# FORM 10-K/AAmendment No. 1

SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549

(Mark One)

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

For the fiscal year ended January 31,
2004

OR

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

For the transition period from ___________________ to ______________________

Commission file number 019774

United Retail Group, Inc.

(Exact name of registrant as specified in its charter)

| |                                                               |                                     
| | ------------------------------------------------------------- | ------------------------------------
| | Delaware                                                      | 51-0303670                          
| | (State or other jurisdictionof incorporation or organization) | (I.R.S. employer identification no.)

365 West Passaic Street, Rochelle Park, New Jersey 07662(Address of principal executive offices) (Zip Code)

(201) 845-0880Registrant's telephone number, including area code

Securities registered pursuant to Section
12(g) of the 1934 Act:

Common Stock, $.001
par value per share, with Stock Purchase Right attached

(Title of class)

---

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 (the 1934 Act) during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

YES [X]   NO [  ]

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the 1934 Act).

YES [  ]   NO [X]

On April 22, 2004, the aggregate
market value of the voting and non-voting common equity of the registrant (the
Corporation also referred to herein, together with its subsidiaries, as the
Company) held by non-affiliates of the registrant was approximately $31.2
million computed by reference to the $3.35 price at which the common equity was last sold
as of August 1, 2003. For purposes of the preceding sentence only, affiliate status was
determined on the basis that all stockholders of the registrant are non-affiliates except
the two non-institutional stockholders who filed statements with the Securities and
Exchange Commission (the SEC or the Commission) under Section
16(a) of the 1934 Act reporting holdings of 10% or more of the shares outstanding. The
holdings of affiliates are based upon the contents of the filed statements.

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

Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Section 12, 13 or
15(d) of the 1934 Act subsequent to the distribution of securities under a plan confirmed
by a court.

YES [  ]   NO [  ]

# APPLICABLE ONLY TO
CORPORATE REGISTRANTS:

Indicate the number of shares
outstanding of each of the registrants classes of common stock, as of the latest
practicable date.

As of April 21, 2004, there were
12,937,304 shares of the registrants common stock, $.001 par value per share,
outstanding. One Stock Purchase Right is attached to each outstanding share.

# INTRODUCTORY NOTE:

This Amendment No. 1 on Form 10-K/A
amends the Companys Form 10-K (i) to restate the Companys balance sheets and
statements of cash flows in Item 8 of Part II, as further discussed in Note 2 to the
consolidated financial statements to (a) reflect a liability for the
unamortized portion of construction allowances and other lease concessions (deferred lease
incentives) rather than as a reduction to property and equipment and (b) present
construction allowances and other lease concessions received within operating activities,
rather than as a reduction of capital expenditures, (ii) to make conforming changes and to supply
incremental disclosure in the footnotes to the financial statements in Item 8 of Part II,
(iii) to make related changes and to supply incremental disclosure in Item 3 of Part I,
Items 6, 7 and 9A of Part II and Item 15 of Part IV and (iv) to file Schedule II
Valuation and Qualifying Accounts. The restatements are made in order to
comply with Statement of Financial Accounting Standards No. 13 and FASB Technical Bulletin
No. 88-1. The other Items of the Form 10-K as originally filed have not been amended and
remain in effect as of the filing date of the original Form 10-K. Except as otherwise
expressly stated, the information in this Amendment is as of April 22, 2004, the date on
which the original Form 10-K was filed, and this Amendment does not purport to provide an
update or discussion of any developments subsequent to the original filing.

---

Part I

Item 3. Legal Proceedings.

1. The Company is involved in legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims, net of
reserves, will not have a material adverse effect on the Companys financial position, annual results of operations or cash
flows.In addition, on May 1, 2003, a suit in California Superior Court, Los Angeles County, styled
Erik Stanford vs. United Retail Incorporated was served on the Company by a
former store manager in California. On March 3, 2004, an amended complaint was served that
added another plaintiff. The suit is purportedly a class action on behalf of certain
current and former associates in California in the previous four years.The plaintiffs in the Stanford case assert state wage and
hour claims.The Company intends to strongly oppose class certification. To the extent that the plaintiffs
successfully obtain class certification, the Company intends to defend the Stanford
case vigorously on the merits at trial.The Company has recorded an accrual for its estimated losses in the Stanford
case.Although the ultimate overall outcome of the Stanford case can not be predicted at this
time, management does not believe that the amount related to the outcome of the case,
beyond the amount already accrued, will have a material impact on the Companys
financial position. An estimate of the range of reasonably possible losses can not be made
at this stage of the case. Given the uncertainty at this stage, it is possible that if
either an adverse judgment for damages is rendered or a negotiated settlement is agreed
upon, the amount payable could be material to the Companys cash flows and results of
operations for the fiscal year in which the matter is resolved.
2. Certain pending legal proceedings to which the Company was a party were terminated during the fourth quarter of 2003 in the ordinary course of business.
The termination of pending legal proceedings during that fiscal quarter did not have a material effect on the financial position, results of operations or cash
flows of the Company.

---

# Part II

Item 6.  Selected Financial Data.

|                                        | Fiscal YearEndedJan. 29,2000 | 53 WeeksFiscal YearEndedFeb. 3,2001 | Fiscal YearEndedFeb. 2,2002 | Fiscal YearEndedFeb. 1,2003 | Fiscal YearEndedJan. 31,2004
|--------------------------------------- | ---------------------------- | ----------------------------------- | --------------------------- | --------------------------- | ----------------------------
|
|Statement of Operations Data:           |                              |                                     |                             |                             |                             
|Net sales                               | $382,631                     | $419,712                            | $427,040                    | $431,964                    | $396,265                    
|Cost of goods sold,                     |                              |                                     |                             |                             |                             
|including buying                        |                              |                                     |                             |                             |                             
|and occupancy costs                     | 282,754                      | 323,153                             | 326,101                     | 343,625                     | 313,767                     
|Gross profit                            | 99,877                       | 96,559                              | 100,939                     | 88,339                      | 82,498                      
|General, administrative                 |                              |                                     |                             |                             |                             
|and store operating expenses            | 77,778                       | 91,474                              | 100,299                     | 105,499                     | 101,287                     
|Goodwill impairment                     | -                            | -                                   | -                           | 5,611                       | -                           
|Operating income (loss)                 | 22,099                       | 5,085                               | 640                         | (22,771)                    | (18,789)                    
|Interest (income) expense, net          | (1,688)                      | (1,854)                             | (361)                       | 827                         | 917                         
|Income (loss) before taxes              | 23,787                       | 6,939                               | 1,001                       | (23,598)                    | (19,706)                    
|Provision for (benefit from)            |                              |                                     |                             |                             |                             
|income taxes                            | 7,638                        | 2,719                               | 571                         | (521)                       | (636)                       
|Net income (loss)                       | 16,149                       | 4,220                               | 430                         | (23,077)                    | (19,070)                    
|Net income (loss) per common share:     |                              |                                     |                             |                             |                             
|Basic                                   | $1.23                        | $0.32                               | $0.03                       | ($1.77)                     | ($1.47)                     
|Diluted                                 | $1.17                        | $0.31                               | $0.03                       | ($1.77)                     | ($1.47)                     
|Weighted average number                 |                              |                                     |                             |                             |                             
|of common shares outstanding:           |                              |                                     |                             |                             |                             
|Basic                                   | 13,156                       | 13,302                              | 13,241                      | 13,047                      | 12,937                      
|Diluted                                 | 13,852                       | 13,515                              | 13,442                      | 13,047                      | 12,937                      
|Balance Sheet Data (at period end):     |                              |                                     |                             |                             |                             
|Working capital                         | $62,360                      | $52,279                             | $44,526                     | $28,688                     | $18,447                     
|Total assets (Restated)(1)              | 194,213                      | 210,046                             | 218,187                     | 200,048                     | 170,688                     
|Long-term capital lease obligations     | -                            | -                                   | 7,213                       | 5,764                       | 3,646                       
|Long-term distribution center financing | 7,944                        | 6,616                               | 5,181                       | 3,961                       | 3,326                       
|Total stockholders' equity              | 117,757                      | 121,796                             | 121,804                     | 98,995                      | 80,020                      

(1)    
          Restated to reflect revisions to accounting for construction allowances and
          other lease concessions as disclosed in Note 2 to the consolidated financial
          statements.

The Selected Financial Data should be
read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and with the Companys Consolidated
Financial Statements, including the notes thereto, appearing elsewhere in this Report.

As described more fully in
Managements Discussion and Analysis of Financial Condition and Results of
Operations, in the womens retail specialty apparel industry, operating results
of businesses, especially businesses that emphasize fashionable merchandise, can vary
significantly over time because of shifts in consumer spending patterns, consumer
preferences and overall economic conditions; the impact of increased competition;
variations in weather patterns; fluctuations in consumer acceptance of products; and
changes in the ability to develop new merchandise.

The Company does not hold or issue
financial instruments for trading purposes. Management of the Company believes that its
exposure to interest rate and market risk associated with financial instruments is not
material.

---

Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

EXECUTIVE SUMMARY

Introduction

The Executive Summary section of
Managements Discussion and Analysis of Financial Condition and Results of Operations
provides a high level summary of the more detailed information elsewhere in this Report,
an overview to put this information in context and a plan to return the Company to
long-term profitability. This section is also an introduction to the discussion and
analysis that follows. Accordingly, it necessarily omits details that appear elsewhere in
this Report. It should not be relied upon separately from the balance of this Report.

As discussed in Note 2 to the
consolidated financial statements, the balance sheets and the statements of cash flows
have been restated to reflect a change in accounting for construction allowances received
from landlords. As applicable, this Item 7 has been revised to reflect these changes and
to make other incremental disclosures.

Products and Purchasing

The Company is a leading specialty
retailer of womens fashions featuring its proprietary AVENUE® brand. Its product
line features AVENUE® brand large size (14 or larger) womens wearing apparel,
AVENUE BODY® brand large size womens undergarments and lingerie and
CLOUDWALKERS® brand womens footwear, as well as AVENUE® brand accessories
and gifts.

Most of the Companys products
are made for the Company by contract manufacturing abroad.

Customer Base

The Company serves the mass market in
the United States and targets fashion conscious women between 25 and 55 years of age who
wear large size apparel. Management believes that the number of women in this age range
who wear large size apparel has increased in recent years.

Merchandising and Marketing

Design is an important aspect of the
Companys products. Many AVENUE® and AVENUE BODY® products are custom
designed. The Company emphasizes a contemporary brand image and consistency of merchandise
quality and fit.

The Company has used direct mail,
credit card statement inserts, in-store signage, and e-mail messages in its marketing
activities.

Channel of Distribution

The Companys channel of
distribution is retail stores using its AVENUE® trade name. It leased 533 stores in 37
states at April 22, 2004, the filing date of the original Form 10-K. The Company also has
operated a website at www.avenue.com that sells a selection of the merchandise that is
also on sale in the stores.

Until March 2003, the Company also
mailed catalogs that featured a merchandise selection that included both items in the
stores and similar products. (The website and the catalog, while it was in existence, are
referred to as the shop@home business.) The more diverse merchandise
assortment and disparate cash flows of the catalog operation compared with the stores led
management to treat the shop@home business as a separate channel of distribution in fiscal
2001 and fiscal 2002.

Increased Competition

The womens retail apparel and
shoe industries are highly competitive. Operating results of businesses in these
industries, especially businesses that emphasize fashionable merchandise, can vary
materially from year to year. The Companys competition includes other specialty
retailers, mass merchants, department stores, discount stores, mail order companies,
television shopping channels and Internet websites. Management believes that total sales
of large size womens apparel from these sources of supply increased in recent years.
Among specialty retailers for large size women like the Company, the competition includes
large store chains that have announced long-term store growth plans to aggressively expand
into additional strip shopping center locations.

Deflationary Price Trend
in Apparel Industry

The Consumer Price Index published by
the U.S. Dept. of Labor, Bureau of Labor Statistics city average for womens and
girls apparel (the CPI) declined 5.0% in fiscal 2001, 1.9% in fiscal
2002 and 1.8% in fiscal 2003. There is no assurance that this deflationary trend will not
continue.

Company Sales Fluctuations

Sales figures and merchandise margins
are central to regaining the Companys profitability. The Company conducts a weekly
interdisciplinary review of sales and merchandise margins and prepares budgets for two
six-month seasons each year, the Spring season and the Fall season. Management uses
comparable store sales (for stores open at least 12 months at the time) as an analytical
tool.

Seasonal sales and CPI data follow:

|                                 | 2001   | 2002   | 2003   |        |        |       
|-------------------------------- | ------ | ------ | ------ | ------ | ------ | ------
|
|Total store sales ($ millions)*  | $208.8 | $206.7 | $225.1 | $198.7 | $203.5 | $187.7
|Sales per average store ($000's) | $393   | $373   | $406   | $356   | $371   | $344  
|Average number of stores         | 532    | 554    | 555    | 558    | 548    | 545   
|Comparable store sales**         | -3.4%  | -2.1%  | +3.2%  | -5.3%  | -9.3%  | -4.2% 
|Six-month CPI***                 | -3.4%  | -1.6%  | -1.9%  | 0.0%   | -1.4%  | -0.4% 

_______*Excluding sales on the internet and, until March 2003, through a catalog.
**A store that is relocated within the same shopping center or mall is considered comparable.  However, if the store is relocated
elsewhere, it is considered a new store and not comparable.  A store that is expanded or contracted is still comparable, i.e., the
sales from the remodeled store are considered comparable.  Stores that are closed are not considered comparable.  The comparable
store sales calculation is not adjusted for changes in the store sales return reserve.
***U.S. Dept. of Labor, U.S. City Average, Women's and Girls' Apparel

Seasonal Operating Results

The declines in sales per average store adversely affected operating results.

The Company had net income of $0.4 million in fiscal 2001 and incurred net losses of $23.1 million in fiscal 2002 and $19.1
million in fiscal 2003.  The Company had operating income of $0.6 million in fiscal 2001 and incurred operating losses of $22.8
million in fiscal 2002 and $18.8 million in fiscal 2003.  (Excluding a one-time goodwill write-off, the operating loss in fiscal 2002
was $17.2 million.)

Product Repositioning Plan

In the women's retail specialty apparel industry, sales, especially in businesses that emphasize fashionable merchandise, can vary
significantly over time.  Sales are volatile because of shifts in consumer spending patterns, consumer preferences and overall
economic conditions; the impact of competition; variations in weather patterns; fluctuations in consumer acceptance of products;
changes in the ability to develop new merchandise; differences in promotional strategies; and movements in consumer confidence
levels.  These variables caused the Company's sales per average store to fluctuate in the past.  Thus, recent sales performance is
not necessarily indicative of future sales performance.  As a result, management believes that long-term sales projections within a
defined narrow range are not reliable.

