<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

                Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

<TABLE>
<S>                                                       <C>
For the Quarter ended July 29, 2006                       Commission File Number
                                                                  0-19517
</TABLE>

                            THE BON-TON STORES, INC.
                             2801 EAST MARKET STREET
                            YORK, PENNSYLVANIA 17402
                                 (717) 757-7660

INCORPORATED IN PENNSYLVANIA                                  IRS NO. 23-2835229

                                   ----------

     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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (check
one):

Large accelerated filer [ ]   Accelerated filer [X]   Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of September 1, 2006, there were 14,075,259 shares of Common Stock, $.01 par
value, and 2,951,490 shares of Class A Common Stock, $.01 par value,
outstanding.

================================================================================

<PAGE>

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                            THE BON-TON STORES, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(In thousands except share and per share data)           July 29,    January 28,
(Unaudited)                                                2006          2006
----------------------------------------------          ----------   -----------
<S>                                                     <C>          <C>
Assets
Current assets:
   Cash and cash equivalents                            $   19,612     $  9,771
   Merchandise inventories                                 675,153      284,584
   Prepaid expenses and other current assets                84,939       28,412
   Deferred income taxes                                     9,480        7,126
                                                        ----------     --------
      Total current assets                                 789,184      329,893
                                                        ----------     --------
Property, fixtures and equipment at cost, net of
   accumulated depreciation and amortization of
   $261,807 and $216,740 at July 29, 2006 and January
   28, 2006, respectively                                  913,946      167,679
Deferred income taxes                                       54,005       38,715
Goodwill                                                   114,303        2,965
Intangible assets, net of accumulated amortization of
   $7,796 and $5,776 at July 29, 2006 and January 28,
   2006, respectively                                       85,759        5,013
Other long-term assets                                      36,665        9,340
                                                        ----------     --------
      TOTAL ASSETS                                      $1,993,862     $553,605
                                                        ==========     ========
Liabilities and Shareholders' Equity
Current liabilities:
   Accounts payable                                     $  205,612     $ 87,318
   Accrued payroll and benefits                             55,601       18,986
   Accrued expenses                                        169,948       52,692
   Current maturities of long-term debt                      5,563          961
   Current maturities of obligations under capital
      leases                                                 1,249           74
   Income taxes payable                                      3,805       19,005
                                                        ----------     --------
      Total current liabilities                            441,778      179,036
                                                        ----------     --------
Long-term debt, less current maturities                  1,144,710       42,491
Obligations under capital leases, less current
   maturities                                               71,230           24
Other long-term liabilities                                 72,478       39,960
                                                        ----------     --------
      TOTAL LIABILITIES                                  1,730,196      261,511
                                                        ----------     --------
Contingencies (Note 10)
Shareholders' equity:
   Preferred Stock - authorized 5,000,000 shares at
      $0.01 par value; no shares issued                         --           --
   Common Stock - authorized 40,000,000 shares at
      $0.01 par value; issued 14,413,059 and
      14,195,664 shares at July 29, 2006 and January
      28, 2006, respectively                                   138          142
   Class A Common Stock - authorized 20,000,000
      shares at $0.01 par value; issued and
      outstanding 2,951,490 shares at July 29, 2006
      and January 28, 2006                                      30           30
   Treasury stock, at cost - 337,800 shares at July
      29, 2006 and January 28, 2006                         (1,387)      (1,387)
   Additional paid-in-capital                              126,423      129,614
   Deferred compensation                                        --       (6,663)
   Accumulated other comprehensive loss                       (442)          (5)
   Retained earnings                                       138,904      170,363
                                                        ----------     --------
      TOTAL SHAREHOLDERS' EQUITY                           263,666      292,094
                                                        ----------     --------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        $1,993,862     $553,605
                                                        ==========     ========
</TABLE>

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


                                       2

<PAGE>

                    THE BON-TON STORES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                    THIRTEEN WEEKS ENDED       TWENTY-SIX WEEKS ENDED
                                                 -------------------------   -------------------------
(In thousands except share and per share data)     July 29,      July 30,      July 29,      July 30,
(Unaudited)                                          2006          2005          2006          2005
----------------------------------------------   -----------   -----------   -----------   -----------
<S>                                              <C>           <C>           <C>           <C>
Net sales                                        $   746,772   $   274,346   $ 1,308,546   $   536,879
Other income                                          19,974         1,814        34,787         3,972
                                                 -----------   -----------   -----------   -----------
                                                     766,746       276,160     1,343,333       540,851
                                                 -----------   -----------   -----------   -----------
Costs and expenses:
  Costs of merchandise sold                          485,933       174,048       837,513       341,463
  Selling, general and administrative                258,361        93,425       458,141       188,089
  Depreciation and amortization                       27,869         7,584        47,085        14,017
                                                 -----------   -----------   -----------   -----------
(Loss) income from operations                         (5,417)        1,103           594        (2,718)
Interest expense, net                                 27,285         3,600        51,153         6,906
                                                 -----------   -----------   -----------   -----------
Loss before income taxes                             (32,702)       (2,497)      (50,559)       (9,624)
Income tax benefit                                   (12,927)       (1,052)      (19,949)       (3,767)
                                                 -----------   -----------   -----------   -----------
NET LOSS                                         $   (19,775)  $    (1,445)  $   (30,610)  $    (5,857)
                                                 ===========   ===========   ===========   ===========
PER SHARE AMOUNTS --
   BASIC:
      Net loss                                   $     (1.20)  $     (0.09)  $     (1.87)  $     (0.36)
                                                 ===========   ===========   ===========   ===========
   BASIC WEIGHTED AVERAGE SHARES OUTSTANDING      16,430,971    16,186,097    16,410,467    16,154,326
   DILUTED:
      Net loss                                   $     (1.20)  $     (0.09)  $     (1.87)  $     (0.36)
                                                 ===========   ===========   ===========   ===========
   DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING    16,430,971    16,186,097    16,410,467    16,154,326
</TABLE>

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


                                       3
<PAGE>

                            THE BON-TON STORES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               TWENTY-SIX
                                                               WEEKS ENDED
                                                        -----------------------
(In thousands)                                            July 29,     July 30,
(Unaudited)                                                 2006        2005
--------------                                          -----------   ---------
<S>                                                     <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                $   (30,610)  $  (5,857)
Adjustments to reconcile net loss to net cash
   provided by operating activities:
   Depreciation and amortization                             47,085      14,017
   Bad debt provision                                            --       1,510
   Stock-based compensation expense                           2,078       1,183
   Tax benefit of stock option exercises                         --         430
   Gain on sale of property, fixtures and
      equipment                                                (700)         (9)
   Amortization of deferred financing costs                   4,325         779
   Amortization of deferred gain on sale of
      proprietary credit card portfolio                      (1,207)         --
   Deferred income tax benefit                                   --      (7,577)
   Net transfers of receivables to accounts
      receivable facility                                        --    (244,000)
   Proceeds from sale of proprietary credit
      card portfolio                                             --     315,445
   Loss on sale of proprietary credit card
      portfolio                                                  --         596
Changes in operating assets and liabilities,
   net of effect of acquisition:
   Decrease (increase) in merchandise
      inventories                                            64,861     (15,059)
   (Increase) decrease in prepaid expenses and
      other current assets                                  (41,884)     30,345
   Increase in other long-term assets                        (6,072)        (65)
   (Decrease) increase in accounts payable                  (35,323)      6,732
   Increase (decrease) in accrued expenses                   39,104      (9,154)
   Decrease in income taxes payable                         (15,200)     (1,935)
   Increase (decrease) in other long-term
      liabilities                                               522        (104)
                                                        -----------   ---------
      Net cash provided by operating activities              26,979      87,277
                                                        -----------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                     (48,124)    (10,323)
   Acquisition, net of cash acquired                     (1,047,054)         --
   Proceeds from sale of property, fixtures and
      equipment                                               1,544          99
                                                        -----------   ---------
      Net cash used in investing activities              (1,093,634)    (10,224)
                                                        -----------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on long-term debt and capital lease
      obligations                                          (424,298)   (216,140)
   Proceeds from issuance of long-term debt               1,530,500     138,250
   Cash dividends paid                                         (497)       (832)
   Proceeds from stock options exercised                        550         775
   Excess tax benefit from exercise of stock
      options                                                   840          --
   Deferred financing costs paid                            (27,622)       (123)
   Decrease in bank overdraft balances                       (2,977)     (9,632)
                                                        -----------   ---------
      Net cash provided by (used in) financing
         activities                                       1,076,496     (87,702)
                                                        -----------   ---------
      Net increase (decrease) in cash and cash
         equivalents                                          9,841     (10,649)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD              9,771      22,908
                                                        -----------   ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD              $    19,612   $  12,259
                                                        ===========   =========
SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid                                        $    23,113   $   6,073
   Net income taxes paid                                $    15,998   $   5,223
</TABLE>

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


                                       4

<PAGE>

                            THE BON-TON STORES, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                             Accumulated
                                                                                                Other
                                                    Class A            Additional  Deferred    Compre-
(In thousands except per share data)       Common   Common   Treasury    Paid-in    Compen-    hensive    Retained
(Unaudited)                                Stock     Stock     Stock     Capital    sation      Loss      Earnings    Total
------------------------------------      --------  -------  --------  ----------  --------  -----------  --------  --------
<S>                                       <C>       <C>      <C>       <C>         <C>       <C>          <C>       <C>
BALANCE AT JANUARY 28, 2006                 $142      $30    $(1,387)   $129,614   $(6,663)     $  (5)    $170,363  $292,094
   Comprehensive loss:
      Net loss                                --       --         --          --        --         --      (30,610)  (30,610)
      Change in fair value of cash flow
         hedges, net of $248 tax effect       --       --         --          --        --       (437)          --      (437)
                                            ----      ---    -------    --------   -------      -----     --------  --------
         Total comprehensive loss                                                                                    (31,047)
   Adoption of SFAS No. 123R (Note 3)         (5)      --         --      (6,658)    6,663         --           --        --
   Dividends to shareholders, $0.05
      per share                               --       --         --          --        --         --         (849)     (849)
   Stock options exercised                     1       --         --         549        --         --           --       550
   Stock-based compensation expense           --       --         --       2,078        --         --           --     2,078
   Tax benefit of stock options and
      restricted shares                       --       --         --         840        --         --           --       840
                                            ----      ---    -------    --------   -------      -----     --------  --------
BALANCE AT JULY 29, 2006                    $138      $30    $(1,387)   $126,423   $    --      $(442)    $138,904  $263,666
                                            ====      ===    =======    ========   =======      =====     ========  ========
</TABLE>

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


                                        5
<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

1.   BASIS OF PRESENTATION

     The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on
January 31, 1996 as the successor of a company incorporated on January 31, 1929,
and currently operates, through its subsidiaries, 271 department stores and
seven furniture galleries in 23 states in the Northeast, Midwest and Great
Plains under the Bon-Ton, Bergner's, Boston Store, Carson Pirie Scott,
Elder-Beerman, Herberger's and Younkers nameplates. The Bon-Ton Stores, Inc.
conducts its operations through one business segment.

     The accompanying unaudited consolidated financial statements include the
accounts of The Bon-Ton Stores, Inc. and all of its wholly owned subsidiaries
(collectively, the "Company," unless the context otherwise indicates the term
refers to The Bon-Ton Stores, Inc.). All intercompany transactions and balances
have been eliminated in consolidation.

     The unaudited consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and do not include all
information and footnotes required by generally accepted accounting principles.
In the opinion of management, all adjustments (primarily consisting of normal
recurring accruals) considered necessary for a fair presentation of interim
periods have been included. The Company's business is seasonal in nature and
results of operations for the interim periods presented are not necessarily
indicative of results for the full fiscal year. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended January 28, 2006.

     All references to the "second quarter of 2006" and the "second quarter of
2005" are to the 13 weeks ended July 29, 2006 and July 30, 2005, respectively.
All references to "fiscal 2006" and "fiscal 2005" are to the 53 weeks ending
February 3, 2007 and the 52 weeks ended January 28, 2006, respectively.

     Certain prior year balances have been reclassified to conform with the
current year presentation.

2.   CARSON'S ACQUISITION

     Effective March 5, 2006, pursuant to the October 29, 2005 purchase
agreement with Saks Incorporated ("Saks"), as amended, the Company acquired all
of the outstanding securities of two subsidiaries of Saks that were solely
related to the business of owning and operating the 142 retail department stores
that operated under the names Carson Pirie Scott, Younkers, Herberger's, Boston
Store and Bergner's (collectively, "Carson's"). The stores are located in 12
states in the Midwest and upper Great Plains regions.

     Under the terms of the purchase agreement, the Company paid $1,040,188 in
cash. The Company financed the Carson's acquisition, payment of related fees and
expenses and the payoff of its existing indebtedness through the issuance of
10-1/4% Senior Notes due 2014 in the aggregate principal amount of $510,000,
entry into a $1,000,000 senior secured revolving credit facility led by Bank of
America, N.A. ("Bank of America") as agent, and entry into a $260,000 mortgage
loan facility with Bank of America as lender (see Note 5).


                                        6

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

     Company management believes the acquisition of Carson's will enable the
Company to enhance its product offerings, strengthen its vendor and customer
relationships and increase its profitability.

