversely affect the Company's business until
alternative arrangements can be secured. Trade

terms are negotiated with each vendor and may be modified from time to time.
Substantially all the Company's foreign purchases are currently paid for in U.S.
dollars.

NEW STORES AND REMODELING EXISTING STORES

The Company intends to commence a controlled program of opening 15 to 20 new
stores annually as well as to deploy capital expenditures toward the remodeling
of existing stores. Accomplishing the Company's expansion goals will depend upon
a number of factors, including the identification of new markets in which the
Company can successfully compete, the ability to obtain suitably sized locations
for new stores at acceptable costs, the hiring and training of qualified
personnel, particularly at the store management level, the integration of new
stores into existing operations, the expansion of the Company's buying and
inventory capabilities and the availability of capital. There can be no
assurance that the Company will be able to achieve its store expansion goals,
manage growth effectively, successfully integrate planned new stores into the
Company's operations, or operate new stores profitably. Nor can there be any
assurance that remodeled stores will provide a satisfactory return on investment
through increased sales or otherwise.

LIMITATION ON USE OF NET OPERATING LOSSES AND BUILT-IN LOSSES

Under the Internal Revenue Code of 1986, as amended (the "Code"), the
utilization of net operating loss carryforwards ("NOLs") against future taxable
income is subject to limitation if a Company experiences an "ownership change"
as defined in the Code (the "Section 382 limitation"). Moreover, if such Company
experiences an ownership change, the ability to use recognized "built-in losses"
to offset other income may also be subject to the Section 382 limitation. As a
result of its reorganization under Chapter 11, the Company will be treated as
having experienced an ownership change. Thus, after emerging from Chapter 11,
the Company's ability to offset income in each post-reorganization taxable year
by its pre-reorganization NOLs and built-in losses will be limited to an amount
not to exceed the aggregate value of the stock of the Company immediately before
such change in control (taking into account in such calculation, however, the
value of all creditors' claims surrendered in connection with the Plan of
Reorganization) multiplied by the specific interest rate published monthly by
the Internal Revenue Service.

The operation and effect of Section 382 of the Code will be materially
different from that just described if the Company is subject to the special
rules for corporations in bankruptcy provided in Section 382(1)(5) of the Code.
In that case, the Company's ability to utilize its NOLs would not be limited as
described in the preceding paragraph. However, several other limitations would
apply to the Company under Section 382(1)(5) of the Code, including (i) the
Company's NOLs would be calculated without taking into account deductions for
interest paid or accrued in the current tax year and all other tax years ending
during the three-year period prior to the current tax year with respect to
creditors' claims that are exchanged for stock of the Company under the Plan of
Reorganization (resulting in a substantial reduction in the Company's NOLs) and
(ii) if the Company undergoes another ownership change within two years after
the Effective Date, the Company's Section 382 limitation with respect to that
ownership change will be zero. The Company believes that the provisions of
Section 382(1)(5) of the Code will apply to the ownership change occurring
pursuant to the Plan of Reorganization. However, the Company can elect to have
the regular Section 382 rules (described above) apply rather than the special
rules of Section 382(1)(5) of the Code. The Company has not yet determined
whether to elect application of the regular rules under Section 382 of the Code.

EMERGENCE FROM CHAPTER 11

The Company emerged from Chapter 11 on the Effective Date. The Company's
experience in Chapter 11 may affect its ability to negotiate favorable trade
terms with manufacturers and other vendors and to negotiate favorable lease
terms with landlords. The failure to obtain such favorable terms could have a
material adverse effect on the Company and its financial performance. On the
Effective Date, the Company entered into the Senior Credit Facility, which will
provide the Company with a seasonal revolving line of credit in an amount of
$115 million, of which up to $90 million may be used to issue letters of credit
and bankers' acceptances, subject to satisfaction of various conditions. See
"Description of Certain Indebtedness--Senior Credit Facility."

EFFECT OF FUTURE SALES OF COMMON STOCK; REGISTRATION RIGHTS

No prediction can be made as to the effect, if any, that future sales of
Common Stock or the availability of Common Stock for future sale will have on
the market price of the Common Stock, prevailing from time to time. Sales of
substantial amounts of Common Stock or the perception that such sales may occur,
could adversely affect prevailing market prices for the Common Stock.

An aggregate of 20,000,000 shares of Common Stock were issued pursuant to
the Plan of Reorganization. Pursuant to Section 1145 of the Bankruptcy Code, all
of such shares of Common Stock are freely tradeable without registration under
the Securities Act, except for shares that were issued to an "underwriter" (as
defined in Section 1145(b) of the Bankruptcy Code) or that are acquired by an
"affiliate" of the Company. With respect to all of the shares of Common Stock
issued to the former creditors of the Company pursuant to the Plan of
Reorganization (together with any securities issued or issuable in respect
thereof by way of a dividend, stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise, the "Registrable Securities") the Company has entered into a
registration rights agreement with certain stockholders (the "Registration
Rights Agreement") which requires The Company to use its reasonable best efforts
to file, cause to be declared effective and keep effective for three years or
until all registerable securities are sold, a "shelf" registration statement
(the "Shelf Registration"). The Registration Statement of which this Prospectus
is a part is the Shelf Registration referred to in the Registration Rights
Agreement. See "Description of Capital Stock-Stock Registration Rights
Agreement."

DIVIDENDS

The Company presently intends to retain earnings for working capital and to
fund capital expenditures. Accordingly, there is no present intention to pay
cash dividends on any shares of the Common Stock. In addition, the Indenture and
the Senior Credit Facility restrict the payment of cash dividends on the
Company's equity securities.

CERTAIN CORPORATE GOVERNANCE MATTERS

It is possible that certain provisions of the Minnesota Business Corporation
Act may make it more difficult to accomplish transactions which stockholders may
otherwise deem to be in their best interests. Such provisions may be deemed to
have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that might result in the receipt of a premium over the market
price for the securities held by stockholders. See "Certain Provisions of the
Minnesota Business Corporation Act."

NO CASH PROCEEDS TO THE COMPANY

The Company will receive none of the proceeds from the sale of the Shares by
the Selling Stockholders. A total of 20,000,000 shares of Common Stock (of which
the Shares are part) were initially issued to the general unsecured creditors of
the Company in accordance with the Plan of Reorganization under which the
Company emerged from a Chapter 11 bankruptcy proceeding.

DIVIDEND POLICY

The Company has no present intention of paying any dividends on the Common
Stock. The declaration and payment of future dividends to holders of Common
Stock will be at the discretion of the Company's Board of Directors and will
depend upon many factors, including the Company's financial condition, earnings,
the capital requirements of its operating subsidiaries, legal requirements and
such other factors as the Board of Directors deems relevant. In addition, the
Indenture and the Credit Agreement contain certain restrictions on the payment
of dividends on the capital stock of the Company.

Under the Minnesota Business Corporation Act ("MBCA"), the Company may only
declare and pay dividends and other distributions if it is able to pay its debts
in the ordinary course of business after making the distribution. In addition,
payment of the distribution must not reduce the remaining net assets of the
corporation below the aggregate preferential amount payable in the event of
liquidation to the holders of shares having preferential rights.

MARKET FOR THE COMMON STOCK

Through the date hereof there has been no established public trading market
for the Common Stock. See "Risk Factors--Liquidity; Absence of Market for Common
Stock." Pursuant to the Plan of Reorganization, 20,000,000 shares of Common
Stock (including the shares subject to this Prospectus) were issued following
the Effective Date. As of March 16, 1998, these 20,000,000 constituted all of
the shares of Common Stock outstanding. Under the terms of the Plan of
Reorganization, the shares were issued to a Disbursing Agent to be disbursed to
creditors upon final settlement of their respective claims. As of ,
1998, shares have been disbursed to creditors who have settled their
claims.

In reliance on the exemption provided by Section 1145 of the Bankruptcy
Code, none of the shares of Common Stock issued pursuant to the Plan of
Reorganization was registered under the Securities Act in connection with its
issuance pursuant to the Plan of Reorganization; however, the Shares are being
registered hereby for resale by the Selling Stockholders pursuant to certain
registration rights. Shares issued pursuant to the Plan of Reorganization are
freely tradeable without registration under the Securities Act, except for any
shares that were issued to an "underwriter" (as defined in Section 1145(b) of
the Bankruptcy Code) or that are subsequently acquired by an "affiliate" of the
Company, all of which shares will be "restricted securities" within the meaning
of Rule 144 under the Securities Act ("Rule 144"). Shares of Common Stock which
are "restricted securities" within the meaning of Rule 144 may not be resold in
the absence of registration under the Securities Act other than in accordance
with Rule 144 or another exemption from registration. See "Description of
Capital Stock--Registration Rights Agreement" for a discussion of the rights of
the Selling Stockholders to request registration of sales of their Shares.

As of , 1998, there were approximately holders of record of
Common Stock. Under the Plan of Reorganization, the Company also issued (i)
Series A Warrants to purchase up to 2,285,718 shares of Common Stock, (ii)
Series B Warrants to purchase up to an aggregate of 15% of Common Stock (subject
to dilution by the Series A Warrants, the Series C Warrants described below, and
options to purchase Common Stock granted to certain employees (the "Employee
Options")), and (iii) Series C Warrants to Mr. Sam Forman to purchase an
aggregate of 15% of Common Stock (subject to dilution by the Series A Warrants
and certain Employee Options). As of the date hereof, none of the holders of the
foregoing warrants or options have exercised their rights to acquire shares of
Common Stock. As of March 16, 1998, other than the foregoing, there were no
outstanding options or warrants to purchase, or securities convertible into,
Common Stock or Preferred Stock.

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of November 1, 1997. The table should be read in conjunction with the historical
consolidated financial statements of the Company and the related notes thereto
included elsewhere in this Prospectus. See "Plan of Reorganization" and
"Selected Historical Financial Data."

NOVEMBER 1, 1997(1)
(DOLLARS IN MILLIONS)
---------------------

Cash and cash equivalents (other than restricted cash in the Security Account)............... $ 9.4
Restricted cash in Security Account(2)....................................................... 17.0
Long-term debt (including current maturities):
Current Maturities(3)........................................................................ .3
Notes Payable--Taxes......................................................................... 1.4
Senior Credit Facility(4).................................................................... 12.3
Notes(5)..................................................................................... 85.0
------
Total long-term debt (including current maturities)(6)....................................... 99.0
Shareholders' equity......................................................................... 78.1
------
Total capitalization......................................................................... $ 177.1
Long-term debt (including current maturities)/Total capitalization........................... 55.9%

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

(1) The balance sheet as of November 1, 1997 gives effect to the Private Note
Offering and the application of the proceeds therefrom, the Senior Credit
Facility, the Plan of Reorganization, and the application of Fresh Start
Accounting in accordance with Generally Accepted Accounting Principles
(GAAP) as if each had occurred on November 1, 1997. Fresh Start Accounting
requires a restatement of the Company's balance sheet accounts to reflect an
estimated fair market value upon emergence from Chapter 11. See the
Company's Unaudited Pro Forma Consolidated Statements of Operations, "Plan
of Reorganization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Changes in Method of Accounting."

(2) Consists of a portion of the net proceeds realized from the Private Note
Offering and placed into the Security Account and represents funds that
together with the proceeds from the investment thereof will be utilized to
pay interest on the Notes to May 1, 1999.

(3) Liabilities subject to compromise are being satisfied pursuant to the Plan
of Reorganization.

(4) As of November 1, 1997, the Company had approximately $27.5 million of
issued letters of credit and approximately $9.6 million of bankers'
acceptances outstanding under the Senior Credit Facility.

(5) In accordance with GAAP, approximately $7.6 million of the proceeds of the
Private Note Offering was allocated to the Series A Warrants, as a discount
to the debt. Therefore, the Note net of the discount is $77.4 million.

(6) Total long-term debt (including current maturities) includes borrowings of
$12.3 million under the Senior Credit Facility, $1.7 million in notes
payable to various taxing authorities as provided for in the Plan of
Reorganization and $85.0 million of Senior Debt. This presentation differs
from that of the Consolidated Balance Sheet at November 1, 1997 as a result
of the recognition of $7.6 million of Series A Warrants attached to the debt
which is presented as a discount to the Senior Notes in accordance with
GAAP.

SELECTED HISTORICAL FINANCIAL DATA

The following selected historical financial data of the Company for 1992,
1993, 1994, 1995, and 1996 have been taken or derived from the historical
audited consolidated financial statements of the Company. The consolidated
financial data for the 39 week periods ended November 2, 1996 and November 1,
1997 have been derived from unaudited consolidated statements of operations of
the Company and, in the opinion of the Company's management, have been prepared
on a basis consistent with the audited financial statements and include all
adjustments that are considered by management to be necessary for a fair
presentation of such financial information. The balance sheet data at November
1, 1997 has been derived from the audited consolidated balance sheet at November
1, 1997. Historical data and interim results are not necessarily indicative of
future results, and interim data are not necessarily indicative of results for a
full year. The information set forth below should be read in conjunction with
the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

FISCAL YEAR 39 WEEKS ENDED
----------------------------------------------------- ----------------------------

NOVEMBER 2, NOVEMBER 1,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ------------- -------------

(UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS)

STATEMENT OF OPERATIONS DATA
Net sales...................... $ 458.9 $ 502.6 $ 588.3 $ 619.2 $ 538.3 $ 400.4 $ 277.1
Gross profit before special
charge(1).................... 137.4 142.1 167.8 167.2 121.9 87.7 74.3
Gross profit after special
charge(1).................... 137.4 142.1 167.8 167.2 121.9 87.7 62.3
Reorganization costs........... -- -- -- -- 43.8 42.4 38.4
Income (loss) from
operations(3)................ 26.2 18.0 31.5 21.3 (15.7) (18.8) (15.3)
Net income (loss)(2)........... 2.9 (6.6) 5.2 (97.0) (76.9) (77.1) (57.7)
Ratio of earnings to fixed
charges(3)................... 1.3 0.9 1.5 n/a n/a n/a n/a
STORE DATA:
Number of stores at end of
period....................... 605 657 701 745 537 692 413
Increase (decrease) in same
store sales(4)............... (0.6)% (3.1)% 7.4% (4.0)% (8.7)% (7.3)% (12.2)%
Other Data:
Gross profit % before special
charge(1).................... 29.9% 28.3% 28.5% 27.0% 22.6% 21.9% 26.8%
Gross profit % after special
charge(1).................... 29.9% 28.3% 28.5% 27.0% 22.6% 21.9% 22.5%
Total capital expenditures..... $ 14.1 $ 8.9 $ 14.8 $ 13.1 $ 1.8 $ 1.8 $ 1.4
Depreciation and
amortization................. 16.6 17.4 16.7 13.2 11.1 8.8 6.1
EBITDA before special
charge(1)(5)................. 42.9 35.3 48.2 34.5 (4.7) (9.9) 2.9
EBITDA after special
charge(1)(5)................. 42.9 35.3 48.2 34.5 (4.7) (9.9) (9.1)

AS OF
AS OF FEBRUARY 1, AS OF
FEBRUARY 3, 1996 1997 NOVEMBER 1, 1997
----------------- --------------- -------------------

BALANCE SHEET DATA
Cash and cash equivalents (excludes restricted cash in
Security Account).......................................... $ 8.2 $ 6.4 $ 9.4
Restricted cash in Security Account......................... -- -- 17.0
Inventories................................................. 110.7 72.6 74.7
Total assets................................................ 199.0 132.9 220.6
Total debt (including current maturities and liabilities
subject to compromise)..................................... 201.4 235.6 99.0(6)
Total shareholder's equity (deficit)........................ (73.2) (157.3) 78.1

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

(1) Gross profit and EBITDA are presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12 million
was recorded within cost of goods sold and relates to the liquidation of
excess inventory from purchase commitments in early 1997 for 1997 fall
merchandise, based upon a chain of over 500 stores, of which 137 stores were
closed by the time the merchandise was received. See Note 8 to the
consolidated balance sheet at November 1, 1997, for a discussion of the
special charge.

(2) Income (loss) from operations does not give effect to the $80.2 million
write-off of certain long-lived assets in 1995 and reorganization costs
incurred of $43.8 million during 1996, and $38.4 million and $42.4 million
for the 39 weeks ended November 1, 1997 and November 2, 1996, respectively.

(3) The ratio of earnings to fixed charges was 1.3 for 1992 and 1.5 for 1994.
The ratio of earnings to fixed charges for 1995, 1996 and 1997 is not stated
because of the net loss incurred in those years. Earnings were inadequate to
cover fixed charges by $1.6 million, $79.4 million and $74.9 million in
1993, 1995 and 1996, respectively. The ratio of earnings to fixed charges
for 1996 and 1997 is not stated due to the suspension of interest accruals
upon the Company's Chapter 11 Filing. The ratio of earnings to fixed charges
is computed by dividing income before income taxes and extraordinary items
and fixed charges by fixed charges. Fixed charges consist of interest
expense, net, amortization of debt issuance costs, and the portion
(approximately one-third) of rent expense that is deemed to represent
interest.

(4) The Company defines same stores to be stores that have reached their
thirteenth full month of operations, excluding closed stores. Same store
sales results present fifty-three weeks of operations measured against
fifty-three weeks in the prior year for 1995 and fifty-two weeks of
operations measured against fifty-two weeks in the prior year for all other
years presented.

(5) EBITDA represents net earnings (losses) before interest, income taxes,
depreciation and amortization, and reorganization costs. EBITDA is presented
here to provide additional information about the Company's operations.
EBITDA is not a measure of financial performance in accordance with GAAP and
should not be considered as an alternative to (i) net income (loss) as a
measure of performance (or any other measure of performance in accordance
with Generally Accepted Accounting Principles (GAAP) or (ii) cash flows from
operating, investing, or financing activities as an indicator of cash flows
or as a measure of liquidity. EBITDA is presented before and after
non-recurring liquidation charge.

(6) Total debt includes borrowings of $12.3 million under the Senior Credit
Facility, $1.7 million in notes payable to various taxing authorities as
provided for in the Plan of Reorganization, and $85.0 million of Senior
Debt. This presentation differs from that of the Consolidated Balance Sheet
at November 1, 1997 as a result of the recognition of $7.6 million of Series
A Warrants attached to the debt which is presented as a discount to the
Senior Notes in accordance with GAAP.

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

The Company recently emerged from bankruptcy under Chapter 11 of the
Bankruptcy Code. See "Plan of Reorganization." The following discussion and
analysis relates to the Company's historical financial results of operations and
financial condition without giving effect to the implementation of the new
business strategy, the Private Note Offering, the Senior Credit Facility, and
the Plan of Reorganization, except to the extent that the implementation of the
new business strategy and the Plan of Reorganization occurred prior to November
1, 1997. The Company's management does not believe that the results of
operations for future periods will be comparable to the results of operations
for prior periods, because of the implementation of the new business strategy
and the Plan of Reorganization, the completion of the Private Note Offering and
the Senior Credit Facility, and the incurrence of expenses in connection with
the Company's Chapter 11 case. The following discussion and analysis should be
read in conjunction with the "Selected Historical Financial Data," the Pro Forma
financial information appearing elsewhere in this Prospectus, and the Company's
consolidated financial statements and the notes thereto.

OVERVIEW

During the period from 1992 to 1994, the Company expanded from 605 stores,
generating net sales of $458.9 million, EBITDA of $42.9 million, and an EBITDA
margin of 9.3%, to 701 stores, generating net sales of $588.3 million, EBITDA of
$48.2 million, and an EBITDA margin of 8.2%. However, by 1995 the Company's
EBITDA margin declined to 5.6% primarily due to the following reasons: (i) the
Company, in an attempt to further its expansion strategy, opened stores without
sufficient regard to the profitability of each location; (ii) in response to
increased price competition on Levi's merchandise, the Company unsuccessfully
expanded its offering of branded apparel in the face of stiff competition from
mall-based department stores; (iii) the Company failed to competitively source
merchandise for its private label program; and (iv) the specialty apparel retail
sector experienced a downturn. By 1996, in the wake of declining sales and
deteriorating margins, the Company was unable to meet its scheduled interest
payment obligations on its then outstanding subordinated indebtedness. As a
result of the foregoing, in October 1996, the Company made the Chapter 11
Filing.

In December 1996, the new management team joined the Company and developed a
new business strategy designed to enhance the Company's profitability and
increase gross margins by capitalizing on the Company's nationally recognized
brand name and large store base and by reducing costs and implementing a new
merchandising strategy. Upon arrival, the new management team immediately began
liquidating merchandise that was inconsistent with its new merchandising
strategy and significantly reduced inventory available in the stores. In
addition, the new management team (i) closed 341 unprofitable stores; (ii)
obtained rent concessions on existing stores; (iii) reduced selling, general and
administrative expenses through personnel reductions associated with closed
stores; (iv) consolidated the Company's corporate infrastructure by closing the
Company's Dallas corporate office; and (v) established a new corporate "culture"
focused on cost control.

The Company began receiving merchandise pursuant to its new business
strategy in May 1997 and began realizing significant benefits of such new
merchandise by August 1997. Accordingly, the Company's retail margins
subsequently increased to 45.2% before the special charge and 40.4% after the
special charge for the 39 weeks ended November 1, 1997. See Note 8 to the
consolidated balance sheet at November 1, 1997, for discussion of the special
charge.

Net sales consists of sales of apparel, accessories, and other merchandise
through the Company's COUNTY SEAT stores, COUNTY SEAT OUTLET stores, LEVI'S
OUTLET stores, and OLD FARMER'S ALMANAC GENERAL STORES. For the Pre-Emergence
Period, the Company's COUNTY SEAT stores, COUNTY SEAT OUTLET stores, LEVI'S
OUTLET stores, and OLD FARMERS ALMANAC GENERAL STORES comprised 87%, 2%, 10%,
and 1% of net sales, respectively. The COUNTY SEAT OUTLET stores sell special
buy and clearance merchandise, including slow-

moving merchandise from the COUNTY SEAT stores. The LEVI'S OUTLET stores offer
closeouts, seconds, and irregulars under the Levi's and Docker's trademarks.
Merchandise at the County Seat stores is generally sold at ticketed retail
prices upon arrival, but markdowns are taken (i) in connection with promotional
activities in the ordinary course of business and (ii) on end-of-season
clearance items and slow moving merchandise. In accordance with the new business
strategy, the Company currently sells its merchandise at lower price points than
it had in prior periods. For example, for the 39 weeks ended November 1, 1997,
the Company decreased its average selling price per unit at its County Seat
stores by 27% to $14.40 from $19.65 in the prior period. As a result, the
Company improved unit volume at its County Seat stores by 18.0% to 13.7 million
units for the nine months ended November 1, 1997 from 11.6 million units for the
nine months ended November 2, 1996.

Cost of sales includes merchandise costs, transportation costs, storage
costs, handling costs, and other costs related to the sourcing of merchandise.
Cost of sales also includes a substantial portion of fixed occupancy costs.
Selling, general, and administrative costs include store and administrative
wages, administrative costs related to corporate offices and corporate
activities, employee benefits, marketing costs, insurance premiums, cash
management fees, and the cost of supplies, equipment rental and maintenance,
outside services, and travel.

The Company's preliminary results, which are subject to adjustment, indicate
that net sales for the thirteen weeks of November 1997, December 1997 and
January 1998 are approximately $117.4 million, representing a 3.0% decline in
same store sales relative to the comparable period of the prior year. The
Company believes that the decline in comparable store sales is primarily due to
a decline in Levi's and other branded sales.

RESULTS OF OPERATIONS

The following table shows the Company's operating results as a percentage of
net sales for the periods indicated:

FISCAL YEAR NINE MONTHS ENDED
------------------------------- ----------------------------------------

NOVEMBER 2, NOVEMBER 1,
1994 1995 1996 1996 1997
--------- --------- --------- ------------------- -------------------

(UNAUDITED)

Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit before special charge(1).............. 28.5% 27.0% 22.6% 21.9% 26.8%
Gross profit after special charge(1)............... 28.5% 27.0% 22.6% 21.9% 22.5%
Selling, general, and administrative expenses...... 20.3% 21.4% 23.5% 24.4% 25.8%
EBITDA before special charge(1).................... 8.2% 5.6% (0.9)% (2.5 )% 1.0%
EBITDA after special charge(1)..................... 8.2% 5.6% (0.9)% (2.5 )% (3.3 )%
Reorganization costs............................... -- -- 8.1% 10.6% 13.9%
Income (loss) from operations(2)................... 5.4% 3.4% (2.9)% (4.7 )% (5.5 )%

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

(1) Gross profit and EBITDA are presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12.0
million was recorded within cost of goods sold and relates to the
liquidation of excess inventory from purchase commitments made in early 1997
for 1997 Fall merchandise based upon a chain of over 500 stores, of which
137 stores were closed by the time the merchandise was received. See Note 8
to the consolidated balance sheet at November 1, 1997, for discussion of the
special charge.

(2) Income (loss) from operations does not give effect to the $80.2 million
write-off of certain long-lived assets in 1995 and reorganization costs of
$43.8 million in 1996 and $38.4 million and $42.4 million for the 39 weeks
ended November 2, 1996 and November 1, 1997, respectively.

COMPARISON OF THE 39 WEEKS ENDED NOVEMBER 1, 1997 WITH THE 39 WEEKS ENDED
NOVEMBER 2, 1996.

Net sales decreased $123.3 million, or 30.8%, to $277.1 million for the 39
weeks ended November 1, 1997 from $400.4 million for the 39 weeks ended November
2, 1996. As contemplated by the Company's new business strategy, the decrease
was primarily due to a $96.5 million decrease in net sales from the closing of
253 stores and a $33.5 million decrease in sales from comparable stores.
Comparable store sales were 12.2% lower for the 39 weeks ended November 1, 1997
than comparable store sales for the 39 weeks ended November 2, 1996 due
primarily to (i) a planned shift toward lower price points in accordance with
the Company's new business strategy and (ii) the Company's difficulty in
obtaining merchandise during 1997 due to the Chapter 11 case. These decreases
were offset by $6.7 million relating to new store sales.

Gross profit decreased $25.4 million, or 28.9%, to $62.3 million for the 39
weeks ended November 1, 1997 from $87.7 million for the 39 weeks ended November
2, 1996. The decrease in gross profit was primarily due to reduced net sales of
$123.3 million, a $10.5 million liquidation sale in the first quarter of 1997,
and a $12.0 million special charge to liquidate excess inventory in the third
quarter of 1997. Gross margin increased by 0.6% to 22.5% for the 39 weeks ended
November 1, 1997 from 21.9% for the 39 weeks ended November 2, 1996 due to (i) a
0.7% reduction in occupancy costs relating primarily to the renegotiation of
certain store leases and (ii) a 4.9% increase in retail margins due to the
successful implementation of the Company's new business strategy, which has
resulted in purchasing merchandise at lower costs per unit and partially offset
by clearing prior management's merchandise which allowed the Company to sell
merchandise at lower price points. These improvements were partially offset by a
4.3% special charge to costs of goods sold and a 0.7% increase in buying and
merchandise handling costs.

Selling, general, and administrative expense decreased $26.2 million, or
26.8%, to $71.5 million for the 39 weeks ended November 1, 1997 from $97.6
million for the 39 weeks ended November 2, 1996. This decrease was due to a
$24.1 million reduction in store expenses from closed stores and a $2.1 million
reduction relating primarily to personnel reductions in 1997 and nonrecurring
severance and outside service charges in 1996. Selling, general and
administrative expense as a percentage of net sales is 25.8% and 24.4% for the
39 weeks ended November 1, 1997 and November 2, 1996, respectively.

Depreciation and amortization expense decreased $2.7 million to $6.1 million
for the 39 weeks ended November 1, 1997 from $8.8 million for the 39 weeks ended
November 2, 1996. The decrease was due to the net closing of 253 stores in 1996
and the first half of 1997.

Loss from operations decreased to $(57.7) million for the 39 weeks ended
November 1, 1997 from $(77.1) million for the 39 weeks ended November 2, 1996.

For the 39 weeks ended November 1, 1997 and November 2, 1996, reorganization
costs of $38.4 million and $42.4 million, respectively, were recorded. The
reorganization costs primarily relate to stores closed during 1997 and 1996 and
stores that the new management team had decided to close. Reorganization costs
recorded in 1997 include estimated lease rejection claims, write-offs to fixed
assets associated with closed stores, other going out of business store
expenses, costs associated with the closure of the distribution center and
administrative offices and professional fees and other reorganization costs.

COMPARISON OF YEARS 1996 AND 1995

Results of operations for 1996 included 52 weeks, while 1995 included 53
weeks.

