<PAGE>
                                      FORM 10-Q

                          SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549

                                      (Mark one)

                (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934

                     For the quarterly period ended  May 1, 1998
                                                     -----------
                                          OR

                ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934

                             Commission File No. 0-13076
                                                --------
                                 LOT$OFF CORPORATION

          DELAWARE                                          74-2640559
------------------------------------------    ----------------------------------
(State or other jurisdiction of                          (I.R.S. Employer
  incorporation or organization                          Identification No.)


1201 Austin Highway, #116, San Antonio, TX                  78209-4859
------------------------------------------    ----------------------------------
(Address of principal executive offices)                    (Zip Code)

                              TELEPHONE: (210) 805-9300
                              -------------------------
                 (Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X   No:
                                      ----    -----

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

4,159,210 shares of the Registrant's Common Stock were outstanding at May 28,
1998, which includes 1,596,420 shares held in escrow and awaiting distribution
to holders of allowed general unsecured claims.  See Item 2.  Changes in
Securities.



<PAGE>



                                   FORM 10-Q INDEX

<TABLE>
<CAPTION>
                                                                            PAGE

                                        PART I
<S>       <C>                                                               <C>
ITEM 1.   Financial Statements (unaudited) . . . . . . . . . . . . . . . . . 3

          Condensed Consolidated Balance Sheets, May 1, 1998,
          January 30, 1998 and May 2, 1997 . . . . . . . . . . . . . . . . . 3

          Condensed Consolidated Statements of Operations, thirteen weeks
          ended  May 1, 1998 and  thirteen weeks ended May 2, 1997 . . . . . 5

          Condensed Consolidated Statements of Cash Flows, thirteen weeks
          ended  May 1, 1998 and thirteen weeks ended May 2, 1997. . . . . . 6

          Notes to Condensed Consolidated Financial Statements . . . . . . . 8

ITEM 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations. . . . . . . . . . . . . . . . . . . . . . .15

                                       PART II

ITEM 1.   Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . .18

ITEM 2.   Changes in Securities. . . . . . . . . . . . . . . . . . . . . . .18

ITEM 3.   Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . .19

ITEM 4.   Submission of Matters to a Vote of Security Holders. . . . . . . .19

ITEM 5.   Other Information. . . . . . . . . . . . . . . . . . . . . . . . .19

ITEM 6.   Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .19

          Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

          Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>


<PAGE>

                                        PART I

ITEM 1.   FINANCIAL STATEMENTS

                         LOT$OFF CORPORATION AND SUBSIDIARIES

                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                     (UNAUDITED)

                                        ASSETS
<TABLE>
<CAPTION>


                                        May 1, 1998              January 30,1998              May 2, 1997
                                        -----------              ---------------              -----------
<S>                                   <C>                        <C>                        <C>
CURRENT ASSETS:
Cash and cash equivalents             $     574,238              $     473,533              $     590,730
Accounts receivable                          93,532                    113,463                    206,887
Merchandise inventories                  15,763,386                 15,309,715                 13,912,910
Prepaid and other current assets            280,221                    265,814                    402,056
                                       ------------               ------------               ------------
TOTAL CURRENT ASSETS                     16,711,377                 16,162,525                 15,112,583
                                       ------------               ------------               ------------
PROPERTY AND
 EQUIPMENT-NET                            3,441,151                  3,632,965                  3,940,548

OTHER ASSETS                                551,500                    548,464                    456,762
                                       ------------               ------------               ------------
TOTAL ASSETS                            $20,704,028                $20,343,954                $19,509,893
                                       ------------               ------------               ------------
                                       ------------               ------------               ------------

</TABLE>



   See accompanying notes to these condensed consolidated financial statements.


                                         -3-
<PAGE>

                         LOT$OFF CORPORATION AND SUBSIDIARIES

                       CONDENSED CONSOLIDATED BALANCE SHEETS
                                    (UNAUDITED)
                                    (CONTINUED)

                        LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                                          May 1, 1998              January 30, 1998                May 2, 1997
                                                          -----------              ----------------                -----------
<S>                                                      <C>                       <C>                           <C>
CURRENT LIABILITIES:
   Credit facility                                       $  5,333,535                $  6,330,598                $  7,660,908
   Accounts payable-trade                                   3,215,610                   3,132,965                   1,550,344
   Accounts payable-other                                   1,537,872                   3,333,093                   2,102,733
   Accrued expenses and
      other current liabilities                             1,724,401                   1,597,859                   1,717,298
   Bank checks outstanding                                  1,107,343                   1,048,855                     479,497
   Current portion of long-term debt                          190,120                     131,553                       -
                                                          -----------                 -----------                  ----------
TOTAL CURRENT LIABILITIES                                  13,108,881                  15,574,923                  13,510,780

LONG-TERM DEBT AND OTHER
OBLIGATIONS, less current portion                           3,021,135                   1,263,263                       -

LIABILITIES SUBJECT TO
   COMPROMISE                                                    -                        -                        30,193,052

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS'  EQUITY:
   Series B Preferred Stock                                      -                      3,991,050                       -
   Common Stock                                                41,578                      25,325                     122,009
   Additional paid-in capital                              64,470,611                  60,447,467                  36,022,264
   Subscription receivable                                       -                         -                       (3,991,050)
   Accumulated deficit                                    (59,938,177)                (60,958,074)                (56,347,162)
                                                          -----------                 -----------                  ----------
TOTAL STOCKHOLDERS' EQUITY                                  4,575,012                   3,505,768                 (24,193,939)
                                                          -----------                 -----------                  ----------

TOTAL LIABILITIES AND
   STOCKHOLDERS' EQUITY                                   $20,704,028                 $20,343,954                 $19,509,893
                                                          -----------                 -----------                 -----------
                                                          -----------                 -----------                 -----------

</TABLE>

   See accompanying notes to these condensed consolidated financial statements.


                                         -4-
<PAGE>

                         LOT$OFF CORPORATION AND SUBSIDIARIES

                   CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                    (UNAUDITED)

<TABLE>
<CAPTION>


                                                      Thirteen Weeks                     Thirteen Weeks
                                                          Ended                              Ended
                                                    -------------------               -------------------
                                                        May 1, 1998                       May 2, 1997
                                                    -------------------               -------------------
<S>                                                 <C>                                 <C>
NET SALES                                              $12,234,903                        $11,919,152

COST OF SALES                                            8,768,465                          7,857,420
                                                        ----------                         ----------
GROSS PROFIT                                             3,466,438                          4,061,732
                                                        ----------                         ----------

OPERATING EXPENSES:
  Selling, advertising, general and
      administrative                                     5,834,557                          5,805,429
  Depreciation and amortization                            201,282                            177,285
  Reorganization items                                        -                               300,000
                                                        ----------                         ----------
TOTAL OPERATING EXPENSES                                 6,035,839                          6,282,714
                                                        ----------                         ----------

