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FORM 10-K SECURITIES AND EXCHANGE COMMISSION  Washington, DC 20549





|(Mark One)                                                                 
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|For the fiscal year ended January 28, 2006                                 
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|For the transition period from ___________________to    ___________________
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|Commission file number 019774                                              
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|United    Retail Group, Inc.                                               
|                                                                           
|(Exact name of registrant as specified in its charter)                     




|Delaware                                                        |  | 51 0303670                          
|--------------------------------------------------------------- |  | ------------------------------------
|                                                                |  |                                     
|State or other jurisdiction of    incorporation or organization |  | (I.R.S. Employer Identification No.)
|                                                                |  |                                     
|365 West Passaic Street, Rochelle Park, NJ                      |  | 07662                               
|                                                                |  |                                     
|(Address of principal executive offices)                        |  | (Zip Code)                          




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





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





|Title of each class                                                            |  | Name of each exchange on which registered
|------------------------------------------------------------------------------ |  | -----------------------------------------
|                                                                               |  |                                          
|                                                                              
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|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 if the  registrant is a well-known seasoned issuer, as defined in Rule 405 of the  Securities Act.





YES         NO





Indicate by check mark if the  registrant is not required to file reports pursuant to Section 13 or Section  15(d) of the Act.


YES         NO





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         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





Indicate by check mark whether  the registrant is a shell company (as defined in Rule 12b-2 of the Exchange  Act).


YES         NO





The aggregate  market value of all 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 on April 1, 2006 was approximately $84  million computed by reference to the $7.71 price per share at which the common  equity was last sold as of July 29, 2005.   Solely for the purpose of this calculation, the number of shares held by  non-affiliates was deemed to have been 10,869,543, which is the number of  shares presently held by stockholders other than Raphael Benaroya, the  Corporations Chairman of the Board, President and Chief Executive Officer.





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:





There were  13,390,745 shares of the registrants common stock, $.001 par value per share,  outstanding on April 1, 2006.  One Stock  Purchase Right is attached to each outstanding share.





DOCUMENTS  INCORPORATED BY REFERENCE





Certain  information in Part III
      of this Annual Report on Form 10-K (this Report) is  incorporated
      therein by reference to the registrants proxy statement on  Schedule
      14A for its 2006 annual meeting of stockholders (the Proxy  Statement)
      to be filed with the Securities and Exchange Commission (the SEC)
      on or before May 28, 2006.





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Part  I





ITEM  1.               BUSINESS.





Overview





The Company is a leading  nationwide specialty retailer of large size (14 or larger) womens fashions  featuring its proprietary AVENUE® brand.   Its product line features AVENUE® brand wearing apparel, AVENUE BODY®  brand undergarments, CLOUDWALKERS® brand footwear, AVENUE® brand accessories  and gifts, AVENUE® brand hosiery and AVENUE BODY® brand loungewear.  Sales in fiscal 2005, fiscal 2004 and fiscal  2003, respectively, were principally of apparel, with none of the other product  categories representing 10% or more of sales.





History





United Retail Group, Inc. was  incorporated in Delaware in 1987 and completed its initial public offering in  1992.  The Companys current business  resulted from an internal reorganization at Limited Brands, Inc. (The  Limited) in 1987, in which The Limited combined its AVENUE® store group (then  operating under the LERNER WOMAN trade name) with the SIZES UNLIMITED store  group.  Raphael Benaroya, currently the  Chairman of the Board, President and Chief Executive Officer of United Retail  Group, Inc., was selected by The Limited to manage the combined businesses.





Website





The Companys corporate website  is www.unitedretail.com.  The Companys  corporate website includes a link to the index of the Companys filings on the  EDGAR database of the Securities and Exchange Commission (the SEC), including  Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports  on Form 8-K, as well as amendments to previously filed reports.  (The EDGAR database can be accessed directly  at www.sec.gov.)





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 size 14 or larger 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 feature  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 often updates its merchandise selections to reflect customer demand and  mainstream fashion trends.  (The apparel  industry is subject to rapidly changing consumer fashion preferences and the  Companys performance depends on its ability to respond quickly to changes in  fashion.)  The Company offers most of  its merchandise at popular or moderate price points and reduces the price of  slow moving merchandise until it sells.





The Company exclusively  promotes merchandise with its own brands, which the Company believes help to  distinguish it from competitors.   Through careful brand management, including consistent imaging of its  brands, the Company seeks enhanced brand recognition.  This paragraph includes forward-looking information under the  Private Securities Litigation Reform Act of 1995 (the Reform Act), which is  subject to the variables, uncertainties and other risk factors referred to in  Item 7 Managements Discussion and Analysis of Financial Condition and Results  of Operations - Future Results of this Report.





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The Company offers selections of AVENUE®  brand casual wear, career apparel, specialty items and accessories.  The casual wear assortment includes skirts,  pants, jeans, active wear, shirts,   T-shirts, jackets and sweaters.   Casual wear comprises the majority of the Companys sales.  The career assortment includes slacks,  skirts, jackets, soft blouses and dresses.





The Company develops new  AVENUE® brand apparel assortments on average four to six times each year.





Accessories include earrings,  pins, scarves, necklaces, watches and handbags.





The Company maintains an  extensive customer database and uses direct mail, print media advertising,  credit card statement inserts, and e-mail messages as part of its marketing  activities in the belief that shoppers often make tentative purchasing  decisions at home.





The Company uses creative  merchandise displays, distinctive signage and custom designed packaging to  create an attractive store atmosphere.





Channel of Distribution





The Companys channel of  distribution is retail stores, using the AVENUE® trade name, that it  leases.  Most stores are located in  strip shopping centers, where occupancy costs are generally lower than in  malls.  See, Properties.  The Company seeks to become a shopping  destination instead of relying on traffic in general.





Merchandise selection is  allocated to each store based on many factors, including store location, store  profile and sales experience.  The  Company regularly updates each stores profile based on selling trends.  The Companys point-of-sale systems gather  sales, inventory and other statistical information from each store daily.  This information is then used to evaluate  and adjust each stores merchandise mix weekly.





The Company also operates a  website at www.avenue.com that sells a selection of the merchandise that is  also for sale in the stores.  Sales on  the website are not included in the Companys calculation of comparable store  sales in different periods.





Until March 2003, the Company  also mailed catalogs.  (The website and  the catalog, while it was in existence, are referred to as the shop@home  business.)  The Company has licensed its  AVENUE trade name to a leading catalog publisher to conduct a market test of an  AVENUE catalog through August 2006.  The  Company is not responsible for the costs of the market test and will not  include sales to catalog customers in its reported sales.  The future business relationship between the  Company and the catalog publisher, if any, will be negotiated after the results  of the market test have been analyzed.





Merchandise Distribution and Inventory Management





Short production schedules and  rapid delivery of merchandise from manufacturers reduce business risks arising  from changing fashion trends.





The Company uses a centralized  distribution system, under which all merchandise is received, processed and  distributed through the Companys distribution complex in Troy, Ohio.  The Company maintains a worldwide logistics  network of agents and space availability arrangements to support the in-bound  movement of merchandise into the distribution complex.  There, it is repacked and shipped to the  stores.  The out-bound system for store  deliveries consists of common carrier line haul routes to a network of delivery  agents.  (The Company does not own or  operate trucks.)  The Company manages  its inventory levels, merchandise allocation to stores and sales replenishing  for each store through its computerized management information systems (MIS).  MIS enables the Company to profile each store and allocate new merchandise by  style, color and size each week to achieve a merchandise assortment that is  suited to each
stores customer base.





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The Companys inventory  management strategy is to maintain targeted inventory levels and turns without  permitting inventory to accumulate at the national distribution center.  The Company also seeks to minimize the  amount of unsold merchandise at the end of each six-month season by closely  comparing sales and fashion trends with on-order merchandise and making  necessary purchasing adjustments and price reductions, including clearance  sales.  The preceding sentences  constitute forward-looking information under the Reform Act and are subject to  the variables, uncertainties and other risk factors referred to in Item 7.  Managements Discussion and Analysis of Financial Condition and Results of  Operations - Future Results of this Report.





Management Information Systems





The Companys management  information systems consist of a full suite of financial and merchandising  systems, including inventory distribution and control, sales reporting,  accounts payable, cash/treasury, merchandise reporting and planning.





All of the Companys stores  have point-of-sale terminals that transmit daily information on sales by  merchandise category, style, color and size, as well as customer data.  The Company evaluates this information,  together with its report on merchandise shipments to the stores, to implement  merchandising decisions regarding markdowns, reorders of fast-selling items and  allocation of merchandise.  In addition,  the Companys headquarters and distribution center are linked through a computer  network, which is accessible to district sales managers in the field.





Company associates located at  its headquarters maintain and support the applications software, operations,  networking and point-of-sale functions of the Companys MIS.  The mainframe hardware and systems software  for the Companys MIS are maintained and operated by IBM under an outsourcing  agreement that makes the Companys platform scaleable.





Purchasing





Separate groups of merchants  are responsible for different categories of merchandise.   Most of the merchandise purchased by the  Company consists of custom designed and fitted products, produced for the  Company by contract manufacturing, under one of the Companys brands.





The Company provides  manufacturers with strict guidelines for product specifications (such as measurement,  fabric and trim) and size gradings to ensure proper, consistent fit and  quality.  The Company and independent  sourcing agents monitor production by manufacturers in the United States and  abroad to ensure that size specifications, grading requirements and other  specifications are met.





In fiscal 2005, three  purchasing agents each accounted for 10% or more of the Companys merchandise  purchases, for a combined total of approximately 42% of purchases.  There is no assurance that the replacement  of any of these firms would not have a materially adverse effect on the  Companys operations.





Domestic purchases (some of  which are foreign-made products) are executed by Company purchase orders.  Import purchases are made in U.S. dollars  and are generally supported by trade letters of credit.





Credit Sales





The Company permits its  customers to use several methods of payment, including cash, personal checks,  general purpose credit cards and a private label credit card that is co-branded  with the





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Companys AVENUE® service mark  and the name of the issuer of the card, World Financial Network National  Bank.  Management believes that, in  addition to supplying needed credit, the Companys private label credit card  builds customer loyalty.





Increased Competition





All aspects of the womens  retail apparel and shoe businesses are highly competitive.  Many of the competitors are units of large  national chains that have substantially greater resources than the Company and  are better known to shoppers.  The  Companys competition includes other specialty retailers, mass merchants,  department stores, discount stores, mail order companies, television shopping  channels and Internet web sites.   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.





Management believes its  proprietary brands, merchandise selection, prices, consistency of merchandise  quality and fit, and appealing store experience emphasizing strong merchandise  presentations, together with its experienced management team, management  information systems and logistics capabilities, enable it to compete in the  marketplace.





This section includes  forward-looking information under the Reform Act and is subject to the  variables, uncertainties and other risk factors referred to in Item 7  Managements Discussion and Analysis of Financial Condition and Results of  Operations - Future Results of this Report.





Trade Name and Trademarks





The Company is the owner in the  United States of its trade name, AVENUE®, used on storefronts, its principal  trademarks, AVENUE®, AVENUE BODY® and CLOUDWALKERS®, used on merchandise  labels, and its service mark, AVENUE®, used on giftcards.  The Company also licenses the AVENUE® trademark  to manufacturers of high-end towels and watches.  The Company is not aware of any use of its trade name or  trademarks by its competitors that has a material effect on the Companys  operations or any material claims of infringement or other challenges to the  Companys right to use its trade name, trademarks and service marks in the  United States.





Employees





As of March 31, 2006, the  Company employed 5,398 associates, of whom 1,887 worked full-time and the  balance of whom worked part-time.   Considerable seasonality is associated with employment levels.  Approximately 52 store associates are  covered by collective bargaining agreements.   The Company believes that its relations with its associates are good.





ITEM 1A. RISK FACTORS.





Fashion Risk





The Company historically  experienced fluctuations in customer response to its merchandise  assortments.  Future success depends on  the Companys ability to consistently anticipate, assess and react to the  changing demands of its customer-base.   As a private label merchandiser, the Company assumes certain risks,  including long product lead times and high initial purchase commitments, that  amplify the consequences of any miscalculation that it might make in  anticipating fashion trends or interpreting them for customers.  There is no assurance that the Company will  be able to identify and offer merchandise that appeals to its customer-base or  that the introduction of new merchandise will be successful or profitable.





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Brand Development Costs





Future success depends upon the  Companys ability to effectively define, evolve and promote its brand.  In order to achieve and maintain significant  brand name recognition, it may become necessary to increase investments in the  development of the brand through various means, including customer research,  advertising, direct mail marketing and Internet marketing.  There is no assurance that, if such funding  becomes necessary, it will be available.





Increased Competition





All aspects of the womens  retail apparel and shoe businesses are highly competitive.  Many of the competitors are units of large  national chains that have substantially greater resources than the Company and  are better known to shoppers.  The Companys  competition includes other specialty retailers, mass merchants, department  stores, discount stores, mail order companies, television shopping channels and  Internet web sites.  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.  There is no assurance that the Company will  be able to maintain its market share in the face of increased competition.





Other External Influences





The following external factors  could impact the Companys operations: threats of terrorism; war risk; shifts  in consumer spending patterns, overall economic conditions; variations in  weather patterns; increases in interest rates; political instability and other  risks associated with foreign sources of production and increases in fuel  costs.





Key Personnel





Management believes that since  the Companys inception it has benefited substantially from the leadership of  Raphael Benaroya, the Companys Chairman of the Board, President and Chief  Executive Officer.  The Company has an  employment contract with Mr. Benaroya and believes that its relations with him  are good.  Nevertheless, there is no  assurance that Mr. Benaroya will remain in the Companys employ or that a  suitable replacement could be recruited in a timely manner if he left.





Future success depends on the  Companys ability to
attract and retain talented
associates engaged in creative activities,  such as product design, product management, marketing,
brand development and  store design.  There is no assurance  that the Company will be able to
attract and retain key associates in these key areas.





ITEM  1B.          UNRESOLVED STAFF  COMMENTS.





Not  applicable.





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ITEM  2.             PROPERTIES.





As of January 28, 2006, the  Company leased 500 stores in the following 37 states:





|Alabama       | 7  | North    Carolina | 9 
|------------- | -- | ----------------- | --
|Arizona       | 5  | Nebraska          | 2 
|Arkansas      | 2  | New Hampshire     | 1 
|California    | 72 | New Jersey        | 38
|Connecticut   | 7  | New Mexico        | 2 
|Delaware      | 2  | Nevada            | 3 
|Florida       | 29 | New York          | 48
|Georgia       | 17 | Ohio              | 25
|Illinois      | 37 | Oklahoma          | 3 
|Indiana       | 11 | Oregon            | 5 
|Kansas        | 2  | Pennsylvania      | 20
|Kentucky      | 3  | Rhode Island      | 2 
|Louisiana     | 7  | South Carolina    | 4 
|Maryland      | 12 | Tennessee         | 6 
|Massachusetts | 13 | Texas             | 48
|Michigan      | 25 | Virginia          | 9 
|Minnesota     | 3  | Washington        | 10
|Mississippi   | 2  | Wisconsin         | 4 
|Missouri      | 5  |                   |   




Store locations are available  on the Internet at www.avenue.com.  403  stores are in strip shopping centers.





The landlord often provides a  construction allowance toward the cost of improvements in the Companys stores,  including interior walls, floors, ceilings, fixtures and decorations.  The Company usually pays certain store  operating costs, including utilities, insurance and taxes and, where  applicable, its share of common area maintenance expenses.





The Company leases its  executive offices, which consist of approximately 65,000 square feet in an  office building at 365 West Passaic Street, Rochelle Park, New Jersey  07662.  The office lease has a term  ending in August 2016.





The Company owns a 128-acre  site adjacent to Interstate 75 in Troy, Ohio, on which its national  distribution center is located.  The  national distribution center is equipped to service approximately 900 retail  stores and the Internet store. The site is adequate for a total of four similar  facilities.





ITEM 3.               LEGAL  PROCEEDINGS.





The Company is defending 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.





Certain pending legal  proceedings to which the Company was a party were terminated during the fourth  quarter of 2005 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.





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





No matters were submitted to a  stockholder vote during the fourth quarter of fiscal 2005.





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PART  II





ITEM 5.MARKET  FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES.





(a)          The  Common Stock of United Retail Group, Inc. is quoted on the Nasdaq Stock Market  under the symbol URGI.





The following table sets forth  the reported high and low sales prices of the Common Stock as reported by  Nasdaq for each fiscal quarter indicated.





|                  |  | 2004 |      | 2005 |  
|----------------- |  | ---- | ---- | ---- | -
|                  |  |      |      |      |  
|                  |  | High |      | Low  |  
|                  |  |      |      |      |  
|First    Quarter  |  | $    | 3.25 |      | $
|Second    Quarter |  | $    | 2.99 |      | $
|Third    Quarter  |  | $    | 3.71 |      | $
|Fourth    Quarter |  | $    | 5.71 |      | $




The last reported sale price of  the
Common Stock on the Nasdaq Stock Market on April 27, 2006 was $19.98.