Net sales decreased $80.9 million, or 13.1% to $538.3 million in 1996 from
$619.2 million in 1995. Comparable store sales were 8.7% lower, on a 52 week
basis, in 1996 as compared to 1995. The decline in net sales was due to (i) the
closing of 217 store locations during 1996, which accounted for $50.0 million in
net sales, 52 weeks versus 53 weeks, (ii) a $41.6 million decrease in sales from
comparable stores on a 52 week basis, and (iii) the $6.9 million in net sales
for the fifty-third week in 1995. Comparable store sales were negatively
affected by the Company's difficulty in obtaining merchandise during the fourth
quarter of 1996 following the Chapter 11 Filing and by the liquidation in 1997
of certain branded merchandise that

was inconsistent with the Company's new business strategy. These decreases were
offset in part by $15.1 million from new store sales.

Gross profit decreased $45.3 million, or 27.1%, to $121.9 million in 1996,
from $167.2 million in 1995. The decrease in gross profit was primarily due to a
$24.2 million decrease due to store closures and $25.0 million decrease due to a
decline in net sales at comparable stores. The decrease in gross profit was
offset by a $3.9 million reduction in buying, occupancy and merchandise handling
costs. Gross margin decreased to 22.6% in 1996 from 27.0% in 1995 due to the
Company's attempt to improve liquidity prior to the Chapter 11 Filing by
liquidating merchandise irrespective of gross margins achieved.

Selling, general and administrative expense decreased $6.1 million, or 4.6%,
in 1996 compared to 1995. The decrease was primarily due to reduced operating
expenses associated with stores closed in 1996. Selling, general and
administrative expense as a percentage of net sales increased to 23.5% in 1996
compared to 21.4% in 1995. The increase in selling, general and administrative
expense as a percentage of net sales was primarily due to comparable stores
reporting lower sales combined with relatively constant operating costs.

Depreciation and amortization expense decreased $2.1 million to $11.1
million in 1996 from $13.2 million in 1995. The decrease was due to the
elimination of goodwill amortization due to the $80.2 million write-off of
long-lived assets in 1995 and fixed assets becoming fully depreciated.

Income (loss) from operations decreased to $(15.7) million for 1996 from
$21.3 million for 1995. As a percentage of net sales, income (loss) from
operations was (2.9)% for 1996 compared to 3.4% for 1995.

In the third quarter of 1995, the Company recorded an $80.2 million non-cash
write-off of certain long-lived assets. Approximately $74.7 million of remaining
goodwill was written off to reflect a change in the Company's estimate of its
fair value. Certain fixed assets with a net book value of $5.5 million were
included in the write-off based on management's estimate of the recoverability
of their net book value.

Reorganization costs of $43.8 million were recorded in 1996. The
reorganization costs primarily relate to stores closed during 1996 and stores
that the new management team had decided to close. Reorganization costs recorded
in 1996 include estimated lease rejection claims of $25.6 million, write-offs of
fixed assets associated with closed stores of $7.2 million, operating and other
costs associated with closed stores of $7.2 million, and professional fees and
other reorganization costs of $3.7 million.

The Company recorded income tax benefits of $0.7 million in 1996 on a loss
before income taxes of $74.9 million. The Company's income tax provision
includes a $28.4 million valuation allowance for deferred tax assets. The
effective income tax rate differs from the statutory federal rate primarily due
to the non-deductible write-off of the valuation allowance for deferred tax
assets.

In the third quarter of 1996, the Company recorded an extraordinary charge
of $2.7 million with no tax benefit. The extraordinary charge represented the
write-off of debt issuance costs related to the pre-existing credit agreement,
which was replaced with the Existing Credit Facility in October 1996.

COMPARISON OF YEARS 1995 AND 1994

Results of operations for 1995 included 53 weeks, while 1994 included 52
weeks.

Net sales increased $30.9 million, or 5.3%, to $619.2 million in 1995 from
$588.3 million in 1994. The increase was primarily due to a $52.0 million
increase in net sales from new store locations, partially offset by a $16.4
million decrease in sales from comparable stores and a $4.7 million reduction in
sales due to store closings. Comparable store sales were 4.0% lower in 1995 than
comparable store performance in 1994 due to a weak retail environment. Sales
were also affected by unseasonable and adverse weather conditions, which
affected the mix of goods sold in both the spring and fall seasons.

Gross profit decreased $0.6 million, or 0.4%, to $167.2 million in 1995
compared to $167.8 million in 1994. The decrease was primarily due to lower
comparable store sales, additional buying and occupancy costs from new store
locations, and a lower retail margin rate, partially offset by sales from stores
opened in 1995 and 1994. Gross Margin decreased to 27.0% in 1995 from 28.5% in
1994 due to promotional pricing and adverse weather conditions. The change in
the mix of goods sold reflected an increase in sales of competitively priced
Levi's jeans and outlet merchandise and lower sales of higher margin tops.

Selling, general, and administrative expense increased $13.1 million, or
10.9%, to $132.7 million in 1995 compared to $119.6 million in 1994. The
increase was primarily due to store operating expenses associated with new
stores opened in 1995 and 1994, as well as a $1.0 million non-recurring
consulting fee related to the evaluation of the Company's financial structure
recorded in the first half of 1995. Selling, general, and administrative expense
as a percentage of net sales increased to 21.4% in 1995 compared to 20.3% in
1994. This increase was primarily due to comparable stores reporting lower sales
combined with relatively constant operating expenses and the non-recurring
consulting fee referred to above.

Depreciation and amortization expense decreased $3.5 million to $13.2
million in 1995 from $16.7 million in 1994. The decrease was due to the
reduction in amortization expense related to the Company's noncompete agreement
and goodwill, partially offset by depreciation on new store and remodeled store
assets. The Company's noncompete agreement was fully amortized in 1994, and the
remaining balance of goodwill was written off in the third quarter of 1995.
Depreciation and amortization decreased as a percentage of net sales to 2.1%
from 2.8%, substantially as a result of the elimination of noncompete agreement
amortization.

Income from operations decreased to $21.3 million for 1995 from $31.5
million for 1994. As a percentage of net sales, income from operations was 3.4%
in 1995 compared to 5.4% for 1994.

In the third quarter of 1995, the Company recorded an $80.2 million non-cash
write-off of certain long-lived assets. The $74.7 million of remaining goodwill
was written off to reflect a change in the Company's estimate of its fair value.
Certain fixed assets with a net book value of $5.5 million were included in the
write-off based on management's estimate of the recoverability of their net book
value.

The Company recorded income tax expense of $7.6 million in 1995 on a loss
before income taxes of $79.4 million, reflecting the impact of non-deductible
charges for the $74.7 million goodwill write-off, $1.6 million goodwill
amortization, and $0.3 million of debt discount amortization. The Company's
income tax provision includes an $8.6 million valuation allowance for the
deferred tax assets, partially offset by a $1.0 million income tax benefit. The
effective income tax rate differs from the statutory federal rate primarily due
to the non-deductible write-off of goodwill and the valuation allowance for the
deferred tax assets.

Extraordinary charges totaling $10.0 million, net of related income taxes,
were recorded in 1995. In May 1995, an extraordinary charge of $2.4 million
relating to the redemption of the Company's senior notes was recorded,
consisting of prepayment premiums of $1.6 million and the write-off of debt
issuance costs related to the retirement of debt of $0.8 million. In July 1995,
an extraordinary charge of $7.6 million relating to the exchange of $104.9
million principal amount of 12% Senior Subordinated Notes maturing October 1,
2002 for $104.9 million principal amount of 12% Senior Subordinated Notes
maturing October 1, 2001 in the second quarter of 1995 was recorded, consisting
of the write-off of debt discount of $5.1 million, the write-off of debt
issuance costs related to the retirement of debt of $2.0 million, and the
payment of repurchase premiums of $0.5 million.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities for the 39 weeks ended November 1,
1997 was $32.8 million due primarily to a $57.7 million net loss which was
offset in part by $6.1 million of depreciation and amortization, $1.2 million of
rent expense in excess of cash outlays, $4.9 million loss on disposal of
property and equipment and $20.2 million of reorganization costs. Net cash used
in operations for the 39

weeks ended November 2, 1996 was $5.8 million due primarily to a $77.1 million
net loss which was offset in part by $8.8 million of depreciation and
amortization, $38.1 million of reorganization costs and a $2.7 million
extraordinary item.

Because of the seasonal nature of the Company's business, working capital
requirements increase as inventory levels peak in anticipation of the
back-to-school and holiday shopping seasons. Working capital as of November 1,
1997 and at the end of 1996 were $41.7 million and $3.4 million respectively.

Net cash used to make capital expenditures was $1.4 million during the 39
weeks ended November 1, 1997 and $1.8 million in 1996.

The Company's Plan of Reorganization was confirmed by the Bankruptcy Court
on, and in an order (the "Confirmation Order") dated, October 1, 1997. The
planned proceeds of the Private Note Offering together with borrowings under the
new Senior Credit Facility are being used to repay the Existing Credit Facility,
pay claims pursuant to the Plan of Reorganization, and pay other transaction
fees and expenses.

The Senior Credit Facility provides for a three-year revolving line of
credit in an amount of $115 million. Up to $90 million of such amount may be
utilized for letters of credit and bankers' acceptances. Amounts available under
the Senior Credit Facility are subject to the value of the Company's eligible
inventory (as defined in the Senior Credit Facility) and to the satisfaction of
certain conditions. The borrowing base provides for seasonal fluctuations in
inventory. Peak borrowing periods generally occur between June and November. The
Company's peak borrowing periods commence with the sourcing of its merchandise
through the utilization of letters of credit facilities with approximately three
months lead-time prior to delivery of such merchandise. The Company has entered
into the Senior Credit Facility to repay its obligations under the Existing
Credit Facility upon the closing of the Private Note Offering. See "Description
of Certain Indebtedness--Senior Credit Facility."

As of November 1, 1997, the Company had approximately $27.5 million of
letters of credit and $9.6 million of bankers' acceptances outstanding in
addition to approximately $24.0 million of remaining availability under the
Senior Credit Facility. The Company believes that cash generated from
operations, together with borrowings under the Senior Credit Facility, will be
adequate to finance 1998 operations.

INFLATION, ECONOMIC TRENDS, AND POTENTIAL DEVELOPMENTS

The Company's operations are affected by general economic trends, including
inflation. Management believes that the Company and other specialty retailers
have suffered from price competition, which has had a negative effect on sales
and gross margin. The Company believes that poor economic conditions have
adversely affected its sales and profitability in prior years and may affect
results in future periods.

SEASONALITY

The Company, like most retailers, has a seasonal pattern of sales and
earnings. The Company has two major selling seasons: back-to-school (third
quarter) and Christmas (fourth quarter). The table below sets forth by quarter,
1997 (through the third quarter), 1996 and 1995 net sales, gross profit, and
EBITDA.

FIRST SECOND THIRD FOURTH TOTAL
YEAR QUARTER QUARTER QUARTER QUARTER YEAR
- --------- ---------- ---------- ---------- ---------- ----------

(DOLLARS IN THOUSANDS)
1997 Net sales........................................... $ 93,158 $ 86,897 $ 97,081 N/A N/A
Gross profit before special charge(1)............... 15,820 25,289 33,221 N/A N/A
Gross profit after special charge................... 15,820 25,289 21,246 N/A N/A
EBITDA before special charge(1)(2).................. (7,861) 247 10,462 N/A N/A
EBITDA after special charge(1)(2)................... (7,861) 247 (1,513) N/A N/A
Income (loss) from operations (3)................... (10,061) (1,832) (3,371) N/A N/A
1996 Net sales........................................... $ 121,604 $ 121,727 $ 157,060 $ 137,869 $ 538,260
Gross profit........................................ 26,075 31,444 33,559 30,793 121,871
EBITDA(2)........................................... (5,227) (2,203) (2,511) 5,251 (4,690)
Income (loss) from operations(3).................... (8,186) (5,159) (5,430) 3,034 (15,741)
1995 Net sales........................................... $ 124,189 $ 130,110 $ 159,476 $ 205,450 $ 619,225
Gross profit........................................ 29,251 34,987 41,073 61,900 167,211
EBITDA(2)........................................... (622) 2,818 8,447 23,869 34,512
Income (loss) from operations(3).................... (3,878) (713) 4,998 20,868 21,275

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

(1) Gross profit and EBITDA are presented before and after a special charge to
liquidate excess inventory. The special charge of approximately $12.0
million was recorded within cost of goods sold and relates to the
liquidation of excess inventory from purchase commitments in early 1997 for
1997 Fall merchandise, based upon a chain of over 500 stores, of which 137
stores were closed by the time the merchandise was received. See Note 8 to
consolidated balance sheet at November 1, 1997, for discussion of special
charge.

(2) EBITDA represents net earnings (losses) before interest, income taxes,
depreciation and amortization, and reorganization costs. EBITDA is presented
here to provide additional information about the Company's operations.
EBITDA is not a measure of financial performance in accordance with
Generally Accepted Accounting Principles (GAAP) and should not be considered
as an alternative to (i) net income (loss) as a measure of performance (or
any other measure of performance in accordance with GAAP) or (ii) cash flows
from operating, investing, or financing activities as an indicator of cash
flows or as a measure of liquidity. EBITDA is presented before and after
special charge to liquidate inventory.

(3) Income (loss) from operations does not give effect to the write-off of
certain long-lived assets in 1995 and reorganization costs incurred during
1996 and the 39 weeks ended November 1, 1997.

INCOME TAXES

The Company had been included in the consolidated federal income tax return
of County Seat, Inc. Prior to the Effective Date, County Seat, Inc. owned all
the Company's capital stock. The tax year-end for the Company and County Seat,
Inc. is the Saturday closest to July 31. As of November 1, 1997, the Company had
NOLs of approximately $100.0 million. The Company's Plan of Reorganization or
significant changes in ownership of the Company could substantially limit the
use of NOLs. The Company and County Seat, Inc. account for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." This standard requires, among other things, recognition of
future tax benefits, measured by enacted tax rates, attributable to deductible
temporary differences between financial statement and income tax bases of assets
and liabilities and to tax NOLs to the extent that realization of such benefits
is more likely than not. Based on the Company's history of earnings and in
consideration of the Company's Chapter 11 Filing, the Company's entire balance
of deferred tax assets has been reduced by a valuation allowance of $14.7
million, as realization of these long-term tax benefits is

dependent upon future earnings. Management cannot predict sufficient operating
income to utilize fully its deferred income tax assets.

CHANGES IN METHOD OF ACCOUNTING

The effects of the Company's reorganization under Chapter 11 have been
accounted for in the Company's financial statements using the principles
required by the American Institute of Certified Public Accountants' Statement of
Position 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE
BANKRUPTCY CODE (Fresh Start Accounting). Pursuant to such principles, the
Company's assets, upon emergence from Chapter 11, were stated at "REORGANIZATION
VALUE," which is defined as the value of the entity before considering
liabilities on a going-concern basis following the reorganization and represents
the estimated amount a willing buyer would pay for the assets of the Company
immediately after the reorganization. The reorganization value for the Company
is determined by reference to the remaining liabilities plus the estimated value
of total shareholders' equity of the outstanding shares of the Common Stock. The
reorganization value of the Company is allocated to the assets of the Company in
conformity with the procedures specified by Accounting Principles Board Opinion
No. 16, Business Combinations, for transactions reported on the basis of the
purchase method of accounting. In this allocation, identifiable assets are
valued at estimated fair values, and any excess reorganization value has been
recorded as "reorganization value in excess of amounts allocated to identified
assets" (a long-term intangible asset similar to "goodwill").

YEAR 2000 COMPLIANCE

The Company has recently commenced a two year project to update and, where
applicable, replace all main frame systems with third party software to support
the operations of the Company. The Company anticipates expenditures for
hardware, software and labor to be approximately $6.0 million through 1998 (the
anticipated completion) and at which point operating systems will be year 2000
compliant. The Company will also begin a process to review with its vendors the
impact of year 2000 on transactions between both parties.

BUSINESS

OVERVIEW

The Company is among the nation's largest mall-based specialty retailers of
casual apparel, operating 413 stores in 41 states in the midwestern, southern,
and eastern regions of the United States. Under the direction of a new
management team, the Company's merchandise mix has recently been updated to
include more tops than bottoms and consist of casual shirts, sweaters, knit
tops, khakis, jeans, dresses, and accessories for men, women, and teens. The
Company's products are now primarily manufactured under private label, which, in
the Company's view, offers customers quality comparable to branded merchandise
at significantly lower prices and generates higher gross margins than the
Company has historically achieved.

In December 1996, a new management team led by Sam Forman developed a new
business plan designed to enhance the Company's profitability and increase gross
margins by reducing costs, implementing a new merchandising strategy, and
capitalizing on the Company's nationally recognized brand name and large store
base.

Mr. Forman has over forty years of retailing and manufacturing experience in
the apparel industry and has been an innovator in manufacturing and retailing
value-priced private label apparel, the cornerstone of the Company's new
merchandising strategy. Mr Forman has implemented successful business strategies
for apparel companies by maximizing profitability through direct sourcing,
value-oriented merchandising strategies, and internal cost controls. Most
recently, Mr. Forman was president and chief operating officer of American
Eagle, a mall-based specialty retailer.

The new management team has implemented a business strategy designed to
re-establish the Company as a leading national retailer of high-quality,
value-priced casual apparel and to restore its profitability and EBITDA to
historical levels. The principal elements of this business strategy are similar
to those implemented by Mr. Forman at American Eagle and include (i) reducing
costs, including, unlike at American Eagle, closing unprofitable stores, (ii)
implementing a new merchandising strategy, and (iii) initiating a controlled
expansion program.

STORES

The Company owns and operates approximately 375 COUNTY SEAT stores, 14
COUNTY SEAT OUTLET stores, 22 LEVI'S OUTLET stores, and 2 OLD FARMER'S ALMANAC
GENERAL STORES. COUNTY SEAT stores are typically located in regional shopping
malls that are typically at least 500,000 square feet in size and that are
anchored by two or more major department stores. COUNTY SEAT stores range in
size from 2,700 to 7,300 square feet and average 4,000 square feet. The Company
seeks to position its COUNTY SEAT stores in prime mall locations with sufficient
store frontage in areas occupied by comparable specialty stores. The Company
believes that, based on its business strategy and recent results of operations
since the arrival of the new management team, it will compete effectively with
comparable apparel stores due to the relative quality and value of its
merchandise selection. The Company believes that its stores are generally in
good physical condition and anticipates making approximately $4.2 million in
capital expenditures in 1998 to remodel its stores.

The Company projects a casual lifestyle image in its stores. In each COUNTY
SEAT store, there are usually large tables near the entrance filled with key
items like polo shirts, flannel shirts, or t-shirts to attract customers into
the store. Coordinated groupings and outfits are displayed throughout the store
to enable the customer to visualize the product offering and to promote multiple
unit transactions. The merchandise selection in the COUNTY SEAT stores is
limited by design to key colors and styles with a focus on offering basics. The
general layout of merchandise in the stores is planned by the Company's
corporate management but may be varied and adapted by individual store
management to properly reflect specific store characteristics and customer
preferences.

The Company's store employees generally wear the Company's merchandise. The
Company seeks to hire sales associates who have prior retail sales experience
and an entrepreneurial spirit. Sales personnel are knowledgeable about the
merchandise and encouraged through incentives to increase the number of units
sold per transaction. The Company considers customer service an important
element of its success and believes it has an established reputation for
personal attention to the customer's needs and requirements for casual,
value-priced apparel. The Company's sales personnel, store managers, and
co-managers are trained by experienced store managers and district managers to
offer the customer courteous and knowledgeable service. Store managers and
co-managers receive bonuses based on sales and shrinkage. Other store employees
are not paid a commission but receive incentive pay based on sales.

MERCHANDISE

The Company has transitioned itself from a retailer of denim jeans and
primarily branded apparel to a private label casual apparel retailer. The new
strategy places less dependence on bottoms and branded apparel and more emphasis
on tops and women's wear and is intended to enhance gross margins. The
assortment of tops consists of classics such as polo shirts, woven and flannel
shirts, knit shirts and t-shirts in a broad range of colors with updated
features.

Since it began implementing its new merchandise strategy, the Company has
offered basic bottoms such as khakis and jeans at $19.99. The Company is
utilizing such marketing strategies and taking advantage of its reputation as a
bottoms retailer to position itself as the value leader in the mall, offering a
merchandise mix designed to appeal to a broad customer base.

SHIFT OF PRODUCT MIX. Part of the Company's merchandise strategy is to
increase the percentage of its sales derived from tops. Tops generally provide
higher margins and more unit volume than bottoms since tops usually have a lower
relative unit cost and customers typically purchase more units of tops than
bottoms. The Company's goal is to increase the ratio of tops to bottoms sold to
3:1 by the end of 1998. The Company has significantly improved the ratio of tops
to bottoms at its COUNTY SEAT stores from 1:1 for the 39 weeks ended November 2,
1996 to 1.7:1 for the nine months ended November 1, 1997.

Another feature of the new management team's strategy is to focus on women's
apparel with a view toward broadening the customer base. The increased mix of
women's wear includes fashionable basics such as sweaters, knit tops, and casual
dresses. Based on this change in product mix, management expects women's wear to
grow from 43% of sales to 50% of sales.

PRIVATE LABEL. The Company believes that the sale of high quality
private-label merchandise builds customer loyalty and differentiates the Company
from its competitors. In addition, private-label merchandise typically has
higher gross margins than branded merchandise and allows the Company to avoid
direct price competition on national branded merchandise. Private-label
merchandise has grown from approximately 65.0% of sales at the Company's COUNTY
SEAT stores during the nine months ended November 2, 1996 to 82.0% during the
nine months ended November 1, 1997.

QUALITY. Management believes that the quality of the Company's
private-label merchandise is comparable to the quality of select branded
merchandise and private-label merchandise sold by the Company's competitors. The
Company's goods are generally made with high quality cotton or other natural
fibers. For example, typically the weight of the Company's private-label jeans
is 14 3/4 ounces, the weight of its private-label t-shirts is 185 grams, and the
weight of its pique polo shirt is 220 grams, which, in management's view, are
the industry standards for high quality denim, cotton t-shirts and pique polo
shirts, respectively. The Company regularly inspects samples of its manufactured
goods prior to delivery for quality based on materials, color, sizing
specifications, and shrinkage. The Company's management team also routinely
inspects the factories of the Company's suppliers to ensure that the Company's
goods are of high quality.

SOURCING AND SUPPLIERS

All the Company's inventory is purchased from third-party suppliers or
manufacturers. The Company owns no manufacturing facilities. Approximately 80%
of the Company's private-label products are manufactured abroad, with the
remainder being made in the United States.

A key element of the Company's strategy is to significantly reduce its cost
of goods sold while maintaining or increasing gross margins through disciplined,
direct sourcing of its merchandise. Pursuant to this strategy, the Company has
established relationships with vendors in certain developing countries. The
Company generally negotiates directly with its vendors without using agents or
middlemen. As a result, the Company has greater control over its manufacturing
costs, the manufacturing process, and the quality of its merchandise. The
Company also takes advantage of special buy situations that complement its
private-label merchandise and provide gross margin enhancement.

As a result of the Company's improved sourcing, the cost of acquiring
merchandise has declined significantly. The table below shows the decline in
average cost per unit on a percentage basis for select items at the COUNTY SEAT
stores between November 1996 and November 1997. For the 39 weeks ended November
1, 1997, the average cost per unit for merchandise at the COUNTY SEAT stores was
$7.53, which is 33% lower than the average cost per unit for the nine months
ended November 2, 1996.

PERCENT SAVINGS
IN COST PER UNIT
---------------------

Menswear
Denim jeans...................................................................................... 34%
Short sleeve solid tee........................................................................... 43%
Short sleeve solid polo.......................................................................... 40%
Socks............................................................................................ 40%
Womenswear
Denim jeans...................................................................................... 33%
Short sleeve solid tee........................................................................... 44%
Socks............................................................................................ 25%

The Company believes it has established relationships with an adequate
number of suppliers to meet its ongoing inventory needs. The Company has no
long-term contracts with suppliers and transacts business principally on an
order-by-order basis. During the nine months ended November 1, 1997, merchandise
purchased from Levi Strauss represented approximately 26% of net sales. No other
vendor or group of vendors account for more than 15% of the Company's
merchandise purchases. No more than 20% of the Company's purchases are currently
manufactured in any particular country other than the United States.

DISTRIBUTION

All merchandise is currently shipped to the Company's stores through the
distribution center in Brooklyn Park, Minnesota, except replenishment of
inventory to the LEVI'S OUTLET stores. In February, 1998 the Company signed a
ten-year lease for a new 276,000 square foot distribution center located near
Baltimore, Maryland. The Company plans to relocate to this new facility from its
current Brooklyn Park distribution center sometime in the early summer of 1998.
The new facility in Baltimore will be able to service a substantially greater
number of stores than the distribution center which the Company currently
operates or could out of its existing facility. The transit time for merchandise
being delivered to the distribution center generally varies from three to five
days for domestic goods and a few days to several weeks for imported goods.
Freight consolidators are used in the shipment process to reduce costs. Advanced
shipping notices are utilized when possible to anticipate delivery of goods and
schedule on-call employees for merchandise handling. The time period from
receipt of goods at the distribution center to display in the Company's stores
is generally five days.

During the nine months ended November 1, 1997, approximately 85% of
merchandise coming into the distribution center was vendor pre-ticketed and
approximately 66% was vendor pre-packed, with 8% of the merchandise prepacked in
a manner which permits cross-docking. Pre-ticketing, pre-packing, and cross-
docking save time, reduce labor costs, and enhance inventory management. The
Company is seeking to increase the amount of goods that are cross-docked. In
accordance with the new business strategy of reducing operating costs, the
Company is evaluating additional ways to reduce distribution costs, including
evaluating alternative distribution facility options to take advantage of
regional differences in labor costs.

Shipments to stores for basic items are generated by a planning and
distribution personnel team that compares individual store stock levels to the
store's model stock level. Shipments to all stores are made once or twice per
week depending on the season. The delivery schedule allows the Company to adjust
on-hand inventory at the store level, thus minimizing the total inventory needs
and maximizing inventory turns.

STORE OPENINGS AND CLOSINGS

The Company has utilized the legal protections available to it under the
Bankruptcy Code to reduce operating costs and improve profitability through its
store closing program. Under this program, immediately following the Chapter 11
Filing the Company began identifying underperforming stores and stores located
in regions where the associated administrative costs did not warrant continuing
such operations and implementing streamlined procedures for closing such stores.

Phase one of the Company's new business strategy contemplated the closing of
approximately 330 stores. Approximately 260 of such stores had been closed prior
to the Effective Date. Approximately 70 such stores were closed in January 1998,
after the Christmas season.

The Company opened two new stores in 1997, and it reopened prior to the
Effective Date 13 COUNTY SEAT OUTLET stores that had previously been closed. In
the future, the Company expects to consider expansion through the opening of
additional stores on a selective basis. The Company expects to open 15 to 20
additional stores per year.

In deciding whether to open or close a store, the Company considers a number
of factors, including (i) the extent of competition from other mall tenants,
(ii) the location of the store in the mall, (iii) the rental rate for the
property on which the store is or will be located, (iv) the performance of other
specialty stores in the mall, (v) whether the mall's environment is suitable for
the store, (vi) the anticipated return on investment, and (vii) whether there
are at least two department store anchors in the mall in which the store is or
will be located.

PROPERTIES

As of the end of 1997, the Company owns and operates 413 go-forward stores
in 41 states. Of the 413 stores, approximately 375 are COUNTY SEAT stores, 14
are COUNTY SEAT Outlet stores, 22 are LEVI'S OUTLET

stores, and 2 are OLD FARMER'S ALMANAC GENERAL STORES. The following table
details the geographical distribution of the Company's stores.

STATE STORES STATE STORES
- ------------------------------------------------ ----------- ------------------------------------------------ -----------

Alabama......................................... 5 Nebraska........................................ 3
Arkansas........................................ 5 Nevada.......................................... 2
Colorado........................................ 7 New Hampshire................................... 2
Delaware........................................ 1 New Jersey...................................... 3
Florida......................................... 20 New Mexico...................................... 1
Georgia......................................... 11 New York........................................ 8
Idaho........................................... 3 North Carolina.................................. 13
Illinois........................................ 32 North Dakota.................................... 3
Indiana......................................... 19 Ohio............................................ 24
Iowa............................................ 13 Oklahoma........................................ 8
Kansas.......................................... 8 Pennsylvania.................................... 11
Kentucky........................................ 6 South Carolina.................................. 7
Louisiana....................................... 10 South Dakota.................................... 2
Maine........................................... 2 Tennessee....................................... 11
Maryland........................................ 11 Texas........................................... 58
Massachusetts................................... 2 Utah............................................ 11
Michigan........................................ 26 Virginia........................................ 9
Minnesota....................................... 19 West Virginia................................... 6
Mississippi..................................... 3 Wisconsin....................................... 14
Missouri........................................ 11 Wyoming......................................... 1
---
Montana......................................... 2
Total Stores.................................... 413
---
---

All the Company's stores are operated under leases that typically provide
for monthly rental payments plus a percentage of gross receipts in excess of
certain sales levels. Leases typically have an initial term of approximately
seven to ten years, except for certain outlet locations and do not contain a
renewal option. In each case, the particular terms of the proposed lease are a
major factor in determining whether to open a store at that site. After a site
has been approved, the Company normally completes lease negotiations and
constructs the store within five to twelve months. As of November 1, 1997 the
average remaining lease term of the Company's stores was 3.7 years.

