<PAGE>   1
                                                                      EXHIBIT 13

<TABLE>
<CAPTION>
TABLE OF CONTENTS
                                                                        Page
                                                                        ----
<S>                                                                     <C>
Management's Discussion and Analysis of Financial
  Condition and Results of Operations                                     3

Report of Independent Accountants                                         8

Consolidated Balance Sheets as of January 31, 1998
  and February 1, 1997                                                    9

Consolidated Statements of Operations for each
  of the three fiscal years ended January 31, 1998                       10

Consolidated Statements of Cash Flows for each
  of the three fiscal years ended January 31, 1998                       11

Consolidated Statements of Stockholders' Equity for each
  of the three fiscal years ended January 31, 1998                       12

Notes to the Consolidated Financial Statements                           13

Selected Financial Data                                                  23
</TABLE>


                                     [LOGO]



UNITED RETAIL GROUP, INC.


is a leading nationwide specialty retailer of private label large-size women's
apparel and accessories featuring the AVENUE brand. The Company seeks to create
a fashion-current, upscale image at prices that appeal to the middle mass
market.

                                     [LOGO]




UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                     [LOGO]


<TABLE>
<CAPTION>
                                                Fiscal Year      Fiscal Year
                                                   Ended             Ended
                                               Feb. 1, 1997      Jan. 31, 1998
                                               ------------      -------------
<S>                                               <C>              <C>
Net sales                                         $363,074         $361,751
(Loss) income before income taxes                   (6,823)           3,050
Benefit from income taxes                           (1,018)            (828)
Provision for (benefit from) write-down
  (write-up) of the compensation related
  deferred tax asset                                   342             (953)
Net (loss) income                                   (6,147)           4,831
Net (loss) income per common share:
                  Basic                              (0.50)            0.40
                  Diluted                            (0.50)            0.37
Weighted average number of
 outstanding shares (in thousands):
                  Basic                             12,190           12,190
                  Diluted                           12,190           13,187
Stores open at end of period                           569              522
</TABLE>



<PAGE>   2
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


FISCAL 1997 VERSUS FISCAL 1996

Net sales for fiscal 1997 decreased 0.4% from fiscal 1996, to $361.8 million
from $363.1 million, principally from a decrease in unit sales volume partially
offset by an increase in average price. Average stores open decreased from 581
to 557 as underperforming stores were closed. (For the two-month period ended
April 4, 1998, net sales increased 6.7% from the comparable period in the
previous year, to $61.6 million from $57.7 million, but the comparison does not
take into consideration that Easter occurred in the two-month period in fiscal
1997 but not in the same period in fiscal 1998. There is no assurance that
annual net sales will increase.) Comparable store sales for fiscal 1997
increased 2.8%. (For the two-month period ended April 4, 1998, comparable store
sales increased 12.7% but there is no assurance that comparable store sales will
continue to increase.)

Gross profit increased by $10.0 million to $83.7 million in fiscal 1997 from
$73.7 million in fiscal 1996, increasing as a percentage of net sales to 23.1%
from 20.3%. The increase in gross profit as a percentage of net sales was
primarily attributable to an increase in the merchandise margin rate. (The
merchandise margin rate increased substantially for the two-month period ended
April 4, 1998 compared to the comparable period in the previous year, but there
is no assurance that the merchandise margin rate will continue to increase.)

General, administrative and store operating expenses were $80.5 million in
fiscal 1997, compared to $80.1 million in the previous year. As a percentage of
net sales, general, administrative and store operating expenses increased to
22.2% from 22.1%.

During fiscal 1997, the Company had operating income of $3.2 million, equivalent
to 0.9% of sales, compared to an operating loss of $6.4 million in the previous
year.

Net interest expense was $0.2 million in fiscal 1997 and $0.4 million in the
previous year. The net expense reduction resulted primarily from lower fees to
lenders for credit facilities.

The Company had an income tax benefit of $0.8 million in fiscal 1997 and of $1.0
million in the previous year. Included in the fiscal 1997 income tax benefit is
the reversal of the $1.8 million valuation allowance with respect to the
deferred tax asset established in fiscal 1996.

As part of certain non-recurring charges in fiscal 1992, the Company incurred a
non-cash compensation expense of $15.6 million because the stock options
("Performance Options") previously granted to Raphael Benaroya, Chairman of the
Board, President and Chief Executive Officer of the Company, and George R.
Remeta, Vice Chairman and Chief Financial Officer of the Company, vested in
March 1992 and became exercisable until December 1999. The non-cash compensation
expense resulted in the recognition of certain future tax benefits realizable at
the time Performance Options are exercised based on an assumption that the
market price of the Common Stock at the time of exercise will be $15 per share
(the price of the initial public offering in March 1992). A write-down of $0.3
million was taken in fiscal 1996 based on the market price of Common Stock at
the end of fiscal 1996. A write-up of $1.0 million was taken in fiscal 1997
based on the market price of Common Stock at the end of fiscal 1997.

The Company had net income of $4.8 million for fiscal 1997, which included the
write-up of the compensation related deferred tax asset and the reversal of the
valuation allowance. There is no assurance that the Company will continue to be
profitable. The Company incurred a net loss of $6.1 million for fiscal 1996,
which reflected the write-down of the compensation related deferred tax asset,
and the valuation allowance. The write-down and the allowance, net of certain
other tax entries, totaled $1.4 million for fiscal 1996. Excluding the write-up,
the write-down and the allowance, net of certain other tax entries, the Company
would have had net income of $2.0 million for fiscal 1997 and the Company would
have incurred a net loss of $4.7 million for fiscal 1996.


                                       1
<PAGE>   3
FISCAL 1996 VERSUS FISCAL 1995

Net sales for fiscal 1996 (52 weeks) decreased to $363.1 million from $369.2
million in fiscal 1995 (53 weeks), principally from a decrease in unit sales
volume rather than a change in average price. Average stores open increased from
552 to 581. Comparable store sales for the comparable 52-week periods decreased
3.6% for fiscal 1996. In fiscal 1996, the Company replaced its older proprietary
brands of clothing with its new AVENUE brand. (Substantially all clothing
carried a proprietary brand.) The transition from the older proprietary brands
of clothing may have had an adverse effect on sales.

Gross profit decreased by $2.7 million to $73.7 million in fiscal 1996 from
$76.4 million in fiscal 1995, decreasing as a percentage of net sales to 20.3%
from 20.7%. The decrease in gross profit as a percentage of net sales was
primarily attributable to higher occupancy costs as a percentage of net sales,
partially offset by a reduction in payroll costs for merchants and planners.

General, administrative and store operating expenses were $80.1 million in
fiscal 1996, compared to $80.2 million in the previous year. As a percentage of
net sales, general, administrative and store operating expenses increased to
22.1% from 21.7%, principally from higher store payroll costs as a percentage of
net sales partially offset by lower administrative costs and insurance costs.

During fiscal 1996, the Company incurred an operating loss of $6.4 million
compared to an operating loss of $3.8 million for fiscal 1995. The fiscal 1996
operating loss was 1.8% of net sales.