     The Company's consolidated financial statements for the twenty-six weeks
ended July 29, 2006 include Carson's operations for the period from March 5,
2006 through July 29, 2006. Carson's operations reflect preliminary purchase
accounting in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," whereby the purchase price was
preliminarily allocated to the assets acquired and liabilities assumed based
upon their estimated fair values on the acquisition date. The preliminary
purchase price and purchase price allocation, as reflected in the following
table, are subject to the final fair value determination of certain assets and
liabilities:

<TABLE>
<S>                                                                   <C>
Preliminary Purchase Price
Cash purchase                                                         $1,040,188
Carson's severance                                                           514
Professional fees incurred                                                11,517
                                                                      ----------
   Total                                                              $1,052,219
                                                                      ==========
Preliminary Purchase Price Allocation
Cash and cash equivalents                                             $    3,110
Merchandise inventories                                                  455,430
Prepaid expenses                                                          14,643
Property, fixtures and equipment                                         744,423
Deferred income taxes                                                     17,397
Goodwill                                                                 111,339
Intangible assets                                                         82,767
Other assets                                                                  10
                                                                      ----------
   Total assets acquired                                               1,429,119
                                                                      ----------
Accounts payable                                                        (158,310)
Accrued payroll and benefits                                             (33,339)
Other accrued expenses                                                   (79,312)
Obligations under capital leases                                         (73,000)
Other liabilities                                                        (32,939)
                                                                      ----------
   Total liabilities assumed                                            (376,900)
                                                                      ----------
   Net assets acquired                                                $1,052,219
                                                                      ==========
</TABLE>

     The Company has filed a section 338(h)(10) election under the Internal
Revenue Code ("Section 338"). The Section 338 election essentially enables a
buyer to account for a stock purchase as an asset purchase for income tax
purposes.

     Goodwill in the amount of $111,339 has been recorded in conjunction with
the acquisition. The Company expects that substantially all goodwill will be
deductible for income tax purposes.


                                        7

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

     Intangible assets are comprised of lease-related interests of $40,000 that
relate to below-market-rate leases; trademarks totaling $37,767, of which only
$1,767 will be subject to amortization; and customer lists totaling $5,000. The
lease-related interests, amortizable trademarks and customer lists were assigned
weighted-average amortization lives of twelve years, eight years and seven
years, respectively.

     Deferred tax assets of $17,397 have been recorded as part of the
preliminary purchase accounting. This balance represents a reduction in the
Company's pre-acquisition valuation allowances against certain net operating
losses acquired as part of the October 2003 acquisition of The Elder-Beerman
Stores Corp. This valuation allowance reduction was a result of the projected
additional net operating loss utilization based on the projected accretive
impact from Carson's on the Company's long-term pre-tax income.

     The Company has not completed its assessment of the fair values of the
acquired assets and assumed liabilities and has not finalized its plans
regarding the integration of computer software. The Company is currently in the
process of obtaining third-party valuations for certain acquired assets and
assumed liabilities. Consequently, the purchase price allocation may be
subsequently adjusted to reflect the final valuation of acquired assets and
assumed liabilities. Such revisions could have a material impact on the
Company's results of operations for fiscal 2006.

     During the second quarter of 2006, $514 was paid for Carson's-related
severance.

     The Company's corporate office will remain in York, Pennsylvania and be
comprised of corporate administrative and back-office functions. Merchandising
and marketing functions for the combined operations will operate from Carson's
former headquarters in Milwaukee, Wisconsin.

     In conjunction with this acquisition, the Company entered into a transition
services agreement with Saks pursuant to which Saks provides the Company with
various services related to Carson's, including, among other things, credit
operations, procurement, accounting, bank card processing, store planning,
construction, facilities maintenance and energy, information technology and
human resources activities. These services will be provided by Saks for periods
ranging from six months to 12 months from the date of the acquisition of
Carson's (subject to extension at the Company's discretion).

     The following unaudited pro forma consolidated financial data give effect
to the Carson's acquisition as if it had occurred as of the beginning of the
periods presented:


                                        8

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                               THIRTEEN               TWENTY-SIX
                                             WEEKS ENDED             WEEKS ENDED
                                         -------------------   -----------------------
                                         July 29,   July 30,    July 29,     July 30,
                                           2006       2005        2006         2005
                                         --------   --------   ----------   ----------
<S>                                      <C>        <C>        <C>          <C>
Net sales                                $746,772   $728,640   $1,490,153   $1,481,082
Other income                               19,974      4,204       35,814        8,727
Costs and expenses:
   Costs of merchandise sold              485,933    448,649      970,167      919,290
   Selling, general and administrative    258,361    255,414      516,982      505,061
   Depreciation and amortization           27,869     29,199       55,233       56,932
                                         --------   --------   ----------   ----------
(Loss) income from operations              (5,417)      (418)     (16,415)       8,526
Interest expense, net                      27,285     27,156       61,539       54,586
                                         --------   --------   ----------   ----------
Loss before income taxes                  (32,702)   (27,574)     (77,954)     (46,060)
Income tax benefit                        (12,927)   (11,080)     (30,770)     (18,307)
                                         --------   --------   ----------   ----------
NET LOSS                                 $(19,775)  $(16,494)  $  (47,184)  $  (27,753)
                                         ========   ========   ==========   ==========
Loss per share:
   Basic                                 $  (1.20)  $  (1.02)  $    (2.88)  $    (1.72)
   Diluted                               $  (1.20)  $  (1.02)  $    (2.88)  $    (1.72)
</TABLE>

     The pro forma information for the thirteen weeks ended July 29, 2006 is
identical to the actual results reported by the Company, as Carson's was
included in the consolidated operations of the Company for the entire period.

     The pro forma information for the twenty-six weeks ended July 29, 2006
includes the following non-recurring charges: $8,158 of integration costs
recorded in selling, general and administrative expense, which includes
severance and relocation expense related to the transition of the Company's
merchandising and marketing staff to Milwaukee, Wisconsin in the amount of
$4,282; $2,319 of charges in interest expense related to the write-off of
deferred financing fees associated with the previous credit agreement; and
$4,500 included in interest expense related to the write-off of commitment fees
associated with a bridge loan in connection with the Carson's acquisition.

     The pro forma information does not purport to be indicative of the results
that actually would have been achieved if the operations were combined during
the periods presented and is not intended to be a projection of future results
or trends.

3.   STOCK-BASED COMPENSATION

     The Company's Amended and Restated 2000 Stock Incentive and
Performance-Based Award Plan ("2000 Stock Plan"), as amended through June 20,
2006, provides for the granting of


                                        9

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

common stock options, restricted shares and restricted stock units to certain
employees, officers, directors, consultants and advisors. A maximum of 2,600,000
shares may be granted under the 2000 Stock Plan, of which 1,235,236 shares
remain available as of July 29, 2006. Vesting periods for the awards are at the
discretion of the Company's board of directors.

     The Company's Amended and Restated 1991 Stock Option and Restricted Stock
Plan ("1991 Stock Plan"), as amended through June 17, 1997, provided for the
granting of common stock options, performance-based common stock options as part
of a long-term incentive plan for selected officers and common stock restricted
shares. A maximum of 1,900,000 shares were available under the 1991 Stock Plan;
no shares remain available as of July 29, 2006.

     Stock options granted during the twenty-six weeks ended July 29, 2006 were
granted with an exercise price equal to the market value of the underlying stock
on the grant date, vest on an annual basis over three years and have a
contractual term of seven years. Stock options granted before January 29, 2006
generally vest over two to four years and have a contractual term of seven or
ten years.

     Restricted shares granted during the twenty-six weeks ended July 29, 2006
vest over three years. Employees granted restricted shares are not required to
pay for the shares; however, they must remain employed with the Company until
the restrictions on the shares lapse. Restricted shares granted before January
29, 2006 generally vest over two to four years.

     Employees and directors who are granted restricted stock units are not
required to pay for the shares but must remain employed by the Company, or
continue to serve as a member of its board of directors, until the restrictions
on the shares lapse. In addition, restricted stock units awarded to a senior
executive in the second quarter of 2006 contain performance criteria based on
achievement of defined Company performance levels. Performance achievement will
be evaluated based on full fiscal year results, at which point some or all of
the restricted stock units will be cancelled if award performance criteria are
not met.

     Refer to Note 15 in the Company's Annual Report on Form 10-K for the
year-ended January 28, 2006 for additional information regarding these plans.
Plan descriptions for the Phantom Equity Replacement Plan and Management
Incentive Plan were excluded from this Quarterly Report on Form 10-Q due to
immateriality.

     The Company generally issues new stock to satisfy share-based award
exercises.

ADOPTION OF SFAS NO. 123R

     Effective January 29, 2006, the Company adopted SFAS No. 123R, "Share-Based
Payment" ("SFAS No. 123R"), which revised SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123R requires a public entity to measure the
cost of employee services


                                       10
<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

received in exchange for an award of equity instruments based on the grant-date
fair value of the award and to recognize that cost over the period that an
employee is required to provide service in exchange for the award. Any awards of
liability instruments to employees would be measured at fair value at each
reporting date through settlement.

     Prior to adopting SFAS No. 123R, the Company followed the intrinsic value
method of accounting for stock-based employee compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. The Company adopted SFAS No. 123R
using the modified prospective application method, which requires that
provisions of SFAS No. 123R are applied only to share-based awards granted,
modified, repurchased, or cancelled on January 29, 2006 and thereafter. For
those grants made prior to January 29, 2006 that are nonvested and outstanding
as of January 29, 2006, the Company started recognizing the remaining
unrecognized compensation cost of these awards over the remaining service period
as required by SFAS No. 123R. Accordingly, the results of prior periods have not
been restated. The adoption of SFAS No. 123R did not have a material effect on
the Company's results of operations, cash flows, or financial position.

     The following table illustrates the effect on net loss and loss per share
for grants issued prior to July 31, 2005 had the Company applied the fair value
recognition provisions of SFAS No. 123 to those grants in fiscal 2005:

<TABLE>
<CAPTION>
                                                           THIRTEEN     TWENTY-SIX
                                                         WEEKS ENDED   WEEKS ENDED
                                                           July 30,      July 30,
                                                             2005          2005
                                                         -----------   -----------
<S>                                                      <C>           <C>
Net loss, as reported                                      $(1,445)      $(5,857)
Add: Stock-based compensation expense included
   in net loss, net of income tax of $274 and $462 for
   the thirteen and twenty-six weeks, respectively             414           720
Deduct: Total stock-based compensation expense
   determined under fair-value-based method for all
   awards, net of income tax of $370 and $630 for
   the thirteen and twenty-six weeks, respectively            (580)       (1,019)
                                                           -------       -------
Pro forma net loss                                         $(1,611)      $(6,156)
                                                           =======       =======
Loss per share:
      Basic As reported                                    $ (0.09)      $ (0.36)
            Pro forma                                        (0.10)        (0.38)
      Diluted As reported                                  $ (0.09)      $ (0.36)
              Pro forma                                      (0.10)        (0.38)
</TABLE>

     The compensation cost that has been charged against income for the
Company's share-based award plans was $1,329 and $2,078 for the thirteen and
twenty-six weeks ended July 29, 2006, respectively; and $688 and $1,182 for the
thirteen and twenty-six weeks ended July 30, 2005, respectively. The total
income tax benefit recognized in the statements of operations for stock-based
award compensation was $533 and $828 for the thirteen and twenty-six weeks ended


                                       11

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

July 29, 2006, respectively; and $274 and $462 for the thirteen and twenty-six
weeks ended July 30, 2005, respectively.

     Cash received from exercise under all share-based payment arrangements was
$550 and $775 for the twenty-six weeks ended July 29, 2006 and July 30, 2005,
respectively. The incremental tax benefit realized for the tax deductions from
exercise of the share-based payment arrangements was $840 and $430 for the
twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively.

     Awards with graded vesting are recognized using the straight-line method.

     Based upon an examination of forfeiture rates for the various classes of
stock options, restricted stock units and restricted shares, Company management
does not believe that the total number of options or shares that are vested and
expected to vest as of July 29, 2006 are materially different from the
respective number of options or shares outstanding as of July 29, 2006.

STOCK OPTIONS

     The fair value of each option award was estimated on the grant date using
the Black-Scholes option valuation model and the weighted average assumptions
noted in the following table:

<TABLE>
<CAPTION>
                                                                  TWENTY-SIX
                                                                 WEEKS ENDED
                                                             -------------------
                                                             July 29,   July 30,
                                                               2006       2005
                                                             --------   --------
<S>                                                          <C>        <C>
Weighted average grant date fair value                        $13.63     $8.94
Weighted average risk-free interest rate                         5.0%      4.0%
Weighted average expected volatility                            52.2%     48.8%
Weighted average expected dividend yield                         0.4%      0.5%
Weighted average expected term (years)                           4.5       5.1
</TABLE>

     The risk-free interest rates used in the twenty-six weeks ended July 29,
2006 and July 30, 2005 were based on the zero-coupon U.S. Treasury bond, with a
term equal to the expected term of the stock options. The volatility used in the
twenty-six weeks ended July 29, 2006 and July 30, 2005 represent the historical
volatility of the Company's common shares over a period that approximates the
expected term of the stock options. The expected dividend yields used in the
twenty-six weeks ended July 29, 2006 and July 30, 2005 were estimated based on
historical dividend yields. The expected term of options granted in the
twenty-six weeks ended July 29, 2006 and July 30, 2005 were estimated using the
average of the vesting date and the contractual


                                       12

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

term, in accordance with guidance provided within Securities and Exchange
Commission Staff Accounting Bulletin No. 107.