After fiscal 2001, when net income declined to $0.4 million, the Company incurred net losses.  The Company has sought to absorb
normal cost inflation and return to long-term profitability through a goal of increased sales per average store with higher
merchandise margins.  This unrealized financial goal was translated into an integrated operational plan early in fiscal 2003 that was
designed to reposition the Company's product offering.  This plan has four principal components:  (i) to improve the design of the
Company's merchandise and thereby differentiate it from competitors' merchandise, (ii) to market more items together as coordinated
outfits rather than separately as individual garments, (iii) to put more emphasis on fashionable merchandise and less on basic items,
and (iv) to raise the level of merchandise presentation in the store to make shopping easier and to encourage outfit buying.  This
plan relies primarily on the Company's intellectual capital.  Only small amounts of financial capital are required to execute the
plan.

This section constitutes forward-looking information under the Reform Act, which is subject to the variables, uncertainties and other risk
factors referred to under the caption "Future Results."

Fluctuation in Store Count

Store counts averaged 543, 557 and 546, respectively, for fiscal 2001, 2002 and 2003.  In 2003, the Company opened five stores and
closed 24 stores.  In fiscal 2004, the Company is planning to open two stores and close approximately 15-25 stores as part of its
normal lease maintenance program.  Thus, the average number of stores is expected to decline further in fiscal 2004.

The annual capital expenditure budgets after fiscal 2004 will provide for new store construction and other infrastructure development
priorities.  Prioritization will be based, among other things, on overall profitability and the availability of suitable locations at
rents and on terms that fit the Company's financial model for new store construction.  This paragraph constitutes forward-looking
information under the Reform Act, which is subject to the variables, uncertainties and other risk factors referred to under the
caption "Future Results."

Liquidity

United Retail Group, Inc. and certain of its subsidiaries (collectively, the "Companies") are parties to a Financing Agreement, dated
August 15, 1997, as amended (the "Financing Agreement"), with The CIT Group/Business Credit, Inc. ("CIT").  The Financing Agreement
provides credit on a revolving basis.

In early fiscal 2003, the Company adopted an integrated operational plan designed to reposition the Company's product offering.  This
plan has four principal components:  (i) to improve the design of the Company's merchandise and thereby differentiate it from
competitors' merchandise, (ii) to market more items together as coordinated outfits rather than separately as individual garments,
(iii) to put more emphasis on fashionable merchandise and less on basic items; and (iv) to raise the level of merchandise
presentation in the store to make shopping easier and to encourage outfit buying.

The Company plans to use the Financing Agreement for its immediate and future working capital needs.  Management believes that the
borrowing capacity under the Financing Agreement, together with cash on hand and current and anticipated cash flow from operations,
will be adequate to meet the Company's working capital and capital expenditure requirements for at least 12 months after April 22,
2004, the filing date of the original Form 10-K.

This section constitutes forward-looking information under the Reform Act and is subject to the variables, uncertainties and other
risk factors referred to under the caption "Future Results."

---

DISCUSSION AND ANALYSIS

(This section and the one that follows provide details about the material line items in the Company's statements of operations.)

Fiscal 2003 Versus Fiscal 2002

Net sales for fiscal 2003 decreased 8.3% from fiscal 2002, to $396.3 million from $432.0 million.

The components of this decrease in net sales are as follows:

| |                 |                                        
| | --------------- | ---------------------------------------
| | Amount          | Attributable to                        
| | ($28.5) million | 7.0% decrease in comparable store sales
| | 11.1 million    | new stores                             
| | (14.6) million  | closed stores                          
| | (3.7) million   | other                                  
| | ($35.7) million | Total                                  

Units sold per average store
decreased 7.3% and average price per unit sold increased 2.3%, in comparison to fiscal
2002.

There was less customer acceptance of
dresses, woven tops and knit bottoms, which reduced sales by $18.5 million in comparison
to fiscal 2002.

Average number of stores decreased from 557 to 546.  See, "Stores."

Internet and catalog (shop @
home) sales, which are not included in the calculation of comparable store sales,
declined to $4.9 million in fiscal 2003 from $8.1 million in fiscal 2002, primarily from
the suspension of catalog mailings. See, Suspension of Catalog Operations.

Gross profit decreased to $82.5
million in fiscal 2003 from $88.3 million in fiscal 2002 but increased as a percentage of
net sales to 20.8% from 20.5%. Gross profit as a percentage of net sales increased
principally because of lower marketing costs resulting from the suspension of catalog
mailings (100 basis points as a percentage of net sales) and higher merchandise margins
(60 basis points). (Higher merchandise margins were the result of stronger customer
demand.) The decline in marketing costs and increase in merchandise margins were partially
offset by an increase in rent and occupancy costs as a percentage of net sales (140 basis
points), which occurred because net sales declined at a faster rate than rent and
occupancy costs. See, Stores. Gross profit levels in the future will be
subject to the variables, uncertainties and other risk factors referred to under the
caption Future Results.

General, administrative and store
operating expenses decreased to $101.3 million in fiscal 2003 from $105.5 million in
fiscal 2002, excluding the goodwill write-off referred to below. However, as a percentage
of net sales, these expenses increased to 25.6% from 24.4% principally from an increase in
store payroll as a percentage of net sales (90 basis points), which occurred because net
sales declined at a faster rate than store payroll.

The Company incurred operating losses
of $18.8 million in fiscal 2003 and $22.8 million in the previous year. In fiscal 2002,
the Company recorded a one-time impairment of goodwill in the amount of $5.6 million.
Excluding the goodwill write-off, the operating loss in fiscal 2002 was $17.2 million.

The Companys effective tax rate
was 3.2% for fiscal 2003 and 2.2% for fiscal 2002. The primary factor contributing to this
rate in each period was the valuation allowance provided for the Companys net
operating loss (NOL) carryforwards and other net deferred tax assets.

In fiscal 2002, the Company
established a $7.3 million valuation allowance for all its net deferred tax assets,
including its NOLs. In fiscal 2003, the tax valuation allowance was increased by
$12.6 million.

The Company incurred net losses of
$19.1 million in fiscal 2003 and $23.1 million in fiscal 2002.

See, Critical Accounting
Policies for a discussion of estimates made by management in preparing financial
statements in accordance with generally accepted accounting principles.

Fiscal 2002 Versus Fiscal
2001

Net sales for fiscal 2002 increased
1.2% from fiscal 2001 to $432.0 million from $427.0 million.

The components of this increase in
net sales are as follows:

| |                |                                        
| | -------------- | ---------------------------------------
| | Amount         | Attributable to                        
| | ($3.7) million | 1.0% decrease in comparable store sales
| | 27.2 million   | new stores                             
| | (15.2) million | closed stores                          
| | (3.3) million  | other                                  
| | $5.0 million   | Total                                  

Units sold per average store
increased by 2.8% and average price per unit sold decreased 3.2%, in comparison to fiscal
2001.

There was less customer acceptance of
woven tops and knit bottoms, which decreased sales by $12 million in comparison to fiscal
2001.

Average number of stores increased
from 543 to 557. Shop@home sales were $8.1 million in fiscal 2002 compared with $11.5
million in fiscal 2001.

Gross profit was $88.3 million in
fiscal 2002 compared with $100.9 million in fiscal 2001, declining as a percentage of net
sales to 20.5% from 23.6%. The decrease in gross profit as a percentage of net sales was
attributable primarily to lower margins (210 basis points) as a result of weaker customer
demand.

General, administrative and store
operating expenses increased to $105.5 million in fiscal 2002 from $100.3 million in
fiscal 2001. As a percentage of net sales, general, administrative and store operating
expenses increased to 24.4% from 23.5%, principally as a result of increases in both store
payroll (70 basis points) and insurance expense (60 basis points). The increases were
partially offset by a decrease in shop@home expense (40 basis points) and by an increase
in private label credit card royalties from World Financial Network National Bank (30
basis points). (See, Private Label Credit Cards Issued By The Bank.)

In fiscal 2002, the Company recorded
an impairment of goodwill in the amount of $5.6 million, after which no goodwill remained.

During fiscal 2002, the Company
incurred an operating loss of $22.8 million compared with operating income of $0.6 million
in fiscal 2001. Operating (loss) income reflected the combined results of two business
segments, store sales and shop@home sales. During fiscal 2002, the (loss) from operations
before unallocated expenses and net interest expense was ($0.9 million) from store sales
and ($5.9 million) from shop@home sales. During fiscal 2001, the income (loss) from
operations before such expenses was $17.0 million from store sales and ($6.9 million) from
shop@home sales. See, Suspension of Catalog Operations.

The Companys effective tax rate
was 2.2% for fiscal 2002, primarily as the result of the valuation allowance provided for
NOL carryforwards and other net deferred tax assets. The Companys effective tax rate
was 57.0% for fiscal 2001.

The Company incurred a net loss of
$23.1 million in fiscal 2002 and had net income of $0.4 million in fiscal 2001.

February-March Sales

Combined net sales for the months of
February and March 2004 decreased 3.6% from February and March 2003 to $64.2 million from
$66.6 million. Comparable store sales for the two months decreased 1.8%. Average number of
stores decreased from 551 to 534.

Increased Competition

The womens retail apparel and
shoe industries are highly competitive. Operating results of businesses in these
industries, especially businesses that emphasize fashionable merchandise, can vary
materially from year to year. The Companys competition includes other specialty
retailers, mass merchants, department stores, discount stores, mail order companies,
television shopping channels and Internet websites. Management believes that total sales
of large size womens apparel from these sources of supply increased in recent years.
Among specialty retailers for large size women like the Company, the competition includes
large store chains that have announced long-term store growth plans to aggressively expand
into additional strip shopping center locations.

Product Repositioning Plan

In the womens retail specialty
apparel industry, sales, especially in businesses that emphasize fashionable merchandise,
can vary significantly over time. Sales are volatile because of shifts in consumer
spending patterns, consumer preferences and overall economic conditions; the impact of
competition; variations in weather patterns; fluctuations in consumer acceptance of
products; changes in the ability to develop new merchandise; differences in promotional
strategies; and movements in consumer confidence levels. These variables caused the
Companys sales per average store to fluctuate in the past. Thus, recent sales
performance is not necessarily indicative of future sales performance. As a result,
management believes that long-term sales projections that fall within a defined narrow
range are not reliable.

After fiscal 2001, when net income
declined to $0.4 million, the Company incurred net losses. Since then, the Company has
sought to absorb normal cost inflation and return to long-term profitability through a
goal of increased sales per average store with higher merchandise margins. This unrealized
financial goal was translated into an integrated operational plan early in fiscal 2003
that is designed to reposition the Companys product offering. This plan has four
principal components: (i) to improve the design of the Companys merchandise and
thereby differentiate it from competitors merchandise, (ii) to market more items
together as coordinated outfits rather than separately as individual garments, (iii) to
put more emphasis on fashionable merchandise and less on basic items, and (iv) to raise
the level of merchandise presentation in the store to make shopping easier and to
encourage outfit buying. This plan relies primarily on the Companys intellectual
capital. Only small amounts of financial capital are required to execute the plan. There
is no assurance, however, that the Companys product repositioning plan will succeed.

This section constitutes
forward-looking information under the Reform Act, which is subject to the uncertainties
and other risk factors referred to under the caption Future Results.

Liquidity and Capital
Resources

This section provides details about
the Companys sources of liquidity.

Cash Flow

Net cash provided from operating
activities decreased to $5.9 million in fiscal 2003 from $6.7 million in fiscal 2002. The
decrease resulted principally from a decrease in accounts payable and accrued expenses (a
decrease of $5.3 million in fiscal 2003 versus an increase of $7.3 million in fiscal
2002), partially offset by a larger decrease in inventory ($12.5 million in fiscal 2003
versus $0.2 million in fiscal 2002). The Companys net income (loss) is generally a
more important variable in net cash provided from operating activities than changes in
items on the balance sheets.

Balance Sheet Sources of
Liquidity

The Companys cash and cash
equivalents were $14.4 million at January 31, 2004 compared with $17.5 million at February
1, 2003.

During fiscal 2003, a planned
decrease in inventories was implemented. Inventories were stated at $49.1 million at
January 31, 2004 compared with $61.6 million at February 1, 2003 principally as a result
of fewer units. Inventory levels are seasonal. (See, Critical Accounting Policies
 Inventory for a discussion of estimates made by management in stating
inventories in financial statements prepared in accordance with generally accepted
accounting principles.)

Property and equipment decreased to
$91.7 million at January 31, 2004 from $104.7 million at February 1, 2003 principally from
depreciation.

Other Liquidity Sources

Purchases of merchandise directly
imported by the Company are made in U.S. dollars. Direct imports are generally financed by
trade letters of credit. They constituted approximately 53% of total purchases in fiscal
2003.

The Financing Agreement was extended
and expanded during fiscal 2003. The term was extended three years to August 15, 2008. The
line of credit was increased from $40 million to $50 million for the Companies, subject to
availability of credit as described in the following paragraphs. The line of credit may be
used on a revolving basis by any of the Companies to support trade letters of credit and
standby letters of credit and to finance loans. At January 31, 2004, trade letters of
credit for the account of the Companies and supported by CIT were outstanding in the
amount of $27.5 million and standby letters of credit were outstanding in the amount of
$5.5 million. Standby letters of credit were used principally in connection with insurance
policies issued to the Company.

Subject to the following paragraph,
the availability of credit (within the aggregate $50 million line of credit) to any of the
Companies at any time is the excess of its borrowing base over the aggregate outstanding
amount of its letters of credit and its revolving loans, if any. The borrowing base, as to
any of the Companies is (i) the sum of (x) a percentage of the book value of its eligible
inventory (both on hand and unfilled purchase orders financed with letters of credit),
ranging from 65% to 75% depending on the time of year, (y) the balance from time to time
in an account in its name that has been pledged to the lenders (a Pledged
Account) and (z) 85% of certain receivables from credit card companies less (ii)
reserves for rent for stores located in the states of Pennsylvania, Virginia and
Washington and liens other than permitted liens and, at CITs option, a reserve for
sales taxes collected but not yet paid.

The provisions of the preceding
paragraph to the contrary notwithstanding, the Companies are required to maintain unused
at all times combined availability of at least $5 million. Except for the maintenance of a
minimum availability of $5 million and a limit on capital expenditures, the Financing
Agreement does not contain any significant financial covenants.

The combined borrowing capacity of
the Companies is cyclical due to the seasonality of the retail industry. At January 31,
2004, the combined borrowing capacity of the Companies, after satisfying the $5 million
minimum availability requirement, was $8.3 million; the Pledged Account had a zero
balance; the Companies cash on hand was unrestricted; and no loan was outstanding.

