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 28, 1997 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:

                                                        Name of each exchange 
     Title of each class                                 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 10, 1997 was $91,953,942  (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  10,  1997,  12,159,199  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 28, 1997, the Company operated 103 stores in 22 metropolitan  markets
in 18 states under the name of Phar-Moru. Approximately 51% 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 28, 1997.

         Except  for  historical   information  contained  herein,  the  matters
discussed in this annual report 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

<PAGE>

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.

         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").   As  of  June  28,  1997,  no  borrowings  were
outstanding  under the Revolving Credit Facility,  other than standby letters of
credit totaling approximately $4.9 million.

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 5,540
employees at June 28, 1997.  Approximately 208 warehouse and distribution center
employees  in  Youngstown  are members of the  Teamsters  Union under a contract
which expires March 1, 2000.  Fifty-three 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, 1997.

         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 further ease and make the
customer's shopping experience pleasurable. The number of open checkout lanes is

<PAGE>

closely  monitored to  facilitate  the  efficient  and  comfortable  checkout of
customers.  These philosophies are regularly  communicated and reinforced by the
Company to its employees.

         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 and understanding  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 28,  1997  ("Fiscal  Year
1997"), each store served approximately 11,800 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  15%,  FoxMeyer Drug
Company,  a pharmaceutical  distributor and an affiliate of the Company from the
Effective  Date until it was  acquired by McKesson in late 1996,  accounted  for
approximately  8%, and Riser Foods,  Inc., a grocery  wholesaler,  accounted for
approximately  8% of the Company's  purchases  during  Fiscal Year 1997.  During
Fiscal  Year 1997,  no other  single  vendor  accounted  for more than 5% 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.

         In conjunction with its remodeling of five stores,  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 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 in 13
stores  scheduled  to be  remodeled  during the fiscal year ending June 27, 1998
("Fiscal Year 1998").

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
part of their overall product lines. In Fiscal Year 1997, 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  $5.6  million per store in its 103  stores.  In

<PAGE>

addition to the  approximately  $574.6 million in traditional  drugstore product
revenues in Fiscal Year 1997, the Company generated approximately $500.2 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
                                                            -----------------

                                    (103 Stores)              (102 Stores)             (102 Stores)
                                    ------------              ------------             ------------
                                    June 28, 1997             June 29, 1996            July 1, 1995
Category                             (52 Weeks)                 (52 Weeks)               (52 Weeks)
--------                             ----------                 ----------               ----------
<S>                                <C>                       <C>                       <C>
Prescription, Health and
  Beauty Care Products,
  Cosmetics and Greeting Cards          57.0%                     56.0%                    55.7%
All Other Merchandise                   43.0%                     44.0%                    44.3%
</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 1997.



                                Sales by Quarter During Fiscal Year 1997

                                                           Percentage of
                                                            Total Sales
                                                            -----------

                                First Quarter                 24.6%
                                Second Quarter                27.1
                                Third Quarter                 24.6
                                Fourth Quarter                23.7
                                                             -----
                                                             100.0%


Competition

         Phar-Mor's  stores  compete  primarily  with  conventional  drugstores,
supermarkets and mass merchant discounters.  Among these competitors,  many have
greater  financial  resources than Phar-Mor.  Phar-Mor's  strategy for competing
with  conventional  drugstores  is through its  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's  strategy for competing with  supermarkets in grocery product
lines where  Phar-Mor  does not have a broader  selection,  is to carry 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  and "The Card  Shop,"  "Pet  Place,"  "One Stop Baby  Shop," and
"Vitamin  Shoppe,"  are  designed  in part to  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.



<PAGE>


Capital Expenditures

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

         The Company's capital expenditures totaled $18.5 million in Fiscal Year
1997, including $2.9 million for the construction of new stores and $8.1 million
for rightsizing and remodeling existing stores. The Company anticipates spending
approximately  $19.1  million  for  capital  expenditures  in Fiscal  Year 1998,
including costs of remodeling 13 additional stores and opening two new stores.

Real Estate and Growth

         The Company  opened one new store in Fiscal Year 1997, one new store in
July 1997 and plans to open one more new store in Fiscal Year 1998. 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.

         Phar-Mor has reduced  store  occupancy  costs through  negotiated  rent
concessions  and store  rightsizings.  As of June 28,  1997,  Phar-Mor's  stores
ranged in size from approximately  30,000 to 70,000 square feet, with an average
store size of approximately 51,000 square feet. Since June 1993, the Company has
"rightsized"   14  stores,   reducing   the  average  size  of  such  stores  by
approximately  19,000 square feet and the average annual occupancy costs of such
stores by over $152,000 per store.

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, the scheduled  increase in the minimum wage will 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.

Proposed Business Combination

         The Company had entered  into an Agreement  and Plan of  Reorganization
dated as of  September  7, 1996,  (amended  as of  October 9, 1996) with  ShopKo
Stores,  Inc.  ("ShopKo"),  a retailer  specializing in prescription  and vision
benefit  management and health  decision  support  services,  to combine the two
companies under Cabot Noble,  Inc. ("Cabot  Noble"),  a Delaware holding company
(the "Proposed Transaction").


<PAGE>

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


Item 2.  Properties.

         As of June 28,  1997,  the  Company  operated  103 stores in 18 states.
Approximately  51% 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       North Carolina.................    9
     Florida...................  5       Ohio...........................   15
     Georgia...................  3       Oklahoma.......................    1
     Illinois..................  4       Pennsylvania...................   34
     Indiana...................  3       South Carolina.................    4
     Iowa......................  2       Virginia.......................   11
     Kansas....................  2       West Virginia..................    4
     Kentucky..................  1       Wisconsin......................    1


         As of June 28, 1997, 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 39% of all merchandise to the stores
in Fiscal  Year 1997,  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 1997,  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"), was issued to creditors on the Effective Date, pursuant to the terms of
the Plan of  Reorganization.  From the Effective Date through  October 31, 1995,
the only market  activity in the Common  Stock of which the Company is aware was
trading on a limited basis,  primarily  through  inter-dealer  quotations.  From
October  31,  1995 to  February  7, 1996,  the  Common  Stock was  included  for
quotation on the NASDAQ  SmallCap Market under the symbol "PMOR." Since February
8, 1996, the Common Stock has been included for quotation on the NASDAQ National
Market  under  the  symbol  "PMOR."  Prior to the  Effective  Date  there was no
established  public trading market for the Common Stock.  High and low prices of
the Common Stock from the Effective Date are shown in the table below:

                                       Fiscal Year 1997      Fiscal Year 1996
                                       ----------------      ----------------
                                        High      Low         High     Low
                                        ----      ---         ----     ---
         1st Quarter...............    $8 3/4    $6 1/8      $9 1/4   $6 13/16
         2nd Quarter...............     6 1/4     5 5/16      9 3/4    6 3/8
         3rd Quarter...............     5 11/16   4 5/8       8 1/4    6 7/8
         4th Quarter...............     6 3/8     4 3/4       8 5/8    7

         As of  September  10, 1997,  there were 2,777  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 and the 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       43 Weeks        9 Weeks              52 Weeks         53 Weeks          39 Weeks
                                  Ended          Ended           Ended               Ended             Ended             Ended
                                June 28,       June 29,       September 2,         July 1,           July 2,           June 26,
                                  1997           1996            1995                1995(b)           1994              1993
                                  ----           ----            ----                -------           ----              ----
<S>                          <C>            <C>             <C>                 <C>               <C>               <C>        
Net sales                    $ 1,074,828    $   874,284  || $   181,968         $ 1,412,661       $ 1,852,244       $ 1,434,256
                                                         ||   
(Loss) income from                                       ||   
continuing operations             (2,281)         2,526  ||     (10,389)(a)         (53,144)(c)      (142,763)(d)       (82,179)(e)
                                                         ||   
(Loss) income per share                                  ||   
from continuing operations          (.19)           .21  ||        (.19)               (.98)            (2.64)            (1.52)
                                                              
                                  As of          As of           As of       ||      As of             As of             As of
                                 June 28,       June 29,      September 2,   ||     July 1,           July 2,          June 26, 
                                  1997           1996            1995        ||      1995              1994              1993
                                  ----           ----            ----        ||      ----              ----              ----
Total assets                     362,605        363,463         390,207      ||     531,332           680,105           860,953
Long-term debt & capital                                                     ||
leases                           140,213        149,163         151,047      ||           -                 -                 -
Liabilities subject to                                                       ||
settlement                             -             -                -      ||   1,154,959         1,182,145         1,252,981
</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 and June 28, 1997 and for the 43 weeks ended June 29, 1996 and the
52 weeks ended June 28, 1997,  are not  comparable in material  respects to such
data for prior  periods.  Furthermore,  the Company's  results of operations for

<PAGE>

periods prior to the Effective Date are not necessarily indicative of results of
operations that may be achieved in the future.

          (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.

          (e)       Includes reorganization costs of $16.7 million.

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-26. 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.


<PAGE>

         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.

          Changes in the federal minimum wage will 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 28, 1997     June 29, 1996(a)    July 1, 1995
                                              -------------     ----------------    ------------
<S>                                                   <C>               <C>                <C>
          Stores, beginning of period                 102               143                168

          Stores opened                                 1                 -                  -

          Stores closed                                 -               (41)               (25)
                                                      ---               ---                ---     
          Stores, end of period                       103               102                143(b)
                                                      ===               ===                ===    
</TABLE>
          (a)       Includes   the  nine   weeks   ended   September   2,   1995
                    (Predecessor)  and the forty-three weeks ended June 29, 1996
                    (Successor).

          (b)       Includes  41 stores in the  process  of  closing  at July 1,
                    1995.

          The  historical  results of  operations  exclude the results of the 25
stores  closed in the fiscal  year ended July 1, 1995  ("Fiscal  Year 1995") (as
part of the  Company's  restructuring)  after the date their closing was decided
(July 2, 1994) and the results of 41 stores closed in the fiscal year ended June
29, 1996 ("Fiscal Year 1996") (also part of the Company's  restructuring)  after
the date their closing was decided (May 6, 1995).

          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 to its
results  of  operations  for prior  periods  due to the  Company's  adoption  of
fresh-start  reporting as of  September 2, 1995 (see Note 2 to the  Consolidated
Financial  Statements).  For  the  purposes  of the  following  discussion,  the
following pro forma  results of operations  for Fiscal Year 1996 and Fiscal Year
1995 will be compared.

<PAGE>


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 and Fiscal Year 1995 as if the Plan of  Reorganization  was  effective
July  2,  1994  and  includes  adjustments  to  reflect  the  implementation  of
fresh-start  reporting  as of July 2,  1994;  the  elimination  of the 41 stores
closed  in July 1995 from the  results  of Fiscal  Year  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
2, 1994 (see Notes 1 and 2 to the Consolidated Financial Statements).

<TABLE>
<CAPTION>
                                                                                     (000's)
                                                               -------------------------------------------------- 
                                                                   Fiscal Year 1996           Fiscal Year 1995
                                                               -----------------------    -----------------------
<S>                                                            <C>             <C>        <C>             <C>    
Sales                                                          $ 1,056,252     100.00%    $ 1,107,222     100.00%
Less:
Cost of goods sold, including occupancy and
 distribution costs                                                869,237      82.30%        897,214      81.03%
                                                                ----------                 ----------
Gross Profit                                                       187,015      17.70%        210,008      18.97%

Selling, general and administrative expenses                       155,369      14.71         161,609      14.60%

Chapter 11 professional fee accrual adjustment                      (1,530)     (0.15)           --           --

Depreciation and amortization                                       18,319       1.73%         18,725       1.69%
                                                                ----------                 ----------
Income from operations before interest and
 income taxes                                                       14,857       1.41%         29,674       2.68%
Interest expense                                                    17,465       1.65%         16,990       1.53%
Interest income                                                      8,614       0.81%           --           --
                                                                ----------                 ----------
Income before income taxes                                           6,006       0.57%         12,684       1.15%
Income tax provision                                                 2,676       0.25%          5,074       0.46%
                                                                ----------                 ----------
Net income                                                     $     3,330       0.32     $     7,610       0.69%
                                                                ==========                 ==========
</TABLE>

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)

<TABLE>
<CAPTION>
                                                                      (000's)
                                                                  Fiscal Year 1997
                                                               -----------------------
<S>                                                            <C>             <C>    
Sales                                                          $ 1,074,828     100.00%
Less:
Cost of goods sold, including occupancy and
distribution costs                                                 873,095      81.23%
                                                                ----------
Gross Profit                                                       201,733      18.77%

Selling, general and administrative                                168,218      15.65%
expenses
Terminated business combination expenses                             3,076       0.29%
Depreciation and amortization                                       20,982       1.95%
                                                                ----------
Income from operations before interest and
income taxes                                                         9,457       0.88%
Interest expense                                                    17,175       1.60%
Interest income                                                      5,437       0.51%
                                                                ----------
Loss before taxes                                                   (2,281)     (0.21)%
Income tax provision                                                  --
                                                                ----------
Net loss                                                       $    (2,281)     (0.21)%
                                                                ==========
</TABLE>

<PAGE>
     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.


Pro forma  results  for the 52 weeks  ended  June 29,  1996  (Fiscal  Year 1996)
compared to the pro forma  results  for the 52 weeks ended July 1, 1995  (Fiscal
Year 1995) (all dollar amounts in thousands)

         Comparable store sales for Fiscal Year 1996 were down $50,970, or 4.6%,
from  Fiscal  Year 1995.  This was due to the fact that (i) the  Company had not
opened a new store since September 1992, while competitors  opened a significant
number of new stores in the  markets  where the Company  operates,  and (ii) the
negative impact of penetration of third-party  prescription plans and its impact
on the Company's pharmacy business. Sales improved over the last two quarters of
Fiscal Year 1996 as a result of the Company's new marketing approach,  which was
launched  January 14, 1996.  Comparable store sales increased .04% in the fourth
quarter of Fiscal Year 1996 compared with the same period of the prior year with
June  increasing  2.96%.  The  new  marketing  approach  included  retail  price
reductions on over 3,000 items and additional advertising.

         Gross  profit for Fiscal Year 1996 was 1.27% of sales lower than Fiscal
Year 1995.  The  Company's new  marketing  approach  resulted in a lower product
gross margin. Vendor rebate income was .39% of sales lower than Fiscal Year 1995
due primarily to the company's lower sales level in Fiscal Year 1996.  Inventory
shrink and damage  expenses  were  reduced by .42% of sales in Fiscal  Year 1996
compared with Fiscal Year 1995.

         Selling,  general and administrative expenses for Fiscal Year 1996 were
0.11% of sales  higher than Fiscal Year 1995.  A 16.8%  reduction  in  corporate
overhead  cost was more than  offset by  increases  in  advertising  expenses to
support the new marketing approach.

