SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

   X  Annual  report  pursuant  to  Section  13 or 15(d)  of the  Securities
  --- Exchange Act of 1934 For the fiscal year ended June 27, 1998 Commission
         File Number 0-27050
                     -------
      Transition report pursuant to Section 13 or 15(d) of the Securities
  --- Exchange Act of 1934 For the transition period from _______ to _______

                                 PHAR-MOR, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          PENNSYLVANIA                                         25-1466309
-------------------------------------------------           --------------------
          (State or other jurisdiction of                   (I.R.S. Employer
          incorporation or organization)                     Identification No.)


          20 Federal Plaza West, Youngstown, Ohio            44501-0400
-------------------------------------------------           --------------------
          (Address of principal executive offices)           (Zip code)


Registrant's telephone number, including area code:          (330) 746-6641
                                                             --------------

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

         Title of each class           Name of each exchange on which registered
        ---------------------          -----------------------------------------
Common Stock, Par Value $0.01 per share                  NASDAQ
Warrants to purchase Common Stock                        NASDAQ

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


         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of the  Registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K.

                                            YES               No      X
                                                  ------           ------

              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

         Indicate by check mark whether the  Registrant  has filed all documents
and reports  required  to be filed by Section 12, 13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.
                                            YES     X         No
                                                  ------           ------

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant as of September 8, 1998 was $105,577,461  (based on the last reported
sale price of the Registrant's Common Stock on the NASDAQ National Market System
on such date).

As of  close  of  business  on  September  8,  1998,  12,240,865  shares  of the
Registrant's Common Stock were outstanding.


<PAGE>


PART I

Item 1.  Business

Introduction

         Phar-Mor,   Inc.,  a  Pennsylvania   corporation   ("Phar-Mor"  or  the
"Company"),  operates a chain of discount retail drugstores  devoted to the sale
of prescription  and  over-the-counter  drugs,  health and beauty care products,
baby products, pet supplies,  cosmetics,  greeting cards, groceries, beer, wine,
tobacco,  soft drinks,  video rental and seasonal and other general merchandise.
As of June 27, 1998, the Company operated 106 stores in 22 metropolitan  markets
in 19 states under the name of Phar-Moru. Approximately 52% of Phar-Mor's stores
are located in Pennsylvania,  Ohio and West Virginia,  and approximately 23% are
located in Virginia,  North Carolina and South Carolina. The Company's principal
executive  offices  are  located  at 20 Federal  Plaza  West,  Youngstown,  Ohio
44501-0400.  Unless otherwise stated,  all statistics in this Item were compiled
as of June 27, 1998.

         Except  for  historical   information  contained  herein,  the  matters
discussed in this Annual Report on Form 10-K are  forward-looking  statements as
defined by the Private Securities  Litigation Reform Act of 1995. Actual results
may differ  materially  from those  projected  as a result of certain  risks and
uncertainties including, but not limited to, economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products,
services and prices and other factors  discussed in the  Company's  filings with
the Securities and Exchange Commission ("SEC").

History

         Phar-Mor was founded in 1982 as a division of a subsidiary of the Giant
Eagle,  Inc.  supermarket  chain.  The initial Phar-Mor concept was built on the
premise  that  a  drugstore  offering  additional,   and  at  times  unexpected,
categories of merchandise  could attract  customers by featuring low prices made
possible by acquiring inventory at relatively low cost through deal purchases of
overstock,  odd lot,  discontinued,  large unit size or slow-moving  merchandise
from manufacturers and distributors. The Company grew, rapidly expanding from 12
stores  in  August  1985 to 311  stores in  August  1992.  Store  size also grew
dramatically,  increasing from an average of approximately 31,000 square feet in
fiscal 1986 to approximately 58,500 square feet in 1992. Phar-Mor's rapid growth
was mirrored by apparent extraordinary financial success.

         However,  in early August 1992, Phar-Mor publicly disclosed that it had
discovered a scheme by certain senior  executives to falsify  certain  financial
results and divert funds to unrelated enterprises and for personal expenses. The
officers  involved,  including  Phar-Mor's  former President and Chief Operating
Officer,  former Chief Financial  Officer,  former Vice President of Finance and
former Controller were promptly dismissed.  In an effort to restore support from
its vendors and lenders and to implement a business  turnaround  plan,  Phar-Mor
and its fifteen  wholly-owned  subsidiaries filed petitions for protection under
Chapter  11 of the  United  States  Bankruptcy  Code on  August  17,  1992  (the
"Petition  Date").  A new  management  team,  hired by the  Board of  Directors,
assumed day-to-day management of Phar-Mor.

         Upon  discovery  of the  fraud,  it  became  apparent  that  Phar-Mor's
explosive growth during the preceding several years had been fueled in part by a
systematic  scheme  to  falsify  Phar-Mor's  financial  results  and to  conceal
Phar-Mor's  true  financial  condition.  The fraud which was  perpetrated by the
manipulation  of information  and overriding the system of internal  controls by
certain of its senior  executives,  as well as a lack of systems and surrounding
controls,  masked very substantial losses,  created in part by low margins, slow
moving merchandise categories,  high rentals for the newer and larger stores and
operational  inefficiencies.  By the time Phar-Mor  concluded its  investigation
into the size of the fraud,  it  determined  that  cumulative  earnings had been
overstated  by  approximately  $500  million.  Additional  charges to cumulative
earnings of  approximately  $500 million  resulted  from  changes in  accounting
policies and restructuring costs which were recorded as of September 26, 1992.
See "Notes to Consolidated Financial Statements."

         The new  management  of Phar-Mor  faced the task of  restructuring  its
accounting  records  and  strengthening  the  control  systems.  New  management
developed  and  implemented a strict  internal  control  regimen,  buttressed by
frequent  and  widely  distributed   internal   management   reports,   designed
specifically to avoid a situation in which a member of management could override
controls and avoid detection.

<PAGE>

         In  particular,  management  (i)  implemented  three major  information
system improvements,  each of which supports the accurate reporting of inventory
and facilitates  stricter accounting  controls:  point-of-sale  ("POS") scanning
equipment,  a pharmacy software system and a Distribution Control System ("DCS")
warehousing system (these systems provide greater merchandising data, facilitate
pharmacy processing and track and coordinate  inventory purchasing and warehouse
volume),  (ii) undertook a review of various  existing systems which included an
operations and control  enhancement project on the accounts payable system and a
vendor  correspondence and relations review and (iii) enhanced an internal audit
department that assembled  extensive protocols to follow in conducting audits of
internal controls.

         In order  to  further  enhance  the  control  process,  new  management
regularly  generates  numerous  internal reports which are distributed to a wide
variety of senior,  middle and lower  level  management  on a daily,  weekly and
monthly basis. In addition,  operational and financial planning meetings are now
attended by members of all levels of management.

         The Company  emerged from  bankruptcy  on September 11, 1995 with a new
President  and  Chief  Operating  Officer,  Chief  Financial  Officer  and  Vice
President and Corporate Controller hired after the Petition Date to replace
those responsible for the fraud.

         During  the   pendency   of  the   Chapter  11   bankruptcy   cases  of
pre-reorganized  Phar-Mor and its  subsidiaries  (the  "Chapter 11 Cases"),  new
management  analyzed the  performance  and prospects of each store to identify a
core group of high volume,  profitable and  geographically  concentrated  stores
that would serve as the basis of reorganized  Phar-Mor.  Based on this analysis,
Phar-Mor  closed 209 stores (not  including  separate  liquor  stores which were
closed at various  times) in five  stages:  54 stores  between  October 1992 and
December  1992,  34 stores  between  March 1993 and June 1993, 55 stores in July
1993, 25 stores in October 1994 and 41 stores in July 1995, thereby reducing the
number of stores from 311 in September  1992 to 102 stores as of  September  11,
1995, the effective date (the "Effective Date") of Phar-Mor's Chapter 11 plan of
reorganization (the "Plan of Reorganization").

         The Company also  implemented a series of fundamental  changes designed
to achieve  operating  profitability and to position Phar-Mor for future growth.
Following  the Petition  Date,  Phar-Mor  reduced the number of  warehouses  and
increased  outsourcing  of product  distribution;  reduced the  average  size of
several stores by approximately  19,000 square feet;  introduced POS scanning in
all  stores;  installed  a new  pharmacy  software  system;  installed  the  DCS
warehouse  logistics  system;  and reduced the number of corporate  personnel by
75%.

         In  connection  with  the  Company's  Plan  of  Reorganization  and its
emergence from  bankruptcy,  the Company  restructured  its debt obligations and
converted  approximately  $855  million of debt into  equity.  The Company  also
entered  into  a  three-year,   $100  million  revolving  credit  facility  (the
"Revolving Credit Facility").

Operations

         Typically,  stores are open 95 hours per week; pharmacies are typically
open 77 hours per  week.  The  average  store has  approximately  50  employees,
including  a store  manager  and  department  managers,  a pharmacy  manager and
pharmacists, and office and cashier supervision.  Overall, the Company had 5,479
employees at June 27, 1998.  Approximately 246 warehouse and distribution center
employees  in  Youngstown  are members of the  Teamsters  Union under a contract
which expires March 4, 2000. Sixty employees at the Company's Niles,  Ohio store
are members of the United  Food and  Commercial  Workers  Union under a contract
which expires October 12, 2000.

         The Company is committed to customer  service and encourages  employees
to be  responsive  to  customer  needs and  concerns.  The  remerchandising  and
remodeling  of stores  (discussed  below)  is  designed  to make the  customer's
shopping experience easier and more enjoyable. The number of open checkout lanes
is closely  monitored to facilitate  the efficient and  comfortable  checkout of
customers.  These philosophies are regularly  communicated and reinforced by the
Company to its employees.
<PAGE>

         Thorough  education  and  training in store  operations  is provided to
employees at every level.  Computer-based  training,  on and off-site  training,
video training,  and teleconferences are a few of the training methods used. The
Company  believes  that such  training  enables  efficiency,  understanding  and
responsiveness within store operations.

         The  typical  trade  area for a Company  store  includes  approximately
105,000  people in 41,000  households  within a radius of between five and seven
miles.  On average  during the fiscal  year ended June 27,  1998  ("Fiscal  Year
1998"), each store served approximately 11,200 customers per week. The Company's
customers are approximately  52% female,  with a median age of 35.5 years, and a
median household income of approximately $33,000.  Approximately 24% of customer
households have children 17 years old and under.

         Company stores accept payment in cash, check,  credit cards and payment
from third-party providers of prescription services.

         The  Company's   purchasing,   pricing,   advertising,   merchandising,
accounting and  supervisory  activities are centrally  directed from  Phar-Mor's
corporate   headquarters.   The  Company  purchases  substantially  all  of  its
merchandise either directly from manufacturers or from wholesalers under various
types  of  purchase   arrangements.   McKesson  Drug  Company  ("McKesson"),   a
pharmaceutical  distributor,  accounted for approximately  25%, of the Company's
purchases  during  Fiscal Year 1998.  During  Fiscal Year 1998,  no other single
vendor accounted for more than 10% of the Company's purchases. Substantially all
of the products the Company sells are purchased from approximately 1,200 outside
vendors.  Alternative sources of supply are generally available for all products
sold by the Company.

Marketing and Merchandising

         Phar-Mor's  overall  merchandising  strategy  is to offer  (i) value to
consumers  by pricing  its  products  below the prices  charged by  conventional
drugstores and  supermarkets and (ii) a broader array of products in each of its
major  product  categories  than  is  offered  by  mass  merchant   discounters.
Phar-Mor's  product  strategy is focused on the  traditional  drugstore lines of
prescription  and  over-the-counter  drugs,  health and beauty care products and
cosmetics.  Phar-Mor's stores also typically  feature other product  categories,
including groceries, snacks and beverages, pet food and supplies, beer, wine and
liquor (where permitted by law), tobacco,  baby products,  general  merchandise,
video  and  music  sales  and  video  rentals.  Phar-Mor  is one of the  leading
retailers of film, vitamins, soft drinks and batteries in the United States.

         Ninety-five percent of the Company's  advertising is print advertising,
through circulars,  newspapers, and POS materials.  Newspaper advertisements and
circulars appear in major newspapers in most market areas. The Company presently
advertises through 75 newspapers and mailers.

         Phar-Mor introduced the "Warehouse District" concept during Fiscal Year
1997. In approximately  10,000 to 15,000 square feet, each "Warehouse  District"
offers a variety of grocery items,  including  fresh,  frozen,  and refrigerated
foods. The Company  incorporated  this concept into 18 stores during Fiscal Year
1998 bringing the total number of "Warehouse District" stores to 23. The concept
has been well received by customers and has improved  overall sales in each such
store. The Company plans to incorporate the "Warehouse  District" concept into 5
stores  scheduled  to be  remodeled  during the fiscal  year ending July 3, 1999
("Fiscal  Year  1999").  During  Fiscal  Years 1997 and 1998,  the Company  also
undertook a plan to remodel  certain  stores  unable to  accommodate  the fresh,
frozen and refrigerated  foods included in the "Warehouse  District" concept due
to  their   small   size.   This   "four-wall"   remodeling   program   includes
remerchandising  the stores to provide a more convenient  shopping experience by
creating  product  adjacencies;  adding new and color coded decor and  enhancing
signage  throughout the store; and further  enhancing the "store within a store"
idea with its  signature  departments.  The  Company  has  completed  ten of the
"four-wall" remodel projects.




Sales

         The retail sale of traditional  drugstore lines is a highly  fragmented
business, consisting of thousands of chain drugstores and independent drugstores
that sell such products as well as mass  merchandisers who sell such products as
<PAGE>

part of their overall product lines. In Fiscal Year 1998, revenues from sales of
the  Company's  traditional   drugstore  products  (i.e.,   prescription  drugs,
over-the-counter drugs, health and beauty care products,  cosmetics and greeting
cards)  averaged  approximately  $5.9  million per store in its 106  stores.  In
addition to the  approximately  $624.0 million in traditional  drugstore product
revenues in Fiscal Year 1998, the Company generated approximately $476.8 million
in revenues from the sale of groceries and general merchandise.

         Set forth below is the  percentage  of sales by  principal  category of
products for the continuing stores for the last three fiscal years.

<TABLE>
<CAPTION>
                                                Fiscal Year Ended
                                                -----------------

                                 (106 Stores)      (103 Stores)     (102 Stores)
Category                         June 27, 1998     June 28, 1997   June 29, 1996
--------                         -------------     -------------   -------------
<S>                              <C>               <C>              <C>

Prescription, Health and
  Beauty Care Products,
  Cosmetics and Greeting Cards        56.7%             57.0%            56.0%

All Other Merchandise                 43.3%             43.0%            44.0%

</TABLE>

         The  Company's  business is seasonal to a certain  extent.  The highest
volume of sales and net  income  usually  occurs in the  second  fiscal  quarter
(generally October,  November and December).  The following table summarizes the
Company's sales by quarter during Fiscal Year 1998.


                    Sales by Quarter During Fiscal Year 1998

                                                  Percentage of
                                                   Total Sales

                        First Quarter                 23.3%
                        Second Quarter                26.5%
                        Third Quarter                 25.2%
                        Fourth Quarter                25.0%
                                                    --------
                                                     100.0%

Competition

         Phar-Mor's  stores  compete  primarily  with  conventional  drugstores,
supermarkets and mass merchant discounters. Many of these companies have greater
financial   resources  than  Phar-Mor.   Phar-Mor   competes  with  conventional
drugstores by offering a broader  product  selection and generally  lower prices
than  traditional   drugstore  lines.   Phar-Mor  believes  it  has  these  same
competitive advantages against most supermarkets for non-grocery items. Phar-Mor
competes with supermarkets in grocery product lines where Phar-Mor does not have
a broader  selection,  by carrying an often  changing  mix of items priced lower
than most supermarkets.

         Phar-Mor does not attempt to compete against mass merchant  discounters
solely on the basis of  price.  In  traditional  drugstore  lines,  particularly
health and beauty care  products and greeting  cards,  Phar-Mor  offers  broader
product  selection  than mass merchant  discounters.  Mass merchant  discounters
generally are unwilling to allocate as much display space as Phar-Mor devotes to
these categories. The merchandising changes Phar-Mor has implemented,  including
the  creation  of  "signature"   departments  in  dedicated   aisle  space  with
distinguishing  signage,  such as health and beauty  care  products,  cosmetics,
video  rentals,  groceries,  perishable  foods in 23 stores and "The Card Shop,"
"Pet Place," "One Stop Baby Shop," and "Vitamin  World," are designed in part to

<PAGE>

distinguish Phar-Mor from mass merchant discounters and to increase its strength
in areas in which Phar-Mor's management believes such merchants do not excel.

Capital Expenditures

         The Company's most significant capital needs are for seasonal purchases
of inventories, technological improvements and remerchandising and remodeling of
existing stores.

         The Company's capital expenditures totaled $21.4 million in Fiscal Year
1998,  including $3.4 million for the  construction of new stores,  $8.9 million
for  remodeling  existing  stores,  and $5.9  million  for  corporate  and store
information  systems.  The  Company  anticipates  spending  approximately  $16.5
million  for  capital  expenditures  in Fiscal  Year  1999,  including  costs of
remodeling 5 additional stores, opening two new stores and replacing one store.

Real Estate and Growth

         The Company  opened three new stores in Fiscal Year 1998,  and plans to
open two more new stores in Fiscal  Year 1999.  Expansion  in the near future is
expected to be minimal and in existing or  contiguous  markets in its core areas
of Pennsylvania,  Ohio and West Virginia. Expansion in existing markets improves
the Company's  operating margins by decreasing  advertising costs on a per store
basis,  permitting  more  efficient  distribution  of  products  to  stores  and
increasing utilization of existing supervisory and managerial staff.

         The aggregate cost of any future expansion is dependent upon the method
utilized  to finance  new stores.  Build to suit  (i.e.,  landlord  constructed)
leases  cost  approximately  $750,000  per store for  furniture,  fixtures,  and
equipment and each new store requires  approximately  $1.3 million in inventory.
Company-funded  conversion of existing  buildings is another  possible method of
expansion;  however the cost of such  expansion  per store varies  significantly
depending upon the age, condition and configuration of such buildings.


Trademarks and Service Marks

         The Company believes that its registered  "Phar-Mor"  trademark is well
recognized  by its customer base and the public at large in the markets where it
has been advertised.  The Company believes that the existing customer and public
recognition  of  its  trademark  and  related  operational  philosophy  will  be
beneficial to its strategic plans to expand  merchandise  categories and add new
stores.  The Company has also  introduced  a number of private  label  brands of
products   under  various   registered   trademarks   and   trademarks   pending
registration.

Regulation

         The Company is subject to the Fair Labor  Standards  Act, which governs
such matters as minimum wages,  overtime,  and other working conditions.  To the
extent that pay scales for a portion of the  Company's  personnel  relate to the
federal  minimum wage,  increases in the minimum wage may increase the Company's
labor costs.

         The prescription drug business is subject to the federal Food, Drug and
Cosmetic  Act,  Drug Abuse  Prevention  and Control Act and Fair  Packaging  and
Labeling Act relating to the content and labeling of drug  products,  comparable
state  statutes  and state  regulation  regarding  recordkeeping  and  licensing
matters with civil and criminal penalties for violations.


<PAGE>



Item 2.  Properties.

         As of June 27,  1998,  the  Company  operated  106 stores in 19 states.
Approximately  52% of Phar-Mor's  stores are located in  Pennsylvania,  Ohio and
West Virginia, and approximately 23% are located in Virginia, North Carolina and
South  Carolina.  The  following is a breakdown by state of the locations of the
Company's stores.