Approximately 8% to 19% of store leases expire each year. The Company has
not experienced problems renewing its leases but no assurance can be given that
the Company can renew existing leases on favorable terms.

In addition to its retail stores, the Company currently leases office space
in New York, New York, and Eden Prairie, Minnesota. In January 1998, the Company
closed its leased offices in Dallas, Texas, which formerly housed the Company's
executive office, merchandising, merchandising planning, and real estate
functions. To complete the Company's office consolidation, the Company plans to
close the Eden Prairie office by the end of June 1998 and transfer functions
formerly performed there to the New York office. Once the Eden Prairie office is
closed, the New York office will house all functions in approximately 34,000
leased square feet. The Eden Prairie office currently houses the accounting,
finance, human resources, and MIS functions in approximately 28,000 leased
square feet, of which 2,400 square feet is sub-leased to a third party. The
Company also currently owns a distribution center in Brooklyn Park, Minnesota,
which provides product distribution to all stores except for Levi's Outlet
stores, which are direct-shipped by Levi Strauss. The Brooklyn Park distribution
center occupies 159,000 square feet. In February 1998, the Company signed a
lease for a new 276,000 square foot facility in the Baltimore, Maryland area.
The

Company's chief executive office is located at 469 Seventh Avenue, 11th Floor,
New York, New York 10018 and its telephone number is (212) 714-4800.

COMPETITION

The retail apparel industry is highly competitive, with merchandise
selection, price, quality, fashion, customer service, location and store
environment being the principal competitive factors. While the Company believes
that it is able to compete favorably with respect to each of these factors, the
Company believes it competes primarily on the basis of price, merchandise
selection, and customer service. In recent years, the Company has experienced
increased competition, particularly with respect to branded apparel.

The Company competes in the highly competitive casual apparel industry. The
Company's specialty store competitors include The Gap, The Limited, Abercrombie
& Fitch, Express, Structure, Gadzooks, The Buckle, American Eagle, Miller's
Outpost, Designs, Inc., Wet Seal, and Contempo Casuals. Among the Company's
largest specialty store competitors, the Company is one of the few companies
offering a full selection of Levi's jeans, the biggest selling brand of jeans in
the United States. The Company also competes with department and discount stores
that sell casual apparel. Many of the Company's competitors are larger and have
greater financial resources than the Company.

MARKETING

The Company relies on mall traffic, the Company's reputation, in-store
promotions, and in-store visual merchandising to attract customers. In-store
visual merchandising is dynamic and coordinated so that all stores feature a
consistent marketing strategy. One of the Company's current marketing strategies
is the in-store promotion of the sale of jeans and khakis for $19.99. This
strategy is designed to make the Company's stores a destination for high quality
merchandise at value prices and take advantage of the Company's reputation as a
bottoms retailer.

The Company utilizes co-op advertising from Levi Strauss, in mass media and
merchandise tabloids. In 1996, Levi Strauss paid for approximately 54% of this
expense. Marketing expenses net of co-op payments have averaged approximately
0.7% of sales for the last five years. The Company has incurred marketing
expenses in the amount of $2.5 million during 1997 for, among other things,
direct marketing, in-store displays, and limited mass media advertising.

CREDIT SALES

In 1996, approximately 37% of the Company's total sales were paid for with
credit cards. The Company accepts MasterCard, VISA, Discover, and American
Express. Under its agreements with MasterCard, VISA, Discover, and American
Express, the Company receives daily payments on amounts charged on those cards.
The payments are not subject to recovery by MasterCard, VISA, Discover or
American Express unless the charge in question involved invalid use of a credit
card.

OTHER OPERATIONS

In addition to 375 COUNTY SEAT stores, the Company owns and operates 14
COUNTY SEAT OUTLET stores, 22 LEVI'S OUTLET stores, and 2 OLD FARMER'S ALMANAC
GENERAL STORES. During 1996, 89% of the Company's sales were derived from the
COUNTY SEAT stores.

The COUNTY SEAT Outlet stores range in size from 5,000 to 8,400 square feet,
with the average size being 5,700 square feet. The COUNTY SEAT OUTLET stores are
located primarily in factory outlet shopping centers. The COUNTY SEAT OUTLET
stores sell special buy and clearance merchandise. The Company uses the COUNTY
SEAT OUTLET stores to facilitate the sale of slow-moving merchandise at the
COUNTY SEAT stores, thus enabling the COUNTY SEAT stores to remain stocked with
fresh, higher margin merchandise.

Located primarily in outlet shopping malls in nine midwestern states, the
Company's LEVI'S OUTLETstores carry a large and comprehensive assortment of
Levi's and Docker's products for men, women, and children. The LEVI'S OUTLET
stores target value conscious consumers by offering Levi's closeouts, seconds,
and irregulars. The LEVI'S OUTLET stores range in size from 8,900 square feet to
13,700 square feet and average about 11,100 square feet. The Company operates
the LEVI'S OUTLET stores on a royalty-free basis pursuant to a license
agreement, which expires on July 31, 2000. Under the terms of this license
agreement, the Company is the only party other than Levi Strauss or any
subsidiary of Levi Strauss that is permitted to use the Levi's trademark in
connection with the sale of closeouts, seconds, and irregulars in nine
midwestern states. The Company is also permitted to use the Levi's trademark in
connection with the sale of closeouts, seconds, and irregulars in two other
states, but two outlet stores operated by Designs, Inc. are also permitted to
use the Levi's trademarks in those states.

The Company's two OLD FARMER'S ALMANAC GENERAL STORES are located in malls
in Indianapolis, Indiana and Bloomington, Minnesota and offer housewares, food
products, decorative home products, clothing, and stationery in a
turn-of-the-century setting that includes potbellied-stoves, and rocking chairs.
The Company's OLD FARMER'S ALMANAC GENERAL STORES are operated pursuant to a
license agreement with Yankee Publishing, Inc. The license agreement grants the
Company the right to use the Old Farmer's Almanac trademark, which is also
licensed to certain other parties, in connection with the marketing,
distribution, and sale of certain products in the United States, Canada, and
Mexico. The Company is required to pay to Yankee Publishing, Inc., on a
quarterly basis, a royalty of 2% of total net sales. If the Company's OLD
FARMER'S ALMANAC GENERAL STORES do not achieve certain annual royalty targets,
then it must pay Yankee Publishing, Inc. the shortfall in the royalty target for
the applicable year or permit Yankee Publishing, Inc. to license the use of the
Old Farmer's Almanac trademark to additional parties. Pursuant to the license
agreement, Yankee Publishing, Inc. has the right to terminate the license if the
Company has not continually operated at least three OLD FARMER'S ALMANAC GENERAL
STORES for a period of one fiscal year at any time. The Company and Yankee
Publishing, Inc. have agreed in principle that the Company will operate at least
five OLD FARMER'S ALMANAC GENERAL STORES from October 1, 1998 throughout the
remainder of the term of the license. The license agreement expires in 2005 but
is subject to renewal if certain sales targets are met or specified amounts are
paid by the Company to Yankee Publishing, Inc.

INFORMATION SYSTEMS

In 1995, the Company completed installation of a new point of sale (POS)
system. The Company's POS system provides daily merchandising data to the
merchandise information systems on a store-by-store basis by individual stock
keeping unit ("SKU"). The new POS system added bar coded universal product code
("UPC") scanning with integrated price-lookup and credit authorization, enhanced
promotional pricing support and improved processing of store transfers. The POS
system generates reports showing merchandise data organized by store,
department, class, category, style, and size. This provides merchandise planners
with detailed information enabling them to adjust stock levels and balance
merchandise and size distribution profiles. The Company's buyers are provided
with velocity sales reports, which rank selling within categories and classes.
Timely sales reporting allows the Company to react quickly to developing sales
trends. The Company believes timely and accurate data capture is critical to the
success of its business.

The Company's systems assist merchandise management in all aspects of
inventory control by tracking purchases and receipts, controlling inter-store
movement, and determining the on-hand inventory for all locations. Stock status
is monitored at the distribution center, at individual stores and in transit, by
capturing SKU level data (style, color, and size). A stock ledger application
developed by the Company provides financial dollar inventory control and gross
margin results for all physical locations and merchandise departments. The
Company's information systems help to shorten the time from product ordering to
receipt at the store. This reduced lead time helps the Company maintain lower
inventory levels and take advantage of sales opportunities.

The Company's systems allow the Company to plan unit sales and inventory for
all merchandise categories according to season. Merchandise categories are
planned by store and adjusted for seasonality, demographics, and sales trends.
The planning system is integrated with a comprehensive distribution and
replenishment system facilitating delivery of merchandise to the correct
location in a timely manner.

Merchandise pricing decisions are controlled centrally and communicated to
stores on a next-day basis through the use of the Company's data transmission
system. Timely and centralized control allows the Company to test sales volume
sensitivity to price changes.

The Company's non-POS systems are primarily mainframe systems. The Company
has recently commenced a two-year project to update and, where applicable,
replace these systems with third-party packaged solutions which will provide
enhanced support to all operating areas, particularly merchandising. The Company
is working with IBM on the selection and implementation process. The Company
currently anticipates aggregate expenditures for hardware, software, labor, and
compliance with year 2000 requirements of approximately $6.0 million between
1997 and 1998 to complete this project, including $4.2 million in 1998.

TRADEMARKS AND SERVICE MARKS

The Company uses numerous trademarks, service marks and trade names in its
business, including COUNTY SEAT-Registered Trademark-, COUNTY SEAT THE
JEANSTORE-Registered Trademark-, NUOVO-Registered Trademark-, NUOVO COUNTY
SEAT-Registered Trademark-, and TEN STAR-Registered Trademark-. While the
Company believes that the products and services underlying such trade names and
trademarks are of great importance to the Company and that such trade names and
trademarks as a whole are of material importance to the Company's business in
which they are used, besides COUNTY SEAT-Registered Trademark- and COUNTY SEAT
THE JEANSTORE-Registered Trademark-, none individually is material to the
Company's business. Certain of the Company's service marks are owned by CSS
Trade Names, Inc. ("CSS"), the Company's subsidiary, and licensed to the
Company. CSS has no other assets other than such service marks.

LITIGATION

The Company has been named as a defendant in certain legal proceedings.
Although the outcome of these matters cannot be determined, the Company believes
that the disposition of these proceedings will not materially affect the
financial position or results of operations of the Company.

On or about September 29, 1997, RAI Credit Corporation ("RAI") filed an
adversary proceeding against the Company in the Bankruptcy Court. The Company
and RAI had entered into an Account Purchase and Service Agreement dated July
11, 1997 (the "RAI Agreement") pursuant to which RAI had agreed to establish and
service a private-label credit card program for the Company. In September 1997,
the Company notified RAI that it was terminating the RAI Agreement on the ground
that RAI had materially breached and failed to perform under the RAI Agreement.
RAI's complaint alleges that the Company wrongfully terminated the RAI Agreement
and seeks compensatory damages of not less than $10,741,960 and an injunction
prohibiting the Company from entering into a private-label credit card program
with any person other than RAI prior to the beginning of 1999, as well as
attorneys' fees and costs.

The Company believes that it has meritorious defenses to RAI's complaint and
counterclaims against RAI, which it intends to pursue vigorously. Although the
ultimate outcome of the litigation cannot be predicted at this time, management
believes that any resolution of this matter will not have a material adverse
effect on the Company's financial position or future results of operations.

Simultaneous with the Company's Chapter 11 Filing, CSS, the Company's
wholly-owned subsidiary, also filed a petition for reorganization relief under
Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. A motion will be
filed with the Bankruptcy Court before the Effective Date to dismiss the Chapter
11 case of CSS.

As contemplated by the Plan of Reorganization and the Confirmation Order,
the Company is litigating various Disputed Claims (as defined in the Plan). As
of November 1, 1997, the aggregate amount of all Disputed Claims was $0.5
million. Cash in the amount of $0.5 million has been established to cover the
estimated aggregate amount of (x) the disputed amount of all Disputed Claims
that are unliquidated or, if liquidated, as to which the Company shall have
requested estimation, and (y) the Face Amount (as defined in the Plan) of all
other liquidated Disputed Claims. Payments and distributions from the
Distribution Reserve to each holder of a Disputed Claim, to the extent that
claim ultimately becomes an Allowed Claim (as defined in the Plan), will be made
in accordance with the provisions of the Plan that govern the class of claims to
which that Allowed Claim belongs under the Plan.

EMPLOYEES

At March 3, 1998, the Company had a total of 5,880 employees, of which 5,524
worked in the Company's stores, 169 worked in the Company's offices, and 187
worked in the Company's distribution center. All the Company's employees are
non-union, and the Company enjoys good labor relations.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning the current
directors and executive officers of the Company and the positions they hold.

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

Sam Forman........................................... 70 Chairman, President, Chief Executive Officer
Brett D. Forman...................................... 28 Executive Vice President and Director
Paul Roth............................................ 53 Executive Vice President
Paul J. Kittner...................................... 48 Senior Vice President, Chief Financial Officer and
Treasurer
Bernadette R. Duponchel.............................. 44 Senior Vice President
Ronda A. Hisiger..................................... 46 Senior Vice President
John R. Meinert...................................... 70 Director
Marshall E. Felenstein............................... 65 Director
M. Brent Stevens..................................... 36 Director
John S. Belisle...................................... 50 Director
Faith Larsen......................................... 42 Director

The Company's board of directors consists of seven members, five of whom
were previously selected and began serving as directors on the Effective Date.
The remaining two members were selected at the first meeting of the Company's
board of directors by the non-management directors. As provided in, and for the
term of, the Forman Employment Agreement (as defined below), Mr. Forman has the
right to serve as a director of the Company and to name one other person to act
as his designee (the "Executive Designee") to serve as an additional director of
the Company. See "--Forman Employment Agreement." All of the Company's directors
shall hold office until the first annual meeting of shareholders and until their
successors are duly elected and qualified. Thereafter, directors who are elected
at an annual meeting of shareholders shall hold office until the next annual
meeting of shareholders and until their successors are elected and qualified.

BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is a brief description of the business experience of the
executive officers and directors of the Company.

SAM FORMAN has served as president and chief executive officer of the
Company since December 1996. Since the Effective Date he has also served as the
chairman of the Company's board of directors. Prior to joining the Company, Mr.
Forman formed Forman Enterprises in 1995 to purchase the outlet stores then
operated by American Eagle. Mr. Forman was president and chief operating officer
of American Eagle from 1992 to 1995 and chairman of Kuppenheimer from 1982 to
1992. Mr. Forman is the chairman of the board of directors of Forman
Enterprises. His service as a director of the Company commenced on the Effective
Date. Sam Forman is the father of Brett D. Forman, a director and executive vice
president of the Company.

BRETT D. FORMAN has served as an executive vice president of the Company
since the Effective Date and served from December 1996 until the Effective Date
as the senior vice president of real estate and corporate development of the
Company. In 1995, he joined his father, Sam Forman, in creating Forman
Enterprises. He was an analyst at Bear, Stearns & Co. Inc from 1994 to 1995 and
was employed by Blue Cross of Western Pennsylvania from 1992 to 1994. His
service as a director of the Company commenced on the Effective Date. He is the
Executive Designee.

PAUL ROTH has served as executive vice president of the Company, with
responsibility for merchandising since December 1996. Before joining the
Company, Mr. Roth served as merchandise manager at American Eagle, which he
joined in 1992. Mr. Roth has nearly thirty years of retail merchandising
experience and was a senior vice president and the general merchandise manager
at R. H. Macy from 1980 to 1991.

PAUL J. KITTNER has served as a senior vice president, treasurer and chief
financial officer of the Company since September 1997. Before joining the
Company, Mr. Kittner was part of the co-sourcing practice at Deloitte & Touche
from November 1996 to September 1997. Before joining Deloitte & Touche, Mr.
Kittner was a vice president and controller for the Leslie Fay Companies, Inc.
from March 1993 to November 1996 and a senior vice president, chief financial
officer, and treasurer for The He-Ro Group Ltd. from November 1989 to November
1992. Prior to joining The He-Ro Group, Ltd., Mr. Kittner was a senior vice
president and the chief financial officer for Loehmann's, Inc. and a vice
president at Associated Dry Goods Corporation.

BERNADETTE R. DUPONCHEL has served as a senior vice president of the Company
with responsibility for planning and distribution since 1997. Ms. Duponchel
served as a vice president of planning and distribution of J. Crew Retail from
July 1996 to November 1997 and as a vice president of planning and distribution
of Britches from 1994 to 1996. From 1993 to 1994 she served as a vice president
of planning and distribution of American Eagle. Ms Duponchel has nearly twenty
years of experience in merchandise planning and allocation.

RONDA A. HISIGER has served as a senior vice president of the Company with
responsibility for store operations since August 1997. Ms. Hisiger served as the
senior vice-president of store operations at Paul Harris Stores, Inc. from
September 1995 to July 1997 and the regional director of stores for certain
divisions of Petrie Stores Corporation from March 1991 to August 1995. Ms.
Hisiger has over twenty-five years of experience in retail store operations.

JOHN R. MEINERT has served as a director of the Company since January 1998
and is a member of both the Compensation Committee and the Audit Committee of
the Company's board of directors. Since January 1990 Mr. Meinert has been a
principal, and since January 1996 the chairman of the board of directors, of the
investment banking firm J.H. Chapman Group, L.L.C. From 1975 through December
1986, Mr. Meinert served as chief financial and administrative officer of
Hartmarx Corporation/Hart Shaffner & Marx. From 1973 to April 1990 he was a
member of the board of directors of Hartmarx

Corporation and the chairman of that board from December 1986 until 1990, and
thereafter has been designated as chairman emeritus. He is a member of the board
of Northwestern University's Kellogg Graduate School of Management and John
Evans Club, the Chicagoland Chamber of Commerce and Better Business Bureau and
has been vice president of the American Institute of CPAs and president of the
Illinois CPA Society.

MARSHALL E. FELENSTEIN has served as a director of the Company since January
1998 and is a member of the Compensation Committee of the Company's board of
directors. Since December 1990 he has been a principal of Felenstein Koniver &
Associates, retail consultants. From 1986 to present Mr. Felenstein has been a
director of Dorchester Public Relations, Inc., a private public relations firm.
Mr. Felenstein has over forty years of experience in the retail industry.

M. BRENT STEVENS has served as a director of the Company since the Effective
Date and is a member of the Audit Committee of the Company's board of directors.
He is a managing director of Jefferies & Company, Inc., which he joined in 1990.

JOHN S. BELISLE has served as a director of the Company since the Effective
Date and is a member of the Compensation Committee of the Company's board of
directors. Mr. Belisle served as a managing director and the chief workout
officer of Chemical Banking Corporation from 1989 to 1996. He has been an
independent consultant since 1996 and formed Alco & Belisle, LLC, a
reorganization consulting firm, in 1998.

FAITH LARSEN has served as a director of the Company since the Effective
Date and is a member of the Audit Committee of the Company's board of directors.
After joining BankAmerica Corporation in 1977, Ms. Larsen served as a senior
vice president and chief workout officer in New York from 1992 to September
1996. Since October 1996, she has been an independent consultant.

EXECUTIVE COMPENSATION

The following table sets forth information with respect to the accrued
compensation of the Company's Chief Executive Officer and each of the four other
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers") received from the Company in 1997, 1996 and 1995.

SUMMARY COMPENSATION TABLE

LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -----------------------------
SECURITIES
NAME AND -------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY$ BONUS$ OPTIONS # COMPENSATION$
- ----------------------------------------------------- --------- --------- --------- ---------- -----------------

Sam Forman........................................... 1997 639,231 -- 3,529,410(1) 9,537
Chairman, CEO and President 1996 140,769 -- -- --
1995 -- -- -- --
Brett D. Forman...................................... 1997 154,693 50,000 -- --
Executive Vice President 1996 23,462 -- -- --
1995 -- -- -- --
Paul Roth............................................ 1997 177,665 -- -- --
Executive Vice President 1996 37,019 -- -- --
1995 -- -- -- --
Steven Anderson...................................... 1997 131,250 30,000 -- --
Senior Vice President/CIO 1996 -- -- -- --
1995 -- -- -- --
David Mitchell....................................... 1997 129,696 25,000 -- --
Vice President 1996 115,449 -- -- --
1995 124,478 13,357 -- --

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

(1) Represents Series C Warrants issued to Sam Forman pursuant to his
employment agreement with the Company. The warrants have a term of five
years. Currently, warrants exercisable for 1,176,470 shares of Common stock
are vested; an additional 1,176,470 warrants will vest on October 29, 1998
and an additional 1,176,470 warrants will vest on October 29, 2000. The
exercise price of the warrants is determined on the basis of the total
recovery to the holders of general unsecured claims under the Plan. See
"Forman Employment Agreement."

DIRECTORS' COMPENSATION

Directors each receive $25,000 in annual directors' fees, and $1,500 per
each meeting attended. The Company is also contemplating establishing a plan to
compensate directors with equity compensation in the form of stock options. In
addition, all directors are reimbursed for their expenses, if any, incurred for
attendance at each Board meeting

The following table sets forth information with respect to option grants to
the Company's Chief Executive Officer during the last fiscal year:

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------- ASSUMED
PERCENT OF ANNUAL
TOTAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES /SAR APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION
OPTION EMPLOYEES OF BASE TERM
/SARS IN FISCAL PRICE EXPIRATION -----------
NAME GRANT (3) YEAR (S/SB) DATE 5% ($)
- ------------------------------------------------- ---------- ------------- ------------- --------------- -----------

Sam Forman....................................... 3,529,410 100 (1) (1)

NAME 10% ($)
- ------------------------------------------------- -----------

Sam Forman.......................................

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

(1) Represents Series C Warrants issued to Sam Forman pursuant to his employment
agreement with the Company. The warrants have a term of five years.
Currently, warrants exercisable for 1,176,470 shares of Common stock are
vested; an additional 1,176,470 warrants will vest on October 29, 1998 and
an additional 1,176,470 warrants will vest on October 29, 2000. The exercise
price of the warrants is determined on the basis of the total recovery to
the holders of general unsecured claims under the Plan. See "Forman
Employment Agreement."

COMMITTEES OF BOARD OF DIRECTORS

An Audit Committee has been established by the Company's board of directors
consisting exclusively of independent directors. The current members of the
Audit Committee are Messrs. Meinert and Stevens and Ms. Larsen. The Audit
Committee makes recommendations to the board of directors regarding the
independent accountants to be nominated for election by the stockholders and
reviews the independence of such accountants, approves the scope of the annual
audit activities of the independent accountants, approves the audit fee payable
to the independent accountants and reviews such audit results. Arthur Andersen
LLP presently serves as the independent accountants of the Company.

The board of directors has also established a Compensation Committee which
consists of Messrs. Belisle, Meinert and Felenstein. The duties of the
Compensation Committee are to provide a general review of the Company's
compensation and benefit plans to ensure that they meet corporate objectives.
The Compensation Committee also reviews compensation policies and practices with
respect to senior executive officers and directors of the Company and makes its
recommendations to the board. The board of directors may also establish other
committees to assist in the discharge of its responsibilities.

FORMAN EMPLOYMENT AGREEMENT

Mr. Sam Forman is employed pursuant to an employment agreement (the "Forman
Employment Agreement") with the Company. Under the terms of the Forman
Employment Agreement, which expires in August 2002, Mr. Forman is entitled to
receive as compensation a base salary of $600,000 per year, which shall be
adjusted annually in accordance with the federal cost of living index. Mr.
Forman received, in connection with the Forman Employment Agreement, Series C
Warrants, which entitle him to purchase 15% of the Common Stock, subject to
dilution only by the Series A Warrants and by certain options to purchase Common
Stock that may be granted to certain employees and directors of the Company. The
Series C Warrants have the following exercise prices: (1) the Series C-1
Warrants have an exercise price which represents a recovery to the holders of
general unsecured claims under the Plan (a "Recovery") of 40%; (ii) the Series
C-2 Warrants have an exercise price which represents a Recovery of 70%; and
(iii) the Series C-3 Warrants have an exercise price which represents a Recovery
of 90%; provided further that, notwithstanding the foregoing, if, for any
consecutive ten trading days during the five-year term of the Series C Warrants,
the product of the average value per share of the Company's Common Stock times
the

number of outstanding shares of such Common Stock (including shares reserved for
Warrants other than the Series C Warrants) exceeds $200 million, then the
exercise price of the Series C-1 Warrants shall be zero. Mr. Forman is also
entitled to receive certain severance benefits if, among other things, (i) any
person or entity acquires beneficial ownership of 51% or more of the Common
Stock (including Common Stock subject to options and warrants) following the
Effective Date, (ii) Mr. Forman's designee (the "Forman Designee") to serve on
the Company's Board of Directors is removed from or not elected to the Company's
Board of Directors, or (iii) Mr. Forman resigns from the Company following
certain specified events. Mr. Forman may terminate the Forman Employment
Agreement at any time upon sixty days' written notice to the Company's Board of
Directors.

LIMITATIONS ON LIABILITY; INDEMNIFICATION

The Company's articles of incorporation, which have been amended and
restated pursuant to the Plan of Reorganization, provide that no director of the
Company shall be personally liable to the Company or its shareholders for
monetary damages for breach of any fiduciary duty. The Articles of
Incorporation, however, do not eliminate or limit the liability of a director
for, among other things, (i) a breach of the director's duty of loyalty, (ii)
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) failing to vote against or consenting to an
unlawful distribution, or (iv) any transaction from which the director derived
an improper personal benefit.

CERTAIN RELATIONSHIPS

Mr. Sam Forman is chairman of the board of directors and owns, together with
his family, 70% of the voting securities of Forman Enterprises. Forman
Enterprises owns and operates 73 factory outlet stores that sell casual apparel
similar to that sold by the Company. The Forman Employment Agreement provides
that Mr. Forman must devote substantially all of his working time to the
performance of his responsibilities as chief executive officer of the Company.
Mr. Forman's sons, Brett Forman and Richard Forman, have relationships with both
the Company and Forman Enterprises. Brett Forman is a member of the board of
directors, a shareholder and a nonemployee president of Forman Enterprises but
devotes substantially all of his time to the performance of his responsibilities
as executive vice president and a director of the Company. Richard Forman is an
employee but not an officer of the Company. Richard Forman also owns voting
securities of Forman Enterprises.

To take advantage of operating synergies and reduce the Company's corporate
overhead, the Company has engaged Forman Enterprises to perform certain
consulting services for the Company. In August 1997, with the approval of the
Bankruptcy Court, the Company entered into a Consulting Agreement with Forman
Enterprises (the "Consulting Agreement"), pursuant to which Forman Enterprises
provides the Company with sourcing, merchandising, budgeting, store management,
and related services. Howard Katcher, the chief operating officer of Forman
Enterprises, Amaz Zivony, the vice president of sourcing of Forman Enterprises,
and Wendy Forman, the vice president of merchandising and a shareholder of
Forman Enterprises, will each provide services to the Company primarily related
to the sourcing of merchandise, spending, respectively, 50%, 75%, and 75% of
their working time to perform such services on behalf of the Company. Wendy
Forman is the daughter of Sam Forman. The Company will reimburse Forman
Enterprises for 50%, 75%, and 75%, respectively, of Messrs. Katcher and Zivony's
and Ms. Forman's salary and benefits payable by Forman Enterprises. In 1997, the
Company purchased $1,666,827 of merchandise and paid consulting fees and related
expenses of $321,739 to Forman Enterprises; in 1998, such payments are expected
to result in an aggregate payment of approximately $750,000. The Consulting
Agreement provides for an additional payment of $40,000 per month by the Company
to reimburse Forman Enterprises for the consulting services referenced above
other than those being performed by Messrs. Katcher and Zivony and Ms. Forman,
from which will be deducted a $5,000 payment from Forman Enterprises to the
Company to pay Forman Enterprises's share of rent expense for the Company's New
York office.

Thirty percent of the equity of Forman Enterprises is owned by Mr. Larry
Ashinoff. Coronet an entity controlled by Mr. Ashinoff, sells merchandise to
both the Company and Forman Enterprises. In addition, Forman Enterprises and the
Company utilize many of the same suppliers. During 1997, payments for
merchandise to Coronet totaled approximately $762,000.