The line of credit is collateralized
by a security interest in (i) inventory and its proceeds, (ii) receivables from credit
card companies and (iii) the balance from time to time in the Pledged Account.

The Financing Agreement includes
certain restrictive covenants that impose limitations (subject to certain exceptions) on
the Companies with respect to making certain investments, declaring or paying dividends,
making loans, engaging in certain transactions with affiliates, or consolidating, merging
or making acquisitions outside the ordinary course of business.

In fiscal 2003, the Company drew on
the revolving loan facility under the Financing Agreement from time to time to meet its
peak working capital requirements. Interest is payable monthly based on a 360-day year
either at the prime rate plus an incremental percentage up to 0.75% per annum or at the
LIBOR rate plus an incremental percentage ranging from 1.75% to 2.50% per annum. The
borrower can select either the prime rate or the LIBOR rate as the basis for determining
the interest rate. In either case, the incremental percentage is determined by the average
excess availability.

The Companys obligation to pay
customs duties on merchandise imports was collateralized by an unsecured surety bond for
$1.5 million during fiscal 2002. The tightening market for surety bonds has made it
necessary for the Company to support the surety bond with a standby letter of credit under
the Financing Agreement in the amount of $0.5 million.

Short-term trade credit represents a
significant source of financing for merchandise purchases other than merchandise directly
imported by the Company. Trade credit arises from the willingness of the Companys
vendors of these products to grant extended payment terms for inventory purchases and is
generally financed either by the vendor or a third-party factor. The availability of trade
credit depends on the Companys having other sources of liquidity, as well. In
particular, credit authorizations by trade creditors focus on the amount of the
Companys cash and cash equivalents and its borrowing capacity under the Financing
Agreement.

In November 2003, the Company agreed
in principle with the Internal Revenue Service (IRS) on the settlement of tax
refund claims the Company had filed. Although only a preliminary settlement has been
reached with the IRS, in April 2004, the Company received from the IRS $2.5 million (which
includes $1.2 million representing interest). However, the Company has not received a
formally authorized and executed closing agreement with the IRS at April 22, 2004, the
filing date of the original Form 10-K. Upon receipt of a closing agreement, the Company
will recognize the benefit of the refund, including the related interest. It is
anticipated the $1.3 million refund will be recorded as an increase to stockholders
equity. The $1.2 million interest payment will be recorded in the Companys results
of operations.

An additional refund estimated to be
$0.7 million is also expected.

Capital Expenditures

This section and the one that follows
provide details about certain uses of cash by the Company.

Capital expenditures were $3.4
million in fiscal 2003 and $14.1 million in fiscal 2002, principally because the Company
opened only five new stores in fiscal 2003 compared with 24 stores during fiscal 2002.

Capital expenditures are projected to
be approximately $2.5 million for fiscal 2004, including implementation of the
Companys product repositioning plan. This paragraph constitutes forward-looking
information under the Reform Act and is subject to the variables, uncertainties and other
risk factors referred to under the caption Future Results.

Principal Contractual
Obligations and Certain Other Commercial Commitments

The principal contractual obligations
of the Company and certain other commercial commitments at January 31, 2004 (see, also
Critical Accounting Policies  Incurred But Not Reported Claims For Personal
Injuries and Medical Benefits) are summarized in the following charts:

|                                    | Payments Due by Period (000's omitted) |         |         |        
|----------------------------------- | -------------------------------------- | ------- | ------- | -------
|
|Operating Leases*                   | $271,336                               | $43,737 | $74,407 | $57,267
|Fixture Capital Leases**            | 5,123                                  | 1,617   | 3,506   | 0      
|Distribution Center Mortgage**      | 3,961                                  | 635     | 1,449   | 1,720  
|Call Center Systems Capital   Lease | 609                                    | 469     | 140     | 0      
|Total                               | $281,029                               | $46,458 | $79,502 | $58,987

| |  | 
| |  | 
| |  | 

|                           | Amount of Commitment Per Period (000's omitted) |         |    |   
|-------------------------- | ----------------------------------------------- | ------- | -- | --
|
|Trade Letters of Credit*** | $27,502                                         | $27,502 | $0 | $0
|Standby Letters of Credit  | 5,545                                           | 5,545   | 0  | 0 
|Total                      | $33,047                                         | $33,047 | $0 | $0

---

*Landlord charges other than rent are
not included. Additional landlord charges for taxes, maintenance and similar expenses were
equivalent to approximately 30% to 35% of the rent paid historically.

**The proceeds of the fixture capital
leases were principally used to partially finance new store construction in fiscal 2001.
The proceeds of the distribution center mortgage were principally used to partially
finance the construction cost of the Companys national distribution center, which
was completed in fiscal 1993.

***Trade letters of credit support
Company obligations under certain purchase orders for merchandise imports for which
payment is not yet due. (Other purchase orders represent material commercial obligations
but are not supported by trade letters of credit.)

Pending Litigation

The Company is involved in legal
actions and claims arising in the ordinary course of business. Management believes that
such litigation and claims, net of reserves, will not have a material adverse effect on
the Companys financial position, annual results of operations or cash flows.

In addition, on May 1, 2003, a suit
in California Superior Court, Los Angeles County, styled Erik Stanford vs. United
Retail Incorporated was served on the Company by a former store manager in California.
On March 3, 2004, an amended complaint was served that added another plaintiff. The suit
is purportedly a class action on behalf of certain current and former associates in
California in the previous four years.

The plaintiffs in the Stanford
case assert state wage and hour claims.

The Company intends to strongly
oppose class certification. To the extent that the plaintiffs successfully obtain class
certification, the Company intends to defend the Stanford case vigorously on the
merits at trial.

The Company has recorded an accrual
for its estimated losses in the Stanford case.

Although the ultimate overall outcome
of the Stanford case can not be predicted at this time, management does not believe
that the amount related to the outcome of the case, beyond the amount already accrued,
will have a material impact on the Companys financial position. An estimate of the
range of reasonably possible losses can not be made at this stage of the case. Given the
uncertainty at this stage, it is possible that if either an adverse judgment for damages
is rendered or a negotiated settlement is agreed upon, the amount payable could be
material to the Companys cash flows and results of operations for the fiscal year in
which the matter is resolved.

Meeting Cash Requirements

The Companys cash requirements
include (i) anticipated working capital needs, including seasonal inventory financing,
(ii) financing activities, including payments due on its principal contractual obligations
and (iii) investing activities, including costs for building stores and replacing fixtures
where appropriate. Also, the Stanford wage and hour class action lawsuit might be
settled with Court approval (see, Pending Litigation).

During fiscal 2003, the Company
funded net cash used in investing activities, repayments of long-term debt and payments on
capital lease obligations from net cash provided from operating activities and a net
decrease in cash and cash equivalents. The Companys historical sources of liquidity
have been the availability of credit under the Financing Agreement on a revolving basis
and short-term trade credit, as well as its cash on hand and net cash provided by
operating activities.

The Company plans to use the
Financing Agreement for its immediate and future working capital needs. Management
believes that the borrowing capacity under the Financing Agreement, together with cash on
hand and current and anticipated cash flow from operations, will be adequate to meet the
Companys working capital and capital expenditure requirements for at least 12 months
after April 22, 2004, the filing date of the original Form 10-K.

This section constitutes
forward-looking information under the Reform Act and is subject to the variables,
uncertainties and other risk factors referred to under the caption Future
Results.

Critical Accounting
Policies

Introduction

This section discusses the
Companys critical accounting policies.

Financial statements prepared by
companies in accordance with generally accepted accounting principles are affected by the
policies followed by management in preparing them. Some accounting policies require
difficult, subjective or complex judgments by corporate management, often as a result of
the need to make estimates about the effect of matters that are inherently uncertain.
Among the most important accounting policies of the Company that involve such management
judgments are (i) the use of the retail method of accounting for inventory, (ii) the use
of estimates of incurred but not reported claims for uninsured damages for personal
injuries and workers compensation benefits and for benefits under the Companys
self-insured medical, dental and prescription plans for its associates, as well as future
development costs of reported claims (collectively, IBNR Claims) and (iii)
determining whether to continue the valuation allowance for the Companys net
deferred tax assets, including NOLs.

Inventory

In accordance with generally accepted
accounting principles, inventories are stated at the lower of cost or market. The Company
utilizes the retail method, under which a cost-to-price relationship is developed on the
basis of original cost as compared to initial retail selling price. The valuation of
inventories at cost and the resulting margins are calculated by applying this
cost-to-price relationship to the retail value of inventories. Consequently, the use of
the retail inventory method results in valuing inventories at lower of cost or market.

Inherent in the retail inventory
method are management estimates on current and future selling value of the inventory.
These estimates, which are described in the following paragraphs, can significantly impact
the ending inventory valuation at cost, as well as resulting margins. In the womens
retail specialty apparel industry, sales, especially in businesses that emphasize
fashionable merchandise, can vary significantly over time. Sales are volatile because of
shifts in consumer spending patterns, consumer preferences and overall economic
conditions; the impact of increased competition; variations in weather patterns;
fluctuations in consumer acceptance of products; changes in the ability to develop new
merchandise; differences in promotional strategies; and movements in consumer confidence
levels. The necessity for management estimates based on these variables, coupled with the
fact that the retail inventory method is an averaging process, can produce inventory
valuations at any point in time that are inexact.

Permanent markdowns, when taken,
reduce both the price and cost components of inventory on hand, which maintains the
established cost-to-price relationship. Deferred markdowns can result in an overstatement
of inventories under the lower of cost or market principle. Accordingly, at the end of
each fiscal year, management conducts a thorough review of inventory on hand. Based on
managements business judgment, the Company may reduce further the carrying value of
inventories by recording a markdown reserve. Markdown reserves are established for
inventory categories with sales performance below expectations and/or unsold quantities in
excess of expectations.

At the end of each fiscal year,
management estimates what quantities of current merchandise are in excess of the amounts
saleable at historical margin rates. A markdown reserve is established to reduce the
carrying value of excess current merchandise to estimated net realizable value. Also, a
markdown reserve is established by management to reduce the carrying value of obsolete
categories of merchandise to their estimated net realizable value.

The markdown reserves at the end of
fiscal 2003, fiscal 2002 and fiscal 2001, respectively, ranged from a low of $1.0 million
to a high of $1.6 million, with fiscal 2003 at the low end of the range. Giving effect to
these reserves, inventories were stated at approximately $49.1 million at January 31,
2004, $61.6 million at February 1, 2003 and $61.8 million at February 2, 2002.

Year-end markdown reserves are likely
to continue to fluctuate, principally because the market environment is dynamic for the
reasons set forth above. However, a consistent methodology for markdown reserves is one of
the Companys important accounting objectives.

Recording a reserve reduces the
inventory on the Companys balance sheet and is charged to the Companys cost of
sales. If inventories, net of reserves, were overestimated at the end of a period, assets
and income for that period would be overstated and margins for the beginning of the next
period would be lower. (The opposite would be true if inventories were underestimated.)

Management believes that the
inventories shown on all the balance sheets included in the financial statements contained
in this Report were properly stated in all material respects. Further, margins in the
first fiscal quarter subsequent to the February 1, 2003 balance sheet were well within
normal historical ranges, indicating that the inventory valuation at February 1, 2003 was
estimated properly.

Incurred But Not Reported
Claims For Personal Injuries and Medical Benefits

The Company records a liability for
IBNR Claims, which is based on (i) the number and size of outstanding claims, (ii) a
comparison between the dates paid claims were incurred and the dates they were paid, (iii)
an analysis of the amounts previously paid, (iv) projections of inflation in medical costs
and (v) advice from time to time from its insurance broker. The Company has insurance
policies with coverage for auto, general liability and workers compensation claims
but it remains liable for a self-insured retention, of $0.1 million for each auto claim
and $0.3 million for each general liability and workers compensation claim. The
Company is self-insured for its medical, dental and prescription plans for associates. The
Company currently has stop loss insurance coverage for employee medical claims over $0.2
million each with an aggregate limit of $6.9 million. The estimates underlying the
liability for IBNR Claims are matters of judgment on which insurance experts may differ.

If the outcome of claims made with
respect to a fiscal period were to exceed the recorded IBNR liability for that period, the
liabilities on the balance sheet would have been understated and income would have been
overstated for the period in question. (The opposite would be true if the subsequent
outcome were less than the recorded IBNR liability.)

To estimate its casualty (auto,
general liability and workers compensation) IBNR, the Company uses policy year (July
1) maturation factors based on the Companys history of claim development (currently
eight fully developed years; the high and low year factors are excluded to arrive at an
average). Another possible method would be to use industry maturation factors.

The Company believes that industry
factors are less reliable because they are broad based. The use of industry factors would
not have changed materially the Companys casualty IBNR liability reflected on the
balance sheets included in the financial statements contained in this Report. As of
January 31, 2004, for example, the use of industry factors would have increased the
liability by less than $0.2 million.

The Company estimates its health
claims IBNR by (i) dividing the run-off amounts (claims paid after a policy
expired without being renewed) by claims paid during the last policy year (December 31)
and (ii) applying the resulting percentage to the trailing 12 months of paid claims at the
time of the calculation. An alternative methodology would be to use industry factors.

The Company believes that industry
factors are less reliable because they are broad based. The use of industry factors would
not have changed materially the Companys health claims IBNR liability reflected on
the balance sheets included in the financial statements contained in this Report. As of
January 31, 2004, for example, the use of industry factors would have increased the
liability by less than $0.1 million.

As the use of different estimates
would change the IBNR liability recorded materially, a consistent approach to estimating
liability for IBNR Claims is one of the Companys important accounting objectives.

Management believes that (i) the
liabilities for IBNR Claims reflected in all the balance sheets included in the financial
statements contained in this Report were fairly stated in all material respects, subject
to the uncertainties of litigation and the risk of different than anticipated inflation in
medical costs and (ii) the changes in the liabilities for IBNR Claims that would have
resulted from the use of industry factors in preparing estimates are not material.

Tax Valuation Allowance

In fiscal 2002, the Company recorded
a $7.3 million charge to establish a valuation allowance for its NOL carryforwards and
other net deferred tax assets. The tax valuation allowance was calculated in accordance
with the provisions of SFAS No. 109, Accounting for Income Taxes (SFAS
No. 109), which places significant importance on the Companys cumulative
operating results in the most recent three-year period when assessing the need for a tax
valuation allowance. In fiscal 2003, the tax valuation allowance was increased by $12.6
million.

The Company intends to maintain a
valuation allowance for its net deferred tax assets until management determines that
sufficient positive evidence regarding operating results exists to support reversal of the
allowance remaining at that time. A reversal of the tax valuation allowance would improve
the Companys net income/loss. Accordingly, whether to continue a tax valuation
allowance is one of the Companys important accounting matters.