OPERATING INCOME (LOSS)                                 (2,569,401)                        (2,220,982)

OTHER INCOME (EXPENSE):
  Non-operating income                                   3,815,737                               -
  Interest income (expense), net                          (226,439)                         (142,214)
                                                        ----------                         ----------
TOTAL OTHER INCOME (EXPENSE)                             3,589,298                          (142,214)
                                                        ----------                         ----------

INCOME (LOSS) BEFORE INCOME                              1,019,897                         (2,363,196)
  TAXES

PROVISION FOR (BENEFIT FROM)
  INCOME TAXES                                                -                                  -
                                                        ----------                         ----------
NET INCOME (LOSS)                                      $ 1,019,897                       $ (2,363,196)
                                                        ----------                         ----------
                                                        ----------                         ----------
INCOME (LOSS) PER COMMON
  SHARE:
  Basic                                                $       .31                       $       (.19)
                                                        ----------                         ----------
                                                        ----------                         ----------
  Diluted                                              $       .22                       $       (.19)
                                                        ----------                         ----------
                                                        ----------                         ----------
WEIGHTED AVERAGE SHARES:
  Basic                                                  3,310,393                         12,200,915
                                                        ----------                         ----------
                                                        ----------                         ----------
  Diluted                                                4,634,030                         12,200,915
                                                        ----------                         ----------
                                                        ----------                         ----------
</TABLE>


   See accompanying notes to these condensed consolidated financial statements.


                                         -5-
<PAGE>

                         LOT$OFF CORPORATION AND SUBSIDIARIES

                   CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                    (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         Thirteen Weeks Ended
                                                              ----------------------------------------------
                                                                  May 1, 1998                  May 2, 1997
                                                              ----------------              ----------------
<S>                                                           <C>                           <C>
CASH FLOWS FROM OPERATING
  ACTIVITIES:
Net  income (loss)                                               $1,019,897                  $(2,363,196)
Adjustments to reconcile net income (loss) to net
  cash provided by (used in) operating  activities:
  Depreciation and amortization                                     201,282                      177,285
  Reorganization items                                                 -                         300,000
Changes in assets and liabilities:
  Accounts receivable                                                19,931                      510,965
  Merchandise inventories                                          (453,671)                    (937,952)
  Prepaid and other current assets                                  (14,407)                      (8,530)
  Other assets                                                       (3,036)                     (98,419)
  Accounts payable-trade                                             82,645                      333,883
  Accounts payable-other                                         (1,795,221)                     281,234
  Accrued expenses and other
    current liabilities                                             126,542                     (206,212)
                                                                  ---------                    ---------
Net cash provided by (used in) operating
    activities                                                     (816,038)                  (2,010,942)
                                                                  ---------                    ---------
                                                                  ---------                    ---------
CASH FLOWS FROM INVESTING
  ACTIVITIES:
Capital expenditures, net                                            (9,468)                    (129,073)
                                                                  ---------                    ---------
Net cash provided by (used in) investing activities                  (9,468)                    (129,073)
                                                                  ---------                    ---------

</TABLE>


   See accompanying notes to these condensed consolidated financial statements.


                                         -6-
<PAGE>

                         LOT$OFF CORPORATION AND SUBSIDIARIES

                   CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                    (UNAUDITED)
                                    (CONTINUED)


<TABLE>
<CAPTION>

                                                                         Thirteen Weeks Ended
                                                              ----------------------------------------------
                                                                  May 1, 1998                  May 2, 1997
                                                              ----------------              ----------------
<S>                                                           <C>                           <C>
CASH FLOWS FROM FINANCING
  ACTIVITIES:
Net proceeds from (payments on) credit facility                    (997,063)                       2,264,328
Bank checks outstanding                                              58,488                          (88,213)
Net proceeds from (payments on) long-term debt                    1,816,439                         (266,667)
Cash in escrow                                                       -                              330,000
Proceeds from the exercise of stock options                          48,347                          -
                                                                  ---------                        ---------
Net cash provided by (used in) financing
  activities                                                        926,211                        2,239,448
                                                                  ---------                        ---------
Increase (decrease) in cash and cash equivalents                    100,705                           99,433
Cash and cash equivalents at
  beginning of period                                               473,533                          491,297
                                                                  ---------                        ---------
Cash and cash equivalents at
  end of period                                                $    574,238                     $    590,730
                                                                  ---------                        ---------
                                                                  ---------                        ---------
SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION:
Cash paid during the period for interest                       $    266,000                     $    166,298

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL
ACTIVITIES:
Conversion of Series B Preferred Stock to:
   Common Stock                                                $     15,964                             -
   Additional paid in capital                                  $  3,975,086                             -

</TABLE>


  See accompanying notes to these condensed consolidated financial statements.


                                         -7-
<PAGE>
                         LOT$OFF CORPORATION AND SUBSIDIARIES

                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE 1:   The condensed consolidated balance sheet at January 30, 1998 has been
          condensed from the audited consolidated balance sheet at January 30,
          1998.

          The condensed consolidated balance sheets at May 1, 1998 and May 2,
          1997 and the condensed consolidated statements of operations and cash
          flows for the thirteen weeks ended May 1, 1998 and the thirteen ended
          May 2, 1997 have been prepared by the Company without audit.  In the
          opinion of management, all adjustments necessary to present fairly the
          condensed consolidated financial position, results of operations and
          cash flows have been made.  The results of operations for the thirteen
          week period ended May 1, 1998 are not necessarily indicative of the
          operating results for a full year or of future operations.

          Certain information and footnote disclosures normally included in
          financial statements prepared in accordance with generally accepted
          accounting principles have been condensed or omitted.  These condensed
          consolidated financial statements should be read in conjunction with
          the consolidated financial statements and notes thereto  included in
          the Registrant's  annual report on  Form 10-K for the year ended
          January 30, 1998.

          Management has been redirecting the Company's retail activities from
          50-OFF's off-price retailing concept to LOT$OFF's extreme value,
          close-out retailing concept.  Coincident and consistent with this
          change has been a change in the  mix of products, historically a
          majority in family apparel, to a majority in non-apparel merchandise,
          principally through the addition of new product categories and the
          elimination of apparel categories subject to substantial markdowns and
          inventory shrink.  The Company continues to maintain a healthy showing
          of basic family apparel products in its stores.  The actual
          merchandise mix fluctuates by category, by season and by store based
          on customer needs and buying trends, demographics and the availability
          of products at close-out prices.  This merchandising concept is
          designed to appeal to value-conscious shoppers and other bargain
          hunters, and management is hopeful its continued implementation will
          lead to higher initial mark-ups, less promotional pricing, fewer
          markdowns, low inventory shrinkage, increased store traffic and
          improved operating results.  The Company's business plan is focused on
          achieving higher gross margins, higher store contribution and
          controlled corporate overhead, all designed to promote overall
          profitability, and on being a major factor in extreme value retailing
          in Texas.  The key elements of this strategy included the geographic
          consolidation of the chain, the liquidation and closing of
          under-performing stores or stores located outside of the reduced
          market area with appropriate reductions in field and corporate
          overhead and staffing, the conversion of the continuing 50-OFF stores
          to LOT$OFF stores (only 14 of the 41 continuing stores had been
          converted as of the filing of the voluntary bankruptcy petitions on
          October 9, 1996; all stores had been converted by January 30, 1998)
          and a reduced overhead structure.  The management team is now
          concentrating on optimizing the contribution from store operations
          while maintaining only the absolute minimum amount of corporate
          overhead necessary to support store operations, on collecting on
          judgments from significant litigation (see Note 5) and on maximizing
          shareholder value.