         Fiscal Year 1996  included  $5,479 in interest  income on invested cash
and also  included  $3,135 in interest  income  received  on federal  income tax
refunds.  The pro forma Fiscal Year 1995 results  assumed the Company  would not
have earned any interest income.

Financial Condition and Liquidity  (all dollar amounts in thousands)

         The Company's cash position as of June 28, 1997 was $79,847.

         On September  11,  1995,  the Company  entered into a 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.


<PAGE>

         Borrowings  under the 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,  capital
expenditures,  investments,  dividends  and  other  distributions,  mergers  and
acquisitions,  and contains 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.  As of the  date  hereof,  the  Company  is in  compliance  with  all such
financial covenants.

         Credit  availability under the Revolving Credit Facility at any time is
the  lesser of the  Aggregate  Availability  (as  defined  in the  Facility)  or
$100,000.  The 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 Revolving  Credit Facility bear 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 ranges between
1.50% and 2.00%.  Under the terms of the Revolving Credit Facility,  the Company
is 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 28, 1997, there were no outstanding  advances and letters of
credit in the  amount of $4,924  were  outstanding  under the  Revolving  Credit
Facility. The Revolving Credit Facility expires on September 10, 1998.

         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  $24,418 during Fiscal Year 1997
as cash  provided by  operating  activities  of $11,460 was offset by $27,161 in
cash  used for  investing  activities  and  $8,717  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 $16,021 was offset by
$13,829  in cash  used for  investing  activities  and  $5,857  in cash used for
financing activities.

         The Company generated cash from operations of $16,021 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.

<PAGE>

         During  the 52 week  period  ended  July 1, 1995,  the  Company's  cash
position  increased  $29,056.  The significant  sources and uses of cash for the
period were as follows:

         The  Company  generated  $84,164  of cash  from  operations  after  net
interest expense (including adequate protection  payments) and professional fees
actually paid that were  associated  with the Chapter 11 Cases,  which  together
totaled $32,592.

         The Company  generated $78,323 from GOB sales and sale of real property
in Boardman, Ohio and Jacksonville, Florida. Of this amount $46,330 was paid to
reduce principal on the Company's prepetition revolving credit facility debt and
prepetition  senior  notes.  The Company also  received  $3,194 from the sale of
leasehold interests in 13 of the closed stores.

         The Company invested $9,088 in property and equipment.  The investments
were  primarily for store  "rightsizing,"  merchandising  fixtures and financial
systems. The Company invested $11,925 in video rental tapes.

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

         Management  believes the availability of the Revolving Credit Facility,
together with the  Company's  current cash position and expected cash flows from
operations  for Fiscal  Year 1998 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  1998 are  expected  to total
$27,400.  The major  expenditures  are  expected  to be (i) video  rental  tapes
($8,300),  (ii)  rightsizing and remodeling of existing stores  ($9,400),  (iii)
systems  and  technology  ($5,500)  and (iv) new stores  ($1,000).  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.

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.

         Under the terms of the Plan of  Reorganization  and Phar-Mor's  Amended
and Restated Articles of Incorporation,  each of the initial directors commenced
service as directors  on  September  11, 1995 and each will serve until the 1997
annual meeting of  shareholders  or until their  successors are elected and duly
qualified.

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

Name                  Age   Position(s)
----                  ---   -----------
M. David Schwartz     52    President and Chief Operating Officer

Sankar Krishnan       50    Senior Vice President and Chief Financial Officer

Warren E. Jeffery     48    Senior Vice President of Operations and Pharmacy

John R. Ficarro       45    Senior Vice President, Chief Administrative Officer,
                            General Counsel and Secretary

Michael K. Spear      52    Senior Vice President of Marketing and Merchandising

Abbey J. Butler       60    Director

Melvyn J. Estrin      55    Director

Malcolm T. Hopkins    69    Director

Richard M. McCarthy   60    Director


         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.


<PAGE>

         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.

         Michael K. Spear has served as Senior Vice  President of Marketing  and
Merchandising  of the  Company  since July 1996.  From 1995 to 1996,  Mr.  Spear
served as Executive Vice President Merchandising, Marketing, Information Systems
at Fred's,  Inc., a regional  grocery  retailer  located in Memphis,  Tennessee.
Prior to that, Mr. Spear served in a number of positions with Wal-Mart from 1973
to 1995,  beginning  as store  manager  until his most  recent  position as Vice
President, Divisional Merchandise Manager Hardlines at Wal-Mart's Sam's Club.

         Abbey J. 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 FWB  Bancorporation,  the holding  company of Grand Bank;  and as a
director of Carson, Inc., a global manufacturer of ethnic hair care products for
African-Americans  and persons of African descent,  UroHealth  Systems,  Inc., a
developer,  manufacturer and distributor for the urology, minimally invasive and
general  surgery,   and  gynecology  markets,  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 a member of the Executive  Committee
of the National  Committee  for the  Performing  Arts,  John F. Kennedy  Center,
Washington, D.C.

         Melvyn J. Estrin is  Co-Chairman  of the Board and  Co-Chief  Executive
Officer  of  Avatex.  Mr.  Estrin  also  serves as  managing  partner of Centaur
Partners,  L.P.,  an  investment  partnership,  and 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 a director and member of the Executive  Committee of
FWB  Bancorporation,  the holding  company of Grand  Bank;  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,  and
UroHealth  Systems,  Inc., a developer,  manufacturer  and  distributor  for the
urology,  minimally invasive and general surgery,  and gynecology  markets.  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.

         Malcolm T. Hopkins, a private  investor and consultant  since 1984, was
Vice Chairman,  Chief Financial Officer, a member of the Board of Directors, and
a  member  of  the  three-man  Senior  Operating  Committee  of  the  St.  Regis
Corporation until, in 1984, St. Regis was acquired by Champion International. In
addition to his corporate  financial and administrative  responsibilities at St.
Regis,  Mr.  Hopkins  was the senior  officer in charge of  strategic  planning,
international  financial policy, and special government  relations.  He also had
senior   operating   responsibility   for  St.  Regis'  chemical  and  insurance
operations.  Mr.  Hopkins has served on the Board of Directors of the  following
companies  since the dates  indicated:  the  Columbia Gas System,  Inc.  (1982),
MAPCO, Inc. (1986), the Metropolitan  Series Funds (1985),  various mutual funds
of State Street  Research  and  Management  Company  (1997),  EMCOR Group,  Inc.
(1994), and U.S. Home Corporation (1993). He received an A. B. degree from Union
College and an L.L.B. degree from Albany Law School.


<PAGE>

         Richard M. McCarthy has over thirty-years experience in credit and risk
management.  From 1962 until his retirement in 1994,  Mr.  McCarthy held various
credit related position with Procter & Gamble  Distributing  Company,  including
Manager of Systems Operations (1987),  Manager of Credit and Accounts Receivable
(1989),  and Manager of Credit and Risk Management  (1991 to 1994). In this last
capacity,  he was  responsible for all of Procter & Gamble's  domestic  accounts
receivable.  Mr. McCarthy was a member of the Board of Directors of the National
Association  of  Credit  Management,   the  Cincinnati   Association  of  Credit
Management,  the  National  Health & Beauty  Aids  Credit  Association,  and the
National Food  Manufacturers  Credit  Association.  He holds a B.S. from Cornell
University  and served as an officer in the United States Marine Corps from 1958
to 1961.

Committees of the Board of Directors; Meetings

         The Board met seventeen  times during  Fiscal Year 1997.  During Fiscal
Year 1997, each director attended all Board meetings during the time such person
was a member of the Board.

         On August 27,  1996,  FoxMeyer  Drug  Company  filed a  petition  under
Chapter  11 of the  United  States  Bankruptcy  Code.  At the time of the filing
Messrs. Butler and Estrin were executive officers and directors of 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,  Messrs.  Butler and Estrin were  directors of Ben  Franklin  Retail
Stores, Inc.

         The Board has a standing  Audit  Committee and a standing  Compensation
Committee.

         Audit  Committee.  The Audit  Committee of the Board provides the Board
with an independent review of the Company's accounting policies, the adequacy of
financial controls and the reliability of financial  information reported to the
public.  The Audit  Committee also conducts  examinations  of the affairs of the
Company  as  required  by  law  or as  directed  by the  Board,  supervises  the
activities of the internal audit department and reviews the services provided by
the independent auditors. For Fiscal Year 1997, the Audit Committee consisted of
Mr. Hopkins (the Committee Chairman) and Mr. McCarthy,  and met three times. For
Fiscal Year 1998,  the Audit  Committee  currently  consists of Mr. Hopkins (the
Committee Chairman) and Mr. McCarthy.

         Compensation  Committee.   The  Compensation  Committee  of  the  Board
determines  compensation  and benefits for officers,  reviews salary and benefit
changes for other senior officers,  administers the Phar-Mor,  Inc. 1995 Amended
and Restated Stock  Incentive Plan (the "Phar-Mor Stock  Incentive  Plan"),  the
Phar-Mor,  Inc. 1995 Director Stock Plan (the  "Phar-Mor  Director Stock Plan"),
the  Phar-Mor,  Inc.  1996  Director  Retirement  Plan (the  "Phar-Mor  Director
Retirement  Plan")  and other  employee  benefits.  For Fiscal  Year  1997,  the
Compensation  Committee  consisted  of Ms.  Linda Haft and  Messrs.  Butler (the
Committee Chairman), Estrin and Hopkins, and met one time. For Fiscal Year 1998,
the Compensation  Committee currently consists of Messrs.  Butler (the Committee
Chairman), Estrin and Hopkins.

         Section 16(a) Beneficial  Ownership Reporting  Compliance.  Pursuant to
Section 16(a) of the Securities  Exchange Act of 1934, as amended (the "Exchange
Act"),  the Company is  required to identify  any person who, at any time during
Fiscal Year 1997,  was a director of the Company,  an  executive  officer of the
Company  or its  subsidiaries  or  beneficial  owner  of  more  than  10% of the
Company's  Common Stock or any other person who was subject to Section  16(a) of
the Exchange Act with respect to the Company that during Fiscal Year 1997 failed
to file on a timely basis with the S.E.C.  any report  required by Section 16(a)
of the Exchange Act, which are Form 3 (an initial report of beneficial ownership
of common  stock) or on Form 4 or Form 5  (relating  to  changes  in  beneficial
ownership of common  stock).  Based solely on a review of such Forms 3, 4 and 5,
and amendments thereto,  furnished to the Company by the reporting persons known
to it, as required by Rule  16a-3(e),  except as set forth  below,  no reporting
person that was required during Fiscal Year 1997 to comply with Section 16(a) of
the  Exchange Act failed to comply with such  requirements.  A Form 5 report was
not filed on a timely basis by directors Ms. Haft, and Messrs.  Butler,  Estrin,
Haft,  Hopkins and McCarthy with respect to automatic grants of stock options of
5,000 shares each granted on October 1, 1996, and where applicable, with respect
to the automatic receipt of shares of Common Stock of the Company in lieu of all
or a portion of their annual retainer. A Form 4 report was not filed on a timely
basis by Mr.  Spear with  respect to options  granted to him during  Fiscal Year
1997 and a Form 3 initial  filing  report was not filed on a timely basis by Mr.
Krishnan  during  Fiscal Year 1997.  All failures to timely file annual  reports
were  inadvertent  and do not relate to the actual purchase of or sale of shares
of Common Stock of the Company.

<PAGE>


Item 11.  Executive Compensation.

Summary Compensation Table

         The following table sets forth information  concerning the compensation
of the Chief  Executive  Officer  and the other  four  most  highly  compensated
executive  officers of the Company who served in those capacities as of June 28,
1997 (the "Named Officers").
<TABLE>
<CAPTION>
                                                                                           Long-Term
                                                                                          Compensation
                                                     Annual Compensation                     Awards
                                        -----------------------------------------------   ------------
           Name and             Fiscal                                  Other Annual         Stock           All Other
      Principal Position         Year   Salary ($)   Bonus ($)(1)    Compensation ($)(3)   Options(#)    Compensation ($)(4)
                                                                                    
<S>                              <C>      <C>           <C>              <C>                 <C>               <C>    
Robert M. Haft (5)               1997     972,000       583,200                    --          5,000           203,662
Former Chairman and CEO          1996     726,936       270,000                    --        256,250            66,637

M. David Schwartz                1997     620,076       620,076                    --           --               8,305
President and COO                1996     571,632       215,000                    --        175,000           505,548
                                 1995     500,000       200,000                    --           --               2,602

Michael Spear                    1997     275,000       325,000                    --         50,000           234,233
Senior Vice President -
Marketing and Merchandising

Warren E. Jeffery                1997     190,585       183,000                    --         50,000             6,671
Senior Vice President - Store    1996     176,265        50,000                    --         50,000            78,540
and Pharmacy Operations          1995     168,390        80,000                    --           --                 875

John R. Ficarro                  1997     186,791       173,000                    --           --               6,440
Senior Vice President, CAO       1996     155,016        50,000                    --         15,000            34,013
Secretary and General            1995      59,622        28,000                    --           --                --
Counsel

<FN>
(1)  Bonuses  are  shown  for the  fiscal  year  earned,  but may be paid in the
     following year.

(2)  The $325,000 in bonus  earned by Mr.  Spear in Fiscal Year 1997  includes a
     $100,000  "signing"  bonus paid upon his acceptance of employment  with the
     Company and relocation of his residence to Youngstown, Ohio.

(3)  No   information   is  provided  in  the  column   labeled   "Other  Annual
     Compensation"  since the aggregate amount of perquisites and other personal
     benefits  for the periods  indicated  is less than the lesser of $50,000 or
     10% of the total  annual  salary and bonus  reported  for each of the named
     officers.

(4)  Information  provided in the column  labeled "All Other  Compensation"  for
     Fiscal  Year  1997  includes  the  following:  (i) the  value of  insurance
     premiums paid by the Company for the benefit of each of the Named  Officers
     as follows:  Mr. Haft, $183,941;  Mr. Schwartz,  $2,451; Mr. Spear, $2,451;
     Mr. Jeffery, $2,455 and Mr. Ficarro, $2,451; (ii) matching contributions to
     the Company's  401(k)  Employee  Savings and Retirement Plan to each of the
     Named Officers as follows:  Mr. Haft,  $3,450;  Mr. Schwartz,  $5,854;  Mr.
     Jeffery, $4,216; and Mr. Ficarro, $3,989; (iii) moving expenses paid by the
     Company for the benefit of each of the Named Officers as follows: Mr. Spear
     $231,782;  (iv)  matching  contributions  to  the  Company's  non-qualified
     deferred compensation plan as follows: Mr. Haft, $16,271.