         Alabama ............    1   Missouri ...........    1
         Colorado ...........    2   New Jersey .........    1
         Florida ............    5   North Carolina .....    9
         Georgia ............    3   Ohio ...............   16
         Illinois ...........    4   Oklahoma ...........    1
         Indiana ............    3   Pennsylvania .......   35
         Iowa ...............    2   South Carolina .....    4
         Kansas .............    2   Virginia ...........   11
         Kentucky ...........    1   West Virginia ......    4
                                     Wisconsin ..........    1


         As of June 27, 1998, all of the Company's stores were leased. All store
leases are  long-term;  the original  terms of 76 leases and the original  terms
with options of four leases expire on or before December 31, 2006. The remaining
stores  have longer  lease  terms.  Most stores are located  adjacent to or near
shopping  centers or are part of strip  centers.  Some stores are free standing.
Depending on the location of a store,  the sites may vary, with averages by type
of location as follows: free-standing stores are located on sites averaging 2.84
acres;  stores located in strip centers are found on sites averaging 23.7 acres;
and stores in malls are on sites averaging 46.8 acres. A proto-typical store now
includes  approximately 40,000 square feet of sales space and 10,000 square feet
of storage  area and ample  off-street  parking.  The stores are  designed  in a
"supermarket"  format  familiar to customers  and shopping is done with carts in
wide aisles with attractive displays.  Traffic design is intended to enhance the
opportunity for impulse purchases.

         The Company operates a distribution center in Youngstown, Ohio which it
leases. This center delivered approximately 46% of all merchandise to the stores
in Fiscal  Year 1998,  primarily  using  contract  carriers.  The balance of the
products were delivered directly to the Company's stores by vendors.

         The Company and a  wholly-owned  subsidiary of the Company are partners
in an Ohio  limited  partnership,  which owns the office  building  in which the
Company  occupies  approximately  141,000 square feet of space for its corporate
offices in Youngstown, Ohio.

Item 3.  Legal Proceedings

         In the normal  course of  business,  the  Company is subject to various
claims.  In the opinion of management,  any ultimate  liability  arising from or
related to these  claims  should not have a  material  adverse  effect on future
results of operations,  cash flows or the consolidated financial position of the
Company.

Item 4.  Submission of Matters to a Vote of Security Holders.

         There were no matters  submitted to a vote of security  holders  during
the fourth quarter of Fiscal Year 1998,  through the  solicitation of proxies or
otherwise.








<PAGE>


                                     Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

         The  Company's  common  stock,  par value $.01 per share  (the  "Common
Stock"),  is included  for  quotation  on the NASDAQ  National  Market under the
symbol  "PMOR."  High and low prices of the Common  Stock are shown in the table
below:

                                         Fiscal Year 1998    Fiscal Year 1997
                                         ----------------    ----------------
                                          High      Low       High      Low
                                          ----      ---       ----      ---
         1st Quarter...............     $ 7 3/4    $6 1/8    $8 3/4    $6 1/8
         2nd Quarter...............       9 5/8     6 3/8     6 1/4     5 5/16
         3rd Quarter...............      11 3/4     8         5 11/16   4 5/8
         4th Quarter...............      11 11/16   8 3/8     6 3/8     4 3/4

         As of  September  8, 1998,  there  were 2,696  holders of record of the
Common  Stock.  The Company has not  declared or paid any cash  dividends on the
Common Stock and does not anticipate  paying cash  dividends in the  foreseeable
future.  The Company  currently intends to retain earnings for future operations
and expansion of its business. In addition,  the indenture pursuant to which the
Company's  senior  notes were  issued,  the  Revolving  Credit  Facility and the
Amended  Revolving Credit Facility restrict the payment of cash dividends on the
Company's capital stock. See "Notes to Consolidated Financial Statements."

Item 6.  Selected Financial Data.

         The following selected consolidated  financial data of Phar-Mor and its
subsidiaries  should  be read in  conjunction  with the  consolidated  financial
statements and related footnotes appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>

                                                      (In thousands except per share data)
------------------------------------------------------------------------------------------------------------------------------------
                              52 Weeks        52 Weeks        43 Weeks         9 Weeks              52 Weeks           53 Weeks
                               Ended           Ended           Ended            Ended                Ended              Ended
                           June 27, 1998   June 28, 1997   June 29, 1996    September 2, 1995    July 1, 1995 (b)    July 2, 1994
                           -------------   -------------   -------------    -----------------    ----------------    ------------
<S>                        <C>             <C>             <C>              <C>                  <C>                <C>
Net sales                  $   1,100,851   $   1,074,828   $     874,284 || $         181,968    $     1,412,661    $  1,852,244
(Loss) income from                                                       ||
continuing operations             (8,830)         (2,281)          2,526 ||           (10,389)(a)        (53,144)(c)    (142,763)(d)
Diluted (loss) income                                                    ||
per share from                                                           ||
continuing operations               (.72)           (.19)            .21 ||              (.19)              (.98)          (2.64)


                                 As of           As of           As of            As of                As of              As of
                           June 27, 1998   June 28, 1997   June 29, 1996    September 2, 1995    July 1, 1995       July 2, 1994
                           -------------   -------------   -------------    -----------------    ------------       ------------
Total assets                     349,455         362,605         363,463              390,207 ||         531,332         680,105
Long-term debt & capital                                                                      ||
leases                           130,993         140,213         149,163              151,047 ||            --              --
Liabilities subject to                                                                        ||
settlement                          --              --              --                   --   ||       1,154,959       1,182,145

</TABLE>

Note: In accordance with fresh-start reporting, reorganization value was used to
record  the  assets  and  liabilities  of the  Company  at  September  2,  1995.
Accordingly,  the selected consolidated  financial data as of September 2, 1995,
June 29, 1996,  June 28, 1997, and June 27, 1998 and for the 43 weeks ended June
29,  1996,  the 52 weeks  ended June 28,  1997,  and the 52 weeks ended June 27,
1998,  are not  comparable in material  respects to such data for prior periods.
Furthermore,  the  Company's  results of  operations  for  periods  prior to the
Effective Date are not necessarily  indicative of results of operations that may
be achieved in the future.

<PAGE>

(a)  Excludes  extraordinary gain of $775 million on debt discharged pursuant to
     the Plan of Reorganization; and includes the gain for revaluation of assets
     and   liabilities   under   fresh-start   reporting   of  $8  million   and
     reorganization costs of $16.8 million.

(b)  Excludes  the results of 25 stores after July 2, 1994 and the results of 41
     stores  after May 6, 1995,  closed as part of the  Company's  restructuring
     prior to emergence from the Chapter 11 Cases.

(c)  Includes reorganization costs of $51.2 million, including $53.7 million for
     costs of  downsizing,  less $7.6  million  gain on sale of assets  held for
     sale.

(d)  Includes reorganization costs of $106.5 million,  including $43 million for
     costs of downsizing and $53.2 million to write-down  property and equipment
     to the lower of appraised or net book value.


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

Introduction

         The discussion of results of operations  that follows is based upon the
Company's  consolidated financial statements set forth on pages F-1 to F-29. The
discussion  of  liquidity  and  capital  resources  is based upon the  Company's
current  financial  position.  The  accompanying  financial  review reflects the
significant  impact of the events  leading  up to and  following  the  Company's
emergence from bankruptcy.  Certain  information  regarding the Chapter 11 Cases
and the  Plan  of  Reorganization  is set  forth  in Note 1 to the  Consolidated
Financial Statements.

         Upon the Company's  emergence from bankruptcy,  the Company adopted the
principles  of  fresh-start  reporting as of the  Effective  Date to reflect the
impact of the  reorganization.  As a result of the  application  of  fresh-start
reporting,  the financial condition and results of operations of the Company for
dates and periods  subsequent  to the  Effective  Date will not  necessarily  be
comparable to those prior to the Effective Date.

Recent Developments and Outlook

         The Company's results of operations and financial condition reflect the
impact of the  recapitalization  effected pursuant to the Plan of Reorganization
and the consolidation of operations following the Petition Date.

         The Company  significantly  restructured  its debt  obligations  at the
Effective  Date. As part of the Plan of  Reorganization,  the Company  converted
approximately  $855  million  of debt  obligations  to  equity,  obtained a $9.5
million  net  cash  equity  infusion,  and  entered  into the  Revolving  Credit
Facility. See "Financial Condition and Liquidity" below.

         In addition,  since August 1992,  the Company has put in place a series
of programs  that are designed to reduce its expense  structure  and improve its
operations.  These  programs  resulted  in the  closing  of 209 stores and three
warehouses,   the   elimination  of  75%  of  corporate   level  staff  and  the
implementation of three major information system improvements. See "Item 1.
Business."

         Management  believes that the  recapitalization  and the specific steps
taken to streamline the Company's  business  operations  since the Petition Date
have yielded a significant improvement in the operating and financial profile of
the  Company.   The   restructuring   of  the  Company's  debt  obligations  has
significantly reduced interest expense and enhanced financial flexibility.  As a
result of the consolidation  program, the Company has significantly  reduced the
fixed cost  elements of cost of sales and  selling,  general and  administrative
expenses partially offset by declines in sales and gross margin dollars.

         Although  there  can be no  assurance,  management  believes  that  the
Company is now  well-positioned to enhance future  profitability as economic and
competitive  conditions  improve in its markets.  Management  also believes that
additional  gains may be realized  through  further  reduction  of expenses  and
refinement  of the  Company's  business  operations,  such as  expansion  of the
"Warehouse District" concept.

<PAGE>

         Changes in the federal  minimum wage may increase the Company's  future
labor costs. See "Item 1. Business - Regulation."

Results of Operations

The following  table sets forth the number of retail stores operated each fiscal
year:
<TABLE>
<CAPTION>
                                                    Fiscal Year Ended
                                       June 27,1998   June 28,1997   June 29,1996(a)
                                       ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
         Stores, beginning of period         103            102            143
         Stores opened                         3              1           --
         Stores closed                      --             --              (41)
                                       ------------   ------------   ------------
         Stores, end of period               106            103            102
                                       ============   ============   ============
</TABLE>

(a)  Includes  the nine weeks  ended  September  2, 1995  (Predecessor)  and the
     forty-three weeks ended June 29, 1996 (Successor).


52 weeks ended June 27, 1998 (Fiscal  Year 1998)  compared to the 52 weeks ended
June 28, 1997 (Fiscal Year 1997) (all dollar amounts in thousands)

<TABLE>
<CAPTION>

                                                       Fiscal Year 1998                  Fiscal Year 1997
                                                ----------------------------      -------------------------------
<S>                                             <C>                  <C>          <C>                     <C>

Sales                                           $ 1,100,851          100.00%      $ 1,074,828             100.00%

Less:
Cost of goods sold, including occupancy and
 distribution costs                                 887,657           80.63%          873,095              81.23%
                                                -----------                       -----------
Gross Profit                                        213,194           19.37%          201,733              18.77%
 Selling, general and administrative expenses       173,982           15.80%          168,218              15.65%
 Terminated business combination expenses              --               --              3,076               0.29%
 Executive severance                                  6,787            0.62%             --                  --
 Loss on disposal of equipment                        4,615            0.42%             --                  --
 Depreciation and amortization                       22,047            2.00%           20,982               1.95%
                                                -----------                       -----------
Income from operations before interest and
 income taxes                                         5,763            0.52%            9,457               0.88%

Interest expense                                     16,639            1.51%           17,175               1.60%

Interest and investment income                        2,046            0.19%            5,437               0.51%
                                                -----------                       -----------
Loss before taxes                                    (8,830)          (0.80)%          (2,281)             (0.21)%

Income tax provision                                   --               --               --                  --
                                                -----------                       -----------
Net loss                                        $    (8,830)          (0.80)%         $(2,281)             (0.21)%
                                                ===========                       ===========
</TABLE>





         Comparable store sales for Fiscal Year 1998 increased  $4,919,  or 0.5%
from Fiscal Year 1997.  This  increase was  primarily  due to the success of the
store  remodel  and  reformatting  program  partially  offset  by the  impact of
discontinuing  certain  promotional  discount  programs  since the  beginning of
Fiscal Year 1997.

         The Company  incorporated the "Warehouse District" food and drug format
into 18 stores  during  Fiscal Year 1998 bringing the total number of "Warehouse
District"  stores to 23. The Company's  "Warehouse  District" format expands the
existing grocery offering and adds fresh, frozen and refrigerated food. Sales in
the stores that were remodeled to include the "Warehouse District" format in the
first nine months of Fiscal Year 1998 increased 23% for the thirteen weeks ended
June 27, 1998, over the comparable period of the prior year.

<PAGE>

         Gross  profit for Fiscal  Year 1998 was 0.60% of sales  higher than for
Fiscal Year 1997. A 0.65% of sales  reduction in inventory  shrink expense and a
0.55% of sales increase in vendor income were partially  offset by lower product
gross margins.

         Selling,  general and administrative  expenses increased 0.15% of sales
in Fiscal Year 1998 over Fiscal Year 1997. The increase in selling,  general and
administrative expenses was primarily due to increases in store wage expense due
to increases in the minimum wage.

         During Fiscal Year 1998 the Company  incurred $6,787 in severance costs
associated  with the  departure  of the  Company's  former  Chairman  and  Chief
Executive Officer.

         The Company  recorded a charge of $4,615  associated with the write off
of the Company's old mainframe  computer and other  equipment which was replaced
with the latest technology IBM mainframe computer  equipment.  The new mainframe
computer  has lower  operating  and  maintenance  costs and provides the Company
greater capacity for growth and expansion over the next three to five years.

         Investment  income  declined  by $3,391 in Fiscal Year 1998 from Fiscal
Year 1997.  The  decrease in  investment  income was due to a $2,286  decline in
interest  income due to lower cash  balances  and  $1,105 in  investment  losses
incurred on the Company's equity investments.


         52 weeks ended June 28, 1997 (Fiscal  Year 1997)  compared to pro forma
results  for the 52 weeks  ended June 29,  1996  (Fiscal  Year 1996) (all dollar
amounts in thousands)


         The Company's  results of operations for the fifty-two weeks ended June
28, 1997 and the forty-three weeks ended June 29, 1996 are not comparable due to
the different  number of weeks included in each period.  For the purposes of the
following  discussion,  the following pro forma results of operations for Fiscal
Year 1996 will be compared to the actual results for Fiscal Year 1997.

Unaudited Pro Forma Statements of Operations

         The  following  unaudited pro forma  statements  of operations  present
consolidated  results of operations of Phar-Mor and its  subsidiaries for Fiscal
Year  1996 as if the  Plan of  Reorganization  was  effective  July 1,  1995 and
include adjustments to reflect the implementation of fresh-start reporting as of
July 1,1995; the effects of non-recurring  transactions  resulting from the Plan
of  Reorganization;  and certain  payments to creditors  pursuant to the Plan of
Reorganization  as of  July  1,  1995  (see  Notes  1 and 2 to the  Consolidated
Financial Statements).



<PAGE>


                                                      Fiscal Year 1996
                                                 -------------------------
Sales                                            $ 1,056,252       100.00%
Less:
Cost of goods sold, including occupancy and
distribution costs                                   869,237        82.30%
                                                     -------
Gross profit                                         187,015        17.70%
 Selling, general and administrative expenses        155,369        14.71%
 Chapter 11 professional fee accrual adjustment       (1,530)       (0.15)%
 Depreciation and amortization                        18,319         1.73%
                                                      ------
Income from operations before interest and
 income taxes                                         14,857         1.41%
Interest expense                                      17,465         1.65%
Interest income                                        8,614         0.81%
                                                      ------
Income before income taxes                             6,006         0.57%
Income tax provision                                   2,676         0.25%
                                                       -----
Net income                                       $     3,330         0.32%
                                                 ===========

         Comparable store sales for Fiscal Year 1997 increased $14,000, or 1.3%,
from Fiscal Year 1996.  This  increase was due to the  continued  success of the
Company's  new marketing  approach  begun in Fiscal Year 1996 and the success of
the Company's  store  remodel  program.  The increase in comparable  store sales
achieved  by the new  marketing  approach  and the  store  remodel  program  was
partially  offset by a reduced level of promotional  activity in the second half
of the year and the discontinuance of certain promotional discounts.

         Sales  improved  significantly  in the five stores that were  remodeled
during Fiscal Year 1997 with sales  increasing  20.6% in the 13 weeks ended June
28, 1997 over the comparable period in Fiscal Year 1996.

         Gross  profit for Fiscal  Year 1997 was 1.07% of sales  higher than for
Fiscal Year 1996.  Reductions in inventory shrink expense,  promotional discount
expense and increases in vendor income were partially  offset by a .06% of sales
reduction in product gross margins. Inventory shrink expense was reduced by .61%
of sales due to the success of several  shrink  reduction  initiatives  begun in
Fiscal Year 1996.  Promotional discount expense was reduced .20% of sales due to
the discontinuance of certain promotional discount programs.

         Selling,  general and administrative expenses for Fiscal Year 1997 were
 .94% of sales higher than for Fiscal Year 1996.  Increases in store  payroll and
corporate overhead costs were partially offset by lower advertising expenses.

         Interest income  decreased  $3,177 in Fiscal Year 1997 from Fiscal Year
1996.  Fiscal Year 1996 included  $3,135 in interest  income received on federal
income tax refunds.


Financial Condition and Liquidity  (all dollar amounts in thousands)

         The Company's cash position as of June 27, 1998 was $44,655.

         On September 11, 1995, the Company entered into a three-year  Revolving
Credit  Facility  (the  "Facility")  with  BankAmerica   Business  Credit,  Inc.
("BABC"),  as  agent,  and  other  financial  institutions  (collectively,   the
"Lenders"),  that  established  a  credit  facility  in the  maximum  amount  of
$100,000.

         Borrowings under the Revolving Credit Facility could have been used for
working  capital  needs and  general  corporate  purposes.  Up to $50,000 of the
Facility at any time could have been used for standby and documentary letters of

<PAGE>

credit.  The Facility included  restrictions on, among other things,  additional
debt,  capital  expenditures,  investments,  dividends and other  distributions,
mergers and acquisitions,  and contained covenants requiring the Company to meet
a specified  quarterly minimum EBITDA Coverage Ratio (the sum of earnings before
interest, taxes, depreciation and amortization,  as defined, divided by interest
expense),  calculated on a rolling four quarter basis, and a monthly minimum net
worth test.

         Credit availability under the Revolving Credit Facility at any time was
the  lesser of the  Aggregate  Availability  (as  defined  in the  Facility)  or
$100,000.  The Revolving  Credit Facility  established a first priority lien and
security interest in the current assets of the Company,  including,  among other
items, cash, accounts receivable and inventory.

         Advances  made under the  Revolving  Credit  Facility  would have borne
interest at the BankAmerica reference rate plus 1/2% or London Interbank Offered
Rate ("LIBOR") plus the  applicable  margin (as defined in the Facility),  which
ranged  between  1.50%  and  2.00%.  Under  the  terms of the  Revolving  Credit
Facility, the Company was required to pay a commitment fee of 0.28125% per annum
on the unused  portion of the facility,  letter of credit fees and certain other
fees.

         As of June 27, 1998, there were no outstanding  advances and letters of
credit in the  amount of $5,709  were  outstanding  under the  Revolving  Credit
Facility.

         The Company  entered  into an Amended  and  Restated  Revolving  Credit
Facility (the "Amended Revolving Credit Facility")  effective September 10, 1998
with BABC, as agent, and other financial  institutions that established a credit
facility in the maximum amount of $100,000.

         Borrowings under the Amended  Revolving Credit Facility may be used for
working  capital  needs and  general  corporate  purposes.  Up to $50,000 of the
facility at any time may be used for standby and documentary  letters of credit.
The facility  includes  restrictions  on, among other things,  additional  debt,
investments,  dividends and other distributions,  mergers and acquisitions.  The
facility contains no financial covenants.

         Credit  availability under the Amended Revolving Credit Facility at any
time is the lesser of the Aggregate Availability (as defined in the Facility) or
$100,000.  The Amended  Revolving  Credit Facility  establishes a first priority
lien and  security  interest in the current  assets of the  Company,  including,
among other items, cash, accounts receivable and inventory.