(b)          At  March 31, 2006, there were 368 record owners of Common Stock.





(c)          United  Retail Group, Inc. has not paid dividends on its Common Stock and has no  present intention of doing so.  Also,  the Financing Agreement between United Retail Group, Inc. and certain of its  subsidiaries and The CIT Group/Business Credit, Inc., dated August 15, 1997, as  amended, forbids the payment of dividends.





The transfer agent and  registrar for the Common Stock is Continental Stock Transfer and Trust Co., 17  Battery Place South, 8th Floor, New York, New York 10004.





(d)            Equity Compensation Plan Information As Of January 28, 2006





|Plan category                                             |  | Number of    shares to    be issued upon    exercise of    outstanding options,    warrants and rights    (% of total) |           | Weighted-average    exercise price of    outstanding options,    warrants and rights |   | Number of    shares    remaining available    for future issuance    under equity    compensation plans    (excluding shares    reflected in column(a)) | 
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------ | - | ------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                          |  |                                                                                                                        |           |                                                                                      |   |                                                                                                                                                         | 
|                                                          |  |                                                                                                                        | (a)       |                                                                                      |   | (b)                                                                                                                                                     | 
|Equity    compensation plans approved by stockholders     |  |                                                                                                                        | 1,479,800 | (98.5%)                                                                              | $ | 6.79                                                                                                                                                    | 
|Equity    compensation plans not approved by stockholders |  |                                                                                                                        | 22,500    | (1.5%)                                                                               | $ | 11.74                                                                                                                                                   | 
|                                                          |  |                                                                                                                        |           |                                                                                      |   |                                                                                                                                                         | 
|Total                                                     |  |                                                                                                                        | 1,502,300 |                                                                                      |   |                                                                                                                                                         | 
|                                                          |  |                                                                                                                        |           |                                                                                      |   |                                                                                                                                                         | 




Included in the table above are  outstanding stock options issued to an incumbent non-management Director and an  incumbent Vice President of the Company, respectively, that were approved by  the Companys Board of Directors but were not issued under a plan approved by  the stockholders.  In 1998, the Director  received an option to purchase 17,000 shares at a price of $12.08 per share and  an option to purchase 3,000 shares at a price of $11.50 per share.  (The Director had not received any stock  options during his service on the Companys Board of Directors from 1992  through 1997.)  In 2000, the Vice  President received an option to purchase 2,500 shares at a price of $9.75 per  share.  All of the foregoing options are  vested.





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All shares of stock of the  Corporation sold by the Corporation between fiscal 2003 and fiscal 2005 were  registered under the Securities Act of 1933 on Form S-8 Registration  Statements.





(e)          There  were no stock repurchases by the Company in fiscal 2005.





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ITEM 6.               SELECTED  FINANCIAL DATA.





Selected Financial Data*





|                                                         |  | Fiscal    Year    Ended    Feb. 2,    2002                  |         | Fiscal    Year    Ended    Feb. 1,    2003 |   | Fiscal    Year    Ended    Jan. 31,    2004 |   | Fiscal    Year    Ended    Jan. 29,    2005 |         | Fiscal    Year    Ended    Jan. 28,    2006 |  
|-------------------------------------------------------- |  | ----------------------------------------------------------- | ------- | ------------------------------------------ | - | ------------------------------------------- | - | ------------------------------------------- | ------- | ------------------------------------------- | -
|                                                         |  |                                                             |         |                                            |   |                                             |   |                                             |         |                                             |  
|                                                         |  | (Shares    and dollars in thousands, except per share data) |        
|Statement of Operations Data:                            |  |                                                             |         |                                            |   |                                             |   |                                             |         |                                             |  
|Net sales                                                |  | $                                                           | 427,040 |                                            | $ | 431,964                                     |   | $                                           | 396,265 |                                             | $
|Cost of goods sold, including buying and occupancy costs |  |                                                             | 327,194 |                                            |   | 344,197                                     |   |                                             | 314,131 |                                             |  
|Gross profit                                             |  |                                                             | 99,846  |                                            |   | 87,767                                      |   |                                             | 82,134  |                                             |  
|General, administrative and store operating expenses     |  |                                                             | 99,206  |                                            |   | 104,927                                     |   |                                             | 100,923 |                                             |  
|Goodwill impairment                                      |  |                                                             |        |                                            |   | 5,611                                       |   |                                             |        |                                             |  
|Operating income (loss)                                  |  |                                                             | 640     |                                            |   | (22,771                                     | ) |                                             | (18,789 | )                                           |  
|Interest income**                                        |  |                                                             | 1,081   |                                            |   | 339                                         |   |                                             | 103     |                                             |  
|Interest expense                                         |  |                                                             | (720    | )                                          |   | (1,166                                      | ) |                                             | (1,020  | )                                           |  
|Income (loss) before 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 common share:                      |  |                                                             |         |                                            |   |                                             |   |                                             |         |                                             |  
|Basic                                                    |  | $                                                           | 0.03    |                                            | $ | (1.77                                       | ) | $                                           | (1.47   | )                                           | $
|Diluted                                                  |  | $                                                           | 0.03    |                                            | $ | (1.77                                       | ) | $                                           | (1.47   | )                                           | $
|Weighted average number of common shares outstanding:    |  |                                                             |         |                                            |   |                                             |   |                                             |         |                                             |  
|Basic                                                    |  |                                                             | 13,241  |                                            |   | 13,047                                      |   |                                             | 12,937  |                                             |  
|Diluted                                                  |  |                                                             | 13,442  |                                            |   | 13,047                                      |   |                                             | 12,937  |                                             |  
|Balance Sheet Data (at period end):                      |  |                                                             |         |                                            |   |                                             |   |                                             |         |                                             |  
|Working capital                                          |  | $                                                           | 44,526  |                                            | $ | 28,688                                      |   | $                                           | 18,324  |                                             | $
|Total assets****                                         |  |                                                             | 229,192 |                                            |   | 210,667                                     |   |                                             | 182,314 |                                             |  
|Long-term capital lease obligations                      |  |                                                             | 7,213   |                                            |   | 5,764                                       |   |                                             | 3,646   |                                             |  
|Long-term distribution center financing                  |  |                                                             | 5,181   |                                            |   | 3,961                                       |   |                                             | 3,326   |                                             |  
|Total stockholders equity                               |  |                                                             | 121,804 |                                            |   | 98,995                                      |   |                                             | 80,020  |                                             |  




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*The Selected Financial Data  should be read in conjunction with Item 7   Managements Discussion and Analysis of Financial Condition and Results  of Operations and Item 8 Financial Statements and Supplementary Data of this  Report.  Balance sheet data at January  28, 2006 and January 29, 2005 and statements of operations data for each of the  three fiscal years in the period ended January 28, 2006 were derived from the  audited consolidated financial statements appearing elsewhere in this Report.


**Includes interest income of  $1.3 million related to an Internal Revenue Service settlement for the year  ended January 29, 2005.


***Includes for fiscal 2004,  federal tax benefit of $0.4 million related to an Internal Revenue Service  settlement and for fiscal 2004 and 2003, increases to valuation allowances of  $4.3 million and $12.6 million, respectively, related to net operating loss  carryforwards, other net deferred tax assets and other tax attributes and $1.8  million and $0.9 million, respectively, in reversals of previous accruals for  potential tax liabilities arising from various settlements.  The benefit from income taxes increased to  $16.8 million in fiscal 2005 from $2.0 million in fiscal 2004, principally from  the reversal of the $22.6 million valuation allowance for the Companys net  operating loss (NOL) carryforwards, other net deferred tax assets and other  tax attributes.


****Total assets for fiscal 2001,
    2002, 2003 and 2004 have been revised to include import in-transit inventory
     on a basis consistent with that used in fiscal 2005 (See, Inventory in Note
    2 to the consolidated financial statements.) The amounts of import inventory
    in-transit
included in the reported inventory amounts at February 2, 2002, February 1, 2003,
    January 31, 2004, January 29, 2005 and January 28, 2006 are $11.0 million,
$10.6 million, $11.5 million, $10.8 million and $12.5 million, respectively.





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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.





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





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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 and an overview to put this information in  context.  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.





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 size 14 or larger 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, print media advertising, 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.  At January 28, 2006, it leased 500 stores in  37 states.  See, Stores.  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  Company has licensed its AVENUE trade name to a leading catalog publisher to  conduct a market test of an AVENUE catalog from March 2006 through August  2006.  The Company is not responsible  for the costs of the market test and will not include sales to catalog  customers in its reported sales.  The  future business relationship between the Company and the catalog publisher, if  any, will be negotiated after the results of the market test have been  analyzed.





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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 1.5% in fiscal 2003, 0.5%  in fiscal 2004 and 2.0% in fiscal 2005, comparing January 31st each  year with that date in the previous year.   During the 10 years ended January 31, 2006, the CPI declined 14.3%.  Price deflation in the industry has limited  the extent to which the Companys is able to increase prices.  There is no assurance that this general  deflationary trend will not continue.





Company Sales Fluctuations





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) to measure business  trends.





Seasonal store sales data (with  sales improvements versus the previous comparable period in bold type) follow:





|                                    |  | 2003   |       | 2004 |   | 2005   |  
|----------------------------------- |  | ------ | ----- | ---- | - | ------ | -
|                                    |  |        |       |      |   |        |  
|                                    |  | Spring |       | Fall |   | Spring |  
|                                    |  |        |       |      |   |        |  
|Total store    sales ($ millions)*  |  | $      | 203.5 |      | $ | 187.7  |  
|Sales per    average store ($000s) |  | $      | 371   |      | $ | 344    |  
|Average    number of stores         |  |        | 548   |      |   | 545    |  
|Comparable    store sales**         |  |        | -9.3  | %    |   | -4.2   | %




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*Excludes sales on the Internet  and through a catalog that was distributed until March 2003.


**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 and excludes sales on the Internet and through a catalog  that was distributed until March 2003.





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Store Count





Store counts averaged 546  stores, 531 stores and 509 stores, respectively, for fiscal 2003, 2004 and  2005.  In fiscal 2005, the Company  opened one store, closed 15 stores and ended the year with 500 stores.





The Company estimates that it  will close approximately 15-20 stores in fiscal 2006 as part of its normal  lease maintenance program and has an objective to open approximately 20 new  stores, generally in strip shopping centers, this year.  Thus, the average number of stores in fiscal  2006 is not expected to differ materially from the 497 stores open on March 31,  2006.  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 to  the Companies on a revolving basis.





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  cash requirements for at least the next 12 months.





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.





Growth Strategy





The Companys internal growth  strategy is to continue to increase sales per square foot in its existing store  base.  Also, 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.





DISCUSSION AND ANALYSIS





(This section and the three  that follow provide details about the material line items in the Companys  statements of operations and recent sales and comparable store sales data.)





Fiscal 2005 Versus Fiscal 2004





Net sales for fiscal 2005  increased 9.9% from fiscal 2004, to $438.7 million from $399.3 million.





The sources of net sales growth  were as follows:





|Amount         |  | Attributable to                            
|-------------- |  | -------------------------------------------
|               |  |                                            
|$43.8 million  |  | 11.5%    increase in comparable store sales
|$1.3 million   |  | new store                                  
|(12.3) million |  | closed    stores                           
|6.7 million    |  | other                                      
|               |  |                                            
|$39.5 million  |  | Total                                      
|               |  |                                            




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In fiscal 2005, transactions  per average store increased 18%, units sold per average store increased 15% and  average price per unit sold decreased 2%.





There was better customer  acceptance of denim, woven tops, knit bottoms, accessories, knit tops and  sweaters, which increased sales by $37.9 million in comparison to fiscal 2004.





Average number of stores  decreased from 531 to 509.  See,  Stores.





Gross profit increased to  $111.4 million in fiscal 2005 from $83.9 million in fiscal 2004, increasing as  a percentage of net sales to 25.4% from 21.0%.   Gross profit as a percentage of net sales increased principally because  rent and occupancy costs declined as a percentage of net sales (240 basis  points as a percentage of net sales), which occurred because net sales  increased and rent and occupancy costs declined.  Merchandise margins also increased (220 basis points), as a  result of lower costs.  Future gross  profit levels will be subject to the variables, uncertainties and other risk  factors referred to under the caption Future Results.





General, administrative and  store operating expenses increased to $99.8 million in fiscal 2005 from $96.8  million in fiscal 2004 but decreased as a percentage of net sales to 22.7% from  24.3%, principally from a reduction in store payroll (120 basis points).  There is no assurance that the general,  administrative and store operating expenses percentage will continue to  decrease.  In addition to general cost  inflation, the Company expects consulting and professional fees and Finance  Department payroll to increase because of additional resources required to  support new regulatory compliance.





The Company had operating  income of $11.6 million in fiscal 2005 and incurred an operating loss of $13.0  million in fiscal 2004.





Interest income was $0.5  million in fiscal 2005 and $1.3 million in fiscal 2004, principally as the  result of interest on a federal income tax refund in fiscal 2004.





Interest expense was $0.7  million in fiscal 2005 and $0.9 million in fiscal 2004.





The benefit from income taxes  increased to $16.8 million in fiscal 2005 from $2.0 million in fiscal 2004,  principally from the reversal of the $22.6 million valuation allowance for the  Companys net operating loss (NOL) carryforwards, other net deferred tax  assets and other tax attributes.  (At  January 28, 2006, the Company had federal NOLs of approximately $17 million  and state NOLs of approximately $65 million.)   The Companys effective tax rate was negative 146.8% for fiscal 2005 and  positive 16.2% for fiscal 2004.





The Company had net income of  $28.3 million in fiscal 2005 and incurred a net loss of  $10.5 million in fiscal 2004.





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Fiscal 2004 Versus Fiscal 2003





Net sales for fiscal 2004  increased 0.8% from fiscal 2003, to $399.3 million from $396.3 million.





The sources of net sales growth  were as follows:





|Amount         |  | Attributable to                           
|-------------- |  | ------------------------------------------
|               |  |                                           
|$8.5 million   |  | 2.2%    increase in comparable store sales
|$2.8 million   |  | new stores                                
|(10.3) million |  | closed    stores                          
|2.0 million    |  | other                                     
|               |  |                                           
|$3.0 million   |  | Total                                     
|               |  |                                           




Comparing fiscal 2004 to fiscal  2003, transactions per average store increased 9%, units sold per average store  increased 8% and average price per unit sold decreased 5%.





There was better customer  acceptance of sweaters, which increased sales by $3.7 million in comparison to  fiscal 2003.





Average number of stores  decreased from 546 to 531.





Internet and catalog sales  increased to $6.4 million in fiscal 2004 from $4.9 million in fiscal 2003,  despite the suspension of catalog mailings early in fiscal 2003.  (Catalog and internet sales were excluded from  the calculation of comparable store sales.)





Gross profit increased to $83.9  million in fiscal 2004 from $82.1 million in fiscal 2003, increasing as a  percentage of net sales to 21.0% from 20.7%.   Gross profit as a percentage of net sales increased principally because  rent and occupancy costs declined as a percentage of net sales (110 basis  points as a percentage of net sales), which occurred because net sales  increased and rent and occupancy costs declined.  The decline in rent and occupancy costs was partially offset by  smaller merchandise margins (50 basis points) and higher marketing costs (30  basis points).  Smaller merchandise  margins were the result of lower prices caused principally by less customer acceptance  of the Companys product offering.





General, administrative and  store operating expenses decreased to $96.8 million in fiscal 2004 from $100.9  million in fiscal 2003, decreasing as a percentage of net sales to 24.3% from  25.5% principally from reductions in store payroll (60 basis points) and  casualty and property insurance expense (60 basis points).





The Company incurred operating  losses of $13.0 million in fiscal 2004 and $18.8 million in the previous  year.





Interest income was $1.3  million in fiscal 2004 and $0.1 million in fiscal 2003 as the result of  interest on a federal income tax refund in fiscal 2004.





Interest expense was $0.9  million in fiscal 2004 and $1.0 million in fiscal 2003.





The benefit from income taxes  increased to $2.0 million in fiscal 2004 from $0.6 million in fiscal 2003,  principally from the reversal of accruals for potential tax liabilities due to  settlements in fiscal 2004.  As to the  benefit from income taxes, the Companys effective tax rate was 16.2% for fiscal  2004 and 3.2% for fiscal 2003.  The primary  contributing factors were the valuation allowance provided for the Companys  NOL carryforwards, other net deferred tax assets and other tax attributes,  partially offset by the reversal of previous accruals for potential tax  liabilities arising from settlements in each year and, in fiscal 2004, a  settlement refund.