(5)  Mr. Haft resigned as Chairman and CEO effective September 19, 1997.
</FN>
</TABLE>


<PAGE>

Option Grants in Fiscal Year 1997

         Option Grants.  The table below shows,  for each of the Named Officers,
the number of options  granted  during Fiscal Year 1997.  All of the options set
forth below were issued  under the Phar-Mor  Stock  Incentive  Plan,  other than
options to  purchase  5,000  shares  granted to Mr.  Haft (and each of the other
directors of the Company) under the Phar-Mor Director Stock Plan. As of June 28,
1997, no stock appreciation rights ("SARs") were outstanding.
<TABLE>
<CAPTION>

                                                                                        Potential Realizable
                                                                                          Value at Assumed
                                                                                        Annual Rates of Stock
                                               Percent of Total                          Price Appreciation
                                               Options Granted                           for Option Term (4) 
                         Number of Securities    to Employees                               (in thousands)
Name and                  Underlying Options   Fiscal Year 1997   Exercise   Expiration  -------------------
Position                      Granted (#)          (%) (3)      Price ($/Sh)    Date      5% ($)   10% ($)
--------                      -----------          -------      ------------    ----      ------   -------

<S>                              <C>                 <C>            <C>       <C>          <C>      <C>
Robert Haft (1)                   5,000               5.0           6.17      10/1/2001     9        19

M. David Schwartz                   -                 -               -           -         -        -

Michael Spear                       -                 -               -           -         -        -

Warren E. Jeffery (2)            50,000              50.0           5.44       6/5/2004    111      258

John R. Ficarro                     -                 -               -           -         -        -

<FN>
(1)      The options  issued to Mr. Haft under the Phar-Mor  Director Stock Plan
         vest immediately upon grant and have a term of 5 years.

(2)      Options to purchase  50,000  shares  granted to Mr.  Jeffery  under the
         Phar-Mor  Stock  Incentive  Plan vested with  respect to 33 1/3% of the
         underlying  shares on the date of grant (June 5, 1997) and will vest in
         additional  increments of 33 1/3% of the underlying  shares (subject to
         adjustment) on each of the succeeding two anniversaries of such date.

(3)      Based on a total of 100,000 options granted to employees of Phar-Mor.

(4)      Annual  growth-rate  assumptions are prescribed by the rules of the SEC
         and do not  reflect  actual  or  projected  price  appreciation  of the
         underlying Common Stock.
</FN>
</TABLE>

         Excluded  from this  table are stock  options  to  purchase  a total of
300,000  shares  that  were  granted  as of June 5,  1997 to Mr.  Haft  (125,000
shares); Mr. Schwartz (100,000 shares);  and Mr. Ficarro (75,000 shares).  These
option grants were  seven-year,  non-qualified  options at $5.4375 per share and
exercisable as to one-third on June 5, 1997 and as to one-third  additionally on
the first and second  anniversaries  thereof.  The grants of these  options  are
subject to shareholder approval of a proposed increase of available shares under
the Phar-Mor  Stock  Incentive  Plan.  See "--  Executive  Compensation  Plans -
Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan."

Option Exercises and Values

         Except as  otherwise  indicated  in the  foregoing  table,  the options
granted under the Phar-Mor  Stock  Incentive  Plan vested with respect to 20% of
the  underlying  shares on each of September  11, 1995,  September  11, 1996 and
September  11,  1997,  and  will  vest in  additional  increments  of 20% of the
underlying  shares  (subject to  adjustment) on September 11, 1998 and September
11, 1999. All options under the Phar-Mor Stock  Incentive Plan (except for those
held by Mr. Haft) will be subject to early  termination  within periods of up to
one year  (depending  on the  cause  of a  termination  of  service)  after  the
effective date of a termination  of service under the Phar-Mor  Stock  Incentive
Plan or (if  applicable)  the  expiration  date under an  applicable  employment
agreement.  Except for Mr. Haft, (i) to the extent then not vested,  the options
will terminate and (ii) to the extent then vested,  they may be exercised within

<PAGE>

one year  following  the death or  disability  of the holder of the option,  and
within  six  months  following  any  other  termination  event,  except  where a
termination  by the Company is for cause,  in which case the  options  then will
terminate.

Option Exercises and Values for Fiscal Year 1997

         The  following  table sets forth  certain  information  concerning  the
exercise of stock options,  the number of unexercised options, and the values of
unexercised options at June 28, 1997 for the Named Executive Officers.  Value is
considered to be, in the case of exercised  options,  the difference between the
exercised price and the market price on the date of exercise and, in the case of
unexercised  options,  the difference  between the exercise price and the market
price on June 28, 1997.
<TABLE>
<CAPTION>

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR END OPTIONS VALUES


                                                             Number of Securities          Value of Unexercised
                                                            Underlying Unexercised       In-the-Money Options at
                     Shares Acquired                       Options at June 28, 1997         June 28, 1997 ($)
Name                 On Exercise (#)  Value Realized ($)  (Exercisable/Unexercisable)  (Exercisable/Unexercisable)
----                 ---------------  ------------------  ---------------------------  ---------------------------
                                      
<S>                  <C>              <C>                  <C>                          <C>
Robert M. Haft              --               --                112,500/143,750                 $391/$0
M. David Schwartz           --               --                 70,000/105,000                    --
Michael Spear               --               --                 10,000/40,000                     --
Warren E. Jeffery           --               --                 36,667/63,333               $13,542/$27,083
John R. Ficarro             --               --                  6,000/9,000                      --


</TABLE>
Executive Compensation Plans

         Phar-Mor,  Inc. 1995 Amended and Restated  Stock  Incentive  Plan.  The
Phar-Mor Stock Incentive Plan was adopted in order to attract, reward and retain
key personnel (including officers,  whether or not directors) of the Company and
its  subsidiaries and certain other closely related eligible persons who provide
substantial  services to such entities ("Eligible  Persons") and to provide them
with long-term  incentives that are linked to the Company's  stock  performance.
Approximately  9 officers and  approximately  414 other employees of the Company
and its  subsidiaries are currently  eligible to participate  under the Phar-Mor
Stock Incentive Plan.

         The Phar-Mor Stock Incentive Plan is  administered by the  Compensation
Committee of the Board (the "Administrator"). A maximum of 913,333 shares of the
Company's  Common Stock (subject to adjustment)  may be issued upon the exercise
of awards granted under the Phar-Mor Stock  Incentive Plan. As of June 28, 1997,
a total of 844,150 shares of the Company's  Common Stock were subject to options
granted under the Phar-Mor Stock Incentive Plan.

         The Phar-Mor Stock  Incentive  Plan  authorizes the issuance of options
and (subject to plan limitations) certain stock appreciation rights ("SARs"). As
is customary in  incentive  plans of this nature,  the number and kind of shares
available  under the Phar-Mor Stock  Incentive  Plan,  share limits,  and shares
subject to outstanding  awards are subject to adjustment in the event of certain
reorganizations,  recapitalization's,  stock splits, stock dividends, spin-offs,
property distributions or other similar extraordinary  transactions or events in
respect of the Company or the shares of the Company.  Shares relating to options
or SARs that are not  exercised or that expire or are canceled will again become
available for grant  purposes  under the Phar-Mor  Stock  Incentive  Plan to the
extent  permitted  by law and the plan.  Awards  may be  repriced  or  otherwise
amended after grant,  provided that the amendment does not adversely  affect the
holder's  rights without his or her consent.  A maximum of 277,778 shares of the
Company's  Common  Stock may be subject to options  that during any twelve month
period are granted to any Eligible  Person under the  Phar-Mor  Stock  Incentive
Plan.

         The exercise  price of the options  granted  under the  Phar-Mor  Stock
Incentive  Plan  generally  may not be less  than the fair  market  value of the
Company's  Common  Stock on the date of grant or such  greater  amount as may be
determined  by the  Administrator.  An option may either be an  incentive  stock

<PAGE>

option,  as defined in the Code, or a  non-qualified  stock option.  All 844,150
options  granted  pursuant to the Phar-Mor  Stock  Incentive Plan as of June 28,
1997 are  non-qualified  stock  options.  The aggregate fair market value of the
Common Stock  (determined at the time the option is granted) for which incentive
stock options may be first  exercisable  by an option holder during any calendar
year under the Phar-Mor Stock Incentive Plan or any other plan of the Company or
its subsidiaries may not exceed  $100,000.  A non-qualified  stock option is not
subject to any of these limitations.

         Subject to early  termination  or  acceleration  provisions  (which are
summarized below), an option generally will be exercisable, in whole or in part,
from the date  specified in the related  award  agreement  until the  expiration
date,  all as  determined by the  Administrator.  Earlier  expiration  may occur
following a termination of service. In no event, however, is an option under the
Phar-Mor Stock Incentive Plan  exercisable  more than seven years after its date
of grant.

         Upon the occurrence of either (A) a Change in Control Event (as defined
in the Phar-Mor Stock Incentive Plan to include,  but not be limited to, (i) the
approval by the  shareholders  of the Company of a dissolution  or  liquidation,
(ii) certain  agreements of merger or  consolidation  resulting in the Company's
shareholders,  or entities associated or affiliated with them, holding less than
50% of the voting stock of the surviving entity, (iii) the sale of substantially
all  the  assets  of the  Company  as an  entirety  to a  person  that is not an
affiliated  person of the Company,  (iv) a person or group (other than Robert M.
Haft,  Hamilton  Morgan or other 25% owners as of September 11, 1995 and certain
related  entities)  acquiring  beneficial  ownership  of over 50% of the  voting
power,  or (v) certain  changes in the  composition of the Board),  or (B) under
other  circumstances (such as a termination of service),  the Administrator,  in
its discretion,  may provide for acceleration or extension of the exercisability
of awards,  or provide for certain  other  limited  benefits,  which may include
SARs, under some or all awards and may determine the extent,  duration and other
conditions  of such  additional  rights by  amendment to  outstanding  awards or
otherwise.  The Board may terminate or amend the Phar-Mor Stock  Incentive Plan,
subject to the rights of holders of outstanding  options.  If an amendment would
(i)  materially  increase the benefits  accruing to Eligible  Persons  under the
Phar-Mor Stock Incentive Plan, (ii) materially  increase the aggregate number of
shares that may be issued  under the Phar-Mor  Stock  Incentive  Plan,  or (iii)
materially  modify the  eligibility  requirements  for  participation  under the
Phar-Mor Stock Incentive Plan, the amendment,  to the extent deemed necessary by
the Board or the  Administrator  or then  required by  applicable  law,  must be
approved by the shareholders.

         An amendment to the Phar-Mor Stock Incentive Plan increasing the number
of shares available under the Phar-Mor Stock Incentive Plan from 913,333 to 1.75
million  has been  approved by the Board,  but has not yet been  approved by the
shareholders. Options to purchase a total of 375,000 shares have been granted to
certain  executive  officers  subject to the  approval of this  amendment by the
shareholders.

         401(k) Employee Savings Plan.  Employees of the Company are eligible to
participate in the 401(k) Employee Savings Plan (the "401(k) Plan").  The 401(k)
Plan is a tax-qualified  profit sharing plan that provides for pre-tax deferrals
by  employees  and  employer  matching  and  profit-sharing  contributions.   In
addition,  warehouse  employees  and drivers are  eligible to  participate  in a
separate 401(k) savings plan.

         Retirement  Plan. The Company  maintains a  noncontributory  retirement
plan (the "Retirement Plan") that provides benefits, following retirement at age
65 or older with one or more years of  credited  service (or age 55 with five or
more years of credited service),  to salaried,  non-union  employees,  including
officers of the Company. The Retirement Plan provides a monthly pension for life
to supplement personal savings and Social Security benefits. The following table
shows as of June 28, 1997 the estimated  annual benefits payable upon retirement
at age 65 under  the  Retirement  Plan by  specified  compensation  and years of
service classification applicable to officers:

  Average Annual                   15 Years   20 Years   25 Years   30 or More
   Compensation                    Service    Service    Service   Years Service
   ------------                    -------    -------    -------   -------------
  $100,000 . . . . . . . . . . .   $14,109    $18 182    $23,515      $28,218
  $150,000 . . . . . . . . . . .   $21,984    $29,312    $36,640      $43,968

         The  amounts  shown in the  table  are  based on an  assumed  continued
applicability of the $150,000  compensation  limit for qualified plans under the
Code.  Each year's accrued  benefit under the  Retirement  Plan is 0.6% of final
average annual  compensation  not in excess of a rolling  average of the last 35
years annual  social  security  wage base,  plus 1.05% of final  average  annual

<PAGE>

compensation  in  excess  of such  average  wage  base,  multiplied  by years of
credited service up to a maximum of 30 years.  The estimated  annual  retirement
benefits,  for  the  individuals  named  below,  were  developed  based  on 1995
compensation,  projected covered compensation, and the respective dates of birth
and projected  credited  service at normal  retirement  age under the Retirement
Plan. The credited years of service as of June 29, 1997 for individuals named in
the Summary Compensation Table who are eligible to participate in the Retirement
Plan are as follows:  Mr.  Schwartz - 4 years;  Mr.  Jeffrey - 4 years;  and Mr.
Ficarro - 2 years.  The plan was  frozen  as of June 29,  1996.  Assuming  these
individuals remain employed until the vesting period is reached, their estimated
annual  retirement  benefits under the plan will be: Mr. Schwartz - $7,516;  Mr.
Jeffrey - $5,585; and Mr. Ficarro - $2,934.

         To the extent  permitted  by law, the minimum  eligibility  and vesting
provisions  under these and other  retirement,  health and welfare benefit plans
were waived for Mr. Haft under the terms of his employment agreement.

         Other  Pension  Plans.  In addition to the  Retirement  Plan  discussed
above,  the Company  maintains  two other  pension  plans for various  groups of
employees: (i) the Phar-Mor, Inc. Retirement Plan for Hourly Employees at Niles,
Ohio Store and (ii) Tamco  Distributors  Company  Warehouse and Drivers  Pension
Plan (collectively,  the "Pension Plans"). The Pension Plans are defined benefit
plans  subject  to the  Employee  Retirement  Income  Security  Act of 1974  (as
amended, "ERISA").

         Corporate Executive Bonus Plan. Under the Company's Corporate Executive
Bonus  Plan for Fiscal  Year 1997 (the "1997  Bonus  Plan"),  certain  executive
officers  would be eligible  to receive a cash bonus if the  Company  achieved a
pre-established  level of  performance  for the fiscal year.  The  participating
executive  would  receive  at  least  60%  of his  or  her  individual  targeted
percentage bonus ("target bonus") if this performance were at target, and 35% of
the target bonus (e.g., if the target bonus is 50%, 35% of 50%) if the Company's
performance were at entry level; the remaining amount (up to 40%) was subject to
the  discretion of the Board.  If the Company did not achieve the targeted level
of performance,  but achieved an "entry level" or minimum performance  threshold
for payment of bonuses  established  by the Board,  the  specific  bonus  amount
between minimum and target bonus levels would be  extrapolated,  pro rata, based
on the  relationship  of actual  performance  to the entry and target  levels of
performance;  60% of such amount would be mandatory and up to 40% discretionary.
For Fiscal Year 1997,  total  bonuses of  $3,209,000  were paid to 116 employees
under the 1997 Bonus Plan.