         Advances made under the Amended Revolving Credit Facility bear interest
at the BankAmerica reference rate plus 1/2% or LIBOR plus 2.00%. Under the terms
of the  Amended  Revolving  Credit  Facility,  the  Company is required to pay a
commitment fee of between 0.25% and 0.35% per annum on the unused portion of the
facility, letter of credit fees and certain other fees.

         The Amended Revolving Credit Facility expires on September 10, 2001.

         Pursuant  to the Plan of  Reorganization,  the  Company and its lenders
agreed to a restructuring of the Company's obligations.  The resulting new debts
are discussed in Notes 8 and 9 to the Consolidated Financial Statements.

         The Company's cash position  decreased  $35,192 during Fiscal Year 1998
as cash  provided by  operating  activities  of $10,054 was offset by $35,655 in
cash  used for  investing  activities  and  $9,591  in cash  used for  financing
activities.

         The Company  invested  $9,065 in  marketable  securities in Fiscal Year
1998  in an  effort  to  increase  its  return  on  its  excess  cash  position.
Merchandise  inventories  increased $6,769 during Fiscal Year 1998 primarily due
to the opening of three new stores.

         The Company invested $4,000 in the common stock of Avatex  Corporation,
the Company's  largest  shareholder.  The Company also invested $4,275 in equity
securities of other privately held companies.


<PAGE>

         The Company's cash position  decreased  $24,418 during Fiscal Year 1997
as cash  provided by  operating  activities  of $11,443 was offset by $27,161 in
cash  used for  investing  activities  and  $8,700  in cash  used for  financing
activities.

         Merchandise  inventories  increased $16,258 during Fiscal Year 1997 due
to the opening of one new store, the stocking of an additional store that opened
in early July 1997 and  increases in warehouse  inventory  levels as a result of
deal purchases that were made in June 1997.

         The Company's cash position  decreased $3,665 during the 43 weeks ended
June 29, 1996 as cash provided by operating  activities of $16,014 was offset by
$13,829  in cash  used for  investing  activities  and  $5,850  in cash used for
financing activities.

         The Company generated cash from operations of $16,014 after payments of
Chapter 11 professional fees of $19,476. Inventories declined $15,534 during the
43 weeks ending June 29, 1996 due to continued emphasis on inventory control and
review of product category  profitability.  As part of this review,  the Company
determined that the music category of goods was not providing an adequate return
on the inventory  invested and decided to exit the music category of goods.  The
liquidation of this inventory resulted in a $5,713 reduction in inventory during
the 43 weeks ended June 29, 1996.

         The Company  increased its cash  position by $5,606 from  operating and
investing  activities  during  the 9 weeks  ended  September  2,  1995  and used
$121,933 for reorganization  activities including cash distributions pursuant to
the Plan of  Reorganization.  Consequently,  the net  decrease in cash  position
during the 9 week period ended September 2, 1995 was $116,327.

         The Company generated $8,129 from operations after net interest expense
(including  adequate  protection  payments) and professional  fees actually paid
that were  associated  with the  Chapter 11 Cases,  which  totaled  $6,479.  The
Company  invested  $649 in property  and  equipment  and $1,874 in rental  video
tapes. The Company  generated $11,951 in net proceeds from going out of business
("GOB") sales. The Company paid $1,079 of equipment capital leases obligations.



Trends,  Demands,  Commitments,  Events or Uncertainties  (all dollar amounts in
thousands)

         Management  believes the  availability of the Amended  Revolving Credit
Facility,  together with the  Company's  current cash position and expected cash
flows from  operations  for Fiscal Year 1999 will enable the Company to fund its
working  capital needs and capital  expenditures.  Achievement  of expected cash
flows from  operations  is dependent  upon,  among other  things,  the Company's
attainment of sales,  gross profit and expense levels that are  consistent  with
its financial  projections,  and there can be no assurance that the Company will
achieve its expected cash flows.

         Investment  activities  for  Fiscal  Year  1999 are  expected  to total
$24,500.  The major  expenditures  are  expected  to be (i) video  rental  tapes
($8,100),  (ii)  remodeling  of  existing  stores  ($3,100),  (iii)  systems and
technology ($8,000) and (iv) new stores ($3,900). The Company expects to finance
and meet its  obligations  for these  capital  expenditures  through  internally
generated funds and the use of the Company's current cash position.

         Certain Company information systems have potential operational problems
in  connection  with  applications  that  contain a date  and/or use a date in a
comparative  manner as the date  transitions into the Year 2000. The Company has
implemented a comprehensive program to identify and remediate potential problems
related to the Year 2000 in its information systems,  infrastructure,  logistics
and  retail   facilities.   In  addition,   the  Company  has  initiated  formal
communication with all of its significant  vendors and other external interfaces
to determine the extent to which the Company is  vulnerable  to a  third-party's
failure to remediate their own potential  problems related to the Year 2000. The
inability of the Company or significant  vendors and/or  external  interfaces of
the Company to adequately address Year 2000 issues could cause disruption of the
Company's systems.

<PAGE>

         Management  believes,  based on its  assessment  of all of its systems,
that its  purchasing  and pharmacy  systems pose the greatest risk of disrupting
its  business  if Year 2000  system  modifications  are not  completed  in time.
Without modification,  the Company may not be able to issue purchase orders with
delivery  dates after  December 31, 1999 or dispense  prescriptions  with refill
dates extending beyond December 31, 1999. The Company has developed or is in the
process of developing contingency plans that include manually performing work in
place of affected systems and the renting of back-up systems and generators.

         Many of the  Company's  systems are Year 2000  compliant,  or have been
scheduled for  replacement in the Company's  on-going  systems plans. As of June
27, 1998, the Company has incurred  approximately $450 related to the assessment
of, and  preliminary  efforts in  connection  with,  its Year 2000  program  and
remediation  plan.  Future  spending  for  software  modifications  and  testing
required for Year 2000 are currently estimated to be approximately $600 with the
majority  expected to be incurred by the end of fiscal  1999.  The Company  will
accelerate  by one year the  purchase  of  approximately  $5,000 in  replacement
hardware in order to ensure the associated  system is Year 2000  compliant.  The
Company's  target date for completing its Year 2000  modifications  is April 30,
1999,  including  additional  testing and  refinements  to identify  the systems
planned for 1999. These  expenditures are not expected to have a material impact
on the Company's operating results, liquidity and capital resources.

         The Company is exposed to certain market risks from  transactions  that
are entered into during the normal course of business. The Company's policies do
not  permit  active  trading  of,  or  speculation  in,   derivative   financial
instruments. The Company's primary market risk exposure relates to interest rate
risk.  The  Company  manages  its  interest  rate risk in order to  balance  its
exposure  between  fixed and  variable  rates while  attempting  to minimize its
interest costs.

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
a Statement  of Financial  Accounting  Standards  "(SFAS")  No. 130,  "Reporting
Comprehensive  Income," in June 1997, the FASB issued SFAS No. 131, "Disclosures
about an Enterprise and Related  Information," in February 1998, the FASB issued
SFAS No. 132,  "Employers'  Disclosures about Pensions and Other  Postretirement
Benefits"  and in June 1998,  the FASB  issued  SFAS No.  133,  "Accounting  for
Derivative Instruments and Hedging Activities."  Management does not believe the
adoption of any of these  standards will have a material effect on its financial
position or results of operations.

Item 8.  Financial Statements and Supplementary Data.

         See Index to Consolidated Financial Statements.

Item  9. Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure.

         None.



<PAGE>



                                    PART III

Item 10. Directors and Executive Officers of the Registrant.


         The  executive  officers  and  directors  of the Company as of the date
hereof are listed below:

<TABLE>
<CAPTION>

Name                           Age         Position(s)
----                           ---         -----------
<S>                            <C>         <C>

Abbey J. Butler                61          Co-Chairman and Co-Chief Executive Officer

Melvyn J. Estrin               56          Co-Chairman and Co-Chief Executive Officer

M. David Schwartz              53          President and Chief Operating Officer

Sankar Krishnan                51          Senior Vice President and Chief Financial Officer

Warren E. Jeffery              49          Senior Vice President of Operations and Pharmacy

John R. Ficarro                46          Senior Vice President, Chief Administrative Officer,
                                           General Counsel and Secretary

Daniel H. Levy                 55          Director

Monroe Osterman                71          Director

Arthur G. Rosenberg            60          Director

John D. Shulman                35          Director
</TABLE>


         Abbey J . Butler has been a director  of the  Company  since  September
1995 and Co-Chairman of the Board and Co-Chief  Executive Officer of the Company
since  October 1, 1997.  Mr.  Butler is  Co-Chairman  of the Board and  Co-Chief
Executive Officer of Avatex Corporation  ("Avatex"),  formerly known as FoxMeyer
Health  Corporation.  Mr.  Butler  also  serves as  managing  partner of Centaur
Partners,  L.P., an investment  partnership with ownership  interests in Avatex,
and as President and a director of C.B.  Equities  Corp.,  a private  investment
company. Mr. Butler presently serves as a director and a member of the Executive
Committee  of  GrandBanc,  Inc.;  and as a director  of Carson,  Inc.,  a global
manufacturer of ethnic hair care products for  African-Americans  and persons of
African descent, and Cyclone, Incorporated, a distributor and installer of chain
link fence  systems,  highway guard rails and  industrial  gates and posts.  Mr.
Butler is a  trustee  and a member of the  Executive  Committee  of the Board of
Trustees of the American University, and a director of the Starlight Foundation,
a charitable organization. He was appointed by President George Bush to serve on
the  President's  Advisory  Committee  on the  Arts,  and he now  serves  as the
president  and  chief  executive  officer  of the  National  Committee  for  the
Performing  Arts, John F. Kennedy Center,  Washington,  D.C. On August 27, 1996,
FoxMeyer  Corporation and FoxMeyer Drug Company,  subsidiaries  of Avatex,  each
filed a petition under Chapter 11 of the United States  Bankruptcy  Code. At the
time of the filing Mr. Butler was an executive  officer and director of FoxMeyer
Corporation  and FoxMeyer Drug Company.  On July 26, 1996,  Ben Franklin  Retail
Stores,  Inc.  filed a petition for  protection  under  Chapter 11 of the United
State Bankruptcy  Code. At the time of the filing,  Mr. Butler was a director of
Ben Franklin Retail Stores, Inc.

<PAGE>

         Melvyn J.  Estrin has been a director of the  Company  since  September
1995 and Co-Chairman of the Board and Co-Chief  Executive Officer of the Company
since October 1, 1997. Melvyn J. Estrin is Co-Chairman of the Board and Co-Chief
Executive Officer of Avatex. Mr. Estrin also serves as Chairman of the Board and
Chief Executive Officer of Human Service Group,  Inc., a private  management and
investment firm, and of University Research Corporation,  a consulting firm. Mr.
Estrin  presently  serves as Chairman of the Board and Chairman of the Executive
Committee of GrandBanc, Inc.; and as a director of Washington Gas Light Company,
Carson,   Inc.,  a  global   manufacturer  of  ethnic  hair  care  products  for
African-Americans and persons of African descent,  Caring Technologies,  Inc., a
manufacturer  of miniature  continuous-wear  vital signs monitors and Mr. Estrin
has served as a Trustee of the University of  Pennsylvania  and was appointed by
President  George Bush to serve as Commissioner of the National Capital Planning
Commission.  On August 27, 1996, FoxMeyer Corporation and FoxMeyer Drug Company,
subsidiaries  of Avatex  Corporation,  each filed a petition under Chapter 11 of
the United States  Bankruptcy  Code. At the time of the filing Mr. Estrin was an
executive  officer and  director  of  FoxMeyer  Corporation  and  FoxMeyer  Drug
Company. On July 26, 1996, Ben Franklin Retail Stores, Inc. filed a petition for
protection under Chapter 11 of the United States Bankruptcy Code. At the time of
the filing, Mr. Estrin was a director of Ben Franklin Retail Stores, Inc.

         M. David Schwartz has served as President and Chief  Operating  Officer
of the Company since February 1993. From 1991 to 1993, he was a Director and the
President and Chief Executive  Officer of Smitty's Super Valu,  Inc., a food and
general merchandising retailer, and between 1987 and 1991 Mr. Schwartz served as
a Director and the  President and Chief  Operating  Officer of Perry Drug Stores
Inc., a regional  chain of 200 drug stores.  Mr.  Schwartz was Vice President of
Drug/General  Manager for the Kroger Company between 1985 and 1987 and,  between
1971 and 1985,  held  positions  with  Albertson's  Inc.  including  Senior Vice
President  of  Marketing,  Senior Vice  President  of  Non-Foods  Merchandising,
Distribution and  Procurement,  Vice President of  Merchandising,  and Non-Foods
Merchandise Manager. Mr. Schwartz attended Arizona State University.

         Sankar Krishnan has served as Senior Vice President and Chief Financial
Officer of the  Company  since June 1997.  From  August  1993 to June 1997,  Mr.
Krishnan  served as Vice President - Corporate  Controller of the Company.  From
February  until  August  1993,  Mr.   Krishnan   served  as  Pharmacy   Business
Administrator of the Company.  From 1991 until the time he joined Phar-Mor,  Mr.
Krishnan served as Senior Vice President and Chief Financial  Officer of Thrifty
Drug Stores.  From 1988 to 1991,  he served as Senior Vice  President  and Chief
Financial Officer of Lord & Taylor, a division of May Department  Stores. He was
employed  with Macy's from 1970 to 1988,  serving as Senior Vice  President  and
Chief  Financial  Officer of Macy's New Jersey  division from 1983 to 1988.  Mr.
Krishnan  received a Masters  degree in Applied  Science from the  University of
Waterloo  in  Ontario,  Canada,  and a Bachelor  of  Technology  degree from the
University of Madras, India.

         Warren E. Jeffery has served as Senior Vice  President of Operations of
the  Company  since  April  1996.  Prior to that,  Mr.  Jeffery  served  as Vice
President of Operations,  beginning  February 1993. From 1992 to 1993, he served
as Regional  Director-Store  Operations for Revco D.S., Inc., operator of one of
the  country's  largest  retail drug store chains.  Mr.  Jeffery was employed by
Perry Drug Stores from 1976 until 1992,  holding various  management  positions,
including  Vice  President of Store  Operations  from 1988 to 1992.  Mr. Jeffery
received a B.S. degree in pharmacy from Ferris State University.

         John  R.  Ficarro  has  served  as  Senior  Vice  President  and  Chief
Administrative  Officer (in addition to his existing  duties as General  Counsel
and Secretary of the Company) since June 1997. Prior to that, Mr. Ficarro served
as Vice  President,  General  Counsel and Secretary of the Company  beginning in
February  1995.  From 1981 to 1995,  Mr.  Ficarro was  employed by General  Host
Corporation  where he served as Vice  President,  General  Counsel and Secretary
since  1989 and prior to that time  served as  Counsel  to several of its retail
businesses.  Prior to 1981, Mr. Ficarro  practiced law at Titone & Roarke in Ft.
Lauderdale,  Florida.  Mr.  Ficarro  received a B.A. from the Maxwell  School at
Syracuse University and a J.D. from its College of Law.

         Daniel H. Levy has been a director of the Company  since  September 25,
1997.  Mr. Levy has been working as a consultant to retailers  since 1994 and is
currently serving as a director of Marks Brothers Jewelers and Donkenny Apparel,
both of which are  listed on  Nasdaq.  Mr.  Levy  served as  chairman  and chief
executive  officer of Best  Products,  Inc. from April 1996 to December 1996. In
September  1996,  Best  Products,  Inc. filed a petition under Chapter 11 of the
United States  Bankruptcy  Code. Mr. Levy served as Chairman and Chief Executive
Officer of Conrans, Mr. Levy served as Vice Chairman and Chief Operating Officer
of Montgomery Ward in Chicago,  Illinois from 1991 to 1993.  Prior to serving as
Vice Chairman and Chief Operating Officer of Montgomery Ward, Mr. Levy served in
various executive capacities with Kaufmann's, Gimbel's and Bloomingdales.

<PAGE>

         Monroe  Osterman has been a director of the Company since September 25,
1997.  Mr.  Osterman has served as President  of Gala  Trading  Corporation,  an
investment  company  specializing  in large  purchases of diamonds  from Europe,
since 1982.  Prior to serving as  President  of Gala  Trading  Corporation,  Mr.
Osterman served as President of Paras USA and Bermont Corporation and was also a
partner at J. Winston & Company, an importing and merchandising company.

         Arthur G.  Rosenberg has been a director of the Company since  November
23, 1997. Mr. Rosenberg has been a principal of The Associated Companies, a real
estate development firm, since 1987 and recently became a principal of Millenium
Development Group, LLC. Prior thereto,  Mr. Rosenberg was a practicing lawyer in
Huntington,  New York and served as General Counsel for ITT Levitt & Sons, Inc.,
an  international  builder.  Mr.  Rosenberg  currently  serves  on the  Board of
Directors of Mike's Original, Inc. and Antra Holding Company.

         John D. Shulman has been a director of the Company  since  November 23,
1997.  Mr. Shulman has served as President and Chief  Executive  Officer of ONYX
International, L.L.C., a merchant banking and venture firm focusing primarily on
private equity placements in high growth companies, since 1994. Prior to serving
as President and Chief  Executive  Officer of ONYX  International,  L.L.C.,  Mr.
Shulman served as the Director of Development for Tower Companies, a diversified
group of  companies  including  real  estate  development,  banking  and related
activities since 1986. Mr. Shulman currently serves on the Board of Directors of
U.S. Interactive, Inc., Performance Distribution, Inc., Taiwan Mezzanine Fund I,
L.P.,  Micro Macro  Technologies,  LTD, and on the Board of Managers of ChemLink
Laboratories, LLC. Mr. Shulman is the husband of Mr. Estrin's niece.




Item 11. Executive Compensation.

         The information required by Item 11 is incorporated herein by reference
from  the   information   set  forth  under  the  sections   titled   "Executive
Compensation,"  "Committees  of the Board;  Meetings,"  "Executive  Compensation
Plans,"  "Compensation of Directors,"  "Employment  Contracts and Termination of
Employment and Change -In-Control Arrangements,"  "Compensation Committee Report
on Executive  Compensation,"  "Executive  Summary  Compensation  Table," "Option
Grants in Fiscal Year 1998," "Option Exercises and Values for Fiscal Year 1998,"
and "Performance Graph" of the Company's  definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the close of its fiscal year.


Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The information required by Item 12 is incorporated herein by reference
from the  information  set forth under sections  titled  "Voting  Securities and
Principal  Holders  Thereof" of the Company's  definitive  proxy statement to be
filed  pursuant to Regulation  14A within 120 days after the close of its fiscal
year.



Item 13. Certain Relationships and Related Transactions.

         The information required by Item 13 is incorporated herein by reference
from the information  set forth under the section titled "Certain  Relationships
and Related  Transactions"  of the Company's  definitive  proxy  statement to be
filed  pursuant to Regulation  14A within 120 days after the close of its fiscal
year.
<PAGE>





                                     PART IV

ITEM 14. Financial  Statements,  Financial  Statement  Schedule,  Exhibits  and
         Reports on Form 8-K.

    (a)  Documents filed as part of this Form 10-K

         1.  Financial Statements

                  The Financial  Statements listed in the accompanying  Index to
                  Consolidated  Financial  Statements  are filed as part of this
                  Form 10-K.

         2.  Financial Statement Schedule

                  The Financial  Statement  Schedule listed in the  accompanying
                  Index to Consolidated Financial Statements is filed as part of
                  this Form 10-K

         3.  Exhibits

                  The Exhibits filed as part of this Form 10-K are listed on the
                  Exhibit   Index    immediately    preceding   such   exhibits,
                  incorporated herein by reference.

    (b)  Reports on Form 8-K
<TABLE>
<CAPTION>


                  Date of Report        Date of Filing       Description

                  <S>                   <C>                  <C>
                  August 22, 1997       August 29, 1997      Robert  M. Haft and  Avatex  Corporation
                                                             entered   into    agreement    resolving
                                                             Avatex's exercise of buy-sell provisions
                                                             of  Hamilton   Morgan,   LLC   Operating
                                                             Agreement.

