SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q


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

               For the quarterly period ended ______________________________

                                    OR

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

               For the transition period from November 1, 1998, to
               January 30, 1999


                         Commission file number 0-24902

                              QUALITY STORES, INC.
             (Exact Name of Registrant As Specified In Its Charter)

Delaware                                                             42-1425562
(State of Incorporation)                                  (I.R.S. Employer No.)

455 E. Ellis Road, Muskegon, MI                                           49441
(Address of Principal Executive Offices)                             (Zip Code)

Registrant's telephone number, including area code: (231) 798-8787


                                 Not Applicable
              (Former Name, Former Address, and Former Fiscal Year,
                         If Changed Since Last Report)


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 the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of January 30, 1999: 100. All of the registrant's stock is held
by QSI Holdings, Inc., and is not publicly traded.


<PAGE>
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<CAPTION>
                                              QUALITY STORES, INC.
                                                      INDEX

                                                                                                            PAGE
<S>              <C>                                                                                         <C>

PART I.           FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS

                  Report of Ernst & Young LLP.................................................................3

                  Consolidated Balance Sheets as of January 30, 1999,
                  October 31, 1998, and November 1, 1997......................................................4

                  Consolidated  Statements  of Income for period of three months
                  ended January 30, 1999,  year ended October 31, 1998,  periods
                  of seven months ended  November 1, 1997, and five months ended
                  March    26,    1997,    and   year    ended    November    2,
                  1996........................................................................................6

                  Consolidated Statements of Changes in Stockholders' Equity for
                  period of three  months  ended  January 30,  1999,  year ended
                  October 31, 1998,  periods of seven  months ended  November 1,
                  1997,  and five months  ended March 26,  1997,  and year ended
                  November 2, 1996............................................................................7

                  Consolidated  Statements  of Cash  Flows  for  period of three
                  months ended  January 30, 1999,  year ended  October 31, 1998,
                  periods of seven  months  ended  November  1,  1997,  and five
                  months ended  March 26, 1997, and year ended November 2, 1996...............................8

                  Notes to Consolidated Financial Statements.................................................10

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................29

INDEX TO EXHIBIT(S)..........................................................................................33
          Exhibit 12       Statement Re:  Computation of Ratio of Earnings of Fixed Charges
          Exhibit 27       Financial Data Schedule (electronic copy only)
          Exhibit 99       Important Factors Regarding Forward-Looking Statements

</TABLE>


                                                       2

<PAGE>


                         Report of Independent Auditors



The Board of Directors
Quality Stores, Inc.


We have audited the accompanying  consolidated balance sheets of Quality Stores,
Inc.  ("Successor"),  a wholly owned  subsidiary  of QSI  Holdings,  Inc., as of
January  30,  1999,  October  31,  1998 and  November  1, 1997,  and the related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows of the Successor for the  three-month  period ended January 30, 1999, year
ended October 31, 1998 and the seven-month period ended November 1, 1997 and its
"Predecessor"  for the  five-month  period ended March 26, 1997 and for the year
ended November 2, 1996. These financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Quality Stores,
Inc.  at January 30,  1999,  October  31,  1998 and  November  1, 1997,  and the
consolidated  results  of  operations  and cash flows of the  Successor  for the
three-month  period ended January 30, 1999,  year ended October 31, 1998 and the
seven-month period ended November 1, 1997 and the Predecessor for the five-month
period  ended  March  26,  1997 and for the year  ended  November  2,  1996,  in
conformity with generally accepted accounting principles.


                                                       /s/ Ernst & Young LLP

Des Moines, Iowa
June 30, 1999, except for Note 15, as to which the date is August 17, 1999


                                       3
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<TABLE>
<CAPTION>


                                          Quality Stores, Inc.

                                      Consolidated Balance Sheets

                                 (In thousands, except per share data)




                                                            January 30     October 31      November 1
                                                               1999           1998            1997
                                                           ------------------------------------------
<S>                                                        <C>             <C>            <C>

Assets (Note 4)
Current assets:
   Cash and cash equivalents                                $  5,144        $  6,971        $  7,378
   Recoverable income taxes                                    2,345           3,134           2,513
   Trade and other receivables, less allowances of $386
     in 1999, 1998 and 1997                                    4,597           4,648           7,264
   Inventory                                                 234,868         217,064         222,117
   Deferred income taxes (Note 7)                                 --              --           4,000
   Other                                                       2,876           3,010           3,136
                                                           ------------------------------------------
Total current assets                                         249,830         234,827         246,408

Property, improvements and equipment:
   Land                                                        1,821           1,821           1,963
   Buildings and improvements                                  5,539           5,210           4,934
   Leasehold improvements                                     14,550          13,384          12,788
   Furniture and fixtures                                     31,121          27,590          24,731
   Capitalized property rights (Note 5)                        1,022             867             867
   Automobiles and trucks                                        701             703             628
                                                           ------------------------------------------
                                                              54,754          49,575          45,911
   Less allowances for depreciation and amortization           9,140           7,948           2,716
                                                           ------------------------------------------
                                                              45,614          41,627          43,195

Goodwill, net of amortization of $5,974 in 1999,
   $5,080 in 1998 and $1,753 in 1997                         135,605         134,037         135,612
Other assets, principally deferred financing costs             8,557           8,354           9,020
                                                           ------------------------------------------
Total assets                                                $439,606        $418,845        $434,235
                                                           ==========================================

                                                   4

<PAGE>
<CAPTION>

                                                            January 30     October 31      November 1
                                                               1999           1998            1997
                                                           ------------------------------------------
<S>                                                        <C>             <C>            <C>

Liabilities and stockholder's equity
Current liabilities:
   Bank line of credit (Note 4)                             $ 44,000        $ 32,075        $ 60,750
   Accounts payable                                           85,359          78,322          68,015
   Accrued payroll and bonuses                                 4,728           8,272           5,847
   Accrued income taxes                                           --              --             508
   Other accrued expenses                                     16,664          14,084          22,479
   Deferred income taxes (Note 7)                              1,768             506              --
   Current portion of long-term debt, note payable and
     capital lease obligations                                 5,001           3,159           3,170
                                                           ------------------------------------------
Total current liabilities                                    157,520         136,418         160,769

Long-term debt, less current portion (Note 4)                146,000         149,000         152,000
Note payable, less current portion (Note 3)                      843              --              --
Capital lease obligations, less current portion (Note 5)       1,370           1,011           1,171
Deferred income taxes (Note 7)                                 2,631           2,659             748
                                                           ------------------------------------------
Total liabilities                                            308,364         289,088         314,688

Stockholder's equity (Notes 3 and 6):
   Common stock, $.01 par value: 3,000 authorized shares;
     100 shares issued and outstanding (wholly owned by
     QSI Holdings, Inc.)                                          --              --              --
   Additional paid-in capital                                119,155         119,155         118,920
   Retained earnings                                          12,087          10,602             627
                                                           ------------------------------------------
Total stockholder's equity                                   131,242         129,757         119,547
Commitments (Notes 5 and 8)                                       --              --              --
                                                           ------------------------------------------
Total liabilities and stockholder's equity                  $439,606        $418,845        $434,235
                                                           ==========================================


<FN>
See accompanying notes.
</FN>
</TABLE>

                                                   5


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<CAPTION>


                                                Quality Stores, Inc. and Predecessor

                                                  Consolidated Statements of Income

                                                           (In thousands)



                                                                        Successor                    |           Predecessor
                                                     ----------------------------------------------  |   ---------------------------
                                                     Period of three   Fiscal year  Period of seven  |   Period of five  Fiscal year
                                                      months ended        ended      months ended    |    months ended      ended
                                                       January 30      October 31     November 1     |      March 26      November 2
                                                          1999             1998           1997       |        1997          1996
                                                     ----------------------------------------------  |   ---------------------------
                                                                                                     |
<S>                                                  <C>              <C>            <C>                <C>              <C>
Net sales                                             $ 146,147        $ 587,195      $ 305,122      |   $ 106,048        $ 293,020
Cost of sales                                           103,521          410,179        216,342      |      75,281          207,228
                                                      -----------------------------------------      |   --------------------------
Gross profit                                             42,626          177,016         88,780      |      30,767           85,792
                                                                                                     |
Selling, general and administrative expenses,                                                        |
   including amounts with related parties (Note 10)      33,742          134,623         72,142      |      29,045           68,197
                                                                                                     |
Amortization of intangibles                                 972            3,552          1,753      |         415              938
                                                      -----------------------------------------      |   --------------------------
Operating income                                          7,912           38,841         14,885      |       1,307           16,657
                                                                                                     |
Interest expense, including amounts with related                                                     |
   parties (Note 10)                                      4,959           20,466         11,463      |       3,188            1,663
                                                      -----------------------------------------      |   --------------------------
Income (loss) before income taxes                         2,953           18,375          3,422      |      (1,881)          14,994
                                                                                                     |
Income taxes (credits) (Note 7)                           1,468            8,400          2,057      |        (634)           6,250
                                                      -----------------------------------------      |   --------------------------
Net income (loss) and comprehensive income (loss)     $   1,485        $   9,975      $   1,365      |   $  (1,247)       $   8,744
                                                      =========================================      |   ==========================
                                                                                                     |
Ratio (deficiency) of earnings to fixed charges            1.5x             1.8x           1.3x      |   $  (1,881)            5.3x
                                                      =========================================      |   ==========================