     The Company's stock options include stock options granted under the 2000
Stock Plan, the 1991 Stock Plan and the Phantom Equity Replacement Plan.

     A summary of the status of the stock options under the Company's stock
option plans as of July 29, 2006 and changes during the twenty-six weeks ended
July 29, 2006 is presented below:

<TABLE>
<CAPTION>
                                                             Weighted
                                                Weighted     Average
                                                Average     Remaining
                                      Shares   Per-Share   Contractual   Aggregate
                                      Under     Exercise       Term      Intrinsic
                                      Option     Price       (Years)       Value
                                     -------   ---------   -----------   ---------
<S>                                  <C>       <C>         <C>           <C>
Outstanding as of January 28, 2006   546,030     $13.15
   Granted                           166,000      28.85
   Exercised                         (93,976)      5.88
   Forfeited/Expired                  (5,000)     21.73
                                     -------     ------        ----        ------
Outstanding as of July 29, 2006      613,054      18.45        6.40        $3,879
                                     -------     ------        ----        ------
Exercisable as of July 29, 2006      170,387     $10.57        4.98        $2,421
</TABLE>

     The total intrinsic value of options exercised was $2,150 and $1,499 during
the twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively. As of
July 29, 2006, there was $3,864 of total unrecognized compensation cost related
to unvested stock options; that cost is expected to be recognized over a
weighted average period of 1.32 years.

RESTRICTED STOCK UNITS

     Restricted stock units consist of those units granted under the 2000 Stock
Plan, as discussed above. The fair value of each restricted stock unit award is
calculated using the stock price at the date of grant. A summary of the status
of the restricted stock units as of July 29, 2006 and changes during the
twenty-six weeks ended July 29, 2006 is presented below:


                                       13

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              Weighted Average Grant-
                                     Restricted Stock Units       Date Fair Value
                                     ----------------------   -----------------------
                                        Future                   Future
                                     Performance    Future    Performance    Future
                                     and Service    Service   and Service    Service
                                       Required    Required     Required    Required
                                     -----------   --------   -----------   --------
<S>                                  <C>           <C>        <C>           <C>
Outstanding as of January 28, 2006          --      46,375           --      $15.09
   Granted                              40,518      14,175       $21.90       24.68
                                        ------      ------       ------      ------
Outstanding as of July 29, 2006         40,518      60,550        21.90       17.34
                                        ======      ======       ======      ======
</TABLE>

     As of July 29, 2006, there was $627 of total unrecognized compensation cost
related to restricted stock units that is expected to be recognized over a
weighted-average period of 0.50 years. Of the total performance-based restricted
stock units outstanding as of July 29, 2006, 20,259 restricted stock units have
not been valued for purposes of unrecognized compensation cost and compensation
expense recognition; valuation of these restricted stock units, and commencement
of compensation expense recognition, is pending establishment of performance
criteria.

     No restricted stock units vested during the twenty-six weeks ended July 29,
2006 and July 30, 2005. The weighted-average grant date fair value of restricted
stock units granted during the twenty-six weeks ended July 29, 2006 was $22.61
per unit, compared with $17.89 per unit during the twenty-six weeks ended July
30, 2005.

     The Company pays cash dividend equivalents on most outstanding restricted
stock units.

RESTRICTED SHARES

     The Company's restricted shares consist of restricted shares granted under
the 2000 Stock Plan, as discussed above. The fair value of each restricted share
award is calculated using the stock price at the date of grant. A summary of the
status of restricted share awards as of July 29, 2006 and changes during the
twenty-six weeks ended July, 29, 2006 is presented below:

<TABLE>
<CAPTION>
                                                                       Weighted
                                                                        Average
                                                         Restricted   Grant-Date
                                                           Shares     Fair Value
                                                         ----------   ----------
<S>                                                      <C>          <C>
Outstanding as of January 28, 2006                         471,647      $17.58
   Granted                                                 134,019       27.40
   Forfeited                                               (10,500)      17.86
                                                           -------       -----
Outstanding as of July 29, 2006                            595,166       19.80
                                                           =======       =====
</TABLE>

     As of July 29, 2006, there was $8,850 of total unrecognized compensation
cost related to restricted shares that is expected to be recognized over a
weighted average period of 2.77 years. No restricted shares vested during the
twenty-six weeks ended July 29, 2006. The total fair value of shares vested
during the twenty-six weeks ended July 30, 2005 was $10.

     The Company pays cash dividends on all outstanding restricted shares.


                                       14
<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

4.   PER-SHARE AMOUNTS

     The presentation of earnings per share ("EPS") requires a reconciliation of
numerators and denominators used in basic and diluted EPS calculations. The
numerator, net loss, is identical in both calculations. The following table
presents a reconciliation of weighted average shares outstanding for the
respective calculations for each period presented in the accompanying
consolidated statements of operations:

<TABLE>
<CAPTION>
                                       THIRTEEN                 TWENTY-SIX
                                     WEEKS ENDED               WEEKS ENDED
                               -----------------------   -----------------------
                                July 29,     July 30,     July 29,     July 30,
                                  2006         2005         2006         2005
                               ----------   ----------   ----------   ----------
<S>                            <C>          <C>          <C>          <C>
Basic calculation              16,430,971   16,186,097   16,410,467   16,154,326
Effect of dilutive shares --
   Restricted shares and
      restricted stock units           --           --           --           --
   Options                             --           --           --           --
                               ----------   ----------   ----------   ----------
Diluted calculation            16,430,971   16,186,097   16,410,467   16,154,326
                               ==========   ==========   ==========   ==========
</TABLE>

     The following securities were antidilutive and, therefore, were not
included in the computation of diluted EPS for the periods indicated:

<TABLE>
<CAPTION>
                                       THIRTEEN                 TWENTY-SIX
                                     WEEKS ENDED               WEEKS ENDED
                               -----------------------   -----------------------
                                July 29,     July 30,     July 29,     July 30,
                                  2006         2005         2006         2005
                               ----------   ----------   ----------   ----------
<S>                            <C>          <C>          <C>          <C>
Antidilutive shares --
   Restricted shares and
      restricted stock units     631,496      511,241     578,831       428,167
   Options                       577,674      541,311     544,297       547,910
</TABLE>

     Certain securities were excluded from the computation of dilutive shares
due to the Company's net loss position in the thirteen and twenty-six weeks
ended July 29, 2006 and July 30, 2005. The following table shows the approximate
effect of dilutive securities had the Company reported a profit for these
periods:


                                       15

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                       THIRTEEN                 TWENTY-SIX
                                     WEEKS ENDED               WEEKS ENDED
                               -----------------------   -----------------------
                                July 29,     July 30,     July 29,     July 30,
                                  2006         2005         2006         2005
                               ----------   ----------   ----------   ----------
<S>                            <C>          <C>          <C>          <C>
Effect of dilutive
   securities --
   Restricted shares and
      restricted
      stock units              236,494        112,819    219,027        105,464
   Options                      34,649        182,384     49,724        199,457
</TABLE>

5.   DEBT

     On March 6, 2006, The Bon-Ton Department Stores, Inc. and certain of its
subsidiaries, Bank of America and certain other lenders entered into a Loan and
Security Agreement ("New Senior Secured Credit Facility") which provides for up
to $1,000,000 of revolver borrowings. The New Senior Secured Credit Facility
includes a last-in, first-out revolving credit facility of up to $900,000 and a
first-in, last-out revolving credit facility of up to $100,000 and has a
sub-limit of $150,000 for the issuance of standby and documentary letters of
credit. All borrowings under the New Senior Secured Credit Facility are limited
by amounts available pursuant to a borrowing base calculation, which is based on
percentages of eligible inventory, real estate and fixed assets, with a
reduction for applicable reserves. The New Senior Secured Credit Facility is
guaranteed by The Bon-Ton Stores, Inc. and certain of its subsidiaries. As part
of the New Senior Secured Credit Facility, Bank of America and the other lenders
will make available certain swing line loans in an aggregate amount not to
exceed $75,000 at any one time outstanding. Borrowings under the New Senior
Secured Credit Facility will bear interest at either (i) the prime rate
established by Bank of America, from time to time, plus the applicable margin
(the "Prime Rate") or (ii) the LIBOR rate from time to time plus the applicable
margin. The applicable margin will be determined by the excess availability
under the New Senior Secured Credit Facility. The swing line loans will bear
interest at the same rate applicable to last in, first out Prime Rate loans. The
Company will be required to pay a commitment fee to the lenders for unused
commitments at a rate of 0.25% to 0.30% per annum, based on excess availability
under the New Senior Secured Credit Facility. The New Senior Secured Credit
Facility expires March 6, 2011. Financial covenants contained in the New Senior
Secured Credit Facility require that the minimum excess availability be greater
than $75,000 at all times. In addition, there are certain restrictions against
the incurrence of additional indebtedness, pledge or sale of assets, payment of
dividends and distributions, and other similar restrictions. Dividends paid by
the Company may not exceed $15,000 over the life of the agreement, or $4,000 in
any single year. Capital expenditures are limited to $125,000 per year, with a
one-year carryover of any prior year unused amount. The available borrowing
capacity under the New Senior Secured Credit Facility will be used in the future
for other general corporate purposes.

     On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned
subsidiary of The Bon-Ton Stores, Inc., entered into an indenture (the
"Indenture") with The Bank of New York, as trustee, under which The Bon-Ton
Department Stores, Inc. issued $510,000 aggregate principal amount of its
10-1/4% Senior Notes due 2014 (the "Notes"). The Notes are guaranteed on a
senior unsecured basis by the Company and by each of the Company's subsidiaries
that is an obligor under the New Senior Secured Credit Facility. The Notes
mature on March 15, 2014. The interest rate of the Notes is fixed at 10-1/4% per
year. Interest on the Notes is payable on


                                       16

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

March 15 and September 15 of each year, beginning on September 15, 2006. The
Indenture includes covenants that limit the ability of the Company and its
restricted subsidiaries to, among other things, incur additional debt, pay
dividends and make distributions, make certain investments, enter into certain
types of transactions with affiliates, use assets as security in other
transactions, and sell certain assets or merge with or into other companies.

     On March 6, 2006, certain bankruptcy remote special purpose entities (each
an "SPE" and, collectively, the "SPEs") that are indirect wholly owned
subsidiaries of The Bon-Ton Stores, Inc. entered into Loan Agreements with Bank
of America, pursuant to which Bank of America provided a new mortgage loan
facility in the aggregate principal amount of $260,000 (the "New Mortgage Loan
Facility"). The New Mortgage Loan Facility has a term of ten years and is
secured by mortgages on twenty-three retail stores and one distribution center
owned by the SPEs. Each SPE entered into a lease with each of The Bon-Ton
Stores, Inc. subsidiaries operating on such SPE's properties. A portion of the
rental income received under these leases will be used to pay the debt service
under the New Mortgage Loan Facility. The New Mortgage Loan Facility requires
level monthly payments of principal and interest based on an amortization period
of 25 years and the balance outstanding at the end of ten years will then become
due and payable. The interest rate for the New Mortgage Loan Facility is a fixed
rate of 6.2125%. Financial covenants contained in the New Mortgage Loan Facility
require that the SPEs maintain certain financial thresholds, as defined in the
agreement.

     The Company used the net proceeds of the Notes offering along with
borrowings under its New Senior Secured Credit Facility and New Mortgage Loan
Facility to finance the acquisition of Carson's, pay related fees and expenses
in connection with the acquisition and related financing transactions, and pay
the outstanding balance under the Company's previous credit agreement.

6.   EXIT OR DISPOSAL ACTIVITIES

     On January 28, 2006, the Company closed its Great Northern and Shoppingtown
stores in the Syracuse, New York area, its Walden Galleria store in Buffalo, New
York and its Lebanon, Pennsylvania store. In connection with the closing of
these four stores, the Company developed plans resulting in involuntary
associate terminations and a lease termination fee. Activities during the
twenty-six weeks ended July 29, 2006 related to these costs are as follows:

<TABLE>
<CAPTION>
                                               Involuntary
                                               Termination      Lease
                                                 Benefits    Termination   Total
                                               -----------   -----------   -----
<S>                                            <C>           <C>           <C>
Balance as of January 28, 2006                   $ 122         $ 782       $ 904
Payments:
   Thirteen weeks ended April 29, 2006            (117)         (168)       (285)
   Thirteen weeks ended July 29, 2006               (5)          (90)        (95)
                                                 -----         -----       -----
Balance as of July 29, 2006                      $  --         $ 524       $ 524
                                                 =====         =====       =====
</TABLE>


                                       17

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

     The Company expects to pay the balance of the lease termination fee
through February 1, 2008.

     In connection with the sale of its credit card accounts in July 2005, the
Company developed plans resulting in involuntary associate terminations and
contract terminations, with total costs of $534 and $200, respectively. The
Company expects to pay the balance of the associate termination payments by
February 3, 2007, while the liability for the contract termination costs will be
paid over the remaining contract periods ending in May 2007. Activities during
the twenty-six weeks ended July 29, 2006 related to these costs are as follows:

<TABLE>
<CAPTION>
                                               Involuntary
                                               Termination     Contract
                                                 Benefits    Termination   Total
                                               -----------   -----------   -----
<S>                                            <C>           <C>           <C>
Balance as of January 28, 2006                    $ 168         $ 168      $ 336
Provision:
   Thirteen weeks ended April 29, 2006               15            --         15
Payments:
   Thirteen weeks ended April 29, 2006             (107)          (31)      (138)
   Thirteen weeks ended July 29, 2006                --           (42)       (42)
                                                  -----         -----      -----
Balance as of July 29, 2006                       $  76         $  95      $ 171
                                                  =====         =====      =====
</TABLE>

     The above provision was included within selling, general and administrative
expense.