Net interest expense was $0.4 million for fiscal 1996, compared to net interest
income of $0.1 million in 1995, principally as a result of lower interest income
in fiscal 1996.

The Company had an income tax benefit of $1.0 million both in fiscal 1996 and in
fiscal 1995 and recorded write-downs of the compensation related deferred tax
asset of $0.3 million in fiscal 1996 and $1.9 million in fiscal 1995. The income
tax benefit in fiscal 1996 and fiscal 1995 resulted from operating losses, the
effect of which was partially offset in fiscal 1996 by a $1.8 million valuation
allowance in the full amount of the net deferred tax asset remaining after the
write-down taken in fiscal 1996.

The Company incurred a net loss of $6.1 million in fiscal 1996 and of $4.6
million in fiscal 1995.


BRANDED MERCHANDISING

The Company believes that certain other chains in the women's apparel specialty
store industry experienced declines in average transactions per store in recent
years, partly as a result of increased competition from other channels of
distribution, including catalogues, mass merchants, discounters and off-price
stores. The Company's average number of transactions per store also declined in
each of the last five fiscal years. The cumulative adverse effect on net sales
per store has been material. Further, the decline in the Company's average
transactions during the last three fiscal years was accelerated by increased
competition within the industry, including "going out of business" sales that
accompanied the liquidation of retail specialty store chains that failed.

Commencing in fiscal 1996, the Company has been implementing a branded
merchandising strategy that is intended, among other things, to reverse the
annual declines in average transactions. The strategy is expected to take
several more years to complete. The brand identity is being defined, new
marketing materials expressing that identity are being created and direct
marketing of the brand is being increased. This paragraph contains
forward-looking information under the 1995 Private Securities Litigation Reform
Act (the "Reform Act"), which is subject to the uncertainties and other risk
factors referred to under the caption "Future Results."


                                       2
<PAGE>   4
LIQUIDITY AND CAPITAL RESOURCES

Net cash provided from operating activities in fiscal 1997 was $16.0 million.

The Company's cash on hand was $31.1 million at January 31, 1998 and $18.3
million at February 1, 1997.

Inventory declined to $38.0 million at January 31, 1998 from $40.8 million at
February 1, 1997. The Company's inventory levels peak in early May and November.
During fiscal 1997, the highest inventory level was $52.1 million.

Import purchases are made in U.S. dollars and are generally financed by trade
letters of credit. As of January 31, 1998, trade letters of credit for the
account of the Company were outstanding in the amount of $19.4 million. (A
standby letter of credit was also outstanding for $2.0 million as collateral for
obligations in the ordinary course of business under casualty insurance
policies.) Import purchases constituted approximately 48% of total purchases in
Fiscal 1997.

Short-term trade credit represents a significant source of financing for
domestic merchandise purchases. Trade credit arises from the willingness of the
Company's domestic vendors to grant extended payment terms for inventory
purchases and is generally financed either by the vendor or a third-party
factor.

The Company and United Retail Incorporated, its subsidiary (collectively, the
"Companies"), are parties to a Financing Agreement, dated August 15, 1997, as
amended September 15, 1997 (the "Financing Agreement"), with The CIT
Group/Business Credit, Inc. ("CIT"). The Financing Agreement provides a
revolving line of credit for a term of three years in the aggregate amount of
$40 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
either of the Companies to support trade letters of credit and standby letters
of credit and to finance loans.

Subject to the following paragraph, the availability of credit (within the
aggregate $40 million line of credit) to either of the Companies at any time is
the excess of its borrowing base over the sum of (x) the aggregate outstanding
amount of its letters of credit and its revolving loans, if any, and (y) at
CIT's option, the sum of (i) unpaid sales taxes, and (ii) up to $500,000 in
total liabilities of the Companies under permitted encumbrances (as defined in
the Financing Agreement). The borrowing base, as to either of the Companies, is
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
60% to 65% depending on the season, and (y) the balance in an account in its
name that has been pledged to the lenders (a "Pledged Account"). (At January 31,
1998, the combined availability of the Companies was $8.9 million; no balance
was in a Pledged Account; no loan had been drawn down; and the Company's cash on
hand was unrestricted.)

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 financial covenants.

In the event a revolving loan is made to one of the Companies, interest is
payable monthly based on a 360-day year at the prime rate or at two percent plus
the LIBOR rate on a per annum basis, at the borrower's option.

The line of credit is secured by a security interest in inventory and proceeds
and by the balance from time to time in the Pledged Account.

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,
acquiring Common Stock or preferred stock of the Company, making loans, engaging
in certain transactions with affiliates, or consolidating, merging or making
acquisitions outside the ordinary course of business.


                                       3
<PAGE>   5
Purchases of Company merchandise made by customers with the Company's
proprietary credit cards were paid for daily at a discount by a bank through
November 30, 1997. Commencing December 1, 1997, however, the bank has paid a
premium, instead of taking a discount, on proprietary credit card purchases.
Premiums paid by the bank are expected to have a material favorable effect on
the Company's general, administrative and store operating expenses in fiscal
1998. The preceding sentence constitutes forward-looking information under the
Reform Act and is subject to the uncertainties and other risk factors referred
to under the caption "Future Results."

The Credit Plan Agreement between the Companies and the bank (the "Credit
Agreement") provides for the issuance of the Company's proprietary credit cards
by the bank and contains financial covenants that require that the Company's (i)
consolidated tangible net worth not be less than the sum of $32 million plus for
each complete fiscal year ended after February 1, 1992 for which net income has
been positive, 50% of net income, and (ii) consolidated fixed charges ratio for
the four preceding fiscal quarters combined not be less than 1.0:1.0.

The Companies terminated the Credit Agreement effective January 30, 1999 and
entered into a contract with another bank to issue the Company's proprietary
credit cards after January 30, 1999 and to purchase from the current bank the
accounts receivable from credit card customers.

The Company believes that its cash on hand, the availability of credit under the
Financing Agreement and cash flows from operating activities will be adequate to
meet anticipated working capital needs, including seasonal financing needs, for
the next 12 months. This paragraph constitutes forward-looking information under
the Reform Act and is subject to the uncertainties and other risk factors
referred to under the caption "Future Results."


STORES

The Company leased 522 retail stores at January 31, 1998, of which 301 stores
were located in strip shopping centers, 198 stores were located in malls and 23
stores were located in downtown shopping districts. Total retail square footage
was 2.1 million square feet.

During fiscal 1997, the Company closed 49 stores (generally at the expiration of
their leases) and opened 2 new stores. The Company believes that these store
closings will have a favorable effect on the Company's operating income as a
percentage of net sales.

In fiscal 1998, the Company intends to pay the costs of opening new stores and
remodeling existing stores from its cash on hand. New stores and newly remodeled
stores will use the AVENUE Plus trade name.

The preceding two paragraphs contain forward-looking information under the
Reform Act, which is subject to the uncertainties and other risk factors
referred to under the caption "Future Results."


TAX MATTERS

The exercise of certain Performance Options in February 1998 provides income tax
deductions for the Company that, management expects, will reduce income tax
payments by approximately $1.8 million in fiscal 1998 or thereafter based on
current tax laws. This paragraph contains forward-looking information under the
Reform Act, which is subject to the uncertainties and other risk factors
referred to under the caption "Future Results."