          The Company's ability to successfully reorganize and continue as a
          going concern will be affected by a number of factors, including, but
          not limited to, the need to remain in compliance with the terms,
          covenants and conditions of it revolving credit facility, the degree
          of success in continuing to increase sales, the ability to achieve an
          operating profit and the ability to maintain trade credit and
          merchandise flows to its stores.  While management believes that the
          downsizing of the total stores in operation and the reduction in the
          geographic area it serves has facilitated its efforts to improve the
          Company's operating performance and that the recapitalization
          implemented upon the consummation of its Plan, coupled with the
          receipt of net lawsuit proceeds and the receipt of contingent claim
          proceeds from GECC (see Note 3), have strengthened its financial
          position and alleviated concerns of credit and merchandise suppliers,
          no assurance can be given

                                         -8-
<PAGE>

          that the Company will be successful in its continuing efforts to
          return to profitability.  The anticipated receipt of additional
          proceeds from the Company's lawsuit related to certain parties'
          breaches of contractual obligations, as well as certain other
          violations, especially conversion, related to the Company's November
          1994 Regulation S offering would further strengthen the Company's
          financial position.

          If the Company's plans to improve operations are not successful in
          producing results which comply with the covenants of its revolving
          credit facility (see Note 4), which the Company and GECC amended June
          12, 1998, and in achieving sustained profitability, management will
          consider, among other alternatives, strategic and/or financial
          alliances with third parties and the merger or sale of all or a part
          of the Company.  Management believes that borrowings available under
          its revolving credit facility, available trade credit, its
          restructuring of certain obligations under the Plan, the capital
          obtained from the purchase by GECC of a contingent claim on a
          $10,000,000 portion of the potential net proceeds from the judgment
          obtained against The Chase Manhattan Bank for $5.8 million (see Notes
          3 and 5), anticipated proceeds from outstanding litigation, its
          operating cash flow and its cash on hand will be adequate to finance
          its operations, including the opening of six (net) new stores in
          Texas, through fiscal 1999.  No assurance can be given, however, that
          such sources of capital will be sufficient or that the Company will be
          successful in its continuing efforts to attain profitability.  For
          this reason, any investment in Common Stock should be considered
          speculative.  The receipt of additional proceeds from the significant
          litigation brought by the Company could add significantly to the
          Company's liquidity and capital resources.  See Note 5.

NOTE 2:   On October 9, 1996 (the "Petition Date"), 50-OFF Stores, Inc.
          ("50-OFF") and its significant subsidiaries (together, the "Debtors")
          filed voluntary petitions for relief under chapter 11 of the United
          States Bankruptcy Code (the "Bankruptcy Code") in the United States
          Bankruptcy Court for the Western District of Texas, San Antonio
          Division (the "Court").  The filing was precipitated by the
          notification from 50-OFF's then asset based lender that it was in
          violation of the minimum gross margin and the minimum working capital
          financial covenants of its credit agreement and that such breaches
          constituted events of default under the loan documents.  The lender
          subsequently established additional availability reserves which
          reduced availability, imposed certain increased fees and other charges
          and accelerated fees deemed earned at the initial closing, which,
          individually and together, substantially impacted 50-OFF's financial
          liquidity and, therefore, its ability to acquire and maintain much
          needed inventory for its stores.  50-OFF was unable to secure the
          resources required to cure the defaults under the loan documents and
          to implement its business plan and effect the changes believed
          necessary to improve operations and reverse its disappointing
          operating results without the protections afforded under the
          Bankruptcy Code.  50-OFF continued to manage its business as a debtor
          in possession pursuant to sections 1107 and 1108 of the Bankruptcy
          Code while management formulated and promoted a plan of
          reorganization.  At a confirmation hearing held on June 3, 1997,
          United States Bankruptcy Judge Leif M. Clark entered an order
          confirming the Debtors' Joint Plan of Reorganization, as Amended and
          Modified (the "Plan").  The Plan became effective June 16, 1997 (the
          "Effective Date").

          The Plan required that the Company's existing senior secured revolving
          credit facility lender, General Electric Capital Corporation ("GECC"),
          provide a post-confirmation revolving credit facility or be replaced
          by a new senior secured lender so that the Company would have a source
          of revolving funds to continue to operate.  GECC provided such
          financing.  See Note 4.  The Plan also provided for the restructure of
          the Company's collateralized obligation to MetLife Capital Corporation
          ("MetLife") at a face amount of $850,000; and the Plan provided for
          the payment of such amount over approximately seven years.  MetLife
          agreed to such treatment with the balance of its claim (approximately
          $3.3 million) becoming an allowed general unsecured claim.  See Note
          3.

          The Plan also provided for the cancellation of all non-priority
          unsecured indebtedness of the Company.  Such cancellation caused the
          elimination of over $25 million of unsecured debt and $3.3 million of
          collateralized debt, which was converted to unsecured debt, from the
          Company's balance sheet.  Under the Plan, as further modified by Court
          order on March 19, 1998 (see Note 3), each holder of an allowed
          general unsecured claim will, in partial cancellation of its allowed
          claim ($3,991,050 in the aggregate), receive a pro rata share of
          1,596,420 shares of LOT$OFF's common stock (the "Common Stock").
          Certain


                                         -9-
<PAGE>

          further obligations of the Company to holders of allowed general
          unsecured claims are secured under the Plan by a lien up to the full
          face amount of the balance of their allowed claims against potential
          net lawsuit proceeds over $3,991,050 from significant litigation being
          prosecuted by the Company.  See Note 5.  As net proceeds over
          $3,991,050 (net of certain items set forth in the Plan) from such
          litigation are received by the Company, holders of allowed general
          unsecured claims will receive Common Stock and/or cash (provided that
          at least the Excess Net Lawsuits' Proceeds, up to $1.5 million as
          defined in the Plan, will be paid in cash) as determined under the
          Plan.  The receipt of such Common Stock and/or cash by holders of
          allowed general unsecured claims will result in a proportionate
          release of the lien.  By the Company's issuing such Common Stock
          and/or paying such cash to allowed general unsecured creditors, such
          creditors will be essentially receiving the net value of the Company's
          significant litigation which was pending pre-Petition Date up to the
          full face amount of their allowed claims.  See Notes 3 and 5.