7.   INTEGRATION ACTIVITIES

     In connection with the acquisition of Carson's, the Company developed
certain integration plans. These plans include transferring Bon-Ton's existing
merchandising and marketing functions to Carson's former headquarters in
Milwaukee, Wisconsin, resulting in involuntary terminations with a total
expected cost of $4,614. The Company expects to pay the balance of the
involuntary termination costs by February 3, 2007. Activities during the
twenty-six weeks ended July 29, 2006 related to these costs are as follows:


                                       18
<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                  (IN THOUSAND EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                     Involuntary
                                                                     Termination
                                                                       Benefits
                                                                     -----------
<S>                                                                  <C>
Provision:
   Thirteen weeks ended April 29, 2006                                 $3,066
   Thirteen weeks ended July 29, 2006                                   1,064
Payments:
   Thirteen weeks ended July 29, 2006                                    (104)
                                                                       ------
Balance as of July 29, 2006                                            $4,026
                                                                       ======
</TABLE>

     The above provision was included within selling, general and administrative
expense.

     In connection with the acquisition of The Elder-Beerman Stores Corp. in
October 2003, the Company developed integration plans resulting in certain lease
terminations. The liability balance as of January 28, 2006 for the lease
terminations was $1,075. Additional payments of $24 have been made during each
of the first and second quarters of fiscal 2006. As of July 29, 2006, the
liability balance for lease terminations was $1,027, which will be paid over the
remaining contract periods ending in 2030.

8.   COMPREHENSIVE LOSS

     Comprehensive loss was determined as follows:

<TABLE>
<CAPTION>
                                             THIRTEEN             TWENTY-SIX
                                           WEEKS ENDED           WEEKS ENDED
                                       -------------------   -------------------
                                       July 29,   July 30,   July 29,   July 30,
                                         2006       2005       2006       2005
                                       --------   --------   --------   --------
<S>                                    <C>        <C>        <C>        <C>
Net loss                               $(19,775)  $(1,445)   $(30,610)  $(5,857)
Other comprehensive (loss) income:
   Cash flow hedge derivative (loss)
      income, net of tax                   (442)      118        (437)      275
                                       --------   -------    --------   -------
Comprehensive loss                     $(20,217)  $(1,327)   $(31,047)  $(5,582)
                                       ========   =======    ========   =======
</TABLE>

9.   EMPLOYEE BENEFIT PLANS

     The Company provides eligible employees with retirement benefits under a
401(k) salary reduction and retirement contribution plan (the "Plan"). The
Company made an annual contribution of $4,054 to the Plan during the thirteen
weeks ended April 29, 2006. The Company recorded Plan expense of $2,876 and $915
during the second quarters of 2006 and 2005, respectively, and expense of $4,819
and $1,675 during the twenty-six weeks ended July 29, 2006 and July 30, 2005,
respectively.


                                       19

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                  (IN THOUSAND EXCEPT SHARE AND PER SHARE DATA)

     The Company provides the Bon-Ton supplementary pension plan to certain key
executives and former employees. Net periodic benefit expense includes the
following components:

<TABLE>
<CAPTION>
                                             THIRTEEN             TWENTY-SIX
                                           WEEKS ENDED           WEEKS ENDED
                                       -------------------   -------------------
                                       July 29,   July 30,   July 29,   July 30,
                                         2006       2005       2006       2005
                                       --------   --------   --------   --------
<S>                                    <C>        <C>        <C>        <C>
Experience gain                           $--       $(20)      $ --       $(20)
Service cost                               21         17         40         36
Interest cost                              52         55        105        109
                                          ---       ----       ----       ----
Net periodic benefit expense              $73       $ 52       $145       $125
                                          ===       ====       ====       ====
</TABLE>

     During the twenty-six weeks ended July 29, 2006, contributions of $113 have
been made to the Bon-Ton supplementary pension plan. The Company anticipates
contributing an additional $138 to fund the Bon-Ton supplementary pension plan
in fiscal 2006 for an annual total of $251.

     As part of the Carson's acquisition (see Note 2), the Company acquired a
defined benefit plan and supplemental pension plans. Net periodic benefit income
for these plans includes the following components:

<TABLE>
<CAPTION>
                                           THIRTEEN WEEKS   PERIOD FROM MARCH 5,
                                                ENDED           2006 THROUGH
                                           --------------   --------------------
                                              July 29,            July 29,
                                                2006                2006
                                           --------------   --------------------
<S>                                        <C>              <C>
Service cost                                   $    29            $    44
Interest cost                                    4,729              4,793
Expected return on plan assets                  (5,629)            (5,629)
                                               -------            -------
Net periodic benefit income                    $  (871)           $  (792)
                                               =======            =======
</TABLE>

     During the period from March 5, 2006 through July 29, 2006, contributions
of $2,035 have been made to the Carson's defined benefit and supplemental
pension plans. The Company anticipates contributing an additional $326 to fund
these pension plans in fiscal 2006 for an annual total of $2,361.

     The Company also acquired a retiree health care plan as part of the
Carson's acquisition. Net periodic benefit interest expense of $92 and $139 has
been recorded for the thirteen weeks ended July 29, 2006 and the period from
March 5, 2006 through July 29, 2006, respectively. During the period from March
5, 2006 through July 29, 2006, contributions of $90 have been made to the
Carson's retiree health care plan. The Company anticipates contributing an
additional $396 to fund this plan in fiscal 2006 for an annual total of $486.


                                       20

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                  (IN THOUSAND EXCEPT SHARE AND PER SHARE DATA)

10.  CONTINGENCIES

     The Company is involved in various legal matters arising in the ordinary
course of business. In the opinion of Company management, the outcome of such
proceedings and litigation will not have a material adverse impact on the
Company's financial position, results of operations or liquidity.

11.  SUBSEQUENT EVENT

     On August 24, 2006, the Company announced a quarterly cash dividend of
$0.025 per share on Class A Common Stock and Common Stock, payable October 16,
2006 to shareholders of record as of October 2, 2006.

     On August 25, 2006, the Company announced that it will close its Carson
Pirie Scott store at One South State Street in Chicago, Illinois by March 2007.
The Company believes it will incur charges totaling approximately $2,300, fully
comprised of associate severance costs, approximately 85% of which is estimated
to be expensed in fiscal 2006.

12.  GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

     On March 6, 2006, The Bon-Ton Department Stores, Inc. (the "Issuer"), a
wholly owned subsidiary of the Company, entered into an Indenture with The Bank
of New York, as trustee, under which The Bon-Ton Department Stores, Inc. issued
$510,000 aggregate principal amount of its 10-1/4% Senior Notes due 2014 (see
Note 5). The Notes are guaranteed on a senior unsecured basis by the Company and
by each of the Company's wholly owned subsidiaries, other than The Bon-Ton
Department Stores, Inc., that is an obligor under the New Senior Secured Credit
Facility. The guarantees are full and unconditional and joint and several.

     The condensed consolidating financial information for the Company, as
presented below, has been prepared from the books and records maintained by the
Company, the Issuer and the guarantor and non-guarantor subsidiaries. The
condensed financial information may not necessarily be indicative of the results
of operations or financial position had the guarantor and non-guarantor
subsidiaries operated as independent entities. Certain intercompany revenues and
expenses included in the subsidiary records are eliminated in consolidation. As
a result of this activity, an amount due to/due from affiliates will exist at
any time.


                                       21

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                  (IN THOUSAND EXCEPT SHARE AND PER SHARE DATA)

                            THE BON-TON STORES, INC.
                      CONDENSED CONSOLIDATING BALANCE SHEET
                                  JULY 29, 2006

<TABLE>
<CAPTION>
                                                 Bon-Ton
                                                  (Parent                  Guarantor    Non-Guarantor   Consolidating     Company
                                                 Company)     Issuer     Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                                 --------   ----------   ------------   -------------   -------------   ------------
<S>                                              <C>        <C>          <C>            <C>             <C>             <C>
Assets
Current assets:
   Cash and cash equivalents                     $      1   $    4,889    $   14,722       $     --      $        --     $   19,612
   Merchandise inventories                             --      145,760       529,393             --               --        675,153
   Prepaid expenses and other current assets           --       44,572        38,892          1,475               --         84,939
   Deferred income taxes                               --        8,956           524             --               --          9,480
                                                 --------   ----------    ----------       --------       ----------     ----------
      Total current assets                              1      204,177       583,531          1,475               --        789,184
                                                 --------   ----------    ----------       --------       ----------     ----------
Property, fixtures and equipment at cost, net          --      146,361       438,762        328,823               --        913,946
Deferred income taxes                                  --       37,132        16,873             --               --         54,005
Goodwill                                               --        2,965       111,338             --               --        114,303
Intangible assets, net                                 --        2,719        83,040             --               --         85,759
Investment in and advances to (from) affiliates   263,665      727,128       473,531          1,341       (1,465,665)            --
Other long-term assets                                 --       29,448         1,641          5,576               --         36,665
                                                 --------   ----------    ----------       --------      -----------     ----------
   TOTAL ASSETS                                  $263,666   $1,149,930    $1,708,716       $337,215      $(1,465,665)    $1,993,862
                                                 ========   ==========    ==========       ========      ===========     ==========
Liabilities and Shareholders' Equity
Current liabilities:
   Accounts payable                              $     --   $  110,221    $   95,391       $     --      $        --     $  205,612
   Accrued payroll and benefits                        --       16,490        39,111             --               --         55,601
   Accrued expenses                                    --       45,774       122,834          1,340               --        169,948
   Current maturities of long-term debt and
      obligations under capital leases                 --           --         1,249          5,563               --          6,812
      Income taxes payable                             --        3,805            --             --               --          3,805
                                                 --------   ----------    ----------       --------      -----------     ----------
      Total current liabilities                        --      176,290       258,585          6,903               --        441,778
Long-term debt and obligations under capital
   leases, less current maturities                     --      874,900        71,230        269,810               --      1,215,940
Other long-term liabilities                            --       30,456        42,022             --               --         72,478
                                                 --------   ----------    ----------       --------      -----------     ----------
   TOTAL LIABILITIES                                   --    1,081,646       371,837        276,713               --      1,730,196
                                                 --------   ----------    ----------       --------      -----------     ----------
SHAREHOLDERS' EQUITY                              263,666       68,284     1,336,879         60,502       (1,465,665)       263,666
                                                 --------   ----------    ----------       --------      -----------     ----------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $263,666   $1,149,930    $1,708,716       $337,215      $(1,465,665)    $1,993,862
                                                 ========   ==========    ==========       ========      ===========     ==========
</TABLE>


                                       22
<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

                            THE BON-TON STORES, INC.
                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                       THIRTEEN WEEKS ENDED JULY 29, 2006

<TABLE>
<CAPTION>
                                     Bon-Ton
                                     (Parent                Guarantor    Non-Guarantor   Consolidating      Company
                                    Company)    Issuer    Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                    --------   --------   ------------   -------------   -------------   ------------
<S>                                 <C>        <C>        <C>            <C>             <C>             <C>
Net sales                           $     --   $147,841     $598,931        $    --         $    --        $746,772
Other income                              --      5,137       14,837             --              --          19,974
                                    --------   --------     --------        -------         -------        --------
                                          --    152,978      613,768             --              --         766,746
Costs and expenses:
   Costs of merchandise sold              --    104,162      381,771             --              --         485,933
   Selling, general and
      administrative                      --     59,683      208,250              1          (9,573)        258,361
   Depreciation and amortization          --      6,033       17,996          3,840              --          27,869
                                    --------   --------     --------        -------         -------        --------
Income (loss) from operations             --    (16,900)       5,751         (3,841)          9,573          (5,417)
Other income (expense):
   Intercompany rental and
      royalty income                      --         --        2,313          7,260          (9,573)             --
   Equity in earnings (losses) of
      subsidiaries                   (32,702)     3,200           --             --          29,502              --
   Interest expense, net                  --    (19,002)      (3,747)        (4,536)             --         (27,285)
                                    --------   --------     --------        -------         -------        --------
Income (loss) before income taxes    (32,702)   (32,702)       4,317         (1,117)         29,502         (32,702)
Income tax provision (benefit)       (12,927)   (12,927)       1,706           (443)         11,664         (12,927)
                                    --------   --------     --------        -------         -------        --------
NET INCOME (LOSS)                   $(19,775)  $(19,775)    $  2,611        $  (674)        $17,838        $(19,775)
                                    ========   ========     ========        =======         =======        ========
</TABLE>


                                       23

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

                            THE BON-TON STORES, INC.
                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                       THIRTEEN WEEKS ENDED JULY 30, 2005