In fiscal 2004, the Companys  tax valuation allowance was increased by $4.3 million.





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The Company incurred net losses  of $10.5 million in fiscal 2004 and $19.1 million in fiscal 2003.





February 2006 - March 2006 Sales





Combined net sales for the  months of February and March 2006 increased from February and March 2005 to  $70.0 million from $69.9 million.   Comparable store sales for the two months combined increased 0.7%.  (Notably, Easter occurred during March in  2005 but not in 2006, creating a calendar shift that made March sales results  stronger in 2005.)  Average number of stores  decreased from 513 to 499.





Comparable  Store Sales





Management uses comparable  store sales* changes to measure productivity.   Changes in comparable store sales in previous seasons and in the current  season to date were:





|2003   |   | 2004 |      | 2005   |  | 2006 |  
|------ | - | ---- | ---- | ------ |  | ---- | -
|       |   |      |      |        |  |      |  
|Spring |   | Fall |      | Spring |  | Fall |  
|       |   |      |      |        |  |      |  
|-9.3   | % |      | -4.2 | %      |  | -2.2 | %




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*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 and excludes sales on the Internet and through a catalog  that was distributed until March 2003.





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.





Liquidity and Capital Resources





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





Cash Flow





Net cash provided from  operating activities increased to $20.6 million in fiscal 2005 from $3.2  million in fiscal 2004, principally because the Company had net income of $28.3  million in fiscal 2005 and incurred a net loss of $10.5 million in fiscal 2004.





Balance Sheet Sources of Liquidity





The Companys cash and cash  equivalents were $32.3 million at January 28, 2006 compared with $12.6 million  at January 29, 2005.





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Inventories were stated at  $62.8
    million at January 28, 2006 compared with $60.3 million at January 29, 2005,
    an increase of 4.1%.  (Inventories  at January 29, 2005 have been revised
    to include import in-transit inventories on a basis consistent with that used
in fiscal 2005 (See, Inventory in Note 2 to the consolidated financial statements.)





Inventory, excluding Shop @  Home inventory and import
in-transit inventory, on a cost per square foot basis increased 2.5% from January 29,  2005 to January 28, 2006.  The increase  in in-store inventory consisted principally of Spring merchandise.  In-store inventory was increased in anticipation  of higher demand.  See, February-March  Sales.  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 $66.8 million at January 28, 2006 from $79.0 million at January  29, 2005, principally from depreciation.   The Company does not expect property and equipment to change materially  in fiscal 2006 because capital expenditures (see, Capital Expenditures) will  be approximately offset by depreciation.   The preceding sentence 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.





Other Liquidity Sources





Purchases of merchandise  directly imported by the Company are made in U.S. dollars and generally  financed by trade letters of credit.   The Company was the importer of record for 54% of its total purchases in  fiscal 2005.  These imports were  generally financed with trade letters of credit.





The Financing Agreement has a  term expiring on August 15, 2008.  The  line of credit is $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 28, 2006,  trade letters of credit for the account of the Companies and supported by CIT  were outstanding in the amount of $24.5 million and standby letters of credit  were outstanding in the amount of $6.1 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 138  stores located in certain states 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 28, 2006, the  combined borrowing capacity of the Companies, after satisfying the $5 million  minimum availability requirement, was $8.9 million; the Pledged Account had a  zero balance; no loan was outstanding; and the Companies balance sheet cash  and cash equivalents of $32.3 million were unrestricted.  The Company has agreed with CIT to have its





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subsidiary, Avenue Giftcards,  Inc. (which issues AVENUE® giftcards), maintain a minimum level of high-grade  liquid investments, which amounted to $0.8 million.  These investments were classified as restricted cash on the  balance sheet at January 28, 2006 and will fluctuate each quarter in relation  to the volume of net issuances of AVENUE® giftcards and merchandise credits  during the previous six months.  (The  volume of net issuances is seasonal.)





The line of credit is  collateralized by (i) inventory and its proceeds,  (ii) receivables from credit card companies and (iii) the  balance, if any, 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.





The Company has drawn 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.  Payments of revolving loans are not required until termination of  the agreement unless either (1) the outstanding balance of revolving loans and  outstanding letters of credit exceeds the combined borrowing capacity of the  Companies, in which case the excess would be payable upon demand from CIT or  (2) a default under the Financing Agreement arises.





Short-term trade credit  represents a significant source of financing for purchases of 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.





Capital Expenditures





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





Capital expenditures were $1.8  million in fiscal 2005 and $2.0 million in fiscal 2004.





Capital expenditures are  budgeted to be $12 million for fiscal 2006, including costs of refurbishing  approximately 20 stores and building approximately 20 new stores.  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.





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Principal Contractual Obligations and Certain  Other Commercial Commitments





The principal contractual  obligations of the Company and certain other commercial commitments at January  28, 2006 (see, also Critical Accounting Policies  Incurred But Not Reported  Claims For Personal Injuries and Medical Benefits) are summarized in the  following charts:





|Principal Contractual    Obligations |  | Total    Payments Due    (000s omitted) |       | Payments    Due by Period (000s omitted) |  
|------------------------------------ |  | ---------------------------------------- | ----- | ----------------------------------------- | -
|                                    
|Less than    1 Year                  |  | 1-3 Years                                |       | 4-5 Years                                 |  
|                                     |  |                                          |       |                                           |  
|Distribution    Center Mortgage*     |  | $                                        | 2,633 |                                           | $
|Fixtures    Capital Leases*          |  |                                          | 1,695 |                                           |  
|                                     |  |                                          |       |                                           |  
|Total                                |  | $                                        | 4,328 |                                           | $
|                                     |  |                                          |       |                                           |  




|Certain Other    Commercial Commitments |  | Total    Amounts    Committed    (000s omitted) |         | Amount of    Commitment per Period (000s omitted) |  
|--------------------------------------- |  | ------------------------------------------------ | ------- | -------------------------------------------------- | -
|                                       
|Less than    1 Year                     |  | 1-3 Years                                        |         | 4-5 Years                                          |  
|                                        |  |                                                  |         |                                                    |  
|Operating    Leases**                   |  | $                                                | 254,997 |                                                    | $
|Trade    Letters of Credit***           |  |                                                  | 24,463  |                                                    |  
|Standby    Letters of Credit            |  |                                                  | 6,145   |                                                    |  
|Customs    Duties Bond                  |  |                                                  | 2,000   |                                                    |  
|                                        |  |                                                  |         |                                                    |  
|Total                                   |  | $                                                | 287,605 |                                                    | $
|                                        |  |                                                  |         |                                                    |  




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* 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.  The proceeds  of the fixture capital leases were principally used to partially finance new  store construction in fiscal 2001.





**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.





***Trade letters of credit  support Company obligations under certain purchase orders for merchandise  directly imported for which payment is not yet due. (Other purchase orders for  products not supported by trade letters of credit represent material commercial  obligations, subject to inspection of the products and possible rejection.)





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.  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.





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  refurbishing and building stores and replacing fixtures where appropriate.  During fiscal 2005, the Company funded its  cash requirements from net cash provided from operating activities.  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.





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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 cash requirements for at least the next 12 months.





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 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 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 managerial 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)  the need for a valuation allowance for the Companys NOLs,
other net deferred  tax assets and other tax attributes.





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 estimates by management 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 managerial  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 and, based on managements business  judgment, estimates what quantities of current merchandise are in excess of the  amounts saleable at historical margin rates.   A markdown reserve is established to reduce to estimated net realizable  value the carrying value of excess current merchandise and obsolete categories  of merchandise.





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The markdown reserves at the  end
    of fiscal 2005, 2004 and 2003, respectively, ranged from a low of $0.8 million
    to a high of $1.5 million with the markdown reserve at January 28, 2006 at
    the high end of the range.  Giving  effect to these reserves and including
    	import in-transit inventories, inventories
    were stated at $62.8 million at January 28, 2006, $60.3 million at January
    29, 2005 and $60.6 million at January 31, 2004.  (Inventories at January
    29, 2005 and January 31, 2004 have been revised to include import in-transit
    inventories on a basis consistent with that used in
fiscal 2005; see Inventory in Note 2 to the consolidated financial statements.)





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





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.





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 has stop loss  insurance coverage for employee medical claims over $0.2 million each.  Also, there is an aggregate limit for these  plans which, at January 28, 2006, was $6.7 million based
on the number of  associates participating at that time.   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  (the high and low year factors are excluded in arriving 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





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reflected on the balance sheets  included in the financial statements contained in this Report.  As of January 28, 2006, for example, the use  of industry factors would have increased the liability by only approximately  $0.3 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 might 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 28, 2006, for  example, the use of industry factors might have increased the liability by only  approximately $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 might have resulted from the use of  industry factors in preparing estimates are not material.





Tax Valuation Allowance





In fiscal 2002, 2003 and 2004,  the Company recorded valuation allowances for its NOL carryforwards, other net  deferred tax assets and other tax attributes in accordance with the provisions  of SFAS No. 109, Accounting for Income Taxes.





In the fourth quarter of fiscal  2005, management concluded that the future utilization of the Companys NOL  carryforwards and other net deferred tax assets was more likely than not and  the Company reversed the tax valuation allowance, which was $22.6 million at  the time.  The preceding sentence  contains 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 benefit  from income taxes on the fiscal 2005 consolidated statements of operations  reflects the reversal.





Private Label Credit  Cards Issued By The Bank





In fiscal 2005, the Company and  World Financial Network National Bank (the Bank) were parties to a Private  Label Credit Card Program Agreement, dated January 27, 1998 (the 1998 Credit  Card Program Agreement).





Under the 1998 Credit Card  Program
    Agreement, the Bank issued credit cards to eligible Company customers who
    apply to the Bank.  Net credit sales  volume with the Bank increased
    to $134.2 million in fiscal 2005 from $123.3 million in fiscal 2004.  Customers
    met standards for creditworthiness set by the Bank with the approval of the
    Company.  The credit cards issued by the Bank were co-branded with both
    the Companys AVENUE service mark and the Banks name.  The
    credit cards were used only for merchandise and services offered by the Company.  Credit
    card holders remitted payments to the Bank, generally by mailing personal
    checks.  The Bank also handled all statement processing, payment processing,
    cardholder customer service and collections from delinquent cardholders.





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In accordance with generally  accepted accounting principles, the Company did not include the receivable  asset created under the 1998 Credit Card Program Agreement in the Companys  accounts receivable on its balance sheets because the Company had no interest  in the customer accounts or receivables.   In this connection, it should be noted that the 1998 Credit Card Program  Agreement stated 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  1998 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.





Receivables as defined in the  1998 Credit Card Program Agreement at the close of the last billing cycle in  the fiscal year increased to $81.7 million at January 28, 2006 from $78.0  million at January 29, 2005.





The credit card program premium  reflected in general, administrative and store operating expenses was an amount  equal to royalties paid to the Company by the Bank minus costs charged by the  Bank.  Costs were 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 $6.6 million in fiscal 2005 and $5.2 million in fiscal 2004.  The increase in premiums from the Bank was  primarily due to increased interest income and customer fees.





Royalties were based on program  revenues minus receivables written off by the Bank and the cost of funds for  the program at the one-year Constant Maturities Treasury (CMT) rate plus 25  basis points to be reset every three months.   However, the CMT rate was not less than 5.00% per annum for the purpose  of this calculation.





On November 28, 2005, the 1998  Credit Card Program Agreement was restated (as restated, the Amended  Agreement).  Under the Amended  Agreement, the Bank will continue the private label credit card program and  will issue Avenue credit cards that may be used to purchase merchandise and  services from United Retail Incorporated and its designees.  The Bank also will continue to administer the  credit card program, handling remittances and processing services.  The Bank will continue to be the sole and  exclusive owner of all customer accounts and the creditor in respect of  receivables generated.  However, the  Company must approve any changes to consumer charges, credit terms and credit  criteria related to the accounts from those in effect on the date of the  Amended Agreement.





The Bank will pay the Company  specified percentages of net credit sales and outstanding receivables,  respectively.  The Company will  reimburse the Bank, however, for chargebacks and all pass through expenses.





Net amounts realized by the  Company under the Amended Agreement on average are not expected to be smaller  than the premiums previously received under the 1998 Credit Card Program  Agreement.  This paragraph constitutes  forward-looking information under the Reform Act and is subject to  uncertainties relating to economic trends that may affect the behavior of  cardholders and changes in governmental regulations affecting the Bank.





The Amended Agreement became  effective January 29, 2006, and shall expire on February 29, 2012 (as may be  extended, the Term) unless earlier terminated.  Additionally, the Term shall automatically extend for successive  three-year terms unless one party notifies the other at least six months prior  to any such extension that it does not wish to extend the Amended Agreement.





During the Term of the Amended  Agreement, United Retail Incorporated may not, directly or indirectly, make  available to customers any credit program or facility that is similar in  purpose to the program established under  the Amended Agreement except multi-purpose credit, charge, debit or secured  cards.





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At the expiration of the Term,  the
    Company shall 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 Amended 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.  The penultimate
    sentence constitutes forward-looking information under the Reform Act and
    is subject to possible changes in the sector of the banking industry that
    issues co-branded credit cards to customers of retail chains and in governmental
    regulations affecting that sector.





Stock  Options





In December 2004, the Financial  Accounting Standards Board issued SFAS No. 123R, Share-Based Payment (SFAS  No. 123R), which replaces SFAS No. 123 Accounting for Stock-Based  Compensation and supersedes APB Opinion No. 25.  SFAS No. 123R requires all share-based payments to employees,  including grants of employee stock options, to be measured at their fair values  at the date of grant and recognized as expense over the service period, which  is generally the vesting period.  SFAS  No. 123R became effective in fiscal 2006.   Management estimates that the resulting compensation expense will reduce  net income for the year by approximately $0.01 or $0.02 per diluted share.





The only forms of equity-based  compensation used by the Company have been stock options issued to associates  and stock options and stock appreciation rights settled in cash issued to  nonmanagement members of the Board of Directors.  The Companys Board of Directors has adopted, subject to  stockholder approval, the 2006 Equity-Based Compensation and Performance  Incentive Plan (the 2006 Plan).  The  2006 Plan authorizes the Compensation Committee of the Board to grant to associates  a variety of equity-based compensation awards.   (The 2006 Plan is the appendix to the Proxy Statement.)  The types of awards to nonmanagement members  of the Board will remain unchanged.





Stores





The Companys channel of  distribution is retail stores using its AVENUE® trade name.  The Company leased 500 stores in 37 states  at January 28, 2006.





Store counts averaged 546  stores, 531 stores and 509 stores, respectively, for fiscal 2003, 2004 and  2005.  In fiscal 2005, the Company  opened one store, closed 15 stores and ended the year with 500 stores.





The Company estimates that it  will close approximately 15-20 stores in fiscal 2006 as part of its normal  lease maintenance program and has an objective to open approximately 20 new  stores, generally in strip shopping centers, this year.  Thus, the average number of stores in fiscal  2006 is not expected to differ materially from the 497 stores open on March 31,  2006.





Retail selling space was  approximately 2.2 million square feet both at January 28, 2006 and January 29,  2005 and is not expected to change materially in fiscal 2006.





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The two preceding paragraphs  contain 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.





Depreciation and amortization  of property and equipment relate principally to assets in stores and declined  to $13.3 million in fiscal 2005 from $14.3 million in fiscal 2004.  Depreciation and amortization of property  and equipment are expected to decline further in fiscal 2006.





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 its avenue.com orders from its national distribution center in  Troy, Ohio.





Suspension of Catalog Operations





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





The Company has licensed its  AVENUE trade name to a leading catalog publisher to conduct a market test of an  AVENUE catalog through August 2006.  The  Company is not responsible for the costs of the market test and will not  include sales to catalog customers in its reported sales.  The future business relationship between the  Company and the catalog publisher, if any, will be negotiated after the results  of the market test have been analyzed.





Stock Repurchases





The Company did not repurchase  shares of its own stock in fiscal 2005 or 2004 except that:





| | (i)          the    trust under the Companys Supplemental Retirement Savings Plan (SRSP)    purchased 279,870 shares in fiscal 2004 using a portion of the funds    accumulated since 1993 in the deferred compensation account of Raphael    Benaroya, the Companys Chairman, President and Chief Executive Officer    (56.2% of the account balance at the time represented amounts withheld from    Mr. Benaroyas salary and earnings thereon and the remainder represented    contributions by the Company pursuant to the general terms of the SRSP and    earnings thereon); and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (ii)          2,059    outstanding shares were surrendered in the fourth quarter of fiscal 2005 by    the holder of an employee stock option for cancellation in lieu of payment of    the exercise price in cash (a swap).                                                                                                                                                                                                                                                                                                                                                              




The Company has no plans to  repurchase shares of its own stock at present except for swaps in connection  with the exercise of employee stock options.