          Finally, the Plan provided for the recapitalization of the Company 
          through cash raised from 50-OFF's existing common stockholders (the 
          "Rights Offering") and, potentially, as discussed above, from the 
          litigation.  Specifically, the Plan provided for the issuance to such
          stockholders of rights to subscribe for units, each consisting of 
          20 shares of Series A Preferred Stock and 20 shares of Common Stock 
          (a "Unit").  Up to 122,009 Units and a minimum of 30,500 Units 
          could be sold in the Rights Offering at $100.00 per Unit.  The 
          record date for determining which holders of 50-OFF common stock 
          ("Old Common Stock") were entitled to vote on the Plan and receive 
          such rights was March 21, 1997.  Persons who acquired Old Common 
          Stock after such record date were not entitled to vote on the Plan 
          or subscribe for Units pursuant to the Rights Offering. The Rights 
          Offering expired on May 22, 1997. At the confirmation hearing on 
          June 3, 1997, the Company announced it had received more than 
          enough subscriptions for Units for the required minimum in the 
          Rights Offering to be met.  Subscriptions received in the Rights 
          Offering were held in escrow with Bank One, Texas N. A. pending the 
          Effective Date of the Plan.

          Contemporaneously with its filing of the Plan on February 6, 1997, the
          Company filed the Disclosure Statement With Respect to the Debtors'
          Joint Plan of Reorganization ("the Disclosure Statement") setting
          forth more detailed information regarding the Company and the Plan.
          Under applicable Court rules and procedures, a hearing was held to
          review and approve the Disclosure Statement, which was approved as
          containing adequate information in accordance with section 1125 of the
          Bankruptcy Code on March 20, 1997.  Upon approval of the Disclosure
          Statement by the Court, the Plan and Disclosure Statement were
          furnished to all creditors of the bankruptcy estates and all holders
          of Old Common Stock as of March 21, 1997 and was also filed with the
          SEC.  Votes in support of the Plan were solicited, and, at the
          confirmation hearing on June 3, 1997, the Company announced that the
          Plan had been approved by both creditors and stockholders.

          On the Effective Date, certain key elements of the Plan were
          implemented, including:  the Company's corporate name was changed from
          50-OFF to LOT$OFF Corporation ("LOT$OFF" or the "Company"); the Old
          Common Stock was canceled, along with all then existing options and
          warrants to buy Old Common Stock; and 856,080 shares of LOT$OFF Series
          A Preferred Stock (each such share was convertible into two shares of
          Common Stock and was entitled to a 5.5%, $0.275, cumulative annual
          dividend) and 856,080 shares of Common Stock (LOTS:  CUSIP #
          545674103) were issued to subscribers to the Rights Offering for gross
          proceeds of $4,280,400.  Also on the Effective Date, LOT$OFF entered
          into a $15,000,000 revolving credit agreement maturing on June 16,
          2000 with GECC.  See Note 4.  The proceeds of the facility, together
          with the net proceeds from the Rights Offering,  were used to
          refinance the Company's debtor in possession facility, also with GECC,
          and to provide post-confirmation working capital for increased
          inventories for its then 41 stores and selected other general
          corporate purposes, including financing LOT$OFF's exit from
          bankruptcy.


                                         -10-
<PAGE>

NOTE 3:   Liabilities in existence at October 9, 1996 were reflected as
          liabilities subject to compromise in the May 2, 1997 consolidated
          balance sheet.  The principal categories of claims included in
          liabilities subject to compromise at May 2, 1997 were as follows:

<TABLE>
          <S>                                                  <C>
          Secured debt, 8.5%, collateralized by furniture,
                 fixtures and equipment. . . . . . . . . . . .  $ 4,179,942
               Secured debt (capital leases),
                 collateralized by signs.. . . . . . . . . . .       88,498
               Trade and other miscellaneous claims,
                 including costs of lease rejections of
                 approximately $5,869,000. . . . . . . . . . .   25,924,612
                                                                 ----------
                                                                $30,193,052
                                                                -----------
                                                                -----------
</TABLE>

          Under the Plan, the $30,193,052 of liabilities subject to compromise
          as included in the consolidated balance sheet as of May 2, 1997 were
          converted to: long-term debt -  $1,394,816 (see Note 4); accounts
          payable other - $458,111;  Series B Preferred Stock - $3,991,050; and
          additional paid in capital - $24,349,075.

          These amounts may be subject to further adjustments as a result of
          actions of the Court and/or developments with respect to disputed
          claims.  The procedures used to determine the amount of any additional
          liabilities or of any elimination of liabilities have not been
          completed.  On May 12, 1998, a decision and order was entered by Judge
          Leif M. Clark in the Company's bankruptcy proceeding in the Court
          effectively denying creditors in the bankruptcy proceeding leave to
          file late proofs of claim or, alternatively, excuse from filing proofs
          of claim by finding that the confirmation of the Company's Plan,
          operates as RES JUDICATA to bar the allowance of any late claims that
          have been or might be filed in the Company's bankruptcy case.  The
          Company estimates that at least $5.9 million of claims were eliminated
          by such order.  The Company's best estimate of the maximum amount of
          unsecured claims which will ultimately be allowed by the Court is
          $28.3 million, $3,991,050 of which were satisfied by the issuance of
          Series B Preferred Stock under the Plan.  The amount of allowed claims
          may differ materially from the Company's estimate; additional amounts
          may arise from the Court's fixing of allowed claims for disputed
          amounts.

          CONVERSION OF SERIES B PREFERRED STOCK

          On March 19, 1998, in response to the Company's motion to modify the
          Plan by consolidating certain steps to be taken pursuant to the Plan
          and with the support of the Class 7 agent and its counsel,
          representing the allowed general unsecured creditors, the Court
          entered an order to consolidate the treatment of Class 7 creditors by
          allowing the issuance of two shares of Common Stock in lieu of any
          single share of Series B Preferred Stock and other intermediate steps
          which would otherwise have been required under the Plan.  The
          immediate effect of the order was to cause the conversion of the
          previously issued, but undelivered, 798,210 shares of Series B
          Preferred Stock into 1,596,420 shares of Common Stock  and the
          cancellation of the Series B Preferred Stock and any obligation of the
          Company to issue Series A Conversion Rights (as defined in the Plan)
          or Series A Preferred Stock to allowed general unsecured creditors
          under the Plan effective March 19, 1998.  Such shares of Common Stock
          are in an escrow account at Continental Stock Transfer & Trust Company
          for the benefit of holders of allowed general unsecured claims pending
          delivery upon the filing and/or resolution of claims objections.
          Future obligations, if any, to the allowed general unsecured creditors
          (up to the full face amount of their allowed claims, depending on Net
          Lawsuits' Proceeds as defined in the Plan) may be satisfied by the
          issuance of Common Stock and/or cash (provided that at least the
          Excess Net Lawsuits' Proceeds, up to $1.5 million as defined in the
          Plan, must be paid in cash).