                  September 19, 1997    September 23, 1997   Resignation  of  Robert M. Haft as Chief
                                                             Executive  Officer of the Company and of
                                                             Linda Haft as a Director of the Company.

</TABLE>







<PAGE>



                                   SIGNATURES



Pursuant to the  requirements of Section 13 or 15(d) 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.


                                                 PHAR-MOR, INC.


Date:  September 25, 1998                     By:/s/  John R. Ficarro
                                                 -------------------------
                                                 John R. Ficarro
                                                 Senior Vice President and Chief
                                                 Administrative Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates listed below.


Date:  September 25, 1998                        /s/  M. David Schwartz
                                                 -------------------------
                                                 M. David Schwartz, President


Date:  September 25, 1998                        /s/  Abbey J Butler
                                                 -------------------------
                                                 Abbey J Butler, Co-Chairman and
                                                 Co-Chief Executive Officer
                                                (Co-Principal executive officer)

Date:  September 25, 1998                        /s/  Melvyn J. Estrin
                                                 -------------------------
                                                 Melvyn J.Estrin,Co-Chairman and
                                                 Co-Chief Executive Officer
                                                (Co-Principal executive officer)

Date:  September 25, 1998                        /s/  Daniel H. Levy
                                                 -------------------------
                                                 Daniel H. Levy, Director

Date:  September 25, 1998                        /s/ Monroe Osterman
                                                 -------------------------
                                                 Monroe Osterman, Director

Date:  September 25, 1998                        /s/  Arthur G. Rosenberg
                                                 -------------------------
                                                 Arthur G. Rosenberg, Director

Date:  September 25, 1998                        /s/ John D. Shulman
                                                 -------------------------
                                                 John D. Shulman, Director

Date:  September 25, 1998                        /s/  Sankar Krishnan
                                                 -------------------------
                                                 Sankar Krishnan
                                                 Senior Vice President and Chief
                                                 Financial Officer
                                                 (principal financial and
                                                  accounting officer)


<PAGE>










                                 PHAR-MOR, INC.

                                INDEX TO EXHIBITS


Exhibit No.

*2.1        Third Amended  Joint Plan of  Reorganization  of Phar-Mor,  Inc. and
            certain affiliated entities dated May 25, 1995, as modified

**2.2       Disclosure Statement in Support of Plan of Reorganization

**2.3       Exhibits to Third Amended Plan of Reorganization

*3.1        Amended and Restated Articles of Incorporation

*****3.2    Amended and Restated By-laws

*4.1        Indenture  dated September 11, 1995 between  Phar-Mor,  Inc. and IBJ
            Schroder Bank & Trust Company

*4.2        Warrant  Agreement dated September 11, 1995 between  Phar-Mor,  Inc.
            and Society National Bank

*9.1        Amended and Restated Limited Liability Company Agreement of Hamilton
            Morgan  dated May 5, 1995,  among  Robert M. Haft,  Mary Z. Haft and
            FoxMeyer Health Corporation

*10.1       New Security  Agreements  and New  Equipment  Notes entered into and
            issued by Phar-Mor,  Inc.  with the CIT  Group/Equipment  Financing,
            Inc.,  Ford  Equipment  Leasing  Corp./General   Electrical  Capital
            Corporation,  NBD Bank Evanston, N.A., Heleasco Twenty-Three,  Inc.,
            HCFS Business  Equipment Corp.,  Romulus  Holdings,  Inc. and FINOVA
            Capital/Corporation

*10.2       Loan Security Agreement,  dated September 11, 1995, by and among the
            financial  institutions  listed  on  the  signature  pages  therein,
            BankAmerica  Business Credit,  Inc., as agent,  and Phar-Mor,  Inc.,
            Phar-Mor  of Florida,  Inc.,  Phar-Mor  of Ohio,  Inc.,  Phar-Mor of
            Virginia, Inc. and Phar-Mor of Wisconsin, Inc.

**10.2.1    Exhibits to Loan and Security Agreement

****10.3    Employment  Agreement between Phar-Mor,  Inc. and M. David Schwartz,
            dated June 5, 1997

****10.4    Employment  Agreement  between  Phar-Mor,  Inc. and John R. Ficarro,
            dated June 5, 1997

10.5        Employment  Agreement  between  Phar-Mor,  Inc. and Sankar Krishnan,
            dated June 13, 1997

10.6        Employment  Agreement  between  Phar-Mor,  Inc. and Abbey J. Butler,
            dated October 1, 1997

10.7        Employment  Agreement between  Phar-Mor,  Inc. and Melvyn J. Estrin,
            dated October 1, 1997

10.8        Employment  Agreement between Phar-Mor,  Inc. and Warren E. Jeffery,
            dated June 23, 1998

10.9        Amendment to Employment  Agreement between Phar-Mor,  Inc. and David
            Schwartz, dated June 23, 1998

10.10       Amendment to Employment Agreement between Phar-Mor,  Inc. and Sankar
            Krishnan, dated June 23, 1998

<PAGE>

10.11       Amendment to Employment Agreement between Phar-Mor, Inc. and John R.
            Ficarro, dated June 23, 1998

10.12       Amendment to Employment Agreement between Phar-Mor,  Inc. and Warren
            E. Jeffery, dated August 27, 1998

10.13       Second Amendment to Employment Agreement between Phar-Mor,  Inc. and
            M. David Schwartz, dated August 27, 1998

10.14       Second Amendment to Employment Agreement between Phar-Mor,  Inc. and
            Sankar Krishnan, dated August 27, 1998

10.15       Second Amendment to Employment Agreement between Phar-Mor,  Inc. and
            John R. Ficarro, dated August 27, 1998

***10.16    Employment  Agreement  between  Phar-Mor,  Inc.  and Robert M. Haft,
            dated September 11, 1995

*10.17      Registration  Rights  Agreement  by and  among  Phar-Mor,  Inc.  and
            FoxMeyer Drug Company and Hamilton Morgan L.L.C. dated September 11,
            1995

*10.18      Registration  Rights Agreement between Phar-Mor,  Inc. and Alvarez &
            Marsal, Inc. dated September 11, 1995

*10.19      Third  Amendment  to  Management  Services  Agreement  dated  as  of
            September  11, 1995 among  Phar-Mor,  Inc.  and  certain  affiliated
            entities,  Alvarez & Marsal,  Inc., Antonio C. Alvarez and Joseph A.
            Bondi

*10.20      Form of Indemnification Agreement dated as of September 11, 1995

*****10.21  Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan

*****10.22  Phar-Mor, Inc. 1995 Director Stock Plan, as Amended

*****10.23  Phar-Mor, Inc. 1996 Director Retirement Plan

*****10.24  Employee Stock Purchase Plan

****10.25   Supply  Agreement  dated as of June 19, 1997  between  Phar-Mor  and
            McKesson Drug Company

****10.26   Severance Agreement between Phar-Mor,  Inc. and Robert M. Haft dated
            September 19, 1997

***21.1     List of Subsidiaries

23          Independent Auditors' Consent

27          Financial Data Schedule
-----------------------------------------------------------------
*           Previously  filed in connection  with the filing of Phar-Mor's  Form
            10, on October 23, 1995

**          Previously filed in connection with the filing of Amendment No. 1 to
            Phar-Mor's Form 10, on December 15, 1995

***         Previously filed in connection with the filing of Amendment No. 2 to
            Phar-Mor's Annual Report on Form 10-K405/A2, on March 27, 1997

****        Previously filed in connection with the filing of Phar-Mor's  annual
            report on Form 10-K 405, on September 25, 1997

*****       Previously  filed  in  connection  with  the  filing  of  Phar-Mor's
            quarterly report on Form 10-Q, on May 1, 1998


<PAGE>


PHAR-MOR, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                                                                          Page
                                                                          -----
INDEPENDENT AUDITORS' REPORT                                              F - 2

CONSOLIDATED  BALANCE SHEETS AS OF JUNE 27, 1998 AND JUNE 28, 1997        F - 3

CONSOLIDATED  STATEMENTS OF OPERATIONS FOR THE FIFTY-TWO WEEKS ENDED
JUNE  27,  1998,  THE  FIFTY-TWO  WEEKS  ENDED  JUNE 28,  1997,  THE
FORTY-THREE  WEEKS  ENDED JUNE 29,  1996,  AND THE NINE WEEKS  ENDED
SEPTEMBER 2, 1995                                                         F - 4

CONSOLIDATED   STATEMENTS   OF  CHANGES  IN   STOCKHOLDERS'   EQUITY
(DEFICIENCY)  FOR THE FIFTY-  TWO WEEKS  ENDED  JUNE 27,  1998,  THE
FIFTY-TWO  WEEKS ENDED JUNE 28, 1997,  THE  FORTY-THREE  WEEKS ENDED
JUNE 29, 1996, AND THE NINE WEEKS ENDED SEPTEMBER 2, 1995                 F - 5

CONSOLIDATED  STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO WEEKS ENDED
JUNE  27,  1998,  THE  FIFTY-TWO  WEEKS  ENDED  JUNE 28,  1997,  THE
FORTY-THREE  WEEKS  ENDED JUNE 29,  1996,  AND THE NINE WEEKS  ENDED
SEPTEMBER 2, 1995                                                         F - 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                F - 7

SCHEDULE II                                                               F - 30

                                      F-1
<PAGE>



                    INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
of Phar-Mor, Inc. :

We have audited the accompanying  consolidated balance sheets of Phar-Mor,  Inc.
and  subsidiaries  (the  "Company")  as of June  27,  1998  and  June  28,  1997
(Successor Phar-Mor balance sheets), and the related consolidated  statements of
operations,  changes in stockholders' equity (deficiency) and cash flows for the
fifty-two  weeks ended June 27, 1998,  the fifty-two  weeks ended June 28, 1997,
the forty-three  weeks ended June 29, 1996 (Successor  Phar-Mor  operations) and
the nine weeks ended September 2, 1995 (Predecessor  Phar-Mor  operations).  Our
audits also included  financial  statement Schedule II, Valuation and Qualifying
Accounts.  These financial  statements and financial  statement schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements and financial statement schedule based on
our audits.

Except as  discussed in the  following  paragraph,  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.

As discussed in Note 1 to the financial statements, in August 1992, the Board of
Directors  of  the  Company  disclosed  that a  fraud  and  embezzlement  of the
Company's   assets,   which  had  been  concealed  for  a  period  of  years  by
falsification of the accounting records,  had been discovered.  As a result, and
as  discussed  in Notes 1 and 6,  reliable  accounting  records  and  sufficient
evidential matter to support the acquisition cost of property and equipment were
not available; accordingly, we were not able to complete our auditing procedures
for depreciation and amortization related to property and equipment for the nine
weeks ended  September 2, 1995.  As discussed in Note 6, during the  fifty-three
weeks ended July 2, 1994, the Company  recorded a $53,211,000  write down of its
property and equipment based upon an independent appraisal.  It was not possible
to determine  whether the aggregate  amount of property and equipment at July 2,
1994  was  greater  than  the  original  acquisition  cost of such  assets  less
accumulated depreciation and amortization.

In our opinion,  except for the effect of any  adjustments  that might have been
determined  to be  necessary  had  reliable  accounting  records and  sufficient
evidential matter to support the acquisition cost of property and equipment been
available,  the  Predecessor  Phar-Mor  financial  statements  referred to above
present  fairly,  in all material  respects,  the results of operations and cash
flows of  Predecessor  Phar-Mor for the nine weeks ended  September 2, 1995,  in
conformity with generally accepted accounting principles.

In our opinion,  the Successor Phar-Mor financial  statements  referred to above
present fairly, in all material  respects,  the financial  position of Phar-Mor,
Inc. and  subsidiaries  as of June 27, 1998 and June 28, 1997 and the results of
their  operations  and their cash flows for the  fifty-two  weeks ended June 27,
1998  and June 28,  1997 and the  forty-three  weeks  ended  June 29,  1996,  in
conformity with general accepted accounting principles.

In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

As  discussed in Note 1 to the  financial  statements,  on August 29, 1995,  the
Bankruptcy  Court entered an order confirming the Plan of  Reorganization  which
became effective on September 11, 1995. Accordingly,  the accompanying financial
statements  have been  prepared in conformity  with AICPA  Statement of Position
90-7,  "Financial  Reporting for Entities in Reorganization Under the Bankruptcy
Code," for the Successor Phar-Mor as a new entity with assets, liabilities and a
capital  structure  having  carrying values not comparable with prior periods as
described in Note 1.

Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 14, 1998
(September 10, 1998 as to Notes 3 and 8)

                                      F-2
<PAGE>

PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                       June 27,     June 28,
                                                                         1998         1997
                                                                      ---------    ---------
<S>                                                                   <C>          <C>
ASSETS

Current assets:
Cash and cash equivalents                                             $  44,655    $  79,847
Marketable securities                                                     9,065         --
Accounts receivable - net                                                20,927       21,614
Merchandise inventories                                                 176,069      169,103
Prepaid expenses                                                          2,214        5,228
Deferred tax asset                                                          489          515
                                                                      ---------    ---------
     Total current assets                                               253,419      276,307

Property and equipment - net                                             75,512       72,835
Deferred tax asset                                                        9,281        9,255
Investments                                                               4,275         --
Investment in Avatex                                                      3,525         --
Other assets                                                              3,443        4,208
                                                                      ---------    ---------

     Total assets                                                     $ 349,455    $ 362,605
                                                                      =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable                                                      $  67,091    $  61,808
Accrued expenses                                                         36,069       36,019
Reserve for costs of rightsizing program                                    967        1,866
Current portion of self insurance reserves                                2,280        2,649
Current portion of long-term debt                                         3,276        2,624
Current portion of capital lease obligations                              7,051        6,531
                                                                      ---------    ---------
     Total current liabilities                                          116,734      111,497

Long-term debt                                                          103,859      107,554
Capital lease obligations                                                27,134       32,659
Long-term self insurance reserves                                         7,680        8,098
Unfavorable lease liability - net                                        11,074       12,493
                                                                      ---------    ---------
     Total liabilities                                                  266,481      272,301
                                                                      ---------    ---------

Commitments and contingencies

Minority interests                                                          535          535
                                                                      ---------    ---------

Stockholders' equity:
Preferred stock, $.01 par value, authorized shares, 10,000,000,
   none outstanding                                                        --           --
Common stock, $.01 par value, authorized shares, 40,000,000; issued
   and outstanding shares, 12,235,865 at June 27, 1998,
   and 12,159,199 at June 28, 1997                                          122          122
Additional paid-in capital                                               89,976       89,402
Stock options outstanding                                                 1,401         --
Unrealized loss on investment in Avatex                                    (475)        --
Retained (deficit)/earnings                                              (8,585)         245
                                                                      ---------    ---------
     Total stockholders' equity                                          82,439       89,769
                                                                      ---------    ---------
     Total liabilities and stockholders' equity                       $ 349,455    $ 362,605
                                                                      =========    =========
</TABLE>

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

                                      F-3
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                 ||     Predecessor
                                                                   Successor Company             ||       Company
                                                    -------------------------------------------- ||   ----------------
                                                      Fifty-two       Fifty-two      Forty-three ||        Nine
                                                     weeks ended     weeks ended     weeks ended ||     weeks ended
                                                    June 27,1998    June 28,1997    June 29,1996 ||   September 2,1995
                                                    ------------    ------------    ------------ ||   ----------------
<S>                                                 <C>             <C>             <C>               <C>
Sales                                               $  1,100,851    $  1,074,828    $    874,284 ||   $    181,968
                                                                                                 ||
Less:                                                                                            ||
Cost of goods sold, including occupancy and                                                      ||
   distribution costs                                    887,657         873,095         722,214 ||        147,124
                                                                                                 ||
Selling, general and administrative expenses             173,982         168,218         128,312 ||         27,057
                                                                                                 ||
Chapter 11 professional fee accrual adjustment              --              --            (1,530)||           --
                                                                                                 ||
Executive severance                                        6,787            --              --   ||           --
                                                                                                 ||
Loss on disposal of equipment                              4,615            --              --   ||           --
                                                                                                 ||
Terminated business combination expenses                    --             3,076            --   ||           --
                                                                                                 ||
Depreciation and amortization                             22,047          20,982          14,891 ||          3,732
                                                    ------------    ------------    ------------ ||   ------------
                                                                                                 ||
Income from operations before interest                                                           ||
   expense, investment loss, interest                                                            ||
   income, reorganization items,                                                                 ||
   fresh-start revaluation, income taxes                                                         ||
   and extraordinary item                                  5,763           9,457          10,397 ||          4,055
                                                                                                 ||
Interest expense (excludes contractual interest                                                  ||
   not accrued on prepetition debt of $3,897 in                                                  ||
   the nine weeks ended September 2, 1995)                16,639          17,175          14,343 ||          5,689
                                                                                                 ||
Investment loss                                            1,105            --              --   ||           --
Interest income                                            3,151           5,437           8,614 ||           --
                                                    ------------    ------------    ------------ ||   ------------
                                                                                                 ||
(Loss) income before reorganization items,                                                       ||
   fresh-start revaluation, income taxes and                                                     ||
   extraordinary item                                     (8,830)         (2,281)          4,668 ||         (1,634)
                                                                                                 ||
Reorganization items                                        --              --              --   ||         16,798
                                                                                                 ||
Fresh-start revaluation                                     --              --              --   ||         (8,043)
                                                    ------------    ------------    ------------ ||   ------------
                                                                                                 ||
(Loss) income before income taxes and                                                            ||
   extraordinary item                                     (8,830)         (2,281)          4,668 ||        (10,389)
                                                                                                 ||
Income tax provision                                        --              --             2,142 ||           --
                                                    ------------    ------------    ------------ ||   ------------
                                                                                                 ||
(Loss) income before extraordinary item                   (8,830)         (2,281)          2,526 ||        (10,389)
   Extraordinary item - gain on debt discharge              --              --              --   ||        775,073
                                                    ------------    ------------    ------------ ||   ------------
                                                                                                 ||
                                                                                                 ||
Net (loss) income                                   $     (8,830)   $     (2,281)   $      2,526 ||   $    764,684
                                                    ============    ============    ============ ||   ============
                                                                                                 ||
Basic and diluted (loss) income per common share:                                                ||
   (Loss) income before extraordinary item          $       (.72)   $       (.19)   $        .21 ||   $       (.19)
                                                                                                 ||
   Extraordinary item                                       --              --              --   ||          14.33
                                                    ------------    ------------    ------------ ||   ------------
   Net (loss) income                                $       (.72)   $       (.19)   $        .21 ||   $      14.14
                                                    ============    ============    ============ ||   ============
                                                                                                 ||
                                                                                                 ||
Weighted average number of common shares                                                         ||
outstanding                                           12,197,371      12,157,419      12,156,614 ||     54,066,463
                                                      ==========      ==========      ========== ||     ==========
</TABLE>

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

                                      F-4
<PAGE>


PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                   Common Stock
                                   ------------
                                                                                                                           Total
                                                 Par    Additional   Stock            Unrealized           Retained    Stockholders'
                                               Value      Paid-in    Options          loss on             (Deficit)    (Deficiency)
                                   Shares     Amount      Capital    Outstanding      Investments          Earnings       Equity
                                   ------     ------      -------    -----------      -----------          --------       ------
<S>                                <C>       <C>        <C>          <C>              <C>               <C>            <C>
Balance at July 1, 1995            54,066    $ 5,407    $ 487,477    $         --     $         --      $(1,257,568)   $(764,684)

Net income                           --         --           --                --               --          764,684      764,684

Cancellation of the former
   common equity under the Plan
   of Reorganization              (54,066)    (5,407)    (487,477)             --               --          492,884         --

Issuance of the new equity
   interests in connection with
   emergence from Chapter 11
   Cases                           12,156        122       89,378              --               --             --         89,500
                                 --------    -------    ---------    --------------   --------------    -----------    ---------

Balance at September 2, 1995       12,156        122       89,378              --               --             --         89,500