These relationships pose a potential conflict of interest. The Company
believes that the potential for a conflict of interest is minimized because (i)
Forman Enterprises is not, for the most part, a mall-based retailer, (ii) the
overlap in suppliers could strengthen the Company's ability to acquire goods at
a low cost in furtherance of its business strategy, and (iii) the Consulting
Agreement is at least as advantageous to the Company as would an arrangement for
similar consulting services entered into with an unaffiliated third party.

In 1997, the Company engaged Felenstein Koniver & Associates ("FKA"), to act
as a real estate consultant to the Company at (i) a consulting fee of $3,000 per
month plus (ii) a success fee of $3,000 for each lease completed by the Company
and arranged by FKA. In fiscal year 1997, the Company entered into 27 leases
that were arranged by FKA and total payments to FKA totaled $117,219. As noted
above, Mr. Felenstein, a member of the Company's board of directors, is a
principal of FKA.

During 1997, prior to their retention after the Effective Date by the
Company, Eaton & Van Winkle represented Sam Forman and Forman Enterprises on
certain matters. Eaton & Van Winkle has continued since the Effective Date to
represent Sam Forman and Forman Enterprises on certain matters.

The Audit committee of the Board of Directors is monitoring and will
continue to monitor these relationships.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information concerning the beneficial
ownership of shares of Common Stock on , 1998, by: (i) each
stockholder known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock (ii) each director of the Company, (iii) each
Named Executive Officer, (iv) and all directors and current executive officers
as a group.

SHARES BENEFICIALLY OWNED
----------------------------

AMOUNT AND
NAME AND ADDRESS OF NATURE OF PERCENTAGE OF
BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- ------------------------------------------------------------------------------------- ------------- -------------
Dean Witter High Yield Securities, Inc.(3)...........................................
Dean Witter Diversified Income Trust(3)..............................................
[To be completed by
Dean Witter Variable Investment Series--High Yield Portfolio(3)...................... amendment.]
High Income Advantage Trust(3).......................................................
High Income Advantage Trust II(3)....................................................
High Income Advantage Trust III(3)...................................................
Dean Witter Select Dimensions Investment--The Diversified Income Portfolio(3)........
Sam Forman........................................................................... 1,176,470(4)
Brett D. Forman...................................................................... -- --
John S. Belisle...................................................................... -- --
Marshall E. Felenstein............................................................... -- --
Faith Larsen......................................................................... -- --
John R. Meinert...................................................................... -- --
M. Brent Stevens.....................................................................
Directors and Named Executive Officers as a group.................................... 1,176,470(4)

(1) In computing the number of shares beneficially owned by a person and the
percentage of ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days of the date hereof are deemed outstanding.

(2) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of the date hereof are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.

(3) The Company has been advised that none of the holders listed above
beneficially owns individually more than 5% of the outstanding shares of
Common Stock. Nevertheless, of the shares of Common Stock held
by each of the listed holders are held pursuant to [shared voting and
investment power with [Dean Witter ,] an affiliate[, and such
shares are held pursuant to shared voting and investment power with ,
a wholly-owned subsidiary].

(4) Represents the vested portion of Series C Warrants issued to Mr. Sam Forman.
See Note 1 to Summary Compensation Table and "Forman Employment Agreement."

CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS

ELECTION OF DIRECTORS

Pursuant to the Bylaws, the directors of the Company appointed pursuant to
the Plan of Reorganization will hold office until the first annual meeting of
the Company's shareholders and until their successors are elected and qualified.
Thereafter, directors who are elected at an annual meeting of the Company's
shareholders shall hold office until the next annual meeting of shareholders and
until their successors are elected and qualified.

INDEMNIFICATION

The Articles of Incorporation provide that the Company shall indemnify each
director and officer of the Company to the fullest extent permitted by law.

LIMITATIONS ON DIRECTORS' LIABILITY

The Articles of Incorporation provide that no director of the Company shall
be personally liable to the Company or its shareholders for monetary damages for
any breach of fiduciary duty as a director, except to the extent such exemption
from liability or limitation thereof is not permitted under the Business
Corporation Act of the State of Minnesota (the "MBCA"). These provisions will
not limit the liability of directors under federal securities laws and will not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care or duty of
loyalty.

CERTAIN PROVISIONS OF THE
MINNESOTA BUSINESS CORPORATION ACT

Certain provisions of the MBCA could thwart an unsolicited takeover of the
Company. These provisions are intended to provide management flexibility, to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors, and
to discourage an unsolicited takeover of the Company if the Board of Directors
determines that such a takeover is not in the best interests of the Company and
its shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company, thus depriving the
Company's shareholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.

Section 302A.671 of the MBCA applies, with certain exceptions, to any
acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in any person acquiring beneficial
ownership of 20% or more of the Company's voting stock then outstanding. Section
302A.671 requires approval of any such acquisitions by a majority vote of the
shareholders of the Company prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by the Company within 30 days after
the acquiring person has failed to give a timely information statement to the
Company or the date the shareholders voted not to grant voting rights to the
acquiring person's shares. A corporation, pursuant to a provision in its
articles of incorporation or bylaws, may elect not to be governed by Section
302A.671 of the MBCA. The Company will not make such an election, and as a
result, the Company will be subject to the provisions of Section 302A.671 of the
MBCA following completion of the Offering.

Section 302A.673 of the MBCA prohibits certain transactions between a
Minnesota corporation and an "interested shareholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 10% or more of the outstanding voting
shares of a Minnesota corporation. Section 302A.673 prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value of 10% or more of the
consolidated assets of the corporation, and certain transactions that would
increase the interested shareholder's proportionate share ownership in the
corporation) between an interested shareholder and a corporation for a period of
four years after the date the interested shareholder acquired its stock unless
the business combination or the acquisition of the shares is approved by an
affirmative vote of a majority of a committee of all the disinterested members
of the Board of Directors. A corporation, pursuant to a provision in its
articles of incorporation or bylaws, may elect not to be governed by Section
302A.673 of the MBCA. The Company will not make such an election, and, as a
result, the Company will be subject to the provisions of Section 302A.673 of the
MBCA following completion of the Offering.

PLAN OF REORGANIZATION

The Private Note Offering and the Plan of Reorganization were consummated on
October 29, 1997. The Plan of Reorganization was confirmed by the Bankruptcy
Court on October 1, 1997. The Plan of Reorganization was designed to reorganize
the Company's capital structure so that the Company can continue as a going
concern with adequate capitalization. The Plan of Reorganization organized the
claims against and interests in the Company into seven classes. Under the terms
of the Plan of Reorganization, the class consisting of general unsecured claims
received 20,000,000 shares of Common Stock and the class consisting of preferred
stock interests received 3,000,000 Series B Warrants, which, when exercised,
will entitle the holder thereof to receive 3,000,000 shares of Common Stock. All
other classes, with the exception of the class consisting of common stock
interests and the class consisting of fines, penalties, and punitive damage
claims, will either be reinstated or paid in full under the Plan of
Reorganization using the proceeds from the Private Note Offering and amounts
borrowed under the Senior Credit Facility. See "Use of Proceeds." The class
consisting of common stock interests and the class consisting of fines,

penalties, and punitive damage claims will not receive a distribution of either
cash or property under the Plan of Reorganization.

The disclosure statement (the "Disclosure Statement") that relates to the
Plan of Reorganization was approved by the Bankruptcy Court on August 22, 1997
and distributed to pre-petition creditors and other parties-in-interest shortly
thereafter. The Disclosure Statement contains, among other things, a description
of the Plan of Reorganization and information relating to the Company, its
operating history, and future prospects. The Disclosure Statement also contains
projections as to the future operating and financial results of the Company. The
inclusion of such projections in the Disclosure Statement is required by the
Bankruptcy Court. Such projections, which are subject to numerous assumptions
and qualifications as set forth in the Disclosure Statement, were prepared in
connection with the Disclosure Statement and not for the purpose of evaluating
an investment in the Common Stock. The Initial Purchaser did not participate in
the preparation of such projections and disclaims any responsibility therefor.
Copies of the Disclosure Statement are available from Donlin, Recano & Company,
Inc., 419 Park Avenue South, Suite 1206, New York, NY 10016; telephone number
(212) 481-1411.

DESCRIPTION OF CERTAIN INDEBTEDNESS

The following is a description of certain indebtedness of the Company
outstanding as of November 1, 1997.

SENIOR CREDIT FACILITY

As of the Effective Date, the Company entered into a revolving credit
facility (the "Senior Credit Facility") with BankBoston Retail Finance Inc. and
the lenders named therein. The Senior Credit Facility provides the Company with
a three-year revolving line of credit in the amount of $115 million. $90 million
of the availability under the Senior Credit Facility may be utilized for
issuance of letters of credit and bankers' acceptances primarily to secure
obligations to merchandise suppliers; provided that only $20 million of such
availability may be utilized in connection with the issuance of standby letters
of credit. The ability of the Company to borrow under the Senior Credit Facility
or to issue letters of credit or bankers' acceptance thereunder is subject to
various conditions precedent including, without limitation, accuracy of
representations, compliance with covenants and absence of defaults thereunder.
The amounts available to be borrowed thereunder or utilized in connection with
the issuance of letters of credit or bankers' acceptances are limited to
specified percentages of the value of the Company's eligible inventory, as
determined under the Senior Credit Facility, ranging from 65% to 75% based upon
the Company's projected seasonal working capital requirements. Availability at
any time will be reduced by any amounts then borrowed under the Senior Credit
Facility, as well as then outstanding amounts of letters of credit and bankers'
acceptances issued thereunder.

Interest on amounts advanced under the Senior Credit Facility will accrue,
at the option of the Company, at (a) the applicable London interbank offered
rate (as determined under the Senior Credit Facility) plus a margin ranging from
1.50% to 1.75% or (b) the prime rate plus a margin not to exceed 0.75%. The
Senior Credit Facility contains a number of covenants and events of default
customary for credit facilities of this nature, including covenants related to
the financial performance of the Company and restrictions on payment of
dividends by the Company. A breach of such covenants or any other default by the
Company under the Senior Credit Facility could prevent the Company from making
borrowings or issuing letters of credit or bankers' acceptances thereunder and
result in the acceleration of the Company's obligations thereunder. The Company
will be subjected to a prepayment penalty if it terminates the Senior Credit
Facility prior to maturity.

The Company's obligations under the Senior Credit Facility are secured by a
lien on substantially all of the Company's assets except real property and
property in the Security Account. The Senior Credit Facility will be
cross-defaulted to the Private Notes and any other material indebtedness of the
Company.

On the Effective Date, the Company borrowed approximately $6.8 million under
the Senior Credit Facility and utilized such amount, together with the net
proceeds of the Private Note Offering, to repay all amounts outstanding under
the Existing Credit Facility, to satisfy certain claims under the Plan of
Reorganization and to pay fees and expenses related to the Plan of
Reorganization and the Private Note Offering.

PRIVATE NOTES

Concurrently with the Plan of Reorganization, as of the Effective Date, the
Company issued $85,000,000 aggregate principal amount of the Private Notes in
order to settle claims of certain of the Company's creditors. Interest on the
Private Notes will be payable in cash semi-annually in arrears on each November
1 and May 1, commencing May 1, 1998. The Private Notes will mature on November
1, 2004. The Company initially placed $15.5 million of the net proceeds realized
from the sale of the Private Notes into a security account (the "Security
Account") to be held for the benefit of the holders of the Private Notes. Such
funds, together with the proceeds from the investment thereof, will be utilized
to pay interest on the Private Notes to May 1, 1999.

The Private Notes are senior unsecured indebtedness of the Company, except
to the extent collateralized by a first priority security interest in the
Security Account. The Private Notes also rank PARI PASSU in right of payment
with all senior indebtedness of the Company and will be senior in right of
payment to all subordinated indebtedness of the Company. Except to the extent
collateralized by a first priority security interest in the Security Account,
the Private Notes will be effectively subordinated to secured indebtedness of
the Company, including indebtedness outstanding under the Senior Credit
Facility, to the extent of the assets securing such indebtedness. As of the
Effective Date, the Company had $99.0 million of indebtedness outstanding, $14.0
million of which was secured indebtedness.

The indenture governing the Private Notes (the "Indenture"), among other
things, restricts the ability of the Company to incur additional indebtedness,
create liens, engage in sale-leaseback transactions, pay dividends or make
distributions in respect of its capital stock, make investments or certain other
restricted payments, sell assets or stock of subsidiaries, enter into
transactions with shareholders or affiliates, or effect a consolidation or
merger. These limitations will, however, be subject to important qualifications
and exceptions.

The Private Notes were sold by the Company on October 29, 1997 to Jefferies
& Company, Inc. (the "Initial Purchaser") pursuant to a Purchase Agreement,
dated October 23, 1997, by and among the Company and the Initial Purchaser (the
"Purchase Agreement"). Pursuant to the Purchase Agreement, the Company and the
Initial Purchaser entered into a Registration Rights Agreement dated as of
October 29, 1997 (the "Registration Rights Agreement"), which grants the holders
of the Private Notes certain exchange and registration rights. Pursuant to those
rights, the Private Notes will be the subject of an Exchange Offer the terms of
which are described in the prospectus filed as part of the Registration
Statement on Form S-4 filed concurrently with the Registration Statement of
which this Prospectus is part.

PRE-PETITION TAX CLAIMS

Certain of the Company's tax liabilities incurred prior to the Chapter 11
Filing have been restructured pursuant to the Plan of Reorganization as
"Priority Tax Claims." Such Priority Tax Claims have an aggregate value of
approximately $1.68 million. Under the Plan of Reorganization, Priority Tax
Claims are payable (i) in equal installments every three months over a period of
six years with interest accruing at the rate available on 90-day United States
Treasuries on the date the Plan of Reorganization is consummated or (ii) with
Bankruptcy Court approval, (a) on other terms that are less favorable than those
set forth in clause (i), or (b) in full on the date the Plan of Reorganization
is consummated. The Company paid approximately $235,000 of Priority Tax Claims
were paid in full on the date the Plan of Reorganization was consummated and the
remainder will be paid over six years in accordance with clause (i) above.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, par value $0.01 per share and 1,000,000 shares of Preferred Stock,
par value $.01 per share. Marine Midland Bank is the transfer agent and
registrar for the Common Stock. As of March 16, 1998, the 20,000,000 shares of
Common Stock issued pursuant to the Plan of Reorganization constituted all of
the shares of Common Stock outstanding. Under the terms of the Plan of
Reorganization, the shares were issued to a Disbursing Agent to be disbursed to
creditors upon final settlement of their respective claims. As of ,
1998, shares have been disbursed to creditors who have settled their
claims.

Under the Plan of Reorganization, the Company also issued (i) Series A
Warrants to purchase up to 2,285,718 shares of Common Stock, (ii) Series B
Warrants to purchase up to an aggregate of 15% of Common Stock (subject to
dilution by the Series A Warrants, the Series C Warrants described below, and
options to purchase Common Stock granted to certain employees (the "Employee
Options")), and (iii) Series C Warrants to Mr. Sam Forman to purchase an
aggregate of 15% of Common Stock (subject to dilution by the Series A Warrants
and certain Employee Options). As of the date hereof, none of the holders of the
foregoing warrants or options have exercised their rights to acquire shares of
Common Stock.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no present plan to issue any shares of preferred stock. In
addition, the Indenture and the Senior Credit Facility contain restrictions on
the Company's ability to issue certain types of redeemable or convertible
capital stock.

COMMON STOCK

The holders of the Common Stock are entitled to one vote for each share held
of record and shall vote as a single class on all matters as to which
stockholders are entitled to vote. There are no cumulative voting rights in the
election of directors. The quorum required at any stockholders' meeting for
consideration of any matter is a majority of all outstanding shares entitled to
vote, represented in person or by proxy. All matters will be decided by a
majority of the votes cast at stockholder meetings by holders of shares present
in person or by proxy who are entitled to vote.

Holders of the Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors out of funds legally available for
dividends. See "Risk Factors--Dividends" and "Dividend Policy." In the event of
any liquidation, dissolution or winding up of the Company, the holders of the
Common Stock are entitled to receive pro rata any assets distributable to
stockholders in respect of shares held by them, after payment of all obligations
of the Company. The holders of Common Stock are not entitled to pre-emptive
rights to any securities issued by the Company.

The Shares of the Common Stock offered hereby are duly authorized, validly
issued, fully paid and nonassessable.

The Company is authorized to issue additional shares of capital stock from
time to time. There are no specific restrictions upon such issuances, except
that the Company's Certificate prohibits the issuance of

non-voting equity securities if, and only to the extent that and so long as,
Section 1123 of the Bankruptcy Code is applicable and would prohibit such
issuance.

REGISTRATION RIGHTS AGREEMENT

The Company has entered into a Registration Rights Agreement, dated as of
January 8, 1998, with the Selling Stockholders of Common Stock pursuant to which
the Company agreed to (i) use its reasonable best efforts to file a registration
statement for a shelf offering within 75 days after the date thereof, (ii) use
its reasonable best efforts to cause the Shelf Registration to be declared
effective within 120 days of the date thereof, and (iii) to keep such Shelf
Registration continuously effective, supplemented and amended until the
disposition of all Registrable Securities under the Shelf Registration or
otherwise.

The Company is also obligated to effect up to three (3) registrations (the
"Demand Registrations") at the request of the 25% of the Registrable Securities
(as defined in the Registration Rights Agreement) outstanding at any given time;
a majority of the demanding holders may request that the Demand Registration be
an underwritten offering. However, the Company will not be obligated (i) in the
case of a Demand Registration, to maintain the effectiveness of a registration
statement for a period longer than 90 days or (ii) to effect any Demand
Registration within 180 days after the effective date of (A) a firm commitment
underwritten registration statement in which all stockholders were given
piggyback registration rights, or (B) any other Demand Registration. In
addition, the Company is entitled to postpone the filing or effectiveness of a
Demand Registration Statement for up to 90 days if the Board reasonably
determines in good faith that effect the Demand Registration would have a
material adverse effect on any proposal or plan by the Company to engage in any
debt or equity offering, material acquisition or disposition of assets (other
than in the ordinary course of business) or any merger, consolidation, tender
offer or other similar transaction. The Company may only postpone once in any
twelve month period and holders making a Demand are entitled to withdraw the
Demand in the event of a postponement.

If the Company proposes to file a Registration Statement for its own account
(other than a Registration Statement on Form S-4 or S-8 (or any successor form
thereto)) or in connection with a Demand Registration, then the Company will
offer the Holders the opportunity to register the number of Registrable
Securities as each such Holder may request (a "Piggyback Registration"). If the
Company is advised by an underwriter that the amount of the shares to be
registered in the Piggyback Registration would adversely affect the
marketability of the shares to be offered, then the Company will able minimize
the adverse effect by allocating the number of Piggybacked shares, giving first
priority to the shares registered on the Company's behalf or on behalf of the
Holders demanding a Demand Registration, as the case may be. The Company will be
entitled to withdraw a Piggyback Registration prior to its effectiveness, but
then the Piggyback Sellers may continue the registration as a Demand
Registration if they hold the requisite number of shares to make such a demand.

Stockholders participating in a Demand or Piggyback Registration may
withdraw any or all of their Registrable Securities from the registration by
giving notice to the Company prior to the effectiveness of the relevant
registration statement. In the case of a Demand Registration, if any withdrawing
Holder withdraws so many Registrable Securities that the number left to be
registered is less than the Requisite Amount, then either the Company or the
holders of a majority of Registrable Securities left to be registered can elect
to terminate or withdraw the registration in its entirety.

Stockholders have agreed to not to effect any sales or distributions of
equity securities of the Company (including Rule 144 sales) for the period from
the 10 day period prior to receiving notice of a public offering through the 60
day period immediately following the effective date of the registration of that
offering. However, stockholders are required to follow such a holdback only once
in any nine month period.

The Registration Rights Agreement also sets forth the procedures which are
to be followed in effecting any registration requireed under the agreement. The
Company will bear all of the expenses

relating to its compliance with the Registration Rights Agreement, including all
registration and filing fees, fees and expenses of underwriters and their
counsel, fees and expenses of theCompany's own counsel and accountants, and all
delivery, printing and copying expenses. However, in the case of a Piggyback
Registration, participating Stockholders shall bear the incremental costs for
federal, blue sky and Nasdaq registration and filing. The Company will be
responsible for the fees and expenses of a single legal counsel retained by all
of the Stockholders in the aggregate in connection withthe sale of Registrable
Securities.

The Company will indemnify each holder of Registrable Securities, each
Affiliate of such holder, each Person who controls (within the meaning of the
Securities Act) such holder, and their respective officers, directors,
employees, shareholders, investment advisors and agents against all losses,
claims, damages, liabilities and expenses, (collectively, the "Losses") caused
by, resulting from or relating to any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectusor preliminary
prospectus or any amendment thereof or supplement thereto, or caused by any
omission or alleged omission of material fact required to be stated therein or a
fact necessary to make the statements therein not misleading, except where such
misstatement or omission was caused by information provided to the Company by
the holder or where the holder failed to deliver materials furnished to it by
the Company. In the case of an underwritten offering, the Company will indemnify
the underwriters and their officers, directors, employees, shareholders,
investment advisors and agents to the same extent as described above for the
holders.

Each holder of Registrable Securities participating in an offering agrees to
indemnify and hold harmless the Company, and its directors, officers, employees,
advisors, agents and each Person who controls (within the meaning of the
Securities Act and the Exchange Act) the Company for any material misstatement
or omission in the offering materials that was caused by information provided by
such holder to the Company; provided, however, that the liability of any such
holder will be limited to the amount of the net proceeds received by such Holder
in the offering giving rise to such liability.

SELLING STOCKHOLDERS

The following tables provide certain information with respect to the Common
Stock held by each Selling Stockholder, which information has been furnished to
the Company by the Selling Stockholders and other sources and which the Company
has not verified. Because the Selling Stockholders may sell all or some part of
the Common Stock which they hold pursuant to this Prospectus and the fact that
this offering is not being underwritten on a firm commitment basis, no estimate
can be given as to the amount of Common Stock that will be held by the Selling
Stockholders upon termination of this Offering. See "Plan of Distribution." The
Common Stock offered by this Prospectus may be offered from time to time in
whole or in part by the persons named below or by their transferees, as to whom
applicable information will, to the extent required, be set forth in a
Prospectus Supplement.

AMOUNT TO BE
AMOUNT OF STOCK OFFERED FOR
OWNED PRIOR TO STOCKHOLDER'S
NAME OFFERING ACCOUNT
- ---------------------------------------------------------------------------------- ----------------- ---------------

Dean Witter High Yield Securities, Inc. (1).......................................
Dean Witter Diversified Income Trust (1).......................................... [To be completed
Dean Witter Variable Investment Series--High Yield Portfolio (1).................. by amendment.]
High Income Advantage Trust (1)...................................................
High Income Advantage Trust II (1)................................................
High Income Advantage Trust III (1)...............................................
Dean Witter Select Dimensions Investment--The
Diversified Income Portfolio (1)..................................................

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

* The Company has been advised that none of the holders listed above
beneficially owns individually more than 5% of the outstanding shares of
Common Stock. Nevertheless, of the shares of Common Stock
held by each of the listed holders are held pursuant to [shared voting and
investment power with [Dean Witter ,] an affiliate [and such
shares are held pursuant to shared voting and investment power with
, a wholly-owned subsidiary].

PLAN OF DISTRIBUTION

The Shares included in this Prospectus were distributed on a pro rata basis
to certain creditors of the Company pursuant to the Plan of Reorganization,
under which the Company emerged from bankruptcy on October 29, 1997.

The Company will receive no proceeds from this offering. The Common Stock
may be sold from time to time to purchasers directly by any of the Selling
Stockholders. Alternatively, any of the Selling Stockholders may from time to
time, offer the Common Stock through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of Common Stock
for whom they may act as agent. The Selling Stockholders and any underwriters,
dealers or agents that participate in the distribution of Common Stock may be
deemed to be underwriters, and any profit on the sale of Common Stock by them
and any discounts, commissions or concessions received by any such underwriters,
dealers or agents might be deemed to be underwriting discounts and commissions
under the Securities Act. If the Company is advised that an underwriter has been
engaged with respect to the sale of any Common Stock offered hereby, or in the
event of any other material change in the plan of distribution, the Company will
cause appropriate amendments to the Registration Statement of which this
Prospectus forms a part to be filed with the Commission reflecting such
engagement or other change. See "Additional Information."

At the time a particular offer of Common Stock is made, to the extent
required, a Prospectus Supplement will be provided by the Company and
distributed by the relevant Selling Stockholder which will set forth the
aggregate amount of Common Stock being offered and the terms of the offering,
including the name or names of any underwriters, dealers or agents, any
discounts, commissions and other items constituting compensation from the
Selling Stockholders and any discount, commissions or concessions allowed or
reallowed or paid to dealers.

The Common Stock may be sold from time to time in one or more transactions
at a fixed offering price, which may be changed, or at varying prices determined
at the time of sale or at negotiated prices. Such prices will be determined by
the Selling Stockholders or by agreement between the Selling Stockholders and
underwriters or dealers.

Through the date hereof, there has been no established public trading market
for the Common Stock. The Shares were issued to general unsecured creditors of
the Company pursuant to the Plan of Reorganization. Application will be made to
list the Common Stock on NASDAQ National Market. There can be no assurance that
any active trading market will develop or will be sustained for the Common Stock
or as to the price at which the Common Stock may trade or that the market for
the Common Stock will not be subject to disruptions that will make it difficult
or impossible for the holders of Common Stock to sell Common Stock in a timely
manner, if at all, or to recoup their investment in the Common Stock. See "Risk
Factors--Liquidity; Absence of Market for Common Stock" and "Risk
Factors--Effect of Future Sales of Common Stock; Registration Rights."

Under applicable rules and regulations under the Exchange Act any person
engaged in a distribution of Common Stock may not simultaneously engage in
market-making activities with respect to such Common Stock for a period of nine
business days prior to the commencement of such distribution and ending upon the
completion of such distribution. In addition to and without limiting the
foregoing, each

Selling Stockholder will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, including without limitation
Regulation M, which provisions may limit the timing of purchases and sales of
any of the Common Stock by the Selling Stockholders. All of the foregoing may
affect the marketability of the Common Stock and the ability of any person or
entity to engage in market-making activities with respect to the Common Stock.

Pursuant to the Registration Rights Agreement, the Company is obligated to
pay substantially all of the expenses incident to the registration, offering and
sale of the Common Stock of the Selling Stockholders to the public other than
commissions and discounts of underwriters, dealers or agents. The Selling
Stockholders, and any underwriter they may utilize, and their respective
controlling persons are entitled to be indemnified by the Company against
certain liabilities, including liabilities under the Securities Act. See
"Description of Capital Stock--Registration Rights Agreement."

LEGAL MATTERS

Certain legal matters regarding the Shares will be passed upon for the
Company by Eaton & Van Winkle, 600 Third Avenue, New York, New York 10016.

INDEPENDENT PUBLIC ACCOUNTANTS

The consolidated financial statements of the Company as of February 1, 1997,
February 3, 1996 and January 28, 1995, and for the years then ended, included in
this Prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report (which report contains an explanatory
paragraph relating to the Company's ability to continue as a going concern)
contained herein, and are included herein in reliance on the authority of such
firm as experts in giving such reports.

The consolidated balance sheet of the Company as of November 1, 1997
included in this Prospectus has been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report contained herein, and is included
in reliance on the authority of such firm as experts in giving such report.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS
39-WEEKS ENDED NOVEMBER 1, 1997 AND NOVEMBER 2, 1996
Report of Independent Public Accountants............................................ F-1
Audited Consolidated Balance Sheet.................................................. F-2
Unaudited Statements of Operations.................................................. F-3
Unaudited Statements of Shareholders' Equity........................................ F-4
Unaudited Statements of Cash Flows.................................................. F-5
Notes to Audited Consolidated Balance Sheet......................................... F-7

52-WEEKS ENDED FEBRUARY 1, 1997, 53-WEEKS ENDED FEBRUARY 3, 1996, AND 52-WEEKS ENDED
JANUARY 28, 1995
Report of Independent Public Accountants............................................ F-21
Consolidated Balance Sheets......................................................... F-22
Consolidated Statements of Operations............................................... F-23
Consolidated Statements of Shareholder's Equity (Deficit)........................... F-24
Consolidated Statements of Cash Flows............................................... F-25
Notes to Consolidated Financial Statements.......................................... F-26

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro Forma Consolidated Statement of Operations for the 52-Weeks Ended
February 1, 1997.................................................................. PF-1
Unaudited Pro Forma Consolidated Statement of Operations for the 39-Weeks Ended
November 1, 1997.................................................................. PF-2

I-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
County Seat Stores, Inc.:

We have audited the accompanying consolidated balance sheet of County Seat
Stores, Inc. (a Minnesota corporation) and subsidiary, as of November 1, 1997.
This balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. 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.