<FN>
See accompanying notes.
</FN>
</TABLE>


                                                                 6
<PAGE>
<TABLE>
<CAPTION>


                                              Quality Stores, Inc. and Predecessor

                                   Consolidated Statements of Changes in Stockholders' Equity

                                                         (In thousands)

                                         Period of three-months ended January 30, 1999,
                                          fiscal year ended October 31, 1998, periods
                                             of seven-months ended November 1, 1997
                                           and five-months ended March 26, 1997, and
                                                  year ended November 2, 1996




                                                                   Stock        Additional       Retained           Total
                                                   Common         Warrant        Paid-In         Earnings        Stockholders'
                                                    Stock       Outstanding      Capital         (Deficit)          Equity
                                                 -----------------------------------------------------------------------------
<S>                                             <C>             <C>             <C>              <C>              <C>
Predecessor
Stockholders' equity at October 28, 1995         $     106       $     665       $  69,667        $  10,839        $  81,277
   Exercise of common stock options                     --              --              42               --               42
   Net income                                           --              --              --            8,744            8,744
                                                 ---------------------------------------------------------------------------
Stockholders' equity at November 2, 1996               106             665          69,709           19,583           90,063
   Exercise of common stock options                     --              --             252               --              252
   Net loss                                             --              --              --           (1,247)          (1,247)
                                                 ---------------------------------------------------------------------------
Stockholders' equity at March 26, 1997           $     106       $     665       $  69,961        $  18,336        $  89,068
                                                 ===========================================================================

Successor
Initial capitalization of the Company after
   merger of JWC Acquisition I on
   March 27, 1997                                $      --                       $  69,170        $    (738)       $  68,432
   Capital contribution from parent                     --                          49,750               --           49,750
     (Note 3)
   Net income                                           --                              --            1,365            1,365
                                                 ---------                       -------------------------------------------
Stockholder's equity at November 1, 1997                --                         118,920              627          119,547
  Net income                                            --                              --            9,975            9,975
  Capital contribution from parent                      --                             235               --              235
                                                 ---------                       -------------------------------------------
Stockholder's equity at October 31, 1998                --                         119,155           10,602          129,757
  Net income                                            --                              --            1,485            1,485
                                                 ---------                       -------------------------------------------
Stockholder's equity at January 30, 1999         $      --                       $ 119,155        $  12,087        $ 131,242
                                                 =========                       ===========================================


<FN>
See accompanying notes.
</FN>
</TABLE>



                                                               7
<PAGE>
<TABLE>
<CAPTION>


                                                Quality Stores, Inc. and Predecessor

                                                Consolidated Statements of Cash Flows

                                                           (In thousands)




                                                                           Successor                    |        Predecessor
                                                           -------------------------------------------- |---------------------------
                                                           Period of three  Fiscal year Period of seven |Period of five  Fiscal year
                                                            months ended       ended     months ended   | months ended      ended
                                                             January 30     October 31    November 1    |  March 26       November 2
                                                                1999            1998          1997      |     1997           1996
                                                           -------------------------------------------- |---------------------------
                                                                                                        |
<S>                                                        <C>             <C>             <C>            <C>            <C>
Operating activities                                                                                    |
Net income (loss) from continuing operations                $   1,485       $   9,975       $   1,365   |  $  (1,247)     $   8,744
Adjustments to reconcile net income (loss) from continuing                                              |
   operations to net cash provided by (used in) continuing                                              |
   operations:                                                                                          |
   Depreciation and amortization of property, improvements                                              |
     and equipment                                              1,317           5,221           2,716   |      1,490          3,056
   Amortization of intangibles and other deferred assets        1,229           4,604           2,253   |        414            998
   Loss on sale of assets                                          --              --              --   |         --             20
   Deferred income taxes                                        1,234           6,417           1,871   |      1,328          1,100
   Changes in operating assets and liabilities:                                                         |
     Recoverable income taxes                                     789            (621)         (1,119)  |     (1,885)            --
     Trade and other receivables                                  839           2,616            (871)  |        144             83
     Inventory                                                 (9,609)          5,053           1,957   |    (11,894)        (4,549)
     Other current assets                                         665             126             946   |       (924)          (972)
     Accounts payable                                           2,065          10,307           1,895   |      1,468         (3,806)
     Accrued expenses                                          (1,666)         (6,478)          1,139   |     (1,524)           287
                                                           -------------------------------------------- |---------------------------
                                                               (1,652)         37,220          12,152   |    (12,630)         4,961
                                                                                                        |
Adjustments for net cash provided by discontinued                                                       |
   operations:                                                                                          |
   Deferred income taxes                                           --              --              --   |         --           (367)
   Changes in operating assets and liabilities                     --              --              --   |         --         13,520
                                                           -------------------------------------------- |---------------------------
                                                                   --              --              --   |         --         13,153
                                                           -------------------------------------------- |---------------------------
Net cash provided by (used in) operating activities            (1,652)         37,220          12,152   |    (12,630)        18,114
                                                                                                        |
Investing activities                                                                                    |
Purchases of property, improvements and equipment              (3,997)         (4,842)         (3,816)  |     (2,419)        (8,789)
Acquisition of Central Tractor Farm & Country, Inc.                                                     |
   (Predecessor)                                                   --              --        (155,963)  |         --             --
Acquisition of Big Bear Farm Stores, Inc. in 1996, Country                                              |
   General, Inc. in 1997 and Fisco Farm and Home in 1999                                                |
   (Note 3)                                                    (6,020)         (1,568)       (136,995)  |         --         (5,650)
Other                                                            (538)            394             206   |     (1,348)           255
                                                           -------------------------------------------- |---------------------------
Net cash used in investing activities                         (10,555)         (6,016)       (296,568)  |     (3,767)       (14,184)


                                                                 8


<PAGE>
<CAPTION>

                                                Quality Stores, Inc. and Predecessor

                                          Consolidated Statements of Cash Flows (continued)

                                                           (In thousands)



                                                                           Successor                    |        Predecessor
                                                           -------------------------------------------- |---------------------------
                                                           Period of three  Fiscal year Period of seven |Period of five  Fiscal year
                                                            months ended       ended     months ended   | months ended      ended
                                                             January 30     October 31    November 1    |  March 26       November 2
                                                                1999            1998          1997      |     1997           1996
                                                           -------------------------------------------- |---------------------------
                                                                                                        |
<S>                                                        <C>             <C>             <C>            <C>           <C>
                                                                                                        |
Financing activities                                                                                    |
Borrowings under line of credit                             $  91,180        $ 273,645      $ 206,106   |  $ 113,119     $  86,782
Repayments on line of credit                                  (79,255)        (302,320)      (170,650)  |    (91,494)      (89,902)
Proceeds from issuance of long-term debt                           --               --        155,000   |      8,000            --
Payments on long-term debt                                     (1,500)          (3,000)        (8,000)  |    (16,000)          (17)
Payments on capitalized lease obligations                         (45)            (171)          (101)  |        (69)         (120)
Proceeds from issuance of common stock and capital                                                      |
   contributions                                                   --              235        115,489   |        252            42
Cash of Central Tractor at date of acquisition                     --               --          1,220   |         --            --
Financing costs relating to new line of credit, term loan                                               |
   and Senior Notes                                                --               --         (8,764)  |         --            --
Other                                                              --               --          1,494   |         --            --
                                                           -------------------------------------------- |---------------------------
Net cash provided by (used in) financing activities            10,380          (31,611)       291,794   |     13,808        (3,215)
                                                           -------------------------------------------- |---------------------------
Net (decrease) increase in cash and cash equivalents           (1,827)            (407)         7,378   |     (2,589)          715
                                                                                                        |
                                                                                                        |
Cash and cash equivalents at beginning of period                6,971            7,378             --   |      3,809         3,094
                                                           -------------------------------------------- |---------------------------
Cash and cash equivalents at end of period                  $   5,144        $   6,971      $   7,378   |  $   1,220     $   3,809
                                                           ============================================ |===========================
                                                                                                        |
Supplemental disclosures of cash flow information                                                       |
Cash paid during the period for interest                    $   1,941        $  19,838      $  10,294   |  $   1,746     $   1,991
Cash paid during the period for income taxes                      225              355            327   |        412         5,675
Supplemental disclosure of non-cash investing activity                                                  |
Note payable issued in acquisition of Fisco Farm and                                                    |
   Home                                                         1,084               --             --   |         --            --