Net income                           --         --           --                --               --            2,526        2,526

Shares issued                           1       --              7              --               --             --              7
                                 --------    -------    ---------    --------------   --------------    -----------    ---------

Balance at June 29, 1996           12,157        122       89,385              --               --            2,526       92,033

Net loss                             --         --           --                --               --           (2,281)      (2,281)


Shares issued                           2       --             17              --               --             --             17
                                 --------    -------    ---------    --------------   --------------    -----------    ---------

Balance at June 28, 1997           12,159        122       89,402              --               --              245       89,769

Net loss                             --         --           --                --               --           (8,830)      (8,830)


Stock options outstanding            --         --           --               1,401             --             --          1,401

Unrealized loss on investments       --         --           --                --               (475)          --           (475)

Shares issued                          77       --            574              --               --             --            574
                                 --------    -------    ---------    --------------   --------------    -----------    ---------

Balance at June 27, 1998           12,236    $   122    $  89,976    $        1,401   $         (475)   $    (8,585)   $  82,439
                                 ========    =======    =========    ==============   ==============    ===========    =========
</TABLE>


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

                                      F-5
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                         ||   Predecessor
                                                                        Successor Company                ||     Company
                                                         ----------------------------------------------  ||  -----------------
                                                           Fifty-two       Fifty-two       Forty-three   ||      Nine
                                                          weeks ended     weeks ended      weeks ended   ||   weeks ended
                                                         June 27,1998    June 28, 1997    June 29, 1996  ||  September 2, 1995
                                                           --------        ---------        ---------    ||    ---------
<S>                                                        <C>             <C>              <C>                <C>
OPERATING ACTIVITIES                                                                                     ||
   Net (loss) income ..................................    $ (8,830)       $  (2,281)       $   2,526    ||    $ 764,684
   Adjustments to reconcile net (loss) income                                                            ||
     to net cash provided by operating activities:                                                       ||
   Items not requiring the outlay of cash:                                                               ||
     Extraordinary gain on debt discharge .............        --               --               --      ||     (775,073)
     Fresh-start revaluation ..........................        --               --               --      ||       (8,043)
     Noncash charges included in reorganization items .        --               --               --      ||       16,500
     Depreciation .....................................      14,030           12,182            8,802    ||        2,388
     Loss on disposal of equipment ....................       4,615             --               --      ||         --
     Stock option expense .............................       1,401             --               --      ||         --
     Amortization of video rental tapes ...............       7,970            8,800            6,055    ||        1,333
     Amortization of deferred financing                                                                  ||
       costs and goodwill .............................         467              408              363    ||           73
     Deferred income taxes ............................        --               --              2,142    ||         --
     Deferred rent and unfavorable lease                                                                 ||
       liabilities ....................................      (1,419)           1,412              606    ||          (89)
   Changes in assets and liabilities:                                                                    ||
     Accounts receivable ..............................         687             (780)           6,905    ||       11,997
     Marketable securities ............................      (9,065)            --               --      ||         --
     Merchandise inventories ..........................      (6,769)         (16,258)          15,534    ||       (6,922)
     Prepaid expenses .................................       3,014              (44)           1,356    ||        2,441
     Deferred income taxes ............................        --               --              2,088    ||         --
     Other assets .....................................         298             (707)            (681)   ||          449
     Accounts payable .................................       5,283            8,047           (4,370)   ||       (8,865)
     Accrued expenses .................................          58            2,610           (1,999)   ||        1,133
     Accrued bankruptcy professional fees .............        --               (181)         (19,476)   ||        4,442
     Reserve for costs of rightsizing program .........        (899)          (1,585)          (2,921)   ||          550
     Self insurance reserves ..........................        (787)            (180)            (916)   ||        1,131
                                                           --------        ---------        ---------    ||    ---------
   Net cash provided by operating activities ..........      10,054           11,443           16,014    ||        8,129
                                                           --------        ---------        ---------    ||    ---------
INVESTING ACTIVITIES                                                                                     ||
   Additions to rental videotapes .....................      (8,167)          (8,694)          (7,316)   ||       (1,874)
   Additions to property and equipment ................     (19,213)         (18,467)          (6,368)   ||         (649)
   Investment in Avatex ...............................      (4,000)            --               --      ||         --
   Investment in equity securities ....................      (4,275)            --               --      ||         --
   Purchase of partnership interests ..................        --               --               (145)   ||         --
                                                           --------        ---------        ---------    ||    ---------
   Net cash used for investing activities .............     (35,655)         (27,161)         (13,829)   ||       (2,523)
                                                           --------        ---------        ---------    ||    ---------
FINANCING ACTIVITIES                                                                                     ||
   Principal payments on term debt ....................      (3,043)          (2,698)          (1,467)   ||         --
   Principal payments on capital lease                                                                   ||
     obligations ......................................      (7,122)          (6,019)          (4,390)   ||         --
   Issuance of common stock ...........................         574               17                7    ||         --
                                                           --------        ---------        ---------    ||    ---------
   Net cash used for financing activities .............      (9,591)          (8,700)          (5,850)   ||         --
                                                           --------        ---------        ---------    ||    ---------
REORGANIZATION ACTIVITIES                                                                                ||
   Cash distribution pursuant to the plan of                                                             ||
   reorganization .....................................        --               --               --      ||     (105,381)
   Payment of reclamation claims ......................        --               --               --      ||      (23,961)
   Decrease in all other liabilities subject                                                             ||
     to settlement under reorganization proceedings ...        --               --               --      ||       (2,076)
   Proceeds from the sale of new common stock .........        --               --               --      ||        9,500
   Debtor-in-possession financing costs ...............        --               --               --      ||          (15)
                                                           --------        ---------        ---------    ||    ---------
   Net cash used for reorganization activities ........        --               --               --      ||     (121,933)
                                                           --------        ---------        ---------    ||    ---------
                                                                                                         ||
   (Decrease) increase in cash and cash equivalents ...     (35,192)         (24,418)          (3,665)   ||     (116,327)
   Cash and cash equivalents, beginning of period .....      79,847          104,265          107,930    ||      224,257
                                                           --------        ---------        ---------    ||    ---------
   Cash and cash equivalents, end of period ...........    $ 44,655        $  79,847        $ 104,265    ||    $ 107,930
                                                           ========        =========        =========    ||    =========
Supplemental Information                                                                                 ||
   Interest paid ......................................    $ 16,155        $  16,762        $   9,067    ||    $   4,592
   Income tax refunds .................................          48               86            2,669    ||         --
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                      F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------

1.       REORGANIZATION AND BASIS OF PRESENTATION

         In early August 1992 Phar-Mor, Inc. and its subsidiaries (collectively,
         the  "Company")  publicly  disclosed that it had discovered a scheme by
         certain of its senior  executives  to falsify  financial  results.  The
         officers  believed to be involved  were  promptly  dismissed and are no
         longer  employed by the Company.  A new management  team,  hired by the
         Board of Directors,  assumed day-to-day management of the Company. Upon
         discovery of the fraud, it became apparent that the Company's explosive
         growth during the preceding  several years had been fueled in part by a
         systematic  scheme to falsify the  Company's  financial  results and to
         conceal the Company's true financial  condition.  The fraud,  which was
         perpetrated  by the  manipulation  of  information  and override of the
         system of  internal  controls by certain of its senior  executives,  as
         well  as a lack  of  systems  and  surrounding  controls,  masked  very
         substantial  losses,  created  in  part  by low  margins,  slow  moving
         merchandise  categories,  high rentals for the newer and larger  stores
         and operational  inefficiencies.  By the time the Company concluded its
         investigation into the size of the fraud, it determined that cumulative
         earnings had been overstated by approximately  $500,000. In response to
         the fraud,  new management  developed and executed a business plan that
         resulted in closing retail store  locations and  distribution  centers,
         improved gross margins, reduced operating costs and invested in systems
         designed  to  strengthen   internal  controls  and  improve  management
         reporting.  Additional charges to cumulative  earnings of approximately
         $500,000 resulted from changes in accounting policies and restructuring
         costs which were recorded as of September 26, 1992 (See Note 6).

         On August 17,  1992,  the  Company  filed  petitions  for relief  under
         Chapter 11 of the United States  Bankruptcy  Code ("Chapter  11"). From
         that time until  September 11, 1995, the Company  operated its business
         as a  debtor-in-possession  subject to the  jurisdiction  of the United
         States  Bankruptcy  Court  for  the  Northern  District  of  Ohio  (the
         "Bankruptcy Court").

         On September 11, 1995, (the "Effective  Date") the Company emerged from
         reorganization   proceedings   under   Chapter  11   pursuant   to  the
         confirmation  order entered on August 29, 1995 by the Bankruptcy  Court
         confirming the Third Amended Joint Plan of Reorganization dated May 25,
         1995  (the  "Joint  Plan") .  Consequently,  the  Company  applied  the
         reorganization   and   fresh-start   reporting   adjustments   to   the
         consolidated  balance sheet as of September 2, 1995, the closest fiscal
         month end to the Effective Date.

         The  consolidated  financial  statements  of  the  Company  during  the
         bankruptcy proceedings (the "Predecessor Company financial statements")
         are presented in accordance with American Institute of Certified Public
         Accountants   Statement  of  Position  90-7,  "Financial  Reporting  by
         Entities in  Reorganization  under the  Bankruptcy  Code" ("SOP 90-7").
         Pursuant  to  guidance  provided  by  SOP  90-7,  the  Company  adopted
         fresh-start  reporting  as of  September  2,  1995.  Under  fresh-start
         reporting,  a new  reporting  entity is deemed  to be  created  and the
         recorded  amounts of assets and  liabilities  are  adjusted  to reflect
         their  estimated  fair  values  at the  Effective  Date  (see  Note 2).
         Consolidated  financial statements for periods ended prior to September
         2, 1995,  have been  designated  as those of the  Predecessor  Company.
         Black  lines  have  been  drawn  to  separate  the  Successor   Company
         consolidated   financial   statements  from  the  Predecessor   Company
         consolidated  financial  statements  to signify that they are different
         reporting entities which have not been prepared on a comparable basis.

         The Joint Plan  provided  for,  among other  things,  settlement of all
         liabilities subject to settlement under  reorganization  proceedings in
         exchange  for cash,  new debt,  12,156,250  shares of common  stock and
         1,250,000 common stock warrants and an interest in a Limited  Liability
         Company  ("LLC") which was  established  as part of the Joint Plan (see
         Notes 9 and 12).  The  Company's  cause of action  against  its  former
         auditor and certain  other causes of action were  assigned to such LLC.
         The  Predecessor  Company's  creditors  and  former  shareholders  were
         beneficiaries of the LLC.


                                      F-7
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         The net cash  disbursements  upon the  effectiveness  of the Joint Plan
         were comprised as follows:

          Payment to the holders of claims under the prepetition
           credit agreement and prepetition senior secured notes     $  103,708
          Payment to fund litigation of LLC causes of action                400
          Payment of origination costs for revolving credit
           facility for the Successor Company                             1,273
                                                                     ----------
                                                                        105,381
          Receipt of net proceeds from the sale of new
           common stock                                                  (9,500)
                                                                     ----------
                                                                     $   95,881
                                                                     ==========

         The value of cash,  notes and  securities  required  to be  distributed
         under the Joint Plan was less than the value of the  allowed  claims on
         and interests in the Predecessor Company;  accordingly, the Predecessor
         Company  recorded  an  extraordinary  gain of  $775,073  related to the
         discharge of prepetition  liabilities in the period ended  September 2,
         1995. Payments and distributions associated with the prepetition claims
         and obligations were made or provided for in the  consolidated  balance
         sheet as of September 2, 1995 (see Note 2). The consolidated  financial
         statements  at  September  2, 1995,  give effect to the issuance of all
         common stock,  senior notes and tax notes in accordance  with the Joint
         Plan.

         The  extraordinary  gain  recorded  by  the  Predecessor   Company  was
         determined as follows:

          Liabilities subject to settlement under reorganization
           proceedings at the Effective Date                         $1,126,414
          Less:
           Cash  distribution  pursuant to the Joint Plan              (105,381)
           Issuance of new debt                                        (108,523)
           New capital lease obligations                                (49,599)
           Assumption of prepetition  liabilities                        (7,838)
           Value of new common stock issued
            to prepetition creditors                                    (80,000)
                                                                      ---------
          Extraordinary item - gain on debt discharge                 $ 775,073
                                                                      =========

2.       FRESH-START REPORTING


         As indicated in Note 1, the Company adopted fresh-start reporting as of
         September 2, 1995.  The Successor  Company  fresh-start  reorganization
         equity  value of $89,500  was  determined  with the  assistance  of the
         financial  advisors  employed by the Company.  The  financial  advisors
         reviewed financial data of the Company, including financial projections
         through the fiscal year 1999. The reorganization  value of the Company,
         net of current  liabilities,  which was  determined to be in a range of
         $260,000 to $330,000,  was based primarily on the following  methods of
         valuation:  discounted  cash flow analysis  using  projected  five year
         financial  information and a discount rate of 9.8%; market valuation of
         certain  publicly  traded  companies  whose  operating  businesses were
         believed  to be similar to that of the  Company;  and review of certain
         acquisitions of companies whose operating  businesses were viewed to be
         similar  to that of the  Company.  In  addition  to  these  methods  of
         analysis, certain general economic and industry information relevant to
         the business of the Company was considered.

         Based on the analysis outlined above, the financial advisors determined
         the equity  value of the Company to be between  $90,000  and  $160,000.
         This equity value represented the  reorganization  value of $260,000 to
         $330,000  less  $170,000 of debt  assumed to be issued  under the Joint
         Plan. The fresh-start reorganization equity value of $89,500 correlates
         to the $90,000 referred to above, less $1,000 in expenses reimbursed to
         certain  shareholders plus $500 reflecting the purchase of common stock
         by present and former members of management as further described in the
         Joint Plan.

                                      F-8
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The five  year  cash  flow  projections  were  based on  estimates  and
         assumptions  about  circumstances  and  events  that had not yet  taken
         place.  Such  estimates  and  assumptions  were  inherently  subject to
         significant  economic and competitive  uncertainties beyond the control
         of the Company including, but not limited to, those with respect to the
         future  course  of the  Company's  business  activity.  Any  difference
         between  the  Company's  projected  and actual  results  following  its
         emergence from Chapter 11 has not and will not alter the  determination
         of the  fresh-start  reorganization  equity value because such value is
         not contingent upon the Company achieving the projected results.











                                      F-9
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
The  Predecessor  Company balance sheet as of September 2, 1995, and adjustments
thereto to give effect to the  discharge  of  prepetition  debt and  fresh-start
reporting, are as follows:

<TABLE>
<CAPTION>

                                                Predecessor
                                                  Company                     Adoption Of    Successor
                                                    Pre-      Restructuring   Fresh-Start     Company
                                               confirmation   (see Note 1)     Reporting    Reorganized
                                               ------------   ------------     ---------    -----------
<S>                                            <C>            <C>            <C>            <C>
ASSETS
Current assets:
Cash and cash equivalents                      $   203,811    $   (95,881)   $      --      $   107,930
Account receivable - net                            27,702           --             --           27,702
Due from related parties                              --             --             --             --
Merchandise inventories                            167,177           --             --          167,177
Prepaid expenses                                     6,540           --             --            6,540
Deferred tax asset                                    --             --            1,814          1,814
                                               -----------    -----------    -----------    -----------
Total current assets                               405,230        (95,881)         1,814        311,163

Property and equipment - net                        69,770           --           (4,592)        65,178
Deferred tax asset                                     180           --           12,006         12,186
Other assets                                         2,992              3         (1,315)         1,680
                                               -----------    -----------    -----------    -----------

Total assets                                   $   478,172    $   (95,878)   $     7,913    $   390,207
                                               ===========    ===========    ===========    ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable                               $    56,483    $     1,623    $      --      $    58,106
Accrued expenses                                    27,619          6,255           --           33,874
Accrued bankruptcy professional fees                19,657           --             --           19,657
Reserve for costs of rightsizing program             7,301           --             --            7,301
Current portion of self insurance reserves           5,030           --             --            5,030
Current portion of long-term debt                     --            1,541           --            1,541
Current portion of capital lease obligations          --            5,534           --            5,534
                                               -----------    -----------    -----------    -----------
Total current liabilities                          116,090         14,953           --          131,043

Liabilities subject to settlement under
reorganization proceedings                       1,126,414     (1,126,414)          --             --
Long-term debt                                        --          106,982           --          106,982
Capital lease obligations                             --           44,065           --           44,065
Long-term self insurance reserves                    8,142           --             --            8,142
Unfavorable lease liability - net                     --             --           10,475         10,475
Deferred rent                                       10,642            (37)       (10,605)          --
                                               -----------    -----------    -----------    -----------
Total liabilities                                1,261,288       (960,451)          (130)       300,707
                                               -----------    -----------    -----------    -----------

Stockholders' equity (deficiency):
Common stock                                         5,407         (5,285)          --              122
Additional paid-in capital                         487,477       (398,099)          --           89,378
Retained earnings (deficit)                     (1,276,000)     1,267,957          8,043           --
                                               -----------    -----------    -----------    -----------
Total stockholders' equity (deficiency)           (783,116)       864,573          8,043         89,500
                                               -----------    -----------    -----------    -----------

Total liabilities and stockholders' equity
(deficiency)                                   $   478,172    $   (95,878)   $     7,913    $   390,207
                                               ===========    ===========    ===========    ===========
</TABLE>



                                      F-10
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         The  significant  fresh-start  reporting  adjustments are summarized as
         follows:
            (1)  Revaluation of fixed assets and leasehold  interests  based, in
                 part,  upon the estimated  fair market values of properties and
                 leases.  This  revaluation  resulted in  recording  unfavorable
                 lease liabilities for certain locations. See Notes 3 and 6.

            (2)  Write-off of lease acquisition costs.

            (3)  Valuation  and  recording of a deferred tax asset  representing
                 the  estimated  net  realizable  value  of net  operating  loss
                 carryforwards.

            (4)  Adjustments to the fair market value of other noncurrent assets
                 in  excess  of   reorganization   value  in   accordance   with
                 fresh-start reporting.

3.       BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         a. Fiscal Periods  Presented - The  accompanying  consolidated  balance
            sheets  were  prepared as of June 27,  1998 and June 28,  1997.  The
            accompanying  consolidated  statements  of  operations,  changes  in
            stockholders'  equity  (deficiency) and cash flows were prepared for
            the fifty-two  weeks ended June 27, 1998, the fifty-two  weeks ended
            June 28, 1997,  the  forty-three  weeks ended June 29, 1996, and the
            nine weeks ended  September 2, 1995.  The Company's year ends on the
            Saturday closest to June 30.

         b. Business  -  The  Company   operates  a  chain  of  "deep  discount"
            drugstores primarily located in the midwest and along the east coast
            of the  continental  United States in which it sells  merchandise in
            various categories.

         c. Principles of Consolidation - The consolidated  financial statements
            include  the   accounts  of   Phar-Mor,   Inc.,   its   wholly-owned
            subsidiaries and its majority-owned  partnerships.  All intercompany
            accounts and transactions have been eliminated.

         d. Cash and Cash  Equivalents - The Company  considers  all  short-term
            investments with an original  maturity of three months or less to be
            cash equivalents.

         e. Marketable  Securities  -  Under  the  provisions  of  Statement  of
            Financial  Accounting  Standards  ("SFAS") No. 115,  "Accounting for
            Certain  Investments  in Debt  and  Equity  Securities,"  marketable
            securities  are carried at fair market value as trading  securities.
            The cost of the  securities  sold is  determined  using the specific
            identification  method.  Marketable  securities consist primarily of
            equity  instruments  of  corporations  and  real  estate  investment
            trusts.  For the  fifty-two  weeks ended June 27,  1998,  unrealized
            losses of $1,363 are included in Investment loss in the Consolidated
            Statement of Operations.

         f. Merchandise  Inventories - Merchandise inventories are valued at the
            lower of first-in, first-out ("FIFO") cost or market.

         g. Video Rental  Tapes - Videotapes  held for rental which are included
            in  inventories,  are recorded at cost and are amortized  over their
            estimated  economic life with no provision for salvage  value.  With
            respect to "hit"  titles for which four or more copies per store are
            purchased,  the fourth and any succeeding  copies are amortized over
            nine  months on a  straight-line  basis.  All other  video  cassette
            purchases up to three copies per store are amortized over thirty-six
            months on a straight-line basis.

         h. Investments   -   Investments   consist  of  equity   interests   in
            unconsolidated  affiliates  that do not  have  readily  determinable
            market values.  The Company uses the equity method of accounting for
            investments  in which it has 20% or more  interest in voting  common
            stock and the cost method of accounting for  investments in which it
            has less than a 20% interest in voting  common stock or  investments
            in preferred stock (see Note 11).

