SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K


(Mark One)
|X|       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the fiscal year ended February 3, 2001

                                    OR

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

          For the transition period from ________________ to _______________


                         Commission file number 0-24902

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No

Indicate 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. |X|

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of May 4, 2001: 100. All of the registrant's  stock is held
by QSI Holdings, Inc., and is not publicly traded.


<PAGE>
<TABLE>
<CAPTION>

                                               QUALITY STORES, INC.

                                                     INDEX TO
                                            ANNUAL REPORT ON FORM 10-K
                                      FOR FISCAL YEAR ENDED FEBRUARY 3, 2001


                                                                                                            PAGE
<S>              <C>                                                                                          <C>
PART  I.

ITEM 1.           Business ....................................................................................1
ITEM 2.           Properties...................................................................................9
ITEM 3.           Legal Proceedings............................................................................9
ITEM 4.           Submission of Matters to a Vote of Security Holders..........................................9


PART II.

ITEM 5.           Market for Registrant's Common Equity and Related Stockholder Matters.......................10
ITEM 6.           Selected Financial Data.....................................................................11
ITEM 7.           Management's Discussion and Analysis of Financial Condition and
                  Financial Disclosure........................................................................12
ITEM 7A.          Quantitative and Qualitative Disclosures About Market Risk..................................20
ITEM 8.           Financial Statements and Supplementary Data.................................................20
ITEM 9.           Changes In and Disagreements With Accountants on Accounting and
                  Financial Disclosure........................................................................20


PART III.

ITEM 10.          Directors and Executive Officers of the Registrant..........................................21
ITEM 11.          Executive Compensation......................................................................23
ITEM 12.          Security Ownership of Certain Beneficial Owners and Management..............................25
ITEM 13.          Certain Relationships and Related Transactions..............................................25


PART IV.

ITEM 14.          Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................27
</TABLE>

                                                       -ii-
<PAGE>

                                     PART I

Note:  Reference herein to fiscal 2000 and fiscal 1999 are references to Quality
Stores,  Inc.'s,  fiscal  years ended  February 3, 2001,  and January 29,  2000,
respectively.  Reference  herein to fiscal 2001 refers to the  Company's  fiscal
year ending February 2, 2002. During fiscal 1999, Quality Stores,  Inc., changed
its fiscal  year end from the  Saturday  nearest  to October 31 to the  Saturday
nearest to January 31.  References  herein to "fiscal years",  other than fiscal
2000 or fiscal 1999, are  references to Quality  Stores,  Inc.'s,  52 or 53-week
fiscal  year  which  ended on the  Saturday  nearest to October 31 in that year.
Fiscal 2000 is a 53-week  fiscal  year,  while  fiscal 1999 is a 52-week  fiscal
year.

ITEM 1.           BUSINESS

Overview

Quality Stores,  Inc., a Delaware  corporation  [formerly Central Tractor Farm &
Country, Inc. ("CT")], together with its primary subsidiaries, including Country
General,  Inc., and the former Quality Stores, Inc.  ("Quality"),  (collectively
the "Company" or "QSI"), is the largest  agricultural  specialty retailer in the
United States with 347 stores in 32 states as of March 31, 2001.  QSI serves the
agricultural,  hardware,  and  related  needs of rural  consumers,  particularly
part-time and full-time  farmers and ranchers,  hobby gardeners,  skilled trades
persons, and do-it-yourself  ("DIY") customers.  The Company was founded in 1935
and has  established  itself as a market  leader in the  agricultural  specialty
market,  having strong name  recognition for each of its store names and a loyal
customer  base with  approximately  971,000  customers in its "ThankQ"  customer
loyalty  program as of March 31, 2001.

The Company is a wholly owned  subsidiary  of QSI  Holdings,  Inc.  [formerly CT
Holding, Inc. ("Holdings")],  an affiliate of J. W. Childs Equity Partners, L.P.
(together with its affiliates, "Childs"), and a new basis of accounting has been
reflected in the Company's financial  statements  reflecting the fair values for
the  Company's  assets and  liabilities  as of March 27,  1997,  the date of the
acquisition of Holdings by Childs (the "Acquisition").  The financial statements
of the Company for the periods  prior to March 27,  1997,  are  presented on the
historical cost basis of accounting.

Fiscal 2000 Results and Ongoing Business Strategy

The Company,  although previously profitable,  incurred significant nonrecurring
charges that  contributed to an operating  loss for fiscal 2000 and  experienced
cash flow issues that related primarily to difficulties  encountered as a result
of the merger of CT and Quality.  These included problems in system integrations
that were  accelerated  by the Year 2000  deadline,  mapping  stock-keeping-unit
(SKU) data from vast  different  assortments,  application  of an  inappropriate
business model for a highly-leveraged  company, and a $60.0 million "overbuy" of
spring product early in fiscal 2000. By the time inventory was re-balanced among
stores,  the  spring  season  was over.  Therefore,  the  Company  was forced to
maintain this  inventory  until the spring season of fiscal 2001 before it could
be sold.  This  resulted  in limited  remaining  borrowing  capacity to fund its
inventory  for the fall and winter 2000 seasons and poor  operating  results for
those periods.

Further,     former     management     had     instituted     an     ill-advised
"trade-dating-for-discounts"  strategy,  which  positioned  the Company's  trade
payables as past due based on  unusually  short  dating.  At the same time,  the
spring  overbuy  problem  prevented  the Company  from taking  advantage  of the
discounts,  leaving the  Company  with past due amounts as a result of the short
dating and without the ability to earn the larger  discounts  that were based on
that shorter dating.

A management  change  instituted  by the Board of  Directors in November,  2000,
resulted  in  significant  turnover  at the  upper  management  levels.  The new
management team has quickly taken steps to correct the Company's business model,
improve liquidity, and instill an improved, performance-based culture.

During fiscal 2000,  and most recently in February  2001,  the Company  received
capital infusions from the stockholders of Holdings($33.2  million in total) and
finalized an amendment to its bank agreement to meet its working  capital needs.
Financial  covenants  associated  with the bank  agreement  were  eliminated for
fiscal 2000 and future covenants were amended.

                                      -1-
<PAGE>
Specifically,  the  Company,  led by its new  management  team,  has  taken  the
following actions:

o    In the first  quarter of fiscal 2001,  the Company  obtained an  additional
     $15.7  million  in equity  indirectly  from the  stockholders  of  Holdings
     (including $1.0 million from QSI's Chief Executive Officer, Jerry Horn, and
     $0.7 million from other  corporate  officers) and finalized an amendment to
     its bank  agreement  that  resulted  in  additional  liquidity  to fund the
     Company's  spring 2001  inventory  needs beyond the inventory  carried over
     from the previous spring.
o    The Company has overhauled advertising methods by reducing the frequency of
     its print advertising,  reducing  television and sponsorships,  and placing
     greater  emphasis on its  "ThankQ"  customer  loyalty  program.  Management
     anticipates  that these  reductions  will result in both lower  advertising
     costs  and  improved  margins  due to a  reduction  in  advertising-related
     promotional pricing.
o    The Company eliminated  infrastructure  overcapacity by the planned closure
     of  seven  distribution  centers.  This  resulted  in a  reduction  of  110
     employees as well as savings in occupancy and other  administrative  costs.
     In addition,  the Company  terminated  10 executive  and 45  administrative
     personnel during the year at its corporate office.
o    The Company  continues to pursue and obtain extended payment terms with its
     vendors that more closely match inventory movement.
o    The Company has reduced SKU's,  resulting in less  inventory  investment in
     each category and improved overall gross margin. Approximately 17,000 SKU's
     have been eliminated from the active assortment through this process, which
     is ongoing.
o    The  Company  has  implemented   improved  expense  reduction  and  control
     procedures throughout its organization.
o    The  Company  closed 17  underperforming  stores in the last half of fiscal
     2000 in order to generate cash from the  liquidation of their  inventories.
     Additionally,  the  Company  liquidated  approximately  $32 million and $23
     million of slow-moving  inventory in January 2001, and the first quarter of
     fiscal 2001, respectively.
o    The Company  finalized  sale-leaseback  transactions  related to a store in
     Michigan and its  full-line  distribution  facility in Fostoria,  Ohio,  in
     January 2001, resulting in cash proceeds of $16.1 million.