<TABLE>
<CAPTION>
                                     Bon-Ton
                                     (Parent                Guarantor    Non-Guarantor   Consolidating      Company
                                    Company)    Issuer    Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                    --------   --------   ------------   -------------   -------------   ------------
<S>                                 <C>        <C>        <C>            <C>             <C>             <C>
Net sales                           $    --    $143,603     $130,743         $  --          $    --        $274,346
Other income                             --       1,724           90            --               --           1,814
                                    -------    --------     --------         -----          -------        --------
                                         --     145,327      130,833            --               --         276,160
Costs and expenses:
   Costs of merchandise sold             --      92,158       81,890            --               --         174,048
   Selling, general and
      administrative                      2      51,033       47,484            --           (5,094)         93,425
   Depreciation and amortization         --       5,632        1,626           326               --           7,584
                                    -------    --------     --------         -----          -------        --------
Income (loss) from operations            (2)     (3,496)        (167)         (326)           5,094           1,103
Other income (expense):
   Intercompany interest income       2,550          --           --            --           (2,550)             --
   Intercompany rental and
      royalty income                     --          --        4,432           662           (5,094)             --
   Equity in earnings (losses) of
      subsidiaries                   (5,045)      2,819           --            --            2,226              --
   Interest expense, net                 --      (4,368)      (1,321)         (461)           2,550          (3,600)
                                    -------    --------     --------         -----          -------        --------
Income (loss) before income taxes    (2,497)     (5,045)       2,944          (125)           2,226          (2,497)
Income tax provision (benefit)       (1,052)     (2,125)       1,240           (50)             935          (1,052)
                                    -------    --------     --------         -----          -------        --------
NET INCOME (LOSS)                   $(1,445)   $ (2,920)    $  1,704         $ (75)         $ 1,291        $ (1,445)
                                    =======    ========     ========         =====          =======        ========
</TABLE>


                                       24

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

                            THE BON-TON STORES, INC.
                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                      TWENTY-SIX WEEKS ENDED JULY 29, 2006

<TABLE>
<CAPTION>
                                     Bon-Ton
                                     (Parent                Guarantor    Non-Guarantor   Consolidating      Company
                                    Company)    Issuer    Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                    --------   --------   ------------   -------------   -------------   ------------
<S>                                 <C>        <C>        <C>            <C>             <C>             <C>
Net sales                           $     --   $276,426    $1,032,120       $    --        $     --       $1,308,546
Other income                              --      9,581        25,206            --              --           34,787
                                    --------   --------    ----------       -------        --------       ----------
                                          --    286,007     1,057,326            --              --        1,343,333
Costs and expenses:
   Costs of merchandise sold              --    192,186       645,327            --              --          837,513
   Selling, general and
      administrative                       2    115,932       358,625             6         (16,424)         458,141
   Depreciation and
   amortization                           --     11,349        29,236         6,500              --           47,085
                                    --------   --------    ----------       -------        --------       ----------
Income (loss) from operations             (2)   (33,460)       24,138        (6,506)         16,424              594
Other income (expense):
   Intercompany interest income        1,700         --            --            --          (1,700)              --
   Intercompany rental and
      royalty income                      --         --         4,828        11,596         (16,424)              --
   Equity in earnings (losses) of
      subsidiaries                   (52,257)    20,679            --            --          31,578               --
   Interest expense, net                  --    (39,476)       (5,913)       (7,464)          1,700          (51,153)
                                    --------   --------    ----------       -------        --------       ----------
Income (loss) before income taxes    (50,559)   (52,257)       23,053        (2,374)         31,578          (50,559)
Income tax provision (benefit)       (19,949)   (20,619)        9,096          (937)         12,460          (19,949)
                                    --------   --------    ----------       -------        --------       ----------
NET INCOME (LOSS)                   $(30,610)  $(31,638)   $   13,957       $(1,437)       $ 19,118       $  (30,610)
                                    ========   ========    ==========       =======        ========       ==========
</TABLE>


                                       25
<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

                            THE BON-TON STORES, INC.
                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                      TWENTY-SIX WEEKS ENDED JULY 30, 2005

<TABLE>
<CAPTION>
                                                  Bon-Ton
                                                  (Parent                Guarantor    Non-Guarantor   Consolidating      Company
                                                 Company)    Issuer    Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                                 --------   --------   ------------   -------------   -------------   ------------
<S>                                              <C>        <C>        <C>            <C>             <C>             <C>
Net sales                                        $     --   $277,134     $259,745        $   --          $    --        $536,879
Other income                                           --      2,871        1,101            --               --           3,972
                                                 --------   --------     --------        ------          -------        --------
                                                       --    280,005      260,846            --               --         540,851

Costs and expenses:
   Costs of merchandise sold                           --    177,524      163,939            --               --         341,463
   Selling, general and administrative                  3    100,459       97,545             1           (9,919)        188,089
   Depreciation and amortization                       --     10,402        2,962           653               --          14,017
                                                 --------   --------     --------        ------          -------        --------
Loss from operations                                   (3)    (8,380)      (3,600)         (654)           9,919          (2,718)

Other income (expense):
   Intercompany interest income                     5,099         --           --            --           (5,099)             --
   Intercompany rental and royalty income              --         --        8,595         1,324           (9,919)             --
   Equity in earnings (losses) of subsidiaries    (14,720)     2,176           --            --           12,544              --
   Interest expense, net                               --     (8,516)      (2,564)         (925)           5,099          (6,906)
                                                 --------   --------     --------        ------          -------        --------
Income (loss) before income taxes                  (9,624)   (14,720)       2,431          (255)          12,544          (9,624)
Income tax provision (benefit)                     (3,767)    (5,762)         952          (100)           4,910          (3,767)
                                                 --------   --------     --------        ------          -------        --------
NET INCOME (LOSS)                                $ (5,857)  $ (8,958)    $  1,479        $ (155)         $ 7,634        $ (5,857)
                                                 ========   ========     ========        ======          =======        ========
</TABLE>


                                       26

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

                            THE BON-TON STORES, INC.
                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                      TWENTY-SIX WEEKS ENDED JULY 29, 2006

<TABLE>
<CAPTION>
                                                 Bon-Ton
                                                 (Parent                 Guarantor   Non-Guarantor  Consolidating     Company
                                                Company)     Issuer    Subsidiaries   Subsidiaries   Eliminations  Consolidated
                                                --------  -----------  ------------  -------------  -------------  ------------
<S>                                             <C>       <C>          <C>           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:            $(902)   $    (1,180)   $ 27,513       $ 1,548         $  --      $    26,979
                                                 -----    -----------    --------       -------         -----      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                             --        (31,486)    (16,638)           --            --          (48,124)
   Acquisition, net of cash acquired                --     (1,047,054)         --            --            --       (1,047,054)
   Proceeds from sale of property,
      fixtures and equipment                        --          1,026         518            --            --            1,544
                                                 -----    -----------    --------       -------         -----      -----------
      Net cash used in investing activities         --     (1,077,514)    (16,120)           --            --       (1,093,634)
                                                 -----    -----------    --------       -------         -----      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on long-term debt and capital
      lease obligations                             --       (422,131)       (619)       (1,548)           --         (424,298)
   Proceeds from issuance of long-term debt         --      1,530,500          --            --            --        1,530,500
   Cash dividends paid                            (497)            --          --            --            --             (497)
   Proceeds from stock options exercised           550             --          --            --            --              550
   Excess tax benefit from exercise of
      stock options                                840             --          --            --            --              840
   Deferred financing costs paid                    --        (27,622)         --            --            --          (27,622)
   Increase (decrease) in bank overdraft
      balances                                      --         (4,617)      1,640            --            --           (2,977)
                                                 -----    -----------    --------       -------         -----      -----------
      Net cash provided by (used in) financing
         activities                                893      1,076,130       1,021        (1,548)           --        1,076,496
                                                 -----    -----------    --------       -------         -----      -----------
      Net increase (decrease) in cash and
         cash equivalents                           (9)        (2,564)     12,414            --            --            9,841
                                                 -----    -----------    --------       -------         -----      -----------

CASH AND CASH EQUIVALENTS AT BEGINNING
   OF PERIOD                                        10          7,453       2,308            --            --            9,771
                                                 -----    -----------    --------       -------         -----      -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD       $   1    $     4,889    $ 14,722       $    --         $  --      $    19,612
                                                 =====    ===========    ========       =======         =====      ===========
</TABLE>


                                       27

<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

                            THE BON-TON STORES, INC.
                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                      TWENTY-SIX WEEKS ENDED JULY 30, 2005

<TABLE>
<CAPTION>
                                                 Bon-Ton
                                                 (Parent               Guarantor   Non-Guarantor  Consolidating     Company
                                                Company)    Issuer   Subsidiaries   Subsidiaries   Eliminations  Consolidated
                                                --------  ---------  ------------  -------------  -------------  ------------
<S>                                             <C>       <C>        <C>           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:            $  71    $  88,549    $(1,870)        $ 527          $  --       $  87,277
                                                 -----    ---------    -------         -----          -----       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                             --       (7,974)    (2,349)           --             --         (10,323)
   Proceeds from sale of property,
      fixtures and equipment                        --           97          2            --             --              99
                                                 -----    ---------    -------         -----          -----       ---------
      Net cash used in investing activities         --       (7,877)    (2,347)           --             --         (10,224)
                                                 -----    ---------    -------         -----          -----       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on long-term debt and capital
      lease obligations                             --     (215,250)      (363)         (527)            --        (216,140)
   Proceeds from issuance of long-term debt         --      138,250         --            --             --         138,250
   Cash dividends paid                            (832)          --         --            --             --            (832)
   Proceeds from stock options exercised           775           --         --            --             --             775
   Deferred financing costs paid                    --         (123)        --            --             --            (123)
   Decrease in bank overdraft balances              --       (9,458)      (174)           --             --          (9,632)
                                                 -----    ---------    -------         -----          -----       ---------
      Net cash used in financing activities        (57)     (86,581)      (537)         (527)            --         (87,702)
                                                 -----    ---------    -------         -----          -----       ---------
      Net increase (decrease) in cash and cash
         equivalents                                14       (5,909)    (4,754)           --             --         (10,649)
                                                 -----    ---------    -------         -----          -----       ---------

CASH AND CASH EQUIVALENTS AT BEGINNING
   OF PERIOD                                         2       14,872      8,034            --             --          22,908
                                                 -----    ---------    -------         -----          -----       ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD       $  16    $   8,963    $ 3,280         $  --          $  --       $  12,259
                                                 =====    =========    =======         =====          =====       =========
</TABLE>


                                       28
<PAGE>

                            THE BON-TON STORES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

13.  FUTURE ACCOUNTING CHANGES

     In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 requires applying a "more likely than not" threshold to the recognition
and derecognition of tax positions. The new guidance will be effective for the
Company as of February 4, 2007. The Company has not yet determined the impact of
FIN 48 on its consolidated financial statements.


                                       29

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

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

     For purposes of the following discussions, all references to "second
quarter of 2006" and "second quarter of 2005" are to the thirteen-week periods
ended July 29, 2006 and July 30, 2005, respectively, of The Bon-Ton Stores, Inc.
and all of its wholly owned subsidiaries (collectively, the "Company," unless
the context otherwise indicates the term refers to The Bon-Ton Stores, Inc.).
All references to "2006" and "2005" are to the twenty-six weeks ended July 29,
2006 and July 30, 2005, respectively.

OVERVIEW

     Effective March 5, 2006, pursuant to the October 29, 2005 purchase
agreement with Saks Incorporated ("Saks"), as amended, the Company acquired all
of the outstanding securities of two subsidiaries of Saks that were solely
related to the business of owning and operating the 142 retail department stores
operated under the names Carson Pirie Scott, Younkers, Herberger's, Boston Store
and Bergner's (collectively, "Carson's"). The stores are located in twelve
states in the Midwest and upper Great Plains regions. Under the terms of the
purchase agreement, the Company paid approximately $1.04 billion in cash for
Carson's. Carson's stores encompass a total of approximately 15 million gross
square feet in mid-sized and metropolitan markets.

     To finance the acquisition and the payoff of the Company's previous
revolving credit facility, the Company entered into a new revolving credit
facility which provides for up to $1.0 billion in borrowings, issued $510.0
million in senior unsecured notes, and entered into a new mortgage loan facility
in the aggregate principal amount of $260.0 million.

     As a result of the acquisition of Carson's, the Company is now one of the
largest regional department store operators in the United States, in terms of
sales, with 278 stores that encompass a total of approximately 27 million gross
square feet across the Northeastern, Midwestern and Great Plains states. The
Company's management believes that the acquisition will enhance the Company's
product offerings, strengthen its vendor and customer relationships and increase
its profitability. The Company's scale will make it an important distribution
channel for leading merchandise vendors and will enhance its ability to offer
its customers nationally distributed brands and exclusive merchandise.
Furthermore, the Company's management believes that the Company will continue to
enjoy the #1 or #2 market position among department stores in most of the
markets in which it operates.

     The Company competes in the department store segment of the U.S. retail
industry. Department stores have historically dominated apparel and accessories
retailing, occupying a cornerstone in the U.S. retail landscape for more than
100 years. Over time, department stores have evolved from single unit, family
owned, urban locations to regional and national chains serving communities of
all sizes. The department store industry continues to evolve in response to
ongoing consolidation among apparel and accessories vendors as well as the
evolution of competitive retail formats -- mass merchandisers, national chain
retailers, specialty retailers and online retailers. The Company's segment of
the retail industry is highly competitive, and the Company anticipates that
competitive pressures and challenges will continue in the foreseeable future.