                                      F-11
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         i. Investment  in Avatex - During the  fifty-two  weeks  ended June 27,
            1998, the Company invested $4,000 to purchase approximately 11.9% of
            Avatex  Corporation,  formerly known as FoxMeyer Health  Corporation
            ("Avatex"),  an affiliate  of one of the  Company's  former  largest
            suppliers and the largest  stockholder of the Company (see Note 11).
            Under the provisions of SFAS No. 115, this  investment is carried at
            market value as available-for-sale securities.  Unrealized losses on
            these  securities  are excluded  from earnings and are reported as a
            separate  component of  stockholders'  equity until realized.  As of
            September 10, 1998,  the quoted  market price of Avatex  Corporation
            common  stock was $1.0625 per share as compared to $2.1875 per share
            at June 27, 1998,  representing  an  additional  unrealized  loss of
            $1,812 on the Company's original $4,000 investment.

         j. Deferred  Debt Expense - Deferred  debt expense is included in other
            assets and is  amortized on a  straight-line  basis over the term of
            the related debt.

         k. Goodwill - Goodwill is included in other  assets and is amortized on
            a straight-line basis over 40 years.

         l. Pre-Opening  Costs - Expenses incurred for new stores prior to their
            opening are expensed as incurred.

         m. Property and Equipment - The Company's  policy is to record property
            and   equipment   (including   leasehold   improvements)   at  cost.
            Depreciation  is  recorded  on the  straight-line  method  over  the
            estimated  useful lives of the assets.  Leasehold  improvements  are
            amortized over the estimated useful lives of the improvements or the
            lives of the leases,  whichever is shorter.  The Company capitalizes
            the costs of software and software upgrades purchased for use in its
            operations.  The Company  expenses  the  internal  costs of software
            developed or modified  for use in its  operations.  Maintenance  and
            repairs are expensed as incurred.  Replacements  and betterments are
            capitalized and depreciated over the remaining estimated useful life
            of the asset .

            Because of the fraud and  embezzlement  referred to in Note 1 above,
            which resulted in unreliable and insufficient  evidential  matter to
            support the acquisition  cost of property and equipment,  as of July
            2, 1994, the Company  revalued  property and equipment based upon an
            independent  appraisal.  Consequently,  Predecessor Company property
            and equipment and related  depreciation  and amortization at and for
            periods subsequent to July 2, 1994 are based upon such assets valued
            at the  lower of the  appraised  value or net book  value at July 2,
            1994 as adjusted for additions  and  disposals  since that date (see
            Note 6).

            Property  and  equipment  was  revalued  at  September  2,  1995  in
            connection with the adoption of fresh-start reporting (see Note 2).

         n. Leased  Property  Under  Capital  Leases - The Company  accounts for
            capital leases, which transfer substantially all of the benefits and
            risks  incident to the ownership of property to the Company,  as the
            acquisition of an asset and the  incurrence of an obligation.  Under
            this method of accounting  the cost of the leased asset is amortized
            principally using the straight-line method over its estimated useful
            life, and the obligation,  including interest thereon, is liquidated
            over the life of the lease.

         o. Operating  Leases and Deferred Rent - Operating leases are accounted
            for on the straight-line  method over the lease term.  Deferred rent
            represents  the  difference  between  rents  paid  and  the  amounts
            expensed for operating leases.

         p. Unfavorable  Lease Liability - The  unfavorable  lease liability was
            recorded  as  part  of  fresh-start   reporting  (see  Note  2)  and
            represents the excess of the present value of the liability  related
            to lease  commitments over the present value of market rate rents as
            of the date of the Reorganization for such locations. This liability
            will be amortized as a reduction of rent expense over the  remaining
            lease terms.

         q. Self insurance reserves - The Company is generally  self-insured for
            losses and liabilities  related  primarily to workers'  compensation
            and comprehensive general and product liability.  Losses are accrued
            based upon the Company's  estimates of the  aggregate  liability for
            claims incurred using certain actuarial  assumptions followed in the
            insurance industry and based on Company experience.

                                      F-12
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         r. Revenue   Recognition  -  Sales  are   recognized   on   merchandise
            inventories  sold upon  receipt by the customer and are recorded net
            of returns.

         s. Reclassifications   -  Certain   amounts  in  prior  year  financial
            statements  have been  reclassified to conform with the current year
            presentation.

         t. 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 period.  Actual results
            could differ from those estimates.

         u. New  Accounting   Pronouncements  -  In  June  1997,  the  Financial
            Accounting  Standards Board ("FASB") issued SFAS No. 130, "Reporting
            Comprehensive  Income."  SFAS  No.  130  establishes  standards  for
            reporting  comprehensive  income and its  components,  some of which
            have been historically excluded from the Statement of Operations and
            recorded directly to the equity section of an entity's  statement of
            financial  position.  SFAS No. 130 also requires that the cumulative
            balance of these items of other  comprehensive  income are  reported
            separately from retained earnings and additional  paid-in capital in
            the equity  section  of a  statement  of  financial  position.  This
            statement is effective for fiscal years beginning after December 15,
            1997. Management  anticipates that the adoption of SFAS No. 130 will
            have an  impact on the  disclosures  in the  consolidated  financial
            statements  but will not have a  material  impact  on its  financial
            position or results of operations.

            In June 1997,  the FASB  issued  SFAS No.  131,  "Disclosures  about
            Segments of an  Enterprise  and Related  Information."  SFAS No. 131
            establishes  standards for the way public  companies report selected
            information  about  operating  segments in both quarterly and annual
            financial  statements  to their  shareholders.  It also  established
            standards  for related  disclosures  about  products  and  services,
            geographic areas and major customers.  SFAS No. 131 is effective for
            fiscal years  beginning  after December 15, 1997.  This statement is
            not required to be applied to interim  financial  statements  in the
            initial year of its  application.  Management  does not believe that
            SFAS  No.  131  will  have  an  impact  on  the  disclosures  in the
            consolidated  financial  statements  or a  material  impact  on  its
            financial position or results of operations.

            In  February  1998,  the  FASB  issued  SFAS  No.  132,  "Employers'
            Disclosures about Pensions and Other Postretirement  Benefits." SFAS
            No. 132  revises  employers'  disclosures  about  pension  and other
            postretirement   benefit  plans  by  standardizing   the  disclosure
            requirements for pensions and other  postretirement  benefits to the
            extent practicable,  requires  additional  information on changes in
            the  benefit  obligations  and fair  values of plan assets that will
            facilitate  financial  analysis and eliminates  certain  disclosures
            that  are no  longer  considered  useful.  It does  not  change  the
            measurement or recognition of these plans. SFAS No. 132 is effective
            for fiscal years beginning  after December 15, 1997.  Management has
            not yet  determined  the  impact  that SFAS No. 132 will have on the
            disclosures in its consolidated  financial statements,  but does not
            believe  adoption  will  have a  material  impact  on its  financial
            position or results of operations.

            In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for
            Derivative  Instruments and Hedging  Activities,"  which establishes
            accounting and reporting  standards for derivative  instruments  and
            for hedging  activities.  It requires  that an entity  recognize all
            derivatives  as either  assets of  liabilities  in the  statement of
            financial position and measure those instruments at fair value, with
            the potential effect on operations dependent upon certain conditions
            being met.  SFAS No. 133 is  effective  for all fiscal  quarters  of
            fiscal  years  beginning  after June 15, 1999.  Management  does not
            believe  that the  adoption  of SFAS No.  133 will  have a  material
            impact on its financial position or results of operations.

                                      F-13
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

4.       ACCOUNTS RECEIVABLE

         Accounts receivable consists of the following:

                                               June 27,1998    June 28,1997
                                               ------------    ------------
         Accounts receivable - vendors            $11,712        $13,162
         Third-party prescriptions                  9,205          8,489
         Vendor coupons                             1,238          1,202
         Other                                        174          1,464
                                                  -------        -------
                                                   22,329         24,317
         Less allowance for doubtful accounts       1,402          2,703
                                                  -------        -------
                                                  $20,927        $21,614
                                                  =======        =======


5.       MERCHANDISE INVENTORIES

         Merchandise inventories consists of the following:

                                                    June 27,1998   June 28,1997
                                                    ------------   ------------
         Store inventories                          $    146,969   $    140,158
         Warehouse inventories                            34,659         37,361
         Video rental tapes - net                          6,065          6,442
                                                    ------------   ------------
                                                         187,693        183,961
         Less reserves for markdowns, shrinkage
         and vendor rebates                               11,624         14,858
                                                    ------------   ------------
                                                    $    176,069   $    169,103
                                                    ============   ============

         The video rental tape inventory is net of accumulated  amortization  of
         $13,340 and $12,797 at June 27, 1998 and June 28, 1997, respectively.

6.       PROPERTY AND EQUIPMENT

         Property and equipment consists of the following:


                                                    June 27, 1998  June 28, 1997
                                                    -------------  -------------
         Furniture, fixtures and equipment          $     40,083   $     28,394
         Building improvements to leased property         33,622         27,641
         Land                                                166            166
         Capital leases:
           Buildings                                      11,076         11,076
           Furniture, fixtures and equipment              21,860         27,380
                                                    ------------   ------------
                                                         106,807         94,657
         Less accumulated depreciation and
         amortization                                     30,923         21,308
         Less allowance for disposal of property
         and equipment                                       372            514
                                                    ------------   ------------
                                                    $     75,512   $     72,835
                                                    ============   ============

         Due to the lack of reliable  accounting  records  referred to in Note 1
         and because the adverse business conditions which had been concealed by
         the fraud and  embezzlement  dictated an  assessment  as to whether the
         carrying  amount of property  and  equipment  had been  overstated,  an
         independent  appraisal was undertaken in 1994.  The appraisal  included
         the  physical  inspection  of property and  equipment at the  Company's
         corporate headquarters, warehouse and

                                      F-14
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         selected  retail  store  locations.  The  appraised  value  of  certain
         property and  equipment was less than the net book value of the assets.
         Accordingly,  the  Company  recorded  a charge of $53,211 to write down
         property  and  equipment  as  of  July  2,  1994.  The  following  is a
         reconciliation  of the net book value of property and equipment and the
         effects of the write down:
<TABLE>
<CAPTION>

                                                                July 2, 1994
                                                    ------------------------------------
                                                    Historical                 Lower of
                                                        Net                   Appraised
                                                       Book                     Or Net
                                                       Value     Write Down   Book Value
                                                       -----     ----------   ----------
<S>                                                 <C>          <C>          <C>
         Furniture, fixtures and equipment          $  54,935    $ (31,150)   $  23,785
         Building improvements to leased property      36,582      (22,061)      14,521
         Capital leases:
           Buildings                                   11,201         --         11,201
           Furniture, fixtures and equipment           40,850         --         40,850
                                                    ---------    ---------    ---------
                                                    $ 143,568    $ (53,211)   $  90,357
                                                    =========    =========    =========
</TABLE>


         The   historical   net  book  value  amounts  are  net  of  accumulated
         depreciation   and   amortization   for   each   caption.   Accumulated
         depreciation  and  amortization is $0 for each caption for the lower of
         appraised or net book value amounts.

         Also, as a result of the fraudulent  reporting described in Note 1, the
         following types of errors extended to property and equipment:

         (1)  Journalization of fictitious income via systematic  capitalization
              of   non-existent   additions  to  store  property  and  equipment
              accounts.

         (2)  Repair and maintenance and short-term equipment rental items which
              were improperly capitalized.

         (3)  Landlord  reimbursements  received  in prior  years for  leasehold
              improvements,   which   reimbursements  were  not  credited  as  a
              reduction to the related asset account,  and in some cases,  could
              not be traced to the accounting records at all.

         Adjustments  were made in the  September 26, 1992 balance sheet for the
         above known  errors.  September  26, 1992 was the end of the  Company's
         first fiscal quarter of fiscal year 1993, the date closest to the dates
         on which the Company  conducted a physical  inventory at its stores and
         distribution  centers  following  the  disclosure  of the fraud and the
         earliest  date a  consolidated  balance  sheet could be prepared by new
         management.

         While it is not possible to say with  certainty that it was a conscious
         part of the fraudulent reporting scheme, the conditions which prevented
         new management from  reconstructing  the property and equipment records
         were: 1) incomplete and  unreconcilable  detailed fixed asset registers
         or equivalent  records (i.e.,  there was inadequate  detail  maintained
         regarding  the  composition  of fixed assets  below the general  ledger
         account  level);  and  2)  inadequate   documentation  to  support  the
         acquisition cost of those assets (e.g., lack of invoices,  contracts or
         the like).

         Despite the expenditure of substantial  resources to locate  sufficient
         underlying  documentation  to reconstruct  those  records,  the Company
         ultimately  concluded  that it was not possible to  determine  that the
         recorded amounts were reflective of the original acquisition cost.

         Accordingly,  any  adjustment  that  might have been  determined  to be
         necessary to adjust to original  acquisition  cost if reliable  records
         could have been reconstructed would be limited to: 1) the recorded cost
         of property and equipment ; 2) accumulated depreciation thereon; and 3)
         the related periodic  depreciation expense. Note that any adjustment to
         cost or  accumulated  depreciation  as of September 26, 1992 would have
         affected those balance sheet line-items and retained deficit, but would
         not have affected subsequent statements of operations beyond the impact
         on depreciation expense.

                                      F-15
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------


7.       OTHER ASSETS

         Other assets consists of the following:

                                            June 27, 1998  June 28, 1997
                                            -------------  -------------
         Goodwill                           $      1,667   $      1,712
         Deferred debt expense                        79            401
         Pharmacy files                              496            641
         Cash surrender value of officers
           life insurance                           --              659
         Utility and other deposits                  664             86
         Other                                       537            709
                                            ------------   ------------
                                            $      3,443   $      4,208
                                            ============   ============

         Goodwill,   deferred  debt  expense  and  pharmacy  files  are  net  of
         accumulated amortization of $123, $989 and $425, respectively,  at June
         27, 1998 and $78, $667 and $180,  respectively,  at June 28, 1997.  The
         deferred debt expense  consists of debt  origination  costs  associated
         with the credit facility (See Note 8).


8.       REVOLVING CREDIT FACILITIES

         On  September  11, 1995,  the Company  entered into a Loan and Security
         Agreement (the  "Facility")  with  BankAmerica  Business  Credit,  Inc.
         ("BABC"), as agent, and other financial institutions (collectively, the
         "Lenders"), that established a credit facility in the maximum amount of
         $100,000.

         Borrowings  under the Facility could have been used for working capital
         needs and general corporate purposes.  Up to $50,000 of the Facility at
         any time could have been used for  standby and  documentary  letters of
         credit.  The Facility  included  restrictions  on, among other  things,
         additional debt, capital expenditures, investments, restricted payments
         and  other  distributions,  mergers  and  acquisitions,  and  contained
         covenants  requiring the Company to meet a specified  quarterly minimum
         EBITDA  Coverage  Ratio (the sum of earnings  before  interest,  taxes,
         depreciation  and  amortization,   as  defined,   divided  by  interest
         expense),  calculated  on a rolling four quarter  basis,  and a monthly
         minimum net worth test.

         Credit  availability  under the  Facility at any time was the lesser of
         the  Aggregate  Availability  (as defined in the Facility) or $100,000.
         Availability  under the Facility,  after  subtracting  amounts used for
         outstanding letters of credit, was $91,704 and $88,003 at June 27, 1998
         and June 28,  1997,  respectively.  The  Facility  establishes  a first
         priority  lien and  security  interest  in the  current  assets  of the
         Company,  including,  among other items, cash,  accounts receivable and
         inventory.

         Advances  made under the  Facility  would have  borne  interest  at the
         BankAmerica  reference rate plus 1/2% or London Interbank  Offered Rate
         ("LIBOR") plus the  applicable  margin.  The  applicable  margin ranged
         between  1.50%  and 2.00% and was  determined  by a formula  based on a
         ratio  of  (a)  the  Company's   earnings   before   interest,   taxes,
         depreciation and  amortization to (b) interest.  Under the terms of the
         Facility,  the Company was required to pay a commitment fee of 0.28125%
         per annum on the unused portion of the Facility,  letter of credit fees
         and certain other fees.

         There have been no borrowings under the Facility.  At June 27, 1998 and
         June 28, 1997 there were  letters of credit in the amount of $5,709 and
         $4,924, respectively, outstanding under the Facility.

         The Company  entered  into an Amended  and  Restated  Revolving  Credit
         Facility (the "Amended Revolving Credit Facility")  effective September
         10, 1998 with BABC, as agent,  and other  financial  institutions  that
         established a credit facility in the maximum amount of $100,000.

                                      F-16
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         Borrowings under the Amended  Revolving Credit Facility may be used for
         working capital needs and general corporate purposes.  Up to $50,000 of
         the  facility  at any  time  may be used for  standby  and  documentary
         letters of credit.  The facility includes  restrictions on, among other
         things,    additional   debt,   investments,    dividends   and   other
         distributions,  mergers  and  acquisitions.  The  facility  contains no
         financial covenants.

         Credit  availability under the Amended Revolving Credit Facility at any
         time is the lesser of the  Aggregate  Availability  (as  defined in the
         Facility)  or  $100,000.   The  Amended   Revolving   Credit   Facility
         establishes a first priority lien and security  interest in the current
         assets of the Company,  including,  among other items,  cash,  accounts
         receivable and inventory.

         Advances made under the Amended Revolving Credit Facility bear interest
         at the BankAmerica  reference rate plus 1/2% or LIBOR plus 2.00%. Under
         the terms of the  Amended  Revolving  Credit  Facility,  the Company is
         required to pay a commitment  fee of between  0.25% and 0.35% per annum
         on the  unused  portion  of the  facility,  letter of  credit  fees and
         certain other fees.

         The Amended Revolving Credit Facility expires on September 10, 2001.


9.       LONG-TERM DEBT

         The composition of the debt  obligations  included on the  consolidated
         balance sheet as of June 27, 1998 and June 28, 1997 is as follows:
<TABLE>
<CAPTION>

                                                                          June 27, 1998  June 28, 1997
                                                                          -------------  -------------
<S>                                                                       <C>            <C>
         Senior unsecured notes, interest rate of 11.72%,
         due September 2002                                               $     91,462   $     91,462

         Equipment notes, interest rate of 7%, due in installments
         through October 2003                                                    5,484          7,166


         Tax notes, interest rates at 5.89% to 8%, due
         through September 2001                                                  5,257          6,342

         Real estate mortgage notes and bonds payable at rates ranging
         from 3% to 9.98% and the prime rate plus 1%                             4,932          5,208
                                                                          ------------   ------------
         Total debt                                                            107,135        110,178
         Less current portion                                                    3,276          2,624
                                                                          ------------   ------------
         Total long-term debt                                             $    103,859   $    107,554
                                                                          ============   ============
</TABLE>


         The Company  must offer to  purchase  the senior  unsecured  notes at a
         price equal to 101% of the  principal  amount upon the  occurrence of a
         change in control.  The new senior notes contain restrictions on, among
         other things,  incurrence of debt, payment of dividends and repurchases
         of common stock.