As a result of actions taken and financing received described above, the Company
has increased average dating terms from 45 days at the end of the fiscal year to
an average of 56 days at present,  with a goal of further improving dating to an
average of 61 days.  At February 3, 2001,  approximately  $81.2 million of trade
payables were past current terms.  As a result of new shipments,  payments,  and
term changes as noted above, by April 30, 2001, past due trade payables had been
reduced to $29.0 million.

The Company has met all debt payments and has complied  with all bank  covenants
since February 3, 2001.

The Company's new management team believes that the corrective steps and actions
taken to date, as well as continued implementation of the revised business plan,
will improve its cash flow from operations,  operating results and its financial
position.  Management  also believes that the generation of additional cash from
the  improvement in operations  combined with amounts  available under Company's
credit  facilities will be sufficient to meet its working capital needs over the
next year,  continue to enhance its credit position in the vendor  community and
improve  vendor  business  relationships,  and meet its  continued  debt service
requirements.

Recurring EBITDA

Recurring  EBITDA is used by certain  investors  as a measure  of the  Company's
ability to service its recurring debt payments.  Recurring  EBITDA is defined by
the Company as net income (loss) before interest  expense,  provision for income
taxes,  depreciation,  amortization,  other income (expense),  and certain other
nonrecurring charges as described below.

Recurring  EBITDA should not be considered an alternative  to operating  income,
net income,  or cash flows from  operations  as an  indicator  of the  Company's
operating performance.

                                       -2-
<PAGE>
<TABLE>
<CAPTION>

Recurring EBITDA for the past two fiscal years is as follows (in millions):

                                                                                    Fiscal Year Ended
                                                                                  ----------------------
                                                                                    2/3/01      1/29/00
                                                                                  ----------------------
<S>                                                                               <C>          <C>
Operating income (loss)                                                            $ (24.6)     $44.0
Depreciation                                                                          21.4       13.7
Amortization                                                                           7.8        6.3
Merger integration expenses                                                            1.9       15.8
Impact of closing underperforming stores (1)                                          11.8          0
Markdowns below cost to eliminate slow-moving inventory (2)                           11.3          0
Distribution network reorganization (3)                                                4.9          0
Severance costs for terminated executives and employees (4)                            2.6          0
Lost vendor allowances (5)                                                             4.0          0
Advertising expansion beyond historical levels and formats (6)                        12.0          0
                                                                                  ----------------------
Recurring EBITDA                                                                     $53.1      $79.8
                                                                                  ======================

<FN>
1)   Seventeen  underperforming  stores were closed in  September  2000 which  generated  additional
     liquidity.  Costs  relate to the  disposition  of the  inventory  below cost,  remaining  lease
     obligations, and other exit costs.
2)   Certain inventory was deliberately marked down below cost which generated further liquidity.
3)   Six of the Company's satellite  distribution  facilities and a full-line distribution center in
     Des Moines,  Iowa,  are being  closed in order to reduce  excess  capacity  created  during the
     merger.  These  costs  include  remaining  occupancy  obligations  and  severance  payments  to
     terminated employees. The closings will generate significant cost savings in future years.
4)   Severance  costs relate to the termination of 10 executive and 45  administrative  personnel at
     the corporate office during the year.  These changes will generate  significant cost savings in
     future years.
5)   Lost volume  rebates and other  allowances  occurred as a result of the  shortfall of sales and
     related reduction in merchandise receipts.
6)   Advertising  expenses  increased beyond the initial plan as former management  attempted to gain
     sales through  increased  advertising  and promotion.  Advertising  was utilized in much greater
     volume than could be supported by the Company's  in-stock position and through the increased use
     of venues such as television,  concert, and other sponsorships beyond historical and planned
     levels which did not produce measurable benefit.
</FN>
</TABLE>
Other Business Acquisitions

Effective June 26, 1997,  the Company  acquired all of the  outstanding  capital
stock of Country General,  Inc.  ("Country  General") for  approximately  $138.6
million  (including  related costs and  expenses) in cash (the "Country  General
Acquisition").  Country General operated a chain of 114  agricultural  specialty
retail stores. The acquisition was accounted for as a purchase.

In January  1999,  the  Company  acquired  nine  retail  stores and  certain net
operating assets from H.C. Shaw Co., a privately owned specialty  retailer doing
business as Fisco Farm and Home ("Fisco"),  for approximately $7.1 million.  The
transaction was accounted for as a purchase.

On May 7, 1999,  the Company  acquired  Quality  Stores,  Inc.  ("Quality") in a
transaction  in  which  Quality  was  merged  with and  into  the  Company  (the
"Merger").  In connection with the Merger,  the former  stockholders  and option
holders of Quality Stores received, in the aggregate, $111.5 million in cash and
792,430 shares of common stock of Holdings that had a value of $91.8 million. In
connection with the Merger, the Company also repaid  approximately $42.1 million
in debt  owed by  Quality.  The total  purchase  price  for  Quality,  including
transaction expenses, was approximately $208.0 million.

Quality, based in Muskegon, Michigan, had a strong presence in Michigan and Ohio
and,  at the time of the  Merger,  operated a chain of 114  stores,  with annual
sales of  approximately  $525.0  million.  In  connection  with the Merger,  the
Company changed its name from "Central Tractor Farm & Country, Inc." to "Quality
Stores, Inc." and relocated its headquarters to Muskegon, Michigan. The non-cash
portion of the Merger  consideration  was contributed to the Company by Holdings
(which, in connection with the Merger, changed its name to QSI Holdings,  Inc.).
The

                                      -3-
<PAGE>

Company funded the cash portion of the Merger consideration and various fees and
expenses  associated  with the Merger from funds drawn  under an  amendment  and
restatement of the Company's  Credit  Agreement,  dated May 7, 1999,  with Fleet
National Bank,  which serves as  administrative  agent for the banks,  financial
institutions, and other institutional lenders party thereto.

The  acquisition  of Quality  Stores  was  accounted  for as a purchase  and the
results of operations of Quality  Stores have been included in the  consolidated
financial  statements  from  the date of  purchase.  The  estimated  cost of the
acquisition over the estimated fair value of the underlying  tangible net assets
was as follows (in thousands):

     Cost of acquiring Quality Stores capital stock                $  208,043
     Fair value of underlying tangible net assets acquired             44,074
                                                                   ----------
       Excess of cost of acquisition over the allocated fair
       value of the underlying tangible net assets                 $  163,969
                                                                   ==========

Revised Expansion Plan

The Company's  historical  business model was highly  acquisitive and focused on
rapid  expansion.  As a result,  the Company  increased the number of its retail
stores from 111 at the  beginning  of fiscal 1997 to 347 as of February 3, 2001.
In fiscal  1997,  the  Company  opened 3 new  stores  and  acquired  118  stores
primarily through the Country General Acquisition, while closing five stores. In
fiscal 1998, the Company opened 1 new store and closed 14 stores. For the period
from November  1998,  through  January 2000,  the Company  opened 24 new stores,
closed 10 stores,  and  acquired  122  stores,  primarily  through the Fisco and
Quality acquisitions.

In fiscal 2000,  the Company  continued  its  expansion,  opening 25 new stores,
primarily  in the early part of the year.  However,  the  Company  also closed a
total of 28 stores  during  fiscal 2000,  primarily as a result of its liquidity
issues  and an  accelerated  review of  under-performing  stores.  Of these,  17
underperforming stores were closed specifically to generate additional cash from
the liquidation of their inventories.  The other 11 stores were primarily closed
earlier in the year as a result of less-than-satisfactory performance.

The Company's  expansion plans for the next two years are modest.  Instead,  the
Company  intends to conserve its resources by limiting  capital  expenditures to
necessary  repairs and maintenance and focus on improving the  profitability  of
its existing  operations.  One relocated  store is planned to be opened in early
2001,  and new stores in fiscal 2002 and 2003 will be limited  under the current
credit agreement.