                                       30

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

     The following table summarizes changes in selected operating indicators of
the Company, illustrating the relationship of various income and expense items
to net sales for the respective periods presented (components may not add or
subtract to totals due to rounding):

<TABLE>
<CAPTION>
                                               THIRTEEN             TWENTY-SIX
                                             WEEKS ENDED           WEEKS ENDED
                                         -------------------   -------------------
                                         July 29,   July 30,   July 29,   July 30,
                                           2006       2005       2006       2005
                                         --------   --------   --------   --------
<S>                                      <C>        <C>        <C>        <C>
Net sales                                 100.0%     100.0%     100.0%     100.0%
Other income                                2.7        0.7        2.7        0.7
                                          -----      -----      -----      -----
                                          102.7      100.7      102.7      100.7
                                          -----      -----      -----      -----
Costs and expenses:
   Costs of merchandise sold               65.1       63.4       64.0       63.6
   Selling, general and administrative     34.6       34.1       35.0       35.0
   Depreciation and amortization            3.7        2.8        3.6        2.6
                                          -----      -----      -----      -----
(Loss) income from operations              (0.7)       0.4         --       (0.5)
Interest expense, net                       3.7        1.3        3.9        1.3
                                          -----      -----      -----      -----
Loss before income taxes                   (4.4)      (0.9)      (3.9)      (1.8)
Income tax benefit                         (1.7)      (0.4)      (1.5)      (0.7)
                                          -----      -----      -----      -----
Net loss                                   (2.6)%     (0.5)%     (2.3)%     (1.1)%
                                          =====      =====      =====      =====
</TABLE>

THIRTEEN WEEKS ENDED JULY 29, 2006 COMPARED TO THIRTEEN WEEKS ENDED JULY 30,
2005

     NET SALES: Net sales for the second quarter of 2006 were $746.8 million as
compared to $274.3 million for the second quarter of 2005. Sales in the second
quarter of 2006 include $464.7 million from Carson's. Net sales for the second
quarter of 2005 include $4.7 million for the four stores closed in January of
2006. The balance of the sales increase in the second quarter of 2006 reflects
the comparable store sales increase of 4.6%, or approximately $12.5 million.

     Sales for Carson's stores are not included in the Company's reported
comparable store sales. However, the following comparable store sales
information is provided for informational purposes only. For the second quarter
of 2006, Carson's comparable store sales increased 2.6% over the prior year
period. For Carson's and Bon-Ton combined, comparable store sales for the second
quarter of 2006 increased 3.4%.

     The best performing merchandise categories in the Company's comparable
stores in the second quarter of 2006 were Home (which includes furniture),
Women's Special Sizes (included in Women's Apparel) and Shoes. Sales in Home
during the second quarter of 2006 reflects approximately $17.5 million of
incremental sales due primarily to the liquidation of merchandise the Company
no longer intends to carry. The performance in Women's Special Sizes reflects
the Company's increased emphasis and corresponding inventory investment. Shoe
sales increased as customers continued to respond favorably to the Company's
offerings in moderately priced branded casual footwear. The poorest performing
merchandise categories in the second quarter of 2006 were Dresses (included in
Women's Apparel), Juniors' Apparel, Men's Apparel and Intimate


                                       31

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

Apparel. Dresses and Juniors' Apparel sales have been trending down and,
consequently, the Company reduced its inventory investment in these areas. Sales
in Men's Apparel and Intimate Apparel were negatively impacted by reduced
inventory receipts in the second quarter of 2006 in accordance with the clearing
of merchandise assortments that the Company will not continue to carry; the
Company anticipates improved performance with the receipt of new merchandise in
subsequent periods.

     OTHER INCOME: Other income was $20.0 million, or 2.7% of net sales, in the
second quarter of 2006 compared to $1.8 million, or 0.7% of net sales, in the
second quarter of 2005. The increase was primarily due to the program revenue
received in the second quarter of 2006 under the credit card program agreement
with HSBC Bank Nevada, N.A. ("HSBC") entered into in July 2005 and the addition
of $4.5 million for Carson's leased departments and other customer revenues. In
the prior year, before the sale of the proprietary credit card portfolio to
HSBC, credit card revenues were reflected as a reduction to selling, general and
administrative expenses ("SG&A").

     COSTS AND EXPENSES: Gross margin was $260.8 million for the second quarter
of 2006 compared to $100.3 million for the second quarter of 2005, an increase
of $160.5 million. The increase in gross margin dollars for the second quarter
of 2006 as compared to the second quarter of 2005 reflects the addition of the
Carson's stores and increased sales volume in comparable stores, partially
offset by a reduced gross margin rate. Gross margin as a percentage of net sales
decreased 1.6 percentage points to 34.9% for the second quarter of 2006 from
36.6% for the same period last year. The decrease in the gross margin rate
reflects a 1.4 percentage point increase, at cost, in the net markdown rate
primarily related to liquidation sales of merchandise the Company no longer
intends to carry.

     SG&A for the second quarter of 2006 were $258.4 million compared to $93.4
million for the second quarter of 2005, reflecting an increase of $164.9
million. The primary factors in the increase in SG&A were the addition of the
Carson's stores and support costs, including the costs associated with the
transition services agreement with Saks Incorporated, and integration expenses.
The Carson's operations costs approximated $157.6 million and integration
expenses approximated $3.8 million. The current year expense rate increased 0.5
percentage point to 34.6% of net sales, compared to 34.1% for the same period
last year.

     Depreciation and amortization expense in the second quarter of 2006 was
$27.9 million, an increase of $20.3 million compared to the $7.6 million expense
in the second quarter of 2005, primarily reflecting the addition of Carson's
depreciation and amortization from the preliminary purchase accounting for the
acquired Carson's operations.

     (LOSS) INCOME FROM OPERATIONS: Loss from operations in the second quarter
of 2006 was $5.4 million, or 0.7% of net sales, compared to income from
operations of $1.1 million, or 0.4% of net sales, in the second quarter of 2005.

     INTEREST EXPENSE, NET: Net interest expense was $27.3 million, or 3.7% of
net sales, in the second quarter of 2006 compared to $3.6 million, or 1.3% of
net sales, in the second quarter of 2005. The $23.7 million net increase is
principally due to the increased debt required to fund the acquisition of
Carson's.

     INCOME TAX BENEFIT: The effective tax rate of 39.5% in the second quarter
of 2006 was 2.6 percentage points lower than the rate of 42.1% in the second
quarter of 2005. The decrease


                                       32

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

largely is the result of adjustments impacting the effective state tax rate in
the second quarter of 2005.

     NET LOSS: Net loss in the second quarter of 2006 was $19.8 million, or 2.6%
of net sales, compared to a net loss of $1.4 million, or 0.5% of net sales, in
the second quarter of 2005.

TWENTY-SIX WEEKS ENDED JULY 29, 2006 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 30,
2005

     NET SALES: Net sales for 2006 were $1,308.5 million as compared to $536.9
million for 2005. Sales in 2006 include $775.9 million from Carson's for the
period March 5, 2006 through July 29, 2006. Net sales for 2005 include $9.4
million for the four stores closed in January of 2006. The balance of the sales
increase in 2006 reflects the comparable store sales increase of 1.0%, or
approximately $5.1 million.

     Sales for Carson's stores are not included in the Company's reported
comparable store sales. However, the following comparable store sales
information is provided for informational purposes only. For the period March 5,
2006 through July 29, 2006, Carson's comparable store sales increased 2.1% over
the prior year period.

     The best performing merchandise categories in the Company's comparable
stores in 2006 were Home (which includes furniture), Women's Special Sizes
(included in Women's Apparel) and Shoes. Home sales during 2006 reflects
approximately $17.5 million of incremental sales in the second quarter of 2006
due primarily to the liquidation of merchandise the Company no longer intends
to carry. The performance in Women's Special Sizes reflects the Company's
increased emphasis and corresponding inventory investment. Shoe sales increased
as customers continued to respond favorably to the Company's offerings in
moderately priced branded casual footwear. The poorest performing merchandise
categories in 2006 were Dresses (included in Women's Apparel), Juniors'
Apparel, Accessories, Intimate Apparel and Men's Apparel. Dresses and Juniors'
Apparel sales have been trending down and, consequently, the Company reduced
its inventory investment in these areas. Accessories sales reflected the lack
of clearance merchandise as compared to the prior year. Sales in Men's Apparel
and Intimate Apparel were negatively impacted by reduced merchandise receipts
in the second quarter of 2006 in accordance with the clearing of merchandise
assortments that the Company will not continue to carry; the Company
anticipates improved performance with the receipt of new merchandise in
subsequent periods.

     OTHER INCOME: Other income was $34.8 million, or 2.7% of net sales, in 2006
compared to $4.0 million, or 0.7% of net sales, in 2005. The increase was
primarily due to the program revenue received in 2006 under the credit card
program agreement with HSBC and the addition of $7.1 million for Carson's leased
departments and other customer revenues. In the prior year, before the sale of
the proprietary credit card portfolio to HSBC in July 2005, credit card revenues
were reflected as a reduction to SG&A.

     COSTS AND EXPENSES: Gross margin was $471.0 million for 2006 compared to
$195.4 million for 2005, an increase of $275.6 million. The increase in gross
margin dollars for 2006 as compared to 2005 reflects the addition of the
Carson's stores, partially offset by lost sales volume attributable to the four
stores closed in January 2006 and a reduced gross margin rate. Gross


                                       33

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

margin as a percentage of net sales decreased 0.4 percentage point to 36.0% for
2006 from 36.4% for the same period last year. The decrease in the gross margin
rate of 0.4 percentage point reflects lower realized markup on merchandise sold
and increased distribution costs.

     SG&A for 2006 were $458.1 million compared to $188.1 million for 2005,
reflecting an increase of $270.1 million. The primary factors in the increase
in SG&A were the addition of the Carson's stores and support costs, including
the costs associated with the transition services agreement, and integration
expenses. The Carson's operations costs approximated $259.3 million and
integration expenses approximated $8.2 million. The current year expense rate
remained even with the prior year at 35.0% of net sales.

     Depreciation and amortization in 2006 was $47.1 million, an increase of
$33.1 million compared to the $14.0 million expense in 2005, primarily
reflecting the addition of Carson's depreciation and amortization from the
preliminary purchase accounting for the acquired Carson's operations.

     INCOME (LOSS) FROM OPERATIONS: Income from operations in 2006 was $0.6
million, or 0.0% of net sales, compared to a loss from operations of $2.7
million, or 0.5% of net sales, in 2005.

     INTEREST EXPENSE, NET: Net interest expense was $51.2 million, or 3.9% of
net sales, in 2006 compared to $6.9 million, or 1.3% of net sales, in 2005. The
$44.2 million net increase is principally due to the increased debt required to
fund the acquisition of Carson's. Included in the 2006 expense are charges of
$2.3 million for the write-off of fees associated with the Company's previous
credit agreement and $4.5 million for fees associated with a bridge facility
required in connection with the financing for the acquisition of Carson's.

     INCOME TAX BENEFIT: The tax rate of 39.5% in 2006 increased 0.3 percentage
point from the prior year rate of 39.1%, largely reflecting the impact of
Carson's operations on the Company's effective state tax rate.

     NET LOSS: Net loss in 2006 was $30.6 million, or 2.3% of net sales,
compared to a net loss of $5.9 million, or 1.1% of net sales, in 2005.

SEASONALITY AND INFLATION

     The Company's business, like that of most retailers, is subject to seasonal
fluctuations, with the major portion of sales and income realized during the
second half of each fiscal year, which includes back-to-school and the holiday
season. Due to the fixed nature of certain costs, selling,


                                       34

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

general and administrative expenses are typically higher as a percentage of net
sales during the first half of each fiscal year. The Company finances increases
in working capital in the second half of each fiscal year through increased
borrowings under its revolving credit facility.

     Because of the seasonality of the Company's business, results for any
quarter are not necessarily indicative of results that may be achieved for a
full fiscal year. In addition, quarterly operating results are impacted by the
timing and amount of revenues and costs associated with the opening of new
stores and closing and remodeling of existing stores.

     The Company does not believe inflation had a material effect on operating
results during the first twenty-six weeks of 2006 and 2005. However, there can
be no assurance that the Company's business will not be affected by inflationary
adjustments in the future.

LIQUIDITY AND CAPITAL RESOURCES

     The following table summarizes material measures of the Company's liquidity
and capital resources:

<TABLE>
<CAPTION>
                                                             July 29,   July 30,
(Dollars in millions)                                          2006       2005
---------------------                                        --------   --------
<S>                                                          <C>        <C>
Working capital                                               $ 347.4    $ 183.9
Current ratio                                                  1.79:1     2.10:1
Debt to total capitalization (1)                               0.82:1     0.28:1
Unused availability under lines of credit (2)                 $ 247.6    $ 129.2
</TABLE>

(1)  Debt includes obligations under capital leases. Total capitalization
     includes shareholders' equity, debt and
      obligations under capital leases.

(2)  Subject to a minimum availability covenant of $75 and $10 as of July 29,
     2006 and July 30, 2005, respectively.

     Prior to March 6, 2006, the Company's primary sources of working capital
were cash flows from operations and borrowings under its revolving credit
facility. On March 6, 2006, to finance the acquisition of Carson's and the
related payoff of the Company's previous revolving credit facility, the Company
entered into a new revolving credit facility which provides for up to $1.0
billion in borrowings, issued $510.0 million in senior unsecured notes, and
entered into a new mortgage loan facility in the aggregate principal amount of
$260.0 million.