In fiscal 2004, the shares held  in Mr. Benaroyas SRSP account were classified as treasury shares and had no  voting rights.  With respect to the  deferred compensation obligations of the SRSP, the liability was marked to  market and this liability adjustment flowed through the statement of operations  as either an increase or a decrease in compensation expense.  With respect to the SRSP assets, marketable  securities were also marked to market except shares of Company stock, which  were recorded permanently at cost.  This  asset adjustment also flowed through the statement of operations.   The liability adjustment and the asset  adjustment were not necessarily equal in amount because of the disparate  treatment of Company stock.  In fiscal  2004, the market price of Company stock rose and compensation expense was  increased $0.7 million as a result of the foregoing accounting treatment.





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In fiscal 2005, the SRSP was  amended to change the status of the shares held in Mr. Benaroyas SRSP account  and to accord voting rights to the shares, which are now classified as  outstanding shares.  (The shares will be  voted by the Administrative Committee of the SRSP in the exercise of its  fiduciary duties.)  The change in the  classification of the shares eliminated the disparate adjustments of SRSP  liabilities and assets described in the preceding paragraph and the related  effect on compensation expense.





Growth Strategy





The Companys internal growth  strategy is to continue to increase sales per square foot in its existing store  base.  Also, 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.





Off-Balance Sheet Arrangements





The Company does not have  material off-balance sheet arrangements.





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 Company historically  experienced fluctuations in customer response to its merchandise  assortments.  Future success depends on  the Companys ability to consistently anticipate, assess and react to the  changing demands of its customer-base.   As a private label merchandiser, the Company assumes certain risks,  including long product lead times and high initial purchase commitments, that  amplify the consequences of any miscalculation that it might make in  anticipating fashion trends or interpreting them for customers.  There is no assurance that the Company will  be able to identify and offer merchandise that appeals to its customer-base or  that the introduction of new merchandise will be successful or profitable.





Future success also depends  upon the Companys ability to effectively define, evolve and promote its  brand.  In order to achieve and maintain  significant brand name recognition, it may become necessary to increase  investments in the development of the brand through various means, including  customer research, advertising, direct mail marketing and Internet  marketing.  There is no assurance that,  if such funding becomes necessary, it will be available.





The following additional  factors, among others, could also 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, overall economic conditions; the impact of increased competition;  variations in weather patterns; 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.





As a result of the variables,  risks and uncertainties referred to in this section, the estimates and  projections made in this Report, and the expectations referred to herein, may  not be reliable.





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The Companys stockholder  rights plan and certain provisions of the By-Laws and of the Delaware General  Corporation Law may make it more difficult for a third party to acquire the  Company even if doing so would allow the stockholders to receive a premium over  the prevailing market price of the Common Stock.  These rights and By-Laws provisions are intended to encourage  potential acquirers to negotiate and allow the Board of Directors the  opportunity to consider alternative proposals in the interest of maximizing  stockholder value.  However, these  rights and provisions may also discourage acquisition proposals or delay or  prevent a change in control, which could negatively affect the price of the  Common Stock.





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





Managements  Annual Report On Internal Control Over Financial Reporting





Management is responsible for  establishing and maintaining adequate internal control over financial  reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act,  for the Company.  Internal control over  financial reporting is designed to provide reasonable assurance regarding the  reliability of financial reporting and the preparation of financial statements  for external purposes in accordance with generally accepted accounting  principles.  Internal control over  financial reporting includes those policies and procedures that: (i) pertain to  the maintenance of records that, in reasonable detail, accurately and fairly  reflect transactions and dispositions of Company assets, (ii) provide  reasonable assurance that transactions are recorded as necessary to permit preparation  of financial statements in accordance with generally accepted accounting  principles and that receipts and expenditures are made only in accordance with
authorizations of management and the Board of Directors, and (iii) provide  reasonable assurance regarding prevention or timely detection of unauthorized  acquisition, use or disposition of assets that could have a material effect on  financial statements.





Because of its inherent  limitations, internal control over financial reporting may not prevent or  detect misstatements in the financial statements.





Commencing in fiscal 2006, the  Company performs a formal annual assessment, in which the Companys Chief  Executive Officer and Chief Financial Officer participate, of the effectiveness  of the Companys internal control over financial reporting.  Management conducted this assessment as of  January 28, 2006 using the criteria set forth in Internal Control - Integrated  Framework, a publication issued by the Committee of Sponsoring Organizations  of the Treadway Commission.  Based on  this assessment, management concluded that the Companys internal control over  financial reporting was effective as of January 28, 2006.





Internal control over financial  reporting in the future will be subject to the risks that controls may become  inadequate because of changes in conditions or that the degree of compliance  with established policies and procedures may deteriorate.





The Companys independent  registered public accounting firm, Eisner LLP, issued a report on managements  assessment of the Companys internal control over financial reporting. The report is the second document in Item 8 Financial Statements and  Supplementary Data of this Report.





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ITEM 7A.               QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





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.   See, however, in Item 7. Managements Discussion and Analysis of  Financial Condition and Results of Operations the penultimate paragraph under  the caption Other Liquidity Sources regarding the variable interest rate  payable on revolving loans to the Companies.





The Company is not exposed to  foreign currency exchange rate risks.





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ITEM 8.               FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA.





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UNITED RETAIL GROUP,  INC. AND SUBSIDIARIES  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





|                                                                                                                              | Page
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|                                                                                                                              |     
|Reports of Independent Registered Public Accounting Firms                                                                     |     
|                                                                                                                              |     
|Consolidated    Balance Sheets as of January 29, 2005 and January 28, 2006                                                    |     
|                                                                                                                              |     
|Consolidated    Statements of Operations for each of the three fiscal years in the period ended January 28, 2006              |     
|                                                                                                                              |     
|Consolidated    Statements of Cash Flows for each of the three fiscal years in the period    ended January 28, 2006           |     
|                                                                                                                              |     
|Consolidated    Statements of Stockholders Equity for each of the three fiscal years in the    period ended January 28, 2006 |     
|                                                                                                                              |     
|Notes to    Consolidated Financial Statements                                                                                 |     




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UNITED RETAIL GROUP,  INC. AND SUBSIDIARIES  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors and  Stockholders


UNITED  RETAIL GROUP, INC.:





We have audited the  accompanying consolidated balance sheet of United Retail Group, Inc. and  subsidiaries (the Company) as of January 28, 2006, and the related  consolidated statements of operations, stockholders equity and cash flows for  the year then ended. 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 audit.





We conducted our audit 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. 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 audit provides a reasonable basis  for our opinion.





In our opinion, the financial  statements referred to above present fairly, in all material respects, the  consolidated financial position of United Retail Group, Inc. and subsidiaries  as of January 28, 2006, and the consolidated results of their operations and  their consolidated cash flows for the year ended January 28, 2006 in conformity  with U.S. generally accepted accounting principles.





In connection with our audit of the
    financial statements referred to above, we audited Schedule IIValuation
    and Qualifying Accounts. In our opinion, this schedule, when considered in
    relation to the financial statements taken as a whole, presents fairly in
    all material respects, the information stated therein.





We also have audited, in  accordance
    with the standards of the Public Company Accounting Oversight Board (United
    States), the effectiveness of United Retail Group, Inc.s internal
    control over financial reporting as of January 28, 2006, based on criteria
    established in Internal Control - Integrated Framework issued by the Committee
    of Sponsoring Organizations of the Treadway Commission (COSO), and our report
    dated April 7, 2006 expressed an unqualified opinion on managements
    assessment of, and the effective operation of, internal control over financial
    reporting.





Eisner LLP








New York, New York


April 7, 2006





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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and StockholdersUnited Retail Group, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that United Retail Group, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). United Retail Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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In our opinion, management’s assessment that United Retail Group, Inc. maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, United Retail Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of United Retail Group, Inc. and subsidiaries as of January 28, 2006 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended and our report dated April 7, 2006, expressed an unqualified opinion thereon.

Eisner LLP

New York, New YorkApril 7, 2006

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Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying
    consolidated balance sheet 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 29, 2005, and the results of their
    operations and their cash flows for each of the two years in the period ended
    January 29, 2005 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.

PricewaterhouseCoopers LLP
Stamford, Connecticut
April 27, 2005





---





UNITED RETAIL GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(dollars in thousands, except per share  amounts)





|                                                                                                                  |  | January    29,    2005 |         | January    28,    2006 |  
|----------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---------------------- | -
|                                                                                                                  |  |                        |         |                        |  
|ASSETS                                                                                                            |  |                        |         |                        |  
|Current    assets:                                                                                                |  |                        |         |                        |  
|Cash and cash equivalents                                                                                         |  | $                      | 12,596  |                        | $
|Accounts receivable                                                                                               |  |                        | 1,504   |                        |  
|Inventory                                                                                                         |  |                        | 60,349  |                        |  
|Prepaid rents                                                                                                     |  |                        | 4,599   |                        |  
|Restricted cash                                                                                                   |  |                        | 742     |                        |  
|Current deferred taxes                                                                                            |  |                        |        |                        |  
|Other prepaid expenses                                                                                            |  |                        | 1,712   |                        |  
|                                                                                                                  |  |                        |         |                        |  
|Total current assets                                                                                              |  |                        | 81,502  |                        |  
|                                                                                                                  |  |                        |         |                        |  
|Property and    equipment, net                                                                                    |  |                        | 79,026  |                        |  
|Deferred    compensation plan assets                                                                              |  |                        | 3,473   |                        |  
|Long-term    deferred taxes                                                                                       |  |                        | 311     |                        |  
|Other intangible assets, net of accumulated    amortization of $453 and $517                                      |  |                        | 430     |                        |  
|Other assets                                                                                                      |  |                        | 1,312   |                        |  
|                                                                                                                  |  |                        |         |                        |  
|Total assets                                                                                                      |  | $                      | 166,054 |                        | $
|                                                                                                                  |  |                        |         |                        |  
|LIABILITIES                                                                                                       |  |                        |         |                        |  
|Current    liabilities:                                                                                           |  |                        |         |                        |  
|Current portion of distribution center financing                                                                  |  | $                      | 693     |                        | $
|Current portion of capital leases                                                                                 |  |                        | 1,873   |                        |  
|Current portion of revolver                                                                                       |  |                        | 100     |                        |  
|Accounts payable and other                                                                                        |  |                        | 29,182  |                        |  
|Disbursement accounts                                                                                             |  |                        | 9,066   |                        |  
|Accrued expenses                                                                                                  |  |                        | 24,252  |                        |  
|                                                                                                                  |  |                        |         |                        |  
|Total current liabilities                                                                                         |  |                        | 65,166  |                        |  
|                                                                                                                  |  |                        |         |                        |  
|Long-term    distribution center financing                                                                        |  |                        | 2,633   |                        |  
|Long-term    capital leases                                                                                       |  |                        | 1,735   |                        |  
|Deferred    lease incentives                                                                                      |  |                        | 12,908  |                        |  
|Deferred    compensation plan liabilities                                                                         |  |                        | 4,853   |                        |  
|Other    long-term liabilities                                                                                    |  |                        | 8,710   |                        |  
|                                                                                                                  |  |                        |         |                        |  
|Total liabilities                                                                                                 |  |                        | 96,005  |                        |  
|                                                                                                                  |  |                        |         |                        |  
|Commitments    and contingencies                                                                                  |  |                        |         |                        |  
|STOCKHOLDERS EQUITY                                                                                              |  |                        |         |                        |  
|Preferred    stock, $.001 par value; authorized 1,000,000 shares; 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 shares; issued 14,249,800    shares and 14,652,400 shares |  |                        | 14      |                        |  
|Additional    paid-in capital                                                                                     |  |                        | 84,856  |                        |  
|Deferred    compensation obligation (279,870 shares)                                                              |  |                        |        |                        |  
|(Accumulated    deficit) retained earnings                                                                        |  |                        | (6,494  | )                      |  
|Treasury    stock (1,590,766 and 1,312,955 shares), at cost                                                       |  |                        | (8,327  | )                      |  
|                                                                                                                  |  |                        |         |                        |  
|Total stockholders equity                                                                                        |  |                        | 70,049  |                        |  
|                                                                                                                  |  |                        |         |                        |  
|Total liabilities and stockholders equity                                                                        |  | $                      | 166,054 |                        | $
|                                                                                                                  |  |                        |         |                        |  




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





---






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





|                                                            |  | Fiscal Year    Ended    January 31,    2004 |            | Fiscal Year    Ended    January 29,    2005 |   | Fiscal Year    Ended    January 28,    2006 |  
|----------------------------------------------------------- |  | ------------------------------------------- | ---------- | ------------------------------------------- | - | ------------------------------------------- | -
|                                                            |  |                                             |            |                                             |   |                                             |  
|Net sales                                                   |  | $                                           | 396,265    |                                             | $ | 399,250                                     |  
|Cost of goods sold, including buying and    occupancy costs |  |                                             | 314,131    |                                             |   | 315,394                                     |  
|                                                            |  |                                             |            |                                             |   |                                             |  
|Gross profit                                                |  |                                             | 82,134     |                                             |   | 83,856                                      |  
|General, administrative and store operating expenses        |  |                                             | 100,923    |                                             |   | 96,838                                      |  
|                                                            |  |                                             |            |                                             |   |                                             |  
|Operating (loss) income                                     |  |                                             | (18,789    | )                                           |   | (12,982                                     | )
|Interest    income                                          |  |                                             | 103        |                                             |   | 1,344                                       |  
|Interest    expense                                         |  |                                             | (1,020     | )                                           |   | (870                                        | )
|                                                            |  |                                             |            |                                             |   |                                             |  
|(Loss) income before income taxes                           |  |                                             | (19,706    | )                                           |   | (12,508                                     | )
|Benefit from    income taxes                                |  |                                             | (636       | )                                           |   | (2,028                                      | )
|                                                            |  |                                             |            |                                             |   |                                             |  
|Net (loss) income                                           |  | $                                           | (19,070    | )                                           | $ | (10,480                                     | )
|                                                            |  |                                             |            |                                             |   |                                             |  
|Net (loss)    income per share                              |  |                                             |            |                                             |   |                                             |  
|Basic                                                       |  | $                                           | (1.47      | )                                           | $ | (0.82                                       | )
|                                                            |  |                                             |            |                                             |   |                                             |  
|Diluted                                                     |  | $                                           | (1.47      | )                                           | $ | (0.82                                       | )
|                                                            |  |                                             |            |                                             |   |                                             |  
|Weighted average number of shares    outstanding            |  |                                             |            |                                             |   |                                             |  
|Basic                                                       |  |                                             | 12,937,304 |                                             |   | 12,748,878                                  |  
|Common stock    equivalents (stock options)                 |  |                                             |           |                                             |   |                                            |  
|                                                            |  |                                             |            |                                             |   |                                             |  
|Diluted                                                     |  |                                             | 12,937,304 |                                             |   | 12,748,878                                  |  
|                                                            |  |                                             |            |                                             |   |                                             |  