As more fully described in Notes 1 and 2 to the consolidated balance sheet,
effective October 29, 1997, the Company emerged from protection under Chapter 11
of the U.S. Bankruptcy Code pursuant to a Reorganization Plan which was
confirmed by the Bankruptcy Court on October 1, 1997. In accordance with AICPA
Statement of Position 90-7, the Company adopted "Fresh Start Accounting" whereby
its assets, liabilities and new capital structure were adjusted to reflect
estimated fair values as of November 1, 1997.

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of County Seat Stores, Inc. and
subsidiary, as of November 1, 1997, in conformity with generally accepted
accounting principles.

New York, New York

March 11, 1998

ARTHUR ANDERSEN LLP

F-1

COUNTY SEAT STORES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

NOVEMBER 1,
1997
-----------

ASSETS
Current Assets:
Cash and cash equivalents.......................................................................... $ 9,370
Restricted cash in security account................................................................ 11,687
Receivables........................................................................................ 2,736
Merchandise inventories............................................................................ 74,701
Prepaid expenses................................................................................... 7,017
-----------
Total current assets............................................................................. 105,511
-----------
Property and equipment, net.......................................................................... 32,360
-----------
Other Assets:
Debt issuance costs................................................................................ 7,384
Restricted cash in security account................................................................ 5,317
Reorganization value in excess of amounts allocated to identified assets........................... 69,643
Other.............................................................................................. 420
-----------
Total other assets............................................................................... 82,764
-----------
$ 220,635
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under credit agreement.................................................................. $ 12,276
Current maturities of long-term debt............................................................... 292
Accounts payable................................................................................... 24,581
Accrued expenses................................................................................... 13,532
Accrued reorganization costs....................................................................... 13,136
-----------
Total current liabilities........................................................................ 63,817
-----------
Long-Term Liabilities:
Long-term debt..................................................................................... 77,353
Other long-term liabilities........................................................................ 1,400
Shareholders' Equity:
Common stock: par value $.01 per share; 40,000,000 shares authorized, 20,000,000 issued and
outstanding...................................................................................... 200
Paid-in capital in excess of par value............................................................. 77,865
-----------
Total shareholders' equity....................................................................... 78,065
-----------
$ 220,635
-----------
-----------

The accompanying notes are an integral part of this consolidated balance sheet.

F-2

COUNTY SEAT STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS)

UNAUDITED

PREDECESSOR COMPANY
--------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 1, NOVEMBER 2,
1997 1996
------------ ------------

Net sales............................................................................. $ 277,137 $ 400,391
Cost of sales, includes buying and occupancy costs, and
a special charge of $11,975......................................................... 214,799 312,693
------------ ------------
Gross profit...................................................................... 62,338 87,698
Selling, general and administrative expenses.......................................... 71,465 97,639
Depreciation and amortization......................................................... 6,136 8,834
Reorganization costs.................................................................. 38,405 42,352
Interest expense, net................................................................. 4,019 14,069
------------ ------------
Loss before income tax (benefit) and extraordinary item........................... (57,687) (75,196)
Income tax (benefit).................................................................. -- (762)
------------ ------------
Loss before extraordinary item.................................................... (57,687) (74,434)
Extraordinary item, net of tax benefit................................................ -- 2,692
------------ ------------
Net loss.......................................................................... $ (57,687) $ (77,126)
------------ ------------
------------ ------------

F-3

COUNTY SEAT STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

UNAUDITED

ACCUMULATED TOTAL
PAID-IN EARNINGS SHAREHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) EQUITY
------------ ----------- ---------- ------------ ------------------

Balance, January 28, 1995................. 1,000 $ 1 $ 49,789 $ (13,912) $ 35,878
Net loss................................ -- -- -- (97,030) (97,030)
Redeemable preferred stock dividends and
accretion............................. -- -- -- (8,645) (8,645)
Dividend to parent...................... -- -- -- (2,102) (2,102)
Receivable from parent.................. -- -- -- (1,300) (1,300)
------------ ----- ---------- ------------ ----------
Balance, February 3, 1996................. 1,000 1 49,789 (122,989) (73,199)
Net loss................................ -- -- -- (76,868) (76,868)
Redeemable preferred stock dividends and
accretion............................. -- -- -- (6,029) (6,029)
Dividend to parent...................... -- -- -- (1,051) (1,051)
Receivable from parent.................. -- -- -- (144) (144)
------------ ----- ---------- ------------ ----------
Balance, February 1, 1997................. 1,000 1 49,789 (207,081) (157,291)
Net loss................................ -- -- -- (57,687) (57,687)
Redeemable preferred stock dividends and
accretion............................. -- -- -- -- --
Dividend to parent...................... -- -- -- -- --
Receivable from parent.................. -- -- -- -- --
------------ ----- ---------- ------------ ----------
Balance, November 1, 1997 (Predecessor
Company)................................ 1,000 $ 1 $ 49,789 ($ 264,768) ($ 214,978)
------------ ----- ---------- ------------ ----------
------------ ----- ---------- ------------ ----------
Retirement of old common stock and
paid-in capital and write-off of
accumulated deficit................... (1,000) $ (1) ($ 49,789) $ 264,768 $ 214,978
Issuance of new common stock at par
value................................. 20,000,000 0.01 200
Paid-in capital in excess of par
value................................. 66,711 -- 66,711
Series A warrants..................... 7,647 -- 7,647
Series B warrants..................... 1,595 -- 1,595
Additional warrant.................... 1,912 -- 1,912
------------ ----- ---------- ------------ ----------
Balance, November 1, 1997 (Reorganized
Company).............................. 20,000,000 $ 0.01 $ 77,865 -- $ 78,065
------------ ----- ---------- ------------ ----------
------------ ----- ---------- ------------ ----------

F-4

COUNTY SEAT STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

UNAUDITED

NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 1, NOVEMBER 2,
1997 1996
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................ $ (57,687) $ (77,126)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Reorganization costs.............................................................. 20,156 38,786
Extraordinary item................................................................ -- 2,692
Depreciation and amortization..................................................... 6,136 8,834
Amortization of debt issuance costs............................................... 538 715
Loss on disposal of property and equipment........................................ 4,915 --
Rent expense in excess of cash outlays............................................ 1,215 12
Deferred tax benefit.............................................................. -- (762)
Changes in operating assets and liabilities:
Receivables..................................................................... (960) 635
Merchandise inventories......................................................... (2,073) (269)
Prepaid expenses................................................................ 1,268 600
Accounts payable................................................................ (5,373) 10,076
Accrued expenses................................................................ (1,190) (5,907)
Current maturities of long-term debt............................................ 292 --
Other non-current assets and liabilities........................................ -- (79)
Operating liabilities subject to compromise..................................... -- 15,968
------------ ------------
Net cash used in operating activities......................................... (32,763) (5,825)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under credit agreement...................................... (26,324) 9,600
Issuance of long-term debt.......................................................... 85,000 --
Notes payable, taxes................................................................ 1,400 --
Debt and equity issuance costs...................................................... (5,872) (1,649)
Dividend to parent.................................................................. -- (1,051)
Receivable from parent.............................................................. -- (237)
Advance to parent and capital leases................................................ -- (16)
Restricted cash in security account................................................. (17,004) --
------------ ------------
Net cash provided by financing activities..................................... 37,200 6,647
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................ (1,423) (1,790)
Proceeds from disposal of property and equipment.................................... -- 4
------------ ------------
Net cash used in investing activities......................................... (1,423) (1,786)
------------ ------------
Net increase (decrease) in cash and cash equivalents.................................. 3,014 (964)
Cash and cash equivalents:
Beginning of period................................................................. 6,356 8,166
------------ ------------
End of period....................................................................... $ 9,370 $ 7,202
------------ ------------
------------ ------------

F-5

NINE MONTHS
ENDED
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND NOVEMBER 1,
FINANCING ACTIVITIES 1997
-------------

NONCASH OPERATING ACTIVITIES:
Elimination of current assets upon emergence from bankruptcy............... $ 269
Elimination of debt issuance costs upon emergence from bankruptcy.......... (1,021)
Elimination of liabilities subject to compromise upon emergence from
bankruptcy............................................................... (197,043)
Other current liabilities upon emergence from bankruptcy................... (15,088)
Other long-term liabilities upon emergence from bankruptcy................. (9,118)

NONCASH INVESTING ACTIVITIES:
Elimination of property and equipment in connection with the
reorganization........................................................... $ 8,160
Establishment of reorganization value in excess of amounts allocated to
identified assets........................................................ (69,643)
Elimination of accumulated deficit upon emergence from bankruptcy.......... 214,978

NONCASH FINANCING ACTIVITIES:
Issuance of common stock to unsecured creditors upon emergence from
bankruptcy............................................................... $ 66,911
Issuance of Series B warrants to preferred shareholders.................... 1,595

F-6

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET

NOTE 1. REORGANIZATION AND NATURE OF BUSINESS

The accompanying consolidated balance sheet represents those of County Seat
Stores, Inc. (County Seat) and its wholly-owned subsidiary, CSS Trade Names,
Inc. (Trade Names) (together, the Company). The Company is a specialty apparel
retailer selling both brand name and private-label jeans and jeanswear. The
Company currently operates 413 stores in 41 states. The Company's 375 County
Seat stores, located almost exclusively in regional shopping malls, offer
one-stop shopping for daily casual wear featuring a contemporary jeanswear look.
The Company's selection of popular brands includes Levi's, and its proprietary
brands, County Seat, Nuovo and Ten Star. The Company also operates 14 County
Seat Outlet stores offering discount pricing on special purchase and clearance
merchandise and 22 Levi's Outlet stores under license from Levi Strauss & Co.
(Levi Strauss) offering a full range of Levi's and Docker's off-price
merchandise for both adults and children. The Company operates two Old Farmer's
Almanac General Stores, a new retail concept selling products associated with
American country living, under license from Yankee Publishing, Inc., the
publisher of The Old Farmer's Almanac.

The activities of Trade Names consist principally of licensing the rights to
the County Seat service marks to these stores.

On October 17, 1996, County Seat and Trade Names filed voluntary petitions
for relief under Chapter 11 (Chapter 11) of Title 11 of the United States Code
(the Bankruptcy Code) in the United States Bankruptcy Court for the District of
Delaware (the Court). The Company operated as debtors-in-possession under the
jurisdiction of the Court.

Following approval by the Court on October 17, 1996, the Company entered
into a debtor-in-possession credit agreement (the DIP Credit Agreement) with a
syndicate of commercial banks to provide working capital and longer-term
financing through the Chapter 11 process.

On August 22, 1997 the Company filed the "First Amended Disclosure Statement
with Respect to Plan of Reorganization of County Seat Stores, Inc." (The Plan)
with the Court, which was confirmed on October 1, 1997 and consummated on
October 29, 1997 (Effective Date). The Plan segregated creditors into three
classes--unclassified claims, unimpaired claims and impaired claims.
Unclassified and unimpaired claims were satisfied by cash payments totaling
$4,234,286. Additionally, a $1,520,664 security account was established to pay
lease cures, disputed claims and holdback professional fees. In exchange for
impaired claims of approximately $151.0 million, creditors received 20,000,000
shares of new common stock (100% of the Company's Stock) valued at $66,911,000
representing 44% recovery of their claims. Previous preferred stockholders
received warrants valued at $1.595 million in exchange for their claims of
$50.347 million.

As provided for in the Plan, the Company sold $85,000,000 of 12 3/4% Senior
Notes due November 1, 2004 with Series A warrants to purchase common stock
(Notes). Each unit consisting of a principal amount of $1,000 contains one
Series A Warrant to purchase 26.8908 shares of the Company's common stock, par
value $.01 per share, at an exercise price of $.01 per share. Proceeds from the
Notes after the initial discount to the underwriters of $4,250,000 and less
$15,482,100 deposited into a security account to satisfy interest on the Notes
to May 1, 1999, and a $125,000 fee paid to the underwriters is $65,142,900.
Additionally, the Company secured a New Credit Facility (Credit Facility) with a
syndicate of banks led by Bank Boston (Banks). The Company used the proceeds
from the Notes and initial borrowings under the Credit Facility to pay
$65,515,531 to satisfy the obligations from the DIP Credit Agreement and pay
claims as described above. Also, under the Plan, the old stockholders of the
Company did not receive assets of the reorganized company. Due to the Company's
reorganization and the implementation of fresh start

F-7

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 1. REORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
reporting, (see Note 2), the consolidated balance sheet as of November 1, 1997,
is not comparable to that of the predecessor company.

NOTE 2. FRESH START ACCOUNTING

The effects of the Company's reorganization under Chapter 11 have been
accounted for in the Company's balance sheet using principals required by the
American Institute of Certified Public Accountants' Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
(Fresh Start Accounting). Fresh Start Accounting results in a revaluation of the
Company's assets and liabilities as of the Effective Date to reflect the
estimated fair market values of those assets and liabilities in conformity with
the procedures specified by Accounting Principles Board (APB) No. 16, "Business
Combinations". The valuation differences are charged to the Reorganization Value
in Excess of Amounts Allocated to Identified Assets account (Excess
Reorganization Value). This balance is being amortized on a straight-line basis
over 15 years. After Fresh Start Accounting is applied, the Company, is in
effect a new entity (Reorganized Company).

The estimated reorganization value has been based upon an equity valuation
and represents a hypothetical value that reflects the estimated intrinsic value
assigned by the public markets for debt and equity securities. The estimated
equity value of the company as of the Effective Date was derived from an entity
equity valuation of the Company, through various valuation methodologies,
prepared by an independent appraiser, including (i) an analysis of comparable
publicly-traded specialty apparel retailers and (ii) a discounted cash flow
analysis. The discounted cash flow analysis utilizes projected future cash flows
of the Company through 2002, which were provided by the Company, and a remaining
terminal value. The cash flow projections were based on estimates and
assumptions about circumstances and events that have not yet occurred. As such,
these estimates and assumptions are inherently subject to significant economic
uncertainties beyond the control of the Company, which prevent the Company from
making assurances in achieving these projections.

The consolidated balance sheet presented herein is as of November 1, 1997,
which differs from the Effective Date of the Company's emergence from
bankruptcy. Management believes that the three days between October 29, 1997 and
November 1, 1997 did not materially impact the presentation of Fresh Start
Accounting, and as a matter of expedience and practicality reported Fresh Start
Accounting as if it occurred on November 1, 1997. Since the fresh start balance
sheet, presented herein, is in effect, that of the Reorganized Company, the
comparable balance as of November 2, 1996 is not presented. Furthermore, the
fresh start balance sheet as of November 1, 1997 is not comparable to prior
periods.

F-8

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 2. FRESH START ACCOUNTING (CONTINUED)
The effect of the Plan on the Company's balance sheet using Fresh Start
Accounting to the Company's consolidated balance sheet for the period ended
November 1, 1997, is presented by the following:

COUNTY SEAT STORES, INC. AND SUBSIDIARY
REORGANIZING BALANCE SHEET
(AMOUNTS IN THOUSANDS)

REORGANIZATION FRESH
PREDECESSOR START REORGANIZED
COMPANY ADJUSTMENTS COMPANY
NOVEMBER 1, ------------------------- NOVEMBER 1,
1997 DEBIT CREDIT 1997
----------- ----------- ------------ -----------

ASSETS
Total current assets.................................... $ 94,094 $ 11,687(a) $ 270(b) $ 105,511
Property and equipment, net............................. 32,439 79(c) 32,360
Other assets............................................ 1,821 12,321(d) 1,021(e) 13,121
Reorganization value in excess of amounts allocated to
identified assets..................................... 69,643(f) 69,643
----------- ----------- ------------ -----------
TOTAL ASSETS............................................ $ 128,354 $ 93,651 $ 1,370 $ 220,635
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under credit agreement....................... $ 70,561 $ 58,285(g) $ 12,276
Current liabilities..................................... 59,382 10,749(h) 2,908(i) 51,541
----------- ----------- ------------ -----------
Total current liabilities............................... 129,943 69,034 2,908 63,817
Long-term liabilities................................... 10,190 17,837(j) 86,400(k) 78,753
Liabilities subject to compromise....................... 201,390 201,390(l) --
----------- ----------- ------------ -----------
341,523 288,261 89,308 142,570
Shareholders' equity.................................... (213,169) 291,234(m) 78,065
----------- ----------- ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 128,354 $ 288,261 $ 380,542 $ 220,635
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------

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

(a) Cash resulting from the Offering restricted for payment of current interest
related to the debt, lease cures, disputed claims and holdback professional
fees.

(b) To reflect the fair market value of current assets, pursuant to Fresh Start
Accounting.

(d) Reflects debt issuance costs related to the Offering, as well as cash
resulting from the Offering restricted for long-term interest payments.

(e) Reflects the write-off of deferred financing fees associated with
retired/extinguished debt.

(f) Reflects the reorganization value of the Company not allocable to specific,
identified assets that is recorded as an intangible asset in accordance with
guidance provided by the American Institute of Certified Public Accountants
in Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code". The Company has estimated a
useful life of 15 years for amortization purposes.

F-9

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 2. FRESH START ACCOUNTING (CONTINUED)
(g) Reflects the repayment of the Company's Debtor in Possession Credit
Agreement with funds obtained through the Offering.

(h) Reflects the repayment of undisputed administrative claims and expenses
pursuant to the Plan of Reorganization and the write-off of the straight
line rent liability.

(i) To record additional liabilities and reclassify certain liabilities not
subject to compromise.

(j) Reflects the debt discount attributable to the value of the Series A
warrants, which are attached to the debt, of approximately $7.6 million and
the write down of long-term liabilities to their fair value pursuant to
Fresh Start Accounting.

(k) Recording of $85 million of seven year Senior Notes that bear interest at
12 3/4% per annum with interest payable semiannually in November and May,
and long-term taxes payable.

(l) Pursuant to Fresh Start Accounting, the Company eliminated its liabilities
subject to compromise, including claims of preferred stockholders.

(m) Reflects the issuance of new common stock and warrants in accordance with
the Plan of Reorganization, as well as the elimination of the Old Common
Stock and accumulated deficit pursuant to Fresh Start Accounting.

SECURED DEBT--The Company's secured obligation of $65,515,531 under the DIP
Credit Agreement was paid in full from the proceeds of the bond sale and initial
borrowings under the New Credit Facility.

UNCLASSIFIED AND UNIMPAIRED CLAIMS--The holders of unclassified and
unimpaired claims were paid $4,234,286. An escrow of $1,520,664 was established
for lease cures, disputed claims and professional fee holdback, which will be
paid by order of the Court through a distribution agent of the Company.

IMPAIRED CLAIMS--Holders of $151,043,087 in impaired claims, which include
$105,000,000 from old senior debt holders, $35,997,407 in lease cure claims from
Lessors and $10,045,680 from other general creditors, received in exchange for
their claims 20,000,000 shares of new common stock. The 20,000,000 shares
represent 100% of the Company's outstanding stock. The new common stock is
valued at $66,911,000 and represents a 44% recovery of their claims.

NEW SENIOR DEBT--The Company secured Notes on the Effective Date with
interest payable each May 1 and November 1, through November 1, 2004 when the
principal amount, $85,000,000 is due. After the discount to the initial
purchaser of $4,250,000, and associated expenses of $125,000, and $15,482,100
placed in escrow to pay the first 18 months of interest, the net proceeds from
the offering are $65,142,900. Each unit has a face value of $1,000 with a stated
interest rate of 12 3/4%. Additionally, Series A Warrants issued as attachments
to the Notes are valued at $7.6 million and reflected as a debt discount to the
Notes in the accompanying balance sheet. The discount will be amortized as
additional interest expense over the life of the debt, utilizing the effective
interest rate method of accounting.

PREFERRED STOCK--The old preferred stock of the Company was retired in
exchange for Series B Warrants, providing for an aggregate of 15% of the new
common stock in three equal tranches exercisable over a seven-year period after
the Effective Date. The first tranche price will be equal to the price per share
of the stock granted to the holders of impaired claims plus an amount equal to
12% per annum from the Effective Date. The second and third tranche prices will
represent a 120% and 140% recovery to the holders of impaired claims. In the
event of a sale, merger or other business combination of the

F-10

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 2. FRESH START ACCOUNTING (CONTINUED)
Reorganized Company for cash within two years following the Effective Date, the
Series B warrants will convert into the right to receive cash. The Series B
Warrants are valued at $1.6 million and in the accompanying schedule of
Shareholders' Equity.

NOTE 3: SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

All significant intercompany accounts and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current year
presentation.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

YEAR-END

The Company's fiscal year ends on the Saturday closest to January 31 of each
year. References to 1996, 1995 and 1994 relate to the fiscal years ended on
February 1, 1997, February 3, 1996 and January 28, 1995 which include 52, 53 and
52 weeks, respectively. The Company's tax year-end is the Saturday closest to
July 31.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards (SFAS) No. 107 requires
disclosure about the fair value of certain financial instruments. Cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities are
presented at fair value.

CASH AND CASH EQUIVALENTS

Short-term investments having original maturities of three months or less
are considered cash equivalents.

MERCHANDISE INVENTORIES

Merchandise inventories are stated at the lower of first-in, first-out
(FIFO) cost or market, using the retail inventory method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets. The useful lives are generally 25 years for buildings and improvements,
3 to 10 years for furniture, fixtures and equipment, and the remaining lease
term for leasehold improvements. The cost of assets sold or retired and the
related accumulated depreciation are removed from the accounts with any
resulting gain or loss included in income.

F-11

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective October 28, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 establishes accounting standards for recognizing and recording
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. The Company evaluates the recoverability of
the net book value of property and equipment based on an analysis of expected
cash flows. In fiscal 1997, the Company closed 137 stores as part of the
Company's reorganization. Reorganization costs of $8.2 million were recorded in
fiscal 1997 for the write-off of the net book value of assets disposed of,
including $6.8 million related to store closings.

Fresh Start Accounting results in a revaluation of the Company's assets and
liabilities as of the Effective Date to reflect the estimated fair market values
of those assets and liabilities in conformity with the procedures specified by
APB Opinion 16, "Business Combinations". When fresh start accounting was applied
to the property and equipment of the Company, the net book value fairly
represented the fair value.

OTHER ASSETS

Other assets consist principally of Excess Reorganization Value, debt
issuance costs, restricted cash, deferred income taxes and other deferred
charges. Excess Reorganization Value will be amortized on a straight-line basis
over 15 years. Debt issuance and credit acquisition costs are amortized into
interest expense utilizing the effective interest rate method.

STORE OPENING AND CLOSING COSTS

Store opening costs are expensed as incurred. Costs of store closings,
principally lease commitment costs, estimated future store fixed expenses and
estimated losses on store asset dispositions, are provided for in the period
when the decision is made to close the store.

PROVISION FOR INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 utilizes an asset and liability
approach to deferred taxes which are determined based on the estimated future
tax effects of differences between the financial statement and tax bases of
assets and liabilities given the provisions of the enacted tax laws.

EQUITY BASED COMPENSATION

The Financial Accounting Standards Board (FASB) issued SFAS No. 123
(effective for fiscal years beginning after December 15, 1996), "Accounting for
Stock-Based Compensation", which gave companies the choice to use either the
fair market valuation method for accounting for stock-based compensation or the
alternative method as provided by APB No. 25. Instead of assigning a fair value
to the stock-based compensation, APB No. 25 records compensation expense when
the first date that both the number of shares that may be issued upon exercise
of the options and the exercise price are known. SFAS No. 123 disclosure
requirements, however, supersede APB No. 25.

The Company has elected to account for stock-based compensation under the
provisions of APB No. 25, and provide disclosures as required by SFAS No. 123.

F-12

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 3: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS

In 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which revises
the manner in which earnings per share is calculated. This statement is
effective for both interim and annual periods after December 15, 1997. The
Company intends to comply with the provisions of SFAS No. 128 after the
effective date.

Additionally, in 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This statement, which is effective for periods beginning
after December 15, 1997, expands and modifies disclosure and will have no impact
on the Company's reported financial position, results of operations, or cash
flows.

NOTE 4: COUNTY SEAT, INC.

On December 4, 1989, County Seat, Inc. (CSI), formed by Donaldson, Lufkin &
Jenrette Securities Corporation (DLJ) and certain members of the Company's
management, acquired all of County Seat's outstanding capital stock from Carson
Pirie Scott & Company. The activities of CSI consisted principally of its
investment in the Company.

Since the old common stock of the Company was canceled under the Plan and no
distributions were made to CSI with respect to such interests, the Company, in
effect, is no longer a subsidiary of CSI. CSI, as of the Effective Date owed the
Company $4.6 million. CSI filed for Chapter 11 bankruptcy protection on the same
day as the Company. The case is currently being converted to a Chapter 7 filing,
and it is unlikely that there will be assets to distribute to creditors to
satisfy claims after the liquidation, including the Company's claim.
Accordingly, this amount has been eliminated from the Company's assets in Fresh
Start Accounting.

NOTE 5: MERCHANDISE INVENTORIES

Merchandise inventories, net of reserves, at November 1, 1997 consist of
finished goods.

NOTE 6: PROPERTY AND EQUIPMENT

Property and equipment, at November 1, 1997, consisted of the following (in
thousands):

Land............................................................................... $ 766
Buildings and improvements......................................................... 2,897
Leasehold improvements............................................................. 13,301
Furniture, fixtures and equipment.................................................. 14,342
Construction in progress........................................................... 1,054
---------
32,360
Less -- Accumulated deprecation and amortization................................... --
---------
Net................................................................................ $ 32,360
---------
---------

F-13

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 7: RESERVE FOR REORGANIZATION COSTS

Reorganization costs of $38.4 million recognized for the nine months ended
November 1, 1997 consist of store closing costs ($22.8 million), corporate
office and distribution center facility exit costs, ($6.1 million), and
professional fees ($9.5 million), as described below. Of this amount,
approximately $13.1 million is reflected as a liability for reorganization costs
to be incurred as a result of the Company's reorganization plan in connection
with and upon the Company's emergence from bankruptcy.

Store closing costs - Store closing costs include 137 stores operating
in a going out of business mode (GOB) in conjunction with the Company's plan
of reorganization. Management records store closings in the period in which
the decision to close is made. Store closing costs of $22.8 million
consisted of lease rejection claims, write-off of fixed assets and other GOB
store expenses. An accrual of approximately $1.9 million is included in
accrued restructuring expenses at November 1, 1997 for costs attributable to
stores closing after November 1, 1997.

Facility exit costs - These costs represent the Company's decision to
relocate its Minneapolis distribution center to Baltimore, Maryland and its
Dallas and Minneapolis administrative operations to New York. Facility exit
costs include severance to terminated employees ($2.7 million), incremental/
duplicative operating costs and wages ($1.7 million), operating lease
cancellations and fixed asset write-offs ($1.7 million). The relocation of
these facilities is expected to be complete during fiscal 1998. An accrual
of approximately $9.5 million is included in accrued reorganization costs at
November 1, 1997 for facility exit costs.

Professional fees - These costs include legal, accounting and consulting
fees incurred in connection with the Company's reorganization. Accrued
professional fees of approximately $1.7 million are included in accrued
reorganization costs at November 1, 1997.

NOTE 8: SPECIAL CHARGE

A special charge of approximately $12.0 million recorded within cost of
goods sold for the nine months ended November 1, 1997 relate to the liquidation
of excess inventory. Non-cancelable purchase commitments made by management for
1997 Fall merchandise were based on a chain of over 500 County Seat stores. As a
result of management's reorganization plan in which it closed a substantial
number of unprofitable stores, the Company owned and operated only 375 County
Seat stores by the Fall season of 1997. This resulted in significantly more
merchandise on-hand than was needed to sell through remaining store channels. In
order to liquidate this excess merchandise, the Company will recognize lower
than anticipated recovery rates on this merchandise. The additional markdowns
anticipated to liquidate this excess inventory represent an incremental
provision in excess of the original provision normally included in cost of goods
sold. The Company utilizes various methods to dispose of excess inventory,
including clearance sales in existing and going out of business stores,
warehouse sales and sales through jobbers. Management anticipates substantially
completing this liquidation process during fiscal 1998. A markdown reserve of
approximately $11.8 million was established at November 1, 1997 to be used to
liquidate this excess inventory in subsequent periods.

F-14

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET

NOTE 9: DEBT

A.) CREDIT AGREEMENT

On October 29, 1997, the Company entered into the Credit Agreement with a
syndicate of banks, led by Bank of Boston (Banks). The Credit Agreement is
funded through the Banks to provide working capital and longer-term financing.
The Credit Agreement matures October 29, 2000.