         Mr.  Haft's  annual cash bonus  rights under his  employment  agreement
(which are subject to each year's bonus plan,  or  otherwise  provided for under
separate  agreement  with the  Company)  are fixed at a  maximum  of 60% of base
salary, but are not be subject to the 60/40 discretionary  allocation applicable
to other executives. If the Company's performance reaches the target performance
level,  the full 60%  target  bonus will be  payable  to him;  if the  Company's
performance  reaches the entry level  performance,  a 21% minimum  bonus will be
paid,  with the actual bonus amount  between 21% and 60% to be determined by the
extrapolation  methodology  described  above.  See "-- Employment  Contracts and
Termination of Employment and Change-In-Control Arrangements - Mr. Robert Haft."

Compensation of Directors

         Each director of the Company (other than Mr. Haft, who waived such fees
for as long as Mr. Haft was also an officer of the  Company)  receives an annual
retainer fee of $25,000 and an attendance fee of $1,000 ($2,000 in the case of a
committee chairman) for each meeting of the Board, and of each of the committees
of the Board  attended,  other than  committee  meetings  occurring on a date on
which a Board meeting is scheduled. All directors are also reimbursed for travel
and  other  out-of-pocket  expenses  incurred  by them  in  attending  Board  or
committee meetings.

         Pursuant to the  Phar-Mor  Director  Stock Plan,  directors  receive an
annual grant of options to purchase 5,000 shares of Common Stock,  and may elect
to  receive  additional  shares of Common  Stock in lieu of all or a portion  of
their annual retainer.  Directors may elect to defer payment of all or a portion
of their annual retainer under a non-qualified,  unfunded deferred  compensation
plan.  Deferred  amounts are invested,  at the election of the  director,  in an
interest-bearing  account or a stock equivalent  account.  The amounts deferred,
plus any  appreciation  thereon,  are paid in cash on the dates specified by the
director.  The Phar-Mor  Director Stock Plan has been approved by the Board, but
has not yet been approved by the shareholders.


<PAGE>

         Pursuant to the Phar-Mor Director  Retirement Plan, the Company credits
each  director  of  the  Company  who is not an  employee  of the  Company  or a
subsidiary  of the  Company  and who has served as  director  for at least three
years (an "Eligible Director")  annually,  commencing in October 1996, with that
number of shares of Common Stock whose  aggregate fair market value on a date as
specified under the Phar-Mor  Director  Retirement Plan equals the amount of the
then current annual retainer  payable to such Eligible  Director,  or such other
amount as may be determined by resolution of the  Compensation  Committee of the
Board.  The award is not in the form of actual  shares of Common  Stock,  and no
shares of Common  Stock will be set aside for the benefit of Eligible  Directors
under the  Phar-Mor  Director  Retirement  Plan.  The number of shares of Common
Stock in each retirement  share account is subject to adjustment for dilution or
otherwise as set forth in the Phar-Mor  Director  Retirement  Plan. The Phar-Mor
Director  Retirement  Plan has been approved by the Board,  but has not yet been
approved by the shareholders.


Employment  Contracts  and  Termination  of  Employment  and Change-In-Control
Arrangements

         The Company has entered into employment  agreements with Messrs.  Haft,
Schwartz, Spear, Jeffery and Ficarro each of which is described below.

         Mr.  Robert  Haft.  On  September  19,  1997,  in  connection  with the
consummation of the transactions contemplated by the HM Redemption Agreement (as
defined and  discussed  below under  "Security  Ownership of Certain  Beneficial
Owners and Management -- Potential Change of Control"), the Company and Mr. Haft
entered into a severance  agreement  (the  "Severance  Agreement"),  pursuant to
which Mr. Haft resigned as Chairman of the Board and Chief Executive  Officer of
the Company and received a lump-sum cash payment of  $4,417,000.  In the event a
long-term  performance  payment  becomes  payable to Mr.  Haft  pursuant  to his
employment  agreement,  it will be paid at 75% of the amount provided for in the
employment agreement. The terms of the long term performance payout provided for
in Mr. Haft's employment agreement were as follows:  commencing with Fiscal Year
1998 and each third year thereafter during the term of the employment agreement,
Mr. Haft would receive a long-term  performance  payout in an amount (subject to
the offset  referred to in the last sentence of this  paragraph)  equal to 3% of
any excess of (i) the aggregate  market value of the  publicly-traded  shares of
Common Stock based on the average  closing price for the thirty  (30)-day period
ending on the last day of the subject  period ( less the sum of (a) the proceeds
from the  exercise  during such  period of any options or warrants  plus (b) any
cash or property  consideration  actually  received  by the Company  during such
period  from the  issuance  of any  shares of its  Common  Stock)  over (ii) the
aggregate  market value of the  publicly-traded  shares of Common Stock based on
the average  closing price for the thirty (30)-day period ending on the last day
of the immediately  prior subject period (provided that for the first day of the
period ending on June 30, 1998, such average closing price shall be deemed to be
$8.00 per share).  One-half of the aggregate  annual  bonuses paid or payable in
respect of the applicable three-year period will be offset against the long-term
payout amount.

         In addition, pursuant to the Severance Agreement, the Company agreed to
continue to provide benefits to Mr. Haft through September 19, 2000 and maintain
Mr. Haft's  Washington,  D.C. office and his current secretary through September
19, 1999.  Mr. Haft has until  February  2000,  October 2000 and October 2001 to
exercise  earlier granted options and 180 days from the approval by shareholders
of the increase in available  shares under the Phar-Mor Stock  Incentive Plan to
exercise his most recent options.  The most recent grant was to purchase 125,000
shares  at a price of  $5.437  per share  and is fully  exercisable  during  the
180-day  period.  The Company also agreed to indemnify  Mr. Haft and provide him
with tax  reimbursement  with respect to any  payments  that  constitute  excess
parachute  payments under Federal income tax laws. The Company further agreed to
provide a letter of credit in the amount of approximately $2.9 million to secure
its  contractual  obligations  under the Severance  Agreement.  Mr. Haft and the
Company  released each other from all claims,  except claims by Mr. Haft against
Messrs.  Butler and  Estrin  other  than in their  capacities  as members of the
Board. See "Certain Relationships and Related Transactions --Hamilton Morgan."

         The principal terms of the employment agreement between the Company and
Mr.  Haft,  which was in  effect  prior to the  execution  and  delivery  of the
Severance Agreement are described below. The employment  agreement with Mr. Haft
had a rolling three-year term commencing on September 11, 1995 that provided for
Mr.  Haft to serve as Chief  Executive  Officer and  Chairman of the Board.  Mr.
Haft's  initial  annual  base salary was  $900,000 subject to annual  cumulative
increases of 8%. The agreement  provided for an annual  incentive  bonus under a

<PAGE>

Company-sponsored  bonus plan (if a bonus plan were  approved,  or  otherwise as
provided  under a separate  agreement  between  the Company  and Mr.  Haft),  if
reasonable  performance  objectives approved by the Board were achieved,  with a
maximum  bonus  of  60%  and a  minimum  bonus  of 21% of  annual  base  salary,
commencing in Fiscal Year 1996.

         Mr. Haft was also granted options to purchase  256,250 shares of Common
Stock at $8.00 per share under the Phar-Mor  Stock  Incentive  Plan.  Mr. Haft's
employment  agreement  provided for  additional  benefits in the future not less
favorable than those  provided  under options  granted or to be granted to other
executives during the term of the employment agreement.

         Pursuant to his employment agreement,  Mr. Haft was permitted to engage
in activities, in addition to serving as Chief Executive Officer and Chairman of
the  Board,  and  pursue  other  investments  (including  activities  that  were
competitive with the Company's  business provided that they did not unreasonably
impede  the  performance  of his  duties  for the  Company  and did not  violate
applicable  legal  requirements).  The Board had the  authority to terminate Mr.
Haft's  employment  without  compensation  under  certain   circumstances.   The
agreement  did  not  require  Mr.  Haft to  provide  services  at the  Company's
principal locations.  Mr. Haft could have resigned at any time without violating
the agreement,  although his  resignation  without cause and without the Board's
consent would  otherwise  have been treated like a termination  for cause by the
Company.

         The employment agreement with Mr.  Haft  further  provided  for various
employee  benefits and perquisites,  including but not limited to payment,  on a
tax reimbursed, "grossed up" basis, for a $3,000,000 whole life insurance policy
on Mr.  Haft's  life or, at Mr.  Haft's  election,  a term policy  requiring  an
equivalent  premium;  disability  insurance adequate to pay Mr. Haft 60% of base
salary until age 70;  reimbursement of all medical and dental costs for Mr. Haft
and his  family;  the use of a  company-owned  car;  and  business  expenses  at
locations  other than the Company's  headquarters.  The agreement  with Mr. Haft
provided that, if it were  terminated  other than for cause,  he would have been
entitled  to the present  value of his base  salary,  discounted  at 5%, for the
remaining contract term, annual and long-term incentive payments payable for the
remaining contract term, annual and long-term incentive payments payable for the
remainder of the term, the  accelerated  vesting (and extended  post-termination
exercise periods) of all outstanding  stock options,  continued health and other
benefits  and tax  reimbursement  in respect of any  termination  payments  that
constitute   excess  parachute   payments  under  Federal  income  tax  laws.  A
termination for cause by the Company, under the agreement, was limited to death,
permanent  disability  (as  defined),  acts of moral  turpitude  concerning  the
Company, voluntary resignation, or the entry of a felony conviction.

         Mr. Haft's  annual  cash bonus rights  under his  employment  agreement
(which were subject to each year's bonus plan,  or otherwise  provided for under
separate  agreement  with the  Company)  were  fixed at a maximum of 60% of base
salary, but were not subject to the 60/40 discretionary allocation applicable to
other executives.  If the Company's  performance  reached the target performance
level,  the full 60%  target  bonus  would  have  been  payable  to him;  if the
Company's  performance reached the entry level performance,  a 21% minimum bonus
would have been payable to him, with the actual bonus amount between 21% and 60%
to be determined by the extrapolation methodology described above.

         Mr.  Haft's employment agreement provided  for accelerated  vesting and
exercisability of all options if Mr. Haft were terminated without cause or if he
was terminated for "good reason" because of certain unilateral  material changes
to certain  terms of his service or other  events (as more fully  defined in the
agreement).  Mr. Haft's options in such  circumstances  were  exercisable at any
time within 4 1/2 years after September 11, 1995.

         Under the  terms  of  Mr. Haft's  employment  agreement  and  grant  of
options,  the Company  agreed to loan Mr. Haft an amount  equal to the  exercise
price of the options (upon exercise). No loans were ever made to Mr. Haft.

         The  employment  agreement with Mr. Haft provided that upon a change in
control  (as  defined)  Mr.  Haft had the  right  for 90 days to  terminate  the
agreement  without  cause and realize the present value of the full (and certain
accelerated)  benefits  under the  agreement  for what  would  otherwise  be the
remaining  term, as in the case of a termination by the Company without cause. A
change in control under the agreement  included (among other events) the removal
of or  failure  to  elect  Mr.  Haft  Chairman  of the  Board,  his  involuntary

<PAGE>

disassociation from Hamilton Morgan LLC under certain circumstances by reason of
the operation of the Hamilton Morgan LLC Operating Agreement buy-sell provision,
certain  changes in  ownership  involving  50% or more of the  voting  stock (or
voting  control) of the  Company,  the sale of all or  substantially  all of the
assets of the Company, certain fundamental changes in the nature of its business
approved by shareholders,  certain changes affecting a majority of the Board, or
the  acquisition  by any person or group  (other  than  existing  25% holders or
persons affiliated with Mr. Haft or FoxMeyer Corporation) of 50% or more control
of the assets or voting stock of the  Company.  Such a  termination  by Mr. Haft
would be deemed a  termination  without  cause by the Company and entitle him to
the rights  attendant  thereto,  in  addition to certain  reimbursement  for any
excise taxes thereon on a "grossed-up" basis.

         Mr. M. David Schwartz. Mr. Schwartz executed a new employment agreement
with the Company on June 5, 1997. The employment agreement with Mr. Schwartz has
a term of two years and  provides  for Mr.  Schwartz  to serve as the  Company's
President and Chief  Operating  Officer.  Mr.  Schwartz's  annual base salary is
$636,000  for the first  year of the term,  which  increase  is  retroactive  to
December 9, 1996,  and then  increases  to  $675,000  for the second year of the
term.  The  agreement  provides  for an annual  incentive  bonus if the  Company
achieves certain  performance  objectives  approved by the Board,  with a target
bonus of not less than 60% of his  annual  base  salary and a maximum of 100% of
annual base salary,  as further  described  below.  A target bonus of 60% of his
current  annual base salary is  guaranteed  for Fiscal Year 1997. In addition to
the options to purchase  175,000 shares of Common Stock at $8.00 per share under
the Phar-Mor  Stock  Incentive  Plan and a  confirmation  bonus of $450,000 plus
6,250 shares of Common  Stock which Mr.  Schwartz was  previously  granted,  Mr.
Schwartz was granted options to purchase an additional  100,000 shares of Common
Stock at $ 5.4375 per share under the Phar-Mor Stock  Incentive Plan (subject to
shareholder  approval of an amendment to increase the number of shares available
under the plan from 933,333 to 1.75 million), which options vest with respect to
one-third of the underlying  shares on each of the date of grant (June 5, 1997),
the first  anniversary of the date of grant,  and the second  anniversary of the
date of grant.  The term of the options are seven years.

         Mr.  Michael K.  Spear.  The  employment  agreement  with Mr.  Spear is
at-will,  and  provides  for Mr.  Spear to serve as  Senior  Vice  President  of
Merchandise  and  Marketing of the Company.  Mr.  Spear's  annual base salary is
$275,000 for the first year of his  employment,  $325,000 for the second year of
his employment,  $375,000 for the third year of his employment, and $400,000 for
the  fourth  year  of his  employment.  The  agreement  provides  for an  annual
incentive bonus if the Company achieves certain performance  objectives approved
by the Board, with a target bonus of 40% of his annual base salary and a maximum
of 100% of annual base salary,  as further  described below. A bonus of $115,000
is  guaranteed  for each of Fiscal  Year 1997 and Fiscal  Year 1998.  A bonus of
$100,000 is guaranteed for Fiscal Year 1999 and a bonus of $60,000 is guaranteed
for Fiscal  Year  2000.  On May 14,  1996,  Mr.  Spear was  granted an option to
purchase  50,000  shares of Common  Stock at $7.625 per share under the Phar-Mor
Stock  Incentive  Plan.  On July 8, 1997,  Mr.  Spear was awarded an  additional
option to purchase  50,000  shares of Common  Stock at $6.50 per share under the
Phar-Mor Stock  Incentive Plan. This seven year option vested as to one third on
the grant date and vests as to an additional  one third on each of the first and
second  anniversaries  of the grant  date.  Mr.  Spear  received a cash bonus of
$100,000  upon  relocating  his residence to the  Youngstown,  Ohio area in late
1996. If Mr. Spear voluntarily terminates his employment after being employed by
the  Company  for one year but prior to being  employed  by the  Company for two
years, 50% of the bonus must be repaid.