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


---






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





|                                                                                              |  | Fiscal Year    Ended    January 31,    2004 |         | Fiscal Year    Ended    January 29,    2005 |   | Fiscal Year    Ended    January 28,    2006 |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------- | ------------------------------------------- | - | ------------------------------------------- | -
|                                                                                              |  |                                             |         |                                             |   |                                             |  
|Cash Flows From Operating Activities:                                                         |  |                                             |         |                                             |   |                                             |  
|Net (loss) income                                                                             |  | $                                           | (19,070 | )                                           | $ | (10,480                                     | )
|Adjustments to reconcile net (loss) income    to net cash provided from operating activities: |  |                                             |         |                                             |   |                                             |  
|Depreciation and amortization of property and equipment                                       |  |                                             | 15,462  |                                             |   | 14,315                                      |  
|Amortization of deferred charges and other intangible assets                                  |  |                                             | 504     |                                             |   | 343                                         |  
|Loss on disposal of assets                                                                    |  |                                             | 938     |                                             |   | 309                                         |  
|Gain on insurance proceeds                                                                    |  |                                             |        |                                             |   |                                            |  
|Tax benefit from stock options                                                                |  |                                             |        |                                             |   |                                            |  
|Compensation expense                                                                          |  |                                             | 95      |                                             |   |                                            |  
|Deferred lease assumption revenue amortization                                                |  |                                             | (30     | )                                           |   | (2                                          | )
|Net non-cash compensation expense on deferred compensation plan                               |  |                                             |        |                                             |   | 729                                         |  
|Provision for deferred income taxes                                                           |  |                                             |        |                                             |   |                                            |  
|Internal Revenue Service settlement related to warrants                                       |  |                                             |        |                                             |   | 1,157                                       |  
|Changes in    operating assets and liabilities:                                               |  |                                             |         |                                             |   |                                             |  
|Accounts receivable                                                                           |  |                                             | 1,205   |                                             |   | 285                                         |  
|Income taxes                                                                                  |  |                                             | 1,275   |                                             |   | 43                                          |  
|Inventory                                                                                     |  |                                             | 11,631  |                                             |   | 208                                         |  
|Accounts payable and accrued expenses                                                         |  |                                             | (4,454  | )                                           |   | 73                                          |  
|Other current assets                                                                          |  |                                             | 392     |                                             |   | (183                                        | )
|Deferred lease incentives                                                                     |  |                                             | (1,995  | )                                           |   | (2,085                                      | )
|Other assets and liabilities                                                                  |  |                                             | (27     | )                                           |   | (1,540                                      | )
|                                                                                              |  |                                             |         |                                             |   |                                             |  
|Net Cash Provided by Operating Activities                                                     |  |                                             | 5,926   |                                             |   | 3,172                                       |  
|                                                                                              |  |                                             |         |                                             |   |                                             |  
|Investing Activities:                                                                         |  |                                             |         |                                             |   |                                             |  
|Capital expenditures                                                                          |  |                                             | (3,395  | )                                           |   | (1,963                                      | )
|Deferred payment for property and equipment                                                   |  |                                             | 53      |                                             |   | (10                                         | )
|Insurance proceeds                                                                            |  |                                             |        |                                             |   |                                            |  
|                                                                                              |  |                                             |         |                                             |   |                                             |  
|Net Cash    Used in Investing Activities                                                      |  |                                             | (3,342  | )                                           |   | (1,973                                      | )
|                                                                                              |  |                                             |         |                                             |   |                                             |  
|Financing Activities:                                                                         |  |                                             |         |                                             |   |                                             |  
|Repayments of long-term debt                                                                  |  |                                             | (1,220  | )                                           |   | (635                                        | )
|Payments on capital lease obligations                                                         |  |                                             | (1,995  | )                                           |   | (2,124                                      | )
|(Decrease) increase in disbursement accounts                                                  |  |                                             | (2,488  | )                                           |   | (368                                        | )
|Net borrowings (repayments) under line-of-credit agreement                                    |  |                                             |        |                                             |   | 100                                         |  
|Proceeds from exercise of stock options                                                       |  |                                             |        |                                             |   | 3                                           |  
|                                                                                              |  |                                             |         |                                             |   |                                             |  
|Net Cash    (Used in) Provided By Financing Activities                                        |  |                                             | (5,703  | )                                           |   | (3,024                                      | )
|                                                                                              |  |                                             |         |                                             |   |                                             |  
|Net    (decrease) increase in cash and cash equivalents                                       |  |                                             | (3,119  | )                                           |   | (1,825                                      | )
|Cash and    cash equivalents, beginning of period                                             |  |                                             | 17,540  |                                             |   | 14,421                                      |  
|                                                                                              |  |                                             |         |                                             |   |                                             |  
|Cash and    cash equivalents, end of period                                                   |  | $                                           | 14,421  |                                             | $ | 12,596                                      |  
|                                                                                              |  |                                             |         |                                             |   |                                             |  




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


---






UNITED RETAIL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  (shares and dollars in thousands, except per share amounts)





|                                                                   |  | Common    Stock    Shares    Outstanding |        | Common    Stock    $.001    Par Value |   | Additional    Paid-in    Capital |  | Retained    Earnings /    Accumulated    Deficit |        | Treasury    Stock,    at Cost |   | Deferred    Compensation    Obligation |   | Total    Stockholders    Equity |       
|------------------------------------------------------------------ |  | ---------------------------------------- | ------ | ------------------------------------- | - | -------------------------------- |  | ------------------------------------------------ | ------ | ----------------------------- | - | -------------------------------------- | - | -------------------------------- | ------
|                                                                   |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  |       
|Balance,    February 1, 2003                                       |  |                                          | 12,937 |                                       | $ | 14                               |  | $                                                | 83,601 |                               | $ | 23,056                                 |   | $                                | (7,676
|Compensation    expense                                            |  |                                          |        |                                       |   |                                  |  |                                                  | 95     |                               |   |                                        |   |                                  |       
|Net loss                                                           |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   | (19,070                                | ) |                                  |       
|                                                                   |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  |       
|Balance,    January 31, 2004                                       |  |                                          | 12,937 |                                       |   | 14                               |  |                                                  | 83,696 |                               |   | 3,986                                  |   |                                  | (7,676
|Tax benefit    from stock warrants                                 |  |                                          |        |                                       |   |                                  |  |                                                  | 1,157  |                               |   |                                        |   |                                  |       
|Shares in    deferred compensation plan                            |  |                                          | (280   | )                                     |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  | (651  
|Exercise of    stock options                                       |  |                                          | 2      |                                       |   |                                  |  |                                                  | 3      |                               |   |                                        |   |                                  |       
|Net loss                                                           |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   | (10,480                                | ) |                                  |       
|                                                                   |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  |       
|Balance,    January 29, 2005                                       |  |                                          | 12,659 |                                       |   | 14                               |  |                                                  | 84,856 |                               |   | (6,494                                 | ) |                                  | (8,327
|Purchase price of shares held in the    deferred compensation plan |  |                                          | 280    |                                       |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  | 651   
|Deferred    compensation obligation                                |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  |       
|Tax benefit    from exercise of stock options                      |  |                                          |        |                                       |   |                                  |  |                                                  | 462    |                               |   |                                        |   |                                  |       
|Treasury    stock                                                  |  |                                          | (2     | )                                     |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  | (29   
|Exercise of    stock options                                       |  |                                          | 402    |                                       |   | 1                                |  |                                                  | 2,425  |                               |   |                                        |   |                                  |       
|Net income                                                         |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   | 28,251                                 |   |                                  |       
|                                                                   |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  |       
|Balance,    January 28, 2006                                       |  |                                          | 13,339 |                                       | $ | 15                               |  | $                                                | 87,743 |                               | $ | 21,757                                 |   | $                                | (7,705
|                                                                   |  |                                          |        |                                       |   |                                  |  |                                                  |        |                               |   |                                        |   |                                  |       




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 500 stores as of January 28, 2006 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. 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 2003, fiscal 2004 and fiscal 2005 consisted of 52 weeks and  ended on January 31, 2004, January 29, 2005, and January 28, 2006,  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. We recognize  revenue from gift cards at the time the gift cards are redeemed.





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 cost of  goods sold. During fiscal 2003, fiscal 2004 and fiscal 2005, shipping and  handling costs were $364,000, $471,000 and $940,000, respectively.





Vendor Discounts





The Company avails itself of excess
    cash positions by paying vendors earlier than required by the terms of the
    purchase order. Such payments resulted in additional discounts in the amount
    of $1.2 million for fiscal 2005 and were deducted from general, administrative
    and store operating expenses.


---






Cost of Goods Sold, Buying and Occupancy





Cost  of goods sold includes merchandise costs, net of discounts and allowances,  marketing, freight and inventory shrinkage. Buying and occupancy expenses  primarily include payroll expenses for the Companys buying departments and  distribution network, rent, common area maintenance, real estate taxes,  utilities, maintenance and depreciation for the Companys stores, distribution  center, internet fulfillment center and equipment.





Marketing Costs





Most marketing costs are  expensed when ordered. Certain direct mail and media campaigns are expensed  over the life of the campaign, which are typically less than one year.  Marketing expense, included in cost of goods sold in the accompanying  consolidated statements of operations, was $10.3 million, $11.6 million and $14.6  million in fiscal 2003, 2004, and 2005, 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 1,897,872 shares and 1,893,812  shares in fiscal 2003 and fiscal 2004, respectively, as a result of the  Companys net loss.  The computation of  earnings per diluted share excludes options to purchase 579,400 shares in  fiscal 2005, because the options exercise prices were greater than the average  market price of the common shares.





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 typically remitted as cash within
    five days after the end of such fiscal period, which amounted to $2.8 million
    at January 28, 2006.





Restricted  Cash





As of January 25, 2005, the  Company is required by The CIT Group/Business Credit, Inc. to maintain at all  times balances in a designated account in an amount not less than 25% of the  amount of gift cards and merchandise credits issued and not redeemed during the  prior six month period (See Note 9).





Inventory





Inventories  are stated at the lower
    of cost or market and include import inventory in-transit under
    FOB shipping point terms. Import inventory in-transit has been included in the
    balance sheet and accounts payable on
    the basis of the FOB shipping point terms. In prior year periods, the
Company did not include such inventory on its balance sheet or accounts payable
until receipt. Prior year inventory and accounts
    payable amounts have been revised to appropriately reflect the FOB shipping
    point terms as well.  The amounts of such import inventory in-transit
    included in the revised inventory amounts at January 31, 2004 and January
    29, 2005, and in the reported amount at January
28, 2006 are $11.5 million, $10.8 million and $12.5 million, respectively.


---






The  Company utilizes the retail method (an average cost flow assumption is used),  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.  Permanent markdowns,  when taken, reduce both the cost and price components of inventory on hand,  which maintains the established cost-to-price relationship.  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, which can significantly impact the ending  inventory valuation at cost as well as resulting margins.  The necessity for management estimates,  coupled with the fact that the retail inventory method is an averaging process,  can produce inventory costs at any point in time that are inexact.





Further,  deferred markdowns can result in an overstatement of cost under the lower of  cost or market principle.  Accordingly,  at fiscal year-end, management conducts a thorough review of inventory on hand  and, based on its business judgment, may reduce further the carrying value of  inventory by recording a markdown reserve for inventory with sales performance  below expectations and/or unsold quantities in excess of expectations.  Recording a reserve reduces the inventory recorded on the Companys balance  sheet and is charged to the Companys cost of sales.





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 carrying value of 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.


---






Private Label Credit Card Agreement





The  Company and World Financial Network National Bank (WFN) are parties to a  Private Label Credit Card Program Agreement (Agreement). Under the Agreement,  WFN reviews applications for credit cards, issues credit cards to eligible  applicants, processes billing statements and payments, handles customer service  and initiates collection activities from delinquent customers (Processing  Costs). The Company does not include the receivable created under the Credit  Card Program in the Companys accounts receivables on its balance sheet because  under the Agreement, the Company has no interest in the customer accounts or  receivables. The credit card program premium (or potentially discount) deducted  from general, administrative and store operating expenses is equal to royalties  (program revenues less net write-offs of receivables and the cost of funding  the receivable) less Processing Costs performed by WFN. The net
premium  deducted from general, administrative and store operating expenses was $4.2  million, $5.2 million and $6.6 million for the fiscal years ended January 31, 2004,  January 29, 2005 and January 28, 2006, respectively.





On November 28, 2005, the  Credit Card Program Agreement was restated (as restated, the Amended  Agreement).  The Amended Agreement is  effective as of January 29, 2006 and shall expire on February 29, 2012 unless  terminated earlier. Under the Amended Agreement, the Bank will continue to  provide the aforementioned services.   The terms of the Amended Agreement require the Bank to pay the Company  amounts based on the programs levels of sales and accounts receivable.





Incurred But Not Reported Claims For Personal  Injuries and Medical Benefits





The  Company records a liability for incurred but not reported claims (IBNR) for  each fiscal year.  This liability 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 but it remains  liable for a self-insured retention.   The Company is self-insured for its medical, dental and prescription  plans for associates but it has stop loss insurance policies to limit its  liability.)





The  estimates underlying the liability for IBNR Claims are matters of judgment on  which insurance experts may differ.  The  use of different estimates or assumptions would change the amount recorded.





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. The  Company also provides for estimated exposures on its filed tax returns; such  accruals are included in other long-term liabilities.


---






Stock  Options





The Company has several stock  option plans in operation which are more fully described in Note 14. 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 (loss) income and (loss) income 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) |        
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | -------
|                                                                                                                                            |  | Fiscal    2003                                  |        
|                                                                                                                                            |  |                                                 |        
|                                                                                                                                            |  |                                                 |        
|Reported net    (loss) income                                                                                                               |  | $                                               | (19,070
|Add back:    Compensation expense                                                                                                           |  |                                                 | 95     
|Deduct: Total stock-based employee
compensation expense determined under fair value based
method for all awards, net of related tax effects |  |                                                 | (618   
|                                                                                                                                            |  |                                                 |        
|Pro forma    net (loss) income                                                                                                              |  | $                                               | (19,593
|Net (loss)    income per share:                                                                                                             |  |                                                 |        
|Basic - as reported                                                                                                                         |  | $                                               | (1.47  
|Basic - pro forma                                                                                                                           |  | $                                               | (1.51  
|Diluted - as reported                                                                                                                       |  | $                                               | (1.47  
|Diluted - pro forma                                                                                                                         |  | $                                               | (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:


|                                   |  |                |         |                |  |                |   |  |         |  
|---------------------------------- |  | -------------- | ------- | -------------- |  | -------------- | - |  | ------- | -
|                                   |  | Fiscal    2003 |         | Fiscal    2004 |  | Fiscal    2005 |  
|                                   |  |                |         |               
|                                   |  |                |         |                |  |                |  
|Expected    dividend yield         |  |                | 0.00    | %              |  | 0.00           | % |  | 0.00    | %
|Expected    stock price volatility |  |                | 50.00   | %              |  | 50.00          | % |  | 50.00   | %
|Risk-free    interest rate         |  |                | 3.02    | %              |  | 3.71           | % |  | 4.38    | %
|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.





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.





Recent Accounting Pronouncements





In  November 2004, FASB issued SFAS No. 151 (SFAS 151), Inventory Costs, which  amends Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing.  SFAS 151 amends the accounting for inventory costs such that idle facility  expense, excessive spoilage, double freight and rehandling costs be recognized  as current-period charges. The provisions of SFAS 151 are effective for  inventory costs incurred during fiscal years beginning after June 15, 2005. The  adoption of SFAS 151 is not expected to have an impact on the Companys  financial position, results of operations or cash flows, as the Company  historically has not manufactured merchandise.





In December 2004, the Financial  Accounting Standards Board issued SFAS No. 123R, Share-Based Payment (SFAS  No. 123R), which replaces SFAS No. 123 Accounting for Stock-Based  Compensation (SFAS No. 123) and supersedes APB Opinion No. 25.  SFAS No. 123R requires all share-based  payments to employees, including grants of employee stock options, to be  measured at their fair values at the date of grant and recognized as expense  over the service period, which is generally the vesting period.  SFAS No. 123R is effective for the first  fiscal year beginning after June 15, 2005, which, for the Company, will be  fiscal 2006.





It is expected that the adoption of SFAS No  123R will reduce the Companys results of operations in fiscal 2006 by amounts  comparable to the pro-forma disclosures in prior years (see stock options.) The  actual impact will depend, among other things on the market value and the  amount of share-based awards outstanding in future periods.





In May 2005, the FASB issued  SFAS No. 154, Accounting Changes and Error Corrections - a replacement of APB  Opinion No. 20 and FASB Statement No. 3. This Statement changes the  requirements for the accounting for and reporting of a change in accounting  principle. Previously, most voluntary changes in accounting principles required  recognition through a cumulative adjustment within net income of the period of  the change. The new standard requires retrospective application to prior  periods financial statements, unless it is impracticable to determine the  period-specific effects or the cumulative effect of the change. SFAS No. 154  does not change the transition provisions of any existing pronouncements. The  Company does not believe that the adoption of SFAS No. 154 will have a  significant impact on its consolidated financial condition, results of  operations or cash flows.


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On October 6, 2005, the FASB  issued FASB Staff Position (FSP) FAS No. 13-1 Accounting for Rental Costs  Incurred during a Construction Period. The FASB has concluded that rental  costs incurred during and after a construction period are for the right to  control the use of a leased asset and must be recognized as rental expense.  Such costs were previously capitalizable as construction costs if the company  had a policy to do so. The FSP is effective for reporting periods beginning  after December 15, 2005. The Company does not expect that the implementation of  FSP FAS No. 13-1 will have a significant impact on its consolidated financial  condition, results of operations or cash flows.





3. Other Assets





Other assets consist of  (dollars in thousands):





|                           |  | January    29,    2005 |       | January    28,    2006 |  
|-------------------------- |  | ---------------------- | ----- | ---------------------- | -
|                           |  |                        |      
|                           |  |                        |       |                        |  
|Long-term    deposits      |  | $                      | 1,106 |                        | $
|Non-current    receivables |  |                        | 90    |                        |  
|Debt    issuance costs     |  |                        | 116   |                        |  
|                           |  |                        |       |                        |  
|                           |  | $                      | 1,312 |                        | $
|                           |  |                        |       |                        |  




4.  Property and Equipment





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





|                                             |  | January    29,    2005 |          | January    28,    2006 |  
|-------------------------------------------- |  | ---------------------- | -------- | ---------------------- | -
|                                             |  |                        |         
|                                             |  |                        |          |                        |  
|Land                                         |  | $                      | 2,176    |                        | $
|Buildings                                    |  |                        | 10,574   |                        |  
|Furniture,    fixtures and equipment (1)     |  |                        | 88,970   |                        |  
|Leasehold    improvements                    |  |                        | 85,573   |                        |  
|                                             |  |                        |          |                        |  
|                                             |  |                        | 187,293  |                        |  
|Accumulated    depreciation and amortization |  |                        | (108,267 | )                      |  
|                                             |  |                        |          |                        |  
|Property and    equipment, net               |  | $                      | 79,026   |                        | $
|                                             |  |                        |          |                        |  




---

(1) Includes approximately $8.2  million of assets under capital leases resulting from a sale and leaseback  agreement (See Note 7).