The Company's federal income tax returns for fiscal 1994, fiscal 1995 and fiscal
1996 are being audited by the Internal Revenue Service.


                                       4
<PAGE>   6
COMPUTER SYSTEMS

The Company is modifying the applications software programs that are essential
to its operations to accommodate dates after 1999, and its vendor is modifying
the operating systems used by the Company. The cost of future modifications is
expected to be less than $1.0 million.

The Company has scheduled 268 projects to analyze and, if necessary, modify
applications software programs to ensure that all its systems are Year 2000
compliant. As of March 31, 1998, 159 projects were completed, 51 projects were
underway and 58 projects were scheduled to begin later in fiscal 1998. The
programs being modified are being installed as part of each project. Integrated
testing of all the Company's systems is scheduled to be completed before fiscal
1999. There is no assurance, however, that integrated testing will not reveal
the need for further modifications.

The preceding paragraphs contain forward-looking information under the Reform
Act, which is subject to the uncertainties and other risk factors referred to
under the caption "Future Results."


FUTURE RESULTS

Future results could differ materially from those currently anticipated by the
Company due to (i) miscalculation of fashion trends, (ii) shifting shopping
patterns, both within the specialty store sector and in other channels of
distribution, (iii) extreme or unseasonable weather conditions, (iv) imposition
by the bank that now issues the Company's proprietary credit cards of more
onerous fees and finance charges to be paid by credit card customers (the late
fees charged to delinquent credit card customers were increased substantially by
the bank in February 1998), (v) inability of the computer links between the
Company and certain of its banks to accommodate dates after 1999, (vi) economic
downturns, weakness in overall consumer demand, and variations in the demand for
women's fashion apparel, (vii) imposition by vendors, or their third-party
factors, of more onerous payment terms for domestic merchandise purchases,
(viii) acceleration in the rate of business failures and inventory liquidations
in the specialty store sector of the women's apparel industry, (ix) disruptions
in the sourcing of merchandise abroad, including (a) China's claims to
sovereignty over Taiwan, (b) North Korea's claims to sovereignty over South
Korea, (c) exchange rate fluctuations, (d) political instability, (e) trade
sanctions or restrictions, (f) changes in quota and duty regulations, (g) delays
in shipping or (h) increased costs of transportation, and (x) disruptions in the
telecommunications, banking, transportation and utilities industries caused by
the inability of their computer systems to accommodate dates after 1999.


                                       5
<PAGE>   7
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of United Retail Group, Inc.,

         We have audited the accompanying consolidated balance sheets of United
Retail Group, Inc. and Subsidiaries (the "Company") as of January 31, 1998 and
February 1, 1997 and the related consolidated statements of operations, cash
flows and stockholders' equity for each of the three fiscal years ended January
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
United Retail Group, Inc. and Subsidiaries as of January 31, 1998 and February
1, 1997 and the consolidated results of their operations and their cash flows
for each of the three fiscal years ended January 31, 1998 in conformity with
generally accepted accounting principles.

Coopers & Lybrand, L.L.P.


New York, New York
February 13, 1998


                                       6
<PAGE>   8
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)



<TABLE>
<CAPTION>
                                                  FEB. 1, 1997    JAN. 31, 1998
-------------------------------------------------------------------------------
<S>                                               <C>             <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                          $  18,264        $  31,122
  Income taxes receivable                                  229               --
  Accounts receivable                                    1,297              571
  Inventory                                             40,778           38,003
  Prepaid rents                                          4,485            3,999
  Other prepaid expenses                                 2,656            2,607
-------------------------------------------------------------------------------
    Total current assets                                67,709           76,302

Property and equipment, net                             54,892           48,231

Deferred charges and other intangible
  assets, net of accumulated amortization
  of $1,490 and $1,784                                   7,031            7,058
Deferred income taxes                                       --            2,685
Other assets                                               715              451
-------------------------------------------------------------------------------
    TOTAL ASSETS                                     $ 130,347        $ 134,727
===============================================================================


LIABILITIES
CURRENT LIABILITIES:
  Current portion of distribution
    center financing                                 $     978        $   1,052
  Accounts payable, trade                               16,543           12,596
  Accrued expenses                                      13,247           18,779
-------------------------------------------------------------------------------
     Total current liabilities                          30,768           32,427

Distribution center financing                           11,355           10,308
Other long-term liabilities                              8,011            6,948
-------------------------------------------------------------------------------
    TOTAL LIABILITIES                                   50,134           49,683
===============================================================================
Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized
  1,000,000; none issued
Common stock, $.001 par value; authorized
  30,000,000; issued 12,680,375; and
  outstanding 12,190,375                                    13               13
Additional paid-in capital                              78,259           78,259
Retained earnings                                        2,523            7,354
Treasury stock (490,000 shares) at cost                   (582)            (582)
-------------------------------------------------------------------------------
    TOTAL STOCKHOLDERS' EQUITY                          80,213           85,044
-------------------------------------------------------------------------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $ 130,347        $ 134,727
===============================================================================
</TABLE>


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


                                       7
<PAGE>   9
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                   53 WEEKS            52 WEEKS            52 WEEKS
FISCAL YEAR ENDED                              FEB. 3, 1996       FEB. 1, 1997        JAN. 31, 1998
---------------------------------------------------------------------------------------------------
<S>                                            <C>                 <C>                 <C>
NET SALES                                      $    369,173        $    363,074        $    361,751

Cost of goods sold, including
  buying and occupancy costs                        292,790             289,421             278,078
---------------------------------------------------------------------------------------------------

    Gross profit                                     76,383              73,653              83,673

General, administrative and
  store operating expenses                           80,170              80,063              80,469
---------------------------------------------------------------------------------------------------

    Operating (loss) income                          (3,787)             (6,410)              3,204

Interest (income) expense, net                         (119)                413                 154
---------------------------------------------------------------------------------------------------

(Loss) income before income taxes                    (3,668)             (6,823)              3,050

Benefit from income taxes                              (957)             (1,018)               (828)

Provision for (benefit from) write-down
  (write-up) of the compensation related
  deferred tax asset                                  1,928                 342                (953)
---------------------------------------------------------------------------------------------------

    Net (loss) income                               ($4,639)            ($6,147)             $4,831
===================================================================================================

Net (loss) income per share
  Basic                                              ($0.38)             ($0.50)              $0.40
===================================================================================================
  Diluted                                            ($0.38)             ($0.50)              $0.37
===================================================================================================

Weighted average number of
  shares outstanding
  Basic                                          12,190,294          12,190,375          12,190,375
  Diluted                                        12,190,294          12,190,375          13,187,609
</TABLE>