         Mr. Warren E. Jeffery.  The  employment  agreement  with Mr. Jeffrey is
at-will,  and provides for Mr.  Jeffery to serve as Senior Vice  President-Store
and Pharmacy  Operations  of the Company.  Mr.  Jeffery's  annual base salary is
$200,000.  The agreement  provides for an annual  incentive bonus if the Company
achieves certain  performance  objectives  approved by the Board,  with a target
bonus of 40% of his annual base  salary.  In  addition  to the options  that Mr.
Jeffery  currently  holds,  he was granted an option to  purchase an  additional
50,000  shares of Common  Stock at $5.4375  per share under the  Phar-Mor  Stock
Incentive  Plan,  which option vests with respect to one-third of the underlying
shares on each of June 5, 1997,  June 5, 1998, and June 5, 1999. The term of the
options are seven years. 

         Mr. John R. Ficarro.  The  employment  agreement with Mr. Ficarro has a
term of two years  commencing on June 5, 1997 and  terminating  on June 5, 1999,
and  provides  for  Mr.  Ficarro  to  serve  as  Senior  Vice  President/  Chief
Administrative  Officer and General Counsel of the Company. Mr. Ficarro's annual
base  salary is  $195,000  for the first  year of the term,  which  increase  is
retroactive  to December 9, 1996,  and then increases to $206,700 for the second
year of the term. The agreement  provides for an annual  incentive  bonus if the
Company achieves certain  performance  objectives  approved by the Board, with a
target  bonus of not less than 40% of his  annual  base  salary and a maximum of

<PAGE>

100% of annual base salary, as further described below. A target bonus of 35% of
his current  annual base salary is guaranteed  for Fiscal Year 1997. In addition
to the  options to  purchase  15,000  shares of Common  Stock at $8.00 per share
under the  Phar-Mor  Stock  Incentive  Plan  which Mr.  Ficarro  was  previously
granted, Mr. Ficarro was granted options to purchase an additional 75,000 shares
of Common Stock at $5.4375 per share under the  Phar-Mor  Stock  Incentive  Plan
(subject to  shareholder  approval  of an  amendment  to increase  the number of
shares  available  under the plan from 933,333 to 1.75  million),  which options
vest with respect to one-third of the  underlying  shares on each of the date of
grant (June 5, 1997), the first anniversary of the date of grant, and the second
anniversary of the date of grant.  The term of the options are seven years.

         The general  terms of the options  granted to Messrs.  Haft,  Schwartz,
Spear,  Jeffery  and  Ficarro  are  summarized  above.  Each  of the  employment
agreements  (except  the  employment  agreements  of Messrs.  Jeffery and Spear)
provides  for  accelerated  vesting  and  exercisability  of all  options if the
employee is  terminated  without  cause or if he  terminates  for "good  reason"
because of certain  unilateral  material changes to certain terms of his service
or other events (as more fully defined in the  agreements).

         Loans.  The Phar-Mor Stock Incentive Plan authorizes the  Administrator
to make loans to  optionees  to pay the  exercise  price of options,  subject to
specified  conditions.  Mr. Spear's employment agreement  specifically  provides
that he will be entitled to receive  loans from the  Company to  facilitate  the
exercise of his options.

         Severance Plan. The Company's  current severance plan, as it applies to
officers generally, provides for payment of severance pay equal to salary at the
time of termination for a period of 26 weeks,  plus one additional week for each
year of service,  up to ten years.  On March 27, 1997,  the Company  approved an
amendment to its existing  severance plan,  enhancing benefits to all employees,
including  executive   officers,   whereby  all  such  employees  would  receive
additional  severance payments upon loss of employment due to certain "change of
control" events. Generally, executive officers would receive 18 months of pay in
such event.

         The employment agreements for Messrs.  Schwartz and Ficarro provide, in
the case of a termination  by the Company during the first year of the agreement
without cause or by them "for good reason," for a severance payment equal to two
year's total compensation (which includes salary plus average bonus paid to them
over the previous two years),  and in the case of a  termination  by the Company
after  the  first  year of the  agreement  without  cause or by them  "for  good
reason,"  for  a  severance   payment  equal  to  1.5  times  one  year's  total
compensation  (which  includes  salary plus average  bonus paid to them over the
previous two years).

         The  employment  agreement for Mr. Jeffery  provides,  in the case of a
termination  of the agreement by the Company  within the period ending two years
from  June  16,  1997  without  cause,  for a  severance  payment  equal  to the
continuation  of Mr.  Jeffery's  base  salary for a period of one year after the
date of termination  and the  continuation  of all medical  benefits during such
period.  "Cause" is defined as a  determination  in good faith by the Company of
Mr.  Jeffery's  personal  dishonesty,  gross  negligence,   willful  misconduct,
habitual  use of  alcoholic  beverage  or  other  substance  abuse,  or upon his
conviction of any offense punishable by imprisonment of one year or more.

         The  employment  agreement  for Mr.  Spear  provides,  in the case of a
termination  of the agreement by the Company  within the period ending two years
from his employment  commencement  date without cause,  for a severance  payment
equal to the  continuation of Mr. Spear's base salary  (including any guaranteed
increases)  for a period  of one year  after  the  date of  termination  and the
continuation of all medical benefits during such period. "Cause" is defined as a
determination in good faith by the Company of Mr. Spear's  personal  dishonesty,
gross  negligence,  willful  misconduct,  habitual use of alcoholic  beverage or
other  substance  abuse,  or upon his  conviction  of any offense  punishable by
imprisonment of one year or more.  After two years, Mr. Spear will be subject to
the Company's severance plan described above.

         Change in Control  Consequences for Messrs.  Schwartz and Ficarro.  The
employment  agreements  with Messrs.  Schwartz  and Ficarro  provide that upon a
change of  control  (as  defined)  each named  executive  will have the right to
terminate  the  agreement  for  "good  reason"  and  receive  the full  benefits
thereunder  as in the case of a  termination  by the Company  without  cause.  A
change of control under each  agreement may include (among other events) (a) the
acquisition by any individual, entity or group of beneficial ownership of 20% or

<PAGE>

more of either (i) the then  outstanding  shares of Common Stock of the Company,
or (ii) the combined voting power of the then outstanding  voting  securities of
the Company  entitled to vote  generally  in the  election of  directors  of the
Company;  or (b)  individuals  who, as of the date of the employment  agreement,
constitute  the Board of  Directors  of the  Company,  cease  for any  reason to
constitute at least a majority  thereof;  or (c) approval by the shareholders of
the Company of a  reorganization,  merger or  consolidation  which  results in a
change  of  ownership  and/or  voting  rights  of 30% or more  of (i)  the  then
outstanding  shares of Common Stock of the  Company,  or (ii) the members of the
Board do not  remain  members  of the Board of the  entity  resulting  from such
reorganization,  merger or consolidation; or (d) approval by the shareholders of
the Company of a  liquidation  or a dissolution  of the Company,  or the sale or
other disposition or substantially all of the assets of the Company. A change in
control does not include any change in ownership of the  Company's  common stock
resulting from any transaction among the principals of Hamilton Morgan.

Compensation Committee Interlocks and Insider Participation

         Ms.  Haft and  Messrs.  Butler  (the  Committee  Chairman),  Estrin and
Hopkins served as members of the Compensation Committee during Fiscal Year 1997.
Ms. Haft and Mr. Hopkins are independent  directors.  Messrs.  Butler and Estrin
are  co-Chief   Executive   Officers,   Co-Chairmen  of  the  Board,  and  major
shareholders of Avatex and FoxMeyer Corporation.


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

         Set forth in the table below is information,  as of September 19, 1997,
with respect to the number of shares of Common Stock  beneficially  owned by (i)
each person or entity  known by the Company to own more than five percent of the
outstanding  Common Stock, (ii) each person who is a director of the Company and
(iii) each of the Named  Officers (as defined in Item 11). A person or entity is
considered to "beneficially own" any shares (i) over which such person or entity
exercises sole or shared voting or investment power or (ii) which such person or
entity has the right to acquire at any time  within 60 days  (e.g.,  through the
exercise of options or warrants).



<PAGE>
<TABLE>
<CAPTION>


                                        Amount and Nature       Percent      Number of Shares Which May
         Name and Address of              of Beneficial            of               be Acquired
         Beneficial Owner (1)             Ownership (2)          Class           Within 60 Days (3)
         --------------------             -------------          -----           ------------------

<S>                                        <C>                    <C>                <C>      
Avatex Corporation                         4,795,935(4)           39.1%               91,902(5)
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206

Pioneering Management Corporation          1,256,200(6)           10.33%                --
60 State Street
Boston MA 02109

The TCW Group, Inc.                          878,300(6)            7.22%                --
865 South Figueroa Street
Los Angeles, CA 90017

M. David Schwartz                            111,250                 *               105,000(7)
20 Federal Plaza West
Youngstown, Ohio 44501

Michael Spear                                 20,000                 *                20,000(7)
20 Federal Plaza West
Youngstown, Ohio 44501

John R. Ficarro                                9,000                 *                 9,000(7)
20 Federal Plaza West 
Youngstown, Ohio 44501

Warren E. Jeffery                             46,667                 *                46,667(7)
20 Federal Plaza West
Youngstown, Ohio 44501

Sankar Krishnan                               15,000                 *                15,000(7)
20 Federal Plaza West
Youngstown, Ohio 44501

Abbey J. Butler                            4,805,935(8)           39.2%               10,000(9)
c/o Avatex Corporation
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206


Melvyn J. Estrin                           4,805,935(8)           39.2%               10,000(9)
c/o Avatex Corporation
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                        Amount and Nature       Percent      Number of Shares Which May
         Name and Address of              of Beneficial            of               be Acquired
         Beneficial Owner (1)             Ownership (2)          Class           Within 60 Days (3)
         --------------------             -------------          -----           ------------------

<S>                                        <C>                    <C>                <C>      
Malcolm T. Hopkins                            10,000                 *                10,000(9)
14 Brookside Road
Asheville, NC  28803

Richard M. McCarthy                           11,304                 *                10,000(9)
1710 Cottontail Drive
Milford, Ohio  45150

All Directors and Executive Officers,      5,039,156              40.4%              327,569
including those named above, as a
Group (9) persons

<FN>
-------------------------------------
(* less than 1%)

(1)  No  director  or  executive  officer is the  beneficial  owner of the other
     equity securities of the Company or any of its subsidiaries.

(2)  Unless otherwise indicated, each person or entity has sole investment power
     and sole voting power with respect to the Common Stock  beneficially  owned
     by such person or entity.

(3)  This  column  lists the  number of shares of Common  Stock  which the names
     person or entity  has the right to acquire  within 60 days after  September
     19, 1997,  through the exercise of stock options and  warrants.  The shares
     shown in this column are  included  in the Amount and Nature of  Beneficial
     Ownership column.

(4)  Includes 4,704,033 shares held directly by Avatex and 91,902 shares subject
     to purchase by Avatex within 60 days upon exercise of warrants.

(5)  Includes 91,902 shares of Common Stock subject to purchase by Avatex within
     60 days upon exercise of warrants.

(6)  The information  provided is based on reports on Schedule 13D and 13G filed
     by the designated persons and entities with the SEC.

(7)  All such shares of Common  Stock are  subject to purchase by the  indicated
     person within 60 days upon  exercise of options  awarded under the Phar-Mor
     Stock  Incentive  Plan. The table excludes  shares subject to options where
     the grant of such options is subject to  shareholder  approval as set forth
     under "--  Executive  Compensation  --  Phar-Mor,  Inc.  1995  Amended  and
     Restated Stock Incentive Plan."

8)   Messrs.  Butler and Estrin are co-chairmen of the Board, co-chief executive
     officers and major shareholders of Avatex.

(9)  All such  shares are subject to  purchase  within 60 days by the  indicated
     person upon exercise of options  awarded under the Phar-Mor  Director Stock
     Plan.
</FN>
</TABLE>

         Potential Changes in Control. As of September 19, 1997, and pursuant to
the terms of the Hamilton Morgan LLC Interest  Redemption and Exchange Agreement
dated  August  22,  1997  (the  "HM  Redemption  Agreement"),   Hamilton  Morgan
transferred  ownership  of all  3,750,000  shares  of  Common  Stock it owned to
Avatex.  This  transaction  settled the outstanding  disputes  between  Hamilton
Morgan  and  Avatex  that were  subject  to a pending  arbitration  between  the
parties. As part of the transaction, Hamilton Morgan and Avatex terminated their
joint proxy agreement with respect to these shares. Avatex has pledged 2,617,500
shares of Common Stock as partial collateral to Credit Lyonnais. In the event of
a default under the Credit  Lyonnais  pledge,  Credit  Lyonnais may acquire such
shares by foreclosing on its collateral.


<PAGE>

         Avatex has sole voting power to vote 2,617,500  shares of Common Stock.
Pending approval of the Settlement (as hereinafter defined), the Chief Financial
Officer of Avatex and the Trustee (as hereinafter defined),  acting as co-escrow
agents,  share voting power over 1,132,500 of the shares,  pursuant to the terms
of an escrow agreement.  Following approval of the Settlement,  Avatex will have
the sole power to vote all 3,750,000 shares of Common Stock.

         Avatex  also owns an  additional  954,033  shares  of Common  Stock and
warrants  to  purchase  91,902  shares  of  Common  Stock   (collectively,   the
"Securities").  On June 19, 1996,  FoxMeyer Drug Company, an indirect subsidiary
of Avatex,  conveyed the Securities to Avatex by way of dividend.  On August 27,
1996,  FoxMeyer  Drug Company  filed a petition for relief under the  Bankruptcy
Code and, in late  November  1996,  the  unsecured  creditors'  committee in the
bankruptcy  case  filed  a  lawsuit  against  Avatex  seeking  recovery  of  the
Securities and certain other assets. On July 25, 1997, Avatex and the bankruptcy
trustee  (the   "Trustee"),   which  had  succeeded  the  unsecured   creditors'
committee's  interest  in the  lawsuit,  executed a  settlement  agreement  (the
"Settlement").  Pursuant to the Settlement,  which is subject to the approval of
the  bankruptcy  court with  jurisdiction  over the FoxMeyer  bankruptcy  cases,
Avatex will retain  ownership  of the  Securities  and continue to have the sole
power to vote  all of the  Securities,  and  will  pledge  1,132,500  shares  as
collateral to the Trustee.