Private Label Credit
Cards Issued By The Bank

The Company and World Financial
Network National Bank (the Bank) are parties to a Private Label Credit Card
Program Agreement, dated January 27, 1998 (as amended, the Credit Card Program
Agreement).

Under the Credit Card Program
Agreement, the Bank issues credit cards to eligible Company customers who apply to the
Bank. Net credit sales volume with the Bank increased to $113.3 million in fiscal 2003
from $106.2 million in fiscal 2002. Customers must meet standards for creditworthiness set
by the Bank with the approval of the Company, provided, however, that the Bank shall take
any actions required to prevent unsafe and unsound banking practices. The credit cards
issued by the Bank are co-branded with both the Companys AVENUE service mark and the
Banks name. The credit cards are used only for merchandise and services offered by
the Company. Credit card holders remit payments to the Bank, generally by mailing personal
checks. The Bank also handles all statement processing, payment processing, cardholder
customer service and collections from delinquent cardholders.

In accordance with generally accepted
accounting principles, the Company does not include the receivable asset created under the
Credit Card Program Agreement in the Companys accounts receivable on its balance
sheets because the Company has no interest in the customer accounts or receivables. In
this connection, it should be noted that the Credit Card Program Agreement states that (i)
the Bank is the sole and exclusive owner of all customer accounts, (ii) the Company has no
interest in the customer accounts and (iii) the Bank is the creditor in respect of
receivables (defined in the Credit Card Program Agreement as amounts owed with respect to
retail purchases, finance charges, deferred finance charges, other fees and charges for
sales tax). Also, depending on the circumstances, the Company might not purchase the
accounts from the Bank upon the expiration of the contractual term.

The Credit Card Program Agreement is
currently scheduled to expire on February 28, 2007. The Company shall then have the right
to purchase the customer accounts from the Bank for a price equal to the receivables.
Also, the Bank shall then have the right to sell the customer accounts to the Company at
that price if the Company commences a private label credit card program either on its own
or through another issuer of credit cards. When the Credit Card Program Agreement is about
to expire without being renewed, the Company is likely to submit requests for proposals to
other banks that issue private label credit cards to retailers customers and to use
the banks proposals to evaluate a continuation of the private label credit card
program. There is no assurance, however, that other banks would make proposals to continue
the program on terms satisfactory to the Company or that the Company could finance a
program on its own without involving a bank.

Receivables as defined in the Credit
Card Program Agreement at the close of the last billing cycle in the year were $76.6
million at both January 31, 2004 and February 1, 2003.

The credit card program premium (or,
potentially, discount) reflected in general, administrative and store operating expenses
is an amount equal to royalties paid to the Company by the Bank minus costs charged by the
Bank. Costs are based on the volume of credit card program processing activities performed
by the Bank.

General, administrative and store
operating expenses were offset in part by premiums received from the Bank of $4.2 million
in fiscal 2003 and $3.3 million in fiscal 2002. The increase in premiums from the Bank was
primarily due to an increase in customer fees paid to the Bank.

Royalties are based on program
revenues minus receivables written off by the Bank and the cost of funds for the program.
For up to the first $85 million of receivables, cost of funds means the one-year Constant
Maturities Treasury (CMT) rate plus 25 basis points to be reset every three
months (the published CMT rate was 1.28% per annum at January 31, 2004). However, the CMT
rate shall not be more than 6.75% per annum and not be less than 5.00% per annum for the
purpose of this calculation. (The Banks receivables for the program were less than
$85 million at January 31, 2004, but, if they grew larger than that amount, the cost of
funds for the excess would be based primarily on the cost of borrowing of a trust for the
purpose of securitizing receivables.)

Stores

The Companys channel of
distribution is retail stores using its AVENUE® trade name. The Company leased 533
stores at April 1, 2004.

Store counts averaged 543, 557 and
546, respectively, for fiscal 2001, 2002 and 2003. In 2003, the Company opened five stores
and closed 24 stores. In fiscal 2004, the Company is planning to open two stores and close
approximately 15-25 stores as part of its normal lease maintenance program. Thus, the
average number of stores is expected to decline further in fiscal 2004. This paragraph
includes forward-looking information under the Reform Act, which is subject to the
variables, uncertainties and other risk factors referred to under the caption Future
Results.

The annual capital expenditure
budgets after fiscal 2004 will provide for new store construction and other infrastructure
development priorities. Prioritization will be based, among other things, on overall
profitability and the availability of suitable locations at rents and on terms that fit
the Companys financial model for new store construction. This paragraph constitutes
forward-looking information under the Reform Act, which is subject to the variables,
uncertainties and other risk factors referred to under the caption Future
Results.

Retail selling space was
approximately 2.3 million square feet at January 31, 2004 and 2.4 million square feet at
February 1, 2003.

Depreciation and amortization of
property and equipment relate principally to assets in stores and were $15.5 million in
fiscal 2003 and $14.9 million in fiscal 2002.

E-Commerce

The Company has an Internet site
(www.avenue.com) that sells a selection of the merchandise that is also for sale in the
Companys stores. The Company ships it avenue.com orders from its national
distribution center in Troy, Ohio.

Sales on the website have not been
material to the Companys operations.

Suspension of Catalog
Operations

The Company mailed catalogs until
March 2003, when the Company suspended catalog mailings indefinitely.

Stock Repurchases

The Company did not repurchase shares
of its own stock in fiscal 2003. The Company has no plans to repurchase shares of its own
stock at present except with trust funds under the Companys Supplemental Retirement
Savings Plan to satisfy obligations that may arise under that plan to invest a portion of
participants accounts in Company stock.

Corporate Acquisition
Reviews

As a matter of routine, the Company
from time to time conducts due diligence reviews of businesses that are either
for sale as a going concern or are in liquidation. The Company would consider making a bid
on a suitable corporate acquisition at an opportune price if adequate financing at
acceptable rates were available.

Future Results

The Company cautions that any
forward-looking statements (as such term is defined in the Reform Act) contained in this
Report or otherwise made by management of the Company involve risks and uncertainties and
are subject to change based on various important factors, many of which may be beyond the
Companys control. Accordingly, the Companys future performance and financial
results may differ materially from those expressed or implied in any such forward-looking
statements.

The following factors, among others,
could affect the Companys actual results and could cause actual results to differ
materially from those expressed or implied in any forward-looking statements included in
this Report or otherwise made by management: threats of terrorism; war risk; shifts in
consumer spending patterns, consumer preferences and overall economic conditions; the
impact of increased competition; variations in weather patterns; fluctuations in consumer
acceptance of the Companys products; uncertainties relating to execution of the
Companys product repositioning strategy; store lease expirations; risks associated
with the financial performance of the World Financial Network National Bank private label
credit card program; increases in interest rates; the ability to retain, hire and train
key personnel; risks associated with the ability of the Companys manufacturers to
deliver products in a timely manner; political instability and other risks associated with
foreign sources of production and increases in fuel costs. Also, in the fourth quarter of
fiscal 2004, the transition from the international quota system for apparel may disrupt
apparel imports into the United States. Further, the Stanford wage and hour class
action lawsuit will be settled or go to trial (see, Pending Litigation.) As a
result of these variables, risks and uncertainties, the projections made in this Report
may not be reliable.

The Company assumes no obligation to
update any forward-looking statement.

---

ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.

# UNITED RETAIL GROUP,
INC. AND SUBSIDIARIES

# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                                                                                         |      
|------------------------------------------------------------------------------------------------------------------------ | -----
|Report of Independent Registered Public Accounting Firm                                                                  | II-20
|                                                                                                                         |      
|Consolidated Balance Sheets as of February 1, 2003 and January 31, 2004 (Restated)                                       | II-21
|                                                                                                                         |      
|Consolidated Statements of Operations for each of the three fiscal years in the period ended January 31, 2004            | II-22
|                                                                                                                         |      
|Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 31, 2004 (Restated) | II-23
|                                                                                                                         |      
|Consolidated Statements of Stockholders' Equity for each of the three fiscal years in the period ended January 31, 2004  | II-24
|                                                                                                                         |      
|Notes to Consolidated Financial Statements                                                                               | II-25

---

# UNITED RETAIL GROUP,
INC. AND SUBSIDIARIES

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of UNITED RETAIL GROUP, INC.:

In our opinion, the accompanying
consolidated balance sheets and the related consolidated statements of operations, cash
flows and stockholders equity present fairly, in all material respects, the
financial position of United Retail Group, Inc. and its subsidiaries (the
Company) at January 31, 2004 and February 1, 2003, and the results of their
operations and their cash flows for each of the three fiscal years in the period ended
January 31, 2004, in conformity with accounting principles generally accepted in the
United States of America. 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 of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the
consolidated financial statements, the Company has restated its consolidated balance
sheets as of January 31, 2004 and February 1, 2003, and its consolidated statements of
cash flows for the years ended January 31, 2004, February 1, 2003 and February 2, 2002.

As discussed in Note 4 to the
consolidated financial statements, effective February 3, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets.

PRICEWATERHOUSECOOPERS LLP

New York, New York February 20, 2004, except for Note 2,
as to which the date is February 15, 2005.

---

UNITED RETAIL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(dollars in thousands)

|                                                 | February 1,2003 | January 31,2004
|------------------------------------------------ | --------------- | ---------------
|
|
|Current Assets:                                  |                 |                
|Cash and cash equivalents                        | $17,540         | $14,421        
|Accounts receivable                              | 2,994           | 1,789          
|Inventory                                        | 61,569          | 49,054         
|Prepaid rents                                    | 4,972           | 4,826          
|Other prepaid expenses                           | 2,290           | 2,044          
|Total current assets                             | 89,365          | 72,134         
|                                                 |                 |                
|Property and equipment, net                      | 104,708         | 91,703         
|Deferred compensation plan assets                | 3,751           | 4,893          
|Deferred charges and other intangible assets,    |                 |                
|net of accumulated amortization of $325 and $389 | 557             | 493            
|Other assets                                     | 1,667           | 1,465          
|Total assets                                     | $200,048        | $170,688       

|LIABILITIES                                      |         |       
|------------------------------------------------ | ------- | ------
|Current Liabilities:                             |         |       
|Current portion of distribution center financing | $1,220  | $635  
|Current portion of capital leases                | 1,963   | 2,086 
|Accounts payable and other                       | 26,596  | 19,795
|Disbursement accounts                            | 11,922  | 9,434 
|Accrued expenses                                 | 18,976  | 21,737
|Total current liabilities                        | 60,677  | 53,687
|                                                 |         |       
|Long-term distribution center financing          | 3,961   | 3,326 
|Long-term capital leases                         | 5,764   | 3,646 
|Deferred lease incentives                        | 16,988  | 14,993
|Deferred compensation plan liabilities           | 3,751   | 4,893 
|Other long-term liabilities                      | 9,912   | 10,123
|Total liabilities                                | 101,053 | 90,668
|                                                 |         |       
|Commitments and contingencies                    |         |       
|                                                 |         |       

|STOCKHOLDERS' EQUITY                                    |          |         
|------------------------------------------------------- | -------- | --------
|Preferred stock, $.001 par value; authorized:           |          |         
|1,000,000; none issued                                  |          |         
|Series A junior participating preferred stock,          |          |         
|$.001 par value; authorized 150,000 shares; none issued |          |         
|Common stock, $.001 par value; authorized               |          |         
|30,000,000; issued 14,248,210 shares                    | 14       | 14      
|Additional paid-in capital                              | 83,601   | 83,696  
|Retained earnings                                       | 23,056   | 3,986   
|Treasury stock (1,310,906 shares), at cost              | (7,676)  | (7,676) 
|Total stockholders' equity                              | 98,995   | 80,020  
|Total liabilities and stockholders' equity              | $200,048 | $170,688

The accompanying notes are an integral part of the Consolidated Financial Statements.

---

UNITED RETAIL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(dollars in thousands, except per share amounts)

|                                                           | 52 WeeksFiscal YearEndedFebruary 2,2002 | 52 WeeksFiscal YearEndedFebruary 1,2003 | 52 WeeksFiscal YearEndedJanuary 31,2004
|---------------------------------------------------------- | --------------------------------------- | --------------------------------------- | ---------------------------------------
|Net Sales                                                  | $427,040                                | $431,964                                | $396,265                               
|Cost of goods sold, including   buying and occupancy costs | 326,101                                 | 343,625                                 | 313,767                                
|Gross Profit                                               | 100,939                                 | 88,339                                  | 82,498                                 
|General, administrative and   store operating expenses     | 100,299                                 | 105,499                                 | 101,287                                
|Goodwill impairment                                        | -                                       | 5,611                                   | -                                      
|Operating income (loss)                                    | 640                                     | (22,771)                                | (18,789)                               
|Interest (income) expense, net                             | (361)                                   | 827                                     | 917                                    
|Income (loss) before income taxes                          | 1,001                                   | (23,598)                                | (19,706)                               
|Provision for (benefit from) income taxes                  | 571                                     | (521)                                   | (636)                                  
|Net income (loss)                                          | $430                                    | ($23,077)                               | ($19,070)                              
|Net income (loss) per share                                |                                         |                                         |                                        
|Basic                                                      | $0.03                                   | ($1.77)                                 | ($1.47)                                
|Diluted                                                    | $0.03                                   | ($1.77)                                 | ($1.47)                                
|Weighted average number of   shares outstanding            |                                         |                                         |                                        
|Basic                                                      | 13,241,110                              | 13,046,568                              | 12,937,304                             
|Common stock equivalents   (stock options)                 | 200,773                                 | -                                       | -                                      
|Diluted                                                    | 13,441,883                              | 13,046,568                              | 12,937,304                             

The accompanying notes are an integral part of the Consolidated Financial Statements.