                                         -11-
<PAGE>



NOTE 4:   CREDIT FACILITY

          On June 16, 1997, the Company, with the approval of the Court, entered
          into a credit agreement (as amended on August 28, 1997, December 22,
          1997, February 15, 1998, April 17, 1998 and June 12, 1998) with GECC
          providing the Company with a line of credit through June 16, 2000 of
          up to $15,000,000, including letters of credit.  Borrowings under the
          line are limited to a borrowing base equal to a percentage of eligible
          inventory at cost:  August 15 through December 15, 65%; and December
          16 through August 14, 60%.  Interest under the line is charged on
          funds borrowed at the annualized yield of 30-day commercial paper
          (currently 5.55%) plus 3%.  The line of credit is collateralized by
          inventory, accounts receivable and other assets.  The credit
          agreement, as amended, contains various restrictive covenants,
          including restrictions on the payment of dividends on Common Stock,
          and various financial covenants, including minimum availability,
          minimum working capital and minimum EBITDA.  On December 22, 1997, the
          Company entered into an amendment to the credit agreement allowing for
          additional availability of $1.0 million from December 22 through
          December 31, 1997 and $2.0 million from January 1 through February 15,
          1998.  On February 15, 1998, the Company entered into another
          amendment to the credit agreement allowing for additional availability
          of $1,250,000 from February 15 through March 1, 1998.  On April 17,
          1998, the Company entered into a further amendment to the credit
          agreement in conjunction with the acquisition by GECC of a contingent
          claim on a $10,000,000 portion of the potential net proceeds from the
          $148,575,000 judgment against The Chase Manhattan Bank ("Chase") for
          $5,800,000, or 58 cents on the dollar.  See Long-term Debt below.  The
          effect of this amendment was the waiver of existing covenant
          violations and related defaults under the credit agreement through May
          31, 1998.  On June 12, 1998, the Company entered into a further
          amendment to the credit agreement, adjusting the minimum availability,
          minimum working capital and minimum EBITDA financial covenants and
          eliminating the minimum gross margin, maximum capital expenditures and
          minimum inventory financial covenants.  On May 1, 1998, the Company
          had approximately $7,729,000 available for borrowings under the credit
          facility (after reserves of $879,000) of which $5,334,000 was
          committed, leaving a net availability of $2,395,000, and was not in
          default under the credit agreement.

          LONG-TERM DEBT

          Long-term debt for the quarter ending May 1, 1998 consists of four
          general types of obligations.  The furniture and fixture note, ad
          valorem tax notes and non-ad valorem tax notes are long-term debts
          settled as part of the Plan and were classified as liabilities subject
          to compromise (see Note 3) for the thirteen weeks ending May 2, 1997.
          Long-term debt consists of the following:


<TABLE>
<CAPTION>


                                                         MAY 1, 1998               JANUARY 30, 1998
                                                       ------------------          ----------------
          <S>                                          <C>                         <C>
          Promissory notes collateralized by
          furniture, fixtures and equipment . . . .        $  848,941                $  849,559
          Notes to ad valorem taxing
          authorities . . . . . . . . . . . . . . .           400,389                   414,698
          Notes to taxing authorities, other
          than ad valorem taxing authorities. . . .           130,559                   130,559

          Guarantee to GECC . . . . . . . . . . . .        $1,831,366                      -

          Less:  current portion. . . . . . . . . .          (190,120)                 (131,553)
                                                            ---------                 ---------
                                                           $3,021,135                $1,263,263
                                                            ---------                 ---------
                                                            ---------                 ---------

</TABLE>

          On April 17, 1998, as part of a corporate reorganization involving the
          formation of a Delaware limited partnership, the Company assigned its
          judgment and cause of action against Chase to such newly formed
          limited partnership.  The limited partnership was formed on April 17,
          1998 by two wholly-owned subsidiaries of the Company, as the general
          partner and common limited partner, and GECC, as the preferred limited
          partner.  GECC acquired its preferred limited partnership interest for
          $5.8 million or 58 cents on the dollar, resulting in a gain of
          $3,815,737 net of certain related expenses.  Such interest


                                         -12-
<PAGE>

          represents a contingent claim on a $10 million portion of the
          potential net proceeds from the $148,575,000 judgment against Chase.
          See Note 5.  While the Company has no material present financial
          obligation to GECC or the partnership, upon receipt of net proceeds
          from Chase, or otherwise, attributable to the judgment, GECC could
          receive as much as $9-10,000,000 (but in no event less than a
          guaranteed $3,000,000), according to a scheduled payout with respect
          to its contingent claim.  The $3,000,000 minimum is
          cross-collateralized to the Company's indebtedness to GECC (see Credit
          Facility, above) and is payable upon the sooner of the resolution of
          the Chase litigation, April 17, 2003 or certain other events.  While
          the Company has been advised by its counsel that it is more likely
          than not that the Chase litigation will be resolved prior to April 17,
          2003 for an amount sufficient to relieve the Company of any liability
          under the $3,000,000 guarantee, the Company reflects a $1,831,366
          (discounted at 10%) liability in the consolidated balance sheet for
          the minimum guarantee to GECC.

NOTE 5:   In November 1994, 50-OFF received subscriptions for approximately
          1,810,000 shares of Old Common Stock in a Regulation S offering to
          qualified investors.  50-OFF received net proceeds of approximately
          $861,000 from the sale of 310,000 shares and recorded a subscription
          receivable for the purchase agreements for 1,500,000 shares for which
          proceeds were never received.

          On February 21, 1995, 50-OFF filed a lawsuit [50-OFF STORES, INC. V.
          BANQUE PARIBAS (SUISSE), S.A., BETAFID, S.A., YANNI KOUTSOUBOS,
          ANDALUCIAN VILLAS (FORTY EIGHT) LIMITED, ARNASS LIMITED, BROCIMAST
          ENTERPRISES LTD., DENNIS MORRIS, HOWARD WHITE, CHASE MANHATTAN BANK,
          N.A. AND ARIES PEAK, INC., Case No. SA-95-CA-0159] in the United
          States District Court in San Antonio, Texas against Banque Paribas
          (Suisse) S.A. ("Paribas"), Yanni Koutsoubos, Chase, Howard White and
          certain affiliated individuals and companies in connection with the
          theft of 1,500,000 shares of  Old Common Stock which certain of the
          defendants had agreed to purchase at $3.65 per share.  Among other
          counts, the lawsuit alleged breach of contracts, securities fraud,
          conspiracy and conversion.  The conversion claim related to actions of
          the defendants in transferring, selling and trading the shares despite
          the fact that the defendants had never paid for such shares.  50-OFF
          sought recovery of actual and punitive damages and pre- and
          post-judgment interest.