Retail Stores

QSI  stores  primarily  sell agricultural and   related  products.  The  Company
segments its merchandising mix into seven key product  categories:  agricultural
products (including tractor parts and accessories), specialty hardware, lawn and
garden products, workwear products, rural automotive parts and accessories,  pet
supplies,  and general  consumer  products.  Sales of  agricultural  and related
products represent approximately 50% of QSI's total net sales.

                                      -4-
<PAGE>
The percentage of total store sales for each retail product  category for fiscal
2000,  fiscal 1999, and fiscal 1998, and a description of each product category,
are set forth below:
<TABLE>
<CAPTION>
                                                                ------------------------------------------
                                                                             Fiscal Year Ended
                                                                ------------------------------------------
                                                                 February 3,    January 29,    October 31,
                                                                    2001         2000 (1)         1998
------------------------------------------------------------    ------------------------------------------
<S>                                                                 <C>            <C>            <C>
Agricultural (including tractor parts and accessories)               20.8%          21.7%          26.6%
Specialty Hardware                                                   15.5%          18.0%          17.6%
Lawn & Garden and Seasonal                                           23.3%          19.6%          17.4%
Workwear                                                             11.1%          10.9%          10.2%
Rural Automotive Parts and Accessories                               13.3%          13.2%          14.3%
Pet Supplies                                                          8.9%           8.6%           7.0%
General Consumer                                                      7.1%           8.0%           6.9%
------------------------------------------------------------   ------------------------------------------
                                                                    100.0%         100.0%         100.0%
                                                               ==========================================
<FN>
(1)      Includes Quality from the date of the merger.
</FN>
</TABLE>
Agricultural Products. QSI's agricultural product line consists of approximately
9,000  stock-keeping  units  (SKU's)  supplying  the needs of the  part-time and
full-time farmer and rancher,  including  tractor parts,  tillage and harvesting
parts, fencing materials, and animal health supplies. This product line consists
largely of  consumable  products  and other  items  requiring  replacement  on a
regular basis.  This product line accounted for $234.2 million,  $236.5 million,
and $156.3  million of the Company's  total revenue in fiscal years 2000,  1999,
and 1998,  respectively.  Agricultural  product sales,  as a percentage of total
sales,  decreased to 20.8% in fiscal 2000,  as compared to 21.7% in fiscal 1999.
This decrease  resulted  from a full year's effect of the  difference in product
mix   associated   with  the  Quality   stores,   which  were   generally   less
agriculture-focused  as the Company's  other stores.  QSI emphasizes  consumable
agricultural  supplies that are  purchased  frequently by its customers and does
not sell heavy equipment such as tractors or combines.

Specialty  Hardware.  QSI's  specialty  hardware line consists of  approximately
20,000 SKU's with an emphasis on products with agricultural applications.  These
products accounted for $174.5 million, $196.4 million, and $103.6 million of the
Company's total revenue in fiscal years 2000, 1999, and 1998, respectively.  QSI
stores  carry a broad  range  of  high-quality  hardware  with  an  emphasis  on
recognized  branded  professional  products,  including hand tools, power tools,
mechanical tools,  electrical  products,  including  outdoor lighting,  security
lighting and motors, welders, air compressors,  generators, paints (as well as a
competitively priced private-label brand), and plumbing supplies.

Lawn & Garden and Seasonal  Products.  QSI's lawn and garden products consist of
approximately  3,000 SKU's,  including lawn and garden tools,  lawn tractors and
mowers,  nursery  stock,  fertilizers,  lawn fencing,  and weed  killers.  These
products accounted for $262.4 million, $214.7 million, and $102.1 million of the
Company's total revenue in fiscal years 2000, 1999, and 1998, respectively.  QSI
stores offer seasonal bedding plants, trees, and shrubs in their garden centers.
QSI stores also offer heating/energy equipment, including stoves, space heaters,
and fans.

Workwear.  QSI's workwear  products are targeted to the specialized needs of its
outdoor-oriented  customers who require high quality  functional  apparel.  This
product  category  consists of  approximately  11,000 SKU's,  including  premium
quality insulated  outerwear,  overalls,  flannel shirts,  and work jeans. These
products accounted for $125.0 million,  $118.6 million, and $59.8 million of the
Company's total revenue in fiscal years 2000, 1999, and 1998, respectively.  The
Company has been  expanding its workwear  line in its stores to include  quality
non-insulated workwear, bib overalls, twill pants, and hunting clothing.

Rural  Automotive  Parts  and  Accessories.  QSI's  rural  automotive  parts and
accessories  inventory consists of approximately  5,000 SKU's,  including a core
selection of automotive  parts,  batteries,  and accessories for rural vehicles,
primarily  pick-up  trucks  and  tractors.  The  products  accounted  for $149.8
million,  $144.4  million,  and $83.9 million of the Company's  total revenue in
fiscal  years  2000,  1999,  and  1998,  respectively.  QSI also  stocks a small
assortment  of  general  automotive  items as a  convenience  to its  customers,
including oil and  lubrication  products and  anti-freeze.  In addition to brand
name products,  certain of the Company's  automotive  products are offered under
QSI's own private label.
                                      -5-
<PAGE>
Pet Supplies. QSI's pet supplies offerings consist of approximately 2,000 SKU's,
including dog and cat foods, wild bird feed, and rabbit supplies. These products
accounted for $100.2 million,  $94.0 million, and $40.9 million of the Company's
total  revenue in fiscal  years  2000,  1999,  and 1998,  respectively.  The pet
supplies include  economically  priced large sizes, such as 50-pound bags of dog
food. Certain of these items are sold under QSI's private label.

General  Consumer  Products.  QSI's general  consumer  products line consists of
approximately  9,000 SKU's,  representing farm replicas and collectible toys and
sporting goods,  including guns and  ammunition,  hunting  accessories,  camping
items,  and outdoor living needs.  These  products  accounted for $79.9 million,
$87.4 million,  and $40.6 million of the Company's total revenue in fiscal years
2000, 1999, and 1998,  respectively.  QSI stores also offer seasonal merchandise
such as charcoal grills and coolers.

Store Operations

QSI's stores are designed primarily to meet the needs of farmers operating small
to  medium-sized  farms  (i.e.,  farms  typically  under  250  acres) as well as
ranchers, hobby gardeners and DIY customers.

Quality operates under six store names:  Quality Farm and Country,  Quality Farm
and Fleet, CT Farm and Country, Country General, Fisco Farm and Home, and County
Post.  The Company's  stores average 22,800 square feet of indoor selling space,
ranging  from 6,000 to 63,400  square  feet.  Average  annual sales per store in
fiscal 2000 was $3.2 million.  In addition to indoor selling space,  the Company
prefers  store sites that have 15,000 to 20,000  square feet of outdoor  selling
space.  The outdoor  selling  space is primarily  used for  displaying  lawn and
garden products,  fencing, tractor accessories,  and livestock watering and feed
equipment.

QSI  prototype  stores are designed to provide  customers  with ease in locating
desired  products  and are clean and  colorful  in order to  provide  an overall
enjoyable shopping environment.  The use of informative directional signing adds
to the ease of the customer's shopping experience.  Plan-o-grams are utilized to
set  merchandise  assortments  in the seven core  product  categories  to ensure
uniformity of presentation,  ease of shopping for the customer and to facilitate
inventory management, replenishment and restocking.

Each store is managed by a store manager who is  responsible  for all aspects of
the store's  operations,  including the hiring and training of store associates,
work scheduling,  inventory control,  expense control, and customer service. The
store manager  typically is supported by an assistant  manager,  core department
heads, and an average of 18 sales  associates.  Store operations are coordinated
through district managers,  each of whom is currently  responsible for eleven to
twenty retail stores.