---

UNITED RETAIL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(dollars in thousands)

|                                                             | 52 WeeksFiscal YearEndedFebruary 2,2002 | 52 WeeksFiscal YearEndedFebruary 1,2003 | 52 WeeksFiscal YearEndedJanuary 31,2004
|------------------------------------------------------------ | --------------------------------------- | --------------------------------------- | ---------------------------------------
|
|
|Net income (loss)                                            | $430                                    | ($23,077)                               | ($19,070)                              
|Adjustments to reconcile net income (loss) to net cash       |                                         |                                         |                                        
|provided from operating activities:                          |                                         |                                         |                                        
|Depreciation and amortization of property and equipment      | 13,207                                  | 14,920                                  | 15,462                                 
|Amortization of deferred charges and other intangible assets | 607                                     | 576                                     | 504                                    
|Goodwill impairment                                          | -                                       | 5,611                                   | -                                      
|Loss on disposal of assets                                   | 466                                     | 533                                     | 938                                    
|Compensation expense                                         | 311                                     | 311                                     | 95                                     
|Provision for (benefit from) deferred income taxes           | (455)                                   | 761                                     | -                                      
|Deferred lease assumption revenue amortization               | (300)                                   | (140)                                   | (30)                                   
|Changes in operating assets and liabilities:                 |                                         |                                         |                                        
|Accounts receivable                                          | 1,118                                   | (1,539)                                 | 1,205                                  
|Inventory                                                    | (2,791)                                 | 224                                     | 12,515                                 
|Accounts payable and accrued expenses                        | (3,801)                                 | 7,290                                   | (5,338)                                
|Prepaid expenses                                             | (95)                                    | 187                                     | 392                                    
|Income taxes payable                                         | 355                                     | 125                                     | 1,275                                  
|Deferred lease incentives                                    | 2,560                                   | 162                                     | (1,995)                                
|Other assets and liabilities                                 | (815)                                   | 798                                     | (27)                                   
|Net Cash Provided from Operating Activities                  | 10,797                                  | 6,742                                   | 5,926                                  
|                                                             |                                         |                                         |                                        
|Investing Activities:                                        |                                         |                                         |                                        
|Capital expenditures                                         | (27,801)                                | (14,144)                                | (3,395)                                
|Proceeds from sale-leaseback transaction                     | 8,249                                   | -                                       | -                                      
|Deferred payment for property and equipment                  | 101                                     | 773                                     | 53                                     
|Proceeds from sale of investment and lease                   | 28                                      | -                                       | -                                      
|Net Cash Used in Investing Activities                        | (19,423)                                | (13,371)                                | (3,342)                                
|                                                             |                                         |                                         |                                        
|Financing Activities:                                        |                                         |                                         |                                        
|Issuance of loans to officers                                | (180)                                   | (52)                                    | -                                      
|Treasury stock acquired                                      | (561)                                   | -                                       | -                                      
|Proceeds from exercise of stock options                      | 26                                      | 49                                      | -                                      
|Repayments of long-term debt                                 | (1,367)                                 | (1,435)                                 | (1,220)                                
|Payments on capital lease obligations                        | (115)                                   | (1,797)                                 | (1,995)                                
|Increase (decrease) in disbursement accounts                 | 1,872                                   | (368)                                   | (2,488)                                
|Other                                                        | (18)                                    | (40)                                    | -                                      
|Net Cash Used in Financing Activities                        | (343)                                   | (3,643)                                 | (5,703)                                
|                                                             |                                         |                                         |                                        
|Net decrease in cash and cash equivalents                    | (8,969)                                 | (10,272)                                | (3,119)                                
|Cash and cash equivalents, beginning of period               | 36,781                                  | 27,812                                  | 17,540                                 
|Cash and cash equivalents, end of period                     | $27,812                                 | $17,540                                 | $14,421                                

The accompanying notes are an integral part of the Consolidated Financial Statements.

---

UNITED RETAIL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(shares and dollars in thousands)

|                            | CommonStockSharesOutstanding | CommonStock$.001Par Value | AdditionalPaid-inCapital | RetainedEarnings | TreasuryStock,at Cost | TotalStockholders'Equity
|--------------------------- | ---------------------------- | ------------------------- | ------------------------ | ---------------- | --------------------- | ------------------------
|                            |                              |                           |                          |                  |                       |                         
|Balance, February 3, 2001   | 13,269                       | $14                       | $80,269                  | $45,703          | ($4,190)              | $121,796                
|                            |                              |                           |                          |                  |                       |                         
|Exercise of stock options   | 5                            |                           | 26                       |                  |                       | 26                      
|Treasury stock              | (70)                         |                           |                          |                  | (561)                 | (561)                   
|Loans to officers           |                              |                           | (180)                    |                  |                       | (180)                   
|Compensation expense        |                              |                           | 311                      |                  |                       | 311                     
|Other                       |                              |                           | (18)                     |                  |                       | (18)                    
|Net income                  |                              |                           |                          | 430              |                       | 430                     
|                            |                              |                           |                          |                  |                       |                         
|Balance, February 2, 2002   | 13,204                       | 14                        | 80,408                   | 46,133           | (4,751)               | 121,804                 
|                            |                              |                           |                          |                  |                       |                         
|Exercise of stock options   | 12                           |                           | 49                       |                  |                       | 49                      
|Treasury stock              | (279)                        |                           |                          |                  | (2,925)               | (2,925)                 
|Loan repayments by officers |                              |                           | 2,873                    |                  |                       | 2,873                   
|Compensation expense        |                              |                           | 311                      |                  |                       | 311                     
|Other                       |                              |                           | (40)                     |                  |                       | (40)                    
|Net loss                    |                              |                           |                          | (23,077)         |                       | (23,077)                
|                            |                              |                           |                          |                  |                       |                         
|Balance February 1, 2003    | 12,937                       | 14                        | 83,601                   | 23,056           | (7,676)               | 98,995                  
|                            |                              |                           |                          |                  |                       |                         
|Compensation expense        |                              |                           | 95                       |                  |                       | 95                      
|Net loss                    |                              |                           |                          | (19,070)         |                       | (19,070)                
|                            |                              |                           |                          |                  |                       |                         
|Balance, January 31, 2004   | 12,937                       | $14                       | $83,696                  | $3,986           | ($7,676)              | $80,020                 

The accompanying notes are an integral part of the Consolidated Financial Statements.

---

# UNITED RETAIL GROUP,
INC. AND SUBSIDIARIES

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# 1. Company Description
and Basis of Presentation

United Retail Group, Inc.
(United Retail) is a specialty retailer of large-size womens fashion
apparel, footwear and accessories, featuring AVENUE® brand merchandise,
operating 535 stores throughout the United States.

The consolidated financial statements
include the accounts of United Retail and its subsidiaries (the Company). All
significant intercompany balances and transactions have been eliminated in consolidation.

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

# 2. Restatement of
Financial Statements

In accordance with Statement of
Financial Accounting Standards No. 13, Accounting for Leases (SFAS
13) and Financial Accounting Standards Board Technical Bulletin No. 88-1,
Issues Relating to Accounting for Leases (FTB 88-1), the Company
accounts for rental expense for step provisions and escalation clauses on a straight-line
basis over the minimum lease term, with such amounts being included along with other
related rent expense as part of buying and occupancy costs. Construction allowances and
other lease concessions are amortized over the minimum lease term on a straight-line basis
as part of buying and occupancy costs. However, in its detailed accounts, the Company had
previously recorded this amortization as a reduction of depreciation expense, rather than
rent expense. Both depreciation and rent expense are reflected within buying and occupancy
costs on the statements of operations.

Also, historically, the
Companys balance sheets have reflected the unamortized portion of construction
allowances and other lease concessions as a reduction of property and equipment, instead
of as a deferred credit (liability). Further, historically, the Companys statements
of cash flows have reflected construction allowances and other lease concessions received
as a reduction of capital expenditures (within investing cash flows), rather
than as an operating lease activity (within operating cash flows).

In order to comply with SFAS 13 and
FTB 88-1, we have determined in December of 2004 that we will restate our consolidated
balance sheets as of February 1, 2003 and January 31, 2004 to reflect a liability for the
unamortized portion of construction allowances and other lease concessions (deferred lease
incentives) rather than as a reduction to property and equipment.

The following information shows the
effect of these restatements on our balance sheets as of February 1, 2003 and January 31,
2004:

|                            | As of February 1, 2003(in thousands) |         |         
|--------------------------- | ------------------------------------ | ------- | --------
|
|Property and equipment, net | $87,720                              | $16,988 | $104,708
|Total assets                | $183,060                             | $16,988 | $200,048
|Deferred lease incentives   | $        --                          | $16,988 | $16,988 
|Total liabilities           | $84,065                              | $16,988 | $101,053
|                            |                                      |         |         

|                            | As of January 31, 2004(in thousands) |         |         
|--------------------------- | ------------------------------------ | ------- | --------
|
|Property and equipment, net | $76,710                              | $14,993 | $91,703 
|Total assets                | $155,695                             | $14,993 | $170,688
|Deferred lease incentives   | $        --                          | $14,993 | $14,993 
|Total liabilities           | $75,675                              | $14,993 | $90,668 

Further, we are restating our
consolidated statements of cash flows for the fiscal years ended February 2, 2002,
February 1, 2003 and January 31, 2004 to present construction allowances and other lease
concessions within operating activities, rather than as a reduction of capital
expenditures.

The following information shows the
effect of this restatement on our statements of cash flows for the fiscal years ended
February 2, 2002, February 1, 2003 and January 31, 2004:

|                                            | For the fiscal year ended February 2, 2002(in thousands) |          |          
|------------------------------------------- | -------------------------------------------------------- | -------- | ---------
|
|Net cash provided by   operating activities | $5,944                                                   | $4,853   | $10,797  
|                                            |                                                          |          |          
|Net cash used in    investing activities    | ($14,570)                                                | ($4,853) | ($19,423)
|                                            |                                                          |          |          

|                                            | For the fiscal year ended February 1, 2003(in thousands) |          |          
|------------------------------------------- | -------------------------------------------------------- | -------- | ---------
|
|Net cash provided by   operating activities | $4,011                                                   | $2,731   | $6,742   
|                                            |                                                          |          |          
|Net cash used in    investing activities    | ($10,640)                                                | ($2,731) | ($13,371)
|                                            |                                                          |          |          

|                                            | For the fiscal year ended January 31, 2004(in thousands) |        |         
|------------------------------------------- | -------------------------------------------------------- | ------ | --------
|
|Net cash provided by   operating activities | $5,146                                                   | $780   | $5,926  
|                                            |                                                          |        |         
|Net cash used in    investing activities    | ($2,562)                                                 | ($780) | ($3,342)

There is no impact on our statements
of operations related to the above. However, amortization of construction allowances and
other lease concessions is now treated as a reduction of rent expense rather than as a
reduction of depreciation expense.

The accompanying financial statements
and these footnotes have not been updated except as required to reflect the effects of the
restatements discussed above, and certain additions to disclosures. Except as identified
in the prior sentence, no other items included in the previously filed financial
statements and footnotes have been updated. Additionally, these financial statements and
footnotes do not purport to provide an update or discussion of any other developments at
the Company subsequent to the original filing.

# 3. Summary of
Significant Accounting Policies

# Fiscal Year

The Companys fiscal year ends
on the Saturday closest to January 31. Fiscal years are designated in the financial
statements and notes by the calendar year in which the fiscal year commences. Fiscal 2001,
fiscal 2002 and fiscal 2003 consisted of 52 weeks and ended on February 2, 2002, February
1, 2003 and January 31, 2004, respectively.

# Net Revenues

Revenues include sales from all
stores operating during the period, the Companys catalog and website operations. The
Companys catalog was discontinued in March 2003. Revenues are net of returns and
exclude sales tax. Revenue is recognized when title and risk of loss have passed to the
customer, which for stores is at the point of sale and for catalog and internet sales is
at the point of destination. The Company recognizes sales upon redemption of gift
certificates.

# Sales Return Reserve

As part of the normal sales cycle,
the Company receives customer merchandise returns. To account for the financial impact of
this process, management estimates future returns on previously sold merchandise.
Reductions in sales and gross margin are recorded for estimated merchandise returns based
on return history.

# Shipping and Handling
Costs

Shipping and handling revenue is
included in net sales. Shipping and handling costs are included in general, administrative
and store operating expenses. During fiscal 2001, fiscal 2002 and fiscal 2003, shipping
and handling costs were $1,093,000, $572,000 and $364,000, respectively.

# Marketing Costs

The Company expenses marketing costs
when the event occurs. Marketing expense, included in cost of goods sold in the
accompanying consolidated statements of operations, was $15.3 million, $15.5 million, and
$10.3 million in fiscal 2001, 2002, and 2003, respectively.

# Earnings Per Share

Basic per share data has been
computed based on the weighted average number of shares of common stock outstanding.
Earnings per diluted share includes the weighted average effect of dilutive options on the
weighted average shares outstanding.

The computation of earnings per
diluted share excludes options to purchase 845,072 shares in fiscal 2001, because the
options exercise prices were greater than the average market price of the common
shares. During fiscal 2002 and fiscal 2003, 1,826,072 shares and 1,897,872 shares,
respectively, were excluded from the computation of earnings per diluted share as a result
of the Companys net loss.

# Cash and Cash Equivalents

The Company considers cash on hand,
bank deposits, money market funds and short-term investments with maturities of less than
90 days, when purchased, as cash and cash equivalents. Cash and cash equivalents also
include proceeds from credit card sales prior to the end of the fiscal period that were
remitted as cash within five days after the end of such fiscal period.

# Inventory

Inventory is stated at the lower of
cost or market utilizing the retail method. An average cost flow assumption is used.

# Long-Lived Assets

Depreciation and amortization of
property and equipment are computed for financial reporting purposes on a straight-line
basis, using service lives of 40 years for the distribution center building, the lesser of
the useful life or the life of the lease for leasehold improvements and furniture and
fixtures, 20 years for material handling equipment and 5 years for other property. The
cost of assets sold or retired and the related accumulated depreciation or amortization
are removed from the accounts with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Betterments which extend
service lives are capitalized.

The Company continually evaluates
whether events and circumstances have occurred that indicate the remaining estimated
useful life of long-lived assets may warrant revision or that the remaining balance may
not be recoverable. When factors indicate that the asset should be evaluated for possible
impairment, the Company uses an estimate of the undiscounted net cash flows over the
remaining life of the group of assets that have independent cash flows on a combined basis
in measuring whether the asset is recoverable.

# Concentration of Credit
Risk

Financial instruments, which
potentially subject the Company to concentrations of credit risk, are primarily cash
equivalents. The Company places its cash and cash equivalents in highly liquid investments
with high quality financial institutions.

# Estimates

The preparation of financial
statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The more significant
estimates and assumptions relate to inventory, insurance, useful lives of assets and
deferred tax assets.

# Income Taxes

The Company provides for income taxes
in accordance with SFAS No.109, Accounting for Income Taxes. This statement
requires the use of the liability method of accounting for income taxes. Under the
liability method, deferred taxes are determined based on the difference between the
financial reporting and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Deferred tax expense
(benefit) represents the change in the deferred tax asset/liability balance. The Company
establishes valuation allowances against deferred tax assets when sufficient negative
evidence exists concerning the realization of those deferred tax assets.

# Stock Options

The Company has several stock option
plans in operation which are more fully described in Note 13. The Company uses the
intrinsic value method to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting For Stock Issued To
Employees (Opinion No. 25) and has adopted the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting For
Stock-Based Compensation (SFAS No. 123). Under Opinion No. 25,
compensation expense, if any, is measured as the excess of the market price of the stock
over the exercise price on the measurement date. In May 1998, the stockholders ratified
the issuance of non-qualified stock options whose market price at the date of grant
exceeded the exercise price, which equaled the market price on the date of Board action.
In accordance with Opinion No. 25, compensation expense is recorded ratably over the
five-year vesting period of the options. All other stock options have been granted at the
market price of the stock at the measurement date.