          On October 14, 1997, the trial of this case began before the Honorable
          H.F. Garcia.  Defendants, Paribas, Chase and Dennis Morris, appeared
          and announced ready for trial.  On November 14, 1997, after four weeks
          of evidence, the Company entered into a Settlement Agreement and Full
          and Final General Release with Paribas.  As part of the settlement,
          Paribas agreed to pay the Company $2,400,000 (of which the Company
          received $1,800,000 after attorneys' contingency fees but before other
          related expenses) in exchange for which the Company agreed to dismiss
          all claims against Paribas with prejudice.  The Company also dismissed
          all claims against Dennis Morris; however, such dismissal was not the
          result of a settlement agreement between the parties.

          On November 20, 1997, at the close of evidence, the Company obtained a
          jury verdict against Chase on its claim of conversion in the amount of
          $150,975,000, representing $12,975,000 in actual damages and
          $138,000,000 in punitive damages.  On November 21, 1997, the Company
          moved the court to enter a final judgment against Chase in the amount
          of $148,575,000, which reflects the jury's verdict, minus a credit for
          Paribas' settlement amount.  In addition to the verdict against Chase,
          the Company obtained a $30,000,000 default judgment against Yanni
          Koutsoubos on its claims for violation of Section 10b-5 of the
          Securities Exchange Act and common law fraud.  Such judgment
          represents $10,000,000 in actual damages and $20,000,000 in punitive
          damages.  On December 4, 1997, the court entered a judgment against
          Chase in the Company's favor for $148,575,000 plus costs of court,
          pre-judgment interest on $12,975,000 at 10% per annum from November
          18, 1994 until December 4, 1997 and post-judgment interest on the
          entire judgment amount at 5.42% from December 4, 1997.  Subsequently,
          Chase filed five post-judgment motions with the court:  motion for new
          trial; motion to alter or amend the judgment; renewed motion for
          judgment as a matter of law; motion to apply a settlement credit and
          motion for leave to conduct oral deposition; and motion for hearing.
          On February 23, 1998, the court, having considered such motions, the
          supplements to such motions, the response of the Company to such
          motions and the entire record in the cause, denied all of Chase's
          post-judgment motions. Chase has given notice that it will appeal the
          judgment entered by the court


                                         -13-
<PAGE>

          to the Fifth Circuit Court of Appeals in New Orleans.  The Fifth
          Circuit Court of Appeals requested and arranged a pre-hearing
          conference among the parties in New Orleans on May 14, 1998.  While
          the parties were unable to reach a resolution at such conference,
          discussions have continued.

          On April 6, 1998, the court entered default judgments against Betafid
          S. A., Andalucian Villas (Forty-Eight) Limited, Arnass Limited,
          Brocimast Enterprises Limited, Howard White and Aries Peak, Inc. on
          the Company's claims for violations of  Section 10b-5 of the
          Securities Exchange Act and common law fraud.  Such judgments total
          $166,275,000, plus pre-judgment interest on $12,975,000 at 10% per
          annum from November 18, 1994 until April 6, 1998 and post-judgment
          interest on the entire amount at 5.31% from April 6, 1998.

          The Company intends to vigorously pursue the favorable judgments
          obtained against defendants in the above matter.  The Company, based
          upon advice from counsel, believes that it will obtain a favorable
          result in the appeal of the judgment against defendant Chase
          referenced in the above proceeding.  To the extent reasonable, the
          Company intends to vigorously pursue the collection of the sums owing
          to the Company as per the judgments that have been obtained against
          the other defendants although the collection of these judgments is
          uncertain.  Akin, Gump, Strauss, Hauer & Feld, L.L.P. represents the
          Company in these matters on a contingency fee basis.

          The Company is party to certain other legal proceedings, none of which
          are believed to be material.

NOTE 6:   The following table shows pro forma earnings per share calculated
          assuming that the Company's emergence from bankruptcy and the
          resulting recapitalization discussed in Note 2 occurred as of the
          beginning of each period.

<TABLE>
<CAPTION>

                                                         13 WEEKS ENDED     13 WEEKS ENDED
                                                          MAY 1, 1998        MAY 2, 1997
                                                         --------------     --------------
          <S>                                            <C>                <C>
          Net Income (Loss) Applicable to Common Stock     $1,019,897         $(2,363,196)

          Weighted Average Number of Shares                 4,134,917           4,128,860

          Earnings Per Share                               $     0.25         $     (0.57)
</TABLE>


                                         -14-
<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following tables set forth (i) certain items in the Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated,
and (ii) the percentage change in such items from the comparable period of  the
prior year.

<TABLE>
<CAPTION>
                                                                            Percentage of Net Sales
                                                                     --------------------------------------
                                                                             Thirteen Weeks Ended
                                                                     --------------------------------------
                                                                        May 1, 1998           May 2, 1997
                                                                     -----------------     -----------------
<S>                                                                   <C>                  <C>
Net sales                                                               100.0%                  100.0%
Cost of sales                                                            71.7                    65.9
Selling, advertising, general and administrative                         47.7                    48.7
Depreciation and amortization                                             1.6                     1.5
Reorganization items                                                      0.0                     2.5
   Operating income (loss)                                              (21.0)                  (18.6)
Other income (expense), net                                              29.3                    (1.2)
Income (loss) before income taxes                                         8.3                   (19.8)
Provision for (benefit from) income taxes                                 0.0                     0.0
Net income (loss)                                                         8.3%                  (19.8)%
</TABLE>

<TABLE>
<CAPTION>
                                                                                Percentage Change
                                                                          -------------------------------
                                                                                  13 Weeks Ended
                                                                            May 1, 1998 compared to
                                                                          13 Weeks Ended  May 2, 1997
                                                                          -------------------------------
<S>                                                                       <C>

Net sales                                                                            2.6%
Cost of sales                                                                       11.6%
Selling, advertising, general and administrative                                     0.5%
Depreciation and amortization                                                       13.5%
Reorganization items                                                              (100.0)%
   Operating loss                                                                   15.7%
Other income (expense), net                                               not a meaningful figure
Income (loss) before income taxes                                         not a meaningful figure
Provision for (benefit from) income taxes                                            0.0%
Net income (loss)                                                         not a meaningful figure
Weighted average number of stores                                                    5.5%

</TABLE>


                                         -15-
<PAGE>

THIRTEEN WEEKS ENDED MAY 1, 1998 COMPARED TO THIRTEEN WEEKS ENDED MAY 2, 1997:

The net sales increase of 2.6% for the thirteen weeks ended May 1, 1998 compared
to the thirteen weeks ended May 2, 1997 is attributable primarily to a 5.5%
increase in the weighted average number of stores in operation (from  41.7
stores to 44.0 stores) and a 4% increase in comparable store merchandise sales
(due primarily to improved inventory balance at the store level and the
increased resources to promote customer traffic to the stores) and is partially
offset by a decline in other revenue, including revenue from leased shoe
departments.