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


                                       8
<PAGE>   10
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED                                        FEB. 3, 1996    FEB. 1, 1997   JAN. 31, 1998
---------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                          ($ 4,639)       ($ 6,147)       $  4,831
Adjustments to reconcile net (loss) income to net
  cash provided from operating activities:
    Depreciation and amortization of property
      and equipment                                            10,101           9,983           8,540
    Amortization of deferred charges and other
      intangible assets                                           224             225             287
    Loss on disposal of assets                                    379             463             496
    Gain on sale of investments                                    --              --             (43)
    Compensation expense                                          246              77              --
    Provision for (benefit from) deferred income taxes          3,645             811          (2,685)
    Deferred lease assumption revenue amortization               (455)           (531)           (655)
    Lease assumption proceeds                                   3,523              --              --

Changes in operating assets and liabilities:
    Accounts receivable                                           647             473             726
    Income taxes receivable                                    (2,719)          2,490             229
    Inventory                                                  (2,883)           (377)          2,775
    Accounts payable and accrued expenses                       2,194             656             223
    Prepaid expenses                                           (1,004)            268             535
    Income taxes payable                                       (1,627)             --           1,379
    Other assets and liabilities                                  505            (768)           (606)
-----------------------------------------------------------------------------------------------------
Net Cash Provided from Operating Activities                     8,137           7,623          16,032
-----------------------------------------------------------------------------------------------------


INVESTING ACTIVITIES:
  Capital expenditures                                        (10,523)         (4,602)         (2,375)
  Deferred payment for property and equipment                     934            (896)             40
  Proceeds from sale of investment                                 --              --             410
-----------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities                         (9,589)         (5,498)         (1,925)
-----------------------------------------------------------------------------------------------------


FINANCING ACTIVITIES:
  Debt issuance costs                                              --              --            (276)
  Net proceeds from issuance of common stock                        4              --              --
  Repayments of long-term debt                                   (832)           (901)           (973)
-----------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities                            (828)           (901)         (1,249)
-----------------------------------------------------------------------------------------------------


Net (decrease) increase in cash and cash equivalents           (2,280)          1,224          12,858
Cash and cash equivalents, beginning of period                 19,320          17,040          18,264
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                     $ 17,040        $ 18,264        $ 31,122
=====================================================================================================
</TABLE>



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


                                       9
<PAGE>   11
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(shares and dollars in thousands)


<TABLE>
<CAPTION>
                                  COMMON      COMMON
                                   STOCK       STOCK    ADDITIONAL                  TREASURY       TOTAL
                                  SHARES       $.001     PAID-IN       RETAINED       STOCK,    STOCKHOLDERS'
                                OUTSTANDING  PAR VALUE   CAPITAL       EARNINGS       AT COST      EQUITY
-------------------------------------------------------------------------------------------------------------
<S>                             <C>          <C>        <C>            <C>          <C>         <C>

Balance, January 28, 1995         12,189       $13       $77,932       $ 13,309        ($582)       $90,672
-------------------------------------------------------------------------------------------------------------

Exercise of stock options              1                       4                                          4
Compensation expense                                         246                                        246
Net loss                                                                 (4,639)                     (4,639)
-------------------------------------------------------------------------------------------------------------


Balance, February 3, 1996         12,190        13        78,182          8,670         (582)        86,283
-------------------------------------------------------------------------------------------------------------

Compensation expense                                          77                                         77
Net loss                                                                 (6,147)                     (6,147)
-------------------------------------------------------------------------------------------------------------


Balance, February 1, 1997         12,190        13        78,259          2,523         (582)        80,213
-------------------------------------------------------------------------------------------------------------

Net income                                                                4,831                       4,831
-------------------------------------------------------------------------------------------------------------


Balance, January 31, 1998         12,190       $13       $78,259       $  7,354        ($582)       $85,044
=============================================================================================================
</TABLE>


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


                                       10
<PAGE>   12
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION

     On July 17, 1989, Sizes Unlimited Acquisition Corporation was merged with
     and into Lernmark, Inc. ("Lernmark"), a wholly-owned subsidiary of The
     Limited, Inc. ("The Limited"), with Lernmark being the surviving
     corporation. Lernmark was the holding company for Lerner Woman/Sizes
     Unlimited, a division of The Limited. Lernmark subsequently changed its
     name to United Retail Group, Inc. ("United Retail"). The Limited, through
     an affiliate, initially retained a one-third interest in United Retail
     through its acquisition of 2.5 million shares of United Retail's Common
     Stock. For financial reporting purposes, the acquisition was accounted for
     using the purchase method and, accordingly, the results of operations have
     been included in the financial statements from April 30, 1989, which is
     considered to be the effective date. The total cost of the acquisition,
     which includes costs directly related to the acquisition, was allocated
     among the net assets acquired on the basis of the respective fair values of
     such net assets adjusted for the one-third interest initially retained by
     The Limited.

     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
     fiscal 1997 presentation.


2. 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 year 1997
     consisted of 52 weeks and ended on January 31, 1998. Fiscal year 1996
     consisted of 52 weeks and ended on February 1, 1997. Fiscal year 1995
     consisted of 53 weeks and ended on February 3, 1996.

     NET RETAIL SALES AND REVENUES

     Sales are net of returns and exclude sales tax. Revenues include sales from
     all stores operating during the period.

     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 $6.7 million, $6.5 million, and $4.9 million
     in fiscal 1997, 1996 and 1995, respectively.

     CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include amounts on deposit with financial
     institutions with maturities of less than 90 days.

     INVENTORY

     Inventory is stated at the lower of cost or market, on a first-in,
     first-out basis, utilizing the retail method.


                                       11
<PAGE>   13
     PROPERTY AND DEPRECIATION

     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 life of the lease for
     leaseholds, improvements, 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, repairs and minor renewals are charged to expense as
     incurred. Renewals and betterments which extend service lives are
     capitalized.

     COMPUTATION OF INCOME (LOSS) PER COMMON SHARE

     At the end of fiscal 1997, the Company adopted the provisions of Statement
     of Financial Accounting Standards No. 128 "Earnings Per Share." Basic per
     share data has been computed based on the weighted average number of shares
     of common stock outstanding. Diluted per share data has been computed on
     the basic plus the dilution of stock options. Shares issuable upon the
     exercise of stock options have not been included in the diluted earnings
     per share computation for fiscal 1995 and fiscal 1996 because the effect
     would be anti-dilutive.

     For fiscal 1995, 1996 and 1997, the diluted net (loss) income per share
     would have been ($0.22), ($.48) and $0.29 per share, respectively, if the
     provision for (benefit from) the write-down (write-up) of the compensation
     related deferred tax asset of $1.9 million, $0.3 million, and ($1.0)
     million, respectively, was excluded (see Note 8).

     DEFERRED CHARGES AND OTHER INTANGIBLE ASSETS

     Certain loan facility fees and other costs of obtaining financing are being
     amortized on a straight-line basis over the term of the related loan.

     Goodwill, as of January 31, 1998, of $6.4 million represents the excess
     cost over the fair market value of the net assets of the businesses
     acquired. Goodwill is being amortized over a 40-year period using the
     straight-line method.

     The Company acquired certain trademarks during fiscal 1996 in the total
     amount of $410,000. These amounts are being amortized over 10 and 15 year
     periods using the straight-line method.