The following table illustrates the
effect on net income (loss) and earnings (loss) per share if the Company had applied the
fair value recognition provisions under SFAS No. 123 to stock-based employee compensation:

|                                                                                                                                                | (dollars in thousands except per share data) |           |          
|----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | --------- | ---------
|
|Reported net income (loss)                                                                                                                      | $430                                         | ($23,077) | ($19,070)
|Add back: Compensation expense                                                                                                                  | 311                                          | 311       | 95       
|Deduct: Total stock based employee compensation   expense determined under fair value based method   for all awards, net of related tax effects | (722)                                        | (787)     | (618)    
|                                                                                                                                                |                                              |           |          
|Pro forma net income (loss)                                                                                                                     | $19                                          | ($23,553) | ($19,593)
|                                                                                                                                                |                                              |           |          
|Earnings (loss) per share:                                                                                                                      |                                              |           |          
|Basic - as reported                                                                                                                             | $0.03                                        | ($1.77)   | ($1.47)  
|Basic - pro forma                                                                                                                               | $0.00                                        | ($1.81)   | ($1.51)  
|                                                                                                                                                |                                              |           |          
|Diluted - as reported                                                                                                                           | $0.03                                        | ($1.77)   | ($1.47)  
|Diluted - pro forma                                                                                                                             | $0.00                                        | ($1.81)   | ($1.51)  

For the pro forma information
disclosed above, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:

|                                | Fiscal2001 | Fiscal2002 | Fiscal2003
|------------------------------- | ---------- | ---------- | ----------
|                                |            |            |           
|Expected dividend yield         | 0.00%      | 0.00%      | 0.00%     
|Expected stock price volatility | 50.00%     | 50.00%     | 50.00%    
|Risk-free interest rate         | 4.59%      | 2.94%      | 3.02%     
|Expected life of options        | 5 years    | 5 years    | 5 years   

The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation models
require input of highly subjective assumptions including the expected stock price
volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in subjective
input assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.

# 4. Goodwill

Effective February 3, 2002, the
Company adopted the provisions of SFAS No. 142 Goodwill and Other Intangible
Assets, which required that goodwill be subject to an impairment test. The
Companys valuation at time of adoption, which utilized a multiple of EBITDA
(earnings before interest, taxes, depreciation and amortization) as well as a comparison
to the Companys current market capitalization, indicated that no impairment existed.
The Company ceased amortization of goodwill in fiscal 2002. The Company conducted a
similar valuation in the fourth quarter of fiscal 2002 and on the basis of both
considerations concluded that the entire amount of goodwill, $5.6 million, was impaired.
In addition to the aforementioned valuation considerations, other compelling reasons for
recording the impairment at that time included the significant losses incurred in fiscal
2002 and the recent downward trend in earnings.

The statement of operations adjusted
to exclude amortization expense for fiscal 2001 related to goodwill is as follows (dollars
in thousands except per share data):

|                                | Fiscal2001
|------------------------------- | ----------
|                                |           
|Reported net income             | $430      
|Add back: Goodwill amortization | 205       
|                                |           
|Pro forma net income            | $635      
|                                |           
|Earnings per share:             |           
|Basic - as reported             | $0.03     
|Basic - pro forma               | $0.05     
|                                |           
|Diluted - as reported           | $0.03     
|Diluted - pro forma             | $0.05     

# 5. Property and Equipment

Property and equipment, at cost,
consists of (dollars in thousands):

|                                                                                                    | February 1,2003(Restated) | January 31,2004(Restated)
|--------------------------------------------------------------------------------------------------- | ------------------------- | -------------------------
|Land                                                                                                | $2,176                    | $2,176                   
|Buildings                                                                                           | 10,574                    | 10,574                   
|Furniture, fixtures and equipment                                                                   | 92,820                    | 91,227                   
|Leasehold improvements                                                                              | 83,122                    | 82,902                   
|Beneficial leaseholds                                                                               | 4,884                     | 4,087                    
|                                                                                                    | 193,576                   | 190,966                  
|                                                                                                    |                           |                          
|Accumulated depreciation and   amortization, including beneficial   leaseholds of $4,774 and $4,046 | (88,868)                  | (99,263)                 
|Property and equipment, net                                                                         | $104,708                  | $91,703                  

Furniture, fixtures and equipment
include approximately $8.2 million of assets under capital leases arising under a sale and
leaseback agreement (See Note 7).

# 6. Accrued Expenses

Accrued
expenses consist of (dollars in thousands):

|                                      | February 1,2003 | January 31,2004
|------------------------------------- | --------------- | ---------------
|Insurance payable                     | $4,465          | $4,938         
|Payroll related expenses              | 3,393           | 3,477          
|Gift cards and other customer credits | 3,242           | 3,359          
|Occupancy expenses                    | 2,557           | 2,682          
|Sales taxes payable                   | 1,301           | 1,885          
|Private credit card processing        | 1,496           | 1,512          
|Other                                 | 2,522           | 3,884          
|                                      | $18,976         | $21,737        

# 7. Leased Facilities and
Commitments

The Company leases its retail store
locations, office facilities and certain equipment under operating leases. Annual store
rent is composed of a fixed minimum amount, plus contingent rent based upon a percentage
of sales exceeding a stipulated amount. Store lease terms generally require additional
payments to the landlord covering taxes, maintenance and certain other expenses.

Rent expense was as follows (dollars
in thousands):

|                    | Fiscal2001(Restated) | Fiscal2002(Restated) | Fiscal2003(Restated)
|------------------- | -------------------- | -------------------- | --------------------
|                    |                      |                      |                     
|Real estate rent    | 43,795               | 45,561               | 45,291              
|Equipment and other | 414                  | 596                  | 550                 
|Total rent expense  | $44,209              | $46,157              | $45,841             

At January 31, 2004, the Company was committed
under store leases with initial terms typically ranging from 1 to 15 years and with
varying renewal options. Some leases also include early termination options, which can be
exercised under specific conditions. Many leases entered into by the Company contain rent
escalations during the initial term of the lease and include options that may extend the
lease term beyond the initial commitment period. At February 2, 2002, February 1, 2003 and
January 31, 2004, accrued rent expense amounted to $7.2 million, $7.2 million and $8.1
million, respectively, of which $6.4 million, $6.9 million and $7.3 million, respectively,
is included in Other long-term liabilities. Deferred lease incentives at
February 1, 2003 and January 31, 2004, were $17.0 million and $15.0 million, respectively.

Lease incentives are recorded as
liabilities and are amortized as a reduction of rent expense over the minimum lease term,
on a straight-line basis, as a part of buying and occupancy costs.

In January 2002, the Company executed
a five-year $8.2 million sale and lease back agreement for certain fixtures in new and
remodeled stores. The lease bears an interest rate of 7.0% per annum. The Company was
required to pay sales tax as part of the agreement. The agreement provides for equal
monthly rent payments beginning February 2002 and gives the Company the option of buying
back the fixtures at the end of the term for a nominal price.

Between January 2002 and January
2003, the Company executed a series of three-year capital lease agreements for call center
systems at the Companys national distribution center in Troy, Ohio, bearing interest
at rates between 6.09% and 6.64% per annum aggregating approximately $1.4 million. The
Company has the option of buying the systems at the end of the term for a nominal price.

The following is a schedule by year
of approximate minimum lease payments (dollars in thousands) under operating and capital
leases:

|                                        | Operating | Capital
|--------------------------------------- | --------- | -------
|2004                                    | $43,737   | $2,411 
|2005                                    | 39,437    | 2,103  
|2006                                    | 34,970    | 1,797  
|2007                                    | 30,629    | -      
|2008                                    | 26,638    | -      
|Thereafter                              | 95,925    | -      
|Total minimum lease payments            | $271,336  | $6,311 
|Less: imputed interest                  |           | (579)  
|Present value of minimum lease payments |           | $5,732 

# 8. Long-term Debt

Long-term distribution center
financing consists of (dollars in thousands):

|                        | February 1,2003 | January 31,2004
|----------------------- | --------------- | ---------------
|                        |                 |                
|8.64% Mortgage due 2009 | $4,544          | $3,961         
|7.30% Note due 2003     | 637             | -              
|Total debt              | $5,181          | $3,961         
|Less current maturities | 1,220           | 635            
|Long-term debt          | $3,961          | $3,326         

Principal maturities of long-term
distribution center financing by year are as follows (dollars in thousands):

|           | DebtMaturities
|---------- | --------------
|2004       | $635          
|2005       | 693           
|2006       | 756           
|2007       | 823           
|2008       | 897           
|Thereafter | 157           
|Total      | $3,961        

In 1993, the Company executed a
ten-year $7.0 million note bearing interest at 7.3% per annum. Interest and principal were
payable in equal monthly installments beginning November 1993. The note was collateralized
by the material handling equipment in the distribution center owned by the Company in
Troy, Ohio. Final payment on this note was made in October 2003.

In 1994, the Company executed a
fifteen-year $8.0 million loan bearing interest at 8.64% per annum. Interest and principal
are payable in equal monthly installments beginning May 1994. The loan is collateralized
by a mortgage on its national distribution center.

The Company and certain of its
subsidiaries (collectively, the Companies) are parties to a Financing
Agreement, dated August 15, 1997, as amended (the Financing Agreement), with
The CIT Group/Business Credit, Inc. (CIT). The Financing Agreement was amended
in December 2003 to increase the revolving line of credit from $40 million to $50 million
and to extend the maturity date from August 15, 2005 to August 15, 2008. The revolving
line of credit is used by the Companies to support trade letters of credit and standby
letters of credit and to finance loans which could be used for working capital and general
corporate purposes.

The Companies are required to
maintain unused at all times combined asset availability of at least $5 million. Except
for the maintenance of a minimum availability of $5 million and a limit on capital
expenditures, the Financing Agreement does not contain any financial covenants.

The Financing Agreement also includes
certain restrictive covenants that impose limitations (subject to certain exceptions) on
the Companies with respect to, among other things, making certain investments, declaring
or paying dividends, making loans, engaging in certain transactions with affiliates, or
consolidating, merging or making acquisitions outside the ordinary course of business.

In the event a loan is made to one of
the Companies, interest is payable monthly based on a 360-day year at the Chase Manhattan
Bank prime rate plus incremental percentages ranging from 0.00% to 0.75% or the LIBOR rate
plus incremental percentages ranging from 1.75% to 2.50% as determined by the average
excess availability each month per the Financing Agreement on a per annum basis. The
borrower can select either the prime rate or the Libor rate as the basis for determining
the interest rate.

The line of credit is collateralized
by a security interest in inventory and proceeds and in bank credit card receivables and
by the balance on deposit from time to time in an account that has been pledged to the
lenders.

At January 31, 2004, the borrowing
capacity of the Companies under the Financing Agreement with CIT, after satisfying the $5
million minimum availability requirement, was $8.3 million, trade letters of credit for
the account of the Companies were outstanding in the amount of $27.5 million, standby
letters of credit were outstanding in the amount of $5.5 million and no loan from CIT was
outstanding.The Companys cash and cash equivalents of $14.4 million was
unrestricted.

# 9. Fair Value of
Financial Instruments

The carrying amounts of cash and cash
equivalents, accounts receivable and trade payables approximate fair value because of the
short-term maturity of these items. The fair value of long-term debt (distribution center
financing and capital leases), including the current portion, is estimated to be $10.0
million for fiscal 2003 based on the current rates quoted to the Company for debt of the
same or similar issues.

# 10. Income Taxes

The provision for (benefit from)
income taxes consists of (dollars in thousands):

|                             | Fiscal2001 | Fiscal2002 | Fiscal2003
|---------------------------- | ---------- | ---------- | ----------
|                             |            |            |           
|Current:                     |            |            |           
|Federal                      | $754       | ($1,588)   | ($874)    
|State                        | 272        | 306        | 238       
|                             | 1,026      | (1,282)    | (636)     
|Deferred:                    |            |            |           
|Federal                      | (374)      | (500)      | -         
|State                        | (81)       | 1,261      | -         
|                             | (455)      | 761        | -         
|Provision for (benefit from) |            |            |           
|income taxes                 | $571       | ($521)     | ($636)    

Reconciliation of the provision for
(benefit from) income taxes from the U.S. Federal statutory rate to the Companys
effective rate is as follows:

|                                              | Fiscal2001 | Fiscal2002 | Fiscal2003
|--------------------------------------------- | ---------- | ---------- | ----------
|Statutory Federal   income tax rate           | 35.0%      | (35.0%)    | (35.0%)   
|State income taxes, net of   Federal benefit  | 12.4       | 0.5        | (1.0)     
|Goodwill amortization                         | 7.2        | 0.0        | 0.0       
|Goodwill impairment                           | 0.0        | 8.3        | 0.0       
|Reversal of previously accrued   income taxes | 0.0        | 0.0        | (4.4)     
|Other                                         | 2.4        | 0.1        | 0.5       
|Sub-total                                     | 57.0       | (26.1)     | (39.9)    
|Deferred tax valuation allowance              | 0.0        | 23.9       | 36.7      
|                                              | 57.0%      | (2.2%)     | (3.2%)    

In November 2003, the Company agreed
in principle with the Internal Revenue Service (IRS) on a settlement and the
closure of its examination of the Companys tax returns for the years through 1996.
As a result, the tax provision reflects a one-time benefit of $0.9 million from favorable
reserve adjustments recorded in fiscal year 2003.

In November 2003, the Company also
agreed in principle with the IRS on the settlement of a matter related to tax refund
claims the Company had filed for research credits and for deductions attributable to
certain bank financing transactions during 1989 to 1992. Although only a preliminary
settlement has been reached with the IRS, in April 2004, the Company received payment from
the IRS in the amount of $2.5 million (which includes $1.2 million representing interest).
An additional payment estimated to be approximately $0.7 million is also expected in
connection with the claim related to the research credits. The Company has not received a
formally authorized and executed closing agreement with the IRS. Upon receipt of such an
agreement, the Company will recognize the benefit of both refund claims, including the
related interest thereon.