The commitment under the Credit Agreement provides for a revolving credit
facility up to $115,000,000, including a $90,000,000 letter of credit facility.
Availability under the Credit Agreement is limited to certain percentages of
eligible inventory. Availability is reduced by any amounts drawn under the
facility as well as outstanding letters of credit and bank acceptances.
Borrowings under the facility are secured by the Company's assets and guaranteed
by Trade Names. Trade Names was formed to hold trade names and service marks of
the Company.

Borrowing capacity under the Credit Agreement is subject to inventory levels
which change during periods of the year as defined below:

FROM TO RATE
- ------------------------------ ---------------------- -----

October 29, 1997 December 15, 1997 75%
December 16, 1997 January 31, 1998 65%
Each February 1 Each June 30 70%
Each July 1 Each December 15 73%
Each December 16 Each January 31 65%

At the option of the Company, interest is payable on borrowings under the
Credit Agreement at a prime rate plus .75% or the London Interbank Offer Rate
(LIBOR) plus 1.75%.

The Credit Agreement contains a financial covenant which requires a fixed
charge coverage ratio of 1.25:1.00 (defined as earnings before interest, taxes,
depreciation and amortization (EBITDA) divided by the sum of interest paid, cash
dividend payments, principal payments on capitalized leases, cash payment of
taxes and capital expenditures). The fixed charge coverage ratio is be measured
quarterly, commencing with the fiscal quarter ended January 31, 1998, using the
preceding twelve month rolling average, provided that, for the first three such
fiscal quarters ending after November 2, 1997, the calculation period for the
ratio shall be the period commencing on November 3, 1997 and ending as of the
end of each of such first three fiscal quarters. Other non-financial covenants
limit the amount of debt of the Company and limit acquisitions.

F-15

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 9: DEBT (CONTINUED)
Loans, borrowing base and letter of credit commitments under the Credit
Agreement as of November 1, 1997 are as follows (dollars in thousands):

AT PERIOD-END
Loans outstanding.................................................................. $ 12,276
Borrowing base..................................................................... 83,906
Available borrowing base........................................................... 23,968
Letter of credit commitments outstanding........................................... 27,468
Bank Acceptances outstanding....................................................... 9,568

DURING THE 39 WEEK PERIOD
Days loans were outstanding........................................................ 272
Maximum loan borrowing............................................................. $ 66,400
Average loan borrowing............................................................. 48,688
Weighted average interest rate..................................................... 8.72%

In connection with securing the credit line, the Company incurred costs of
$1.1 million, which will be amortized on a straight-line basis over the life of
the Credit Agreement.

B.) LONG-TERM DEBT

GENERAL--As provided for in the Plan, the Company sold 85,000 units of
"12 3/4% Senior Notes due 2004 with Series A warrants to purchase shares of
common stock" on the Effective Date. Each unit has a face value of $1,000 with
interest payable each May 1 and November 1, through November 1, 2004 when the
principal amount, $85,000,000 is due. The Company deposited $15,482,100 of the
net proceeds of the Offering into an escrow account, which, together with the
proceeds from the investment thereof will pay the interest on the Notes to May
1, 1999. The net proceeds from the offering after the initial purchaser discount
of $4,250,000, fees of $125,000 and the payment to the escrow account is
$65,142,900.

The value assigned to the Series A warrants represents a discount to the
Notes of $7,647,000. In addition, the Company incurred debt issuance costs of
$6.3 million. Both the discount to the Notes and debt issuance costs will be
amortized as interest expense utilizing the effective interest rate method over
the life of the Notes.

The Notes are senior unsecured obligations of the Company, that rank senior
in right of payment to all present and future subordinated indebtedness, except
to the extent collateralized by a first priority security interest in the
security account. The Notes were issued as a private offering, and as such
cannot be traded publicly. The Company has agreed, for the benefit of all
holders of the Notes, to register the Notes under the Securities Act of 1933
within 180 days of their issuance on the necessary form to effect an exchange of
the private notes for public notes (Exchange Offer).

If the Exchange Offer registration statement is not filed within 120 days
following the Effective Date of the Plan, an additional interest of 0.50 % per
annum over and above the stated interest of 12.75% will accrue on the Notes for
the first 90 days commencing on the 120th day after the Effective Date.
Additional interest of 0.50% per annum for each subsequent 90-day period will
accrue. Further, if the Exchange Offer does not become effective 180 days after
the Effective Date, additional interest of 0.50% per annum over

F-16

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 9: DEBT (CONTINUED)
and above the stated interest of 12.75% will accrue on the Notes for the first
90 days commencing on the 180th day after the Effective Date.

The additional interest penalty for failing to file within 120 days and
failing to become effective within 180 days may not exceed 1.50% per annum in
the aggregate; and provided further, that as soon as all registration defaults
have been cured additional interest on the Notes shall cease to accrue. The
penalty began accruing February 25, 1998 and will be cured with the filing of
the S-4.

REDEEMABLE OPTION--The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after November 1, 2001 at
redemption prices set below, plus accrued and unpaid interest, if any, to the
date of redemption. In addition, prior to November 1, 2001, the Company may,
subject to certain conditions, redeem up to one-third of the principal amount of
outstanding Notes with proceeds of one or more offerings of capital stock at
112.75% of the principal amount, plus accrued and unpaid interest, if any, to
the date of redemption. Upon a change of control, the Company is required to
offer to repurchase all the then outstanding Notes at 101% of the principal
amount, plus accrued and unpaid interest, if any, to the date of repurchase.

Optional Redemption:

YEAR PERCENTAGE
- ------------------------------------------------------------------------------ -----------

2001.......................................................................... 106.3750%
2002.......................................................................... 103.1875%
2003 and thereafter........................................................... 100%

CERTAIN COVENANTS--The Company has agreed to certain covenants upon the sale
of the Notes, including the inability to declare or pay a dividend, or purchase
equity of the Company. The Company will not acquire additional indebtedness or
issue preferred stock. The Company is also restricted in its ability to sell the
assets of the Company, and not permitted to sell any capital stock.

The Company's wholly-owned subsidiary, Trade Names, has guaranteed the
payment of the Notes.

NOTE 10: INCOME TAXES

The Company's tax year-end is the Saturday closest to July 31. A
consolidated federal income tax return is filed. For the purpose of these
financial statements, the Company calculates income taxes as if it files federal
and state income tax returns for its fiscal years.

As of November 1, 1997, the Company had a net operating loss carryforward of
approximately $100,000,000. The Company's reorganization or significant changes
in ownership of the Company could substantially limit the use of the net
operating loss carryforward.

Under SFAS No. 109, deferred taxes are determined based on the estimated
future tax effects of differences between the financial reporting and tax bases
of assets and liabilities given the provisions of the enacted tax laws. The
Company evaluates the recoverability of its deferred tax assets based on
estimates of future operating income. Based on these estimates and in
consideration of the Company's recent emergence from Chapter 11, the Company
fully reserved the current deferred tax asset of $10.2 million and the
non-current deferred tax asset of $4.5 million representing a total valuation
reserve of $14.7 million.

F-17

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 11: SHAREHOLDERS' EQUITY

Pursuant to the Plan the Company has amended and restated the articles of
incorporation and bylaws of the Company. As such, the Company's authorized
capital stock consists of 40,000,000 shares of common stock and 1,000,000 shares
of preferred stock, par value $.01 per share.

COMMON STOCK--20,000,000 shares of common stock were granted to creditors
holding impaired claims (see Note 2 for a further explanation). In addition, (i)
shares of common stock constituting 10% of the common stock on a fully-diluted
basis are reserved for issuance upon the exercise of the Series A warrants, (ii)
shares of common stock constituting 15% of the common stock are reserved for
issuance upon the exercise of the Series B warrants, subject to dilution by the
Series A warrants, the additional warrant, the Series C warrants, and options to
purchase common stock to be granted to certain employees and directors of the
Company, (iii) shares of common stock constituting 15% of the common stock are
reserved for issuance upon exercise of the Series C warrants (as defined
herein), subject to dilution by the Series A warrants, the additional warrant,
and options to purchase common stock to be granted to certain employees and
directors of the Company, and (iv) share of common stock constituting 2.5% of
the common stock on a fully-diluted basis are reserved for issuance upon the
exercise of the additional warrant. The holders of the common stock are entitled
to one vote for each share of common stock.

PREFERRED STOCK--Preferred stock may be issued from time to time by the
board of directors as shares of one or more series, subject to the provisions of
the articles of incorporation. Currently, the Company has no plans to issue any
shares of preferred stock.

WARRANTS

A) SERIES A WARRANTS--Each unit of the Notes have attached a Series A
warrant to purchase 26.8908 shares of the Company's common stock at an exercise
price of $.01 (See Note 8: Debt, b) Long-Term Debt--for further discussion).

B) SERIES B WARRANTS--As provided for in the Plan, old preferred
stockholders received warrants to purchase 15% of the Company's common stock,
exercisable over a seven-year period in three equal tranches (See Note 2 for
further discussion).

C) SERIES C WARRANTS--Pursuant to a warrant agreement between the Company
and Mr. Sam Forman (Mr. Forman), Mr. Forman received on the Effective Date,
warrants to purchase 15% of the common stock, subject to dilution only by the
Series A Warrants and by certain options to purchase common stock that may be
granted to certain directors of the Company. The warrants vest in three equal
tranches. The first vested on the Effective Date, the second on the first
anniversary of the Effective Date and the third on the third anniversary date.

The exercise price of the Series C warrants for the three tranches will
represent a recovery to the holders of general unsecured claims under the Plan
of 40%, 70% and 90%, respectively. However, if for any consecutive ten trading
days during the term of the Series C warrant the product of (i) the average
value per share of the common stock and (ii) the number of shares of common
stock outstanding (including shares reserved for warrants other than the Series
C warrants) exceeds $200 million, the exercise price for the first tranche of
Series C warrants shall be $0.

D) ADDITIONAL WARRANT--In connection with the offering, the Company issued
to the initial purchaser of the senior debt an additional Series A warrant to
purchase 2.5% of the common stock on a fully-diluted basis.

F-18

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 12: COMMITMENTS AND CONTINGENCIES

A) LEASES--The Company's leases are principally for the use of retail store
facilities and equipment and certain non-store equipment and are generally for a
period of up to ten years. Most store leases are net leases which require the
Company to pay real estate taxes, maintenance costs, insurance and other
operating costs. Rent payments are based upon a combination of fixed rentals
(subject to escalation) and rentals contingent upon sales levels.

The Company can reject executory contracts, including leases, under the
relevant provisions of the Bankruptcy Code. Prior to the Effective Date, the
Company rejected certain leases on stores, which they intend to close subsequent
to January 1998. The minimum annual rental commitments, giving effect to
rejected leases, at November 1, 1997 are summarized as follows (in thousands):

YEAR PAYMENTS
- ------------------------------------------------------------------------------- -----------

1997 (13-Weeks ending January 31, 1998)........................................ $ 8,625
1998........................................................................... 31,330
1999........................................................................... 27,140
2000........................................................................... 23,677
2001........................................................................... 18,646
Thereafter..................................................................... 31,683

LITIGATION--The Company has been named as a defendant in certain legal
proceedings. Although the outcome of these matters cannot be determined, the
Company believes the disposition of these proceedings will not materially affect
the financial position or results of operations of the Company.

On or about September 29, 1997, RAI Credit Corporation (RAI) filed an
adversary proceeding against the Company in the Court. The Company and RAI had
entered into an Account Purchase and Service Agreement dated July 11, 1997
(Agreement) pursuant to which RAI had agreed to establish and service a
private-label credit card program for the Company. In September 1997, the
Company notified RAI that it was terminating the Agreement on the ground that
RAI had materially breached and failed to perform under the Agreement. RAI's
complaint alleges that the Company wrongfully terminated the Agreement and seeks
compensatory damages of not less than $10,741,960 and an injunction prohibiting
the Company from entering into a private-label credit card program with any
entity other than RAI prior to the beginning of 1999, as well as attorneys' fees
and costs.

NOTE 13: RELATED PARTY TRANSACTIONS

Mr. Forman is chairman of the board of directors and owns, together with his
family, 70% of the voting securities of Forman Enterprises. Forman Enterprises
owns and operates approximately 60 factory outlets stores that sell casual
apparel similar to that sold by the Company. Mr. Forman's sons, Brett Forman and
Richard Forman, and his daughter, Wendy Forman, have relationships with both the
Company and with Forman Enterprises.

The Company has engaged Forman Enterprises to perform certain consulting
services for the Company. The Company entered into a consulting agreement with
Forman Enterprises to provide the

F-19

COUNTY SEAT STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)

NOTE 13: RELATED PARTY TRANSACTIONS (CONTINUED)
Company with sourcing, merchandising, budgeting, store management, and related
services for a payment of $40,000 per month. Certain employees of Forman
Enterprises will provide such services to the Company, and the Company will
reimburse Forman Enterprises for the salary of these employees for the time
spent working, based on a fixed percentage. In 1997, the Company purchased
$1,666,827 of merchandise and paid consulting fees and related expenses of
$321,739 to Forman Enterprises.

Thirty percent of the equity of Forman Enterprises is owned by Mr. Larry
Ashinoff, (Mr. Ashinoff). Coronet, an entity controlled by Mr. Ashinoff, sells
merchandise to both the Company and Forman Enterprises. In addition, Forman
Enterprises and the Company utilize many of the same suppliers. During 1997,
payments for merchandise to Coronet totaled approximately $762,000.

Felenstein, Koniver & Associates (FKA) was engaged by the Company in 1997 to
act as a real estate consultant to the Company for a fee of $3,000 a month.
Total payments to FKA in 1997 were $117,219. Mr. Felenstein, a member of the
Company's board of directors, is a principal of FKA.

The Company's legal counsel is Eaton & Van Winkle, who also provide personal
legal counsel to Mr. Forman. Work performed by Eaton & Van Winkle, includes Mr.
Forman's employment contract with the Company.

NOTE 14: RETIREMENT PLAN

The Company has an Employee 401(k) Savings Plan (the 401K Plan), which is
independently administered. All employees consistently working a minimum of
20-hour weeks and completing one year of service, as defined in the plan
document, are eligible to participate in the 401(K) Plan. The Company is
required to match 25% of the first 6% of compensation contributed by each
employee.

NOTE 15: STOCK-BASED EMPLOYEE COMPENSATION

Pursuant to the Plan and a warrant agreement, the Company granted Mr. Forman
warrants to purchase 15% of the common stock of the Company (See Note 11,
- --Series C Warrants). As such, these warrants represent Stock-Based Employee
Compensation (Stock Compensation) as defined by APB Opinion No. 25.

As the exercise price is not currently determinable and a measurement date
did not occur, the Company is unable to record compensation expense with respect
to the Series C Warrants in accordance with APB Opinion No. 25. In addition,
management is unable to provide the disclosures required by SFAS No. 123 as a
measurement date has not occurred.

NOTE 16: SUBSIDIARY GUARANTOR

CSS Trade Names, Inc. (Trade Names), a wholly-owned subsidiary, owns the
County Seat Stores, Inc.'s service marks and licenses the rights to the Company.
Trade Names guaranteed repayment of the Notes and indebtedness arising from
borrowings under the Company's Credit Agreement (see Note 9). Trade Names is not
an active Company, and as such, their financial statements are not presented
herein.

NOTE 17: SUBSEQUENT EVENT

In connection with the closing of the Company's current distribution center
in Brooklyn Park, Minnesota during the early summer of 1998, the Company on
February 26, 1998 signed a ten-year lease agreement for a new distribution
center located near Baltimore, Maryland. Aggregate base rental commitments are
$11.3 million.

F-20

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of County Seat Stores, Inc.:

We have audited the accompanying consolidated balance sheets of County Seat
Stores, Inc. (a Minnesota corporation) and subsidiary as of February 1, 1997 and
February 3, 1996, and the related consolidated statements of operations,
shareholder's equity (deficit) and cash flows for the fifty-two week periods
ended February 1, 1997 and January 28, 1995, and the fifty-three week period
ended February 3, 1996. 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 County Seat Stores, Inc. and
Subsidiary as of February 1, 1997 and February 3, 1996, and the results of their
operations and their cash flows for the fifty-two week periods ended February 1,
1997 and January 28, 1995 and the fifty-three week period ended February 3,
1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas

April 24, 1997, except for

Note 15, as to which the

date is October 29, 1997

F-21

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------

ASSETS
Current Assets:
Cash and cash equivalents............................................................... $ 6,356 $ 8,166
Receivables............................................................................. 1,983 2,658
Merchandise inventories................................................................. 72,628 110,744
Prepaid expenses........................................................................ 8,347 11,188
Deferred tax benefit.................................................................... -- 989
----------- -----------
Total current assets.................................................................. 89,314 133,745
----------- -----------
Property and equipment, at cost......................................................... 90,668 120,277
Less--Accumulated depreciation and amortization......................................... (48,787) (61,674)
----------- -----------
Property and equipment, net........................................................... 41,881 58,603
----------- -----------
Other Assets, net:
Debt issuance costs..................................................................... 1,159 3,073
Deferred income taxes................................................................... -- 2,368
Other................................................................................... 528 1,303
----------- -----------
Total other assets, net............................................................... 1,687 6,744
----------- -----------
$ 132,882 $ 199,092
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Borrowings under credit agreement....................................................... $ 38,600 $ 27,000
Current maturities of long-term debt.................................................... -- 25
Accounts payable........................................................................ 30,009 36,754
Accrued expenses........................................................................ 11,565 19,913
Accrued income taxes.................................................................... -- 3,007
Accrued restructuring expenses.......................................................... 3,838 --
----------- -----------
Total current liabilities............................................................. 84,012 86,699
----------- -----------
Long-term borrowings under credit agreement............................................. -- 25,000
Other long-term liabilities............................................................. 9,118 11,242
Liabilities Subject to Compromise:
Accounts payable and accrued liabilities................................................ 16,089 --
Reserves for lease settlements.......................................................... 25,600 --
Long-term debt.......................................................................... 105,007 105,031
Redeemable preferred stock.............................................................. 50,347 44,319
Commitments and contingencies
Shareholder's Equity (Deficit):
Common stock: par value $1.00 per share; 1,000 shares authorized,
issued and outstanding................................................................ 1 1
Paid-in capital......................................................................... 49,789 49,789
Accumulated deficit..................................................................... (207,081) (122,989)
----------- -----------
Total shareholder's equity (deficit).................................................. (157,291) (73,199)
----------- -----------
$ 132,882 $ 199,092
----------- -----------
----------- -----------

The accompanying notes are an integral part of these consolidated balance
sheets.

F-22

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
--------------- --------------- ---------------

Net sales..................................................... $ 538,260 $ 619,225 $ 588,327
Cost of sales, including buying and occupancy (includes $4,311
inventory write-down charges related to restructuring in
fiscal 1996)................................................ 416,389 452,014 420,478
--------------- --------------- ---------------
Gross profit.............................................. 121,871 167,211 167,849
Selling, general and administrative expenses.................. 126,561 132,699 119,638
Depreciation and amortization................................. 11,051 13,237 16,668
Write-off of certain long-lived assets........................ -- 80,241 --
Reorganization costs.......................................... 43,752 -- --
Interest expense, net......................................... 15,445 20,435 21,025
--------------- --------------- ---------------
Income (loss) before income taxes and extraordinary
items................................................... (74,938) (79,401) 10,518
--------------- --------------- ---------------
--------------- --------------- ---------------
Income taxes.................................................. (762) 7,632 5,295
--------------- --------------- ---------------
Income (loss) before extraordinary items.................. (74,176) (87,033) 5,223
Extraordinary items, net of income tax benefit................ 2,692 9,997 --
--------------- --------------- ---------------
Net income (loss)............................................. $ (76,868) $ (97,030) $ 5,223
--------------- --------------- ---------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-23

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

TOTAL
ACCUMULATED SHAREHOLDER'S
PAR PAID-IN EARNINGS EQUITY
SHARES VALUE CAPITAL (DEFICIT) (DEFICIT)
----------- ----- --------- ------------ --------------

COMMON STOCK
-----------------------------------
Balance, January 29, 1994............................... 1,000 $ 1 $ 49,789 $ (13,050) $ 36,740
Net income............................................ -- -- -- 5,223 5,223
Redeemable preferred stock dividends and accretion.... -- -- -- (6,085) (6,085)
--
----- --------- ------------ --------------
Balance, January 28, 1995............................... 1,000 1 49,789 (13,912) 35,878
Net loss.............................................. -- -- -- (97,030) (97,030)
Redeemable preferred stock dividends and accretion.... -- -- -- (8,645) (8,645)
Dividend to parent.................................... -- -- -- (2,102) (2,102)
Receivable from parent................................ -- -- -- (1,300) (1,300)
--
----- --------- ------------ --------------
Balance, February 3, 1996............................... 1,000 1 49,789 (122,989) (73,199)
Net loss.............................................. -- -- -- (76,868) (76,868)
Redeemable preferred stock dividends and accretion.... -- -- -- (6,029) (6,029)
Dividend to parent.................................... -- -- -- (1,051) (1,051)
Receivable from parent................................ -- -- -- (144) (144)
--
----- --------- ------------ --------------
Balance, February 1, 1997............................... 1,000 $ 1 $ 49,789 $ (207,081) $ (157,291)
--
--
----- --------- ------------ --------------
----- --------- ------------ --------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-24

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
--------------- --------------- ---------------

Cash Flows from Operating Activities:
Net income (loss)........................................... $ (76,868) $ (97,030) $ 5,223
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Noncash reorganization costs............................ 33,563 -- --
Extraordinary items..................................... 2,692 9,997 --
Write-off of certain long-lived assets.................. -- 80,241 --
Depreciation and amortization........................... 11,051 13,237 16,668
Amortization of debt issuance costs and discount........ 835 1,272 2,599
Rent expense in excess of cash outlays, net............. 460 494 768
Deferred tax provision (benefit)........................ (762) 6,500 --
Changes in operating assets and liabilities:
Receivables........................................... (141) 1,534 (1,819)
Merchandise inventories............................... 38,116 (14,473) (13,088)
Prepaid expenses...................................... 2,841 (1,300) (771)
Accounts payable...................................... (6,290) (3,307) (2,482)
Accrued expenses...................................... (5,610) (2,522) 2,217
Accrued income taxes.................................. 361 1,263 3,151
Other non-current assets and liabilities.............. (68) (1,673) (196)
Operating liabilities subject to compromise........... 16,089 -- --
--------------- --------------- ---------------
Net cash provided by (used for) operating
activities.......................................... 16,269 (5,767) 12,270
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Borrowing (repayments) under credit agreement, net.......... (13,400) 52,000 --
Issuance of long-term debt.................................. -- 104,943 --
Debt and equity issuance costs and prepayment premiums...... (1,649) (6,998) (81)
Principal payments on long-term debt and capital leases..... (25) (150,836) (45)
Dividend to parent.......................................... (1,051) (2,102) --
Advance to parent........................................... (237) (350) (623)
--------------- --------------- ---------------
Net cash used for financing activities................ (16,362) (3,343) (749)
--------------- --------------- ---------------
Cash Flows from Investing Activities:
Capital expenditures........................................ (1,841) (13,199) (14,785)
--------------- --------------- ---------------
Proceeds from disposal of property and equipment............ 124 16 32
--------------- --------------- ---------------
Net cash used for investing activities................ (1,717) (13,183) (14,753)
--------------- --------------- ---------------
Net Decrease in Cash and Cash Equivalents..................... (1,810) (22,293) (3,232)
Cash and Cash Equivalents:
Beginning of period......................................... 8,166 30,459 33,691
--------------- --------------- ---------------
End of period............................................... $ 6,356 $ 8,166 $ 30,459
--------------- --------------- ---------------
Cash Paid During the Period For:
Interest.................................................... $ 12,308 $ 19,459 $ 18,449
--------------- --------------- ---------------
Income taxes................................................ $ (361) $ 520 $ 2,144
--------------- --------------- ---------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-25

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. REORGANIZATION AND NATURE OF BUSINESS

The accompanying consolidated financial statements represent those of County
Seat Stores, Inc. (County Seat) and its wholly-owned subsidiary, CSS Trade
Names, Inc. (Trade Names) (together, the Company). The Company is a wholly-owned
subsidiary of County Seat, Inc. (CSI) (see Note 3).

The Company is a specialty apparel retailer selling both brand name and
private-label jeans and jeanswear. The Company currently operates 537 stores in
42 states. The Company's 500 County Seat stores, located almost exclusively in
regional shopping malls, offer one-stop shopping for daily casual wear featuring
a contemporary jeanswear look. The Company's selection of popular brands
includes Levi's, and its proprietary brands, County Seat-Registered Trademark-,
Nuovo-Registered Trademark- and Ten Star-Registered Trademark-. The Company also
operates 13 County Seat Outlet stores offering discount pricing on special
purchase and clearance merchandise and 21 Levi's Outlet stores under license
from Levi Strauss & Co. (Levi Strauss) offering a full range of Levi's and
Docker's off-price merchandise for both adults and children. The Company
operates three The Old Farmer's Almanac General Stores, a new retail concept
selling products associated with American country living, under license from
Yankee Publishing, Inc., the publisher of THE OLD FARMER'S ALMANAC.

The activities of CSI consist principally of its investment in County Seat.
The activities of Trade Names consist principally of licensing the rights to the
County Seat service marks to these stores.

On October 17, 1996, County Seat, Trade Names and CSI each filed voluntary
petitions for relief under Chapter 11 (Chapter 11) of Title 11 of the United
States Code (the Bankruptcy Code) in the United States Bankruptcy Court for the
District of Delaware (the Court). The Company and CSI are presently operating
their business as debtors-in-possession under the jurisdiction of the Court. As
debtors-in-possession, the Company and CSI may not engage in transactions
outside of the ordinary course of business without approval of the Court, after
notice and hearing.

Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on events that occurred, on or before
the petition date of October 17, 1996 (the Filing Date). Other liabilities may
arise or be subject to compromise as a result of rejection of executory
contracts, including leases, or the Court's determination of the allowed amount
of contingent or other disputed claims. The ultimate terms of settlement of
these claims will be determined in accordance with a plan of reorganization
which requires the approval of impaired prepetition creditors and stockholders
and confirmation by the Court. Liabilities subject to compromise (see Note 10)
in the accompanying consolidated balance sheets represent the Company's estimate
of liabilities as of February 1, 1997 subject to adjustment in the
reorganization process.

Following approval by the Court on October 17, 1996, the Company and CSI
entered into a debtor-in-possession credit agreement (the DIP Credit Agreement)
with a syndicate of commercial banks (the Banks) to provide working capital and
longer-term financing through the Chapter 11 process. The Banks previously
provided funding under the Company's pre-existing credit agreement and all
outstanding obligations under the pre-existing credit agreement were secured and
funded through the DIP Credit Agreement.

On November 6, 1996, the Company and CSI notified the Securities and
Exchange Commission of the suspension of the duty to file reports under Sections
13 and 15(d) of the Securities Exchange Act of 1934, as amended.

F-26

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. REORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
The Company has experienced significant losses from operations and has a net
capital deficiency as of February 1, 1997. The Company's board of directors and
management are in the process of implementing several steps to reorganize County
Seat to provide for profitable operations in the future. Executive management,
including the Chief Executive Officer and several Senior Vice-Presidents, has
substantially been replaced with a new management team. Management is in the
process of implementing new merchandising strategies with the intention of
expanding the Company's customer base while improving retail gross margins.
Approximately 200 under-performing stores were closed in the fourth quarter of
fiscal 1996 to focus efforts on potentially profitable locations. The operating
performance of the remaining store locations is continuing to be evaluated and
the Company is negotiating with landlords for more favorable lease terms.
Administrative costs have been reduced with a reduction in the administrative
work force. Management is also in the process of working with its creditors and
equity holders to develop a plan of reorganization under Chapter 11 for the
financial restructuring of the Company and the settlement of its liabilities
(the Plan).

Successful development and implementation of the Plan will depend on, among
other things, the availability of long-term financing on acceptable terms and
conditions, and acceptance of the Plan by the prepetition creditors and
stockholders as required by the Bankruptcy Code. There can be no assurance that
the Company will be successful in the development, implementation and validation
of a business plan. If no plan of reorganization is successfully implemented,
the Company could be liquidated.

At this time it is not possible to predict the outcome of the Company's
Chapter 11 proceedings as a general matter, or the effect of the proceedings on
the Company or on the interests of prepetition creditors and stockholders. The
uncertainty regarding the eventual outcome of the Chapter 11 proceedings and the
effects of other unknown adverse factors could threaten the Company's existence
as a going concern.

The accompanying consolidated financial statements have been presented on
the basis that the Company is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the Chapter 11 filing and circumstances relating to
this event, realization of assets and satisfaction of liabilities is subject to
uncertainty. The final plan of reorganization could materially change the
amounts reported in the accompanying consolidated financial statements, which do
not give effect to adjustments to the carrying values of assets and liabilities
which may be necessary as a consequence of a plan reorganization. The ability of
the Company to continue as a going concern is dependent on, among other things,
confirmation of an acceptable plan of reorganization, a successful senior
management transition, future profitable operations, compliance with
debtor-in-possession financing agreements, availability of long-term financing
on acceptable terms and conditions, maintenance of vendor and factor confidence,
renewal of desirable store leases, and the ability to generate sufficient cash
from operations.