<FN>
See accompanying notes.
</FN>
</TABLE>


                                                                 9
<PAGE>

                      Quality Stores, Inc. and Predecessor

                   Notes to Consolidated Financial Statements

                 Period of three months ended January 30, 1999,
                      year ended October 31, 1998, periods
                     of seven-months ended November 1, 1997
                      and five-months ended March 26, 1997,
                         and year ended November 2, 1996

                (In thousands of dollars, except where indicated)



1. Basis of Presentation and Acquisition of the Company

Quality Stores,  Inc. ("the Company"),  formerly known as Central Tractor Farm &
Country,  Inc.,  is a  wholly  owned  subsidiary  of QSI  Holdings,  Inc.  ("QSI
Holdings"),  formerly  known as CT Holding,  Inc.,  an affiliate of J. W. Childs
Equity Partners,  L.P. ("Childs").  See Note 12 regarding acquisition of Quality
Stores, Inc. by Central Tractor Farm & Country, Inc.

As a result of the acquisition of the Company  discussed below,  effective March
27,  1997,  a new  basis of  accounting  has  been  reflected  in the  Company's
financial  statements  reflecting  the fair values for the Company's  assets and
liabilities at that date ("Successor").  The financial statements of the Company
for periods prior to March 27, 1997 are presented on the  historical  cost basis
of  accounting  ("Predecessor").  A  line  has  been  placed  in  the  financial
statements to distinguish between Predecessor and Successor activity.

On November 27, 1996,  the Board of Directors of the Company  approved,  and the
Company entered into, a merger  agreement (the "Merger  Agreement") with Childs,
QSI Holdings and its subsidiary,  JWC Acquisition I, Inc., that provided for the
acquisition  of the  Company by QSI  Holdings in a  two-stage  transaction.  The
Merger Agreement provided that following the acquisition of all of the Company's
common stock held by  affiliates  of Butler  Capital  Corporation  (collectively
"BCC"),  QSI  Holdings'  subsidiary  would merge with and into the Company  (the
"Merger") and QSI Holdings would acquire the remaining shares of common stock of
the Company held by public shareholders.
The Merger was completed on March 27, 1997.

On March 27, 1997, the Company  consummated a public  offering of $105.0 million
aggregate  principal  amount of Senior Notes. The net proceeds from the offering
were used to pay the Merger consideration, repay certain outstanding borrowings,
and pay fees and expenses of the acquisition.

The  acquisition  of the Company was accounted  for as a purchase.  The purchase
price for the common stock was approximately  $159.4 million,  including related
costs and expenses, of which $156.0 million was paid in cash and $3.4 million in
common stock and stock options of QSI Holdings. The cash portion was funded from
the  proceeds  of capital  stock  issued by QSI  Holdings,  and the Senior  Note
borrowings  by the  Company.  The  final  purchase  price was  allocated  to the
tangible and intangible  assets and the liabilities of the Company based on fair
values, as follows:


                                       10
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)



1.  Basis of Presentation and Acquisition of the Company (continued)

     Inventory                                          $ 124,284
     Property, improvements and equipment                  25,387
     Accounts receivable and other assets                   9,990
     Goodwill                                              87,343
     Bank line of credit                                  (23,554)
     Accounts payable and accrued expenses                (51,809)
     Long-term debt and capitalized lease obligations      (9,442)
     Deferred income taxes                                 (2,806)
                                                        ---------
                                                        $ 159,393
                                                        =========


2.  Summary of Accounting Policies and Other Matters

Business and Principles of Consolidation

The consolidated  financial  statements include the Company and its wholly owned
subsidiary, Country General, Inc. (hereinafter collectively "the Company").

The Company operates  agricultural  specialty retail stores located primarily in
the Midwest,  Northeast,  and Southeast  United  States.  The Company also sells
merchandise on a wholesale basis under various distributor agreements throughout
the United  States.  During fiscal 1996,  the Company  completed the sale of its
wholly owned subsidiary,  Herschel Corporation ("Herschel"),  a manufacturer and
wholesale  distributor of equipment parts for use in the farming industry.  With
this sale,  continuing operations of the Company constitute one business segment
for financial reporting purposes.

The Company  operates on a 52-53 week fiscal year ending on the Saturday nearest
to October 31.

All  significant  intercompany   transactions  have  been  eliminated  from  the
consolidated financial statements.

Cash and Cash Equivalents

For purposes of the statements of cash flows,  the Company  considers all highly
liquid  investments with a maturity of three months or less when purchased to be
cash equivalents.  Investments,  including repurchase  agreements and commercial
paper, are carried at cost, which approximates market.


                                       11
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




2.  Summary of Accounting Policies and Other Matters (continued)

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

Trade Receivables

Most of the  Company's  retail  sales  are  cash or  credit  card  sales,  while
wholesale sales and some retail sales are on account. The Company generally does
not require collateral for sales on account.  Concentrations of credit risk with
respect to trade  receivables  are limited due to the number of customers of the
Company and their geographic dispersion.  The allowance for doubtful accounts is
based on a current  analysis of receivable  delinquencies  and  historical  loss
experience.

Inventory

Inventory  is  recorded  at  cost,  including  warehousing  and  freight  costs,
determined  principally by the last-in,  first-out ("LIFO") method, which is not
in excess of market. The Company reviews its inventory for slow-moving, obsolete
or otherwise  unsalable items on a regular basis throughout the year,  including
at the time of physical inventory counts. Write downs are made for any estimated
losses to be  incurred  with  respect  to  slow-moving,  obsolete  or  otherwise
unsalable  inventory as such inventory is identified.  Inventories  valued using
the LIFO method were  approximately $0, $0 and $134 at January 30, 1999, October
31,  1998 and  November  1, 1997,  respectively,  less than the  amounts of such
inventories valued at current cost.

Property, Improvements and Equipment

Property,  improvements  and equipment are carried at cost less  allowances  for
depreciation and amortization. Depreciation and amortization expense is computed
primarily on a basis of the straight-line method over the estimated useful lives
of the assets as follows:

Buildings and improvements                                        10 to 39 years
Leasehold improvements (not in excess of underlying lease terms)   5 to 20 years
Furniture and fixtures                                             5 to 15 years
Automobiles and trucks                                             3 to 10 years


                                       12

<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




2.  Summary of Accounting Policies and Other Matters (continued)

Certain long-term lease  transactions have been accounted for as capital leases.
The property  rights recorded under direct  financing  leases are amortized on a
straight-line  basis over the lesser of the useful life or the respective  terms
of the leases.

Goodwill

Goodwill is being amortized  utilizing the straight-line  method over periods of
40 years.  The carrying  value of goodwill is reviewed  continually to determine
whether any impairment has occurred.  This review takes into  consideration  the
recoverability  of the unamortized  amounts based on the estimated  undiscounted
cash flows of the related  businesses to the  respective  carrying  value of the
goodwill.  To the extent that the estimated  undiscounted  future cash flows are
less than the carrying value of the assets,  an impairment  loss can be measured
based upon various methods,  including undiscounted cash flows,  discounted cash
flows and fair value.  Based upon  undiscounted  cash flows,  no  impairment  of
goodwill was determined to exist and, accordingly, no measurement was required.

Deferred Financing Costs

Deferred financing costs are amortized over the term of the related debt.

Deferred Income Taxes

The Company uses the liability method of accounting for income taxes. Under this
method,  deferred income tax assets and liabilities are determined  based on the
difference  between  financial  reporting  and  income  tax bases of assets  and
liabilities  using the enacted marginal tax rates.  Deferred income tax expenses
or credits  are based on the  changes in the asset or  liability  from period to
period.

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:

     Cash  equivalents  and accounts  receivable and payable:  Carrying  amounts
     reported in the Company's  consolidated  balance sheets based on historical
     cost approximate  estimated fair value for these instruments,  due to their
     short-term nature.

     The fair value of the bank line of credit,  note  payable,  bank term loan,
     and Senior Notes is estimated to  approximate  their  carrying  value as of
     January 30, 1999.


                                       13

<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)



2.  Summary of Accounting Policies and Other Matters (continued)

Interest Rate Swap Agreements

The  differential  to be paid or received in connection  with interest rate swap
agreements is accrued as interest  rates change and is recognized  over the life
of the agreements.