The Company has established an internal store  management-training  program that
focuses on store operations,  systems,  financial  matters,  human resources and
sales. The Company has implemented a long-range personnel plan that provides for
internal promotions, coupled with recruitment of college graduates and hiring of
individuals with previous retail  experience.  Store associates receive training
that  emphasizes  customer  service,  sales,  and  product  knowledge  and store
procedures.  All QSI store operations  management,  including district managers,
store managers,  and assistant managers are compensated based on job performance
and participate in an incentive program based on the store/district  exceeding a
targeted level of profitability.

Other Operations

In addition to QSI's  retail  stores,  the Company  also  distributes  an annual
catalog.  The QSI catalog,  which is distributed  under the Company's  Valu-Bilt
Tractor Parts name,  offers a broad assortment of new, used, and rebuilt tractor
parts and  agricultural  components,  including  approximately  8,500 SKU's. The
Company also sells tractor parts and other items to other agricultural retailers
and distributors  through the same division.  In fiscal 2000, catalog sales were
approximately  $14.1  million,  including  $3.6  million of product  through QSI
retail stores.  The catalog is distributed  nationally to approximately  500,000
households in rural and  agricultural  communities,  through direct mailings and
in-store distribution.

                                      -6-
<PAGE>
Purchasing and Distribution

The  Company  maintains  a  staff  of 15  merchandise  buyers,  each  of whom is
responsible for specific  product  categories,  at its headquarters in Muskegon,
Michigan.  The purchasing and inventory control process is controlled  centrally
by the Company's  point-of-sale ("POS") and automatic replenishment systems. The
Company  purchases its merchandise  from  approximately  2,000 vendors,  none of
which accounted for more than 10% of the Company's purchases during fiscal 2000.
The Company generally  maintains  multiple sources of supply for its products in
order to minimize the risk of supply  disruption  and to maximize its purchasing
power. The Company has no material long-term contractual commitments with any of
its vendors.

At March 31, 2001,  the Company's  distribution  network  included one full-line
distribution  facility in Fostoria,  Ohio,  with 583,000 square feet, as well as
four full-case  distribution  centers in Georgia,  Pennsylvania,  Nebraska,  and
California ranging in size from 87,000 to 305,000 square feet.

In  January  2001,  the  Board  of  Directors   approved  a  plan  to  eliminate
overcapacity  in the  Company's  distribution  network  through the closure of a
full-line  facility in Des Moines and six "satellite"  facilities.  This plan is
expected  to reduce  operating  expenses  related to the  distribution  network,
including a reduction of 110 employees.  At the same time,  investments  made in
the Company's continuing distribution facilities will be maximized.

Corporate Offices and Management Information Systems

QSI has centralized specific functions of its operations,  including accounting,
the  development  of  store  policies  and  procedures,  store  layouts,  visual
merchandise  presentation,  inventory  management,  merchandise  procurement and
allocations,  marketing and advertising,  human resources and real estate.  This
centralization   effectively  utilizes  the  experience  and  resources  of  the
Company's senior management and provides a high level of consistency  throughout
the chain.

All QSI stores use the Company's POS system to capture sales  information at the
SKU level.  Through the POS system,  the Company can monitor customer  purchases
and  inventory  levels with respect to every item of  merchandise  in each store
daily.

The Company also has an automated inventory  replenishment system which utilizes
POS information and facilitates the timely  replenishment of both the stores and
the  warehouses.  The sales and  inventory  information  used in this  system is
updated on a daily basis.  This system also provides for minimum stocking levels
for lower volume items.

Competition

The  Company  faces  competition  primarily  from other  chain and  single-store
agricultural  specialty  retailers  and from mass  merchandisers.  Some of these
competitors have  substantially  greater  financial and other resources than the
Company.

Currently,  most of the Company's  stores do not compete directly in the markets
of other agricultural  specialty retail chains.  (QSI faces competition from its
largest  competitor,  Tractor  Supply  Company,  near  approximately  10% of its
stores.) However,  there can be no assurance that these chains, certain of which
have announced expansion plans, will not expand into the Company's markets.

The  Company  faces  Wal-Mart  near 39% of its stores and  national  home center
chains (Home Depot and Lowes) near 27% of its stores.  The Company believes that
its merchandise mix and level of customer service successfully  differentiate it
from  these  types  of  merchandisers.  The  Company  has,  to  date,  not  been
significantly  impacted by competition  from such chains.  However,  in the past
certain  retailers  have  experimented  with  their  product  mix  in an  effort
apparently  intended to permit them to compete more effectively in the Company's
markets. These efforts may continue.

                                      -7-
<PAGE>
Advertising and Promotions

In  fiscal  2000,  QSI's  primary   advertising   occurred  through  the  weekly
distribution  of  color  print  circulars  and  related   promotional   pricing,
sponsorship of events,  and local TV  advertising.  For fiscal 2001, the Company
has taken specific  efforts to reduce  advertising  expenditures by reducing the
frequency of its media advertising,  television,  and sponsorships,  and placing
greater  emphasis  on  its  "ThankQ"   customer  loyalty  program  for  customer
acquisition  and  promotional  purposes.   Management   anticipates  that  these
reductions  in  advertising  will  result in both  lower  advertising  costs and
improved margins due to a reduction in advertising-related promotional pricing.

The Company's  targeted  marketing and customer  loyalty program,  "ThankQ",  is
designed  to build  loyalty in all of its  customer  segments.  The  benefits to
customers  include  regular  rebates  based on a customer's  purchasing  volume,
itemized  statements  sent to each  customer of every  purchase  made during the
year, bulk discounts, and various member-specific sales events. The program also
tracks  customer  purchases,  thereby  providing  a  database  of  the  members'
purchasing patterns for merchandising  strategy and marketing  initiatives.  QSI
believes  that  increased  use of the  ThankQ  program  will  allow  it to  more
effectively  promote  to and  service  the  needs  of its best  customers  while
maximizing the cost-benefit of its advertising expenditures,  and the Company is
focused on additional acquisitions of members for the program. Since February 3,
2001, the Company has increased its ThankQ membership by 35%.

Seasonality and Weather

Prior to the management and operational  issues  encountered during fiscal 2000,
the Company historically generated positive operating income in each of its four
fiscal  quarters.  However,  because  the Company is an  agricultural  specialty
retailer,  its  sales  fluctuate  with the  seasonal  needs of the  agricultural
community.  The Company  responds to this  seasonality  by  attempting to manage
inventory  levels (and the  associated  working  capital  requirements)  to meet
expected demand,  and by varying its use of part-time  employees.  Historically,
the Company's sales and operating income have been highest in the second quarter
(May through  July) of each fiscal year due to the farming  industry's  planting
season and the sale of  seasonal  products.  Working  capital  needs are highest
during the first quarter  (February  through  April).  The Company expects these
trends to continue for the foreseeable future.

The  Company's  results  are  also  impacted  by  weather  patterns,  and can be
adversely  affected by temperature and  precipitation  fluctuations  outside the
expected  pattern for each  season.  Unseasonable  weather and  excessive  rain,
drought,  or early or late frosts may affect the  Company's  sales and operating
income.

Employees

As of March 31, 2001, QSI had approximately 5,900 employees (approximately 3,400
in  full-time  and  approximately  2,500 in  part-time  positions).  The Company
believes that its relations with its employees are good.

                                      -8-
<PAGE>
ITEM 2.  PROPERTIES

As of March 31,  2001,  the Company had 347 stores in 32 states as  described in
the chart below.