---






5. Accrued Expenses





Accrued expenses consist of  (dollars in thousands):





|                                         |  | January    29,    2005 |        | January    28,    2006 |  
|---------------------------------------- |  | ---------------------- | ------ | ---------------------- | -
|                                         |  |                        |       
|                                         |  |                        |        |                        |  
|Payroll    related expenses              |  | $                      | 3,973  |                        | $
|Gift cards    and other customer credits |  |                        | 4,401  |                        |  
|Insurance    payable                     |  |                        | 4,198  |                        |  
|Occupancy    expenses                    |  |                        | 3,080  |                        |  
|Private    credit card processing fees   |  |                        | 970    |                        |  
|Sales taxes    payable                   |  |                        | 1,434  |                        |  
|Legal    contingency liability           |  |                        | 1,495  |                        |  
|Deferred tax liability                   |  |                        | 311    |                        |  
|Other                                    |  |                        | 4,390  |                        |  
|                                         |  |                        |        |                        |  
|                                         |  | $                      | 24,252 |                        | $
|                                         |  |                        |        |                        |  




6. Other Long-term Liabilities





Other long-term liabilities  consist of (dollars in thousands):





|                               |  | January    29,    2005 |       | January    28,    2006 |  
|------------------------------ |  | ---------------------- | ----- | ---------------------- | -
|                               |  |                        |      
|                               |  |                        |       |                        |  
|Rent                           |  | $                      | 7,429 |                        | $
|Legal    contingency liability |  |                        | 996   |                        |  
|Tax    contingency liability   |  |                        | 285   |                        |  
|                               |  |                        |       |                        |  
|                               |  | $                      | 8,710 |                        | $
|                               |  |                        |       |                        |  




7. Leases





Operating  Leases





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):





|                       |  | Fiscal    2003 |        | Fiscal    2004 |   | Fiscal    2005 | 
|---------------------- |  | -------------- | ------ | -------------- | - | -------------- | 
|                       |  |                |        |               
|                       |  |                |        |                |   |                | 
|Real estate    rent    |  | $              | 45,291 |                | $ | 43,019         | 
|Equipment    and other |  |                | 550    |                |   | 518            | 
|                       |  |                |        |                |   |                | 
|Total rent    expense  |  | $              | 45,841 |                | $ | 43,537         | 
|                       |  |                |        |                |   |                | 

---






At January 28, 2006, the  Company was committed under store leases with terms typically ranging from 1 to  12 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 term of  the lease and include options that may extend the lease term beyond the initial  commitment period.





Rental expense for step rent  provisions and escalation clauses is recognized on a straight-line basis over  the minimum lease term and included along with other related rent expense as  part of buying and occupancy costs.





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. Deferred lease incentives at January 29, 2005 and January 28, 2006, were  $12.9 million and $10.6 million, respectively.





Capital Leases





In January 2002, the Company  executed a five-year $8.2 million sale and leaseback 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 of $163,344 beginning  February 2002 and gives the Company the option of buying back the fixtures 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 |  
|------------------------------------------ |  | --------- | ------- | ------- | -
|                                           |  |           |         |         |  
|2006                                       |  | $         | 43,695  |         | $
|2007                                       |  |           | 39,779  |         |  
|2008                                       |  |           | 35,137  |         |  
|2009                                       |  |           | 32,007  |         |  
|2010                                       |  |           | 29,372  |         |  
|Thereafter                                 |  |           | 75,007  |         |  
|                                           |  |           |         |         |  
|Total    minimum lease payments            |  | $         | 254,997 |         | $
|                                           |  |           |         |         |  
|Less:    imputed interest                  |  |           |         |         |  
|                                           |  |           |         |         |  
|Present    value of minimum lease payments |  |           |         |         | $
|                                           |  |           |         |         |  




8. Long-term Debt





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 of $79,437 beginning  May 1994. The loan is collateralized by a mortgage on its national distribution  center.


---






The balance outstanding under  this loan is as follows (dollars in thousands):





|                            |  | January    29,    2005 |       | January    28,    2006 |  
|--------------------------- |  | ---------------------- | ----- | ---------------------- | -
|                            |  |                        |      
|                            |  |                        |       |                        |  
|8.64%    Mortgage due 2009  |  | $                      | 3,326 |                        | $
|Less:    current maturities |  |                        | 693   |                        |  
|                            |  |                        |       |                        |  
|Long-term    debt           |  | $                      | 2,633 |                        | $
|                            |  |                        |       |                        |  




Principal maturities by year  are as follows (dollars in thousands):





|           |  | Debt    Maturities |      
|---------- |  | ------------------ | -----
|           |  |                   
|           |  |                    |      
|2006       |  | $                  | 756  
|2007       |  |                    | 823  
|2008       |  |                    | 897  
|2009       |  |                    | 157  
|Thereafter |  |                    |     
|           |  |                    |      
|Total      |  | $                  | 2,633
|           |  |                    |      




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 of $81,829 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.





9. Financing Agreement





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  significant 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. Payments of revolving loans are not required until termination of the  agreement unless either 1) the outstanding balance of revolving loans and  outstanding letters of credit exceeds the availability under the agreement, in  which case the excess would be payable upon demand from CIT or 2) the Company  is in default under the Financing Agreement.





The line of credit is  collateralized by (i) inventory and its proceeds, (ii) bank credit card  receivables and (iii) the balance on deposit from time to time in an account  that has been pledged to the lenders.





At January 28, 2006, the  borrowing capacity of the Companies under the Financing Agreement with CIT,  after satisfying the $5 million minimum availability requirement, was $8.9  million, trade letters of credit for the account of the Companies were  outstanding in the amount of $24.5 million, standby letters of credit were  outstanding in the amount of $6.1 million and no loan had been drawn down. The  Companys cash and cash equivalents of $32.3 million was unrestricted.





The Company did not draw down  on its revolving credit facility in 2005.   The average amount of borrowings outstanding during fiscal 2004 was $0.5  million at a weighted average interest rate of   5.4%.  The average outstanding  balance in 2003 was less than $0.1 million.





10. 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 $4.4 million at January 28, 2006 based  on the current rates quoted to the Company for debt of the same or similar  issues.





11. Income Taxes





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





|                             |  | Fiscal    2003 |      | Fiscal    2004 |   | Fiscal    2005 |  
|---------------------------- |  | -------------- | ---- | -------------- | - | -------------- | -
|                             |  |                |      |               
|                             |  |                |      |                |   |                |  
|Current:                     |  |                |      |                |   |                |  
|Federal                      |  | $              | (874 | )              | $ | (2,165         | )
|State                        |  |                | 238  |                |   | 137            |  
|                             |  |                |      |                |   |                |  
|                             |  |                | (636 | )              |   | (2,028         | )
|                             |  |                |      |                |   |                |  
|Deferred:                    |  |                |      |                |   |                |  
|Federal                      |  |                |     |                |   |               |  
|State                        |  |                |     |                |   |               |  
|                             |  |                |      |                |   |                |  
|                             |  |                |     |                |   |               |  
|                             |  |                |      |                |   |                |  
|Benefit from    income taxes |  | $              | (636 | )              | $ | (2,028         | )
|                             |  |                |      |                |   |                |  

---






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





|                                               |  | Fiscal    2003 |       | Fiscal    2004 |  | Fiscal    2005 |   
|---------------------------------------------- |  | -------------- | ----- | -------------- |  | -------------- | --
|                                               |  |                |       |               
|                                               |  |                |       |                |  |                |   
|Statutory    Federal income tax rate           |  |                | (35.0 | )%             |  | (34.0          | )%
|State income    taxes, net of Federal benefit  |  |                | (1.0  | )              |  | 1.1            |   
|Permanent    differences including credits     |  |                | 0.0   |                |  | 0.0            |   
|Reversal of    previously accrued income taxes |  |                | (4.4  | )              |  | (14.5          | ) 
|IRS refund    settlement                       |  |                | 0.0   |                |  | (2.8           | ) 
|Other                                          |  |                | 0.5   |                |  | (0.3           | ) 
|                                               |  |                |       |                |  |                |   
|Sub-total                                      |  |                | (39.9 | )              |  | (50.5          | ) 
|Deferred tax    valuation allowance            |  |                | 36.7  |                |  | 34.3           |   
|                                               |  |                |       |                |  |                |   
|Effective    tax rate                          |  |                | (3.2  | )%             |  | (16.2          | )%
|                                               |  |                |       |                |  |                |   




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.





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. In  April 2004, the Company received payment from the IRS in the amount of $2.5  million which was initially deferred on the balance sheet. The Company  subsequently received final clearance from the IRS regarding this amount.  Consequently, the Company recognized the benefit of the refund claims,  including the related interest thereon, during the second fiscal quarter of  2004. $1.1 million was recorded as an increase to additional paid-in capital as  it related to stock warrant deductions, $1.2 million of interest income was  recorded in the Companys results of operations and $0.2 million in federal tax  benefit was recorded related to research credits. An additional payment of $0.3
million was received in August 2004 in connection with further claims, of which  $0.1 million of interest income was recorded in the Companys third quarter  results of operations and $0.2 million in federal tax benefit was recorded  related to research credits.





In the fourth quarter of fiscal  2004, due to various settlements, the Company recorded a $1.8 million tax  benefit for reversals of accruals for potential tax liabilities.


---






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





|                                              |  | January    29,    2005 |         | January    28,    2006 |  
|--------------------------------------------- |  | ---------------------- | ------- | ---------------------- | -
|                                              |  |                        |        
|                                              |  |                        |         |                        |  
|Current    deferred tax assets:               |  |                        |         |                        |  
|Federal NOL    and other tax attributes       |  | $                      |        |                        | $
|State NOLs                                   |  |                        |        |                        |  
|Inventory                                     |  |                        | 221     |                        |  
|Accruals and    reserves                      |  |                        | 262     |                        |  
|                                              |  |                        |         |                        |  
|Total    current deferred tax assets          |  | $                      | 483     |                        | $
|                                              |  |                        |         |                        |  
|Non-current    deferred tax assets:           |  |                        |         |                        |  
|State NOLs                                   |  | $                      | 6,610   |                        | $
|Federal NOL    and other tax attributes       |  |                        | 14,644  |                        |  
|Depreciation                                  |  |                        |        |                        |  
|Compensation                                  |  |                        | 909     |                        |  
|Accruals and    reserves                      |  |                        | 8,016   |                        |  
|                                              |  |                        |         |                        |  
|Total    non-current deferred tax assets      |  | $                      | 30,179  |                        | $
|                                              |  |                        |         |                        |  
|Non-current    deferred tax liabilities:      |  |                        |         |                        |  
|Depreciation                                  |  | $                      | (6,508  | )                      | $
|Accruals and    reserves                      |  |                        |        |                        |  
|                                              |  |                        |         |                        |  
|Total    non-current deferred tax liabilities |  | $                      | (6,508  | )                      | $
|                                              |  |                        |         |                        |  
|Valuation
         allowance                  |  | $                      | (24,154 | )                      | $
|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 Company recorded additional  valuation allowances of $12.6 million and $4.3 million in fiscal 2003 and  fiscal 2004, respectively. In the fourth quarter of fiscal 2005, due to a  number of factors, primarily that the Company recorded income before taxes of  $11.4 million for fiscal 2005 (and taxable income exceeded that amount),  management increased its projection of future taxable income. As a result of  these increased projections, management concluded the future utilization of its  deferred tax assets (with the exception of charitable contributions  carryforward) was more likely than not. In fiscal 2005, the Company reduced its  valuation allowance by $22.6 million.


---






At January 28, 2006 the Company  had net operating loss carryforwards of approximately $17.0 million available  to reduce future Federal taxable income, expiring through 2024. Additionally,  at January 28, 2006 the Company had net operating loss carryforwards of  approximately $65 million available to reduce future taxable income in certain  states, expiring through 2024. The utilization of these carryforwards will not  have any future impact on the results of operations but will have a favorable  impact on future cash flows.





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, which is titled the  Supplemental Retirement Savings Plan (the 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.





In fiscal 2004, the SRSP  purchased 279,870 shares of the Companys common stock at a cost of $0.7  million using a portion of the funds accumulated since 1993 in the deferred  compensation account of Raphael Benaroya, the Companys Chairman, President and  Chief Executive Officer. The shares held in Mr. Benaroyas SRSP account were  reflected in the same manner as treasury shares and carried at cost on the  balance sheet. In fiscal 2003, 2004 and the first half of 2005 the liability  was marked to market and this liability adjustment flows through the statement  of operations as either an increase or a decrease in compensation expense. With  respect to the SRSP assets, marketable securities were also marked to market  except shares of Company stock, which are recorded permanently at cost. This  asset adjustment also flows through the statement of operations. The liability  adjustment and the asset adjustment were not necessarily equal in
amount  because of the disparate treatment of Company stock. In fiscal 2004 and fiscal  2005, the market price of Company stock increased and the related compensation  expense was $0.7 million and $0.6 million, respectively.





In the second quarter of fiscal  2005, the Company amended the SRSP and, as a result, the market value of  Company stock held in the SRSP, $2.0 million, on the date of the amendment was  reclassified on the balance sheet to the deferred compensation obligation in  stockholders equity from deferred compensation plan liabilities. Additionally,  the cost of those shares, $0.65 million, were reclassified from treasury stock  and netted against the deferred compensation obligation. Accordingly, movements  in the market price of the Company stock no longer impacted compensation  expense as of the date of the change to the plan and the asset and liability  adjustments are equal in value. The resulting balance in the deferred  compensation obligation is $1.35 million.





The value of the other investments,  held by the Company on behalf of the SRSP, at January 29, 2005 and January 28,  2006, was $3.5 million and $4.1 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 expense, excluding net  compensation expense related to Company stock, during fiscal 2003, fiscal 2004  and fiscal 2005 was approximately $363,000 and $311,000, and $524,000,  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:





|                                                |  |                     |           |   | Weighted    Average    Exercise Price |     
|----------------------------------------------- |  | ------------------- | --------- | - | ------------------------------------- | ----
|                                                |  | Number of    Shares |           |  
|Fiscal 2003                                     |  |                     |          
|                                                |  |                     |           |   |                                      
|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

---






|                                                |  |                     |           |   | Weighted    Average    Exercise Price |     
|----------------------------------------------- |  | ------------------- | --------- | - | ------------------------------------- | ----
|                                                |  | Number of    Shares |           |  
|Fiscal 2004                                     |  |                     |          
|                                                |  |                     |           |   |                                      
|Options    outstanding at beginning of period   |  |                     | 1,897,872 |   | $                                     | 6.85
|Options    granted                              |  |                     | 111,000   |   | $                                     | 2.98
|Options    exercised                            |  |                     | (1,600    | ) | $                                     | 1.97
|Options    canceled                             |  |                     | (113,460  | ) | $                                     | 6.30
|                                                |  |                     |           |   |                                       |     
|Options    outstanding at end of period         |  |                     | 1,893,812 |   | $                                     | 6.66
|                                                |  |                     |           |   |                                       |     
|Options    available for grant at end of period |  |                     | 257,860   |   |                                       |     
|Options    exercisable at end of period         |  |                     | 1,397,062 |   | $                                     | 7.09




|                                                |  |                     |           |   | Weighted    Average    Exercise Price |     
|----------------------------------------------- |  | ------------------- | --------- | - | ------------------------------------- | ----
|                                                |  | Number of    Shares |           |  
|Fiscal 2005                                     |  |                     |          
|                                                |  |                     |           |   |                                      
|Options    outstanding at beginning of period   |  |                     | 1,893,812 |   | $                                     | 6.66
|Options    granted                              |  |                     | 119,500   |   | $                                     | 7.23
|Options    exercised                            |  |                     | (402,600  | ) | $                                     | 6.02
|Options    canceled                             |  |                     | (108,412  | ) | $                                     | 6.77
|                                                |  |                     |           |   |                                       |     
|Options    outstanding at end of period         |  |                     | 1,502,300 |   | $                                     | 6.86
|                                                |  |                     |           |   |                                       |     
|Options    available for grant at end of period |  |                     | 185,700   |   |                                       |     
|Options    exercisable at end of period         |  |                     | 1,105,100 |   | $                                     | 7.34




A summary of stock options  outstanding at year-end fiscal 2005 is as follows:





|Options    Outstanding      |  | Options    Exercisable |          
|--------------------------- |  | ---------------------- | ---------
|                            |  |                        |          
|Range of    Exercise Prices |  | Number    Outstanding  |          
|                            |  |                        |          
|$1.80 -    $3.03            |  |                        | 173,600  
|$3.09 -    $5.13            |  |                        | 193,800  
|$5.50 -    $5.97            |  |                        | 156,000  
|$6.25 -    $6.25            |  |                        | 30,000   
|$6.31 -    $6.31            |  |                        | 300,000  
|$6.38 -    $8.95            |  |                        | 167,900  
|$8.96 -    $8.96            |  |                        | 10,000   
|$9.40 -    $9.40            |  |                        | 320,000  
|$9.75 -    $12.08           |  |                        | 133,000  
|$15.13 -    $15.13          |  |                        | 18,000   
|                            |  |                        |          
|$1.80 -    $15.13           |  |                        | 1,502,300

---






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





15. 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 for options granted prior to  June 2005 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 1) the exercise price of the corresponding  option plus 2) any personal income tax withholding on the gain arising from the  exercise. The payment for options granted in June 2005 will be an amount  equivalent to twice the above calculation. No such payments have been made to  date.