Returns and Warranties

Costs  relating to  merchandise  returns from sales at retail stores and through
distributors are not significant and generally are accounted for as they occur.

Catalogs, Sale Flyers and Advertising Costs

The direct cost of printing and mailing the Company's  annual mail order catalog
is deferred and amortized  against mail order revenues over the year the catalog
is in use. The direct cost of printing and distributing  sale flyers is deferred
and  amortized  over the life of the flyer which is generally two weeks or less.
Other advertising costs are expensed as incurred.  Unamortized  amounts relating
to the costs of the annual catalog and periodic sale flyers  amounted to $1,048,
$394, $923 and $950 at January 30, 1999, October 31, 1998,  November 1, 1997 and
March 26, 1997, respectively. Advertising expenses were $3,880, $15,127, $7,755,
$3,286  and  $8,841  for the  three-month  period  of  1999,  fiscal  1998,  the
seven-month and five-month periods of 1997 and for fiscal 1996, respectively.

Store Pre-Opening Costs

Prior to  fiscal  1998,  direct  costs,  which  consisted  principally  of rent,
employee  compensation  and travel costs for  merchandise  set-up and  supplies,
incurred in setting up new stores for opening were deferred and  amortized  over
the first  twenty-six weeks of store  operations.  Beginning in fiscal 1998, all
such costs are  currently  expensed.  The effect of this change in accounting on
fiscal 1998 results of  operations  was  immaterial.  The amount of  unamortized
store  pre-opening costs at November 1, 1997 and March 26, 1997 amounted to $104
and $1,203, respectively.

Emerging Accounting Issues

The Company is not aware of any accounting  standards which have been issued and
which will  require  the Company to change its  current  accounting  policies or
adopt new  policies,  the effect of which  would be  material  to the  Company's
financial statements.

                                       14
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)


3.  Acquisitions

Effective  December 31, 1998, the Company acquired  substantially all assets and
assumed certain  liabilities of The H. C. Shaw Company,  doing business as Fisco
Farm and Home ("Fisco"),  a chain of nine agricultural  specialty retail stores,
for  approximately  $6,020 in cash and a note,  payable over a four-year period,
with a  present  value  of  $1,084,  subject  to  post-closing  adjustment.  The
acquisition was accounted for as a purchase. The purchase price was allocated to
the tangible and intangible  assets and the liabilities  based on fair values as
follows:

     Inventory                                        $ 8,195
     Accounts receivable and other assets               1,319
     Leaseholds and equipment                           1,307
     Goodwill                                           2,462
     Accounts payable and accrued expenses             (6,179)
                                                      -------
                                                      $ 7,104
                                                      =======

Effective June 26, 1997,  the Company  acquired all of the  outstanding  capital
stock of Country General,  Inc.  ("Country  General") for  approximately  $138.6
million (including  related costs and expenses) in cash,  including $1.6 million
related to post  closing  adjustments  finalized  during  fiscal  1998.  Country
General  operated  a chain of 114  agricultural  specialty  retail  stores.  The
Company  funded  the  acquisition  price  in part  from a  $49,750  cash  equity
contribution from its parent,  QSI Holdings,  and the remainder from funds drawn
under the Company's amended and restated Credit Facility.

The  acquisition  was accounted for as a purchase.  The final purchase price was
allocated to the tangible and  intangible  assets and the  liabilities  based on
fair values, as follows:

     Inventory                                        $  99,790
     Accounts receivables and other assets                5,824
     Property, improvements and equipment                17,174
     Goodwill                                            51,775
     Deferred income taxes                                9,229
     Accounts payable and accrued expenses              (45,229)
                                                      ---------
                                                      $ 138,563
                                                      =========

In initially  allocating the purchase price to the assets and liabilities  based
on fair values,  a $3,358  reserve was recorded in 1997 for the estimated  cost,
principally  lease  liabilities,  to close nine  acquired  stores;  and a $2,866
reserve was  recorded in 1997 for the cost of severance  payments to  identified
employees  in  connection  with  the  closing  of  Country  General's  corporate
headquarters.  During March of 1998,  the  decision  was made to actually  close
twelve of the acquired stores. As of October 31, 1998, the inventory liquidation
and store closing process and the termination of employees at Country  General's
closed  corporate  headquarters  had been  completed.  During  fiscal  1998,  in
connection  with the final  purchase  price  adjustments,  the reserve for store
closings was


                                       15
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




3.  Acquisitions (continued)

increased by $1,522 as a result of the additional closed stores, and the reserve
for severance  payments was decreased by $704; these  adjustments  resulted in a
net increase in goodwill of $818.  As of January 30, 1999,  October 31, 1998 and
November 1, 1997,  the reserve for closed stores,  which  consists  primarily of
remaining  lease  costs,  was  $3,023,  $3,435  and  $3,358,  respectively.  The
reductions in the reserve for closed stores are primarily the result of payments
under leases and related  costs.  As of January 30,  1999,  October 31, 1998 and
November 1, 1997,  the reserve for severance had been reduced to $102,  $224 and
$2,722,  respectively,  as a result of payments to terminated  employees and the
final purchase price adjustments.

On May 31,  1996,  the  Predecessor  acquired  31 retail  stores and related net
operating assets from Big Bear Farm Stores,  Inc. ("Big Bear"),  an agricultural
specialty  retailer,  for  approximately  $5,650 in cash.  The  acquisition  was
accounted  for as a purchase.  The purchase  price was allocated to the tangible
and intangible assets and the liabilities based on fair values as follows:

     Inventory                                        $ 8,780
     Accounts receivable and other assets                 206
     Leaseholds and equipment                             517
     Deferred income taxes                                135
     Goodwill                                           2,666
     Accounts payable and accrued expenses             (6,654)
                                                      -------
                                                      $ 5,650
                                                      =======

The results of operations of Fisco, Country General and Big Bear are included in
the accompanying  consolidated  statements of income from the respective date of
purchase.

Pro Forma Results of Operations

Pro forma results of operations (in thousands)  presented below are based on the
historical  results  of  operations  of  the  Company,  as  Successor,  and  its
Predecessor,  adjusted  to give  effect to: (i) the  acquisition  of the Company
described  in Note 1; (ii) the  acquisitions  of  Country  General  and Big Bear
described  above;  and (iii) the debt  financing  arrangements  relating  to the
acquisitions,  as though these  transactions  had  occurred at the  beginning of
fiscal 1996.  Pro forma  results of  operations  for 1997 and 1996 have not been
adjusted for the effect of the twelve acquired Country General stores which were
closed during fiscal 1998. In addition, proforma results of operations as if the
acquisition  of Fisco had  occurred  at the  beginning  of  fiscal  1996 are not
materially  different  from the  historical  and pro forma results of operations
presented herein.

                                       16
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




3.  Acquisitions (continued)

                                                      Year ended
                                           -----------------------------------
                                            November 1         November 2
                                               1997               1996
                                           -----------------------------------

   Net sales                                   $600,157           $613,538
   Operating income                              28,828             28,897
   Net income                                     3,418              4,147


4.  Line of Credit and Long-Term Debt

The  Company  has a  Credit  Facility,  with a bank  which  consists  of a $50.0
million,  six-year  term loan  facility,  which was fully  funded,  and a $100.0
million  revolving credit facility under which borrowings of $44,000 and letters
of credit  totaling $5,817 were  outstanding as of January 30, 1999.  Borrowings
under the  Credit  Facility  bear  interest  at rates  based  upon  prime or the
Eurodollar  Rate plus a margin.  At January 30, 1999,  the interest  rate on the
Term Loan was 8.1% and the interest  rate on the Revolving  Credit  Facility was
7.9%. See Note 12 regarding New Credit Facility.

The Credit Facility  agreement  contains  covenants which require the Company to
maintain a minimum:  consolidated  net worth;  earnings before taxes,  interest,
depreciation  and  amortization  ("EBITDA");  ratio of EBITDA  to cash  interest
payable;  and ratio of debt to EBITDA. The covenants also restrict,  among other
things, the payment of dividends, incurrence of debt, and disposition of assets.

The  Credit  Facility  is  secured  by  substantially  all of the  assets of the
Company.