State                      # of             State                   # of
                          Stores                                   Stores
--------------------------------------------------------------------------
Alabama                      1              North Dakota              5
California                  16              Nebraska                 46
Colorado                    17              New Jersey                3
Delaware                     2              New York                 26
Florida                      2              Ohio                     42
Georgia                     10              Oklahoma                  2
Indiana                     18              Pennsylvania             25
Iowa                        15              South Carolina            6
Kansas                       7              South Dakota             11
Kentucky                     7              Tennessee                 2
Maryland                     4              Virginia                 11
Massachusetts                1              Vermont                   1
Michigan                    40              West Virginia             9
Minnesota                    5              Wisconsin                 1
Missouri                     1              Wyoming                   4
Montana                      1                                 -----------
North Carolina               6              TOTAL:                  347
                                                               ===========

The  Company  owns 81 of the stores and leases the  remaining  266  stores.  The
Company leases its  distribution  facilities and its corporate  headquarters  in
Muskegon, Michigan. The Company generally negotiates retail store leases with an
initial term between five and seven years,  with two or three renewal periods of
five years each, exercisable at the Company's option. Through January, 2001, the
Company  paid an  average  of $5.25 per square  foot in retail  store  occupancy
expenses,  including rent, taxes, common area charges,  repairs and maintenance.
Rent expenses generally do not vary based on sales and generally increase 10-15%
at the beginning of each option period.  Management  believes that the Company's
properties  are generally in good  condition and are adequate for their intended
uses.

ITEM 3.  LEGAL PROCEEDINGS

The Company has been notified by the U.S.  Environmental  Protection Agency that
it may have potential liability for cleanup costs associated with the cleanup of
a  dumpsite  near  Owensburg,  Kentucky.  To date,  the only  articles  of waste
identified as possibly  once  belonging to the Company are certain empty battery
acid  containers.  The Company  believes  that any  liability it might have as a
result of this action would be as a de minimis  contributor  and will not have a
material effect on the Company's financial position, liquidity or future results
of operations.

The Company is also party to other  routine  claims and lawsuits  arising in the
ordinary  course of business.  The Company does not believe that such claims and
lawsuits,  individually or in the aggregate, will have a material adverse effect
on the Company's  business.  Compliance  with federal,  state and local laws and
regulations  pertaining to the discharge of materials into the  environment,  or
otherwise relating to the protection of the environment, has not had, and is not
anticipated to have, a material effect upon the capital  expenditures,  earnings
or competitive position of the Company.


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

None.


                                      -9-
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Quality Stores,  Inc.'s common stock is held entirely by Holdings.  See "Item 1.
Business - Overview".

In fiscal 1999, the Company paid cash  dividends of $1,542,000 to Holdings.  The
Company did not pay such  dividends in fiscal 2000 and had not  previously  paid
any cash  dividends  on its common  stock.  Although the Company may pay limited
cash dividends on its common stock, the Company's  ability to pay cash dividends
is restricted by the Credit Agreement and Senior Notes.

                                      -10-
<PAGE>
<TABLE>
<CAPTION>
ITEM 6.  SELECTED FINANCIAL DATA

                                                               Successor (7)                        |            Predecessor (7)
                                        ----------------------------------------------------------  |  -----------------------------
                                         Fiscal Year    Fiscal Year    Fiscal Year   Seven Months   |   Five Months      Fiscal
                                            Ended          Ended          Ended         Ended       |      Ended        Year End
                                         February 3,    January 29,    October 31,   November 1,    |    March 26,     November 2,
                                            2001 (3)    2000 (4)(5)        1998          1997       |      1997           1996
                                        ----------------------------------------------------------  |  -----------------------------
<S>                                       <C>            <C>             <C>             <C>              <C>           <C>
                                                                                                    |
Net sales (000's)                          $1,126,039     $1,092,021      $587,195     $305,122     |      $106,048      $293,020
Merger integration and other                                                                        |
  nonrecurring charges (000's)                 21,113         15,820            --            --    |            --            --
Income (loss) from continuing                                                                       |
  operations (000's)                          (50,676)         3,163         9,975        1,365     |        (1,247)        8,744
Ratio (deficiency) of earnings to                                                                   |
   fixed charges (1)                          (72,518)          1.2x          1.8x         1.3x     |        (1,881)         5.3x
Number of stores at end of period                 347            350           214          227     |           112           111
Comparable store sales per square foot                                                              |
   of indoor selling space (2)                    146            163           180          191 (6) |                         222
Comparable store sales increases                                                                    |
   (decreases) (3)                             (14.4%)          0.8%          4.6%        (4.7%)(6) |                        1.0%
Balance sheet data (at end of period):                                                              |
  (000's) (4)                                                                                       |
   Working capital                           $152,142       $191,904      $130,484      $85,639     |                     $63,803
   Total assets                               793,739        822,463       418,845      434,235     |                     159,238
   Long-term debt, less current portion       396,696        388,554       181,075      153,171     |                      17,341
   Stockholders' equity                       191,451        224,627       129,757      119,547     |                      90,063


<CAPTION>

                                                                                  Three Months Ended
                                                                     ------------------------------------------
                                                                                              January 31, 1998
                                                                       January 30, 1999          (Unaudited)
                                                                     ------------------------------------------
<S>                                                                       <C>                     <C>

Net sales (000's)                                                           $146,147                $144,393
Income from continuing operations (000's)                                      1,485                     590
Ratio of earnings to fixed charges (1)                                          1.5x                    1.2x
Number of stores at end of period                                                224                     227
Comparable store sales increases (decreases) (3)                                6.1%                    2.3%
Balance sheet data (at end of period) (000's):
  Working capital                                                           $136,310                 $85,501
  Total assets                                                               439,606                 425,210
  Long-term debt, less current portion                                       190,843                 150,500
  Stockholders' equity                                                       131,242                 120,137

<FN>
(1)  For purposes of computing this ratio,  earnings  consist of income (loss) before income taxes plus fixed charges.  Fixed
     charges  consist of interest  expense,  amortization  of deferred  financing  costs and 20.0% of the rent  expense  from
     operating leases, which the Company believes is a reasonable  approximation of the interest factor included in the rent.
     For the periods where a ratio is not present,  earnings were insufficient to cover fixed charges by the amount indicated
     as a deficiency.

(2)  Comparable  sales per square foot of indoor  selling space is calculated by dividing store sales by total indoor selling
     square  footage  for stores open and  operated by QSI at least  twelve  months in each fiscal  year.  The amount for the
     53-week fiscal year ended February 3, 2001, has been adjusted to reflect a comparable 52-week year.

                                                            -11-
<PAGE>

(3)  Comparable store sales percentage is computed as the change in sales for stores open and operated by QSI for at least 12
     months in each year as compared to sales for the same stores for the prior year. The fiscal year ended February 3, 2001,
     was a 53-week  year.  The 14.4%  decrease  in  comparable  store  sales in fiscal  2000 has been  adjusted  to reflect a
     comparable 52-week year. Comparable store sales declined 12.7% without such adjustment.

(4)  During the fiscal year ended January 29, 2000, the Company acquired Quality in a transaction in which Quality was merged
     with and into the Company.

(5)  During  fiscal 1999,  the Company  changed its fiscal year end from the  Saturday  nearest to October 31 to the Saturday
     nearest to January 31.

(6)  Calculations are for the 12-month fiscal year ended November 1, 1997.

(7)  As a result of the  Acquisition of the Company by Childs,  a new basis of accounting has been reflected in the Company's
     financial  statements  reflecting  the fair values for the Company's  assets and  liabilities  as of March 27, 1997. The
     financial  statements of the Company for periods prior to March 27, 1997, are presented on the historical  cost basis of
     accounting.
</FN>
</TABLE>
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

The  following  discussion  and analysis of financial  condition  and results of
operations  should  be  read  in  conjunction  with  the  selected  consolidated
financial  data and the  consolidated  financial  statements  of the Company and
related notes thereto.

Overview

The Company,  although previously profitable,  incurred significant nonrecurring
charges that  contributed to an operating  loss for fiscal 2000 and  experienced
cash flow issues that related primarily to difficulties  encountered as a result
of the merger of CT and Quality.  These included problems in system integrations
that were  accelerated  by the Year 2000  deadline,  mapping  stock-keeping-unit
(SKU) data from different assortments,  application of an inappropriate business
model for a  highly-leveraged  company,  and a $60.0 million "overbuy" of spring
product  early in fiscal  2000.  By the time  inventory  was  re-balanced  among
stores,  the  spring  season  was over.  Therefore,  the  Company  was forced to
maintain this  inventory  until the spring season of fiscal 2001 before it could
be sold.  This  resulted  in limited  remaining  borrowing  capacity to fund its
inventory  for the fall and winter 2000 seasons and poor  operating  results for
those periods.