     Increases in working capital, debt to total capitalization and unused
availability under lines of credit, and a decrease in the current ratio for 2006
as compared to 2005 primarily reflect the addition of Carson's operations and
the increase in debt to fund the acquisition.

     Net cash provided by operating activities amounted to $27.0 million in
2006, as compared to $87.3 million in 2005. The reduction in net cash provided
in the current year primarily reflects the net proceeds from the sale of the
Company's proprietary credit card operation in July of 2005 and the inclusion of
Carson's activity from the acquisition date.


                                       35
<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

     Net cash used in investing activities amounted to $1,093.6 million in 2006,
as compared to $10.2 million in the 2005. The increase of $1,083.4 million
primarily reflects the acquisition of Carson's and an increase in capital
expenditures of $37.8 million over the prior year period.

     Net cash provided by financing activities amounted to $1,076.5 million in
2006, as compared to net cash used in financing activities of $87.7 million in
2005. The increase in net cash provided in 2006 primarily reflects the issuance
of debt to finance the acquisition of Carson's.

     Prior to March 6, 2006, the Company's amended and restated revolving credit
facility agreement (the "Credit Agreement") provided a revolving line of credit
of $300.0 million. In connection with the acquisition of Carson's and the
related financing arrangements, discussed below, the Credit Agreement was
terminated and simultaneously replaced by a new senior secured credit facility
on March 6, 2006. There were no prepayment or early termination premiums or
penalties in connection with the termination of the Credit Agreement. All
deferred financing costs as of March 6, 2006 associated with the Credit
Agreement, which totaled $2.3 million, were expensed immediately upon
termination of the Credit Agreement.

     On March 6, 2006, The Bon-Ton Department Stores, Inc. and certain of
its subsidiaries, Bank of America, N.A. ("Bank of America") and certain other
lenders entered into a Loan and Security Agreement ("New Senior Secured Credit
Facility") which provides for up to $1.0 billion of revolver borrowings. The
New Senior Secured Credit Facility includes a last-in, first-out revolving
credit facility of up to $900.0 million and a first-in, last-out revolving
credit facility of up to $100.0 million, and has a sub-limit of $150.0 million
for the issuance of standby and documentary letters of credit. All borrowings
under the New Senior Secured Credit Facility are limited by amounts available
pursuant to a borrowing base calculation, which is based on percentages of
eligible inventory, real estate and fixed assets, with a reduction for
applicable reserves. The New Senior Secured Credit Facility is guaranteed by
The Bon-Ton Stores, Inc. and certain of its subsidiaries. As part of the New
Senior Secured Credit Facility, Bank of America and the other lenders will make
available certain swing line loans in an aggregate amount not to exceed $75.0
million outstanding at any one time. Borrowings under the New Senior Secured
Credit Facility will bear interest at either (i) the prime rate established by
Bank of America, from time to time, plus the applicable margin (the "Prime
Rate") or (ii) the LIBOR rate from time to time plus the applicable margin. The
applicable margin will be determined by the excess availability under the New
Senior Secured Credit Facility. The swing line loans will bear interest at the
same rate applicable to last-in, first-out Prime Rate loans. The Company will
be required to pay a commitment fee to the lenders for unused commitments at a
rate of 0.25% to 0.30% per annum, based on excess availability under the
facility. The New Senior Secured Credit Facility expires March 6, 2011.
Financial covenants contained in the New Senior Secured Credit Facility require
that the minimum excess availability under the facility be greater than $75.0
million at all times. In addition, there are certain restrictions against
incurring additional indebtedness, pledge or sale of assets, payment of
dividends and distributions, and other similar restrictions. Dividends paid by
the Company may not exceed $15.0 million over the life of the agreement, or
$4.0 million in any single year. Capital expenditures are limited to $125.0
million per year, with a one-year carryover of any prior year unused amount.
The proceeds of the March 6, 2006 borrowings under the New Senior Secured
Credit Facility were used to pay the outstanding balance under the Credit
Agreement and a portion of the purchase price for the acquisition of Carson's.
The available borrowing capacity under this facility will be used for other
general corporate purposes. As of July 29, 2006, the Company had $363.9 million
of outstanding borrowings under the New Senior Secured Credit Facility and,
under the most restrictive covenant, the Company had the ability to borrow an
additional $172.6 million.


                                       36

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

     On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned
subsidiary of The Bon-Ton Stores, Inc., entered into an Indenture (the
"Indenture") with The Bank of New York, as trustee, under which The Bon-Ton
Department Stores, Inc. issued $510.0 million aggregate principal amount of its
10-1/4% Senior Notes due 2014 (the "Notes"). The Notes are guaranteed on a
senior unsecured basis by The Bon-Ton Stores, Inc. and certain of its
subsidiaries. The Notes mature on March 15, 2014. The interest rate of the Notes
is fixed at 10-1/4% per year. Interest on the Notes is payable on March 15 and
September 15 of each year, beginning on September 15, 2006. The Indenture
includes covenants that limit the ability of the Company and its restricted
subsidiaries to, among other things, incur additional debt, pay dividends and
make distributions, make certain investments, enter into certain types of
transactions with affiliates, use assets as security in other transactions, and
sell certain assets or merge with or into other companies.

     On March 6, 2006, certain bankruptcy-remote special purpose entities (each
an "SPE" and, collectively, the "SPEs") that are indirect wholly owned
subsidiaries of The Bon-Ton Stores, Inc. entered into Loan Agreements with Bank
of America, pursuant to which Bank of America provided a new mortgage loan
facility in the aggregate principal amount of $260.0 million (the "New Mortgage
Loan Facility"). The New Mortgage Loan Facility has a term of ten years and is
secured by mortgages on twenty-three retail stores and one distribution center
owned by the SPEs. Each SPE entered into a lease with each of The Bon-Ton
Stores, Inc. subsidiaries operating on such SPE's properties. A portion of the
rental income received under these leases will be used to pay the debt service
under the New Mortgage Loan Facility. The New Mortgage Loan Facility requires
level monthly payments of principal and interest based on an amortization period
of 25 years and the balance outstanding at the end of ten years will then become
due and payable. The interest rate for the New Mortgage Loan Facility is fixed
at 6.2125%. Financial covenants contained in the New Mortgage Loan Facility
require that the SPEs maintain certain financial thresholds, as defined.

     The Company used the net proceeds of the Notes offering along with
borrowings under its New Senior Secured Credit Facility and New Mortgage Loan
Facility to finance the acquisition of Carson's, refinance the Credit Agreement,
and pay related fees and expenses in connection with the acquisition and related
financing transactions.

     Aside from planned capital expenditures, the Company's primary cash
requirements will be to service debt and finance working capital increases
during peak selling seasons.

     The Company paid a quarterly cash dividend of $0.025 per share on shares of
Class A Common Stock and Common Stock to shareholders on May 1, 2006 and August
1, 2006 to shareholders of record as of April 15, 2006 and July 14, 2006,
respectively. Additionally, the Company declared a quarterly cash dividend of
$0.025 per share, payable October 16, 2006 to shareholders of record as of
October 2, 2006. The Company's Board of Directors will consider dividends in
subsequent periods as it deems appropriate.

     The Company's capital expenditures for 2006 totaled $48.1 million. Capital
expenditures for the full year fiscal 2006 are planned at approximately $91.0
million.

     The Company anticipates that its cash flows from operations, supplemented
by borrowings under its New Senior Secured Credit Facility, will be sufficient
to satisfy its operating cash requirements for at least the next twelve months.


                                       37

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

     Cash flows from operations are impacted by consumer confidence, weather in
the geographic markets served by the Company, and economic and competitive
conditions existing in the retail industry. A downturn in any single factor or a
combination of factors could have a material adverse impact upon the Company's
ability to generate sufficient cash flows to operate its business.

     The Company has not identified any probable circumstances that would likely
impair its ability to meet its cash requirements or trigger a default or
acceleration of payment of its debt.

CRITICAL ACCOUNTING POLICIES

     The Company's discussion and analysis of financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles.
Preparation of these financial statements required the Company to make estimates
and judgments that affected reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of its financial statements. On an ongoing basis, the Company evaluates its
estimates, including those related to merchandise returns, bad debts,
inventories, goodwill, intangible assets, income taxes, financings,
contingencies, insurance reserves and litigation. The Company bases its
estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

     Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially lead to
materially different results under different assumptions and conditions. The
Company believes its critical accounting policies are as described below.

INVENTORY VALUATION

     Inventories are stated at the lower of cost or market with cost determined
by the retail inventory method. Under the retail inventory method, the valuation
of inventories at cost and the resulting gross margin is derived by applying a
calculated cost-to-retail ratio to the retail value of inventories. The retail
inventory method is an averaging method that has been widely used in the retail
industry. Use of the retail inventory method will result in valuing inventories
at the lower of cost or market if markdowns are taken timely as a reduction of
the retail value of inventories.

     Inherent in the retail inventory method calculation are certain significant
management judgments and estimates including, among others, merchandise markups,
markdowns and shrinkage, which significantly impact both the ending inventory
valuation at cost and the resulting gross margin. These significant estimates,
coupled with the fact that the retail inventory method is an averaging process,
can, under certain circumstances, result in individual inventory components with
cost above related net realizable value. Factors that can lead to this result
include applying the retail inventory method to a group of products that is not
fairly uniform in terms of its cost, selling price relationship and turnover; or
applying the retail inventory method to transactions over a period of time that
include different rates of gross profit, such as those relating to seasonal


                                       38

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

merchandise. In addition, failure to take timely markdowns can result in an
overstatement of inventory under the lower of cost or market principle. The
Company believes that the retail inventory method it uses provides an inventory
valuation that approximates cost and results in carrying inventory in the
aggregate at the lower of cost or market.

     The Company regularly reviews inventory quantities on-hand and records an
adjustment for excess or old inventory based primarily on an estimated forecast
of merchandise demand for the selling season. Demand for merchandise can
fluctuate greatly. A significant increase in the demand for merchandise could
result in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on-hand. Additionally, estimates of future
merchandise demand may prove to be inaccurate, in which case the Company may
have understated or overstated the adjustment required for excess or old
inventory. If the Company's inventory is determined to be overvalued in the
future, the Company would be required to recognize such costs in costs of goods
sold and reduce operating income at the time of such determination. Likewise, if
inventory is later determined to be undervalued, the Company may have overstated
the costs of goods sold in previous periods and would recognize additional
operating income when such inventory is sold. Therefore, although every effort
is made to ensure the accuracy of forecasts of future merchandise demand, any
significant unanticipated changes in demand or in economic conditions within the
Company's markets could have a significant impact on the value of its inventory
and reported operating results.

     The Company uses a last-in, first-out ("LIFO") cost basis for valuation of
certain inventories. As is currently the case with many companies in the retail
industry, the Company's LIFO calculations have yielded inventory increases in
recent years due to deflation reflected in price indices used. This is the
result of the LIFO method whereby merchandise sold is valued at the cost of more
recent inventory purchases (which the deflationary indices indicate to be
lower), resulting in the general inventory on-hand being carried at the older,
higher costs. Given these higher values and the promotional retail environment,
the Company has reduced the carrying value of its LIFO inventories to a net
realizable value ("NRV"). These reductions totaled $23.7 million as of July 29,
2006 and January 28, 2006. Inherent in these NRV assessments are significant
management judgments and estimates regarding future merchandise selling costs
and pricing. Should these estimates prove to be inaccurate, the Company may have
overstated or understated its inventory carrying value. In such cases, operating
results would ultimately be impacted.

VENDOR ALLOWANCES

     As is standard industry practice, allowances are received from merchandise
vendors as reimbursement for charges incurred on marked-down merchandise. Vendor
allowances are generally credited to costs of goods sold, provided the allowance
is: (1) collectable, (2) for merchandise either permanently marked down or sold,
(3) not predicated on a future purchase, (4) not predicated on a future increase
in the purchase price from the vendor, and (5) authorized by internal
management. If the aforementioned criteria are not met, the allowances are
reflected as an adjustment to the cost of merchandise capitalized in inventory.

     Additionally, allowances are received from vendors in connection with
cooperative advertising programs. Advertising allowances received from each
vendor are reviewed to ensure


                                       39

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

reimbursements are for specific, incremental and identifiable advertising costs
incurred to sell the vendor's products. If a vendor reimbursement exceeds the
costs incurred, the excess reimbursement is recorded as a reduction of cost
purchases from the vendor and reflected as a reduction of costs of merchandise
sold when the related merchandise is sold. All other amounts are recognized as a
reduction of the related advertising costs that have been incurred and reflected
in selling, general and administrative expenses.

INCOME TAXES

     Significant management judgment is required in determining the provision
(benefit) for income taxes, deferred tax assets and liabilities, and the
valuation allowance recorded against net deferred tax assets. The process
involves summarizing temporary differences resulting from differing treatment of
items (e.g., allowance for doubtful accounts) for tax and accounting purposes.
These differences and net operating loss carry-forwards result in deferred tax
assets and liabilities, which are included within the consolidated balance
sheet. The Company must then assess the likelihood that deferred tax assets will
be recovered from future taxable income or tax carry-back availability and, to
the extent it does not believe recovery of the deferred tax asset is
more-likely-than-not, a valuation allowance must be established. To the extent a
valuation allowance is established in a period, an expense must be recorded
within the income tax provision (benefit) in the statement of operations.