         The Company has mortgage notes and bonds payable collateralized by real
         estate with an aggregate net book value of $4,222 at June 27, 1998.

                                      F-17
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------


         Future  maturities  of long-term  debt  subsequent to June 27, 1998 are
         summarized as follows:

                  1999                                $  3,276
                  2000                                   1,502
                  2001                                   1,120
                  2002                                   3,079
                  2003                                  92,591
                  Thereafter                             5,567
                                                      --------
                                                      $107,135
                                                      ========

10.      LEASES

         The  Company  leases its retail  store  properties,  certain  warehouse
         facilities and certain  equipment  under capital and operating  leases.
         Generally,  leases are net leases that require the payment of executory
         expenses such as real estate taxes,  insurance,  maintenance  and other
         operating costs, in addition to minimum  rentals.  The initial terms of
         the leases range from three to twenty-five  years and generally provide
         for renewal options.

         Minimum  annual  rentals for all capital and  operating  leases  having
         initial  noncancelable  lease  terms in  excess of one year at June 27,
         1998 are as follows:

                                                    Capital   Operating
                                                     Leases     Leases
                                                     ------     ------
         1999                                      $  9,398   $ 35,080
         2000                                         8,822     35,313
         2001                                         5,887     34,802
         2002                                         5,240     34,253
         2003                                         3,423     31,513
         Thereafter                                  10,610    124,321
                                                   --------   --------

         Total minimum lease payments                43,380   $295,282
         Less amounts representing interest           9,195   ========
                                                   --------
         Present value of minimum lease payments     34,185
         Less current portion                         7,051
                                                   --------
         Long-term capital lease obligations       $ 27,134
                                                   ========

         The operating leases on substantially all store properties, provide for
         additional  rentals  when sales  exceed  specified  levels and  contain
         escalation clauses. Rent expense for the fifty-two weeks ended June 27,
         1998, the fifty-two  weeks ended June 28, 1997, the  forty-three  weeks
         ended June 29,  1996,  and the nine weeks ended  September  2, 1995 was
         $31,921,  $32,557, $26,278, and $5,660,  respectively,  including $123,
         $145, $103, and $36 of additional rentals.

11.      TRANSACTIONS WITH RELATED PARTIES

         Successor Company

         From  September 11, 1995, to September  19, 1997,  Hamilton  Morgan LLC
         ("Hamilton  Morgan")  beneficially  owned  approximately  39.9%  of the
         Company's common stock.  During this period,  (a) Avatex owned 69.8% of
         Hamilton  Morgan,  and Abbey J. Butler and Melvyn J.  Estrin,  Avatex's
         Co-Chairmen  of the Board and Co-Chief  Executive  Officers,  served as
         directors of the  Company,  and (b) Robert Haft owned 31.2% of Hamilton
         Morgan and served as  Hamilton  Morgan's  President  and the  Company's
         Chairman of the Board and Chief  Executive  Officer.  On September  19,
         1997, under the terms of an agreement  between Hamilton Morgan,  Robert
         Haft and Avatex (the "Hamilton Morgan Agreement"),  Avatex acquired the
         3,750,000  shares of the  Company's  common stock  previously  owned by
         Hamilton  Morgan  in  exchange  for  (i)  the  redemption  of  Avatex's
         membership interest in Hamilton

                                      F-18
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         Morgan,  (ii)  the  satisfaction  of a  certain  promissory  note  from
         Hamilton  Morgan to Avatex  and (iii) the  transfer  of  certain  other
         assets from Avatex to Hamilton  Morgan.  Avatex now  beneficially  owns
         approximately 39.1% of the Company's common stock.

         In conjunction with the Hamilton Morgan Agreement,  the Company entered
         into a Severance  Agreement  with Robert Haft  whereby he resigned  his
         position  as  Chairman of the Board of  Directors  and Chief  Executive
         Officer and received a lump sum cash payment of $4,417. Under the terms
         of the  Severance  Agreement,  the  Company  will  continue  to provide
         benefits to him through  September  19,  2000.  He is  indemnified  and
         entitled  to  tax   reimbursement  in  respect  to  any  payments  that
         constitute excess parachute payments under Federal Income Tax laws. The
         Company  is  obligated  to  provide a letter of credit in the amount of
         approximately  $2,900 to secure its contractual  obligations  under the
         Severance Agreement.

         A subsidiary of Avatex,  FoxMeyer  Drug  Company,  supplied the Company
         with  pharmaceuticals  and health and beauty care products under a long
         term contract until November 1996, when  substantially  all of FoxMeyer
         Drug Company's  assets were acquired by McKesson  Corporation.  For the
         fifty-two  weeks ended June 28, 1997, and the  forty-three  weeks ended
         June  29,   1996,   the  Company   purchased   $71,298  and   $179,841,
         respectively,   of  products  from  FoxMeyer  Drug  Company  under  the
         contract.

         In March 1998,  13 persons and  entities  purchased  (or  committed  to
         purchase) a total of $2,200 million of Series A membership interests in
         Chemlink Acquisition Company, LLC, which in turn purchased a membership
         interest in Chemlink  Laboratories,  LLC.  These  persons and  entities
         included the Company;  Avatex; two of the Company's executive officers,
         Abbey J.  Butler and Melvyn J. Estrin  (and/or  their  designees);  one
         Avatex officer,  Edward L. Massman; one non-officer director of Avatex;
         and five  additional  parties  related to, or referred to by,  Abbey J.
         Butler or Melvyn J. Estrin. Of the total amount invested, the Company's
         share was approximately 35.8%,  Avatex's share was approximately 35.8%,
         the Avatex  officers/designees'  share  (including  Messrs.  Butler and
         Estrin) was  approximately  14.8%,  the Avatex  non-officer  director's
         share  was  approximately  1.1%,  and the  related  parties'  share was
         approximately 12.5%. The largest share invested by a Company officer or
         director (or his designee) was  approximately  6.8% of the total amount
         invested.  Messrs.  Butler,  Estrin and Shulman  serve  on the Board of
         Managers of Chemlink  Laboratories,  LLC. The Company accounts for this
         investment using the equity method of accounting.

         In April 1998,  13 persons and  entities  purchased  (or  committed  to
         purchase) a total of $3,000 of Series B Preferred Stock and warrants to
         purchase  Series B Preferred  Stock of RAS Holding Corp.  These persons
         and  entities  included  the  Company;  Avatex;  two of  the  Company's
         executive  officers,  Melvyn  J.  Estrin  and Abbey J.  Butler;  all of
         Avatex's  executive  officers  and its Director of  Accounting  (and/or
         their  designees);   one  non-officer   director  of  Avatex;  and  two
         additional  parties  related to, or referred to by,  Abbey J. Butler or
         Melvyn J. Estrin. Mr. Butler is also a director of RAS Holding Corp. Of
         the total amount invested,  Avatex's share was approximately 46.7%, the
         Company's  share  was 25%,  the  Avatex  officers/designees'  share was
         19.8%, the Avatex  non-officer  director's share was 1% and the related
         parties' share was approximately 7.5%. The largest share invested by an
         officer or  director of the  Company  (or his  designee)  was 5% of the
         total amount  invested.  The Company accounts for this investment using
         the cost method of accounting.

         In April  1998,  the  Company  and  Avatex  each  purchased  $1,250  of
         preferred  stock of HPD Holdings Corp.  ("HPD") in connection  with the
         acquisition  by a HPD subsidiary of certain of the assets of Block Drug
         Company, Inc. ("Block") used in or related to the manufacture,  sale or
         distribution  of Block's  household  product  lines.  In addition,  the
         Company and Avatex  each  acquired  2.5% of the common  stock of HPD as
         part  of  the  transaction.  The  largest  shareholder  of  HPD  is HPD
         Partners,  LP, a Delaware  limited  partnership and Abbey J. Butler and
         Melvyn J. Estrin are limited partners of HPD Partners, LP and directors
         of HPD  Laboratories,  Inc.,  a wholly  owned  subsidiary  of HPD.  The
         Company   accounts  for  this  investment  using  the  cost  method  of
         accounting.

         During Fiscal Year 1998,  the Company paid $10 to  University  Research
         Corporation  and $10 to  Human  Service  Group,  Inc.  for  secretarial
         services  provided  to  Mr.  Estrin.  Human  Service  Group,  Inc.  and
         University  Research  Corporation are corporations  wholly owned by Mr.
         Estrin.

                                      F-19
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The Company  purchased  $314 of product  from AM  Cosmetics,  Inc.  Mr.
         Butler and Mr.  Estrin  were  directors  of AM  Cosmetics,  Inc.  until
         September 1998.

         The  Company  purchased  $241  of  product  from  Carson  Products,   a
         subsidiary  of Carson,  Inc. Mr. Butler and Mr. Estrin are directors of
         Carson, Inc. A subsidiary of Avatex purchased a total of 372,000 shares
         of Carson class A common stock in December 1997 and January 1998.

         The Company paid CB Equities  Corporation  $52 for office and equipment
         support  for  Mr.  Butler.  Mr.  Butler  is  President  of CB  Equities
         Corporation.

         Predecessor Company

         Operating  Leases - The Company leased  various  property and equipment
         from  related  parties.  Rental  payments  for  the  nine  weeks  ended
         September 2, 1995 were $2,280.

12.      COMMON STOCK, WARRANTS AND OPTIONS

         Common Stock
         ------------
         A total of 12,156,250  common shares were issued and  outstanding as of
         the  Effective  Date.  Pursuant  to the Joint Plan,  10,000,000  common
         shares were issued to prepetition creditors.  Further,  pursuant to the
         Joint  Plan,  1,250,000  common  shares  were  issued by the Company to
         Hamilton Morgan,  50,000 common shares were issued to Alvarez & Marsal,
         Inc.,  and 12,500  common  shares  were  issued to  certain  members of
         existing  management  in exchange for cash  consideration  at $8.00 per
         share  net  of  $1,000  in  expenses   incurred  by  Hamilton   Morgan.
         Additionally,  843,750 shares were  distributed to Avatex as settlement
         for a prepetition reclamation claim.

         Warrants
         --------
         Pursuant to the Joint  Plan,  warrants  to  purchase  an  aggregate  of
         1,250,000 common shares were issued as of the Effective Date to certain
         prepetition  unsecured  creditors.  Each  warrant  entitles  the holder
         thereof to acquire  one common  share at a price of $13.50,  subject to
         certain  adjustments,  as defined in the Joint Plan.  The  warrants are
         exercisable  at any time until the close of business on  September  10,
         2002. As of June 27, 1998, no warrants have been exercised.

         Stock Options
         -------------
         The Company has an  incentive  stock  option plan for  officers and key
         employees  which  allows for the  issuance  of a maximum  of  3,500,000
         options.  As of June 27, 1998, options for 1,343,834 common shares were
         reserved  for future  grant,  and  options  for  2,079,500  shares were
         outstanding  and are exercisable  upon vesting.  Under the terms of the
         option plan,  all options  have a  seven-year  term from date of grant.
         Generally,  the options  granted vest with respect to 20% or 33 1/3% of
         the  underlying  shares on the grant date,  and will vest in additional
         increments  of 20% or 33 1/3% of the  underlying  shares on each of the
         subsequent  anniversaries  of the grant date until 100% vested.  To the
         extent then vested,  the options are generally  exercisable  within one
         year following the death or disability of the holder of the option, and
         within six months of any termination event,  except where a termination
         is for  cause,  in which case the option  will then  terminate.  To the
         extent then not vested,  the options  generally will terminate upon the
         holders death, disability or termination of employment.  The employment
         agreements  of  certain  executive  officers  provide  for  accelerated
         vesting of options upon specified termination events.

         The firm of Alvarez & Marsal,  Inc.  were  granted  fully  vested stock
         options for 416,667  shares of common stock on the Effective  Date. The
         options are  exercisable at $8.00 per share and expire on September 11,
         2002.

                                      F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The Company has a stock option plan for  directors.  Before  October 1,
         1997,  each director  received an annual grant of an option to purchase
         5,000 shares of Common Stock.  Commencing  with the grant on October 1,
         1997,  each  director  now  receives  an  annual  grant of an option to
         purchase  10,000  shares of Common Stock The options vest  immediately,
         expire  five  years  after the  grant  date and are  exercisable  at an
         exercise  price equal to the market  price on the grant date. A maximum
         of 500,000 common shares may be granted under the stock option plan for
         directors.

         As of June 27, 1998, options for 120,000 shares were outstanding.

         Each director may also elect to receive common stock, in lieu of all or
         portions  of the  director's  annual  retainer  at a price equal to the
         market price as of October 1 of the year of the election.

         The  Company  applies  Accounting  Principles  Board  Opinion  No.  25,
         "Accounting for Stock Issued to Employees" and related  interpretations
         in accounting for its stock-based compensation.  Accordingly, $1,401 in
         compensation  cost  for the  Company's  stock  option  plans  has  been
         recognized in the accompanying  consolidated financial statements.  Had
         compensation  cost for the Company's plans been determined based on the
         fair value at the grant  date  instead of the  intrinsic  value  method
         described  above for the  awards  granted in 1996,  1997,  and 1998 the
         Company's  net (loss) income and net (loss) income per share would have
         been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>


                                        Fifty-two weeks     Fifty-two weeks    Forty-three weeks
                                      ended June 27, 1998 ended June 28, 1997 ended June 29, 1996
                                      ------------------- ------------------- -------------------

         <S>                          <C>                 <C>                 <C>
         Net income
         As reported                  $         (8,830)   $         (2,281)   $          2,526
         Pro forma                    $        (11,654)   $         (2,541)   $          2,364

         Basic and diluted earnings
         per share
         As reported                  $          (0.72)   $          (0.19)   $           0.21
         Pro forma                    $          (0.96)   $          (0.21)   $           0.19

</TABLE>


         The fair value of each option has been  estimated  on the date of grant
         using  the  Black-Scholes  options  pricing  model  with the  following
         assumptions for the periods presented:  expected  volatility of 30%; no
         dividend yield; expected life of 7 years; and a risk-free interest rate
         of 6.5%.

         All of  the  Company's  Stock  Option  Plans  are  administered  by the
         Compensation Committee of the Company's Board of Directors.

         As of June 27, 1998,  1,452,579  options were exercisable at a weighted
         average exercise price per share of $7.70.

                                      F-21
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         The following table summarizes stock option activity under the plans:

<TABLE>
<CAPTION>

                                                                                                  Weighted
                                                             Weighted                              Average
                                                              Average                             Remaining
                                             Options         Exercise       Option Price         Contractual
                                           Outstanding    Price Per Share    per Share           Life (Years)
                                           -----------    ---------------    ---------           ------------
<S>                                          <C>          <C>              <C>                       <C>
         Balance at September 2,1995         1,225,917    $         8.00   $         8.00            7.00

         Granted                               248,800    $         7.53   $ 7.06 - $8.00

         Forfeited                            (116,100)   $         8.00   $         8.00
                                           ------------
         Balance at June 29, 1996            1,358,617    $         7.91   $ 7.06 - $8.00            6.22

         Granted                               100,000    $         5.66   $ 5.44 - $6.17

         Forfeited                            (137,800)   $         7.82   $ 7.06 - $8.00
                                           ------------

         Balance at June 28, 1997            1,320,817    $         7.75   $ 5.44 - $8.00            5.30

         Granted                             1,840,000    $         7.83   $ 5.44 - $9.63

         Forfeited                            (467,984)   $         7.00   $ 5.44 - $8.00

         Exercised                             (76,666)   $         7.50   $ 6.50 - $8.00
                                           ------------

         Balance at June 27, 1998            2,616,167    $         7.92   $ 5.44 - $9.63            5.71
                                           ============
</TABLE>



         On February 17, 1998, the Company granted  options to purchase  375,000
         shares at $5.4375 and options to purchase  400,000  shares at $6.84375.
         These  options  were issued  below the market  price of $9.6875 on this
         date. All of the remaining  options were granted at the market price on
         the date of the grant.

         EMPLOYEE STOCK PURCHASE PLAN
         ----------------------------
         The Company  sponsors an Employee  Stock  Purchase Plan ("ESPP")  under
         which it is authorized to issue up to 500,000 shares of common stock to
         all  employees  with a minimum  of three  months of  service.  The ESPP
         allows eligible  employees to contribute  through payroll deductions up
         to 10% of their annual salary toward stock  purchases.  Stock purchases
         will be made  quarterly at 90% of the closing  price at the last day of
         any calendar quarter.

13.      INCOME TAXES

         Deferred taxes at June 27, 1998 and June 28, 1997,  reflect the net tax
         effect of temporary  differences between the carrying amounts of assets
         and liabilities for financial  reporting  purposes and the amounts used
         for income tax  purposes.  Deferred  tax assets are  recognized  to the
         extent  that  realization  of such  benefits  is more  likely than not.
         Changes in tax rates or laws will result in adjustments to the recorded
         deferred  tax assets or  liabilities  in the period  that the change is
         enacted.

                                      F-22
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The components of deferred tax assets and liabilities are as follows:

                                                  June 27, 1998   June 28, 1997
                                                  -------------   -------------
         Deferred Tax Assets:
         Operating and restructuring reserves     $      5,495    $      7,448
         Net operating losses                          114,293         116,399
         Depreciation and amortization                  28,411          27,078
         Lease escalation accruals                       4,470           5,030
         Jobs tax credit                                 4,432           4,432
         Other items                                     3,730             767
                                                  ------------    ------------
                                                       160,831         161,154
         Valuation allowance                          (151,061)       (151,384)
                                                  ------------    ------------
         Net deferred tax assets                  $      9,770    $      9,770
                                                  ============    ============


         Composition of amounts in Consolidated
         Balance Sheet:
         Deferred tax assets - current            $        489    $        515
         Deferred tax liabilities - current               --              --
                                                  ------------    ------------
         Net deferred tax assets - current        $        489    $        515
                                                  ============    ============


         Deferred tax assets - noncurrent         $      9,281    $      9,255
         Deferred tax liabilities - noncurrent            --              --
                                                  ------------    ------------
         Net deferred tax assets - noncurrent     $      9,281    $      9,255
                                                  ============    ============

         Deferred  tax assets,  arising  both from future  deductible  temporary
         differences and net operating losses  ("NOLs"),  have been reduced by a
         valuation  allowance  to an amount  more likely than not to be realized
         through the future reversal of existing taxable temporary  differences.
         Any  future  reversal  of  the  valuation  allowance  existing  at  the
         Effective  Date to increase the net deferred tax asset will be added to
         additional paid-in capital.

         There is no current income tax provision. A reconciliation of the total
         tax  provision  with the amount  computed  by  applying  the  statutory
         federal income tax rate to (loss) income before taxes is as follows:

<TABLE>
<CAPTION>

                                                           Fifty-two        Fifty-two        Forty-three ||      Nine
                                                          weeks ended      weeks ended      weeks ended  ||   weeks ended
                                                         June 27, 1998    June 28, 1997    June 29, 1996 || September 2,1995
                                                         -------------    -------------    ------------- || ----------------
<S>                                                           <C>              <C>                 <C>                 <C>
         Statutory tax rate                                   (35.0%)          (35.0%)             35.0% ||            35.0%
         State income taxes, net of federal benefit            --               --                  5.1  ||          --
         Nontaxable forgiveness of indebtedness                --               --                 --    ||           (29.1)
         Depreciation                                          --               --                 --    ||            (0.4)
         Restructuring reserves                                --               --                 --    ||            (5.3)
         Change in valuation allowance                         35.0%            35.0%              --    ||             0.3
         Other, net                                            --               --                  5.8  ||            (0.5)
                                                         -------------    -------------    ------------- || ----------------
         Effective tax rate                                     0.0%             0.0%              45.9% ||             0.0%
                                                         =============    =============    ============= || ================
</TABLE>

         The Company has  approximately  $279,000 of tax basis NOLs available to
         offset future  taxable  income.  Approximately  $263,000 of this amount
         ("Section 382 NOLs") is subject to restrictions enacted in the Internal
         Revenue  Code of 1986,  as  amended,  dealing  specifically  with stock
         ownership  changes and debt  cancellations  that occurred in connection
         with the Company's emergence from bankruptcy.  Additional  restrictions
         imposed  by  Internal   Revenue  Code  Section  382  (I)(6),   and  the
         regulations  thereunder,  could further limit the Company's  ability to
         use  its  Section  382  NOLs  to  offset  future  income  to an  amount
         approximating  $5,100  annually.  The  remaining  $16,000  of NOLs were
         incurred  subsequent  to September  2, 1995,  and may be used to offset
         future  taxable  income  without  restriction.  These NOLs will  expire
         beginning in 2008.