Long-term debt consisted of the following:

                                     January 30     October 31     November 1
                                        1999           1998           1997
                                     ----------------------------------------

     10-5/8% Senior Notes due 2007    $105,000       $105,000       $105,000
     Bank term loan                     45,500         47,000         50,000
                                      --------------------------------------
                                       150,500        152,000        155,000
     Less current portion                4,500          3,000          3,000
                                      --------------------------------------
                                      $146,000       $149,000       $152,000
                                      ======================================



                                       17
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




4.  Line of Credit and Long-Term Debt (continued)

The Senior Notes mature on April 1, 2007 with interest  payable  semiannually in
arrears on April 1 and  October 1. The Senior  Notes may be  redeemed  beginning
April  1,  2002 at a price  of  105.3125%  of the  principal  amount  decreasing
approximately  1.77% annually  thereafter until April 1, 2005 at which time they
are  redeemable at face value.  Furthermore,  notwithstanding  the foregoing the
Company may redeem up to 35% of the original  aggregate  principal amount of the
Senior  Notes  at a price  of 110% of the  principal  amount  with  the net cash
proceeds of a public equity offering within 60 days of closing such offering.

In March of 1998, the Company  entered into an interest rate swap agreement (the
"Swap  Agreement") with a bank to reduce the impact of changes in interest rates
on its floating term loan facility.  Accordingly, the Swap Agreement was entered
into for purposes other than trading. The Swap Agreement has an initial notional
amount of $48,500.  The notional amount decreases in tandem with the outstanding
balance on the Company's term loan facility until the Swap Agreement's  maturity
on March 30, 2001 and was $45,500 at January 30, 1999. The Swap Agreement  fixes
the  interest  rate on the term loan  facility at 5.8525%,  plus the  applicable
margin, resulting in an effective rate of 8.23% at January 30, 1999. The Company
is exposed to interest rate risk in the event of  nonperformance  by the counter
party  to  the  Swap  Agreement.   However,  the  Company  does  not  anticipate
nonperformance by the bank.

The bank  term  loan must be repaid  in  semiannual  installments,  plus  annual
prepayments  based on the Company's  excess cash flow,  as defined.  The minimum
annual  installments  are as follows:  years ending in January of 2000 - $4,500;
2001 - $7,000; 2002 - $10,000; 2003 - $15,000; and 2004 - $9,000.


5.  Lease Obligations

The Company has entered into certain  long-term lease  agreements for the use of
warehouses, certain retail store facilities and computer equipment. These leases
have been  accounted  for as  purchases  of property  rights and  designated  as
capitalized leases.

Amortization expense relating to such property rights recorded under capitalized
leases was $36,  $145,  $86,  $59 and $125 for the  three-month  period of 1999,
fiscal 1998, the seven-month and five-month periods of 1997 and for fiscal 1996,
respectively.  The net book value of  property  rights  recorded  under  capital
leases  was $755,  $636 and $781 at  January  30,  1999,  October  31,  1998 and
November 1, 1997, respectively.


                                       18

<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




5.  Lease Obligations (continued)

As of January 30, 1999, the debt associated with the capitalized property rights
is represented by the present value of the minimum lease payments as follows:

   Year ended in January of:
     2000                                                           $   442
     2001                                                               442
     2002                                                               442
     2003                                                               442
     2004                                                               244
     After 2004                                                         162
                                                                    -------
   Total minimum lease payments                                       2,174
   Less amount representing interest                                    544
                                                                    -------
   Present value of minimum lease payments                            1,630
   Less current installments                                            260
                                                                    -------
                                                                     $1,370
                                                                    =======

The Company also has entered into certain noncancelable operating leases for the
use of real estate,  automobiles  and trucks,  and office  equipment.  Aggregate
rental expense for operating leases was approximately $3,886,  $16,169,  $9,299,
$4,069  and  $9,294  for the  three-month  period  of  1999,  fiscal  1998,  the
seven-month and five-month periods of 1997 and for fiscal 1996, respectively.

The following is a summary of minimum rental commitments as of January 30, 1999,
for operating leases:

   Year Ended in                      Automobile      Office
     January of       Real Estate     and Trucks     Equipment      Total
-----------------------------------------------------------------------------

2000                   $15,801           $405        $  80        $16,286
2001                    12,271             24           22         12,317
2002                     9,285             18            7          9,310
2003                     7,185             12            1          7,198
2004                     5,207              5            1          5,213
After 2004               6,071              -            -          6,071
                      -------------------------------------------------------
                       $55,820           $464         $111        $56,395
                      =======================================================



                                       19

<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)


6.  Stock Options

QSI  Holdings  has stock option  arrangements  with  various  officers and other
members of management of the Company which it accounts for under the  provisions
of APB Opinion No. 25 and related  interpretations.  No compensation expense has
been  recognized  by QSI Holdings or the Company in  connection  with such stock
option arrangements.

Under FASB  Statement No. 123,  certain pro forma  information is required as if
QSI Holdings had accounted for stock  options under the  alternative  fair value
method of Statement 123 with the resultant compensation expense "pushed-down" to
the Company.  QSI Holdings used a Minimum  Valuation  model to determine the per
unit fair value of the options at the grant date. The following assumptions were
used in the valuation:

   Risk-free interest rate                                      5.65%
   Expected dividend yield                                      None
   Expected volatility                                          None
   Expected life of option                                      7 years

For purposes of pro forma  disclosures,  the estimated fair value of the options
at the  grant  date is  amortized  to  expense  over the  vesting  period of the
options.  Pro forma stock  option  compensation  expense for the period of three
months  ended  January  30,  1999 and the year  ended  October  31,  1998 is not
indicative of what annual pro forma expense may be in the future.  Pro forma net
income of the Company for the period of three months ended  January 30, 1999 and
fiscal 1998 is approximately $1,424 and $9,729, respectively.  Pro forma results
for the period of seven  months  ended  November  1, 1997 would not differ  from
amounts  as  reported  since  no  stock  option  compensation  expense  would be
recognized during that period.

The Company had no capital shares  reserved for issuance  under any  outstanding
stock option or other agreements at January 30, 1999 or October 31, 1998.


7.  Income Taxes

The  Company's   consolidated   results  of  operations   are  included  in  the
consolidated  tax  returns of its  parent,  QSI  Holdings.  The  entities in the
consolidated tax returns have adopted a policy of allocating  income tax expense
or  benefit  based on a  separate  return  concept.  This  generally  results in
profitable companies recognizing income tax expense as if the individual company
filed a separate return and loss companies  recognizing an income tax benefit to
the extent their losses contribute to reduce consolidated income taxes currently
or in the future.



                                       20
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




7.  Income Taxes (continued)

Deferred  income  taxes  reflect  the net tax  effect of  temporary  differences
between the amount of assets and  liabilities for financial  reporting  purposes
and the amounts  used for income tax  purposes.  Significant  components  of the
Company's deferred tax liabilities and assets are as follows:

                                              January 30  October 31  November 1
                                                 1999        1998        1997
                                              ----------------------------------
Deferred tax liabilities:
  Differences in depreciation and cost basis
    of property, improvements and
    equipment                                  $  3,457    $  3,392   $  2,428
  Differences in cost basis of inventories
    due to LIFO and uniform capitalization        6,411       5,623      5,423
  Prepaid advertising                               419         158        369
  Differences in amortization and cost basis
    of intangibles                                  709         584         --
  Other                                              --          --         42
                                              ----------------------------------
Total deferred tax liabilities                   10,996       9,757      8,262

Deferred tax assets:
  Net operating loss carryforward                 1,325       1,105      1,369
  Capital loss carryforward                         920         920        920
  Allowance for doubtful accounts                   154         154        214
  Excess and obsolete inventory reserves          2,078       2,120      5,355
  Compensation and employee benefit
     accruals                                     1,320       1,319      2,509
  Operating leases                                  292         308        368
  Accrued store closing costs                     1,209       1,374      1,362
  Capitalized property rights and lease
    obligations treated as operating leases
    for income tax purposes                         210         212        223
  Other                                               9          --        114
                                              ----------------------------------
                                                  7,517       7,512     12,434
  Less valuation allowance for capital loss
    carryforward                                   (920)       (920)      (920)
                                              ----------------------------------
Total deferred tax assets                         6,597       6,592     11,514
                                              ----------------------------------
Net deferred tax (liabilities) assets          $ (4,399)   $ (3,165)  $  3,252
                                              ==================================



                                       21


<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




7.  Income Taxes (continued)

The Company has a net operating loss carryforward of approximately  $3.3 million
which will expire in the year 2012. A capital loss carryforward of approximately
$2.3 million which relates to the sale of Herschel will expire in the year 2001.

Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>

                                                     Successor                    |           Predecessor
                                  ----------------------------------------------  |   ---------------------------
                                  Period of three   Fiscal year  Period of seven  |   Period of five  Fiscal year
                                   months ended        ended      months ended    |    months ended      ended
                                    January 30      October 31     November 1     |     March 26       November 2
                                       1999             1998           1997       |        1997           1996
                                  ----------------------------------------------  |   ---------------------------
    <S>                              <C>             <C>             <C>               <C>              <C>
                                                                                  |
     Continuing operations:                                                       |
       Current:                                                                   |
         Federal                      $   234         $    --         $   148     |     $(1,541)         $ 3,951
         State                             --             200              38     |        (421)           1,199
                                      ---------------------------------------     |     ------------------------
                                          234             200             186     |      (1,962)           5,150
       Deferred                         1,234           8,200           1,871     |       1,328            1,100
                                      ---------------------------------------     |     ------------------------
                                        1,468           8,400           2,057     |        (634)           6,250
     Discontinued operations:                                                     |
       Current                             --              --              --     |          --              367
       Deferred                            --              --              --     |          --             (367)
                                      ---------------------------------------     |     ------------------------
       Current                             --              --              --     |          --               --
                                      ---------------------------------------     |     ------------------------
     Total                            $ 1,468         $ 8,400         $ 2,057     |     $  (634)         $ 6,250
                                      =======================================     |     ========================
</TABLE>
Total reported  income tax expense differs from the tax that would have resulted
by applying the  statutory  expected  federal  income tax rate to income  before
taxes. The reasons for these differences are as follows:

<TABLE>
<CAPTION>

                                                     Successor                    |           Predecessor
                                  ----------------------------------------------  |   -----------------------------
                                  Period of three   Fiscal year  Period of seven  |   Period of five   Fiscal year
                                   months ended        ended      months ended    |    months ended       ended
                                    January 30      October 31     November 1     |     March 26        November 2
                                       1999             1998           1997       |        1997            1996
                                  ----------------------------------------------  |   -----------------------------
<S>                                   <C>             <C>             <C>                <C>              <C>
                                                                                  |
Income tax at federal statutory        $1,004          $6,248          $1,163     |       $(639)           $5,098
rate                                                                              |
Increases in taxes resulting                                                      |
   from:                                                                          |
   State income taxes, net of                                                     |
     federal income tax effect            194           1,214             306     |         (79)              833
   Goodwill amortization                  192             766             391     |          72               178
   Other, net                              78             172             197     |          12               141
                                      ------------------------------------------  |       ------------------------
                                       $1,468          $8,400          $2,057     |       $(634)           $6,250
                                      ==========================================  |       ========================
</TABLE>


                                                        22
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




8.  Employment Commitments

The Company has  employment  agreements  with two officers of the Company  which
provide for annual salaries amounting to approximately $700. Upon termination of
employment without cause or for certain other circumstances, compensation may be
continued for a period not to exceed eighteen months.


9.  Profit Sharing Plan

The Company has a profit  sharing plan  covering all  employees who meet certain
eligibility   requirements.   The  plan  provides  for  discretionary   employer
contributions   and  allows   voluntary   participant   contributions.   Company
contributions are determined by its Board of Directors.  The Company  recognized
expense in connection  with the profit  sharing plan of $185,  $0, $729, $85 and
$881 for the  three-month  period of 1999,  fiscal  1998,  the  seven-month  and
five-month periods of 1997 and for fiscal 1996, respectively.


10.  Transactions with Related Parties

Certain investment funds managed by Butler Capital  Corporation  ("BCC") owned a
majority of the  outstanding  common  stock of the Company (see Note 1 regarding
acquisition  by  Childs  and QSI  Holdings).  The BCC  Funds  also  held  the 7%
convertible  notes which were retired in connection with the purchase of the BCC
common stock.  Interest paid on such notes was approximately $171 and $1,425 for
the  period  of  five  months   ended  March  26,  1997  and  for  fiscal  1996,
respectively.

Included in costs  associated  with  acquiring the Company and related  deferred
financing  costs is an advisory and financing fee of $1.7 million paid to Childs
in consideration of services regarding the planning, structuring and negotiating
of the acquisition and related financings.

For the period of three  months  ended  January  30,  1999,  fiscal 1998 and the
period of seven months ended November 1, 1997,  Childs was paid a management and
consulting services fee of approximately $60, $240 and $140, respectively, under
a five-year agreement, annually renewable thereafter,  requiring annual payments
of $240.  In addition,  during the period of three months ended January 30, 1999
and fiscal 1998 Fenway  Partners,  a  stockholder  of QSI  Holdings,  was paid a
management fee of $30 and $120, respectively.


                                       23
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




10.  Transactions with Related Parties (continued)

The  Company  purchases  inventory  from two  suppliers  who are  controlled  by
stockholders  of  QSI  Holdings.   Purchases  from  these  suppliers  aggregated
approximately  $1,437,  $4,999 and $6,092 for the period of three  months  ended
January  30,  1999,  fiscal  1998 and fiscal  1997,  respectively.  The  Company
purchased  inventory  from two suppliers  who were  controlled by the BCC Funds.
Purchases from these suppliers  aggregated  approximately  $1,605 and $6,228 for
the  period  of  five  months   ended  March  26,  1997  and  for  fiscal  1996,
respectively.


11.  Guarantee of Senior Notes

The Senior Notes described in Note 4 are guaranteed jointly and severally, fully
and unconditionally by Country General, the Company's wholly owned subsidiary.

As a result of the acquisition of Country General by the Company as discussed in
Note 3, a new  basis of  accounting  has been  reflected  in  Country  General's
financial statements reflecting the fair values for Country General's assets and
liabilities at that date.

Summarized financial information for Country General is as follows:

                                           January 30   October 31   November 1
                                              1999        1998          1997
                                          -------------------------------------
Balance sheet data
Current assets:
  Accounts receivable                       $  2,742     $  3,437     $  6,049
  Inventory                                  106,674      104,777      102,571
  Other                                        2,257        3,569        7,702
                                            ----------------------------------
                                             111,673      111,783      116,322
Property and equipment, net of
  allowances for depreciation                 15,390       15,598       16,673
Other noncurrent assets, principally
  goodwill and deferred financing costs       51,735       52,170       53,109
                                            ----------------------------------
                                            $178,798     $179,551     $186,104
                                            ==================================

Current liabilities, principally accounts
  payable and accrued expenses              $ 26,912     $ 28,159     $ 38,696
Noncurrent liabilities, principally
  amounts due to related parties               6,613        5,262       11,434
Stockholder's equity                         145,273      146,130      135,974
                                            ----------------------------------
                                            $178,798     $179,551     $186,104
                                            ==================================


                                       24

<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)



<TABLE>
<CAPTION>

11.  Guarantee of Senior Notes (continued)


                                        Period of                                Period of four
                                       three months         Fiscal year          months ended
                                          ended               ended               November 1
                                        January 30          October 31          1997 (from date
                                           1999                1998             of acquisition)
                                       ========================================================
<S>                                    <C>                 <C>                   <C>
Income statement data
Net sales                               $  63,914           $ 257,342              $  99,381
Cost of sales                              45,469             178,918                 71,095
                                        ----------------------------------------------------
Gross profit                               18,445              78,424                 28,286

Selling, general and administrative
  and other expenses                       13,961              53,151                 26,719
                                        ----------------------------------------------------
Operating income                            4,484              25,273                  1,567
Interest expense to related party           2,167               9,167                  3,201
                                        ----------------------------------------------------
Income (loss) before income taxes           2,317              16,106                 (1,634)
Income taxes (credits)                        972               6,488                   (613)
                                        ----------------------------------------------------
Net income (loss)                       $   1,345           $   9,618              $  (1,021)
                                        ====================================================

Cash flow data
Net cash flows provided by (used in):
  Operating activities                  $    (743)          $   2,586              $  (1,736)
  Investing activities, principally
    capital expenditures                     (112)             (3,575)                  (415)
  Financing activities, principally
    change in amounts due to related
    parties, less payment of deferred
    financing costs of $2,340 in 1997       1,355              (5,192)                 5,548

</TABLE>

12.  Subsequent Event

On May 7, 1999,  Central Tractor Farm and Country,  Inc. ("CT") acquired Quality
Stores,  Inc.  ("Quality") in a transaction in which Quality was merged with and
into CT (the  "Merger").  At the time of the Merger,  the name of the  surviving
corporation was changed to Quality  Stores,  Inc. In connection with the Merger,
the  former  shareholders  and  option  holders  of  Quality  received,  in  the
aggregate,  $111.5  million  in cash and  792,430  shares of common  stock of CT
Holding, whose name changed to QSI Holdings, Inc. In connection with the Merger,
the Company also repaid approximately $42.1 million in debt owed by Quality. The
total purchase price for Quality was  approximately  $208.0 million,  subject to
post closing adjustment.