16. Supplemental Cash Flow Information





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





|                                     |  | Fiscal    2003 |        | Fiscal    2004 |   | Fiscal    2005 |  
|------------------------------------ |  | -------------- | ------ | -------------- | - | -------------- | -
|                                     |  |                |        |               
|                                     |  |                |        |                |   |                |  
|Cash interest    paid                |  | $              | 1,168  |                | $ | 854            |  
|Cash    interest received            |  |                | (103   | )              |   | (1,344         | )
|                                     |  |                |        |                |   |                |  
|Net cash    interest paid (received) |  | $              | 1,065  |                | $ | (490           | )
|                                     |  |                |        |                |   |                |  
|                                     |  |                |        |                |   |                |  
|                                     |  |                |        |                |   |                |  
|Income taxes    paid                 |  | $              | 483    |                | $ | 118            |  
|Income taxes    refunded             |  |                | (1,447 | )              |   | (1,531         | )
|                                     |  |                |        |                |   |                |  
|Net income    taxes (refunded) paid  |  | $              | (964   | )              | $ | (1,413         | )
|                                     |  |                |        |                |   |                |  




Non-cash investing activities  include $1.4 million related to capital lease obligations incurred between  January 2002 and January 2003 and the exercise of certain stock options made by  surrendering 2,059 shares of Company common stock with a market value equal to  the exercise price of the options of approximately $29,000 in fiscal 2005.





17.   Contingencies





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. Legal  fees are typically expensed as incurred.





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 was  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 asserted federal and state wage and hour claims and related claims against  the Company.





Total expense related to this  matter
    was $0.7 million in fiscal 2003 and $1.6 million in fiscal 2004, of which
    $0.8 million was recorded in the fourth quarter.





The Stanford case was settled in  the second quarter of fiscal 2005 at a cost of $1.8 million, at which time the  underlying accruals were adjusted resulting in $0.5 million of income.  During the third quarter of fiscal 2005,  $1.1 million of this liability was paid. In anticipation of the settlement,  compensation of store managers employed by the Company in California had been  converted from salaried to hourly wages in January 2005.





18.   Supplemental Financial Data (Unaudited)


(dollars in thousands, except per share data)





|                                       |  | Fiscal    2004 |       
|-------------------------------------- |  | -------------- | ------
|                                       |  |                |       
|                                       |  | Qtr 1          |       
|                                       |  |                |       
|Net sales                              |  | $              | 97,519
|Gross profit                           |  |                | 20,792
|Operating    loss                      |  |                | (3,098
|Net (loss)    income                   |  | $              | (3,363
|Net (loss)    income per common share: |  |                |       
|Basic                                  |  | $              | (0.26 
|Diluted                                |  | $              | (0.26 




|                                |  | Fiscal    2005 |        
|------------------------------- |  | -------------- | -------
|                                |  |                |        
|                                |  | Qtr 1          |        
|                                |  |                |        
|Net sales                       |  | $              | 106,531
|Gross profit                    |  |                | 25,691 
|Operating    income             |  |                | 864    
|Net income                      |  | $              | 1,004  
|Net income    per common share: |  |                |        
|Basic                           |  | $              | 0.08   
|Diluted                         |  | $              | 0.08   




---

| | (1) | Includes    $0.8 million for settlement costs related to the Stanford case (See Note 17).                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Includes a    $1.8 million tax benefit for reversals of accruals for potential tax    liabilities due to various settlements (See Note 11).
| | (3) | Includes a    reduction of $0.5 million for settlement costs related to the Stanford case    (See Note 17.)                                
| | (4) | Includes a    $22.6 million tax benefit for reversals of valuation allowances.                                                             

---






|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND    FINANCIAL DISCLOSURE.
|------- | ----------------------------------------------------------------------------------------




Information  about a change in the Companys accountants
and related matters was filed in a  Current Report on Form 8-K dated May 6, 2005,
the Annual Report on Form 10-K for the year ended January 29, 2005 and the Quarterly
Report on Form 10-Q for the period ended April 30, 2005.





|ITEM 9A. | CONTROLS AND PROCEDURES.
|-------- | ------------------------




Disclosure Controls





A  committee of senior managers in the Companys Finance Department (the  Disclosure Committee), chaired by the Chief Financial Officer (the CFO),  coordinates disclosure controls and procedures (as defined by 1934 Act Rule  13a-15(e)) with respect to information required to be disclosed by the Company  (Disclosures) in filings with the Commission.  The Companys disclosure controls and procedures are intended to  provide reasonable assurance that the disclosure controls and procedures will  meet their objectives.





Each  fiscal quarter, the Company performs a formal evaluation of both the  effectiveness and the design and operation of the Companys disclosure controls  and procedures.  The evaluation  includes, among other things, consideration of the processes carried out under  the direction of the Disclosure Committee in order to ensure that Disclosures  are recorded, processed, summarized and reported within the time periods specified  by the Commissions rules and forms, and that Disclosures are accumulated and  communicated to the Companys management, including the Companys Chief  Executive Officer (the CEO) and CFO, as appropriate, to allow timely  discussion regarding required financial disclosure.





As  of the end of fiscal 2005, such an evaluation was carried out under the  supervision and with the participation of the CEO and CFO.  Based on this evaluation, the CEO and CFO  each concluded that, at January 28, 2006, the Companys disclosure controls and  procedures were effective to ensure that the information required to be  disclosed in SEC reports is recorded, processed, summarized and reported within  the requisite time periods.





Internal Control Over Financial Reporting





Managements  Annual Report on Internal Control Over Financial Reporting is the last section in Item 7 Managements Discussion and Analysis of Financial Condition  and Results of Operations of this Report and is incorporated herein by  reference.  The Report of Independent  Registered Public Accounting Firm on Internal Control Over Financial Reporting  is the second document in Item 8 Financial  Statements and Supplementary Data of this Report.





Each  fiscal quarter, the Company performs a formal evaluation, in which the  Companys CEO and CFO participate, of changes in the Companys internal control  over financial reporting.  Based on this  evaluation, management concluded that there was no change in the Companys  internal control over financial reporting during the fiscal quarter ended  January 28, 2006 that has materially affected, or is reasonably likely to  materially affect, the Companys internal control over financial reporting.





|ITEM 9B. | OTHER INFORMATION.
|-------- | ------------------
|         |                   
|         | Not applicable.   




---






Part III





|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
|-------- | ---------------------------------------------------




Incumbent Directors of the  Registrant





The  eight incumbent Directors have been nominated for reelection by the Board of  Directors of the Company and an additional nomination has been made by the  Board.  The subsection under Election  of Directors captioned Business and Professional Experience in the Proxy  Statement is incorporated herein by reference.





Executive Officers of the  Registrant and Subsidiaries





In addition to Raphael Benaroya and
George R. Remeta, whose employment history with the Corporation is described in
the Proxy Statement, the executive officers of the Corporation are the
following:





Kenneth  P. Carroll, age 63, is United Retail Group, Inc.s Senior Vice President -  General Counsel and Secretary.  He has  been an officer since joining the Corporation in March 1992.





Paul  McFarren, age 42, has been the Chief Information Officer of United Retail  Group, Inc. since joining the Corporation in October 2000, with the title of  Senior Vice President since August 2003.   Previously, he was Vice President of Worldwide Field Operations of LVMH,  a consumer goods manufacturer, for two years.





Jon  Grossman, age 48, is Vice President  Finance of United Retail Group, Inc.  He has been an officer of the Corporation or  one of its subsidiaries since May 1992.





Each  of the Corporations executive officers holds office until the Board of  Directors meeting after the 2006 annual meeting of stockholders of United  Retail Group, Inc., and until his successor shall be elected.  However, officers are always subject to  removal from office by the Board of Directors in its discretion.





The  subsection under Executive Compensation captioned Employment and Bonus  Agreements in the Proxy Statement is incorporated herein by reference.





The  executive officers of the Corporations subsidiaries are the following:





Ellen  Demaio, age 48, has been Senior Vice President - Merchandise of United Retail  Incorporated since October 1994 and previously was Vice President-Merchandise  since November 1992.





Joann  Fielder, age 52, has been Senior Vice President-Chief Design Officer of United  Retail Incorporated since April 2004.   She was a senior design executive at Ann Taylor stores for more than  five years, with the title of Executive Vice President of Design in 2001 and of  Senior Vice President of Design before that.





Julie  L. Daly, age 51, has been a Vice President of United Retail Incorporated since  May 1991, most recently as Vice President-Shop @ Home Operations.





David  D. English, age 47, has been Vice President-Store Construction of United Retail  Incorporated since October 2005.   Previously, he was Vice President-Construction of Thor Equities, Inc., a  real estate developer, from August 2005 to January 2003.  Earlier, Mr. English was Vice  President-Store Planning and Construction of Urban Brands, Inc., a chain of  retail specialty apparel stores, from December 2002 to prior to 2001.





---






Kent  Frauenberger, age 59, has been Vice President - Logistics of United Retail  Logistics Operations Incorporated since March 1993.





Scott  Lucas, age 51, has been a senior sales executive with United Retail  Incorporated for more than five years, with the title of Vice President-Sales,  Western Region since August 2003.  He  joined the Company in February 1994.





Patrick  McGahan, age 54, has been national Vice President-Sales of United Retail  Incorporated since October 2003.   Previously, he held similar positions with Bebe Stores, a retail chain,  from April 2003 to February 2002 and with the Structure chain of stores  operated by Limited Brands, Inc. for many years prior to August 2000.





John  J. OConnell III, age 37, has been Vice President-Controller of United Retail  Incorporated since October 2005.   Previously, he was Retail Controller for Polo Ralph Lauren, which, among  other businesses, operated a chain of retail specialty apparel stores, from  September 2005 to October 2002.   Earlier, Mr. OConnell was Controller of Brooks Brothers, Inc., a chain  of retail specialty apparel stores, from September 2002 to October 2001.  For several years prior to October 2001, Mr.  OConnell was a Senior Manager at PricewaterhouseCoopers LLP, an independent  registered public accounting firm.





Bradley  Orloff, age 48, has been Vice President - Marketing of United Retail  Incorporated since May 1991.





Rose  Panicali, age 49, has been Vice President-Avenue BODY of United Retail  Incorporated since August 2005.   Previously, she was Vice President-General Merchandise Manager of  Delias, a chain of retail specialty apparel stores, from December 2004 to  February 2004.  Earlier, she was a  Divisional Merchandise Manager for New York & Co., Inc., a chain of retail  specialty apparel stores, from January 2004 to prior to 2001.





Terence  Puffer, age 56, has been Vice President-Production Services of United Retail


Incorporated  since August 2005.  He joined the  Company as Director of Production Services in November 2001.  Previously, Mr. Puffer was Vice  President-Manufacturing of Jacques Moret, an apparel wholesaler, since prior to  2001.





Gerald  Schleiffer, age 54, has been Vice President - Planning and Distribution of  United Retail Incorporated since August 1999.





Jerry  Soucy, age 58, has been Vice President-Real Estate of United Retail  Incorporated since October 2004.   Previously, he was Vice President-Development of David King Enterprises,  LLC, a real estate developer, from September 2004 to January 2002.  Earlier, he was a partner of RAM  Development, LLC, a real estate developer, since prior to 2001.





Compliance With Section 16(a)  of the Exchange Act





The  section captioned Section 16(a)  Beneficial Ownership Reporting Compliance  in the Proxy Statement is incorporated herein by reference.





Codes of Ethics





Separate  corporate codes of ethics apply to the Corporations officers, to Directors who  are not employed by the Corporation and to associates of the Corporations  subsidiaries.  The code for officers of  the Corporation has been incorporated as an exhibit to this Report by reference  to Exhibit 14 to the Annual Report on Form 10-K for the year ended January 31,  2004 and is available at www.sec.gov.   The code for associates of the Corporations subsidiaries has been  posted on the About Us  Ethical Statement page at www.unitedretail.com.  The several codes reflect the distinct  responsibilities of the different persons covered.





---






Audit Committee





The  Corporations Board of Directors has determined that at least one audit  committee financial expert serves on its Audit Committee, namely, Michael  Goldstein.  Mr. Goldstein is independent  as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the 1934  Act.  The other members of the Audit  Committee, Joseph A. Alutto and Joseph Ciechanover, are also independent in  accordance with that definition.





Nominating Committee





The  Nominating Committee annually recommends a slate of nominees to the Board of  Directors for submission to a stockholder vote.  On February 23, 2006, a quorum of the Nominating Committee  unanimously recommended the eight incumbent Directors for reelection at the  2006 Annual Meeting of Stockholders and recommended an additional nomination to  bring the slate to nine members.





The  Nominating Committee considers the comparative qualifications of (i) incumbent  Directors who are willing to stand for reelection, (ii) other candidates, if  any, whom the Committee invites to apply and (iii) volunteers, if any,  including any recommended in a timely manner by a stockholder of the  Company.  On February 23, 2006, the  Nominating Committee evaluated the performance of the eight incumbent Directors  and found it satisfactory.  The  Nominating Committee had also invited additional candidates to apply and  recommended one additional candidate for nomination.





A  stockholder wishing to submit the name of one or more candidates for  consideration by the Nominating Committee should do so by letter to the  Committee in care of the Companys Secretary addressed to the Companys  headquarters and delivered before December of the year preceding the annual  meeting of stockholders.  An address  should be provided for the candidate(s) to receive application materials,  including a consent to background and reference checks by the Committee and an  autobiographical questionnaire, to be completed, signed and returned to the  Secretary.  Candidates should be  available for interviews upon request.





Apart from the Nominating  Committee process, stockholders may present their own nominations.  Any nominations for election as Directors of the Company that a  stockholder intends to present in person or by proxy at the 2007 Annual Meeting  of Stockholders but which are not received in proper form by the Secretary of  the Company at the principal executive offices of the Company at least 90 days  prior to the anniversary date of the 2006 Annual Meeting of Stockholders will  be omitted by the Company from the proxy statement and form of proxy relating  to that meeting and may not properly be brought before the meeting.  The Nominating Committee may select its slate  of nominees for election at the 2007 Annual Meeting of Stockholders after the  last day on which a stockholder can give notice of intent to present a  nomination at the annual meeting of stockholders.  The submission of the name of one or more candidates for  consideration by the
Committee shall not satisfy the requirement to give notice  to the Secretary of intent to present a nomination personally or by proxy at  the annual meeting of stockholders.





|ITEM 11. | EXECUTIVE COMPENSATION.
|-------- | -----------------------




The  section captioned Executive Compensation in the Proxy Statement is  incorporated herein by reference.





|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND    RELATED STOCKHOLDER MATTERS.
|-------- | --------------------------------------------------------------------------------------------------




The  sections captioned Security Ownership of Principal Stockholders and Security  Ownership of Management in the Proxy Statement are incorporated herein by  reference.





---






The  table entitled Equity Compensation Plan Information As of January 28, 2006  appearing in Item 5 Market for Registrants Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities of this Report is  incorporated herein by reference.





|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- | -----------------------------------------------




The  section captioned Certain Transactions in the Proxy Statement is incorporated  herein by reference.





|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------




The  section captioned Independent Registered Public Accounting Firm in the Proxy  Statement is incorporated herein by reference.





Financial Statements and  Supplementary
    Data, Item 8 of this Report, includes PricewaterhouseCoopers LLPs
     previous audit report on the Companys financial statements as of January
    29, 2005 and for the years ended January 29, 2005 and January 31, 2004. The
     Company has agreed to indemnify PricewaterhouseCoopers LLP for the payment
    of all
    legal
    costs
    and
    expenses
    incurred in PricewaterhouseCoopers LLPs  successful defense of any
    legal action or proceeding that might arise as a result of the inclusion
    of PricewaterhouseCoopers LLPs previous audit report  in this Report.  The
    Company believes that this indemnity is both legally enforceable and appropriate
    under the circumstances.