Significant components of the
Companys deferred tax assets and liabilities are summarized below (dollars in
thousands):

|                                       | February 1,2003(Restated) | January 31,2004(Restated)
|-------------------------------------- | ------------------------- | -------------------------
|Deferred tax asset:                    |                           |                          
|Federal NOL and other   tax attributes | $4,128                    | $12,428                  
|Accruals and reserves                  | 6,890                     | 7,612                    
|State NOL's                            | 2,974                     | 5,843                    
|Inventory                              | 1,112                     | 667                      
|Compensation                           | 564                       | 601                      
|                                       | 15,668                    | 27,151                   
|                                       |                           |                          
|Deferred tax liability:                |                           |                          
|Depreciation                           | 6,284                     | 7,080                    
|Prepaid rent                           | 2,134                     | 206                      
|                                       | 8,418                     | 7,286                    
|                                       |                           |                          
|Valuation allowance                    | (7,250)                   | (19,865)                 
|                                       |                           |                          
|Net deferred tax asset                 | $      -                  | $      -                 

The Company recorded a $7.3 million
non-cash charge to establish a valuation allowance for its net deferred tax assets,
including its net operating loss carryforwards in the fourth quarter of fiscal 2002. The
valuation allowance was calculated in accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109), which places
significant importance on the Companys cumulative operating results in the most
recent three-year period when assessing the need for a valuation allowance. The
Companys cumulative loss in the three-year period ended February 1, 2003, which
included the net loss reported in the fourth quarter of fiscal 2002, was sufficient to
require this full valuation allowance under the provisions of SFAS No. 109.

The Company recorded an additional
valuation allowance of $12.6 million in fiscal 2003.The Company intends to maintain a
valuation allowance for its net deferred tax assets and net operating loss carryforwards
until sufficient positive evidence exists to support its reversal.

# 11. Related Party
Transactions

In fiscal 2001, an affiliate of the
Chairman of the Board of the Company, American Licensing Group, L.P. (ALGLP)
(in which he holds an 80% interest), provided management and administrative services to a
subsidiary of Limited Brands, Inc., American Licensing Group, Inc., for a base annual fee
and profit sharing fee, the profit sharing fee being the lower of one-third of net profits
or $150,000 per annum.

During fiscal 2001, the Company
incurred $12,000 of expenses under Sublicensing Agreements with respect to trademarks to
ALGLP and ALGLP, in turn, incurred expenses with respect to the trademarks under certain
Licensing Agreements with the owner of the trademarks. The Sublicensing Agreements between
the Company and ALGLP terminated as of November 30, 2000. There were no further expenses
incurred after fiscal 2001.

# 12. Retirement Plan

The Company maintains a qualified
defined contribution pension plan. Generally, an employee is eligible to participate in
the plan if the employee has completed one year of full-time continuous service. The
Company makes a 50% match of a portion of employee savings contributions.

The Company also maintains a
non-qualified defined contribution pension plan. The Company makes a 50% match of a
portion of employee savings contributions for those associates whose contributions to the
qualified plan are limited by IRS regulations, as well as retirement contributions for
certain grandfathered associates equal to 6% of those associates compensation. The
value of the investments, held by the Company on behalf of the plan, at February 1, 2003
and January 31, 2004 were $3.8 million and $4.9 million, respectively. The Company
accounts for such investments in accordance with SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, and classifies these investments as
trading.

Pension costs for all benefits
charged to income during fiscal 2001, fiscal 2002 and fiscal 2003 were approximately
$396,000, $404,000 and $363,000, respectively.

# 13. Stockholders
Equity

Coincident with the completion of its
initial public offering on March 17, 1992, the Companys certificate of incorporation
was amended to provide for only one class of Common Stock, par value $.001 per share, with
30 million shares authorized. The Company also authorized 1 million shares of Preferred
Stock, par value $.001 per share, to be issued from time to time, in one or more classes
or series, each such class or series to have such preferences, voting powers,
qualifications and special or relative rights and privileges as shall be determined by the
Board of Directors in a resolution or resolutions providing for the issuance of such class
or series of Preferred Stock. Additionally, certain loan agreements, to which the Company
is a party, impose restrictions on the payment of dividends.

In September 1999, the Company
adopted a Shareholder Rights Plan and distributed rights as a dividend at the rate of one
Right for each share of Common Stock of the Company. The rights will expire on September
28, 2009.

Each Right initially entitles a
shareholder to buy for $65 one one-hundredth of a share of a series of preferred stock
which is convertible to shares of Common Stock. Among other things, the Rights will be
exercisable, subject to certain exceptions, if a person or group acquires beneficial
ownership of 15% or more of the Companys Common Stock or commences a tender or
exchange offer upon consummation of which such person or group would beneficially own 15%
or more of the Companys Common Stock. Until the Rights become exercisable, each
share of common stock of the Company has a Right attached and the securities trade as a
unit.

# 14. Stock Options

The Company has three stock option
plans with options available to be granted. Under these three plans, employees of the
Company whose judgment, initiative and efforts may be expected to contribute materially to
the successful performance of the Company are eligible to receive options. Non-employee
Directors also receive annual grants of options. The options granted vest beginning one
year from the date of grant, and vest fully after five years, subject to acceleration
under certain circumstances. The options granted expire ten years after the date of grant.
Options are granted, and the plans are administered, by the Compensation Committee of the
Board of Directors, composed of non-employees of the Company. Other option plans are in
operation with no options available for grant.

A summary of stock option activity
follows:

|Fiscal 2001                                  | Number ofShares | WeightedAverageExercise Price
|-------------------------------------------- | --------------- | -----------------------------
|Options outstanding at beginning of period   | 1,329,072       | $6.79                        
|Options granted                              | 500,500         | $8.71                        
|Options exercised                            | 5,000           | $5.23                        
|Options canceled                             | 108,700         | $5.62                        
|Options outstanding at end of period         | 1,715,872       | $7.42                        
|Options available for grant at end of period | 209,000         |                              
|Options exercisable at end of period         | 854,847         | $6.66                        

| |  | 
| |  | 
| |  | 

|Fiscal 2002                                  | Number ofShares | WeightedAverageExercise Price
|-------------------------------------------- | --------------- | -----------------------------
|Options outstanding at beginning of period   | 1,715,872       | $7.42                        
|Options granted                              | 168,200         | $6.73                        
|Options exercised                            | 12,200          | $4.00                        
|Options canceled                             | 45,800          | $7.75                        
|Options outstanding at end of period         | 1,826,072       | $7.37                        
|Options available for grant at end of period | 82,000          |                              
|Options exercisable at end of period         | 1,093,622       | $6.93                        

| |  | 
| |  | 
| |  | 

|Fiscal 2003                                  | Number ofShares | WeightedAverageExercise Price
|-------------------------------------------- | --------------- | -----------------------------
|Options outstanding at beginning of period   | 1,826,072       | $7.37                        
|Options granted                              | 220,000         | $2.20                        
|Options exercised                            | 0               | $0.00                        
|Options canceled                             | 148,200         | $6.47                        
|Options outstanding at end of period         | 1,897,872       | $6.85                        
|Options available for grant at end of period | 294,200         |                              
|Options exercisable at end of period         | 1,282,962       | $7.05                        

A summary of stock options
outstanding at year-end fiscal 2003 is as follows:

|Options Outstanding | Options Exercisable |     |        |           |       
|------------------- | ------------------- | --- | ------ | --------- | ------
|
|$1.80-$2.25         | 163,000             | 9.2 | $1.96  | 0         | $0.00 
|$3.03-$5.88         | 501,600             | 4.0 | $4.73  | 428,400   | $4.87 
|$6.25-$8.80         | 730,272             | 4.2 | $7.26  | 594,962   | $7.22 
|$9.13-$12.08        | 485,000             | 6.8 | $9.74  | 245,200   | $9.95 
|$15.13-$15.13       | 18,000              | 5.3 | $15.13 | 14,400    | $15.13
|$1.80-$15.13        | 1,897,872           | 5.3 | $6.85  | 1,282,962 | $7.05 

Certain outstanding options were
authorized directly by the Companys stockholders but most were issued in accordance
with stock option plans authorized by them and administered by the Compensation Committee
of the Board of Directors.

# 15. Advances To Officers

Advances were made by the Company in
February 1998, February 1999 and November 1999 to Raphael Benaroya, the Companys
Chairman of the Board, President and Chief Executive Officer. The purpose of the advances
was to finance payment of income taxes incurred in connection with the exercise of stock
options, totaling approximately $2.3 million. On November 30, 2001, Mr. Benaroya signed a
consolidated promissory note in the amount of approximately $2.8 million, representing the
cumulative advances and accrued interest as of that date, with a term of two years. Mr.
Benaroya repaid the note with accrued interest as of July 1, 2002 by surrendering 278,529
shares of Company common stock. The surrendered shares had a value equivalent to the
consolidated note based on the closing price on the NASDAQ Stock Market on the preceding
trading day. The Compensation Committee of the Board of Directors, which administers the
stock option program, met on the morning of July 1, 2002 and approved the transaction.

# 16. Stock Appreciation
Rights Plan

Commencing in May 2000 and annually
thereafter, each nonmanagement Director received an award under the Companys Stock
Appreciation Rights Plan that provides for a cash payment by the Company when the Director
exercises the stock option granted to him contemporaneously under the Companys Stock
Option Plans. The payment will be an amount equivalent to the after tax equity in the
option that is being exercised, that is, the excess of the then current market price of
the shares issued over the sum of the exercise price of the corresponding option plus any
personal income tax withholding on the gain arising from the exercise.

# 17. Supplemental Cash
Flow Information

Net cash flow from operating
activities reflects cash payments for interest and income taxes as follows (dollars in
thousands):

|                                                                                                         | Fiscal2001 | Fiscal2002 | Fiscal2003
|-------------------------------------------------------------------------------------------------------- | ---------- | ---------- | ----------
|Net cash interest (income) expense   (received) paid, including interest   income of $920, $339 and $103 | ($102)     | $787       | $1,065    
|                                                                                                         |            |            |           
|Income taxes paid (refunded)                                                                             | $715       | ($1,786)   | ($964)    

Investing activities includes $8.8
million related to capital lease obligations incurred during fiscal 2001.

Non-cash investing activities include
$1.4 million related to capital lease obligations incurred between January 2002 and
January 2003.

Non-cash financing activities include
the repayment of officer advances with accrued interest as of July 1, 2002 with the
repayment made by surrendering 278,529 shares of Company common stock with a market value
equal to the principal and interest, in lieu of cash payment.

# 18. Segment Information

The Company operated its business in
two reportable segments in fiscal 2001 and fiscal 2002: Avenue Retail (retail stores) and
Shop @ Home (catalog and internet). In deciding how to allocate resources and assess
performance, the Company regularly evaluated the performance of its operating segments on
the basis of net sales and earnings (losses) from operations. The Company assesses retail
store performance on a regional basis. However, these operating segments are aggregated
into one reportable segment in accordance with the aggregation criteria of SFAS 131,
 Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131).

In March 2003, the Company suspended
its catalog operations indefinitely and management no longer considered its Shop@Home
business to be of continuing significance. The only remaining Shop@Home business is the
Companys website. The website both functions as a vehicle for advertising
merchandise available at Avenue retail stores and sells a selection of the merchandise
that can be found in these stores. Since the website is considered to have similar
characteristics to the Companys retail stores, the Company has concluded that the
websites financial information should be aggregated with the retail store financial
information. Consequently, as a result of the suspension of the catalog business, the
Company has only one reportable segment for fiscal 2003. Accordingly, prior year segment
information has been recast to no longer show separate segment results, to be comparable
with the current year.

# 19. Contingencies

The Company is involved in legal
actions and claims arising in the ordinary course of business. Management believes that
such litigation and claims will not have a material adverse effect on the Companys
financial position, annual results of operations or cash flows.

In addition, on May 1, 2003, a suit
in California Superior Court, Los Angeles County, styled Erik Stanford vs. United Retail
Incorporated was served on the Company by a former store manager in California. On March
3, 2004, an amended complaint was served that added another plaintiff. The suit is
purportedly a class action on behalf of certain current and former associates in
California in the previous four years.

The plaintiffs in the Stanford case
assert state wage and hour claims.

The Company intends to oppose class certification
strongly and to defend the Stanford case vigorously on the merits.

The Company has recorded an accrual for its estimated losses in the Stanford case.

Although the ultimate outcome of the
Stanford case cannot be predicted at this time, management does not believe that the
amount related to the outcome of the case, beyond the amount already accrued, will have a
material impact on the Companys financial position. An estimate of the range of
reasonably possible losses cannot be made at this stage of the case. However, given the
uncertainty at this stage, it is possible that if either an adverse judgment for damages
is rendered or a negotiated settlement is agreed upon, the amount payable could be
material to the Companys annual results of operations or cash flows.

20.   Supplemental Financial Data (Unaudited)(dollars in thousands, except per share data)

|                                    | Fiscal 2002 |          |          |          
|----------------------------------- | ----------- | -------- | -------- | ---------
|
|Net sales                           | $115,574    | $113,674 | $97,019  | $105,697 
|Gross profit                        | 30,785      | 21,065   | 17,326   | 19,163   
|Operating income (loss)             | 4,772       | (7,077)  | (7,687)  | (12,779) 
|Net income (loss)                   | $2,876      | ($4,639) | ($5,232) | ($16,082)
|Net income (loss) per common share: |             |          |          |          
|Basic                               | $0.22       | ($0.35)  | ($0.40)  | ($1.24)  
|Diluted                             | $0.21       | ($0.35)  | ($0.40)  | ($1.24)  

| |  | 
| |  | 
| |  | 

|                           | Fiscal 2003 |          |          |         
|-------------------------- | ----------- | -------- | -------- | --------
|
|Net sales                  | $101,530    | $104,790 | $88,535  | $101,410
|Gross profit               | 22,169      | 21,671   | 17,803   | 20,855  
|Operating loss             | (4,211)     | (3,945)  | (5,839)  | (4,794) 
|Net loss                   | ($4,545)    | ($4,246) | ($6,247) | ($4,032)
|Net loss per common share: |             |          |          |         
|Basic                      | ($0.35)     | ($0.33)  | ($0.48)  | ($0.31) 
|Diluted                    | ($0.35)     | ($0.33)  | ($0.48)  | ($0.31) 

---

ITEM 9A. CONTROLS AND PROCEDURES.

1. In December 2004, the Company re-evaluated the manner in which it accounts for construction allowances and other concessions
         from landlords of retail stores leased by the Company ("Construction Allowances") on its balance sheets and statements of
         cash flows. The Company's accounting for Construction Allowances on its statements of operations has complied with Statement
         of Financial Accounting Standards No. 13 ("SFAS 13") and FASB Technical Bulletin No. 88-1 ("FTB 88-1") because Construction
         Allowances have been amortized over the minimum lease term on a straight-line basis, as part of buying and occupancy costs.
         However, in its detailed accounts, the Company historically followed the practice of recording this amortization as a
         reduction of depreciation expense, rather than rent expense.  Additionally, on the Company's balance sheets, the unamortized
         portion of Construction Allowances was netted against fixed assets and not presented as a deferred credit.  Further, the
         Company's statements of cash flows reflected Construction Allowances received as a reduction of capital expenditures (within
         "investing" cash flows), rather than as an operating lease activity (within "operating" cash flows).