                                       25
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




12.  Subsequent Event (continued)

Quality, based in Muskegon, Michigan, has a strong presence in Michigan and Ohio
and,  at the time of the  Merger,  operated a chain of 114  stores,  with annual
sales of approximately  $525 million,  which offer merchandise  oriented to farm
and country  living,  including  animal care products,  farm and ranch supplies,
workwear,  and lawn and garden  products.  In  connection  with the Merger,  the
Company  relocated  its  headquarters  to Muskegon,  Michigan.  The Company will
continue to operate stores  primarily  under the Central Tractor Farm & Country,
Country General and Quality Farm & Fleet names.

The  acquisition  of Quality will be accounted for as a purchase and the results
of  operations  of  Quality  will  be  included  in the  consolidated  financial
statements from the date of purchase. The estimated cost of the acquisition over
the estimated fair value of the underlying tangible net assets is as follows:

Cost of acquiring Quality capital stock                                $208,043
Fair value of underlying tangible net assets acquired                    51,886
                                                                       --------
Excess of cost of acquisition over the allocated fair value of the
  underlying tangible net assets                                       $156,157
                                                                       ========

The non-cash portion of the Merger  consideration was contributed to the Company
by QSI  Holdings,  Inc.  The  Company  funded  the cash  portion  of the  Merger
consideration  and various  fees and  expenses  associated  with the Merger from
funds drawn under an amendment and restatement of the Company's credit Agreement
with Fleet  National  Bank,  as  administrative  agent for the banks,  financial
institutions  and other  institutional  lenders  party  thereto (the "New Credit
Facility").  The New  Credit  Facility  which  was  entered  into on May 7, 1999
increased the aggregate  principal amount of the facility from $150.0 million to
$320.0 million,  consisting of a $220.0 million,  seven-year term loan facility,
which was fully funded,  and a $100.0 million  revolving  credit  facility under
which  $60.0  million was  outstanding  on May 7, 1999.  The amounts  originally
funded and drawn  under the New Credit  Facility  were used,  in part,  to repay
outstanding borrowings under the Company's prior credit facility.


                                       26
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)




12.  Subsequent Event (continued)

The New Credit Facility will mature on April 30, 2006.  Borrowings under the New
Credit  Facility will bear interest at rates based upon prime or the  Eurodollar
Rate plus a margin.  The term  loans  must be repaid in  quarterly  installments
beginning July 31, 1999,  plus  prepayments  based on the Company's  excess cash
flow, as defined. The installments, on an annual basis, are as follows:

          Year ending in January of                                 Amount
-------------------------------------------------------------------------------

   2000                                                           $    5,425
   2001                                                               19,325
   2002                                                               21,200
   2003                                                               21,200
   2004                                                               21,200
   Thereafter                                                        131,650
                                                                 -----------
                                                                    $220,000
                                                                 ===========

The New Credit Facility  agreement  contains covenants which require the Company
to maintain a minimum Fixed Charge Coverage Ratio, a minimum  Interest  Coverage
Ratio and a maximum  Debt to EBITDA  Ratio  (all as  defined  in the New  Credit
Facility  agreement).  The covenants  also  restrict,  among other  things,  the
payment of dividends, incurrence of debt and capital expenditures.

The New Credit  Facility  is secured by  substantially  all of the assets of the
Company.


13.  Quarterly Results of Operations (Unaudited)

The following is a tabulation of the unaudited  quarterly  results of operations
for the years ended October 31, 1998 and November 1, 1997:
<TABLE>
<CAPTION>

                                                                   Successor
                                              ------------------------------------------------------
                                                First        Second         Third         Fourth
                                               Quarter       Quarter       Quarter       Quarter
                                              ------------------------------------------------------
  <S>                                         <C>          <C>             <C>           <C>
   Fiscal year ended October 31, 1998:
     Net sales                                 $144,393      $143,717       $167,859      $131,226
     Gross profit                                41,619        42,501         51,146        41,750
     Operating income                             6,659         8,168         15,696         8,318
     Net income                                     590         1,375          6,597         1,413
     Ratio of earnings to fixed charges             1.2x          1.4x           3.1x          1.6x

</TABLE>

                                       27
<PAGE>


                      Quality Stores, Inc. and Predecessor

             Notes to Consolidated Financial Statements (continued)

                (In thousands of dollars, except where indicated)



<TABLE>
<CAPTION>

13.  Quarterly Results of Operations (Unaudited) (continued)

                                               Predecessor           |                   Successor
                                        -------------------------    |   -------------------------------------
                                                     February 2,     |     March 27,
                                                      1997 to        |     1997 to
                                          First       March 26,      |      May 3,      Third        Fourth
                                         Quarter        1997         |       1997       Quarter      Quarter
                                        -------------------------    |   -------------------------------------
<S>                                      <C>          <C>                 <C>         <C>          <C>

   Fiscal year ended November 1, 1997:                               |
     Net sales                            $71,479      $34,569       |     $35,168     $129,216      $140,738
     Gross profit                          20,409       10,358       |      10,634       36,649        41,497
     Operating income (loss)                2,538       (1,231)      |       2,832        9,519         2,534
     Net income (loss)                        601       (1,848)      |         732        2,709        (2,076)
     Ratio (deficiency) of earnings                                  |
       to fixed charges                       1.6x        (910)      |         1.8x         1.9x       (2,871)
                                                                     |

</TABLE>

14.  Year 2000 Issue (Unaudited)

The Company  has  developed a plan to modify its  information  technology  to be
ready for the Year 2000 and has begun  converting  its critical data  processing
systems. The Company currently expects the project to be substantially completed
by mid-1999  and does not expect the cost to modify  systems  used in the normal
course of business to be significant. While additional testing will be conducted
on its systems  through the Year 2000,  the Company does not expect this project
to have a significant affect on operating activities.

To mitigate the affect of outside influences and other dependencies  relative to
the Year 2000,  the Company's  plan includes  procedures to contact  significant
customers,  suppliers and other third parties whose success in addressing  their
own Year 2000 issue will impact the  Company's  initiative.  To the extent these
third  parties  would be  unable  to  transact  business  in the  Year  2000 and
thereafter, it could adversely affect the Company's operations.


15.  Change in Fiscal Year-End

On August  17,  1999,  the Board of  Directors  of  Quality  Stores,  Inc.  (the
"Registrant"),   determined  to  change  the   Registrant's   fiscal  year.  The
Registrant's fiscal year will now end on the Saturday closest to January 31.


                                       28
<PAGE>


                              QUALITY STORES, INC.


Certain statements in this Report may contain "forward-looking"  information (as
defined  in  the  Private  Securities   Litigation  Reform  act  of  1995).  All
forward-looking  statements involve  uncertainty,  and actual future results and
trends may differ materially depending on a variety of factors.


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

Three-Month Period Ended January 30, 1999, Compared to Quarter Ended January 31,
1998

Net sales for the  three-month  period  ended  January  30,  1999,  were  $146.1
million,  an increase of $1.7 million, or 1.2%, as compared to net sales for the
quarter  ended  January 31,  1998,  of $144.4  million.  This  increase  was due
principally to a comparable store sales increase of 6.1% and to sales derived in
1999 from new stores  opened in fiscal  1999 to date,  partially  offset by $8.1
million of sales derived in 1998 from stores closed in fiscal 1998.

Gross  profit for the  three-month  period  ended  January 30,  1999,  was $42.6
million,  an increase of $1.0 million or 2.4%,  as compared to $41.6 million for
the quarter  ended  January 31,  1998,  as a result of the increase in net sales
discussed  above and an increase in gross profit  percentage.  Gross profit as a
percentage  of net sales  increased  to 29.2% for the  three-month  period ended
January 30, 1999,  as compared to 28.8% for the quarter  ended January 31, 1998.
The  increase  in the gross  profit  percentage  is  attributable  to the fuller
realization of the increased  purchasing power of the company resulting from the
acquisition of Country General during fiscal 1997.

Selling,  general,  and administrative (SGA) expenses for the three-month period
ended January 30, 1999, were $33.7 million, a decrease of $0.4 million, or 1.0%,
as compared to the quarter ended January 31, 1998.  SGA expenses as a percentage
of net sales  improved to 23.1% for the  three-month  period  ended  January 30,
1999, as compared to 23.6% for the quarter ended January 31, 1998. This decrease
is attributable to completion of the integration of the Country General stores.

Amortization of intangibles remained relatively constant at $1.0 million for the
three-month  period ended  January 30, 1999, as compared to $0.9 million for the
quarter ended January 31, 1998.

Operating  income for the  three-month  period ended January 30, 1999,  was $7.9
million,  an increase of $1.2 million, or 18.8%, as compared to $6.7 million for
the quarter  ended  January 31, 1998.  Operating  income as a percentage  of net
sales increased to 5.4% for the three-month  period ended January 30, 1999, from
4.6% for the quarter ended January 31, 1998.  The increase was the result of the
factors affecting net sales, gross profit, and SGA expenses discussed above.