Further,     former     management     had     instituted     an     ill-advised
"trade-dating-for-discounts"  strategy,  which  positioned  the Company's  trade
payables as past due based on  unusually  short  dating.  At the same time,  the
spring  overbuy  problem  prevented  the Company  from taking  advantage  of the
discounts,  leaving the Company with  past-due  amounts as a result of the short
dating and without the ability to earn the larger  discounts  that were based on
that shorter dating.

A management  change  instituted  by the Board of  Directors  in November,  2000
resulted  in  significant  turnover  at the  upper  management  levels.  The new
management team has quickly taken steps to correct the Company's business model,
improve liquidity, and instill an improved, performance-based culture.

During fiscal 2000,  and most recently in February  2001,  the Company  received
indirect  capital  infusions from the stockholders of Holdings ($33.2 million in
total) and  finalized  an  amendment to its bank  agreement to meet its working
capital  needs.  Financial  covenants  associated  with the bank  agreement were
eliminated for fiscal 2000, and future covenants were amended.

Specifically,  the  Company,  led by its new  management  team,  has  taken  the
following actions:

o    In the first  quarter of fiscal 2001,  the Company  obtained an  additional
     $15.7  million  in equity  indirectly  from the  stockholders  of  Holdings
     (including $1.0 million from QSI's Chief Executive Officer, Jerry Horn, and
     $0.7

                                      -12-
<PAGE>

     million from other  corporate  officers)  and finalized an amendment to its
     bank agreement that resulted in additional  liquidity to fund the Company's
     spring 2001  inventory  needs  beyond the  inventory  carried over from the
     previous spring.
o    The Company has overhauled advertising methods by reducing the frequency of
     its print advertising,  reducing  television and sponsorships,  and placing
     greater  emphasis on its  "ThankQ"  customer  loyalty  program.  Management
     anticipates  that these  reductions  will result in both lower  advertising
     costs  and  improved  margins  due to a  reduction  in  advertising-related
     promotional pricing.
o    The Company eliminated  infrastructure  overcapacity by the planned closure
     of  seven  distribution  centers.  This  resulted  in a  reduction  of  110
     employees as well as savings in occupancy and other  administrative  costs.
     In addition,  the Company  terminated 10 executive  and 45  administrative
     personnel during the year at its corporate office.
o    The Company  continues to pursue and obtain extended payment terms with its
     vendors that more closely match inventory movement.
o    The Company has reduced SKU's,  resulting in less  inventory  investment in
     each category and improved overall gross margin. Approximately 17,000 SKU's
     have been eliminated from the active assortment through this process, which
     is ongoing.
o    The  Company  has  implemented   improved  expense  reduction  and  control
     procedures throughout its organization.
o    The  Company  closed 17  underperforming  stores in the last half of fiscal
     2000 in order to generate cash from the  liquidation of their  inventories.
     Additionally,  the  Company  liquidated  approximately  $32 million and $23
     million of slow-moving  inventory in January 2001, and the first quarter of
     fiscal 2001, respectively.
o    The Company  finalized  sale-leaseback  transactions  related to a store in
     Michigan and its  full-line  distribution  facility in Fostoria,  Ohio,  in
     January 2001, resulting in cash proceeds of $16.1 million.

The Company's new management team believes that the corrective steps and actions
taken to date, as well as continued implementation of the revised business plan,
will improve its cash flow from operations,  operating results and its financial
position.

Results of Operations

The following table sets forth, for the periods indicated,  certain items in the
Company's Statements of Operations (in millions), and those items expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended
                                                    -----------------------------------------------------------------
                                                     February 3, 2001        January 29, 2000       October 31, 1998
                                                    -----------------------------------------------------------------
                                                       $           %           $           %          $          %
                                                    -----------------------------------------------------------------
<S>                                                <C>           <C>      <C>           <C>         <C>        <C>
Net sales                                           1,126.0       100.0    1,092.0       100.0       587.2      100.0
Losses on inventory liquidation                         4.5         0.4         --          --          --         --
Cost of sales                                         822.0        73.0      774.5        70.9       410.2       69.9
                                                    -----------------------------------------------------------------
    Gross profit                                      299.5        26.6      317.5        29.1       177.0       30.1
Selling, general and administrative expenses          299.6        26.6      251.4        23.0       134.6       22.9
Store closing expenses                                  7.3         0.6         --          --          --         --
Distribution network reorganization costs               4.9         0.4         --          --          --         --
Severance costs                                         2.6         0.2         --          --          --         --
Merger integration expenses                             1.9         0.2       15.8         1.4          --         --
Amortization of intangibles                             7.8         0.7        6.3         0.6         3.6        0.6
                                                    -----------------------------------------------------------------
    Operating income (loss)                           (24.6)       (2.1)      44.0         4.0        38.8        6.6
Interest expense                                       47.9         4.3       34.6         3.2        20.5        3.5
                                                    -----------------------------------------------------------------
Income (loss) before income taxes                     (72.5)       (6.4)       9.4         0.9        18.3        3.1
Income taxes (credit)                                 (21.8)       (1.9)       6.2         0.6         8.4        1.4
                                                    -----------------------------------------------------------------
    Net income (loss)                                 (50.7)       (4.5)       3.2         0.3         9.9        1.7
                                                    =================================================================
</TABLE>

                                      -13-
<PAGE>
Fiscal 2000 1 Compared to Fiscal 1999

Net sales for the fiscal year ended February 3, 2001, were $1,126.0 million,  an
increase of $34.0 million, or 3.1%, as compared to net sales for the fiscal year
ended January 29, 2000 of $1,092.0 million. This increase was due principally to
the  inclusion  of a full  year of sales for the  stores  acquired  through  the
Quality  merger in May 1999, the opening of 25 new stores in fiscal 2000, a full
year of sales for 24 new stores  opened  during  fiscal 1999,  and an additional
week of sales  attributable  to the 53rd week of fiscal 2000.  This increase was
partially offset by a comparable stores decrease of approximately 14.4% compared
to  fiscal  1999 (net of sales  attributable  to the  additional  week in fiscal
2000), and the closure of 28 stores during fiscal 2000.

Comparable stores sales, which include comparable stores acquired in the Quality
acquisition,  were impacted negatively in the second quarter of fiscal 2000 as a
result of cold, wet weather  conditions in the Company's  northeast  markets and
dry and drought  conditions in Colorado and Nebraska.  The Company's  sales were
impacted negatively in the third and fourth quarters of fiscal 2000 primarily as
a result of out-of-stock  issues  resulting from  interruptions in normal vendor
shipping patterns while the Company renegotiated its credit agreement. Unusually
high sales of generators  during fiscal 1999 related to customers'  preparations
for "Year 2000" problems also reduced  comparable sales of those products during
fiscal 2000.

Gross profit for fiscal 2000 was $299.5 million, a decrease of $18.0 million, or
5.7%,  as  compared  to  $317.5  million  for  fiscal  1999.  Gross  profit as a
percentage of sales decreased to 26.6% for fiscal 2000, as compared to 29.1% for
fiscal 1999. The decreases in both gross profit dollars and percentage  were the
result of losses on inventory  liquidated  through store  closings,  lost volume
rebates and cash discounts from vendor  shipping and payment issues  encountered
by the Company  related to its credit  position during fiscal 2000, and the sale
of certain  inventory  deliberately  marked  down in order to  generate  further
liquidity.  Additionally,  the former  business  model  employed  by the Company
during fiscal 2000 heavily emphasized  advertising and promotional pricing in an
attempt to drive sales, resulting in lower margins.