In view of the Chapter 11 reorganization, there is uncertainty with respect
to the Company's liquidity. The Company believes that at the present time its
working capital, anticipated net cash provided by operating activities, factor
and vendor trade credit, and debtor-in-possession financing should enable the
Company to meet its short-term liquidity requirements. However, any change in
the current status of these or other items affecting the Company, including
adverse operating results, a reduction in vendor or factor

F-27

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. REORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
trade credit, loss or inadequacy of debtor-in-possession financing could have a
materially adverse effect on the Company's liquidity and on its operations.

See Note 15 for the subsequent event relating to the Company's emergence
from Chapter 11 bankruptcy.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

All significant intercompany accounts and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current
presentation.

The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

YEAR-END

CASH AND CASH EQUIVALENTS

Short-term investments included in cash and cash equivalents have original
maturities of three months or less.

MERCHANDISE INVENTORIES

Merchandise inventories are stated at the lower of first-in, first-out
(FIFO) cost or market, using the retail inventory method.

PROPERTY AND EQUIPMENT

Effective October 28, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
establishes accounting standards for recognizing and recording the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets. The

F-28

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company evaluates the recoverability of the net book value of property and
equipment based on an analysis of expected cash flows. In fiscal 1996, the
Company closed approximately 200 stores as part of the Company's reorganization.
Restructuring charges of $7,239,000 were recorded in fiscal 1996 for the write-
off of the net book value of assets disposed of in the store closing process. In
fiscal 1995, certain fixed assets with a net book value of $5,523,000 were
written off because the Company did not expect to recover their net book value
(see Note 6).

OTHER ASSETS

Other assets consist principally of debt issuance costs, deferred income
taxes and other deferred charges. Debt issuance costs are amortized on a
straight-line basis over the life of the related debt. Amortization expense was
$776,000, $1,938,000 and $5,966,000 in fiscal 1996, 1995 and 1994, respectively.
Amortization of debt issuance costs related to the Company's long-term debt was
suspended as of the Filing Date. Deferred costs related to the pre-existing
credit agreement were written off as an extraordinary charge in the third
quarter of fiscal 1996 (see Note 7). Deferred income tax assets of $42,238,000
have been reduced in their entirety by a valuation allowance at February 1, 1997
(see Note 11). Other deferred charges are being amortized over 1 to 5 years
(which represents the life of the related assets). In fiscal 1995, the
$74,718,000 of remaining goodwill was written off to reflect a change in the
Company's estimate of its fair value (see Note 6).

STORE OPENING AND CLOSING COSTS

Store opening costs are expensed as incurred. Costs of store closings,
principally lease commitment costs and estimated losses on store asset
dispositions, are provided for in the period when the decision is made to close
the store.

PROVISION FOR INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 utilizes an asset and liability
approach and deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of the enacted tax laws.

REORGANIZATION

The Company accounts for its reorganization activities under the provisions
of Statement of Position (SOP) 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". Under SOP 90-7, reorganization
charges and prepetition liabilities subject to compromise are reported
separately in the Company's financial statements. Liabilities subject to
compromise are valued based on current estimates of the amount of the allowed
claim under the Chapter 11 reorganization process. Interest accruals on the
Company's and CSI's long-term debt and dividends and accretion on the Company's
and CSI's preferred stock have been suspended as of the Filing Date.

F-29

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS

As the market for claims against companies under Chapter 11 is not well
developed, no reliable source of market prices is available for estimating the
fair value of the Company's long-term debt and liabilities subject to
compromise.

3. COUNTY SEAT, INC.

On December 4, 1989, CSI, formed by Donaldson, Lufkin & Jenrette Securities
Corporation (DLJ) and certain members of the Company's management, acquired all
of County Seat's outstanding capital stock from Carson Pirie Scott & Company
(Carson). The activities of CSI consist principally of its investment in County
Seat. A receivable from CSI totaling $1,444,000 was included in the accumulated
deficit of County Seat at February 1, 1997.

The consolidated financial position of CSI was comprised of the following
(in thousands):

FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------

Current assets.......................................................................... $ 89,314 $ 133,896
Property and equipment, net............................................................. 41,881 58,603
Other assets, net....................................................................... 1,687 6,862
----------- -----------
Total assets........................................................................ $ 132,882 $ 199,361
----------- -----------
----------- -----------
Current liabilities..................................................................... $ 84,012 $ 85,416
Long-term borrowing under credit agreement.............................................. -- 25,000
Other long-term liabilities............................................................. 10,141 12,044
Liabilities subject to compromise:
Accounts payable and accrued liabilities............................................ 16,889 --
Reserves for lease settlements...................................................... 25,600 --
Long-term debt...................................................................... 122,747 122,365
Minority interest redeemable preferred stock of Stores.............................. 50,347 44,319
Redeemable preferred stock of CSI................................................... 66,969 58,628
----------- -----------
Total liabilities subject to compromise......................................... 282,552 225,312
Shareholders' equity (deficit):
Common stock........................................................................ 33 33
Paid-in capital..................................................................... 24,793 24,793
Common stock notes receivable....................................................... (5,203) (4,982)
Accumulated deficit................................................................. (263,446) (168,255)
----------- -----------
Total shareholders' equity (deficit)............................................ (243,823) (148,411)
----------- -----------
----------- -----------
Total liabilities and shareholders' equity (deficit)............................ $ 132,882 $ 199,361
----------- -----------
----------- -----------

F-30

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. COUNTY SEAT, INC. (CONTINUED)
The consolidated results of operations of CSI were (in thousands):

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
--------------- --------------- ---------------

Net sales..................................................... $ 538,260 $ 619,225 $ 588,327
Gross profit.............................................. 121,871 167,211 167,849
Selling, general and administrative expenses.................. 126,619 132,746 119,649
Depreciation and amortization................................. 11,051 13,237 16,668
Write-off of certain long-lived assets and other deferred
costs....................................................... -- 81,462 --
Reorganization costs.......................................... 43,752 -- --
Interest expense, net......................................... 17,327 23,087 23,522
Minority interest dividends and accretion of redeemable
preferred stock of Stores................................... 6,029 8,645 6,085
--------------- --------------- ---------------
Income (loss) before income taxes and extraordinary
items................................................... (82,907) (91,966) 1,925
Income taxes.................................................. 1,252 6,548 4,527
Extraordinary items, net of income tax benefit................ 2,692 9,997 --
--------------- --------------- ---------------
Net loss.................................................... $ (86,851) $ (108,511) $ (2,602)
--------------- --------------- ---------------
--------------- --------------- ---------------

Long-term debt consisted of the following (in thousands):

FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------

Long-term borrowings under credit agreement............................................. $ -- $ 25,000
9% junior subordinated exchange debentures.............................................. 17,740 17,334
County Seat Stores, Inc. long-term debt................................................. 105,007 105,031
----------- -----------
$ 122,747 $ 147,365
----------- -----------
----------- -----------

The aggregate redemption values of redeemable preferred stock were as
follows (in thousands):

FEBRUARY 1,
1997
-----------

Junior exchangeable preferred stock of CSI....................................... $ 66,969
County Seat Stores, Inc. senior exchangeable preferred stock..................... 51,351

The components of long-term debt, redeemable preferred stock and
shareholders' investment of CSI are as follows:

LONG-TERM DEBT

On June 1, 1993 CSI exchanged all of the then outstanding shares of CSI
senior exchangeable preferred stock (CSI Senior Preferred) for 9% junior
subordinated exchange debentures (9% Exchange Debentures) due 2004, in the
principal amount of $20,466,000. The 9% Exchange Debentures were issued

F-31

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. COUNTY SEAT, INC. (CONTINUED)
at a discount of approximately $7,500,000 which was being amortized over the
life of the debentures. The unamortized discount on the 9% Exchange Debentures
was $5,612,000 and $6,018,000 at February 1, 1997 and February 3, 1996,
respectively. The 9% Exchange Debentures are subordinated to all senior and
senior subordinated debt of the Company and are due November 30, 2004, or
earlier upon a change in control of CSI. Interest on the 9% Exchange Debentures
was payable semi-annually at an annual rate of 9%. During 1996, CSI made a cash
interest payment on the 9% Exchange Debentures of $1,051,000 which was funded
through cash dividends from County Seat to CSI. The 9% Exchange Debentures are
classified as subject to compromise in the consolidated financial position of
CSI. The Company has suspended interest accruals and discount amortization on
the 9% Exchange Debentures as of the Filing Date. An interest payment due
November 1996 and future interest payments have been suspended until the Court
authorizes payment or confirms a plan of reorganization defining the repayment
terms. Accrued interest was $800,000 as of the Filing Date and at February 1,
1997.

See Note 10 for discussion of County Seat Stores, Inc. long-term debt.

JUNIOR EXCHANGEABLE PREFERRED STOCK

As part of the Acquisition, CSI issued 1,381,128 shares of Series A junior
exchangeable preferred stock and 282,766 shares of Series B junior exchangeable
preferred stock, par value $.01, (together, the CSI Junior Preferred) for $12.02
per share.

The CSI Junior Preferred is mandatorily redeemable at $25 per share on
November 30, 2004, or earlier upon change in control of CSI, at the optional
redemption price which increases ratably to $25 per share through November 30,
2004. In addition, CSI can redeem the CSI Junior Preferred at any time at the
optional redemption price.

Dividends on the Series A junior exchangeable preferred stock (Series A
Junior Preferred) are cumulative and payable quarterly. Under the terms of the
Series A Junior Preferred, the Company has the option of declaring stock
dividends in lieu of cash dividends through February 15, 2000. For the quarterly
dividends at February 29, 1996, May 31, 1996, and August 31, 1996, the Company
was restricted from declaring dividends on the Series A Junior Preferred until
sufficient net earnings are generated to permit the declaration of dividends
under Delaware corporate law. As a result, under the terms of the CSI Junior
Preferred, the annual dividend rate was increased from $3.00 per share to $3.50
per share beginning the quarter ending August 31, 1996. Unpaid dividends on the
Series A Junior Preferred cumulate and compound until paid. As a result of the
Chapter 11 Filing, accrued dividends and accretion on the CSI Junior Preferred
were suspended on the Filing Date. At October 17, 1996, the optional redemption
price was $17.76. Cumulative undeclared, unpaid Series A Junior Preferred stock
dividends were $4,883,000 and equivalent to 274,937 shares as of the Filing Date
and at February 1, 1997. These equivalent shares are not issued or outstanding.

Cumulative dividends on the Series B junior exchangeable preferred stock
(Series B Junior Preferred) compound as if a stock dividend was declared at each
quarterly dividend date. Undeclared, unpaid Series B Junior Preferred stock
dividends were $6,129,000 and equivalent to 345,099 shares as of the Filing Date
and at February 1, 1997. At February 3, 1996, undeclared, unpaid Series B Junior
Preferred stock dividends were $4,920,000 and equivalent to 289,238 shares.
These equivalent shares are not issued or outstanding.

F-32

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. COUNTY SEAT, INC. (CONTINUED)
The CSI Junior Preferred has a liquidation preference over CSI common stock
equal to the optional redemption price plus accrued dividends. At CSI's option,
the CSI Junior Preferred is exchangeable for 12% Exchange Debentures, due 2004,
at the rate of $25 face value of debt for each share of stock. The 12% Exchange
Debentures would be redeemable under the same conditions and at the same
redemption price as the CSI Junior Preferred. The 12% Exchange Debentures would
be subordinated to all senior and senior subordinated debt of the Company (see
Note 10).

In May 1994, CSI repurchased 3,666 shares of CSI Junior Preferred held by a
former officer and director of the Company at the optional redemption price of
$15.37 per share.

Of the 6,000,000 shares of CSI Junior Preferred authorized 3,085,164 shares
were issued and outstanding at February 1, 1997 and February 3, 1996.

COMMON STOCK

As part of the Acquisition, CSI issued 3,375,000 shares of common stock, par
value $.01, (CSI Common Stock) for $6.67 per share. Of the 50,000,000 shares
authorized, 3,327,042 shares were issued and outstanding at February 1, 1997 and
February 3, 1996.

In 1994, in accordance with the terms of the Management Stock Subscription
Agreement, CSI repurchased 170,119 shares of CSI Common Stock held by former
officers of the Company. Vested shares were repurchased at $10.00 per share.
Non-vested shares were repurchased at the original purchase price of $6.67 per
share plus accrued interest on the notes issued to purchase the shares. The cash
payments to repurchase the shares were reduced by approximately $1,187,000 in
common stock notes receivable and interest due from the former officers. Net
cash payments of $464,000 were made in settlement of these transactions.

In September 1994, CSI reissued 138,000 shares of previously repurchased CSI
Common Stock to current members of management at $10.00 per share. As payment
for the shares, CSI received $46,000 in cash, $306,000 in notes due September 1,
1995 and $1,028,000 in notes due November 30, 1997. Interest on these notes
receivable accrues at 9% per year. During fiscal 1995 and 1994, principal and
interest on the common stock notes receivable due September 1, 1995 were repaid.

On November 17, 1994, the Board of Directors effected a 2.25 for 1 stock
split on the CSI Common Stock and authorized an additional 5,000,000 shares of
preferred stock. On June 1, 1995, the Board of Directors effected a 2 for 3
stock split on the CSI Common Stock. All presentations of common shares and per
common share data have been adjusted to reflect these changes.

DIVIDENDS

Under the terms of its DIP Credit Agreement (see Note 4), the Company cannot
pay any dividends to CSI to fund payment of dividends to holders of CSI Common
Stock. The indenture for the 12% Senior Subordinated Notes also restricts the
ability of the Company to pay dividends to CSI to fund payment of dividends to
holders of CSI Common Stock.

F-33

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. COUNTY SEAT, INC. (CONTINUED)
WARRANTS

In connection with the 1993 senior subordinated notes issuance discussed in
Notes 7 and 10, CSI issued 105,000 Warrants to purchase 183,000 shares of CSI
Common Stock. The Warrants were valued at $24.76 per Warrant, and the $2,600,000
proceeds to CSI for the Warrants were contributed to the Company as a capital
contribution. The Warrants are exercisable after April 15, 1994, upon the
earlier of a change in control or initial public offering, as defined, or April
15, 1998, at $.007 per share, subject to adjustment. The Warrants expire on
October 15, 1998.

STOCK OPTIONS

The CSI stock program, consisting of an incentive stock option plan and a
director stock option plan, provides for the grant of options to purchase up to
375,000 shares of CSI Common Stock. As of February 1, 1997, options to purchase
141,652 shares of CSI Common Stock have been granted to management at $9.00 to
$15.00 per share. These grants are exercisable 25% per year and expire five
years from the date of the grant. At February 1, 1997, grants of 11,526, 39,000
and 34,688 shares were exercisable at $9.00, $10.00 and $15.00 per share,
respectively. In February 1995, certain members of management exercised 14,649
common stock options at a total exercise price of $97,565. In June 1995, a
former member of management exercised 505 common stock options at a total
exercise price of $6,185.

As of February 1, 1997, options to purchase 18,000 shares of CSI Common
Stock have been granted to a director at $6.67 per share which are currently
exercisable through January 2001 pursuant to a separate stock option agreement.
In addition, options to purchase 3,000 shares of CSI Common Stock have been
granted to a director at $15.00 per share, exercisable when vested through
November, 2003 pursuant to a separate stock option agreement. These options to
purchase 3,000 shares of CSI Common Stock vested 25% per year through November,
1996. As of February 1, 1997, options to purchase 3,000 shares were exercisable.

4. DEBTOR-IN-POSSESSION CREDIT AGREEMENT

Following approval by the Court on October 17, 1996, the Company and CSI
entered into the DIP Credit Agreement, which was subsequently amended as of
March 5, 1997. The DIP Credit Agreement is funded through the Banks to provide
working capital and longer-term financing. The DIP Credit Agreement matures
January 31, 1998 or the effective date of a plan of reorganization under the
Chapter 11 process. The Banks previously provided funding under the Company's
pre-existing credit agreement and all outstanding obligations under the
pre-existing credit agreement were secured and funded through the DIP Credit
Agreement.

The commitment under the DIP Credit Agreement provides for a revolving
credit facility up to $125,000,000 including a $65,000,000 letter of credit
facility. Availability under the DIP Credit Agreement is limited to certain
percentages of eligible inventory. Availability is reduced by any amounts drawn
under the facility as well as outstanding letters of credit and bank
acceptances. The DIP Credit Agreement also requires that for a period of 30
consecutive days after each December 15 and before each February 15 of the
following year, the Company must not have any aggregate borrowings (including
Bankers Acceptances) outstanding under the DIP Credit Agreement, less cash on
deposit, in excess of $65,000,000. Borrowings

F-34

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. DEBTOR-IN-POSSESSION CREDIT AGREEMENT (CONTINUED)
under the facility are secured by the Company's assets and guaranteed by CSI.
CSI's guarantee is secured by a pledge of its primary asset, the outstanding
common stock of the Company.

At the option of the Company, interest is payable on borrowings under the
DIP Credit Agreement at a prime rate plus 1.5% or a Eurodollar rate plus 2.5%.
The DIP Credit Agreement provides for a commitment fee during the period prior
to maturity of 0.5% of the unutilized commitment under the DIP Credit Agreement.

The DIP Credit Agreement contains certain covenants which, among other
things, limit the amount of debt of the Company, restrict the payment of
interest or principal on the Company's or CSI's prepetition debt or liabilities,
restrict the payment of dividends on the Company's or CSI's redeemable preferred
stock, limit the maximum value of inventory, limit expenditures for property and
equipment and require the Company to maintain certain financial performance
levels. The most restrictive financial performance levels at February 1, 1997
for the Company on a consolidated basis with CSI included maximum inventory
levels of $81,000,000, minimum adjusted net worth, as defined, (including
redeemable preferred stock and excluding the effect of certain restructuring
charges) of $(150,000,000). For fiscal 1997, required financial performance
levels, as amended, include, as defined, a minimum EBITDA of $22,298,000,
minimum adjusted net worth of $(150,000,000), various limits on the permitted
levels of inventory throughout the year and capital expenditure limitations of
$3,500,000. The Company obtained a waiver with respect to certain of its
financial covenants at February 1, 1997. The Company was in compliance with all
other restrictive and financial covenants at February 1, 1997.

Loans, borrowing base and letter of credit commitments under the DIP Credit
Agreement and the pre-existing credit agreement were as follows (dollars in
thousands):

FEBRUARY 1,
1997
-----------

AT PERIOD-END
Loans outstanding.............................................................. $ 38,600
Borrowing base................................................................. 88,531
Available borrowing base....................................................... 14,348
Letter of credit commitments outstanding....................................... 20,612
Bank Acceptances outstanding................................................... 14,971
DURING THE 52 WEEK PERIOD
Days loans were outstanding.................................................... 364
Maximum loan borrowing......................................................... $ 91,000
Average loan borrowing......................................................... 61,010
Weighted average interest rate................................................. 8.48%

F-35

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. REORGANIZATION COSTS

Reorganization costs primarily relate to stores closed during fiscal year
1996 and stores which Management has decided to close and is in the process of
closing. Reorganization costs associated with additional store closings, if any,
would be recorded in the period in which the decision is made. Reorganization
costs recorded in fiscal 1996 were as follows (amounts in thousands):

Estimated lease rejection claims for closed stores................. $ 25,600
Write-off of fixed assets associated with stores closed............ 7,239
Operating and other costs associated with closing stores........... 7,206
Professional fees and other reorganization costs................... 3,707
---------
$ 43,752
---------
---------

In addition, the Company recorded inventory write-down charges of $4,311,000
as additional cost of goods sold, to adjust inventory liquidated in connection
with closing stores, to net realizable value.

6. WRITE-OFF OF CERTAIN LONG-LIVED ASSETS

In fiscal 1995, the Company recorded an $80,241,000 non-cash write-off of
certain long-lived assets. The $74,718,000 of remaining goodwill was written off
to reflect a change in the Company's estimate of its fair value. Certain fixed
assets with a net book value of $5,523,000 were included in the write-off based
on Management's estimate of the recoverability of their net book value.

Goodwill of $87,596,000 was initially recorded at the time CSI acquired
County Seat through a leveraged buyout transaction (the Acquisition) in 1989.
The goodwill represented the excess of the purchase price over the valuation of
the net assets acquired in the Acquisition. The purchase price was based on
Management's expectations of future performance at the time of the Acquisition,
considering historical experience and industry trends. These expectations
assumed significant growth rates in revenue, improved store sales productivity,
stable gross profit margins and sufficient cash flow from operations to repay
Acquisition indebtedness in addition to funding capital expansion.

During the third quarter of fiscal 1995, the Company revised its projections
of earnings before interest and taxes. As a result of these revised projections
and the Company's significant accumulated deficit, combined with CSI's inability
to successfully complete its initial public offering, Management reevaluated its
goodwill based on a fair value approach. The Company believes fair value is the
preferable method of estimating goodwill, as it better reflects the impact of
the Company's capital structure on the fair value of goodwill. The result of
this reevaluation indicated the remaining unamortized balance of goodwill had no
value.

Also in the third quarter of fiscal 1995, the Company performed an analysis
of the recoverability of the net book value of property and equipment. The
Company analyzed cash flows on an individual store level to assess
recoverability of store fixed assets. This analysis identified stores with a
history of negative cash flows which were not expected to recover the carrying
value of their fixed assets in the future. A non-cash charge of approximately
$5,523,000 was recorded in fiscal 1995, representing the write-off of the net
book value of non-recoverable property and equipment. Property and equipment
associated with stores consists primarily of leasehold improvements and fixtures
which have minimal residual value.

F-36

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. EXTRAORDINARY ITEMS

In the third quarter of fiscal 1996, the Company recorded an extraordinary
charge of $2,692,000, with no tax benefit. The extraordinary charge represented
the write-off of debt issuance costs related to the pre-existing credit
agreement, which was replaced with the DIP Credit Agreement as of the Filing
Date (see Note 4).

In fiscal 1995, the Company recorded extraordinary charges totaling
$9,997,000 in connection with certain refinancing activities. As a result of the
redemption of the Company's then outstanding senior notes, an extraordinary
charge of $2,362,000 was recorded, consisting of $1,640,000 of prepayment
premiums on the senior notes and the write-off of $722,000 of debt issuance
costs related to the early retirement of the senior notes, all net of related
income tax benefits of $1,510,000. As a result of the exchange of substantially
all of the Company's then-outstanding 12% senior subordinated notes maturing
October 1, 2001 (the Old Notes) with 12% senior subordinated notes maturing
October 1, 2002, an extraordinary charge of $7,635,000 was recorded. This
extraordinary charge consisted of the write-off of $5,099,000 of unamortized
issuance discount and $2,057,000 of debt issuance costs related to the early
retirement of the Old Notes and $479,000 of prepayment premiums on the Old
Notes, all net of related income tax benefits of $1,622,000.

8. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------

Land.................................................................................... $ 765 $ 765
Buildings and improvements.............................................................. 4,235 4,235
Leasehold improvements.................................................................. 42,175 57,613
Furniture, fixtures and equipment....................................................... 43,376 55,205
Leasehold rights........................................................................ -- 134
Construction in progress................................................................ 117 2,325
----------- -----------
90,668 120,277
Less-Accumulated depreciation and amortization...................................... (48,787) (61,674)
----------- -----------
$ 41,881 $ 58,603
----------- -----------

F-37

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. ACCRUED EXPENSES

Accrued expenses consisted of the following (in thousands):

FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------

Interest................................................................................ $ 119 $ 4,701
Payroll and related benefits............................................................ 3,582 3,585
Taxes other than income taxes........................................................... 1,392 2,644
Rent.................................................................................... 442 1,697
Other................................................................................... 6,030 7,286
----------- -----------
$ 11,565 $ 19,913
----------- -----------

10. LIABILITIES SUBJECT TO COMPROMISE

Certain prepetition liabilities have been approved by the Court for payment.
As of February 1, 1997, such amounts, to the extent not paid, were included in
accrued expenses and other payables. The remainder of the Company's liabilities
as of the Filing Date, and certain other prepetition claims, are classified as
liabilities subject to compromise as of February 1, 1997. The reported amount of
liabilities subject to compromise represents the Company's estimates of the
amount of allowed claims under the Chapter 11 process. These estimates may be
subject to change due to reconciliation of the bankruptcy claims through the
Chapter 11 process, the termination of contractual obligations and the
settlement of disputed claims (see Note 1).

RESERVES FOR LEASE SETTLEMENTS

As part of the Company's reorganization, approximately 200 stores were
closed in the fourth quarter of fiscal 1996 (see Note 1). Leases for the closed
stores were rejected under the Chapter 11 process. The reserve for lease
settlements represents the Company's estimate of allowable claims for rejected
lease contracts under the Chapter 11 process. The ultimate settlement of the
claims for rejected contracts may vary significantly from the estimate.

LONG-TERM DEBT

Long-term debt subject to compromise consisted primarily of $105,000,000
principal amount of 12% senior subordinated notes, of which $104,959,000 matures
October 1, 2002 and $41,000 matures October 1, 2001.

The Company did not make the semi-annual interest payment on the 12% senior
subordinated notes scheduled for October 1, 1996. This constituted a default
under the indenture for the 12% senior subordinated notes. Interest accruals on
the 12% senior subordinated notes were suspended as of the Filing Date.
Prepetition accrued interest of $6,934,000 is included in the accrual balance of
liabilities subject to compromise. Net interest expense included $835,000,
$936,000 and $1,810,000 of debt issuance cost amortization and $56,000, $192,000
and $446,000 of interest income for 1996, 1995 and 1994, respectively.
Additionally, net interest expense in 1995 and 1994 included $336,000 and
$790,000 of issuance discount amortization, respectively, arising from the
original issuance of the Old Notes.

F-38

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
COUNTY SEAT STORES, INC. SENIOR EXCHANGEABLE PREFERRED STOCK

In June 1991, County Seat issued 506,974 shares of Series A senior
exchangeable preferred stock and 293,026 shares of Series B senior exchangeable
preferred stock, par value $.01 (together, the County Seat Senior Preferred) for
$25 per share.

Dividends are cumulative and payable quarterly at an annual cash dividend
rate of $4.50 per share through August 31, 2004. Each quarter thereafter, the
rate increases $0.25 per share to a maximum of $5.75 per share. In addition, a
dividend rate adjustment of $0.125 per quarter per share will occur if dividends
remain unpaid for two consecutive quarters. County Seat may declare stock
dividends in lieu of cash dividends for the Series A senior exchangeable
preferred stock through February 15, 2000. Cash dividends can only be paid on
the Series B senior exchangeable preferred stock if cash dividends are paid on
the Series A senior exchangeable preferred stock.

Cumulative stock dividends on the Series B senior exchangeable preferred
stock compound as if a stock dividend was declared at each quarterly dividend
date through February 15, 2000. As a result of the Chapter 11 filing, dividend
accruals and issuance cost accretion on the County Seat Senior Preferred were
suspended as of the Filing Date. Undeclared, unpaid stock dividends were
$11,066,000 as of the Filing Date and at February 1, 1997 and $8,791,000 at
February 3, 1996. These undeclared, unpaid stock dividends were equivalent to
442,643 shares as of the Filing Date and at February 1, 1997 and 351,638 shares
at February 3, 1996. These equivalent shares are not issued or outstanding.

The County Seat Senior Preferred is redeemable at the option of the
shareholder only upon certain events, as defined, that primarily relate to a
change in control of County Seat or CSI. In addition, County Seat can redeem the
stock at any time for $25 per share plus accrued dividends. The County Seat
Senior Preferred has a liquidation preference over the CSI Junior Preferred and
the County Seat common stock equal to the redemption price of $25 per share plus
accrued dividends. The County Seat Senior Preferred is exchangeable at the
option of County Seat for 18% Exchange Debentures, due 2004, at the rate of $25
face value of debt for each share of stock. The 18% Exchange Debentures would be
redeemable under the same conditions and at the same redemption price as the
County Seat Senior Preferred. The 18% Exchange Debentures would be subordinated
to all senior and senior subordinated debt of the Company.

In connection with the issuance of the County Seat Senior Preferred, the
Company recorded issuance costs of $1,476,000 as a reduction of the net carrying
value of the County Seat Senior Preferred. The issuance costs were being
amortized through 2004 as preferred stock accretion. The unamortized issuance
costs were $1,004,000 as of the Filing Date and at February 1, 1997 and
$1,093,000 at February 3, 1996.

Of the 4,000,000 shares of County Seat Senior Preferred authorized,
1,565,695 and 1,408,272 shares were issued and outstanding at February 1, 1997
and February 3, 1996, respectively.