Interest  expense was $5.0 million for the three-month  period ended January 30,
1999, as compared to $5.3 million for the quarter  ended  January 31, 1998.  The
decrease in interest expense is attributable to a lower average debt balance and
a decrease in interest rates on the Company's variable rate borrowings.

Income  taxes for the  three-month  period  ended  January 30,  1999,  were $1.5
million,  an increase of $0.7 million as compared to the quarter  ended  January
31,  1998.  Income tax as a  percentage  of pretax  earnings  was 49.7% in 1999,
compared to 57.1% in 1998.  This  decrease is due primarily to  amortization  of
goodwill  related to the  acquisition  of the  Company  by Childs,  which is not
deductible  for income tax purposes,  being spread over a larger  pre-tax income
base.

Net income for the three-month  period ended January 30, 1999, was $1.5 million,
as compared to $0.6 million for the quarter  ended January 31, 1998, as a result
of the factors discussed above.

                                       29
<PAGE>

Liquidity and Capital Resources

In addition to cash to fund  operations,  the  Company's  primary  on-going cash
requirements are those necessary for the Company's expansion program,  including
inventory purchases and capital  expenditures,  and debt service.  The Company's
primary  sources  of  liquidity  have  been  funds  provided  from   operations,
borrowings  pursuant to the  Company's  revolving  and term  credit  facilities,
short-term trade credit, and additional equity investments.

On January 30, 1999, the Company had working  capital of $92.3  million,  a $6.1
million decrease from working capital of $98.4 million on October 31, 1998. This
decrease  resulted  primarily  from a $19.1  million  aggregate  increase in the
Company's note payable to bank and accounts  payable and a $2.8 million decrease
in miscellaneous current assets, partially offset by a $17.8 million increase in
inventory. The increase in inventory is due primarily to the Company's new store
expansion  program for fiscal 1999 along with the purchase of the H. C. Shaw Co.
stores in January, 1999.

Net cash  provided used in operating  activities  was $1.6 million for the three
months  ended  January 30, 1999.  This was a decrease of $12.9  million from the
three months  ended  January 31,  1998,  during which $11.3  million of cash was
generated by operating  activities.  This decrease  resulted  primarily  from an
increase in inventory  during the three-month  period ended January 30, 1999, as
compared to a decrease  during the same period in the prior year.  The Company's
capital  expenditures,  exclusive of the H. C. Shaw Co.  acquisition,  were $4.0
million and $1.1  million for the three  months  ended  January  30,  1999,  and
January 31, 1998,  respectively.  The increase is primarily  attributable to the
Company's new store expansion program for fiscal 1999. In addition,  the Company
had cash  provided by financing  activities  of $10.4  million  during the three
months ended January 30, 1999, as compared to cash used in financing  activities
of $11.2 million during the three months ended January 31, 1998. The increase in
cash  provided by  financing  activities  during the  three-month  period  ended
January  30,  1999,  as  compared to the quarter  ended  January  31,  1998,  is
attributable  to the purchase of the H. C. Shaw Co. stores and  subsequent  cash
advances  and the funding of the  inventory  build-up  and capital  expenditures
related to the Company's new store expansion program for fiscal 1999.

The Company has a $100.0 million  revolving credit  facility,  under which $44.0
million was  outstanding as of January 30, 1999. The credit facility will mature
on June 30, 2003, and borrowings will bear interest at rates based upon prime or
Eurodollar rates plus an applicable margin.

The  Company  anticipates  that its  principal  uses of cash in the  foreseeable
future will be working  capital  requirements,  debt service  requirements,  and
capital expenditures,  as well as expenditures  relating to acquisitions.  Based
upon current and anticipated levels of operations, the Company believes that its
cash flow from  operations,  together  with amounts  available  under the credit
facility,  will  be  adequate  to  meet  its  anticipated  requirements  in  the
foreseeable  future for working  capital,  capital  expenditures,  and  interest
payments.  The  Company  expects  that  if  it  were  to  pursue  a  significant
acquisition,  it would arrange prior to the  acquisition  any additional debt or
equity financing  required to fund the  acquisition.  There can be no assurance,
however,  that the Company's business will continue to generate  sufficient cash
flow from  operations in the future to service its debt,  and the Company may be
required  to  refinance  all or a  portion  of its  existing  debt or to  obtain
additional  financing  or to  reduce  its  capital  spending.  There  can  be no
assurance  that any such  refinancing  would be possible or that any  additional
financing could be obtained.  The inability to obtain additional financing could
have a material adverse effect on the Company.


Seasonality

Unlike  many  specialty  retailers,  historically,  the  Company  has  generated
positive operating income in each of its four fiscal quarters.  However, because
the  Company  is an  agricultural  specialty  retailer,  its  sales  necessarily
fluctuate with the seasonal  needs of the  agricultural  community.  The Company
responds to this  seasonality by attempting to manage  inventory levels (and the
associated working capital requirements) to meet expected demand, and by varying
its use of part-time employees.  Historically, the Company's sales and operating
income  have been  highest in the third  quarter of each  fiscal year due to the
farming industry's  planting season and the sale of seasonal

                                       30
<PAGE>

products.  Working  capital  needs is highest  during the  second  quarter.  The
Company expects these trends to continue for the foreseeable future.


Inflation

Management  does not believe its  operations  have been  materially  affected by
inflation.


Year 2000

The Year 2000  issue,  common  to most  companies,  concerns  the  inability  of
information  and other  systems to  correctly  recognize  and  properly  process
date-sensitive information after 1999 due to the use of only the last two digits
to refer to a year. This problem could affect both information systems (software
and hardware) and other equipment that relies on microprocessors. Management has
completed a  company-wide  evaluation  of this impact on its  computer  systems,
applications, and other date-sensitive equipment. Systems and equipment that are
not Year 2000 compliant have been  identified,  and  remediation  efforts are in
process.  Management  estimates that over 90 percent of remediation efforts were
completed  as  of  July  31,  1999.  All  remediation  efforts  and  testing  of
product/equipment are expected to be completed by November 15, 1999.

The Company is also in the process of monitoring  the progress of material third
parties  (vendors and suppliers) in their efforts to become Year 2000 compliant.
Those third parties include,  but are not limited to: product  suppliers,  third
party  benefit  administrators,   third  party  logistic  providers,   insurance
institutions, mainframe computer services suppliers, financial institutions, and
utilities.  The Company  has  requested  confirmation  from all  material  third
parties that they will be timely Year 2000 compliant. Through July 31, 1999, the
Company had received  confirmations  from approximately 80% of the third parties
that were sent these requests.

Through  July 31, 1999,  the Company has spent  approximately  $1.85  million to
address Year 2000 issues.  Total costs to address Year 2000 issues are currently
estimated  not to exceed $2.0  million and  consist  primarily  of costs for the
remediation of internal systems,  including internal programming time. Funds for
these  costs are  expected to be  provided  by the  operating  cash flows of the
Company. The majority of the costs of internal system remediation efforts relate
to the costs of on-staff systems engineers and,  therefore,  are not necessarily
incremental  costs.  The Company has not canceled or delayed any other  material
projects as a result of this work.

The Company could be faced with severe  consequences if Year 2000 issues are not
identified  and resolved in a timely  manner by the Company and  material  third
parties. A worst-case  scenario would result in the short-term  inability of the
Company to sell products in its stores due to unresolved Year 2000 issues.  This
would  result in lost  revenues;  however,  the amount would be dependent on the
length and nature of the disruption,  which cannot be predicted or estimated. In
light of the possible consequences, the Company is devoting the resources needed
to address  Year 2000 issues in a timely  manner.  Management  receives  monthly
updates as to project status.  While management expects a successful  resolution
of these issues,  there can be no guarantee  that the Company and material third
parties,  on which the Company  relies,  will  address all Year 2000 issues on a
timely basis or that their failure to timely and successfully address all issues
would not have an adverse effect on the Company.

The Company is in the process of developing  contingency  plans in case business
interruptions  do occur.  Management  expects  these  plans to be  completed  by
November 15, 1999.

                                       31
<PAGE>


                                   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.

Date:  October 1, 1999                 QUALITY STORES, INC.



                                       /s/ James F. Hurley
                                       James F. Hurley
                                       Senior Vice-President, Finance, MIS
                                       and Chief Financial Officer




                                       32
<PAGE>


                              QUALITY STORES, INC.

                                INDEX TO EXHIBITS



EXHIBIT 12    Statement Re:  Computation of Ratio of Earnings of Fixed Charges

EXHIBIT 27    Financial Data Schedule (electronic copy only)

EXHIBIT 99    Important Factors Regarding Forward-Looking Statements





                                       33