Certain Relationships and Related Transactions

         Transactions  with Hamilton Morgan. On August 22, 1997, Robert Haft and
Avatex entered into the HM Redemption Agreement,  resolving issues stemming from
Avatex  triggering  a buy/sell  mechanism  in December  1996.  In  exchange  for
3,750,000  shares of  Common  Stock  and the  return of a voting  proxy on other
shares of Common  Stock,  Hamilton  Morgan  agreed  to redeem  the 69.8%  Avatex
interest in Hamilton  Morgan;  re-pay  certain  indebtedness;  and receive other
consideration.  As a  result  of  the  consummation  of the  transaction,  as of
September  19,  1997,  Avatex   beneficially  holds  39.1%  of  the  issued  and
outstanding  Common  Stock.  On  September  19,  1997,  in  connection  with the
consummation of the transaction contemplated by the HM Redemption Agreement, the
Company  and Mr.  Haft  entered  into  the  Severance  Agreement.  See  Item 11,
"Executive  Compensation  -- Employment  Contracts and Termination of Employment
and Change in Control Arrangements."

         Transactions  with Robert M. Haft. On September  19, 1997,  the Company
and Mr. Haft entered into the Severance  Agreement  whereby Mr. Haft resigned as
Chairman  and Chief  Executive  Officer  of the  Company  and  received  certain
benefits.

         Transactions  with FoxMeyer Drug Company.  Following the Petition Date,
the Company  entered into a revised,  long-term  supply  agreement with FoxMeyer
Drug Company (the "Supply  Agreement") to become the Company's  primary supplier
of  prescription  medications  until the later of August 17, 1997 or the date on
which the Company's  purchases equal an aggregate net minimum of $1.4 billion of
products.  The Supply Agreement established certain minimum supply requirements,
specified events of default,  and limited damages  recoverable in the event of a
termination. Abbey J. Butler and Melvyn J. Estrin, directors of the Company, are
Co-Chairmen of the Board,  Co-Chief Executive Officers and major shareholders of
Avatex. FoxMeyer Drug Company is a wholly owned subsidiary of Avatex.

         On August  29,  1996,  two days after  FoxMeyer  Drug  Company  and its
subsidiaries filed their bankruptcy petition, the Company notified FoxMeyer Drug
Company  that the supply of products to the Company  under the Supply  Agreement
was insufficient and that,  consequently,  FoxMeyer Drug Company had committed a
material  breach  thereunder.  On  September  27, 1996,  the Company  received a
response from FoxMeyer Drug Company  disputing the Company's  notification.  The
Company did not experience any material  disruption to its business or supply of
pharmaceutical  products  because  adequate  alternative  sources of supply were
readily  available to the Company.  In connection with McKesson Corp.'s purchase
of FoxMeyer Drug Company's assets on November 8, 1996, McKesson Corp.
assumed the Supply Agreement.

                  Transactions with Daniel J. O'Leary. On May 12, 1997 Daniel J.
O'Leary, the Company's Chief Financial Officer since December 1995, tendered his
resignation effective June 13, 1997. In connection  therewith,  the Company paid
Mr. O'Leary $225,000 and transferred  title to him of a  Company-leased  vehicle
valued at approximately $10,000.


<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


Date of Report       Date of Filing        Description
--------------       --------------        -----------

September 7, 1996    September 10, 1996    Agreement and Plan of Reorganization 
                                           by and among the Company, ShopKo 
                                           Stores, Inc. and Cabot Noble, Inc.

October 11, 1996     October 16, 1996      Amended Agreement and Plan of
                                           Reorganization by and among the
                                           Company, ShopKo Stores, Inc. and 
                                           Cabot Noble, Inc.

December 18, 1996    December 20, 1996     Exercise by FoxMeyer Health
                                           Corporation of buy-sell provisions of
                                           Hamilton Morgan, LLC Operating 
                                           Agreement.

April 1, 1997        April 3, 1997         Termination Agreement mutually
                                           terminating the Agreement and Plan of
                                           Reorganization by and among the
                                           Company, ShopKo Stores, Inc. and 
                                           Cabot Noble, Inc.

May 20, 1997         May 29, 1997          Promotion of Sankar Krishnan to 
                                           Senior Vice President and Chief 
                                           Financial Officer



<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, 1997            By:  /s/ John R. Ficarro
                                                John R. Ficarro
                                                Senior Vice President and Chief
                                                 Administrative Officer


<PAGE>


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, 1997            /s/  M. David Schwartz
                                              M. David Schwartz, President
                                              (principal executive officer)


Date:  September 25, 1997            /s/  Abbey J Butler
                                              Abbey J Butler, Director


Date:  September 25, 1997            /s/  Melvyn J. Estrin
                                              Melvyn J. Estrin, Director


Date:  September 25, 1997            /s/  Malcolm T. Hopkins
                                              Malcolm T. Hopkins, Director


Date:  September 25, 1997            /s/  Richard M. McCarthy
                                              Richard M. McCarthy, Director


Date:  September 25, 1997            /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      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




<PAGE>



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

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

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

*10.8     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

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

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

*10.11    Phar-Mor, Inc. 1995 Director Stock Plan

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

# 10.13   Supply Agreement dated as of June 19, 1997 between Phar-Mor and 
          McKesson Drug Company.

10.14     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 Amendment No. 2 to 
          Form 10, on February 1, 1996

#         Portions of this exhibit have been omitted pursuant to a request for 
          confidential treatment and filed separately with the Commission


<PAGE>
                                                             




<PAGE>

PHAR-MOR, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                                                                          Page 

INDEPENDENT AUDITORS' REPORT                                              F - 2

CONSOLIDATED BALANCE SHEETS AS OF JUNE 28, 1997
  AND JUNE 29, 1996                                                       F - 3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIFTY-TWO
  WEEKS ENDED JUNE 28, 1997, THE FORTY-THREE WEEKS ENDED
  JUNE 29, 1996, THE NINE WEEKS ENDED SEPTEMBER 2, 1995, AND THE
  FIFTY-TWO WEEKS ENDED JULY 1, 1995                                      F - 4

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
  (DEFICIENCY) FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1997, THE
  FORTY-THREE WEEKS ENDED JUNE 29, 1996, THE NINE WEEKS ENDED
  SEPTEMBER 2, 1995, AND THE FIFTY-TWO WEEKS  ENDED  JULY 1, 1995         F - 5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO
  WEEKS ENDED JUNE 28, 1997, THE FORTY-THREE WEEKS ENDED
  JUNE 29, 1996, THE NINE WEEKS ENDED SEPTEMBER 2, 1995, AND THE
  FIFTY-TWO WEEKS ENDED JULY 1, 1995                                      F - 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                F - 7

SCHEDULE II                                                               F - 26

























<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  28,  1997  and  June  29,  1996
(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 28, 1997, the  forty-three  weeks ended June 29, 1996
(Successor Phar-Mor operations),  the nine weeks ended September 2, 1995 and the
fifty-two weeks ended July 1, 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 and for the fifty-two weeks ended July 1, 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 and the
fifty-two  weeks  ended  July 1,  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 28, 1997 and June 29, 1996 and the results of
their  operations and cash flows for the fifty-two weeks ended 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 15, 1997
(September 19, 1997 as to Note 11)

                                      F-2
<PAGE>


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

                                                                                  June 28,    June 29,
                                                                                    1997        1996
                                                                                 ----------  ---------

ASSETS

<S>                                                                                <C>        <C>    
Current assets:
Cash and cash equivalents                                                          $ 79,847   $104,265
Accounts receivable - net                                                            21,614     20,834
Merchandise inventories                                                             169,103    152,904
Prepaid expenses                                                                      5,228      5,184
Deferred tax asset                                                                      515        388
                                                                                   --------   --------
Total current assets                                                                276,307    283,575

Property and equipment - net                                                         72,835     66,550
Deferred tax asset                                                                    9,255      9,382
Other assets                                                                          4,208      3,956
                                                                                   --------   --------

Total assets                                                                       $362,605   $363,463
                                                                                   ========   ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable                                                                   $ 61,808   $ 53,761
Accrued expenses                                                                     36,019     33,590
Reserve for costs of rightsizing program                                              1,866      3,451
Current portion of self insurance reserves                                            2,649      3,701
Current portion of long-term debt                                                     2,624      2,903
Current portion of capital lease obligations                                          6,531      6,019
                                                                                   --------   --------
Total current liabilities                                                           111,497    103,425

Long-term debt                                                                      107,554    109,973
Capital lease obligations                                                            32,659     39,190
Long-term self insurance reserves                                                     8,098      7,226
Unfavorable lease liability - net                                                    12,493     11,081
                                                                                   --------   --------
Total liabilities                                                                   272,301    270,895
                                                                                   --------   --------

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, 12,159,199
at June 28, 1997,and 12,157,054 at June 29, 1996                                        122        122
Additional paid-in capital                                                           89,402     89,385
Retained earnings                                                                       245      2,526
                                                                                   --------   --------
Total stockholders' equity                                                           89,769     92,033
                                                                                   --------   --------
Total liabilities and stockholders' equity                                         $362,605   $363,463
                                                                                   ========   ========
</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>

                                                      Successor Company           Predecessor Company
                                                      -----------------           -------------------
                                                                             ||      Nine
                                                 Fifty-two     Forty-three   ||   weeks ended     Fifty-two
                                                weeks ended    weeks ended   ||   September 2,   weeks ended
                                               June 28, 1997  June 29, 1996  ||      1995        July 1, 1995
                                               -------------  -------------  ||  ------------    ------------
                                                                             ||   
<S>                                            <C>             <C>               <C>             <C>         
Sales                                          $  1,074,828    $    874,284  ||  $    181,968    $  1,412,661
                                                                             ||   
Less:                                                                        ||   
Cost of goods sold, including occupancy and                                  ||   
distribution costs                                  873,095         722,214  ||       147,124       1,152,120
Selling, general and administrative expenses        168,218         128,312  ||        27,057         204,671
Chapter 11 professional fee accrual                                          ||
   adjustment                                          --            (1,530) ||          --              --                 
Terminated business combination expenses              3,076            --    ||          --              --   
Depreciation and amortization                        20,982          14,891  ||         3,732          24,643
                                               ------------    ------------  ||  ------------    ------------
Income from operations before interest                                       ||   
expense, interest income, reorganization                                     ||   
items, fresh-start revaluation, income taxes                                 ||   
and extraordinary item                                9,457          10,397  ||         4,055          31,227
                                                                             ||   
                                                                             ||   
Interest expense (excludes contractual                                       ||   
interest not accrued on prepetition debt of                                  ||   
$3,897 and $20,595, in the nine weeks ended                                  ||   
September 2, 1995, and the fifty-two weeks                                   ||   
ended July 1, 1995, respectively)                    17,175          14,343  ||         5,689          33,324
                                                                             ||   
Interest income                                       5,437           8,614  ||          --              --   
                                               ------------    ------------  ||  ------------    ------------
                                                                             ||   
                                                                             ||   
(Loss) income before reorganization items,                                   ||   
fresh-start revaluation, income taxes and                                    ||   
extraordinary item                                   (2,281)          4,668  ||        (1,634)         (2,097)
                                                                             ||   
Reorganization items                                   --              --    ||        16,798          51,158
                                                                             ||   
Fresh-start revaluation                                --              --    ||        (8,043)           --
                                               ------------    ------------  ||  ------------    ------------
                                                                             ||   
                                                                             ||   
(Loss) income before income taxes and                                        ||   
extraordinary item                                   (2,281)          4,668  ||       (10,389)        (53,255)
                                                                             ||   
Income tax provision (benefit)                         --             2,142  ||          --              (111)
                                               ------------    ------------  ||  ------------    ------------
                                                                             ||   
(Loss) income before extraordinary item              (2,281)          2,526  ||       (10,389)        (53,144)
Extraordinary item - gain on debt discharge            --              --    ||       775,073            --
                                               ------------    ------------  ||  ------------    ------------
                                                                             ||   
Net (loss) income                              $     (2,281)   $      2,526  ||  $    764,684    $    (53,144)
                                               ============    ============  ||  ============    ============
                                                                             ||                                                     
                                                                             ||   
Net (loss) income per common share:                                          ||   
(Loss) income before extraordinary item        $       (.19)   $        .21  ||  $       (.19)   $       (.98)
Extraordinary item                                     --              --    ||         14.33            --
                                               ------------    ------------  ||  ------------    ------------
Net (loss) income                              $       (.19)   $        .21  ||  $      14.14    $       (.98)
                                               ============    ============  ||  ============    ============
Weighted average number of common shares                                     ||   
outstanding                                      12,157,419      12,156,614  ||    54,066,463      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                           Retained        Stockholders'
                                                               Value       Additional         (Deficit)       (Deficiency)
                                               Shares         Amount     Paid-in Capital       Earnings           Equity
                                               ------         ------     ---------------       --------           ------
                                                                                                      

<S>                                       <C>            <C>            <C>                 <C>            <C>      
Balance at July 2, 1994                        54,066    $     5,407    $        487,477    $(1,204,424)   $  (711,540)

Net loss                                         --             --                  --          (53,144)       (53,144)
                                          -----------    -----------    ----------------    -----------    -----------


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
                                          ===========    ===========    ================    ===========    ===========
</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>