         The  Company  also has  $4,432  of  federal  targeted  jobs tax  credit
         carryovers, which will expire beginning in 2001.

                                      F-23
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         The Internal Revenue Service has completed its field examination of the
         Company's  federal  income tax returns  for all years to and  including
         June 1992.

14.      EMPLOYEE BENEFIT PLANS

         Defined Benefit Plans

         The Company  provides pension  benefits under  noncontributory  defined
         benefit  pension  plans  to  its  union  employees  who  have  met  the
         applicable age and service requirements specified in the plans.

         Benefits  are  earned  on the basis of  credited  service  and  average
         compensation over a period of years. Vesting occurs after five years of
         service as specified under the plans.  The Company makes  contributions
         to the plans as necessary to satisfy the minimum funding requirement of
         ERISA.

         The Company  provided pension  benefits under  noncontributory  defined
         benefit  pension  plans  to its  non-union  employees  who have met the
         applicable age and service requirements  specified in the plans. During
         fiscal  1996 the  Company's  Board of  Directors  voted to  freeze  the
         benefits  accruing under its defined benefit plan that covers non-union
         personnel  effective  June  29,  1996  and to  increase  the  Company's
         matching  contribution  to the  defined  contribution  plan  for  those
         employees.  The Company terminated its defined benefit plan that covers
         non-union personnel on April 30, 1998. Lump sum cash payments were made
         to the majority of plan participants prior to June 27, 1998.  Annuities
         will be purchased for the remaining participants during the fifty-three
         weeks ended July 3, 1999.

         The  following  table  sets forth the  funded  status of the  Company's
         defined  benefit  pension  plans  and  the  amounts  recognized  in the
         Company's consolidated balance sheets:

<TABLE>
<CAPTION>


                                                                   June 27, 1998      June 28, 1997
                                                                   -------------      -------------
<S>                                                               <C>                <C>
         Actuarial present value of benefit obligations:
         Accumulated benefit obligation, including
         vested benefits of $4,011 and $9,076                     $        4,013     $        9,498
         Additional amounts related to future salary increases             1,162                764
                                                                  --------------     --------------

         Projected benefit obligation                                      5,175             10,262
         Plan assets, at fair value                                        3,589              8,829
                                                                  --------------     --------------
         Projected benefit obligation in excess of plan                    1,586              1,433
         assets
         Unrecognized net (loss)/ gain                                      (309)             1,335
         Unrecognized prior service costs                                     (1)                (1)
         Unrecognized transition asset                                         1                  5
                                                                  --------------     --------------

         Accrued pension costs                                    $        1,277     $        2,772
                                                                  ==============     ==============
</TABLE>

         The significant assumptions used in determining the pension obligations
         are:

<TABLE>
<CAPTION>

                                                       June 27, 1998     June 28, 1997
                                                       -------------     -------------
<S>                                                        <C>               <C>
         Discount rate                                     6.5 %             6.3 %
         Expected long-term rate of return on assets       8.5 %             8.5 %
         Rate of increase in future compensation levels    4.0 %             4.0 %
</TABLE>

         Assets of the plans consist  primarily of investments in stock and bond
         pooled funds.

                                      F-24
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         The net pension expense consists of the following:
<TABLE>
<CAPTION>

                                                                                                              ||    Predecessor
                                                                         Successor   Company                  ||      Company
                                                          --------------------------------------------------  ||  -----------------
                                                             Fifty-two         Fifty-two        Forty-three   ||        Nine
                                                            weeks ended       weeks ended       weeks ended   ||    weeks ended
                                                           June 27, 1998     June 28, 1997     June 29, 1996  ||  September 2, 1995
                                                          --------------    --------------    --------------  ||  -----------------
                                                                                                              ||
<S>                                                       <C>               <C>               <C>                 <C>
         Service costs                                    $          170    $           85    $          875  ||  $             179
         Interest cost on projected benefit obligation               668               622               698  ||                104
         Actual net return on assets                              (1,783)           (1,584)           (1,746) ||                (97)
         Net amortization (deferral)                               1,010               933             1,186  ||                  2
                                                          --------------    --------------    --------------  ||  -----------------
                                                                                                              ||
         Net periodic pension cost                        $           65    $           56    $        1,013  ||  $             188
         Settlement effect from lump sum                                                                      ||
         cashouts                                                 (1,446)             --                --    ||               --
                                                          --------------    --------------    --------------  ||  -----------------
         Net pension (income) expense                     $       (1,381)   $           56    $        1,013  ||  $             188
                                                          ==============    ==============    ==============  ||  =================
</TABLE>

         Defined Contribution Plans
         --------------------------
         The Company has defined  contribution  employee  savings plans covering
         employees  who meet the  eligibility  requirements  as described in the
         plans. The Company contributes to these plans an amount equal to 25% of
         an  employee's  contribution  up to a maximum  of 4% of the  employee's
         compensation.  The Company  increased its  contribution to the nonunion
         employee savings plan beginning in fiscal 1997 to 100% of the employees
         contribution  up to 2% of the  employees  pay and 20% of the  employees
         contribution  in  excess  of 2% up to  4% of  employees  pay.  Employee
         savings plan expenses for the fifty-two  weeks ended June 27, 1998, the
         fifty-two weeks ended June 28, 1997, the  forty-three  weeks ended June
         29, 1996, and the nine weeks ended September 2, 1995 were $1,009, $980,
         $281, and $65, respectively.

         Health and Welfare Plans
         ------------------------
         The Company also contributes to a multiemployer  union sponsored health
         and welfare plan covering truck drivers and warehouse personnel.  Total
         expenses for the  fifty-two  weeks ended June 27, 1998,  the  fifty-two
         weeks ended June 28, 1997, the  forty-three  weeks ended June 29, 1996,
         and the nine weeks ended September 2, 1995, were $1,858,  $1,303, $896,
         and $196, respectively.

         The  Company  has no  postretirement  health and  welfare  or  benefits
         programs.

15.      PREDECESSOR COMPANY INTEREST EXPENSE

         Interest expense for the Predecessor  Company,  for which disclosure is
         required by SOP 90-7, consists of the following:

                                                             Nine
                                                         weeks ended
                                                       September 2, 1995
                                                       -----------------
         Prepetition credit facility interest               $ 3,164
         Senior notes                                         1,695
         Adequate protection term loans and
          capitalized equipment leases                          776
         Amortization of deferred debt expense                   44
         Other                                                   10
                                                            -------
                                                            $ 5,689
                                                            =======


                                      F-25
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         Generally,  as a result of the  bankruptcy,  the  contractual  terms of
         prepetition  debt  obligations  are  suspended.  Only creditors who are
         secured by  collateral,  the value of which exceeds  their  prepetition
         claims,  are  entitled  to  accrue  interest  on those  claims  after a
         bankruptcy  filing.  Subsequent to the bankruptcy  filing,  the Company
         continued to accrue  interest on the  revolving  credit loan and senior
         notes at the  contractual  rates.  During  October  1992,  the  Company
         entered  into  agreements  with  lenders  to make  adequate  protection
         payments  at  rates  less  than  those  specified  as  interest  in the
         respective   agreements.   The  difference  between  these  amounts  is
         reflected in  liabilities  subject to settlement  under  reorganization
         proceedings.  With  respect to the  remainder  of the secured  debt and
         capitalized  lease  obligations,  the Company accrued only the adequate
         protection  payments it anticipated  would be required.  The difference
         between the interest which would have accrued at the contractual  rates
         and the adequate  protection  payments related to the remaining secured
         debt and  capitalized  lease  obligations was $2,846 for the nine weeks
         ended  September 2, 1995. The Company did not accrue or pay interest on
         the unsecured debt subsequent to the bankruptcy  filing.  The unaccrued
         interest  on the  unsecured  debt was $1,051  for the nine weeks  ended
         September 2, 1995.

16.      REORGANIZATION ITEMS AND RELATED RESERVES

         Reorganization items consist of the following:


                                                                Nine
                                                            weeks ended
                                                         September 2, 1995
                                                         -----------------
         Chapter 11 professional fees                         $ 9,373
         Amortization of prepetition exclusivity
          income                                                 (283)
         Interest income                                       (2,171)
         Amortization of post-petition credit
          facility origination fees                                29
         Insurance claim recovery                              (6,650)
         Costs of downsizing                                   16,500
                                                               ------
                                                             $ 16,798
                                                             ========

         Costs of downsizing

         In September  1992,  the Company made a decision to downsize the chain,
         and in October  1992  commenced a store  closing  program.  The program
         involved  the closing of 143 of the  Company's  stores that  management
         considered not viable.  In conjunction with the program to downsize the
         chain, the Company also consolidated its distribution  centers into one
         location  in  Youngstown,  Ohio and  reduced  corporate  overhead.  The
         Company  identified  for closure an additional 25 stores in fiscal 1994
         and 41 stores in fiscal 1995. In August 1995  management  identified 50
         stores  which were  scheduled  to be reduced in size  (rightsized)  and
         provided for the cost of  rightsizing  and provided a markdown  reserve
         for the inventories  which would be liquidated in the affected  stores.
         In 1997,  the  rightsizing  program was  replaced  with the  "Warehouse
         District"   concept.   The  "Warehouse   District"   concept   involves
         liquidating  slow-moving  merchandise  and utilizes the excess space to
         expand the existing  grocery  offering and adds frozen and refrigerated
         food.





                                      F-26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         The  consolidated   statements  of  operations  reflect  reorganization
         expenses related to the downsizings as follows:


                                                    Nine
                                                weeks ended
                                             September 2, 1995
                                             -----------------
         Downsizing reserve                       $ 2,500
         Inventory markdown reserve                14,000
                                                 --------
                                                 $ 16,500
                                                 ========



         The activity in the reserve for costs of downsizing is as follows:
<TABLE>
<CAPTION>

                                                                                                         ||    Predecessor
                                                                       Successor Company                 ||       Company
                                                    ---------------------------------------------------  ||  -----------------
                                                      Fifty-two           Fifty-two        Forty-three   ||         Nine
                                                     weeks ended        weeks ended        weeks ended   ||     weeks ended
                                                    June 27, 1998      June 28, 1997      June 29, 1996  ||  September 2, 1995
                                                    --------------    --------------     --------------  ||  -----------------
<S>                                                 <C>               <C>                <C>                 <C>
         Balance, beginning of period               $        1,866    $        3,451     $        7,301  ||  $           6,564
         Additions to reserve                                 --                --                 --    ||              2,500
         Charges associated with closed stores                --                (462)            (1,772) ||             (1,690)
         Store rightsizing costs                              (899)             (895)              (640) ||               --
         Corporate and distribution center costs              --                (228)            (1,438) ||                (73)
                                                    --------------    --------------     --------------  ||  -----------------
         Balance, end of period                     $          967    $        1,866     $        3,451  ||  $           7,301
                                                    ==============    ==============     ==============  ||  =================

</TABLE>

         The  remainder of the reserve for the costs of  downsizing  at June 27,
         1998 is considered  by  management  to be a reasonable  estimate of the
         costs  to be  incurred  related  to  the  downsizings.  To  the  extent
         additional stores or distribution centers are identified for closure at
         a later date or the  estimates  for  write-downs  or  reserves  for the
         current downsizing program require adjustment, such adjustments will be
         recognized in future periods.


17.      FINANCIAL INSTRUMENTS

         The  Company  has  financial   instruments  which  include   marketable
         securities,  investments and long-term debt. The carrying values of all
         instruments at June 27, 1998 approximated their fair market value.

         The fair values of the instruments were based upon quoted market prices
         of the same or  similar  instruments  or on the rate  available  to the
         Company for instruments of the same maturities.




                                      F-27
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

18.      NONCASH INVESTING AND FINANCING ACTIVITIES

         On September 29, 1995 the Company and one of its subsidiaries purchased
         all of the  partnership  interests  in the  partnership  that  owns the
         building in which the Company's headquarters is located for $145. Also,
         the partnership has a 50% interest in another  partnership which owns a
         commercial  building.  In conjunction with the acquisition,  assets and
         liabilities were assumed in the forty-three  weeks ended June 29, 1996,
         as follows:

         Fair value of assets acquired:
         ------------------------------
         Accounts receivable                                 37
         Land, buildings and leasehold interests          4,735
         Goodwill and other assets                        1,958

         Liabilities and minority interest assumed:
         ------------------------------------------
         Accounts payable                                    25
         Accrued expenses                                   205
         Mortgage notes and bonds payable                 5,820
         Minority interest                                  535

         For the fifty-two weeks ended June 27, 1998, the Company entered into a
         capital lease which increased  property and equipment and capital lease
         obligations $2,178.

19.      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>

         Fiscal 1998
         -----------                                            Thirteen              Thirteen           Thirteen           Thirteen
                                                             weeks ended           weeks ended        weeks ended        weeks ended
                                                       September 27,1997      December 27,1997      March 28,1998       June 27,1998
                                                       -----------------     -----------------     --------------     --------------
<S>                                                    <C>                   <C>                   <C>                <C>
         Sales                                         $         256,332     $         292,212     $      277,319     $      274,988
         Gross profit                                  $          48,130     $          57,992     $       53,623     $       53,449
         Net (loss) income                             $          (7,571)    $           2,778     $       (4,712)    $          675
         Net (loss) income per basic share             $           (0.62)    $            0.23     $        (0.39)    $         0.06
         Weighted average number of basic
         shares outstanding                                   12,159,199            12,165,353         12,229,071         12,235,865
         Net (loss) income per diluted share           $           (0.62)    $            0.23     $        (0.39)    $         0.05
         Weighted average number of diluted
         shares outstanding                                   12,159,199            12,212,527         12,229,071         12,790,933

         Fiscal 1997
         -----------                                            Thirteen              Thirteen           Thirteen           Thirteen
                                                             weeks ended           weeks ended        weeks ended        weeks ended
                                                       September 28,1996      December 28,1996      March 29,1997       June 28,1997
                                                       -----------------     -----------------     --------------     --------------

         Sales                                         $         264,551     $         290,933     $      264,043     $      255,301
         Gross profit                                  $          45,460     $          54,990     $       50,451     $       50,832
         Net (loss) income                             $          (2,195)    $            (548)    $           49     $          413

         Net (loss) income per basic share             $           (0.18)    $           (0.05)    $         --       $         0.03
         Weighted average number of basic
         shares outstanding                                   12,157,054            12,157,054         12,157,054         12,158,515
         Net (loss) income per diluted share           $           (0.18)    $           (0.05)    $         --       $         0.03
         Weighted average number of diluted
         shares outstanding                                   12,157,054            12,157,054         12,157,054         12,158,515

</TABLE>
                                      F-28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

20.      (LOSS) INCOME PER SHARE

         During 1997,  the Company  adopted SFAS No. 128  "Earnings  per Share."
         This  standard  requires  the  Company  to  present  basic and  diluted
         earnings  per share.  Basic  earnings per share is computed by dividing
         net income by the average  number of common shares  outstanding  during
         the period.  The diluted  earnings  per share  calculation  assumes the
         conversion of dilutive  stock options and warrants into common  shares.
         Previously  reported  earnings per share information have been restated
         as a result of the adoption.  The earnings per share  calculations  for
         all periods are as follows:

<TABLE>
<CAPTION>

                                                                 Fifty-two         Fifty-two       Forty-three ||        Nine
                                                               weeks ended       weeks ended       weeks ended ||     weeks ended
                                                             June 27, 1998     June 28, 1997     June 29, 1996 || September 2, 1995
                                                             -------------     -------------     ------------- || ---------------
         BASIC (LOSS) INCOME PER SHARE                                                                         ||
         -----------------------------                                                                         ||
<S>                                                          <C>               <C>               <C>              <C>
         Net  (loss) income available for common shares      $      (8,830)    $      (2,281)    $       2,526 || $       764,684
         Basic weighted average common shares outstanding       12,197,371        12,157,419        12,156,614 ||      54,066,463
         Basic earnings per share                            $        (.72)    $        (.19)    $         .21 || $         14.14
                                                                                                               ||
         DILUTED (LOSS) INCOME PER SHARE                                                                       ||
         -------------------------------                                                                       ||
         Net (loss) income available for common shares       $      (8,830)    $      (2,281)    $       2,526 || $       764,684
         Diluted weighted average common shares                 12,197,371        12,157,419        12,162,095 ||      54,066,463
         Diluted earnings per share                          $        (.72)    $        (.19)    $         .21 || $         14.14

</TABLE>

         There were 2,616,167; 1,320,817 and 1,358,617 options for the fifty-two
         weeks ended June 27, 1998, the fifty-two  weeks ended June 28, 1997 and
         the forty-three weeks ended June 29, 1996, respectively,  and 1,250,000
         warrants for the  fifty-two  weeks ended June 27, 1998,  the  fifty-two
         weeks ended June 28, 1997 and the forty-three weeks ended June 29, 1996
         excluded  from the  calculation  of diluted  (loss) income per share as
         they would have had an anti-dilutive effect on (loss) income per share.

21.      LITIGATION

         The Company and its  subsidiaries  are  involved in legal  proceedings,
         claims and litigation  arising in the ordinary  course of business.  In
         the  opinion  of   management,   the  outcome  of  such  current  legal
         proceedings,  claims and litigation  will not have a material impact on
         the Company's consolidated financial position.


22.      TERMINATED BUSINESS COMBINATION

         The Company entered into an Agreement and Plan of Reorganization  dated
         September  7, 1996 (as  amended as of  October  9,  1996)  with  ShopKo
         Stores, Inc. ("ShopKo") and Cabot Noble, Inc. ("Cabot Noble").

         On April 1, 1997,  the Company,  ShopKo and Cabot Noble  entered into a
         Termination  Agreement  mutually  terminating  the  Agreement  Plan  of
         Reorganization effective as of April 1, 1997.

         The  Company has  expensed  all fees and costs it has  incurred  and is
         obligated to pay in connection with the Proposed Transaction.

                                      F-29
<PAGE>


                                                                     Schedule II

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

                                               Balance at      Charged to                         Balance at
                                               beginning       costs and      Deductions-           end of
         Description                           of period         expense      Charge-offs           period
         -----------                           ---------         -------      -----------           ------
         Allowance for doubtful accounts
         -------------------------------
<S>                                         <C>             <C>              <C>              <C>
         9 weeks ended September 2, 1995    $      4,917    $        350     $       (645)    $      4,622

         43 weeks ended June 29, 1996              4,622           3,106           (3,537)           4,191

         52 weeks ended June 28, 1997              4,191           1,382           (2,870)           2,703

         52 weeks ended June 27, 1998              2,703            (186)          (1,115)           1,402

         Inventory shrink reserve
         ------------------------
         9 weeks ended September 2, 1995    $      5,495    $      3,100     $       (836)    $      7,759

         43 weeks ended June 29, 1996              7,759          16,385          (17,675)           6,469

         52 weeks ended June 28, 1997              6,469          13,122          (13,968)           5,623

         52 weeks ended June 27, 1998              5,623           6,310           (8,009)           3,924

         Inventory markdown reserve
         --------------------------
         9 weeks ended September 2, 1995    $       --      $     14,000     $       --       $     14,000

         43 weeks ended June 29, 1996             14,000            --             (8,639)           5,361

         52 weeks ended June 28, 1997              5,361            --             (4,616)             745

         52 weeks ended June 27, 1998                745            --               (745)            --

</TABLE>













                                      F-30