     The Company continually evaluates whether events and circumstances have
     occurred that indicate the remaining estimated useful life of deferred
     charges and other intangible 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 will use an
     estimate of the related business segment's undiscounted net cash flows over
     the remaining life of the asset in measuring whether the asset is
     recoverable.

     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.

     OTHER ACCOUNTING MATTERS

     In June 1997, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
     (SFAS No. 130) and No. 131, "Disclosures about Segments of an Enterprise
     and Related Information" (SFAS No. 131). SFAS No. 130 establishes standards
     for reporting and display of comprehensive income and its components
     (revenues, expenses, gains, and losses)in a full set of general-purpose
     financial statements.

     SFAS No. 131 establishes standards for the way that public business
     companies report information about operating segments in annual financial
     statements and requires that those companies report selected information
     about operating segments in interim financial reports issued to
     stockholders.

                                       12
<PAGE>   14
     Both statements are effective for financial statements for periods
     beginning after December 15, 1997. Neither statement will have an impact on
     the Company's financial statements taken as a whole.

     STORE OPENING COSTS

     All costs associated with the opening of new stores are expensed as
     incurred.


3. PROPERTY AND EQUIPMENT

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


<TABLE>
<CAPTION>
                                                            FEBRUARY 1,  JANUARY 31,
                                                               1997         1998
                                                            -----------  -----------
<S>                                                         <C>           <C>      
                    Land                                    $   2,176     $   2,176
                    Buildings                                  10,574        10,574
                    Furniture, fixtures and equipment          61,414        58,947
                    Leasehold improvements                     31,348        26,905
                    Beneficial leaseholds                      10,005         9,811
                    Construction in progress                      228           651
                                                            ---------     ---------
                                                              115,745       109,064
                                                            ---------     ---------

                    Accumulated depreciation and
                      amortization, including beneficial
                      leaseholds of $8,339 and $8,683         (60,853)      (60,833)
                                                            ---------     ---------
                    Property and equipment, net             $  54,892     $  48,231
                                                            =========     =========
</TABLE>

4. ACCRUED EXPENSES

     Accrued expenses consist of (dollars in thousands):


<TABLE>
<CAPTION>
                                                      FEBRUARY 1,   JANUARY 31,
                                                         1997          1998
                                                      -----------   -----------
<S>                                                   <C>            <C>    
                    Fixed asset payable               $     38       $    77
                    Occupancy expenses                   3,308         3,514
                    Payroll related expenses             2,855         4,404
                    Insurance payable                    2,905         3,140
                    Sales taxes payable                    770         1,208
                    Other                                3,371         6,436
                                                      --------       -------
                                                      $ 13,247       $18,779
                                                      ========       =======
</TABLE>

5. LEASED FACILITIES AND COMMITMENTS

     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):

<TABLE>
<CAPTION>
                                                       FISCAL            FISCAL           FISCAL
                                                        1995              1996             1997
                                                       -------           -------          -------
<S>                                                    <C>               <C>              <C>    
              Store rent
                Fixed minimum                          $39,300           $40,546          $39,423
                Percentage                                  41               (26)              32
                                                       -------           -------          -------
              Total store rent                          39,341            40,520           39,455
                Equipment and other                        517               424              411
                                                       -------           -------          -------
              Total rent expense                       $39,858           $40,944          $39,866
                                                       =======           =======          =======
</TABLE>

                                       13
<PAGE>   15
     At January 31, 1998, the Company was committed under store leases with
     initial terms ranging from 1 to 20 years and with varying renewal options.
     At February 3, 1996, February 1, 1997, and January 31, 1998, accrued rent
     expense amounted to $5.5 million, $5.7 million, and $5.7 million,
     respectively, of which $5.9 million, $5.5 million, and $5.3 million,
     respectively, is included in "Other long-term liabilities."

     A summary of approximate rent commitments under leases follows (dollars in
     thousands) for the fiscal years:


<TABLE>
<S>                                                                          <C>     
                       1998                                                  $ 32,846
                       1999                                                    28,124
                       2000                                                    24,548
                       2001                                                    21,777
                       2002                                                    19,824
                       Thereafter                                              60,505
                                                                             --------
                       Total minimum obligations                             $187,624
                                                                             ========
</TABLE>

     In July 1995, the Company agreed to assume the lease obligations of 21
     stores previously operated by another retail chain. In order to induce the
     Company to assume the leases, the assignor of the leases paid the Company
     approximately $3.5 million. This payment has been recorded as accrued rent
     payable and is being amortized against rent expense over the life of the
     assumed leases. As of January 31, 1998, the unamortized balance was $1.9
     million.


6. LONG-TERM DEBT

     Long-term debt consists of (dollars in thousands):

<TABLE>
<CAPTION>
                                                              FEBRUARY 1,      JANUARY 31,
                                                                 1997             1998
                                                              -----------      -----------
<S>                                                           <C>              <C>    
                    Distribution center financing:

                    Current portion                             $   978          $ 1,052
                    Long-term portion                            11,355           10,308
                                                                -------          -------
                    Total distribution center financing         $12,333          $11,360
                                                                =======          =======
</TABLE>

     In 1994, the Company executed a fifteen-year $8.0 million loan bearing
     interest at 8.64%. Interest and principal are payable in equal monthly
     installments beginning May 1, 1994. The loan is collateralized by a
     mortgage on the national distribution center owned by the Company in Troy,
     Ohio.

     In 1993, the Company executed a ten-year $7.0 million note bearing interest
     at 7.3%. Interest and principal are payable in monthly installments
     beginning November 1993. The note is collateralized by the material
     handling equipment in the distribution center.

     The Company and United Retail Incorporated, its subsidiary (collectively,
     the "Companies"), are parties to a Financing Agreement, dated August 15,
     1997, as amended September 15, 1997 (the "Financing Agreement"), with the
     CIT Group/Business Credit, Inc. ("CIT"). The Financing Agreement provides a
     revolving line of credit for a term of three years in the aggregate amount
     of $40 million for the Companies to support trade letters of credit and
     standby letters of credit and to finance loans.

     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 financial covenants.

     In the event a loan is made to one of the Companies, interest is payable
     monthly based on a 360-day year at the prime rate or at two percent plus
     the LIBOR rate on a per annum basis, at the borrower's option.

                                       14
<PAGE>   16
     The line of credit is secured by a security interest in inventory and
     proceeds and by the balance on deposit from time to time in an account that
     has been pledged to the lenders.

     At January 31, 1998, the combined availability of the Companies was $8.9
     million, no balance was in the pledged account, the aggregate outstanding
     amount of letters of credit arranged by CIT was $21.0 million and no loan
     had been drawn down. The Company's cash on hand was unrestricted.


7. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following represents the fair value of the Company's financial
instruments:

<TABLE>
<CAPTION>
                                                             FEBRUARY 1,       JANUARY 31,
                                                                1997              1998
                                                             -----------       -----------

<S>                                                             <C>              <C>    
                    Assets
                    ----------------------------------------------------------------------
                    Cash and cash equivalents

                         Carrying amount                        $18,264          $31,122
                         Fair value                             $18,264          $31,122

                    Liabilities
                    ----------------------------------------------------------------------
                    Long-term debt including current portion

                         Carrying amount                        $12,333          $11,360
                         Fair value                             $12,084          $11,466
</TABLE>

     The carrying amounts of cash and cash equivalents approximates fair value
     because of the short-term maturity of these instruments. The fair value of
     long-term debt, including current portion, is estimated based on the
     current rates quoted to the Company for debt of the same or similar issues.