                                                                           Successor Company        Predecessor Company
                                                                           -----------------        -------------------
                                                                       Fifty-two     Forty-three ||       Nine         Fifty-two   
                                                                      weeks ended    weeks ended ||   weeks ended     weeks ended  
                                                                        June 28,      June 29,   ||   September 2,       July 1,   
                                                                          1997           1996    ||       1995            1995
                                                                          ----           ----    ||       ----            ----
                                                                                                 ||
OPERATING ACTIVITIES                                                                             ||
<S>                                                                 <C>            <C>              <C>            <C>         
Net (loss) income                                                   $    (2,281)   $     2,526   || $   764,684    $   (53,144)
                                                                                                 ||
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         46,056
 Depreciation                                                            12,182          8,802   ||       2,388         15,073
 Amortization of video rental tapes                                       8,800          6,055   ||       1,333          9,423
 Amortization of deferred financing costs and goodwill                      408            363   ||          73          2,139
 Deferred income taxes                                                     --            2,142   ||        --             (111)
 Deferred rent and unfavorable lease liabilities                          1,412            606   ||         (89)         1,126
 Issuance of common stock                                                    17              7   ||        --             --
Changes in assets and liabilities:                                                               ||
 Accounts receivable                                                       (780)         6,905   ||      11,997        (10,335)
 Merchandise inventories                                                (16,258)        15,534   ||      (6,922)       164,482
 Prepaid expenses                                                           (44)         1,356   ||       2,441            631
 Deferred income taxes                                                     --            2,088   ||        --             --
 Other assets                                                              (707)          (681)  ||         449            136
 Accounts payable                                                         8,047         (4,370)  ||      (8,865)       (39,772)
 Accrued expenses                                                         2,610         (1,999)  ||       1,133        (18,994)
 Accrued bankruptcy professional fees                                      (181)       (19,476)  ||       4,442          1,654
 Reserve for costs of rightsizing program                                (1,585)        (2,921)  ||         550        (35,311)
 Self insurance reserves                                                   (180)          (916)  ||       1,131          1,111
                                                                    -----------    -----------   || -----------    -----------
Net cash provided by operating activities                                11,460         16,021   ||       8,129         84,164
                                                                    -----------    -----------   || -----------    -----------
                                                                                                 ||
INVESTING ACTIVITIES                                                                             ||
 Additions to rental video tapes                                         (8,694)        (7,316)  ||      (1,874)       (11,925)
 Additions to property and equipment                                    (18,467)        (6,368)  ||        (649)        (9,088)
 Purchase of partnership interests                                         --             (145)  ||        --             --
                                                                    -----------    -----------   || -----------    -----------
Net cash used for investing activities                                  (27,161)       (13,829)  ||      (2,523)       (21,013)
                                                                    -----------    -----------   || -----------    -----------
                                                                                                 ||
FINANCING ACTIVITIES                                                                             ||
 Principal payments on term debt                                         (2,698)        (1,467)  ||        --             --
 Principal payments on capital lease obligations                         (6,019)        (4,390)  ||        --             --
                                                                    -----------    -----------   || -----------    -----------
Net cash used for financing activities                                   (8,717)        (5,857)  ||        --             --
                                                                    -----------    -----------   || -----------    -----------
                                                                                                 ||
                                                                                                 ||
REORGANIZATION ACTIVITIES                                                                        ||
 Cash distribution pursuant to the plan of reorganization                  --             --     ||    (105,381)          --
 Repayment of revolving credit loan and secured notes                                            ||
  from proceeds of going-out-of-business sales and                                               ||
  sale of assets                                                           --             --     ||        --          (46,330)
                                                                                                 ||
 Payment of reclamation claims                                             --             --     ||     (23,961)          --
 Decrease in all other liabilities subject to settlement                                         ||
  under reorganization proceedings                                         --             --     ||      (2,076)        (1,256)
 Proceeds from the sale of new common stock                                --             --     ||       9,500           --
 Proceeds from sale of assets held for disposition                         --             --     ||        --           13,663
 Debtor-in-possession financing costs                                      --             --     ||         (15)          (172)
                                                                    -----------    -----------   || -----------    -----------
                                                                                                 || 
Net cash used for reorganization activities                                --             --     ||    (121,933)       (34,095)
                                                                    -----------    -----------   || -----------    -----------
                                                                                                 ||
                                                                                                 ||
 (Decrease) increase in cash and cash equivalents                       (24,418)        (3,665)  ||    (116,327)        29,056
  Cash and cash equivalents, beginning of period                        104,265        107,930   ||     224,257        195,201
                                                                    -----------    -----------   || -----------    -----------
Cash and cash equivalents, end of period                            $    79,847    $   104,265   || $   107,930    $   224,257
                                                                    ===========    ===========   || ===========    ===========
                                                                                                 ||
                                                                                                 ||
Supplemental Information                                                                         ||
Interest paid                                                       $    16,762    $     9,067   || $     4,592    $    27,989
Income tax refunds                                                           86          2,669   ||        --              570
</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).
         Financial  statements  for periods  ended on and 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  are the
         beneficiaries of the LLC.

         The net cash  disbursements  upon the  effectiveness  of the Joint Plan
          were  comprised as follows: 
<TABLE>
           <S>                                                               <C>
            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
                                                                              =========
</TABLE>
                                      F-7
<PAGE>

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

          <S>                                                                  <C>
          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
                                                                               ===========
</TABLE>

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;  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.

         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 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-8
<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-9
<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 carry forwards.

                           (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 28, 1997 and June 29,
                  1996. The accompanying  consolidated statements of operations,
                  changes in  stockholders'  equity and cash flows were prepared
                  for the fifty-two  weeks ended June 28, 1997, the  forty-three
                  weeks ended June 29, 1996,  the nine weeks ended  September 2,
                  1995, and the fifty-two weeks ended July 1, 1995.

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

                  f. 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.

                  g.  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.

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

                  i. Pre-Opening  Costs - Expenses incurred for new stores prior
                  to their  opening are  included in other  assets and  expensed
                  during the first month of operation.

                  j. 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.

                  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,

                                      F-10
<PAGE>


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

                  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).

                  k. 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.

                  l. 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.

                  m.  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.

                  n.  Reclassifications  -  Certain  amounts  in  the  financial
                  statements have been reclassified for comparative purposes.

                  o. Net (Loss)  Income Per Common Share - Net (loss) income per
                  common share is computed by dividing net (loss)  income by the
                  weighted   average   number  of  common  shares   outstanding.
                  Outstanding  stock options and warrants do not have a dilutive
                  effect on net (loss) income per share.

                  p.  Accounting  Changes  -  In  February 1997,  the  Financial
                  Accounting  Standards  Board  issued  Statement  of  Financial
                  Accounting  Standards  ("SFAS") No. 128, "Earnings per Share,"
                  which  establishes  standards  for  computing  and  presenting
                  earnings per share and applies to entities  with publicly held
                  common  stock or potential  common  stock.  This  Statement is
                  effective for financial  statements  issued for periods ending
                  after December 15, 1997,  including  interim periods;  earlier
                  application   is  not  permitted.   This  Statement   requires
                  restatement  of  all  prior-period  earnings  per  share  data
                  presented.  The Company has determined that the implementation
                  of this Statement will not have a material  effect on reported
                  earnings per share.

                           In June,  1997,  the Financial  Accounting  Standards
                  Board issued SFAS No. 131, "Disclosures  about  Segments of an
                  Enterprise  and Related Information,"  which will be effective
                  for financial  statements for periods beginning after December
                  15, 1997.  SFAS No. 131 redefines  how operating  segments are
                  determined  and  requires   disclosure  of  certain  financial
                  and  descriptive   information  about  a  company's  operating
                  segments.  The Company  anticipates  that the adoption of SFAS
                  No.   131  will  not  have  a   material   effect  on  current
                  disclosures.

                  q.  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.

                                      F-11
<PAGE>


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

4.       ACCOUNTS RECEIVABLE

         Accounts receivable consists of the following:
<TABLE>
<CAPTION>

                                                                          June 28, 1997   June 29, 1996
                                                                          -------------   -------------
            <S>                                                           <C>             <C>         
            Accounts receivable - vendors                                 $      13,162   $      15,583
            Third-party prescriptions                                             8,489           5,151
            Vendor coupons                                                        1,202           1,719
            Income tax receivable                                                  --               175
            Other                                                                 1,464           2,397
                                                                          -------------   -------------
                                                                                 24,317          25,025
            Less allowance for doubtful accounts                                  2,703           4,191
                                                                          -------------   -------------
                                                                          $      21,614   $      20,834
                                                                          =============   =============
</TABLE>


5        MERCHANDISE INVENTORIES

         Merchandise inventories consists of the following:
<TABLE>
<CAPTION>
      
                                                                          June 28, 1997   June 29, 1996
                                                                          -------------   -------------
            <S>                                                          <C>             <C>          
            Store inventories                                             $     140,158   $     140,522
            Warehouse inventories                                                37,361          25,387
            Video rental tapes - net                                              6,442           7,059
                                                                          -------------   -------------
                                                                                183,961         172,968
            Less reserves for markdowns, shrinkage
               and vendor rebates                                                14,858          20,064
                                                                          -------------   -------------
                                                                          $     169,103   $     152,904
                                                                          =============   =============
</TABLE>

     The video  rental tape  inventory  is net of  accumulated  amortization  of
     $12,797 and $6,055 at June 28, 1997 and June 29, 1996, respectively

6        PROPERTY AND EQUIPMENT

         Property and equipment consists of the following:
<TABLE>
<CAPTION>


                                                                          June 28, 1997   June 29, 1996
                                                                          -------------   -------------
            <S>                                                           <C>             <C>          
            Furniture, fixtures and equipment                             $      28,394   $      19,596
            Building improvements to leased property                             27,482          17,954
            Land                                                                    166             166
            Capital leases:
            Buildings                                                            11,235          11,235
            Furniture, fixtures and equipment                                    27,380          27,383
                                                                          -------------   -------------
                                                                                 94,657          76,334
            Less accumulated depreciation and amortization                       21,308           9,014

                 Less allowance for disposal of property
                            and equipment                                           514             770
                                                                          -------------   -------------
                                                                          $      72,835   $      66,550
                                                                          =============   =============
</TABLE>

     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-12
<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-13
<PAGE>


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

7.       OTHER ASSETS

         Other assets consists of the following:
<TABLE>
<CAPTION>

                                                               June 28, 1997   June 29, 1996
                                                               -------------   -------------
            <S>                                               <C>             <C>         
            Goodwill                                           $      1,712    $      1,757
            Deferred debt expense                                       401             711
            Pharmacy files                                              641             513
            Cash surrender value of officers life insurance             659             323
            Other                                                       795             652
                                                               ------------    ------------
                                                               $      4,208    $      3,956
                                                               ============    ============
</TABLE>

     Goodwill,  deferred debt expense and pharmacy  files are net of accumulated
     amortization of $78, $667 and $180,  respectively at June 28, 1997 and $34,
     $329 and $30,  respectively  at June 29, 1996.  The  deferred  debt expense
     consists of debt origination  costs associated with the new 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 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,  capital
     expenditures,  investments,  restricted  payments and other  distributions,
     mergers and acquisitions,  and contains 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 is 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 $88,003 and $76,829 at June 28, 1997 and
     June 29, 1996, 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 bear interest at the BankAmerica reference
     rate  plus  1/2% or  London  Interbank  Offered  Rate  ("LIBOR")  plus  the
     applicable margin. The applicable margin ranges between 1.50% and 2.00% and
     is 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  is  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 28, 1997 and June
     29,  1996 there were  letters of credit in the amount of $4,924 and $5,384,
     respectively, outstanding under the Facility.

     The Facility expires on September 10, 1998.

                                      F-14
<PAGE>


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

9.       LONG-TERM DEBT

     Pursuant  to the  Joint  Plan,  the  Company  and its  lenders  agreed to a
     restructuring  of  the  Company's  obligations.   The  resulting  new  debt
     obligations   are   summarized   below.   The   difference    between   the
     preconfirmation  debt obligations and the new debt obligations was included
     in the  calculation of the  "Extraordinary  items - gain on debt discharge"
     (see Note 1).

     The composition of the new debt  obligations  included on the  consolidated
     balance sheet as of June 28, 1997 and June 29, 1996 is as follows:
<TABLE>
<CAPTION>

                                                                               June 28, 1997   June 29, 1996
                                                                                -------------   -------------
         <S>                                                                    <C>            <C>
         New senior unsecured notes, interest rate of 11.72%,
           due September 2002                                                   $     91,462   $     91,462

         New equipment notes, interest rate of 7%, due in installments
           through October 2003                                                        7,166          9,536


         New tax notes, interest rates at 5.89% to 8%, due                             
           through September 2001                                                      6,342          6,423

         Real estate  mortgage notes and bonds payable at rates ranging
           from 3% to 9.98% and the prime rate plus 1%                                 5,208          5,455
                                                                                ------------   ------------

         Total debt                                                                  110,178        112,876
         Less current portion                                                          2,624          2,903
                                                                                ------------   ------------
         Total long-term debt                                                   $    107,554   $    109,973
                                                                                ============   ============
</TABLE>

     Holders of the  prepetition  senior  notes and  revolving  credit  facility
     received the new senior unsecured notes as part of their distribution under
     the Joint Plan.

     The Company  must offer to  purchase  the new 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 $4,408 at June 28, 1997.

     Future  maturities  of  long-term  debt  subsequent  to June  28,  1997 are
     summarized as follows:

                  1998                                              $     2,624
                  1999                                                    2,918
                  2000                                                    1,491
                  2001                                                    1,120
                  2002                                                    1,143
                  Thereafter                                            100,882
                                                                       --------
                                                                       $110,178
                                                                       ========


                                      F-15
<PAGE>


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

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 28,
         1997 are as follows:


                                                       Capital         Operating
                                                        Leases           Leases
                                                        ------           ------
            1998                                       $ 9,221         $ 34,284
            1999                                         8,841           34,902
            2000                                         8,265           34,824
            2001                                         5,330           33,569
            2002                                         4,998           33,025
            Thereafter                                  14,071          134,472
                                                        ------          -------

          Total minimum lease payments                  50,726         $305,076
                                                        ======          =======
          Less amounts representing interest            11,536
                                                        ------
          Present value of minimum lease payments       39,190
          Less current portion                           6,531
                                                       -------
          Long-term capital lease obligations          $32,659
                                                        ======

         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 28,
         1997, the  forty-three  weeks ended June 29, 1996, the nine weeks ended
         September  2,  1995,  and the  fifty-two  weeks  ended July 1, 1995 was
         $32,557,  $26,278,  $5,660 and $44,385,  respectively,  including $145,
         $103, $36 and $253 of additional rentals.

11.      TRANSACTIONS WITH RELATED PARTIES

     Successor Company

     Avatex   Corporation   formerly  known  as  FoxMeyer   Health   Corporation
     ("Avatex"),  an affiliate of one of the Company's largest  suppliers, owned
     69.8% of Hamilton Morgan L.L.C. "Hamilton Morgan") which beneficially owned
     approximately  39.9%  of the  Company's  common  stock.  Robert  Haft,  the
     Company's  Chairman of the Board of Directors and Chief Executive  Officer,
     is  President  of  Hamilton  Morgan.  The two  Co-chairmen  of the Board of
     Directors  of Avatex are members of the Board of  Directors of the Company.
     An affiliate of Avatex supplied the Company's  stores with  pharmaceuticals
     and health and beauty care products  under a long-term  contract  until the
     affiliate  was acquired by McKesson  Drug Company in late 1996. On June 29,
     1996 the Company had liabilities to the Avatex affiliate  relating to these
     purchases of $7,751.  This liability is included in accounts payable in the
     accompanying  consolidated  balance  sheets.  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 product under the terms of
     the contract.

     On  September  19,  1997,  Robert Haft and Avatex  finalized  an  agreement
     regarding  Hamilton Morgan,  (Hamilton Morgan  Agreement).  In exchange for
     3,750,000 shares of the Company's stock and the return of a voting proxy on
     other Company shares, Hamilton Morgan will redeem the 69.8% Avatex interest
     in  Hamilton   Morgan,   repay  certain   indebtedness  and  receive  other
     consideration,  Avatex now beneficially  owns 39.1% of the Company's common
     stock.  In  conjunction  with the Hamilton  Morgan  Agreement,  the Company
     entered into a Severence Agreement with Robert Haft whereby he resigned his
     position as Chairman of the Board of Directors and Chief Executive  Officer
     and will receive a lump sum cash payment of $4,417.  Under the terms of the
     Severence  Agreement,  the Company will continue to provide benefits to him
     through  September  19,  2000.  He  is  indemnified  and  entitled  to  tax

                                      F-16
<PAGE>

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

     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.