         The Company, in consultation with and with the concurrence of the Company's independent registered public accounting firm,
         is changing the manner in which it accounts for Construction Allowances to provide for, pursuant to SFAS 13 and FTB 88-1,
         the establishment of a deferred credit on the balance sheets for the unamortized portion of Construction Allowances, rather
         than netting these amounts against fixed assets.  Further, the Company will present Construction Allowances received within
         "operating" activities on the statements of cash flows.  These changes to the accounting presentation of Construction
         Allowances are reflected in the balance sheets and statements of cash flows included in this Amendment.  In addition, this
         Amendment includes conforming changes to the financial statement footnotes and Management's Discussion and Analysis of
         Financial Condition and Results of Operations.

         Based on the definition of the term "material weakness" in the Public Company Accounting Oversight Board's Auditing Standard
         No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements,
         the need to file amendments to restate financial statements in prior filings with the Securities and Exchange Commission
         indicates the existence of a "material weakness" in the design or operation of internal control over financial reporting.

         The Company also performed its evaluation, in which the Company's Chief Executive Officer and Chief Financial Officer (the
         "CEO" and "CFO") participated, of the effectiveness of its disclosure controls and procedures (as defined by Exchange Act
         Rule 13a-15(e), "Disclosure Controls") with respect to information required to be disclosed by the Company ("Disclosures")
         in filings with the Commission.  Based on the issue that they identified in the Company's accounting for Construction
         Allowances and certain other matters, the CEO and CFO each concluded that the Disclosure Controls were not effective as of
         January 31, 2004 in providing reasonable assurance that Disclosures were (i) recorded, accumulated, processed, summarized
         and communicated to him on a timely basis and (ii) reported within the time periods specified in the Commission's rules and
         forms.  The Company is currently studying ways (i) to strengthen its evaluation and monitoring of ongoing compliance with
         leasing matters and other generally accepted accounting principles and (ii) to ensure that it has appropriate staffing in
         its financial reporting function with qualifications for evaluating ongoing compliance with relevant accounting and
         financial reporting requirements.
2. During the fourth quarter of fiscal 2003, there were no significant changes in the Company's internal control over financial
         reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting.

---

# PART IV

Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)    
          (1) Consolidated Financial Statements of the Corporation for fiscal 2003 are
          included herein.          (2) Schedule II  Valuation and Qualifying Accounts,
together with the related report of the Independent Registered Public Accounting Firm for the Corporation as filed herewith and designated as Exhibit No. 99.

The following exhibits are filed
herewith:

|Number | Description                                                                 
|------ | ----------------------------------------------------------------------------
|23     | Consent of Independent Registered Public Accounting Firm for the Corporation
|31     | Certifications pursuant to Section 302                                      

Certifications pursuant to Section 906 are furnished as Exhibit 32 hereto.

The following exhibits to the
Corporations Annual Report on Form 10-K for the year ended January 31, 2004 are
incorporated herein by reference.

|Number in Filing | Description                                                                                 
|---------------- | --------------------------------------------------------------------------------------------
|3                | Restated By-laws of the Corporation                                                         
|10.1*            | Form of Tandem Bonus Plan Agreement                                                         
|10.2             | Form of Indemnification Agreement between the Corporation and each of its Directors         
|14               | Code of Ethics for Principal Executive and Senior Financial Officers pursuant to Section 406

The following exhibit to the
Corporations Current Report on Form 8-K filed on January 8, 2004 is incorporated
herein by reference:

|Number in Filing | Description                                                                                                                                                                                          
|---------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10               | Amendment, dated December 23, 2003, to Financing Agreement among the Corporation, United
Retail Incorporated, Cloudwalkers, Inc. and The CIT Group/Business Credit, Inc., as Agent and Lender ("CIT")

The following exhibits to the
Corporations Quarterly Report on Form 10-Q for the period ended August 2, 2003 are
incorporated herein by reference:

|Number in Filing | Description                                                                                                                                                          
|---------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1*            | Amendment, dated September 2, 2003, to Employment Agreement, dated November 20, 1998, between the Corporation and Raphael Benaroya ("Benaroya Employment Agreement") 
|10.2*            | Amendment, dated September 2, 2003, to Employment Agreement, dated November 20, 1998, between the Corporation and George R. Remeta ("Remeta Employment Agreement")   
|10.3*            | Amendment, dated September 2, 2003, to Employment Agreement, dated November 20, 1998, between the Corporation and Kenneth P. Carroll ("Carroll Employment Agreement")
|21               | Subsidiaries of the Corporation                                                                                                                                      

The following exhibit to the Corporation's Quarterly Report on Form 10-Q for the period ended May 3, 2003 is
   incorporated herein by reference:

|Number in Filing | Description                                                         
|---------------- | --------------------------------------------------------------------
|10*              | Amendments to Restated Supplemental Retirement Savings Plan ("SRSP")

The 2003 Stock Option Plan set forth
as the appendix to the Corporations proxy statement on Schedule 14A for its 2003
annual meeting of stockholders is incorporated herein by reference.*

The following exhibits to the
Corporations Annual Report on Form 10-K, as amended, for the year ended February 1,
2003 are incorporated herein by reference:

|Number in Filing | Description                                                                                                                            
|---------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|10.1             | Amendment, dated January 31, 2003, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT
|10.2*            | Amendment to SRSP                                                                                                                      

The following exhibits to the
Corporations Quarterly Report on Form 10-Q for the period ended November 2, 2002 are
incorporated herein by reference:

|Number in Filing | Description                                                        
|---------------- | -------------------------------------------------------------------
|10.1*            | Amendment, dated December 6, 2002, to Benaroya Employment Agreement
|10.2*            | Amendment, dated December 6, 2002, to Remeta Employment Agreement  
|10.3*            | Amendment, dated December 6, 2002, to Carroll Employment Agreement 

The following exhibits to the
Corporations Quarterly Report on Form 10-Q for the period ended August 3, 2002 are
incorporated herein by reference:

|Number in Filing | Description                                                                                                                          
|---------------- | -------------------------------------------------------------------------------------------------------------------------------------
|10.1             | Amendment, dated August 2, 2002, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT
|10.2*            | Amendment to SRSP                                                                                                                    
|10.3             | Purchase and Sale Agreement, dated as of July 1, 2002, between Raphael Benaroya and the Corporation                                  

The following exhibit to the
Corporations Quarterly Report on Form 10-Q for the period ended May 4, 2002 is
incorporated herein by reference:

|Number in Filing | Description                                                    
|---------------- | ---------------------------------------------------------------
|10.1*            | Amendment, dated May 30, 2002, to Benaroya Employment Agreement

The following exhibits to the
Corporations Annual Report on Form 10-K for the year ended February 2, 2002 are
incorporated herein by reference:

|Number in Filing | Description                                                                                                                                                                                                                                          
|---------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1             | Amendment, dated April 5, 2002, to Private Label Credit Card Program Agreement, dated January 27, 1998, between the Corporation, United Retail Incorporated and World Financial
Network National Bank ("Private Label Credit Card Program Agreement")
|10.2             | Amendment, dated December 29, 1999, to Private Label Credit Card Program Agreement                                                                                                                                                                   
|10.3             | Amendment, dated August 19, 1999, to Private Label Credit Card Program Agreement                                                                                                                                                                     
|10.4*            | Letter, dated March 1, 2002, from the Corporation to Raphael Benaroya with respect to the
cost of living adjustment under the Benaroya Employment Agreement                                                                                          

The following exhibits to the
Corporations Quarterly Report on Form 10-Q for the period ended November 3, 2001 are
incorporated herein by reference:

|Number in Filing | Description                                                                                                                                                   
|---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1*            | Amendment, dated November 29, 2001, to Benaroya Employment Agreement                                                                                          
|10.2*            | Amendment, dated November 29, 2001, to Remeta Employment Agreement                                                                                            
|10.3*            | Amendment, dated November 29, 2001, to Carroll Employment Agreement                                                                                           
|10.4*            | Summary Plan Description for United Retail Group, Inc. Incentive Compensation Program for Executives                                                          
|10.5             | Amendment, dated October 1, 2001, to Private Label Credit Card Program Agreement (Confidential portions filed separately with the Secretary of the Commission)
|10.6*            | Promissory note, dated November 30, 2001, from Raphael Benaroya to the Corporation (paid as of July 1, 2002)                                                  

The following exhibit to the
Corporations Quarterly Report on Form 10-Q for the period ended August 4, 2001 is
incorporated herein by reference:

|Number in Filing | Description                            
|---------------- | ---------------------------------------
|10.1*            | Restated Stock Appreciation Rights Plan

The 2001 Stock Option Plan set forth
as an appendix to the Corporations proxy statement on Schedule 14A for its 2001
annual meeting of stockholders is incorporated herein by reference.*

The following exhibit to the
Corporations Registration Statement on Form S-8 (Registration No. 333-44868) is
incorporated herein by reference:

|Number in Filing | Description                                                                                                                           
|---------------- | --------------------------------------------------------------------------------------------------------------------------------------
|10               | Amendment, dated August 21, 2000, to Financing Agreement among the Corporation,
United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibits to the
Corporations Quarterly Report on Form 10-Q for the period ended October 28, 2000 are
incorporated herein by reference:

|Number in Filing | Description                                                       
|---------------- | ------------------------------------------------------------------
|10.1*            | Amendment, dated August 18, 2000, to Benaroya Employment Agreement
|10.2*            | Amendment, dated August 18, 2000, to Carroll Employment Agreement 

The following exhibits to the
Corporations Annual Report on Form 10-K for the year ended January 29, 2000 are
incorporated herein by reference:

|Number in Filing | Description                                                                                                                                 
|---------------- | --------------------------------------------------------------------------------------------------------------------------------------------
|10.2             | Amendment, dated December 28, 1999, to Financing Agreement among the Corporation, United Retail Incorporated and CIT ("Financing Agreement")
|10.3             | Amendment, dated January 31, 2000, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT     

The following exhibit to the
Corporations Quarterly Report on Form 10-Q for the period ended October 30, 1999 is
incorporated herein by reference:

|Number in Filing | Description                                             
|---------------- | --------------------------------------------------------
|10.1             | Amendment, dated October 6, 1999, to Financing Agreement

The following exhibit to the
Corporations Current Report on Form 8-K, filed September 23, 1999, is incorporated
herein by reference:

|Number in Filing | Description                                                                                        
|---------------- | ---------------------------------------------------------------------------------------------------
|3                | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock

The stockholders rights plan
filed as the exhibit to the Corporations Registration Statement on Form 8-A, dated
September 15, 1999, is incorporated herein by reference.

The following exhibit to the
Corporations Annual Report on Form 10-K for the year ended January 30, 1999 is
incorporated herein by reference:

|Number in Filing | Description                                            
|---------------- | -------------------------------------------------------
|10.1             | Amendment, dated March 29, 1999, to Financing Agreement

The 1999 Stock Option Plan set forth
as the Appendix to the Corporations proxy statement on Schedule 14A for its 1999
annual meeting of stockholders is incorporated herein by reference.*

The following exhibits to the
Corporations Quarterly Report on Form 10-Q for the period ended October 31, 1998 are
incorporated herein by reference:

|Number in Filing | Description                  
|---------------- | -----------------------------
|10.1*            | Benaroya Employment Agreement
|10.2*            | Remeta Employment Agreement  
|10.3*            | Carroll Employment Agreement 

The following exhibits to the
Corporations Quarterly Report on Form 10-Q for the period ended May 2, 1998 are
incorporated herein by reference:

|Number in Filing | Description                                                                                  
|---------------- | ---------------------------------------------------------------------------------------------
|10.1*            | 1998 Stock Option Agreement, dated May 21, 1998, between the Corporation and Raphael Benaroya
|10.2*            | 1998 Stock Option Agreement, dated May 21, 1998, between the Corporation and George R. Remeta

The following exhibits to the
Corporations Annual Report on Form 10-K for the year ended January 31, 1998 are
incorporated herein by reference:

|Number in Filing | Description                                                                                                                                                                        
|---------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1             | Restated Stockholders' Agreement, dated December 23, 1992, between the Corporation and certain of its
stockholders and Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto
|10.2             | Private Label Credit Card Program Agreement                                                                                                                                        
|10.4*            | Restated 1990 Stock Option Plan as of March 6, 1998                                                                                                                                
|10.5*            | Restated 1990 Stock Option Plan as of May 28, 1996                                                                                                                                 
|10.6*            | Restated 1996 Stock Option Plan as of March 6, 1998                                                                                                                                

The following exhibit to the
Corporations Quarterly Report on Form 10-Q for the period ended November 1, 1997 is
incorporated herein by reference:

|Number in Filing | Description                                                
|---------------- | -----------------------------------------------------------
|10.1             | Amendment, dated September 15, 1997, to Financing Agreement

The following exhibits to the
Corporations Quarterly Report on Form 10-Q for the period ended August 2, 1997 are
incorporated herein by reference:

|Number in Filing | Description        
|---------------- | -------------------
|10.1             | Financing Agreement
|10.2*            | Amendment to SRSP  

The following exhibit to the
Corporations Quarterly Report on Form 10-Q for the period ended November 2, 1996 is
incorporated herein by reference:

|Number in Filing | Description
|---------------- | -----------
|10.1*            | SRSP       

The following exhibits to the
Corporations Registration Statement on Form S-1 (Registration No. 33-44499), as
amended, are incorporated herein by reference:

|Number in Filing | Description                                                                                                                                                                      
|---------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1              | Amended and Restated Certificate of Incorporation of the Corporation                                                                                                             
|4.1              | Specimen Certificate for Common Stock of the Corporation                                                                                                                         
|10.2.1           | Software License Agreement, dated as of April 30, 1989, between The Limited Stores, Inc.
and Sizes Unlimited, Inc. (now known as United Retail Incorporated) ("Software License")
|10.2.2           | Amendment, dated December 10, 1991, to Software License                                                                                                                          

---

*A compensatory plan for the benefit
of the Corporations management or a management contract.

(b)    
          Current Reports on Form 8-K were submitted by the Corporation (i) on January 8,
          2004 that filed the most recent amendment to the Financing Agreement and that
          furnished a press release that disclosed the Corporations sales for
          December 2003, among other things and (ii) on November 18, 2003 that furnished a
          press release that disclosed the Corporations results of operations for
          the third quarter of fiscal 2003.

---

# SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant)    
          UNITED RETAIL GROUP, INC.

|                        |                                                                                                    
|----------------------- | ---------------------------------------------------------------------------------------------------
|Date: February 16, 2005 | By: /s/RAPHAEL BENAROYARaphael BenaroyaChairman of the Board, President and Chief Executive Officer