Cost of sales as a percentage of net sales increased from 65.9% for the thirteen
weeks ended May 2, 1997 to 71.7% for the thirteen weeks ended May 1, 1998, due
primarily to inventory markdowns taken primarily in April 1998 as part of an 
effort to liquidate aged merchandise, especially apparel inconsistent with the 
Company's merchandising philosophy.  Excluding the $342,091 of revenue realized 
on the sale of the aged merchandise and the cost of sales of $761,281 (including
$423,400 of markdowns), the cost of sales as a percentage of net sales would 
have been 66.6% for the recent period.

Selling, advertising, general and administrative expense decreased from 48.7% of
net sales for the thirteen weeks ended May 2, 1997 to 47.7% of net sales for the
thirteen weeks ended May 1, 1998 due primarily to higher sales and improved
operating efficiencies.  The 0.5% increase in the amount of selling,
advertising, general and administrative expense compared to the thirteen weeks
ended May 2, 1997 was the result of the 5.5% increase in the weighted average
number of stores in operation.

Depreciation and amortization expense increased by 13.5% in the thirteen weeks
ended May 1, 1998 compared to the comparable period of fiscal 1998, due
primarily to the increased number of  stores in operation and capital
expenditures associated with the conversions of existing stores to the LOT$OFF
format.

Other income (expense) improved $3,731,512, from an expense of $142,214 in the
thirteen weeks ended May 2, 1997 to income of $3,589,298 in the comparable
period of fiscal 1999, due primarily to the corporate reorganization described
in Note 4 of Notes to Condensed Consolidated Financial Statements and the
related receipt of $5.8 million of proceeds from GECC and partially offset by
higher interest expense caused by a higher average outstanding loan balance for
the quarter ended May 1, 1998 and the cessation of  interest accrual on
liabilities subject to compromise in the fiscal 1998 period.

The Company's income before income taxes for the thirteen weeks ended May 1,
1998 compared to the loss for the thirteen weeks ended  May 2, 1997 is primarily
due to the corporate reorganization described above and in Note 4 to Notes to
Condensed Consolidated Financial Statements.

Income tax expense related to the income for the thirteen weeks ended May 1,
1998 was not recognized because of the Company's substantial tax loss
carryforward to shelter the income.  As of January 30, 1998, the Company had a
federal tax net operating loss ("NOL") carryforward of approximately $58,549,000
expiring through 2014, an alternative minimum tax credit carryforward of
approximately $337,000, which is available to offset regular federal income
taxes in the future until fully utilized, and a targeted jobs credit
carryforward of approximately $178,000 expiring in 2006 through 2009.  As a
result of the bankruptcy proceedings and the related Plan, the NOL carryforward,
tax credit carryforward and other tax attributes of the Company will be reduced
(perhaps significantly) as a result of debt forgiveness income in accordance
with section 108(b) of the Internal Revenue Code ("IRC") and/or the receipt of
substantial net lawsuit proceeds in excess of such debt.  In addition, IRC
section 382 limits a NOL and a tax credit carryforward when an ownership change
of more than fifty percent of the value of stock in a loss corporation occurs
within a three year period.  Under the Plan and through subsequent transactions
by investors in the Company's Common Stock, the ownership of the Company may be
deemed to have changed by more than fifty percent.  Accordingly, to the extent
NOL and tax credit carryforwards remain after reduction under IRC section 108(b)
and /or the receipt of any net lawsuit proceeds, the ability to utilize
remaining NOL and tax credit carryforwards may be significantly restricted. 
Income tax benefit related to the loss for the fiscal 1998 period was not 
recognized because the utilization of such benefit was not assured.

STORE DEVELOPMENT PLANS

While the Company will concentrate near term principally on developing existing
stores to full maturity, it is management's intention to expand the Company's
regional presence in existing and new markets, especially in Texas. The Company

                                         -16-
<PAGE>

currently expects to be operating 50 stores by this fiscal year's
Christmas/holiday shopping season after the opening of  new stores (limited to
existing and new markets in Texas) and the closing of certain stores (the
Company's Lawton, Oklahoma store closed on May 5, 1998) through negotiated lease
cancellations or lease expirations.  New stores are expected to be smaller than
the Company's current stores which average 25,900 square feet (22,120 square
feet of selling space).  Consistent with its store development plan, the Company
opened a new 13,800 square foot store in San Angelo, Texas the week of June 8,
1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company began fiscal 1998 with cash of $473,533.  During the thirteen weeks
ended May 1, 1998, the Company generated $926,211 from financing activities
($48,347 from the exercise of stock options under the Company's stock option
plan, $1,831,366 from the obligation to GECC related to the corporate
reorganization discussed in Note 4 of Notes to Condensed Consolidated Financial
Statements and $58,488 from an increase in bank checks outstanding, net of a
$997,063 paydown of the Company's outstanding balance under its credit agreement
with GECC), used $816,038 in operating activities, used $9,468 for capital
expenditures and ended the period with cash on hand of $574,238.

On June 16, 1997, the Company entered into a credit agreement with GECC
providing the Company with a revolving credit facility through June 16, 2000 of
up to $15,000,000.  The credit facility bears interest at a floating rate equal
to the published rate for thirty-day commercial paper issued by major
corporations (5.53% at May 1, 1998) plus 3% per annum and provides for an unused
facility fee of 0.5% per annum.  Borrowings under the facility are available in
aggregate amounts up to 65% of LOT$OFF's eligible inventory for the period from
August 15 through December 15 and up to 60% for the period from December 16
through August 14, subject to certain required reserves.  The credit facility is
collateralized by inventory, accounts receivable and other assets.  The credit
agreement, as amended, contains various restrictive covenants, including
restrictions on the payment of dividends on Common Stock, and various financial
covenants, including minimum EBITDA, minimum working capital and minimum
availability.  See below and Notes 1 and 4 of Notes to Condensed Consolidated
Financial Statements.  As of  June 9, 1998,  LOT$OFF had approximately
$7,476,000 available for borrowings under the credit facility (after reserves of
$885,000) of which $6,190,000 was committed, leaving a net availability of
$1,286,000.

Management believes that borrowings available under its revolving credit
facility, available trade credit, its restructuring of certain obligations under
the Plan, the capital obtained from the purchase by GECC of a contingent claim
on a $10,000,000 portion of the potential net proceeds from the judgment
obtained against The Chase Manhattan Bank for $5.8 million (see Notes 4 and 5 of
Notes to Condensed Consolidated Financial Statements), anticipated proceeds from
outstanding litigation, its operating cash flow and its cash on hand will be
adequate to finance its operations, including the opening of six (net) new
stores in Texas, through fiscal 1999.  No assurance can be given, however, that
such sources of capital will be sufficient or that the Company will be
successful in its continuing efforts to attain profitability.  For this reason,
any investment in Common Stock should be considered speculative.  The receipt of
additional proceeds from the significant litigation brought by the Company could
add significantly to the Company's liquidity and capital resources.  See Notes 1
and 5 of Notes to Condensed Consolidated Financial Statements.