8. 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 represents the change in the deferred tax
     asset/liability balance.

     The provision (benefit) for income taxes, together with the write-down
     (write-up) of the deferred tax asset, consists of (dollars in thousands):

<TABLE>
<CAPTION>
                                                       FISCAL            FISCAL           FISCAL
                                                        1995              1996             1997
                                                       -------           -------          -------
<S>                                                    <C>               <C>              <C>    
              Currently payable
                Federal                                $(2,523)          $(1,584)         $   722
                State                                     (151)               97              182
                                                       -------           -------          -------
                                                        (2,674)           (1,487)             904
                                                       -------           -------          -------
              Deferred
                Federal                                  2,850               696           (2,419)
                State                                      795               115             (266)
                                                       -------           -------          -------
                                                         3,645               811           (2,685)
                                                       -------           -------          -------
                                                       $   971           $  (676)         $(1,781)
                                                       =======           =======          =======
</TABLE>

                                       15
<PAGE>   17
     Reconciliation of the provision (benefit) for income taxes, together with
     the provision for (benefit from) write-down (write-up) of the compensation
     related deferred tax asset, from the U.S. Federal statutory rate to the
     Company's effective rate is as follows:


<TABLE>
<CAPTION>
                                                               FISCAL            FISCAL           FISCAL
                                                                1995              1996             1997
                                                               ------            ------           ------
<S>                                                            <C>               <C>                <C>  
         Statutory Federal income
           tax rate                                            (34.0%)           (34.0%)            34.0%
         State income taxes, net of
           Federal benefit                                       5.3               0.4               3.9
         Goodwill amortization                                   1.9               1.0               2.3
         Other                                                   0.7              (1.0)              0.7
                                                                ----              ----             -----  
         Sub-total                                             (26.1)            (33.6)             40.9
         Charitable contribution benefit                         0.0              (3.0)              0.0
         Write-down (write-up) of the
           compensation related deferred tax asset              52.6               5.0             (31.3)
         Valuation allowance                                     0.0              21.7             (68.0)
                                                                ----              ----             -----  
                                                                26.5%             (9.9%)           (58.4%)
                                                                ====              ====             =====
</TABLE>

     The Company's net deferred tax asset reflects the tax impact of temporary
     differences. The components of the net deferred tax asset as of January 31,
     1998 are as follows:

<TABLE>
<S>                                                                             <C>
                       Assets:
                       Inventory                                                $  184
                       Accruals and reserves                                     1,820
                       Compensation                                              1,839
                       Credit carryforwards                                      1,479
                                                                                ------
                                                                                 5,322

                       Liabilities:
                       Depreciation                                              2,637
                                                                                ------

                       Net deferred tax asset                                   $2,685
                                                                                ======
</TABLE>

     Future realization of the tax benefits attributable to these existing
     deductible temporary differences ultimately depends on the existence of
     sufficient taxable income within the carryback and/or carryforward period
     available under the tax law at the time of the tax deduction. Based on
     management's assessment, it is more likely than not that the net deferred
     tax asset will be realized through future taxable earnings or available
     carrybacks. Because of this assessment, the fiscal 1997 benefit reflects
     the reversal of the valuation allowance established in the prior year. In
     fiscal 1995, fiscal 1996 and fiscal 1997, the Company took a $1.9 million
     write-down, a $0.3 million write-down, and a $1.0 million write-up of the
     compensation related deferred tax asset, respectively, which had been
     recorded in fiscal 1992 based upon the initial public offering price of $15
     per share. On February 13, 1998, employee stock options relating to $1.822
     million of the compensation related deferred tax asset were exercised.

     At February 1, 1997 and January 31, 1998, the Company has pre-acquisition
     net operating loss carryforwards aggregating approximately $0.5 million
     available to reduce future taxable income in certain states, expiring
     through 2004.


9. RELATED PARTY TRANSACTIONS

     The Company shared certain store locations with subsidiaries of The Limited
     and was charged by The Limited for occupancy costs.

                                       16
<PAGE>   18
     The impact on the statements of operations of these occupancy charges was
as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                        FISCAL            FISCAL           FISCAL
                                                         1995              1996             1997
                                                        ------            ------           ------

<S>                                                     <C>               <C>              <C> 
           Costs of goods sold, including
           buying and occupancy costs                     $537              $367             $123
</TABLE>

     An affiliate of the Chairman of the Board of the Company (in which he holds
     an 80% interest)provides management and administrative services to a
     subsidiary of The Limited 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 1995, fiscal 1996, and fiscal 1997, the
     aforementioned affiliate was paid $114,000, $105,000, and $160,000,
     respectively, by that subsidiary of The Limited.

     During fiscal 1995, fiscal 1996, and fiscal 1997, the Company incurred
     expenses under certain Sublicensing Agreements with respect to trademarks
     to the subsidiary of The Limited referred to above in the amounts of
     $308,000, $416,000, and $395,000, and to the affiliate of the Chairman of
     the Board of the Company referred to above in the amounts of $331,000,
     $593,000 and $599,000, respectively.

     In fiscal 1994 and fiscal 1996, the Company made investments in a vendor
     from which the Company purchased apparel. The investments totaled $12,500
     for approximately 22% of the outstanding common stock of the vendor and an
     unsecured loan facility in the amount of $400,000, which expired on January
     31, 1997. Purchases during fiscal 1995, fiscal 1996, and fiscal 1997
     totaled $1.8 million, $2.7 million, and $0.6 million, respectively. In
     fiscal 1997, the Company exercised its option to sell its shares of common
     stock to the vendor. The price to be received on the aforementioned common
     stock can not be estimated at this time.

     During fiscal 1995, the Company made an investment in one of the purchasing
     agents that acted on the Company's behalf in contracting for apparel with
     foreign vendors. The investment made during fiscal 1995 (which is the only
     investment made in the purchasing agent by the Company) was $463,000 for
     25% of the outstanding common stock of the purchasing agent. Fees paid to
     the purchasing agent during fiscal 1995 and fiscal 1996 totaled $844,000
     and $497,000, respectively, principally as percentage commissions on
     apparel purchases. In fiscal 1995, the Company extended to the purchasing
     agent a loan of $125,000 with interest at 2 percentage points over the
     prime rate, which was repaid in full in fiscal 1996. In fiscal 1997 the
     Company sold its entire investment in the purchasing agent at a purchase
     price of $505,000, of which $95,000 is a receivable as of January 31, 1998,
     resulting in a gain of $43,000.

10. RETIREMENT PLAN

     The Company maintains a defined qualified 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, known as the Supplemental Retirement Savings Plan ("SRSP"). 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.

     Pension costs for all benefits charged to income during fiscal 1995, fiscal
     1996, and fiscal 1997 were $248,000, $335,000, and $278,000, respectively.