LONG-LIVED ASSETS

     Property, fixtures and equipment are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of such assets. Changes
in the Company's business model or capital strategy can result in the actual
useful lives differing from its estimates. In cases where the Company determines
that the useful life of property, fixtures and equipment should be shortened, it
depreciates the net book value in excess of the salvage value over its revised
remaining useful life, thereby increasing depreciation expense. Factors such as
changes in the planned use of fixtures or leasehold improvements could also
result in shortened useful lives. The Company's net property, fixtures and
equipment amounted to $913.9 million and $167.7 million at July 29, 2006 and
January 28, 2006, respectively.

     The Company assesses, on a store-by-store basis, the impairment of
identifiable long-lived assets--primarily property, fixtures and
equipment--whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that could trigger an impairment
review include the following:

     -    Significant under-performance of stores relative to historical or
          projected future operating results,

     -    Significant changes in the manner of the Company's use of assets or
          overall business strategy, and

     -    Significant negative industry or economic trends for a sustained
          period.


                                       40

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

     Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," requires the Company to
recognize an impairment loss if the carrying amount of the long-lived asset is
not recoverable from its undiscounted cash flows. Impairment losses on
long-lived assets used in operations are recorded when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of
those items. Cash flow estimates are based on historical results adjusted to
reflect the Company's best estimate of future market and operating conditions.
The net carrying value of assets not recoverable is reduced to fair value.
Estimates of fair value represent the Company's best estimate based on industry
trends and reference to market rates and transactions, if available. Should cash
flow estimates differ significantly from actual results, an impairment could
arise and materially impact the Company's financial position and results of
operations. Given the seasonality of operations, impairment is not conclusive,
in many cases, until after the holiday period in the fourth quarter is
concluded.

     Newly opened stores may take time to generate positive operating and cash
flow results. Factors such as store type, store location, current marketplace
awareness of private label brands, local customer demographic data and current
fashion trends are all considered in determining the time-frame required for a
store to achieve positive financial results. If conditions prove to be
substantially different from expectations, the carrying value of new stores'
long-lived assets may ultimately become impaired.

GOODWILL AND INTANGIBLE ASSETS

     The Company's goodwill was $114.3 million and $3.0 million as of July 29,
2006 and January 28, 2006, respectively. The increase in the goodwill reflects
the preliminary purchase accounting for the acquisition of Carson's.

     The Company's net intangible assets totaled $85.8 million and $5.0 million
as of July 29, 2006 and January 28, 2006, respectively. The Company's intangible
assets are principally comprised of $43.2 million of lease interests that relate
to below-market-rate leases and $42.6 million associated with trademarks and
customer lists. The lease-related interests, customer lists and the portion of
trademarks subject to amortization are being amortized on a straight-line
method. Trademarks of $36.0 million have been deemed to have an indefinite life
as part of the preliminary purchase accounting for Carson's.

     The Company has not completed its assessment of the fair values of the
acquired Carson's assets and assumed liabilities and has not finalized its
plans regarding the integration of computer software. The Company is currently
in the process of obtaining third-party valuations for certain acquired assets
and assumed liabilities. Consequently, the purchase price allocation may be
subsequently adjusted to reflect the final valuation of acquired assets and
assumed liabilities.

     In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill and other intangible assets that have indefinite lives are reviewed for
impairment at least annually or when events or changes in circumstances indicate
the carrying value of these assets might exceed their current fair values. Fair
value is determined using a discounted cash flow analysis, which requires
certain assumptions and estimates regarding industry economic factors and future
profitability of acquired businesses. The Company's policy is to conduct
impairment testing based


                                       41

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

on its most current business plans, which reflect anticipated changes in the
economy and the industry. If actual results prove inconsistent with the
Company's assumptions and judgments, the Company could be exposed to a material
impairment charge.

INSURANCE RESERVE ESTIMATES

     The Company uses a combination of insurance and self-insurance for a number
of risks including workers' compensation, general liability and employee-related
health care benefits, a portion of which is paid by its associates. The Company
determines the estimates for the liabilities associated with these risks by
considering historical claims experience, demographic factors, severity factors
and other actuarial assumptions. A change in claims frequency and severity of
claims from historical experience as well as changes in state statutes and the
mix of states in which the Company operates could result in a change to the
required reserve levels.

PURCHASE ACCOUNTING

     The Company has accounted for the acquisition of Carson's in accordance
with the provisions of SFAS No. 141, "Business Combinations," whereby the
purchase price paid to effect the Carson's acquisition was allocated to the
acquired assets and assumed liabilities at their estimated fair value as of the
acquisition date. The acquisition of Carson's was effective as of March 5, 2006.
In connection with the preliminary purchase price allocation, the Company made
estimates of the fair values of its long-lived and intangible assets based upon
assumptions related to the future cash flows, discount rates and asset lives
utilizing currently available information. As of July 29, 2006, the Company has
recorded preliminary purchase accounting adjustments to record the property and
equipment and inventory at their estimated fair values, to establish intangible
assets for its tradenames, customer lists and favorable lease interests and to
revalue its long-term benefit plan obligations, among other things.

     The Company has not completed its assessment of the fair values of the
acquired Carson's assets and assumed liabilities and has not finalized its plans
regarding the integration of computer software. The Company is currently in the
process of obtaining third-party valuations for certain acquired assets and
assumed liabilities. Consequently, the purchase price allocation may be
subsequently adjusted to reflect the final valuation of acquired assets and
assumed liabilities. Such revisions could have a material impact on the
Company's results of operations for fiscal 2006.

FORWARD-LOOKING STATEMENTS

     Certain information included in this report and other materials filed or to
be filed by the Company with the Securities and Exchange Commission contain
statements that are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, which may be
identified by words such as "may," "could," "will," "plan," "expect,"
"anticipate," "estimate," "project," "intend" or other similar expressions,
involve important risks and uncertainties that could significantly affect
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, uncertainties
affecting the retail industry in general, such as consumer confidence and demand
for soft goods; risks relating to leverage and debt service; competition within
markets in which the Company's stores are located; the need for, and costs
associated with, store renovations and other capital


                                       42

<PAGE>

                            THE BON-TON STORES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

expenditures; and risks related to the Company's acquisition of Carson's,
including difficulties in the assimilation of the operations, services and
corporate culture of the acquired business, diversion of management attention
from other business concerns and overvaluation of the acquired business. These
risks, as applicable, and other risks are discussed in the Company's Annual
Report on Form 10-K for the fiscal year ended January 28, 2006.


                                       43
<PAGE>

                            THE BON-TON STORES, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK AND FINANCIAL INSTRUMENTS

     The Company is exposed to market risk associated with changes in interest
rates. To provide some protection against potential rate increases associated
with its variable-rate facilities, the Company entered into derivative financial
transactions in the form of interest rate swaps. The interest rate swaps are
used to hedge a portion of the underlying variable-rate facilities. The swaps
are a qualifying hedge and the interest rate differential is reflected as an
adjustment to interest expense over the life of the swaps. At July 29, 2006, the
Company held two "variable-to-fixed" rate swaps with notional amounts of $50.0
million each. The notional amount does not represent amounts exchanged by the
parties; rather, it is used as the basis to calculate amounts due and to be
received under the rate swaps. The Company has not entered into or held
derivative financial instruments for trading purposes.

     The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including debt obligations and interest rate swaps.
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates at July 29, 2006. For
the interest rate swaps, the table presents the notional amount and weighted
average pay and receive interest rates by expected maturity date.

<TABLE>
<CAPTION>
                                       Expected Maturity Date By Fiscal Year
                              -------------------------------------------------------
                              Remainder                                        There-                 Fair
(Dollars in thousands)         of 2006     2007     2008     2009     2010      after      Total      Value
----------------------        ---------   ------   ------   ------   ------   --------   --------   --------
<S>                           <C>         <C>      <C>      <C>      <C>      <C>        <C>        <C>
Debt:
   Fixed-rate debt             $2,734     $5,760   $6,173   $6,617   $8,096   $756,993   $786,373   $783,340
      Average fixed rate         6.83%      6.84%    6.86%    6.88%    6.67%      8.98%      8.90%

   Variable-rate debt          $   --     $   --   $   --   $   --   $   --   $363,900   $363,900   $363,900
      Average variable rate        --         --       --       --       --       7.04%      7.04%

Interest Rate Derivatives:
   Interest rate swaps
      Variable-to-fixed        $   --     $   --   $   --   $   --   $   --   $100,000   $100,000   $   (693)
      Average pay rate             --         --       --       --       --       5.49%      5.49%
      Average receive rate         --         --       --       --       --       5.50%      5.50%
</TABLE>


                                       44

<PAGE>

                            THE BON-TON STORES, INC.

ITEM 4. CONTROLS AND PROCEDURES

                Evaluation of Disclosure Controls and Procedures

     The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in reports filed pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. The Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as
of the end of the period covered by this report and, based on this evaluation,
concluded that the Company's disclosure controls and procedures are effective.

              Changes in Internal Control over Financial Reporting

     Effective March 5, 2006, the Company completed the acquisition of Carson's.
In conjunction with this acquisition, the Company entered into a transition
services agreement with Saks pursuant to which Saks provides the Company with
various services related to Carson's, including, among other things, credit
operations, procurement, accounting, bank card processing, store planning,
construction, facilities maintenance and energy, information technology and
human resources activities. These services will be provided by Saks for periods
ranging from three months to 12 months from the date of the acquisition of
Carson's (subject to extension at the Company's discretion). As the transition
of these services to the Company continues over approximately the next five
months, the Company will carefully review internal control over financial
reporting related to the integration of Carson's operations. There were no
changes to the Company's internal control over financial reporting related to
its previously existing business that occurred during the thirteen weeks ended
July 29, 2006 that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.


                                       45

<PAGE>

                            THE BON-TON STORES, INC.

PART II: OTHER INFORMATION

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

     On June 20, 2006, the Company held its Annual Meeting of Shareholders. The
following matters were submitted for vote:

1.   The following individuals were nominated and elected by the votes set forth
     to serve as the directors of the Company:

<TABLE>
<S>                    <C>                   <C>
Robert B. Bank                        For:   42,526,262
                       Withhold Authority:      598,066

Byron L. Bergren                      For:   41,596,718
                       Withhold Authority:    1,527,610

Philip M. Browne                      For:   42,718,358
                       Withhold Authority:      405,971

Shirley A. Dawe                       For:   42,522,274
                       Withhold Authority:      602,054

Marsha M. Everton                     For:   41,068,680
                       Withhold Authority:    2,055,648

Michael L. Gleim                      For:   40,819,210
                       Withhold Authority:    2,305,119

M. Thomas Grumbacher                  For:   41,579,230
                       Withhold Authority:    1,545,099

Robert E. Salerno                     For:   42,615,487
                       Withhold Authority:      508,841

Thomas W. Wolf                        For:   40,999,591
                       Withhold Authority:    2,124,738
</TABLE>

2.   With respect to the proposal to approve the amendment of The Bon-Ton
     Stores, Inc. Amended and Restated 2000 Stock Incentive and
     Performance-Based Award Plan, 39,464,170 votes were cast in favor,
     1,149,691 votes were cast against and 7,779 votes abstained.

3.   With respect to ratification of the appointment of KPMG LLP as independent
     registered public accounting firm of The Bon-Ton Stores, Inc., 42,960,607
     votes were cast in favor, 20,938 votes were cast against and 142,784 votes
     abstained.


                                       46

<PAGE>

                            THE BON-TON STORES, INC.

ITEM 6. EXHIBITS

(a) The following exhibits are filed pursuant to the requirements of Item 601 of
Regulation S-K:

<TABLE>
<CAPTION>
Exhibit                    Description                             Document Location
-------                    -----------                             -----------------
<S>       <C>                                             <C>
10.1      Amendment No. 1 to Amended and Restated         Filed herewith.
          Transition Services Agreement
10.2      Second Amendment to Employment Agreement with   Exhibit 99.1 to Current Report
          Byron L. Bergren                                on Form 8-K filed on May 26, 2006
10.3      Employment Agreement with Anthony Buccina       Exhibit 10.1 to Current Report
                                                          on Form 8-K filed on June 6, 2006
10.4      The Bon-Ton Stores, Inc. Amended and Restated   Exhibit 10.1 to Current Report
          2000 Stock Incentive and Performance-Based      on Form 8-K filed on June 26, 2006
          Award Plan
10.5      Restricted Stock Unit Agreement with Byron L.   Exhibit 10.2 to Current Report
          Bergren dated June 20, 2006                     on Form 8-K filed on June 26, 2006
31.1      Certification of Byron L. Bergren               Filed herewith.
31.2      Certification of Keith E. Plowman               Filed herewith.
32.1      Certification Pursuant to Rules 13a-14(b) and   Furnished herewith.
          15d-14(b) of the Securities Exchange Act of
          1934
</TABLE>

                                   SIGNATURES

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

                                        THE BON-TON STORES, INC.


DATE: September 6, 2006                 BY: /s/ Byron L. Bergren
                                            ------------------------------------
                                            Byron L. Bergren
                                            President and
                                            Chief Executive Officer


DATE: September 6, 2006                 BY: /s/ Keith E. Plowman
                                            ------------------------------------
                                            Keith E. Plowman
                                            Executive Vice President,
                                            Chief Financial Officer and
                                            Principal Accounting Officer


                                       47