     Predecessor Company

     Operating  Leases - The Company leased various  property and equipment from
     related parties. Rental payments for the nine weeks ended September 2, 1995
     and the  fifty-two  weeks  ended  July 1,  1995  were  $2,280  and  $15,558
     respectively.

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 28,  1997,  no
     warrants have been exercised.

     Stock Options

     The  Company  has an  incentive  stock  option  plan for  officers  and key
     employees.  As of June 28,  1997,  options  for 69,183  common  shares were
     reserved for future grant,  and options for 844,150 shares were granted 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% of the  underlying  shares on the grant
     date,  and will  vest in  additional  increments  of 20% of the  underlying
     shares on each of the first four  anniversaries  of September  11, 1995. 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 Board of Directors  voted to increase the number of shares eligible for
     grant under the incentive stock option plan from 913,333 to 1,750,000.  The
     proposed plan amendment and restatement is subject to shareholder approval.

     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 seven years from date of grant.

     The  Company has a stock  option  plan for  directors.  Each  director  was
     granted  options for 5,000 common  shares on October 3, 1995 and October 1,
     1996 and will be granted  options  for 5,000  shares on October 1 each year
     through  1999.  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 250,000  common shares may be granted
     under the stock option plan for directors. As of June 28, 1997, options for
     60,000 shares were granted.

                                      F-17
<PAGE>

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

     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, no 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
     and 1997, 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           Forty-three weeks
                                                       ended June 28, 1997        ended June 29, 1996
                                                       -------------------        -------------------

<S>                                                          <C>                       <C>  
     Net (Loss) income                   As reported              $(2,281)                  $  2,526
                                         Pro forma                $(2,541)                  $  2,364

     Net (Loss) Income per share         As reported               $(0.19)                    $ 0.21
                                         Pro forma                 $(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 28, 1997,  844,840  options  were  excercisable at a  weighted 
     average excercise price per share of $7.80.

     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
                                            =========
</TABLE>
                                                                    

     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 who are  non-officers
     and  non-highly  compensated  as defined by the Internal  Revenue Code. The
     ESPP allows eligible  employees to contribute through payroll deductions up
     to 10% of their annual salary toward stock purchases. Stock purchases will

                                      F-18
<PAGE>

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

     be made  quarterly  at 90% of the  closing  price  at the  last  day of any
     calendar quarter. The plan is subject to shareholder approval.

13.      INCOME TAXES

     Deferred  taxes at June 28,  1997 and June 29,  1996,  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.

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

                                                 June 28, 1997   June 29, 1996
                                                 -------------   -------------
Deferred Tax Assets:
 Operating and restructuring reserves            $      7,448    $     10,889
 Net operating losses                                 116,399         113,634
 Depreciation and amortization                         27,078          18,831
 Lease escalation accruals                              5,030           4,462
 Jobs tax credit                                        4,432           4,432
 Other items                                              767           2,008
                                                 ------------    ------------
                                                      161,154         154,256
 Valuation allowance                                 (151,384)       (144,326)
                                                 ------------    ------------
  Net deferred tax assets                        $      9,770    $      9,930
                                                 ============    ============


Deferred Tax Liabilities:
 Other items                                             --              (160)
                                                 ------------    ------------
  Total deferred tax liabilities                 $       --      $       (160)
                                                 ============    ============


Composition of amounts in Consolidated Balance
 Sheet:
 Deferred tax assets - current                   $        515    $        548
 Deferred tax liabilities - current                      --              (160)
                                                 ------------    ------------

  Net deferred tax assets - current              $        515    $        388
                                                 ============    ============


Deferred tax assets - noncurrent                 $      9,255    $      9,382

Deferred tax liabilities - noncurrent                    --              --
                                                 ------------    ------------
Net deferred tax assets - noncurrent             $      9,255    $      9,382
                                                 ============    ============

     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 income (loss) before taxes is as follows:
<TABLE>
<CAPTION>

                                                            Fifty-two      Forty-three   ||       Nine            Fifty-two
                                                           weeks ended     weeks ended   ||    weeks ended       weeks ended
                                                          June 28, 1997   June 29, 1996  ||  September 2,1995    July 1, 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)            (0.2)
            Restructuring reserves                                --               --    ||          (5.3)             2.2
            Change in valuation allowance                        35.0%             --    ||           0.3             36.6
            Other, net                                            --               5.8   ||          (0.5)            (3.8)
                                                          -------------    ------------- ||   -------------    -------------
                Effective tax rate                                0.0%            45.9%  ||           0.0%            (0.2)%
                                                          =============    ============= ||   =============    =============
</TABLE>

                                      F-19
<PAGE>

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

     The  Company has  approximately  $269,000  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 $6,000 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.

     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 nonunion 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 nonunion personnel  effective June 29,
     1996 and to increase the  Company's  matching  contribution  to the defined
     contribution plan for those employees.

     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 28, 1997            June 29, 1996
                                                                     -------------            -------------
         <S>                                                         <C>                      <C>  
         Actuarial present value of benefit obligations:
            Accumulated benefit obligation, including
             vested benefits of $9,076 and $9,145                    $       9,498            $       9,543
            Additional amounts related to future salary increases              764                      560
                                                                     -------------            -------------

            Projected benefit obligation                                    10,262                   10,103
            Plan assets, at fair value                                       8,829                    7,698
                                                                     -------------            -------------
            Projected benefit obligation in excess of plan assets            1,433                    2,405
            Unrecognized net gain                                            1,335                      312
            Unrecognized prior service costs                                    (1)                      (1)
            Unrecognized transition asset                                        5                        6
                                                                     -------------            -------------

            Accrued pension costs                                    $       2,772            $       2,722
                                                                     =============            =============
</TABLE>




                                      F-20
<PAGE>


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

     The significant  assumptions  used in determining  the pension  obligations
     are:
<TABLE>
<CAPTION>

                                                             June 28, 1997         June 29, 1996
                                                             -------------         -------------
         <S>                                                 <C>                  <C> 
         Discount rate                                              6.3%                 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.

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

                                                               Fifty-two       Forty-three  ||        Nine          Fifty-two
                                                              weeks ended      weeks ended  ||    weeks ended     weeks ended
                                                             June 28, 1997    June 29, 1996 || September 2, 1995  July 1, 1995
                                                             -------------    ------------- || -----------------  -------------
<S>                                                          <C>              <C>              <C>              <C>          
            Service costs                                    $          85    $         875 ||   $         179    $       1,176
            Interest cost on projected benefit obligation              622              698 ||             104              636
            Actual net return on assets                             (1,584)          (1,746)||             (97)            (860)
            Net amortization (deferral)                                933            1,186 ||               2              259
                                                             -------------    ------------- ||   -------------    -------------
                                      Net pension expense    $          56    $       1,013 ||   $         188    $       1,211
                                                             =============    ============= ||   =============    =============
</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 28, 1997, the forty-three
     weeks ended June 29, 1996, the nine weeks ended  September 2, 1995, and the
     fifty-two  weeks  ended  July 1,  1995  were  $980,  $281,  $65,  and $506,
     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 28, 1997, the  forty-three  weeks ended
     June 29, 1996,  the nine weeks ended  September 2, 1995,  and the fifty-two
     weeks ended July 1, 1995 were $1,303, $896, $196, and $1,558, respectively.

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









                                      F-21
<PAGE>

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

15.      PREDECESSOR COMPANY INTEREST EXPENSE

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

                                                              Predecessor Company
                                                              -------------------
                                                            Nine           Fifty-two
                                                        weeks ended       weeks ended
                                                     September 2, 1995    July 1, 1995
                                                     -----------------    ------------
<S>                                                  <C>              <C>          
            Prepetition credit facility interest     $       3,164    $      16,377
            Senior notes                                     1,695            9,417
            Adequate protection term loans and
              capitalized equipment leases                     776            5,772
            Amortization of deferred debt expense               44            1,580
            Loan commitment fees                                10              160
            Other                                             --                 18
                                                     -------------    -------------
                                                     $       5,689    $      33,324
                                                     =============    =============
</TABLE>

     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 and $14,521 for the nine
     weeks ended  September 2, 1995, and the fifty-two weeks ended July 1, 1995,
     respectively.  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 and $6,074 for the nine weeks ended  September 2,
     1995, and the fifty-two weeks ended July 1, 1995, respectively.

16.      REORGANIZATION ITEMS AND RELATED RESERVES

         Reorganization items consist of the following:

<TABLE>
<CAPTION>

                                                               Predecessor Company
                                                               -------------------
                                                               Nine            Fifty-two
                                                             weeks ended      weeks ended
                                                         September 2, 1995   July 1, 1995
                                                         -----------------   ------------
<S>                                                          <C>             <C>         
            Chapter 11 professional fees                     $      9,373    $     17,201
            Amortization of prepetition exclusivity
              income                                                 (283)         (2,572)
            Interest income                                        (2,171)        (10,174)
            Amortization of post-petition credit facility
              origination fees                                         29             646
            Insurance claim recovery                               (6,650)           --
            Gain on sale of assets held for sale                     --            (7,634)
            Costs of downsizing                                    16,500          53,691
                                                             ------------    ------------
                                                             $     16,798    $     51,158
                                                             ============    ============
</TABLE>

         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 

                                      F-22
<PAGE>

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

     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.

     The consolidated  statements of operations reflect reorganization  expenses
     related to the downsizings as follows:
<TABLE>
<CAPTION>

                                                             Predecessor Company
                                                             -------------------
                                                           Nine            Fifty-two
                                                       weeks ended        weeks ended
                                                    September 2, 1995    July 1, 1995
                                                    -----------------    ------------
            <S>                                         <C>            <C>         
            Downsizing reserve                          $      2,500   $     25,786
            Inventory markdown reserve                        14,000           --
            Lease rejection reserve                             --           20,400
            Reserve for abandonment of property  and
               equipment                                        --           10,550
            Lease-purchase cost write-off                       --              860
            Adjustments to deferred rent liability              --           (3,905)
                                                        ------------   ------------
                                                        $     16,500   $     53,691
                                                        ============   ============
</TABLE>


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

                                                            Successor Company             Predecessor Company
                                                            -----------------             -------------------
                                                        Fifty-two      Forty-three  ||       Nine           Fifty-two
                                                       weeks ended     weeks ended  ||    weeks ended      weeks ended
                                                      June 28, 1997   June 29, 1996 || September 2, 1995   July 1, 1995
                                                      -------------   ------------- || -----------------   ------------
            <S>                                        <C>             <C>                <C>             <C>         
            Balance, beginning of period               $      3,451    $      7,301 ||    $      6,564    $     16,089
                                                                                    ||
            Additions to reserve                               --              --   ||           2,500          25,786
            Charges associated with closed stores              (462)         (1,772)||          (1,690)        (34,502)
            Store rightsizing costs                            (895)           (640)||            --              --   
            Corporate and distribution center costs            (228)         (1,438)||             (73)           (809)
                                                       ------------    ------------ ||    ------------    ------------
            Balance, end of period                     $      1,866    $      3,451 ||    $      7,301    $      6,564
                                                       ============    ============ ||    ============    ============
</TABLE>



     The  remainder of the reserve for the costs of  downsizing at June 28, 1997
     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  cash  and  cash
     equivalents  and long-term  debt. The carrying values of all instruments at
     June 28, 1997 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.

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

                                      F-23
<PAGE>

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

     has a 50% interest in another partnership which owns a commercial building.
     In conjunction with the acquisition, assets and liabilities were assumed 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



19.      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>


                                                           Thirteen              Thirteen            Thirteen         Thirteen
         Fiscal 1997                                      weeks ended          weeks ended         weeks ended      weeks ended    
         -----------                                   September 28, 1996    December 28, 1996  March 29, 1997    June 28, 1997
                                                       ------------------    -----------------  --------------    -------------
                                                                                                                              
            <S>                                              <C>               <C>                <C>              <C>         
            Sales                                            $    264,551      $    290,933       $    264,043     $    255,301
            Gross profit                                           45,460            50,451             54,990           50,832
            Net (loss) income                                $     (2,195)     $       (548)      $         49     $        413

            Per Share:
            Net(loss) income                                 $       (.18)     $       (.05)      $       --       $        .03
            Weighted average number of shares outstanding      12,157,054        12,157,054         12,157,054       12,158,515


</TABLE>
<TABLE>
<CAPTION>



                                                           Predecessor
                                                             Company                            Successor Company
                                                         ------------    ---------------------------------------------------------- 
                                                               Nine   ||      Four          Thirteen        Thirteen      Thirteen
         Fiscal 1996                                      weeks ended ||  weeks ended      weeks ended     weeks ended   weeks ended
         -----------                                      September 2,||  September 30,    December 30,      March 30,     June 29, 
                                                               1995   ||      1995             1995            1996          1996
                                                         ------------ ||   -----------    ------------    -----------   -----------
            <S>                                          <C>             <C>            <C>             <C>           <C>         
            Sales                                        $    181,968 ||   $    72,877    $    284,318    $   252,291   $   264,798
            Gross profit                                       34,844 ||        14,034          52,785         44,324        40,927
            Income (loss) before extraordinary item           (10,389)||            88           3,578          1,544        (2,684)
            Extraordinary item                                775,073 ||          --              --             --            --
            Net income (loss)                            $    764,684 ||   $        88    $      3,578    $     1,544   $    (2,684)
                                                                      ||
            Per Share:                                                ||
            Income (loss) before extraordinary item      $       (.19)||   $       .01    $        .29    $       .13   $      (.22)
                                                                      ||
            Extraordinary item                                  14.33 ||          --              --             --            --
            Net income (loss)                            $      14.14 ||   $       .01    $        .29    $       .13   $      (.22)
                                                                      ||
            Weighted average number of shares outstanding  54,066,463 ||    12,156,250      12,156,250     12,156,658    12,157,046

</TABLE>



20.      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"),  a  retailer  specializing  in  prescription  and  vision
     benefit("Cabot   Noble"),   a  Delaware   holding  company  (the  "Proposed
     Transaction"). 

                                      F-24
<PAGE>

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

     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-25
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts,continued)
--------------------------------------------------------------------------------
                                                                     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
            -----------                         ---------     -------       -----------       ------
            <S>                                <C>           <C>           <C>           <C>       
            Allowance for doubtful accounts
            -------------------------------                      
            52 weeks ended July 1, 1995        $    6,520    $    6,584    $   (8,187)   $    4,917

            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

            Inventory shrink reserve
            ------------------------
            52 weeks ended July 1, 1995        $    4,726    $   24,889    $  (24,120)   $    5,495

            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

            Inventory markdown reserve
            --------------------------
            52 weeks ended July 1, 1995        $     --      $     --      $     --      $     --   

            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

</TABLE>


                                      F-26
<PAGE>