                                       17
<PAGE>   19
11. 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 1,000,000 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 issue of such class or series
     of Preferred Stock. The Company has paid no cash dividends and expects to
     retain any future earnings for expansion of its business rather than to pay
     cash dividends in the foreseeable future. Additionally, the Financing
     Agreement imposes restrictions on the payment of cash dividends.


12. STOCK OPTIONS

     Under the 1989 Management Stock Option Plan (the "1989 Plan") established
     on July 17, 1989, options to purchase 1,078,125 shares and 50,000 shares at
     exercise prices of $1.00 and $5.00 per share, respectively, have been
     granted and are outstanding as of January 31, 1998. All options granted
     under the 1989 Plan became vested and exercisable upon completion of the
     initial public offering and the payment of certain obligations to The
     Limited Inc. On February 13, 1998, 1,078,125 of the 1989 Plan options were
     exercised by management.

     Under 1991 Stock Option Agreements between the Company and certain
     executive officers (the "1991 Options"), the Board of Directors approved
     and granted, on July 24, 1991, options to purchase 300,000 shares at an
     exercise price of $5.00 per share which are outstanding as of January 31,
     1998. These options became vested and excercisable upon completion of the
     initial public offering and the payment of certain obligations to The
     Limited Inc.

     The options outstanding under the 1989 Plan and the 1991 Options expire on
     December 31, 1999. The voluntary resignation of an optionee does not limit
     the options' expiration date or otherwise affect the excercisability of
     these options in any way.

     The Restated 1990 Stock Option Plan (as amended, the "1990 Plan") was
     established in June 1990, amended in November 1991, December 1992 and May
     1993, and terminated in May 1996. Exercise prices were not less than fair
     market value of the Company's stock on the date of grant. The options
     granted under the 1990 Plan expire between seven and ten years after the
     date of grant. As of February 1, 1997 and January 31, 1998, outstanding
     options to purchase 658,000 and 625,700, respectively, were granted under
     the 1990 Plan at average exercise prices of $6.78 and $6.89 per share,
     respectively. The options vest beginning one year from the date of grant,
     and vest fully after four or five years, subject to acceleration under
     certain circumstances. Options were granted, and the 1990 Plan is
     administered by the Compensation Committee of the Board of Directors,
     composed of non-employees of the Company. The Company recorded compensation
     expense pursuant to the 1990 Plan in fiscal 1996 of $77,000.

     A summary of stock option transactions under the 1990 Plan is as follows:

<TABLE>
<CAPTION>
                                                              Fiscal          Fiscal             Fiscal
                                                               1995            1996               1997
                                                           ------------    -------------     -------------
<S>                                                        <C>             <C>               <C>          
    Options outstanding at beginning of period                  636,750          665,000           658,000
    Options granted (a)                                         111,500           99,000                 0
    Options exercised                                             1,000                0                 0
    Options expired                                                   0                0            22,500
    Options canceled (a)                                         82,250          106,000             9,800
    Options outstanding at end of period                        665,000          658,000           625,700
    Options available for grant at end of period                 94,625                0                 0
    Options vested and outstanding at end of period             141,900          102,895           198,783
    Options excercisable at end of period and having
      an exercise price that is less than the respective
      year end common stock closing price                             0                0            86,500
    Range of option prices per share for
      outstanding options                                  $4.50-$26.75    $4.125-$26.75     $4.125-$26.75
</TABLE>

     (a) Options granted and options canceled do not include the reissuance in
     fiscal 1995 and fiscal 1996 of 210,000 and 271,500 options at exercise
     prices of $8.50 and $5.125 per share, respectively.

                                       18
<PAGE>   20
     The 1996 Stock Option Plan (the "1996 Plan") was established in May 1996.
     Exercise prices are required by the 1996 Plan not to be less than fair
     market value of the Company's stock on the date of grant. The total number
     of shares that may be optioned under the 1996 plan is 440,000 shares. The
     options granted under the 1996 Plan expire ten years after the date of
     grant. As of February 1, 1997 and January 31, 1998, outstanding options to
     purchase 45,000 and 163,000 shares have been granted under the Plan at an
     average exercise price of $3.00 and $3.22 per share. The options granted
     vest beginning one year from the date of grant, and vest fully after five
     years, subject to acceleration under certain circumstances. 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. Public Directors will receive annual grants of
     options under the 1996 Plan. Options are granted, and the 1996 Plan is
     administered, by the Compensation Committee of the Board of Directors,
     composed of non-employees of the Company.

     A summary of stock option transactions under the 1996 Plan follows:

<TABLE>
<CAPTION>
                                                                             Fiscal           Fiscal
                                                                              1996             1997
                                                                             ------           ------

<S>                                                                          <C>        <C>   
     Options outstanding at beginning of period                                    0           45,000
     Options granted                                                          45,000          145,000
     Options exercised                                                             0                0
     Options canceled                                                              0           27,000
     Options outstanding at end of period                                     45,000          163,000
     Options available for grant at end of period                            395,000          277,000
     Options vested and outstanding at end of period                               0            4,000
     Options excercisable at end of period and having
       an exercise price that is less than the respective
       year end common stock closing price                                         0            4,000
     Range of option prices per share for
       outstanding options                                                     $3.00    $2.625-$5.625
</TABLE>


     The Company records compensation expense for all stock-based compensation
     plans using the intrinsic value method prescribed by Accounting Principles
     Board Opinion No. 25, "Accounting for Stock Issued to Employees." 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 October 1995, the Financial Accounting Standards Board issued
     Statement of Financial Accounting Standards No. 123, "Accounting for
     Stock-Based Compensation," which encourages companies to recognize expense
     for stock-based awards based on their estimated value on the date of grant.
     SFAS No. 123, which is first effective for fiscal year 1996, does not
     require companies to change their existing accounting for stock-based
     awards. The Company continues to account for stock-based compensation plans
     using the intrinsic value method, and has supplementally disclosed pro
     forma information required by SFAS No. 123.


<TABLE>
<CAPTION>
                                                               Fiscal             Fiscal
                                                                1996               1997
                                                               ------             ------

<S>                                                            <C>                <C>   
               Net (loss) income - as reported                 $(6,147)           $4,831
               Net (loss) income - pro forma                   $(6,416)           $4,532

               (Loss) earnings per share - as reported         $ (0.50)           $ 0.37
               (Loss) earnings per share - pro forma           $ (0.53)           $ 0.34
</TABLE>

                                       19
<PAGE>   21
     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:


<TABLE>
<CAPTION>
                                                                Fiscal            Fiscal
                                                                 1996              1997
                                                                ------            ------
<S>                                                             <C>              <C>  
                    Expected dividend yield                       0.00%            0.00%
                    Expected stock price volatility              50.00%           50.00%
                    Risk-free interest rate                       5.72%            5.39%
                    Expected life of options                    5 years          5 years
</TABLE>

     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.