Selling,  general, and administrative (SGA) expenses for fiscal 2000 were $299.6
million, an increase of $48.2 million, or 19.2% over fiscal 1999 SGA expenses of
$251.4  million.  SGA  expenses as a percentage  of sales  increased to 26.6% in
fiscal 2000, as compared to 23.0% in fiscal 1999.  These increases were due to a
full year of expenses  related to the stores  acquired in the Quality  merger in
May 1999,  expenses  related to new stores opened during fiscal 2000,  increased
advertising  expenditures  associated with prior  management's  over-emphasis on
advertising  and  promotional  pricing in fiscal 2000,  higher  insurance  costs
resulting  from a tightening of insurance  markets,  and an  additional  week of
expenses  attributable  to the 53rd week of fiscal  2000.  Advertising  expenses
increased  $12.0  million as former  management  attempted to gain sales through
increased  advertising  and  promotion  which  could  not  be  supported  by the
Company's in-stock position,  and by increased use of venues such as television,
concert and other  sponsorships well beyond historical and plan levels which did
not produce measurable  benefit.  This increase was partially offset by dropping
all  advertising  in January  2001,  resulting in a net increase in  advertising
expense of $10.4 million versus the prior year. The increase in SGA expenses was
partially offset by some  realization of synergies from the merger,  the closure
of 28 stores  during  fiscal  2000,  headcount  reductions  and  other  employee
terminations during fiscal 2000, and other expense reduction efforts.

Distribution  network  reorganization  costs  relate to a charge of $4.9 million
taken for the planned  closure of six of the  Company's  satellite  distribution
facilities and a full-line distribution center in Des Moines, Iowa by July 2001.
These costs include remaining  occupancy  obligations and severance  payments to
terminated  employees.  The  reorganization  of  the  distribution  network  was
implemented in order to reduce excess capacity in the network established during
the merger, thereby reducing future operating costs.

Store  closing  expenses  of  $7.3  million   (excluding   losses  on  inventory
liquidation  included in the  computation  of gross  profit)  relate to expenses
associated  with the closure of 17  underperforming  stores in September 2000 in
order to generate additional  liquidity for the Company.  These expenses related
to the impartment of equipment ($1.2 milion),  and remaining  lease  obligations
and  other  exit   costs   ($6.1   million).   The   Company   closed  11  other
under-performing  stores during fiscal 2000 which  coincided with the expiration
of those stores'  lease  obligations  and did not have a material  effect on the
Company's operating results.

_______
1 Fiscal 2000 was a 53-week year,  while fiscal 1999 was a 52-week  fiscal year.
Discussion and analysis of operating  results include  relevant  adjustments.


                                      -14-
<PAGE>
Severance  costs of $2.6 million in fiscal 2000 relate to the  termination of 10
executive and 45  administrative  personnel at the  corporate  office during the
year.  These  terminations  resulted  from  headcount  reductions as well as the
replacement of a majority of the prior  management team in the fourth quarter of
fiscal 2000.

Merger and  integration  expenses for fiscal 2000 were $1.9 million  compared to
$15.8  million  in  fiscal  1999.  The  merger  and  integration   expenses  are
attributable  to costs related to closing the former  corporate  headquarters in
Des  Moines,  Iowa,  and  expenses  incurred  to  integrate  the CT and  Quality
operations.  These costs include  severance and retention  costs for  employees,
costs  associated with leased  facilities to be closed,  and costs to facilitate
the integration process,  particularly the implementation and standardization of
information   systems.   The   integration  of  Quality  into  the  Company  was
substantially complete at the end of the first quarter of fiscal 2000.

Amortization of intangibles was $7.8 million for fiscal 2000 and $6.3 million in
fiscal  1999.  The  increase  is due  to a  full  year  of  amortization  of the
additional goodwill acquired in the Quality merger.

<TABLE>
<CAPTION>
Operating loss for fiscal 2000 was $24.6  million,  a decrease of $68.6 million,
as compared to  operating  income of $44.0  million for fiscal  1999.  Operating
income  (loss) as a  percentage  of sales  decreased  to (2.1%) for fiscal  2000
compared  to 4.0% for  fiscal  1999.  The  decrease  resulted  from the  factors
discussed  above,  and is summarized as follows:

<S>                                                                          <C>
Reduction in merger integration expenses                                      $  13.9
Sales decline impact due to SKU-mapping problems and shipment interruptions     (32.2)
Sales decline impact of generators                                               (3.0)
Impact of store closings                                                        (11.8)
Markdowns below cost to raise cash and eliminate slower-moving inventory        (11.3)
Severance costs of terminated employees                                          (2.6)
Distribution network reorganization costs                                        (4.9)
Increase in advertising expenses due to over-emphasis on promotions             (12.0)
Increased goodwill amortization                                                  (1.5)
Reduction in vendor allowances                                                   (4.0)
All other, net                                                                     .8
                                                                              -------
   Change in operating profit                                                 $ (68.6)
                                                                              =======
</TABLE>

Interest  expense  for  fiscal  2000 was $47.9  million,  an  increase  of $13.3
million,  as  compared to $34.6  million  for fiscal  1999.  This  increase  was
primarily due to additional  borrowings used to finance the Quality acquisition,
higher borrowings under the Company's revolving credit facility,  an increase in
average interest rates, and amortization of additional deferred financing costs.

The income tax credit for fiscal  2000 was $21.8  million as  compared to income
tax expense for fiscal 1999 of $6.2  million.  The credit for income  taxes as a
percentage  of the  pretax  loss  was  30.0%,  compared  to  income  taxes  as a
percentage of pretax earnings of 66.3% for fiscal 1999.  Goodwill  amortization,
the  majority  of  which  is not  deductible  for  income  tax  purposes,  has a
significant impact on the Company's effective income tax rate.

Fiscal 1999 Compared to Fiscal 1998 2

Net sales for the fiscal year ended January 29, 2000, were $1,092.0 million,  an
increase of $504.8  million,  or 86.0%,  as compared to net sales for the fiscal
year ended October 31, 1998, of $587.2 million. The increase was due principally
to the  acquisition of 122 stores,  primarily  through the Quality  merger.  Net
sales include $445.5 million of Quality sales since the date of acquisition.  In
addition,  the Company opened 24 new stores  subsequent to October 31, 1998, and
had an increase in comparable store sales of $4.4 million, or 0.8%.
_________
2  Effective for the year ended January 29, 2000, the Company's fiscal year end
was changed  from the  Saturday  closest to October  31 to the  Saturday closest
to January 31.

                                      -15-
<PAGE>
Gross profit for fiscal 1999 was $317.6 million,  an increase of $140.6 million,
or 79.4%, as compared to $177.0 million for fiscal 1998, principally as a result
of the increase in net sales. Gross profit as a percentage of sales decreased to
29.1% for fiscal  1999,  as compared to 30.1% for fiscal  1998.  The decrease in
gross profit percentage was primarily the result of the Quality merger.  Quality
historically had a lower gross profit percentage than CT.

Selling,  general,  and  administrative  expenses  for fiscal  1999 were  $251.4
million, an increase of $116.8 million, or 86.8% over fiscal 1998. This increase
was due  primarily  to costs  related to the  acquisition  and  operation of the
Quality stores and costs related to new store openings.  Selling,  general,  and
administrative  expenses as a percentage  of sales  increased to 23.0% in fiscal
1999  as  compared  to  22.9%  in  fiscal  1998.   This  increase  is  primarily
attributable to costs related to new store openings in fiscal 1999.

Merger  integration  expenses for fiscal 1999 were $15.8 million (none in fiscal
1998).  The merger  integration  expenses are  attributable  to costs related to
closing  the QSI  corporate  headquarters  in Des  Moines,  Iowa,  and  expenses
incurred  to  integrate  the CT and  Quality  operations.  These  costs  include
severance  and  retention  costs for  employees,  costs  associated  with leased
facilities to be closed, and costs to facilitate the integration process.

Amortization of intangibles was $6.3 million for fiscal 1999 and $3.6 million in
fiscal 1998.  The increase is due to  amortization  of the  additional  goodwill
acquired in the Quality merger.

Operating income for fiscal 1999 was $44.0 million, an increase of $5.2 million,
or 13.4%, as compared to fiscal 1998.  Operating income as a percentage of sales
decreased to 4.0% in fiscal 1999 from 6.6% in fiscal 1998. The decrease resulted
from the factors  affecting  net sales,  gross  profit,  selling,  general,  and
administration  expenses,  merger and integration expenses,  and amortization of
intangibles discussed above.