---






PART IV





|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|-------- | -------------------------------------------




|(a) |                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consolidated Financial Statements of the Corporation for fiscal 2005    are included herein.                                                                                                                                         
|    |                                                                                                                                                                                                                                      
|(2) | Schedule II  Valuation and Qualifying Accounts, together with the    related report of the predecessor Independent Registered Public Accounting    Firm for the Corporation, are filed herewith and designated as Exhibit No.    99.
|    |                                                                                                                                                                                                                                      
|(b) |                                                                                                                                                                                                                                      
|(3) | The following additional exhibits are filed herewith:                                                                                                                                                                                




| | Number |  | Description                                                                                                                                                                                                                     
| | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |  |                                                                                                                                                                                                                                 
| | 10     |  | Private Label Credit Card Program Agreement between the Corporation    and United Retail Incorporated and World Financial Network National Bank    (Confidential portions filed separately with the Secretary of the Commission)
| | 23.1   |  | Consent of Incumbent Independent Registered Public Accounting Firm    for the Corporation                                                                                                                                       
| | 23.2   |  | Consent of Predecessor Independent Registered Public Accounting Firm    for the Corporation                                                                                                                                     
| | 31     |  | Certifications pursuant to Section 302                                                                                                                                                                                          




|(4) | Certifications pursuant to Section 906 are furnished as Exhibit 32    hereto.
|--- | -----------------------------------------------------------------------------
|    |                                                                              
|(5) | The following additional documents are incorporated herein by    reference.  




The  2006 Equity-Based Compensation and Performance Incentive Plan set forth as the  appendix to the Corporations proxy statement on Schedule 14A for its 2006  annual meeting of stockholders (to be filed by May 28, 2006) is incorporated  herein by reference.*





The  following exhibits to the Corporations Current Report on Form 8-K filed on  March 2, 2006 are incorporated herein by reference:





| | Number in Filing |  | Description                                         
| | ---------------- |  | ----------------------------------------------------
| |                  |  |                                                     
| | 3                |  | Amended    By-laws of the Corporation               
| | 10.1*            |  | Spring 2006    Incentive Compensation Plan Agreement




The  following exhibit to the Corporations Current Report on Form 8-K filed on  November 29, 2005 is incorporated herein by reference:





| | Number in Filing |  | Description                                                                                                           
| | ---------------- |  | ----------------------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                                       
| | 10               |  | Form of    Severance Pay Agreements between United Retail Incorporated and its officers    hired after August 21, 2005




---



The  following exhibits to the Corporations Current Report on Form 8-K filed  on September 1, 2005 are incorporated herein by reference:





| | Number in Filing |  | Description                                                                                                                                                                       
| | ---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                                                                                                   
| | 10.2*            |  | Amendment to    Supplemental Retirement Savings Plan                                                                                                                              
| | 10.3*            |  | Amendment,    dated August 29, 2005, to Employment Agreement, dated as of September 3,    2004, between the Corporation and Raphael Benaroya (Benaroya Employment    Agreement) 
| | 10.4*            |  | Amendment,    dated August 29, 2005, to Employment Agreement, dated as of September 3,    2004, between the Corporation and George R. Remeta (Remeta Employment    Agreement)   
| | 10.5*            |  | Amendment,    dated August 29, 2005, to Employment Agreement, dated as of September 3,    2004, between the Corporation and Kenneth P. Carroll (Carroll Employment    Agreement)
| | 10.6*            |  | Form of Severance    Pay Agreements, dated August 26, 2005, between the Corporation and Terence    Puffer and Rose Panicali, respectively                                         
| | 10.9*            |  | Bonus    Agreement, dated August 22, 2005, between the Corporation and Rose Panicali                                                                                              




The  following exhibits to the Corporations Current Report on Form 8-K filed on  June 29, 2005 are incorporated herein by reference:





| | Number in Filing |  | Description                                                                                                
| | ---------------- |  | -----------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                            
| | 10.1*            |  | Supplemental    Retirement Savings Plan                                                                    
| | 10.2*            |  | Severance    Pay Agreement form                                                                            
| | 10.3*            |  | Amendment to    2003 Stock Option Plan                                                                     
| | 10.4*            |  | Amendment to    2001 Stock Option Plan                                                                     
| | 10.5*            |  | Amendment to    1999 Stock Option Plan                                                                     
| | 10.6*            |  | Amendment to    1996 Stock Option Plan                                                                     
| | 10.7*            |  | Amendment to    1990 Stock Option Plan                                                                     
| | 10.8*            |  | Amendment to    Stock Option Agreement, dated May 21, 1998, between the Corporation and    Raphael Benaroya
| | 10.9*            |  | Amendment to    Stock Option Agreement, dated May 21, 1998, between the Corporation and    George R. Remeta
| | 10.10*           |  | Amendment to    Benaroya Employment Agreement                                                              
| | 10.11*           |  | Amendment to    Remeta Employment Agreement                                                                
| | 10.12*           |  | Amendment to    Carroll Employment Agreement                                                               




The  following exhibit to the Corporations Current Report on Form 8-K filed on  April 22, 2005 is incorporated herein by reference:





| | Number in Filing |  | Description                               
| | ---------------- |  | ------------------------------------------
| |                  |  |                                           
| | 10*              |  | Restated Stock    Appreciation Rights Plan




The  following exhibit to the Corporations Current Report on Form 8-K filed on  March 23, 2005 is incorporated herein by reference:





| | Number in Filing |  | Description                                                                                                        
| | ---------------- |  | -------------------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                                    
| | 10               |  | Stipulation    and Settlement Agreement, dated March 18, 2005, in Stanford et ano vs. United Retail    Incorporated




---






The  following exhibit to the Corporations Quarterly Report on Form 10-Q for the  period ended October 30, 2004 is incorporated herein by reference:





| | Number in Filing |  | Description                       
| | ---------------- |  | ----------------------------------
| |                  |  |                                   
| | 21               |  | Subsidiaries    of the Corporation




The  following exhibits to the Corporations Quarterly Report on Form 10-Q for the  period ended July 31, 2004 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 exhibit to the Corporations Quarterly Report on Form 10-Q for the  period ended May 1, 2004 is incorporated herein by reference:





| | Number in Filing |  | Description                                                                      
| | ---------------- |  | ---------------------------------------------------------------------------------
| |                  |  |                                                                                  
| | 10*              |  | Bonus    agreement, dated May 28, 2004, between the Corporation and Joann Fielder




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                                                                                       
| | ---------------- |  | --------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                   
| | 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  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 exhibit to the Corporations Annual Report on Form 10-K/A for the  year ended February 1, 2003 is 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




---






The  following exhibit to the Corporations Quarterly Report on Form 10-Q for the  period ended August 3, 2002 is 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




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                                                                                                                                                                              




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                                                                                               
| | ---------------- |  | ----------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                           
| | 10.4*            |  | 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                       




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





| | Number in Filing |  | Description           
| | ---------------- |  | ----------------------
| |                  |  |                       
| | 10.1             |  | Financing    Agreement




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            




|
|
|




---






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: April 27, 2006 | By: | /s/ Raphael Benaroya                                                             
|                     |     |                                                                                  
|                     |     | Raphael Benaroya, Chairman of the Board, President and Chief Executive    Officer




LIMITED POWER OF ATTORNEY





KNOWN ALL MEN BY THESE PRESENTS, that each Director whose signature appears below other than
RAPHAEL BENAROYA and GEORGE R. REMETA constitutes and appoints Raphael Benaroya
and George R. Remeta, and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in his capacity as a Director of United Retail Group,
Inc., to sign any or all amendments to this Annual Report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute, may lawfully do or cause to be done by virtue
hereof.





Pursuant
    to the requirements of the Securities Exchange Act of 1934, this report has
    been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 27, 2006.





|Signature                    |  | Title                                |  | Signature                       |  | Title   
|---------------------------- |  | ------------------------------------ |  | ------------------------------- |  | --------
|                             |  |                                      |  |                                 |  |         
|/s/RAPHAEL BENAROYA          |  | Chairman of the Board, President,    |  | /s/ MICHAEL GOLDSTEIN           |  | Director
|                             |  | Chief Executive Officer and Director |  |                                 |  |         
|Raphael Benaroya             |  |                                      |  | Michael Goldstein               |  |         
|Principal Executive Officer  |  |                                      |  |                                 |  |         
|                             |  |                                      |  |                                 |  |         
|/s/GEORGE
      R. REMETA    |  | Vice Chairman, Chief Administrative  |  | /s/
      ILAN KAUFTHAL         |  | Director
|                             |  | Officer and Director                 |  |                                 |  |         
|George R. Remeta             |  |                                      |  | Ilan Kaufthal                   |  |         
|Principal Financial Officer  |  |                                      |  |                                 |  |         
|                             |  |                                      |  |                                 |  |         
|/s/JON GROSSMAN              |  | Vice President-Finance               |  | /s/ VINCENT P. LANGONE          |  | Director
|                             |  |                                      |  |                                 |  |         
|Jon Grossman                 |  |                                      |  | Vincent P. Langone              |  |         
|Principal Accounting Officer |  |                                      |  |                                 |  |         
|                             |  |                                      |  |                                 |  |         
|/s/JOSEPH A. ALUTTO          |  | Director                             |  | /s/
      RICHARD W. RUBENSTEIN |  | Director
|                             |  |                                      |  |                                 |  |         
|Joseph A. Alutto             |  |                                      |  | Richard W. Rubenstein           |  |         
|                             |  |                                      |  |                                 |  |         
|/s/JOSEPH CIECHANOVER        |  | Director                             |  |                                 |  |         
|                             |  |                                      |  |                                 |  |         
|Joseph Ciechanover           |  |                                      |  |                                 |  |         




---






EXHIBIT INDEX





|(1) | Consolidated Financial Statements of the Corporation for fiscal 2005    are included herein.                                                                                                                                         
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                      
|(2) | Schedule II  Valuation and Qualifying Accounts, together with the    related report of the predecessor Independent Registered Public Accounting    Firm for the Corporation, are filed herewith and designated as Exhibit No.    99.
|    |                                                                                                                                                                                                                                      
|(3) | The following additional exhibits are filed herewith:                                                                                                                                                                                




| | Number |  | Description                                                                                                                                                                                                                     
| | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |  |                                                                                                                                                                                                                                 
| | 10     |  | Private Label Credit Card Program Agreement between the Corporation    and United Retail Incorporated and World Financial Network National Bank    (Confidential portions filed separately with the Secretary of the Commission)
| | 23.1   |  | Consent of Incumbent Independent Registered Public Accounting Firm    for the Corporation                                                                                                                                       
| | 23.2   |  | Consent of Predecessor Independent Registered Public Accounting Firm    for the Corporation                                                                                                                                     
| | 31     |  | Certifications pursuant to Section 302                                                                                                                                                                                          




|(4) | Certifications pursuant to Section 906 are furnished as Exhibit 32    hereto.
|--- | -----------------------------------------------------------------------------
|    |                                                                              
|(5) | The following additional documents are incorporated herein by    reference.  




The  2006 Equity-Based Compensation and Performance Incentive Plan set forth as the  appendix to the Corporations proxy statement on Schedule 14A for its 2006  annual meeting of stockholders (to be filed by May 28, 2006) is incorporated  herein by reference.*





The  following exhibits to the Corporations Current Report on Form 8-K filed on  March 2, 2006 are incorporated herein by reference:





| | Number in Filing |  | Description                                           
| | ---------------- |  | ------------------------------------------------------
| |                  |  |                                                       
| | 3                |  | Amended By-laws of the Corporation                    
| | 10.1*            |  | Spring 2006 Incentive Compensation Plan Agreement form




The  following exhibit to the Corporations Current Report on Form 8-K filed on  November 29, 2005 is incorporated herein by reference:





| | Number in Filing |  | Description                                                                                                        
| | ---------------- |  | -------------------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                                    
| | 10               |  | Form of Severance Pay Agreements between United Retail Incorporated    and its officers hired after August 21, 2005




---






The  following exhibits to the Corporations Current Report on Form 8-K filed on  September 1, 2005 are incorporated herein by reference:





| | Number in Filing |  | Description                                                                                                                                                                    
| | ---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                                                                                                
| | 10.2*            |  | Amendment to Supplemental Retirement Savings Plan                                                                                                                              
| | 10.3*            |  | Amendment, dated August 29, 2005, to Employment Agreement, dated as    of September 3, 2004, between the Corporation and Raphael Benaroya (Benaroya    Employment Agreement) 
| | 10.4*            |  | Amendment, dated August 29, 2005, to Employment Agreement, dated as    of September 3, 2004, between the Corporation and George R. Remeta (Remeta    Employment Agreement)   
| | 10.5*            |  | Amendment, dated August 29, 2005, to Employment Agreement, dated as    of September 3, 2004, between the Corporation and Kenneth P. Carroll    (Carroll Employment Agreement)
| | 10.6*            |  | Form of Severance Pay Agreements, dated August 26, 2005, between the    Corporation and Terence Puffer and Rose Panicali, respectively                                         
| | 10.9*            |  | Bonus Agreement, dated August 22, 2005, between the Corporation and    Rose Panicali                                                                                           




The  following exhibits to the Corporations Current Report on Form 8-K filed on  June 29, 2005 are incorporated herein by reference:





| | Number in Filing |  | Description                                                                                             
| | ---------------- |  | --------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                         
| | 10.1*            |  | Supplemental Retirement Savings Plan                                                                    
| | 10.2*            |  | Severance Pay Agreement form                                                                            
| | 10.3*            |  | Amendment to 2003 Stock Option Plan                                                                     
| | 10.4*            |  | Amendment to 2001 Stock Option Plan                                                                     
| | 10.5*            |  | Amendment to 1999 Stock Option Plan                                                                     
| | 10.6*            |  | Amendment to 1996 Stock Option Plan                                                                     
| | 10.7*            |  | Amendment to 1990 Stock Option Plan                                                                     
| | 10.8*            |  | Amendment to Stock Option Agreement, dated May 21, 1998, between the    Corporation and Raphael Benaroya
| | 10.9*            |  | Amendment to Stock Option Agreement, dated May 21, 1998, between the    Corporation and George R. Remeta
| | 10.10*           |  | Amendment to Benaroya Employment Agreement                                                              
| | 10.11*           |  | Amendment to Remeta Employment Agreement                                                                
| | 10.12*           |  | Amendment to Carroll Employment Agreement                                                               




The  following exhibit to the Corporations Current Report on Form 8-K filed on  April 22, 2005 is incorporated herein by reference:





| | Number in Filing |  | Description                            
| | ---------------- |  | ---------------------------------------
| |                  |  |                                        
| | 10*              |  | Restated Stock Appreciation Rights Plan




The  following exhibit to the Corporations Current Report on Form 8-K filed on  March 23, 2005 is incorporated herein by reference:





| | Number in Filing |  | Description                                                                                                     
| | ---------------- |  | ----------------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                                 
| | 10               |  | Stipulation and Settlement Agreement, dated March 18, 2005, in Stanford    et ano vs. United Retail Incorporated




---






The  following exhibit to the Corporations Quarterly Report on Form 10-Q for the  period ended October 30, 2004 is incorporated herein by reference:





| | Number in Filing |  | Description                    
| | ---------------- |  | -------------------------------
| |                  |  |                                
| | 21               |  | Subsidiaries of the Corporation




The  following exhibits to the Corporations Quarterly Report on Form 10-Q for the  period ended July 31, 2004 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 exhibit to the Corporations Quarterly Report on Form 10-Q for the  period ended May 1, 2004 is incorporated herein by reference:





| | Number in Filing |  | Description                                                                      
| | ---------------- |  | ---------------------------------------------------------------------------------
| |                  |  |                                                                                  
| | 10*              |  | Bonus agreement, dated May 28, 2004, between the Corporation and    Joann Fielder




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                                                                                    
| | ---------------- |  | -----------------------------------------------------------------------------------------------
| |                  |  |                                                                                                
| | 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  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 exhibit to the Corporations Annual Report on Form 10-K/A for the  year ended February 1, 2003 is 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




---






The  following exhibit to the Corporations Quarterly Report on Form 10-Q for the  period ended August 3, 2002 is 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




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                                                                                                                                                                           




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                                                                                            
| | ---------------- |  | -------------------------------------------------------------------------------------------------------
| |                  |  |                                                                                                        
| | 10.4*            |  | 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                    




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 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 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




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





| | Number in Filing |  | Description        
| | ---------------- |  | -------------------
| |                  |  |                    
| | 10.1             |  | Financing Agreement




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            




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