13. SUPPLEMENTAL CASH FLOW INFORMATION

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


<TABLE>
<CAPTION>
                                                        Fiscal           Fiscal             Fiscal
                                                         1995             1996               1997
                                                        ------           ------             ------

<S>                                                     <C>              <C>                <C>
              Interest (income) expense, net
                per statements of operations             $(119)          $   413             $154

              Less: Non-cash interest
                (expense) income                           (41)               50              (63)
                                                         -----           -------             ----

              Net cash interest (income) expense
                including interest income of
                $1,425, $924, and $984                   $(160)          $   463             $ 91
                                                         =====           =======             ====

              Income taxes paid (refunded)               $ 474           $(3,990)            $531
                                                         =====           =======             ====
</TABLE>

14. CONTINGENCY FOOTNOTE

     The Company is involved in legal actions and claims arising in the ordinary
     course of business. Management believes (based on advice of legal counsel)
     that such litigation and claims will not have a material effect on the
     Company's financial condition or results of operations.

                                       20
<PAGE>   22
UNITED RETAIL GROUP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(shares and dollars in thousands)


<TABLE>
<CAPTION>
Fiscal Year Ended                 Jan. 29, 1994   Jan. 28, 1995  Feb. 3, 1996    Feb. 1, 1997    Jan. 31,1998
-----------------                 -------------   -------------  ------------    ------------    ------------
<S>                               <C>             <C>            <C>             <C>             <C>      
OPERATING STATEMENT DATA
   Net sales                           $ 344,090       $ 357,684      $ 369,173       $ 363,074       $ 361,751
   Cost of goods sold,
     including buying and
     occupancy costs                     261,920         276,038        292,790         289,421         278,078
   Gross profit                           82,170          81,646         76,383          73,653          83,673
   General, administrative and
     store operating expenses             75,744          74,986         80,170          80,063          80,469
   Operating income (loss)                 6,426           6,660         (3,787)         (6,410)          3,204
   Interest (income) expense, net           (143)            491           (119)            413             154
   Income (loss) before taxes              6,569           6,169         (3,668)         (6,823)          3,050
   Provision for (benefit from)
     income taxes                          2,522           2,276           (957)         (1,018)           (828)
   Provision for (benefit from)
     write-down (write-up) of the
     compensation related
     deferred tax asset                    2,479             917          1,928             342            (953)
   Net income (loss)                       1,568           2,976         (4,639)         (6,147)          4,831
   Net income (loss) per
     common share:
       Basic                           $    0.13       $    0.24      $   (0.38)      $   (0.50)      $    0.40
       Diluted                         $    0.12       $    0.22      $   (0.38)      $   (0.50)      $    0.37
   Weighted average number of
     common shares outstanding:
       Basic                              12,126          12,169         12,190          12,190          12,190
       Diluted                            13,372          13,313         12,190          12,190          13,187
   
BALANCE SHEET DATA (at period end)
   Working capital                     $  24,533       $  37,614      $  38,394       $  36,941       $  43,875
   Total assets                          141,607         138,434        139,033         130,347         134,727
   Long-term debt                              0               0              0               0               0
   Distribution center financing           6,293          13,233         12,333          11,355          10,308
   Total stockholders' equity             87,320          90,672         86,283          80,213          85,044
</TABLE>

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. The data for the periods indicated has been derived from the Company's
Consolidated Financial Statements, which have been audited by Coopers & Lybrand,
L.L.P., independent accountants, whose report for the three fiscal years ended
January 31, 1998 appears elsewhere in this Annual Report.

                                       21
<PAGE>   23
UNITED RETAIL GROUP, INC
EXECUTIVE OFFICERS AND DIRECTORS

RAPHAEL BENAROYA
Chairman of the Board, President and Chief Executive Officer*

GEORGE R. REMETA
Vice Chairman - Chief Financial Officer, Secretary and Director*

KENNETH P. CARROLL
Senior Vice President - General Counsel*

ELLEN DEMAIO
Senior Vice President - Merchandise

CARRIE CLINE-TUNICK
Vice President - Product Design and Development

JULIE L. DALY
Vice President - Strategic Planning

KENT FRAUENBERGER
Vice President - Logistics

JON GROSSMAN
Vice President - Finance*

ALAN R. JONES
Vice President - Real Estate

CHARLES E. NAFF
Vice President - Sales

BRADLEY ORLOFF
Vice President - Marketing

ROBERT PORTANTE
Vice President - MIS

FREDRIC E. STERN
Vice President - Controller

JOSEPH A. ALLUTO
A Director of the Company, is the Dean of Max M. Fisher School of Business at
Ohio State University

RUSSELL BERRIE
A Director of the Company, is the Chairman of the Board and Chief Executive
Officer of Russ Berrie and Company, Inc., an international toy manufacturer

JOSEPH CIECHANOVER
A Director of the Company, is the Chairman of the Board of El Al Israel Airlines
Ltd.

ILAN KAUFTHAL
A Director of the Company, is a Vice Chairman of Schroder & Co., Inc., an
investment banking firm

VINCENT P. LANGONE
A Director of the Company, is Chairman of the Board of Interbuild International
Inc., a venture capital firm

CHRISTINA A. MOHR
A Director of the Company, is a Managing Director of Salomon Brothers, Inc., an
investment banking firm

RICHARD W. RUBENSTEIN
A Director of the Company, is a Partner of Squire, Sanders & Dempsey, a law firm

SHAREHOLDER INFORMATION

The Company's Annual Report on Form 10-K, including financial statements, filed
with the Securities and Exchange Commission ("SEC"), is available without charge
upon written request to Kenneth P. Carroll, Esq., Senior Vice President -
General Counsel, at the Company's headquarters. Mail should be addressed to 365
West Passaic Street, Rochelle Park, New Jersey 07662; E-mail should be addressed
to kencarroll@ibm.net.The Annual Report on Form 10-K is also available through
the SEC at http://www.sec.gov.

The Common Stock is quoted on the NASDAQ National Market under the symbol
"URGI." The last reported sale price of the Common Stock on the NASDAQ National
Market on April 3, 1998 was 6 9/16. The following table sets forth the reported
high and low sale prices of the Common Stock as reported by NASDAQ for each
calendar quarter indicated.


<TABLE>
<CAPTION>
                            HIGH              LOW
                            ----              ---
<S>                        <C>              <C>
1996

     First Quarter         $5 1/2           $3 7/8
     Second Quarter        $5 1/4           $4
     Third Quarter         $4 7/8           $2 3/8
     Fourth Quarter        $3 3/8           $1 1/2

1997

     First Quarter         $4 3/4           $2 7/8
     Second Quarter        $4 1/8           $2 1/2
     Third Quarter         $3 9/16          $2 9/16
     Fourth Quarter        $6 1/8           $2 5/8
</TABLE>


The Company has paid no cash dividends and expects to retain any earnings in the
foreseeable future for expansion of its business rather than to pay cash
dividends.

The Company's transfer agent and registrar is
Continental Stock Transfer & Trust Co.,
2 Broadway New York, New York 10004

At March 31, 1998 there were approximately 1,500 beneficial owners of Common
Stock, not including participants in the Company's stock purchase and retirement
savings plans.


* An officer of the parent holding company rather than the operating subsidiary,
United Retail Incorporated or United Retail Logistics Operations Incorporated.

                                       22