F-39

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES

The Company's tax year-end is the Saturday closest to July 31. A
consolidated federal income tax return is filed. For the purpose of these
financial statements, the Company has calculated income taxes as if it filed
federal and state income tax returns for its fiscal years.

The provision (benefit) for income taxes, excluding the income tax benefit
of the extraordinary items, includes the following (in thousands):

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
--------------- --------------- ---------------

Current
Federal..................................................... $ -- $ 900 $ 3,941
State....................................................... -- 232 1,016
------- ------- -------
-- 1,132 4,957
------- ------- -------
------- ------- -------
Deferred
Federal..................................................... (664) 5,805 295
State....................................................... (98) 695 43
------- ------- -------
(762) 6,500 338
------- ------- -------
------- ------- -------
Total
Federal..................................................... (664) 6,705 4,236
State....................................................... (98) 927 1,059
------- ------- -------
$ (762) $ 7,632 $ 5,295
------- ------- -------
------- ------- -------

As of February 1, 1997, the Company had a net operating loss carryforward of
approximately $42,500,000. The Company's plan of reorganization or significant
changes in ownership of the Company could substantially limit the use of the net
operating loss carryforward.

F-40

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)
filing, the Company recorded a valuation reserve of $42,238,000 against the
entire balance of deferred tax assets as of February 1, 1997. The net deferred
tax asset is comprised of the following (in thousands):

FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------

Current deferred taxes:
Gross assets............................................................................ $ 35,973 $ 4,105
Gross liabilities....................................................................... (227) (483)
Valuation allowance..................................................................... (35,746) (2,633)
----------- -----------
Total current deferred taxes........................................................ -- 989
----------- -----------
----------- -----------
Non-current deferred taxes:
Gross assets............................................................................ 6,492 8,715
Gross liabilities....................................................................... -- (375)
Valuation allowance..................................................................... (6,492) (5,972)
----------- -----------
Total non-current deferred taxes.................................................... -- 2,368
----------- -----------
----------- -----------
Total deferred taxes................................................................ $ -- $ 3,357
----------- -----------
----------- -----------

The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows (in thousands):

FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------

Net operating losses.................................................................... $ 20,885 $ --
Lease settlement reserve................................................................ 9,984 --
Depreciation............................................................................ 2,999 4,799
Accrued rent............................................................................ 2,458 3,001
Other restructuring reserves............................................................ 1,814 --
Book accruals........................................................................... 1,506 584
Acquisition related reserves............................................................ 1,170 1,170
Inventory valuation..................................................................... 817 1,696
Deferred revenue........................................................................ 400 715
Other................................................................................... 205 (3)
----------- -----------
Temporary differences................................................................... 42,238 11,962
Valuation allowance..................................................................... (42,238) (8,605)
----------- -----------
Net deferred tax asset.................................................................. $ -- $ 3,357
----------- -----------
----------- -----------

F-41

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)
The Company's effective income tax rate was different than the statutory
federal income tax rate for the following reasons (in thousands):

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
--------------- --------------- ---------------

Federal income taxes (benefit) at statutory rate.............. $ (25,479) $ (26,996) $ 3,576
State taxes, net of federal income tax benefit................ (3,747) (3,970) 525
Valuation allowance........................................... 28,476 8,605 --
Tax effect of nondeductible amortization expense and write-off
related to goodwill......................................... -- 29,762 854
Tax effect of amortization of discount on long-term debt...... -- 131 309
Other......................................................... (12) 100 31
--------------- --------------- -------
Income tax provision (benefit)................................ $ (762) $ 7,632 $ 5,295
--------------- --------------- -------
--------------- --------------- -------

12. COMMITMENTS AND CONTINGENCIES

LEASES

The Company's leases are principally for the use of retail store facilities
and equipment and certain non-store equipment and are generally for a period of
up to ten years. Most store leases are net leases which require the Company to
pay real estate taxes, maintenance costs, insurance and other operating costs.
Rent payments are based upon a combination of fixed rentals and rentals
contingent upon sales levels.

Subject to the approval of the Court, the Company can reject executory
contracts, including leases, under the relevant provisions of the Bankruptcy
Code. Rejection of a lease gives the lessor the right to assert a prepetition
claim against the Company as though the lease had been terminated as of the date
of the Chapter 11 filing. However, the amount of the claim may be limited by the
Bankruptcy Code. Estimated allowed claims for rejected leases related to stores
closed are included in reorganization costs (see Note 10). The analysis of lease
commitments below has not been adjusted to reflect possible future lease
rejections related to additional store closures, if any.

At February 1, 1997, future annual minimum rentals for all noncancelable
operating leases were as follows (in thousands):

1997.............................................................. $ 49,560
1998.............................................................. 45,692
1999.............................................................. 39,796
2000.............................................................. 35,024
2001.............................................................. 30,082
Thereafter........................................................ 62,929
---------
$ 263,083
---------
---------

F-42

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rent expense was as follows (in thousands):

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
--------------- --------------- ---------------

Minimum rents................................................. $ 65,863 $ 65,240 $ 58,750
Contingent rents.............................................. 97 336 693
------- ------- -------
$ 65,960 $ 65,576 $ 59,443
------- ------- -------
------- ------- -------

LITIGATION

The Company is a defendant in legal proceedings arising in the ordinary
course of business. Although the outcome of these matters cannot be determined,
Management does not expect disposition of these proceedings to have a material
impact on the financial position, results of operations or liquidity of the
Company. Under Chapter 11, actions to pursue litigation against the Company are
automatically stayed if the claim arose, or is based on events that occurred on
or before the petition date of October 17, 1996.

SUPPLIERS

Levi Strauss is a significant supplier of brand name goods, representing
approximately 31% of County Seat's total sales in fiscal 1996.

13. RELATED PARTY TRANSACTIONS

Affiliates of DLJ held 1,407,630 and 1,407,630 shares of CSI Junior
Preferred and 788,141 and 709,483 shares of the County Seat Senior Preferred at
February 1, 1997 and February 3, 1996, respectively. Undeclared, unpaid stock
dividends on the CSI Junior Preferred and County Seat Senior Preferred held by
affiliates of DLJ, if issued, would be equivalent to 137,992 and 229,943 shares,
respectively, as of February 1, 1997. In addition, affiliates of DLJ held
917,746 shares of CSI Common Stock at February 1, 1997 and February 3, 1996.

The Company had a financial advisory and exclusive investment banking
agreement with DLJ dated December 4, 1989 that required an annual retainer fee
of $250,000 plus reimbursement for certain expenses incurred for services
provided. This agreement expired on December 4, 1994. During the 52-week period
ended February 1, 1997, the 53-week period ended February 3, 1996 and the
52-week period ended January 28, 1995, the Company paid to DLJ fees of $167,000,
$556,000 and $257,000, respectively.

14. RETIREMENT PLAN

The Company has an Employee 401(k) Savings Plan (the Plan), which is
independently administered. All employees consistently working a minimum of
20-hour weeks and completing one year of service, as defined, are eligible to
participate in the Plan. The Company is required to match 25% of the first 6% of
compensation contributed by each employee. In addition, a discretionary
contribution may be made if the Company meets its financial objectives. The
Company's contributions under the Plan were $260,000, $297,000 and $252,000 for
1996, 1995 and 1994, respectively.

F-43

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. RETIREMENT PLAN (CONTINUED)
In January, 1991, the Company amended the Plan to include an employee profit
sharing feature which covers all employees consistently working a minimum of
20-hour weeks and completing one year of service, as defined. Each year, a
contribution up to 3% of an employee's compensation may be made if the Company
meets its financial objectives. Eligible employees are immediately vested in
profit sharing contributions made by the Company. The Company made a profit
sharing contribution of $222,000 under the Plan in 1994. There were no
contributions for 1996 or 1995. The Company does not provide other post-
retirement benefits.

15. SUBSEQUENT EVENTS

On August 22, 1997 the Company filed the "First Amended Disclosure Statement
with Respect to the Plan of Reorganization of County Seat Stores, Inc." with the
Court which was confirmed on October 1, 1997 and consummated on October 29, 1997
(Effective Date). Therefore, the Company emerged from bankruptcy as a newly
reorganized entity. The plan of reorganization segregated creditors into three
classes--unclassified claims, unimpaired claims and impaired claims.
Unclassified and unimpaired claims were satisfied by cash payments totaling
$4,234,286. In exchange for impaired claims of approximately $151.0 million,
creditors received $4.2 million. In exchange for impaired claims of
approximately $151.0 million, creditors received 20 million shares of the new
common stock of the Company (100% of the Company's stock) valued at $66.9
million representing 44% recovery of their claims. Previous preferred
stockholders received warrants valued at $1.6 million in exchange for their
claims of $50.3 million. Additionally, a $1.5 million security account was
established to pay lease cures, disputed claims and holdback professional fees.

The effects of the Company's reorganization under Chapter 11 has been
accounted for in the Company's consolidated balance sheet at November 1, 1997
using principles required by the American Institute of Certified Public
Accountants, Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (Fresh Start Accounting). Fresh Start
Accounting results in a revaluation of the Company's assets and liabilities as
of the Effective Date to reflect the estimated fair market values of those
assets and liabilities in conformity with the procedures specified by Accounting
Principles Board (APB) No. 16, "Business Combinations". The valuation
differences are charged to the Reorganization Value in Excess of Amounts
Allocable to Identified Assets account (Excess Reorganization Value).

On or about September 29, 1997, RAI Credit Corporation (RAI) filed an
adversary proceeding against the Company in the Court. The Company and RAI had
entered into an Account Purchase and Service Agreement dated July 11, 1997
(Agreement) pursuant to which RAI had agreed to establish and service a
private-label credit card program for the Company. In September 1997, the
Company notified RAI that it was terminating the Agreement on the ground that
RAI had materially breached and failed to perform under the Agreement. RAI's
complaint alleges that the Company wrongfully terminated the Agreement and seeks
compensatory damages of no less than $10,741,960 and an injunction prohibiting
the Company from entering into a private-label credit card program with any
person other than RAI prior to the beginning of 1999, as well as attorneys' fees
and costs.

F-44

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. SUBSEQUENT EVENTS (CONTINUED)
predicted at this time, management believes that any resolution of this matter
will not have a material adverse effect on the Company's financial position or
future results of operations.

F-45

COUNTY SEAT STORES, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE 52 WEEKS ENDED FEBRUARY 1, 1997

(DOLLARS IN THOUSANDS)

PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ----------

Net sales................................................................ $ 538,260 $(156,741)(a) $ 381,519
Cost of sales, including buying and occupancy............................ 416,389 (132,651)(a) 283,738
---------- ----------- ----------
Gross profit......................................................... 121,871 (24,090) 97,781
Selling, general and administrative expenses............................. 126,561 (39,118)(a) 82,143
(400)(b)
(4,900)(c)
Depreciation and amortization............................................ 11,051 (3,444)(d) 12,212
4,605(e)
Reorganization costs..................................................... 43,752 (43,752)(f) --
Interest expense, net.................................................... 15,445 (2,557)(g) 12,888
---------- ----------- ----------
Loss before income taxes and extraordinary item...................... (74,938) (65,476) (9,462)
---------- ----------- ----------
Income taxes (benefit)................................................... (762) -- (762)
---------- ----------- ----------
Loss before extraordinary item....................................... $ (74,176) $ (65,476) (8,700)
---------- ----------- ----------
---------- ----------- ----------
Other Data:
EBITDA(h).............................................................. $ (4,490) $ 15,638
---------- ----------
---------- ----------

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

(a) Reflects the elimination of results related to the 341 closed or decided to
be closed stores from the beginning of 1996 through the end of 1997 and the
consolidation of certain regional offices.

(b) Reflects the planned closing of the Dallas and Minneapolis corporate offices
and the opening of the Company's new corporate headquarters in New York.

(g) Reflects the adjustment to interest expenses, amortization of debt issuance
costs, and amortization of the debt discount to reflect restructured
capitalization of the Company related to the Private Note Offering and the
Senior Credit Facility.

(h) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization and reorganization costs. EBITDA is presented here to
provide additional information about the Company's operations. EBITDA is not
a measure of financial performance in accordance with Generally Accepted
Accounting Principles (GAAP) and should not be considered as an alternative
to (i) net income (loss) as a measure of performance (or any other measure
of performance under GAAP) or (ii) cash flows from operating, investing, or
financing activities as an indicator of cash flows or as a measure of
liquidity.

PF-1

COUNTY SEAT STORES, INC. AND SUBSIDIARY

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE 39 WEEKS ENDED NOVEMBER 1, 1997

(DOLLARS IN THOUSANDS)

PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
---------- ----------- ----------

Net sales.......................................................... $ 277,137 $ (43,427)(a) $ 233,710
Cost of sales, including buying and occupancy...................... 202,824 (35,725)(a) 167,099
Cost of sales, special charge...................................... 11,975 (11,975) --
---------- ----------- ----------
Gross profit................................................... 62,338 4,273 66,611
Selling, general and administrative expenses....................... 71,465 (8,762)(a) 58,803
(300)(b)
(3,600)(c)
Depreciation and amortization...................................... 6,136 (3,150)(d) 6,468
3,482(e)
Reorganization costs............................................... 38,405 (38,405)(f)
Interest expense, net.............................................. 4,019 5,647(g) 9,666
---------- ----------- ----------
Loss before income taxes....................................... (57,687) (49,361) (8,326)
---------- ----------- ----------
Income taxes (benefit)............................................. -- -- --
---------- ----------- ----------
Net loss....................................................... $ (57,687) $ (49,361) $ (8,326)
---------- ----------- ----------
---------- ----------- ----------
Other Data:
EBITDA(h)........................................................ $ (9,127) $ 7,808
---------- ----------
---------- ----------

- ------------------------
(a) Reflects the elimination of results related to the 137 closed or decided to
be closed stores during the 39-week period and the consolidation of certain
regional offices.

(b) Reflects the planned closing of the Dallas and Minneapolis corporate offices
and the opening of the Company's new corporate headquarters in New York.

(h) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization and reorganization costs. EBITDA is presented here to
provide additional information about the Company's operations. EBITDA is not
a measure of financial performance in accordance with Generally Accepted
Accounting Principles (GAAP) and should not be considered as an alternative
to (i) net income (loss) as a measure of performance (or any other measure
of performance under GAAP) or (ii) cash flows from operating, investing, or
financing activities as an indicator of cash flows or as a measure of
liquidity.

PF-2

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

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, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

PAGE
---------

Notice to Investors............................
Special Note Regarding Forward-Looking
Statements.....................................
Available Information..........................
Summary........................................
Risk Factors...................................
No Cash Proceeds to the Company................
Dividend Policy................................
Market for the Common Stock....................
Capitalization.................................
Selected Historical Financial Data.............
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................
Business.......................................
Management.....................................
Certain Relationships..........................
Principal Stockholders.........................
Certain Provisions of the Articles of
Incorporation and By-laws....................
Certain Provisions of the Minnesota Business
Corporation Act..............................
Plan of Reorganization.........................
Description of Certain Indebtedness............
Description of Capital Stock...................
Selling Stockholders...........................
Plan of Distribution...........................
Legal Matters..................................
Independent Public Accountants.................
Index to Consolidated Financial Statements..... I-1
Financial Statements........................... F-1
Pro Forma Financial Statements................. PF-1

10,000,000 SHARES

COUNTY SEAT STORES, INC.

COMMON STOCK

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

PROSPECTUS

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

, 1998

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

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses in connection with the
sale and distribution of the Shares being registered, other than underwriting
discounts and commissions. All of the amounts shown are estimated except the
Commission registration fee and NASD filing fee.

Commission registration fee.....................................
Legal fees and expenses.........................................
Accounting fees and expenses....................................
Miscellaneous...................................................
---------
Total.......................................................
---------
---------

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

MINNESOTA BUSINESS CORPORATION ACT

Under Section 302A.521 of the MBCA, a corporation shall indemnify a past or
present director, officer or employee who is made or threatened to be made a
party to a proceeding by reason of actions undertaken in the person's official
capacity. Such persons shall be indemnified against judgments, penalties, fines
(including, without limitation, excise taxes assessed against the person with
respect to an employee benefit plan), settlements, and reasonable expenses,
including attorneys' fees and disbursements, incurred in connection with the
proceeding, as long as the person: (1) has not been indemnified by another
organization or employee benefit plan against the same items arising out of the
same acts or omissions; (2) acted in good faith; (3) received no improper
personal benefit and, if there was a conflict of interest, statutory procedures
were followed; (4) in the case of a criminal proceeding, had no reasonable cause
to believe the conduct was unlawful; and (5) reasonably believed that his/her
conduct was in the best interests of the corporation (or where any such person
was acting on the behest of the corporation as a director, officer, employee or
agent of another entity, the person reasonably believed that the conduct was not
opposed to the best interests of the corporation). Eligibility for
indemnification is determined by the board, a committee or special legal counsel
under procedures specified by the statute.

Nothing in the statute shall be construed to limit the power of the
corporation to indemnify persons other than a director, officer, employee, or
member of a committee of the board of the corporation by contract or otherwise.

MBCA Section 302A.521 also permits the reimbursement of an indemnified
person by the corporation of reasonable expenses (including attorneys' fees and
disbursements) incurred by the person in advance of the final disposition of the
proceeding, upon compliance with certain statutory procedures. The corporation
may also reimburse expenses, including attorneys' fees and disbursements,
incurred by a person in connection with an appearance as a witness in a
proceeding at a time when the person has not been made or threatened to be made
a party to a proceeding.

A corporation's articles or bylaws may prohibit, limit or impose conditions
on indemnification or advances of expenses otherwise required by Section
302A.521 if the prohibition, limitation or conditions apply equally to all
persons or to all persons within a given class. No such prohibition or limit on
indemnification may affect the right of a person to indemnification or advances
of expenses with respect to any acts or omissions of the person occurring prior
to the effective date of the prohibition or limit on indemnification or
advances.

A corporation may purchase and maintain insurance on behalf of a person in
that person's official capacity against any liability asserted against and
incurred by the person in or arising from that capacity,

II-1

whether or not the corporation would have been required to indemnify the person
against the liability under the provisions of this section.

A corporation that indemnifies or advances expenses to a person in
accordance with Section 302A.521 in connection with a proceeding by or on behalf
of the corporation shall report to the shareholders in writing the amount of the
indemnification or advance and to whom and on whose behalf it was paid not later
than the next meeting of shareholders.

AMENDED AND RESTATED ARTICLES OF INCORPORATION

The Company's Amended and Restated Articles of Incorporation provide that
the Company shall indemnify its directors and officers and any other permitted
persons to the fullest extent permitted by Section 302A.521 of the MBCA.

The Company maintains policies insuring its officers and directors against
certain civil liabilities, including liabilities under the Securities Act.

Pursuant to the Registration Rights Agreement, the Company has agreed to
indemnify holders of registrable Notes against certain liabilities. Also
pursuant to the Registration Rights Agreement, the Company and certain
broker-dealers, including certain persons associated with such broker-dealers,
have agreed to indemnify each other against certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Pursuant to the Plan of Reorganization, 20,000,000 shares of Common Stock
(including the shares subject to this Prospectus) were issued following the
Effective Date and, as of March 16, 1998, constituted all of the shares of
Common Stock outstanding. Under the Plan of Reorganization, the Company also
issued (i) Series A Warrants to purchase up to 2,285,718 shares of Common Stock,
(ii) Series B Warrants to purchase up to an aggregate of 15% of Common Stock
(subject to dilution by the Series A Warrants, the Series C Warrants described
below, and options to purchase Common Stock granted to certain employees (the
"Employee Options")), and (iii) Series C Warrants to Mr. Sam Forman to purchase
an aggregate of 15% of Common Stock (subject to dilution by the Series A
Warrants and certain Employee Options). As of the date hereof, none of the
holders of the foregoing warrants or options have exercised their rights to
acquire shares of Common Stock. Concurrently with the Plan of Reorganization, as
of the Effective Date, the Company also issued $85,000,000 aggregate principal
amount of the Private Notes in order to settle claims of certain of the
Company's creditors.

ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES

(a) Exhibits

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

2.1+ First Amended Plan of Reorganization of County Seat Stores, Inc., dated August 22, 1997.

2.2+ Order of United States Bankruptcy Court, dated October 1, 1997, confirming First Amended Plan of
Reorganization of County Seat Stores, Inc.

3.1+ Articles of Amendment and Restatement of the Articles of Incorporation of County Seat Stores, Inc.

3.2+ Amended and Restated Bylaws of County Seat Stores, Inc.

4.1 Registration Rights Agreement dated as of January 8, 1998 by and among County Seat Stores, Inc. and the
Selling Stockholders.

*5.1 Opinion of Eaton & Van Winkle with respect to the legality of the Shares.

II-2

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

10.1+ Loan and Security Agreement dated October 29, 1997 between BankBoston Retail Finance, Inc. and County
Seat Stores, Inc.

10.2+ Revolving Credit Note dated December 11, 1997 between BankBoston Retail Finance, Inc. and Count Seat
Stores, Inc.

10.3+ Revolving Credit Note dated December 11, 1997 between BankAmerica Business Credit, Inc. and County Seat
Stores, Inc.

10.4+ Revolving Credit Note dated December 11, 1997 between Congress Financial Corporation Central and County
Seat Stores, Inc.

10.5+ Revolving Credit Note dated December 11, 1997 between Foothill Capital Corporation and County Seat
Stores, Inc.

10.6+ Revolving Credit Note dated December 11, 1997 FINOVA Capital Corporation and County Seat Stores, Inc.

10.7+ Revolving Credit Note dated December 11, 1997 between The CIT Group/Business Credit, Inc. and County
Seat Stores, Inc.

10.8+ Non-Encumbrance Agreement dated October 29, 1997 between BankBoston Retail Finance, Inc. and County Seat
Stores, Inc.

10.9+ Trademark and Trademark Applications Security Agreement dated October 29, 1997 between BankBoston Retail
Finance, Inc. and County Seat Stores, Inc.

10.10+ Copyright and Copyright Applications Security Agreement dated October 29, 1997 between BankBoston Retail
Finance, Inc. and County Seat Stores, Inc.

10.11+ Form of Guaranty between BankBoston Retail Finance, Inc. and County Seat Stores, Inc.

10.12+ Form of Trademark and Trademark Applications Security Agreement between BankBoston Retail Finance, Inc.
and CSS Trade Names, Inc.

10.13+ Form of Trademark License Agreement between Levi Strauss & Co. and County Seat Stores, Inc.

10.14+ Lease Agreement dated June 30, 1990 by and between CB Institutional Fund VIII and County Seat Stores,
Inc. incorporated herein by reference to the Company's Registration Statement on Form S-1. (No.
33-66868).

10.15+ Consulting Agreement dated November 14, 1997, between County Seat Stores, Inc. and Forman Enterprises,
Inc.

10.16+ Consulting Agreement dated July 30, 1996, between County Seat Stores, Inc. and Retail Consulting
Services, Inc.

10.17+ Amendment to Consulting Agreement dated March 12, 1997, between County Seat Stores, Inc. and Retail
Consulting Services, Inc.

10.18+ Employment Agreement dated August 11, 1997, between Sam Forman and County Seat Stores, Inc.

12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges

21.1+ Subsidiaries of the Registrant.

*23.1 Consent of Eaton & Van Winkle (included in their opinion filed as Exhibit 5.1 hereto).

23.2 Consent of Arthur Anderson L.L.P.

24.1 Power of Attorney of County Seat Stores, Inc. (included on signature page to this Registration Statement
on S-1).

II-3

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

27.1 Financial Data Schedule.

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

* To be filed by amendment.

+ Filed as part of the Company's Registration Statement on Form S-4 covering
its Exchange Offer for its 12 3/4 Senior Notes (filed concurrently with this
Registration Statement on Form S-4), and incorporated herein by reference
under Rule 411(c) under the Securities Act and 126-23 under the Exchange
Act.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes:

1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any Prospectus required by Section 10(a)(3) of the Securities
Act;

(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b), if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;

2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.

3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions 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 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, suite or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
offered, 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 Act and will be governed by the final adjudication of
such issue.

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

* To be filed by amendment.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on March 13, 1998.

COUNTY SEAT STORES, INC.

BY: /S/ SAM FORMAN
-----------------------------------------
Sam Forman
CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Sam Forman and Brett Forman and each and
either of them, his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including, without limitation, post-effective amendments) to this Registration
Statement, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------

/s/ SAM FORMAN President; Chief Executive March 13, 1998
- ------------------------------ Officer; Director
Sam Forman

/s/ BRETT D. FORMAN Executive Vice President; March 13, 1998
- ------------------------------ Director
Brett D. Forman

/s/ PAUL J. KITTNER Senior Vice President; March 13, 1998
- ------------------------------ Chief Financial Officer;
Paul J. Kittner Treasurer

/s/ JOHN S. BELISLE Director March 13, 1998
- ------------------------------
John S. Belisle

/s/ MARSHALL FELENSTEIN Director March 13, 1998
- ------------------------------
Marshall Felenstein

/s/ FAITH LARSEN Director March 13, 1998
- ------------------------------
Faith Larsen

/s/ JOHN MEINERT Director March 13, 1998
- ------------------------------
John Meinert

/s/ M. BRENT STEVENS Director March 13, 1998
- ------------------------------
M. Brent Stevens

II-5

EXHIBIT INDEX

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

2.1+ First Amended Plan of Reorganization of County Seat Stores, Inc., dated August 22, 1997.

2.2+ Order of United States Bankruptcy Court, dated October 1, 1997, confirming First Amended Plan
of Reorganization of County Seat Stores, Inc.

3.1+ Articles of Amendment and Restatement of the Articles of Incorporation of County Seat Stores,
Inc.

3.2+ Amended and Restated Bylaws of County Seat Stores, Inc.

4.1 Registration Rights Agreement dated as of January 8, 1998 by and among County Seat Stores, Inc.
and the Selling Stockholders.

*5.1 Opinion of Eaton & Van Winkle with respect to the legality of the Shares.

10.1+ Loan and Security Agreement dated October 29, 1997 between BankBoston Retail Finance, Inc. and
County Seat Stores, Inc.

10.2+ Revolving Credit Note dated December 11, 1997 between BankBoston Retail Finance, Inc. and Count
Seat Stores, Inc.

10.3+ Revolving Credit Note dated December 11, 1997 between BankAmerica Business Credit, Inc. and
County Seat Stores, Inc.

10.4+ Revolving Credit Note dated December 11, 1997 between Congress Financial Corporation Central
and County Seat Stores, Inc.

10.5+ Revolving Credit Note dated December 11, 1997 between Foothill Capital Corporation and County
Seat Stores, Inc.

10.6+ Revolving Credit Note dated December 11, 1997 FINOVA Capital Corporation and County Seat
Stores, Inc.

10.7+ Revolving Credit Note dated December 11, 1997 between The CIT Group/Business Credit, Inc. and
County Seat Stores, Inc.

10.8+ Non-Encumbrance Agreement dated October 29, 1997 between BankBoston Retail Finance, Inc. and
County Seat Stores, Inc.

10.9+ Trademark and Trademark Applications Security Agreement dated October 29, 1997 between
BankBoston Retail Finance, Inc. and County Seat Stores, Inc.

10.10+ Copyright and Copyright Applications Security Agreement dated October 29, 1997 between
BankBoston Retail Finance, Inc. and County Seat Stores, Inc.

10.11+ Form of Guaranty between BankBoston Retail Finance, Inc. and County Seat Stores, Inc.

10.12+ Form of Trademark and Trademark Applications Security Agreement between BankBoston Retail
Finance, Inc. and CSS Trade Names, Inc.

10.13+ Form of Trademark License Agreement between Levi Strauss & Co. and County Seat Stores, Inc.

10.14+ Lease Agreement dated June 30, 1990 by and between CB Institutional Fund VIII and County Seat
Stores, Inc. incorporated herein by reference to the Company's Registration Statement on Form
S-1. (No. 33-66868).

10.15+ Consulting Agreement dated November 14, 1997, between County Seat Stores, Inc. and Forman
Enterprises, Inc.

10.16+ Consulting Agreement dated July 30, 1996, between County Seat Stores, Inc. and Retail
Consulting Services, Inc.

10.17+ Amendment to Consulting Agreement dated March 12, 1997, between County Seat Stores, Inc. and
Retail Consulting Services, Inc.

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

12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges

21.1+ Subsidiaries of the Registrant.

*23.1 Consent of Eaton & Van Winkle (included in their opinion filed as Exhibit 5.1 hereto).

23.2 Consent of Arthur Anderson L.L.P.

24.1 Power of Attorney of County Seat Stores, Inc. (included on signature page to this Registration
Statement on S-1).

27.1 Financial Data Schedule.

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

* To be filed by amendment.