SIGNIFICANT LITIGATION

The Company has received a jury verdict and substantial judgments in its favor
from a lawsuit related to certain parties' breaches of contractual obligations
to purchase 1,500,000 shares of Old Common Stock and actions in misappropriating
and removing these shares from an escrow account prior to payment for such
shares.  The Company intends to vigorously pursue all reasonable available
avenues to effect the receipt of payment for actual and punitive damages.  The
matter is being handled by counsel on a contingency fee basis.  The Company,
based upon advice of counsel, believes that it will obtain a favorable result in
this lawsuit.  See Note 5 of Notes to Condensed Consolidated Financial
Statements for further discussion of this matter.

SEASONALITY AND QUARTERLY FLUCTUATIONS

As with most retailers, highest net sales and operating income are experienced
during the fourth quarter, which includes the Christmas/holiday selling season.
Otherwise, LOT$OFF's business is heaviest on weekends (Friday through Sunday)
and at

                                         -17-
<PAGE>

the beginning of each month.  Any adverse trend in net sales for the fourth
quarter could have a material adverse effect upon the Company's results of
operations for an entire fiscal year.

In addition to seasonality, the Company's results of operations may fluctuate
from quarter to quarter as a result of the timing of store openings, including
the level of advertising and pre-opening expenses associated with such openings,
as well as other factors.

USE OF ESTIMATES

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.

FORWARD-LOOKING INFORMATION

This Form 10-Q, including Management Discussion and Analysis of Financial 
Condition and Results of Operations--Liquidity and Capital Resources 
contains various forward-looking statements and information that are based on 
management's beliefs as well as assumptions made by and information currently 
available to management.  When used in this document, the words "believe," 
"expect," "anticipate" and similar expressions are intended to identify 
forward-looking statements.  Such statements are subject to certain risks, 
uncertainties and assumptions including those identified set forth below and 
elsewhere herein.  Should one or more of these risks or uncertainties 
materialize, or should underlying assumptions prove incorrect, actual results 
may vary materially from those anticipated, estimated or projected.  In 
addition to the other risk factors set forth herein and in Note 1 of Notes to 
Condensed Consolidated Financial Statements, among the key factors that may 
have a direct bearing on the Company's results and ability fo finance its 
operations, including the opening of six (net) new stores, are competitive 
practices in the close-out merchandising industry generally and particularly 
in the Company's targeted market and the ability of the Company to fund its 
continuing operations in the event of poor operating performance or adverse 
industry or economic conditions.

                                      PART II

ITEM 1.   LEGAL PROCEEDINGS

See Note 5 of Note to Condensed Consolidated Financial Statements regarding a
lawsuit filed in February 1995.  Such lawsuit was also reported in the Company's
annual reports on Form 10-K for the fiscal years ended February 3, 1995,
February 2, 1996, January 31, 1997 and January 30, 1998 and was the subject of a
report on Form 8-K dated December 9, 1997.

The Company is a party to certain other legal proceedings arising in the
ordinary course of business, none of which are believed to be material.

ITEM 2.   CHANGES IN SECURITIES

On March 19, 1998, in response to the Company's motion to modify the Plan by
consolidating certain steps to be taken pursuant to the Plan and with the
support of the Class 7 agent and its counsel, representing Class 7 creditors
(the allowed general unsecured creditors) under the Plan, the Court entered an
order to consolidate the treatment of Class 7 creditors by allowing the issuance
of two shares of Common Stock in lieu of any single share of Series B Preferred
Stock, Series A Conversion Rights or Series A Preferred Stock, as the case may
be, which would otherwise have been issued pursuant to the Plan.  The immediate
effect of the order was to cause the conversion of the previously issued, but
not delivered, 798,210 shares of Series B Preferred Stock into 1,596,420 shares
of Common Stock and the cancellation of the Series B Preferred Stock and of any
obligation of the Company to issue Series A Conversion Rights or Series A
Preferred Stock to allowed general unsecured creditors under the Plan.  Such
shares of Common Stock are in an escrow account at Continental Stock Transfer &
Trust Company for the benefit of holders of allowed general unsecured claims
pending delivery upon the filing and/or resolution of claims objections.  Future
obligations, if any,  to the allowed general unsecured creditors (up to the full
face amount of their allowed claims, depending on Net Lawsuits' Proceeds as
defined in the Plan) may be satisfied by the


                                         -18-
<PAGE>

issuance of Common Stock and/or cash (provided that at least the Excess Net
Lawsuits' Proceeds, up to $1.5 million as defined in the Plan, must be paid in
cash).

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5.   OTHER INFORMATION

The Company's Annual Meeting of Stockholders will be held July 14, 1998 in San
Antonio, Texas.  The record date for the Annual Meeting was May 28, 1998.  At
May 28, 1998, there were 4,159,210 shares of Common Stock outstanding, 1,596,420
shares of which are held in an escrow account at Continental Stock Transfer &
Trust Company for the benefit of holders of allowed general unsecured claims
pending delivery upon the filing and/or resolution of claims objections under
the Company's confirmed Plan of Reorganization, as Amended and Modified.  Such
escrowed shares are not entitled to vote at the Annual Meeting.

ITEM 6    EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

          Exhibit 10 - Fifth Amendment to the General Electric Capital
                       Corporation Revolving Credit Agreement

          Exhibit 27 - Financial Data Schedule

     (b)  Reports on Form 8-K

     A report on Form 8-K was filed on May 18, 1998 reporting the following:

          A decision and order was entered by Judge Leif M. Clark in the
          Company's bankruptcy proceeding in the  United States District Court
          for the Western District of Texas, San Antonio Division effectively
          denying creditors in the bankruptcy proceeding leave to file late
          proofs of claim or, alternatively, excuse from filing proofs of claim
          by finding that the confirmation of the Company's plan of
          reorganization, as amended and modified, operates as RES JUDICATA to
          bar the allowance of any late claims that have been or might be filed
          in the Company's bankruptcy case.

                                     SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:

                              LOT$OFF CORPORATION

                         By:  /s/ CHARLES J. FUHRMANN II
                              ------------------------------------------------
                              Charles J. Fuhrmann II, Chairman, President, and
                                Chief Executive Officer (Principal Executive
                                Officer)

                         By:  /s/ JEFF SEIDEL
                              ------------------------------------------------
                              Jeff Seidel, Vice President, Chief Financial
                                Officer (Principal Financial and Accounting 
                                Officer)


                                         -19-
<PAGE>

                                   EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                      Page
<S>                                                                   <C>
Exhibit 10                                                             21

Exhibit 27                                                             27
</TABLE>


                                         -20-