Interest  expense  for  fiscal  1999 was $34.6  million,  an  increase  of $14.1
million,  as  compared to $20.5  million  for fiscal  1998.  This  increase  was
primarily due to the interest  expense on the  additional  debt incurred to fund
the Quality merger.

Income tax expense for fiscal 1999 was $6.2 million, a decrease of $2.2 million,
or  26.2% as  compared  to $8.4  million  for  fiscal  1998.  Income  taxes as a
percentage of pretax  earnings were 66.3% in fiscal 1999 as compared to 45.7% in
fiscal 1998. The increase is due primarily to amortization  of goodwill  related
to the Quality merger, which is not deductible for income tax purposes.

Three-Month Period Ended January 30, 1999, Compared to the Unaudited Results for
the Quarter Ended January 31, 1998

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

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

Selling,  general,  and administrative (SGA) expenses for the three-month period
ended January 30, 1999, were $33.7 million, a decrease of $0.4 million, or 1.2%,
as compared to the quarter ended January 31, 1998.  SGA expenses as a percentage
of net sales  improved to 23.1% for the  three-month  period  ended  January 30,
1999, as compared to 23.6% for the quarter ended January 31, 1998. This decrease
is attributable to completion of the integration of the Country General stores.

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

                                      -16-
<PAGE>
Operating  income for the  three-month  period ended January 30, 1999,  was $7.9
million,  an increase of $1.2 million, or 17.9%, as compared to $6.7 million for
the quarter  ended  January 31, 1998.  Operating  income as a percentage  of net
sales increased to 5.4% for the three-month  period ended January 30, 1999, from
4.6% for the quarter ended January 31, 1998.  The increase was the result of the
factors affecting net sales, gross profit, and SGA expenses discussed above.

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

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

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

Liquidity and Capital Resources

The Company's  primary ongoing cash requirements are those necessary to fund its
operations  and meet its debt  service  obligations.  QSI's  primary  sources of
liquidity have been funds generated from operations,  borrowings pursuant to the
Company's  revolving and term credit  facilities,  short-term trade credit,  and
additional equity investments.

On February  3, 2001,  the Company  had  working  capital of $152.1  million,  a
decrease of $39.8 million,  as compared to working  capital of $191.9 million on
January 29, 2000. This decrease resulted primarily from changes in inventory and
accounts  payable.  On February 3, 2001, the Company's  inventories  were $325.1
million,  a decrease of $40.3 million,  as compared to $365.4 million at January
29,  2000.  On February 3, 2001,  the  Company's  accounts  payable  were $132.3
million,  an increase of $8.3 million,  as compared to $124.0 million at January
29, 2000.  The decrease in  inventory is a result of store  closings  during the
year,  efforts to reduce the Company's SKU assortment,  and poor in-stock levels
at February 3, 2001,  prior to the amendment of the Company's  bank agreement on
February  6, 2001,  which  provided  additional  financing  to improve  in-stock
positions.  The increase in accounts payable  reflects the Company's  efforts to
improve  inventory  financing  by  obtaining  more  appropriate  dating from its
vendors,  as well as past due  balances as a result of the  Company's  cash flow
constraints during fiscal 2000.

As a result of actions taken and financing received described above, the Company
has increased average dating terms from 45 days at the end of the fiscal year to
an average of 56 days at present,  with a goal of further improving dating to an
average of 61 days.  At February 3, 2001,  approximately  $81.2 million of trade
payables were past current terms.  As a result of new shipments,  payments,  and
term changes as noted above, by April 30, 2001, past due trade payables had been
reduced to $29.0 million.

Operating  activities of the Company  utilized $3.6 million and $19.0 million of
net cash in fiscal  2000 and 1999,  respectively.  The use of net cash in fiscal
2000 resulted primarily from nonrecurring  charges and operating losses incurred
by the  Company as a result of the factors  noted above  offset by the effect of
decreases  in  inventory,  while  the use of net cash in  fiscal  1999  resulted
primarily from a decrease in accounts payable.

The  Company's  capital  expenditures  were $48.5  million and $35.7 million for
fiscal 2000 and 1999,  respectively.  The majority of capital  expenditures were
for fixtures, equipment, and leasehold improvements for new stores, additions to
the  Company's  primary   distribution   facilities,   and  information  systems
expenditures  related to  completing  the  systems  integration  of the  Quality
merger.  The Company  intends to limit its capital  expenditures  in fiscal 2001
primarily  to renewal and repair at existing  stores and  distribution  centers,
totaling approximately $4.5 million. During fiscal 2000, the Company reduced its
net cash  outflows for capital  purposes by selling and leasing back four stores
and the  building and  equipment  of its  Fostoria,  Ohio  distribution  center,
resulting in cash proceeds of $23.0 million for the transactions.  Approximately
$5.9 million of these proceeds was used to pay down term loan  borrowings  under
its bank credit agreement.

                                      -17-
<PAGE>
At  February  3,  2001,  the  Company  had a bank  credit  agreement  for  which
borrowings totaled $189.4 million under two term loan facilities  (Tranche A and
B) and $121.2 million under a revolving credit  Agreement.  On February 6, 2001,
contemporaneous  with an equity  infusion of $15.7 million,  an amendment to the
bank credit  agreement  (the Amended Credit  Agreement)  increased the Company's
maximum revolving credit availability to $160 million,  through a combination of
revolving  credit  borrowings  up to $150.0  million and letters of credit up to
$15.0 million.  (The  combination is limited to $160 million in the  aggregate.)
The amendment also eliminated  certain  covenants for the period ending February
3, 2001 and adjusted such covenants for further periods. The amendment was filed
as an exhibit to the Company's Form 8-K filing on March 23, 2001.

The Amended  Credit  Agreement  requires a reduction of the revolving  credit to
$130.0  million for 30  consecutive  days during the period from July 1, 2001 to
September 30, 2001. Thereafter,  no specific reductions will be required for the
remaining period of the revolving credit facility, which extends through October
31, 2004. The revolver balance will continue to be governed through the ratio of
senior debt to inventory.

The Tranche A term loan  ($75.1  million)  is payable in  alternating  quarterly
installments  of $2.5 million and $7.5 million  through April 30, 2004 and final
quarterly  installments  of $11.25 million and $0.9 million  through October 31,
2004.  The Tranche B term loan ($114.3  million)  requires  alternating  of $0.2
million and $0.5 million through October 31, 2004 and then alternating quarterly
principal installments of $28.4 million and $5.5 million through April 30, 2006.
The Company is required to make  mandatory  prepayments  based on the  Company's
excess cash flow, as defined, or upon the sale of certain assets or the issuance
of additional equity.

Borrowings  under the Amended Credit  Agreement are secured by all assets of the
Company  and bear  interest  at the  prime  or  eurodollar  rates  plus a margin
(approximately  8.9% to 9.9% at February 3, 2001).  The revolving credit debt is
also subject to a 0.5% commitment fee on its unused portion.

The Company's  long-term borrowing  agreements contain covenants,  which require
the Company to maintain certain other financial ratios and also restrict,  among
other things,  the payment of dividends,  incurrence of additional debt, capital
expenditures,  mergers and  acquisitions,  and the  disposition  of assets.  The
Company has made all debt  payments  and has  complied  with all bank  covenants
since February 3, 2001.

Commercial  and standby  letters of credit  outstanding  at February 3, 2001 and
January 29, 2000, totaled $4.4 million and $9.9 million, respectively.

The Company is party to interest rate cap agreements (the Cap Agreements) with a
bank to reduce the impact of changes in interest rates on its floating term loan
debt. The Cap Agreements have a notional  amount of $105.0 million,  and cap the
eurodollar rate on the notional amount at 7%, plus an applicable margin. The Cap
Agreements expire in fiscal 2001.

The  Company  anticipates  that its  principal  uses of cash in the  foreseeable
future will be working  capital  requirements,  debt  service  requirements  and
capital  expenditures.  Based upon current and anticipated levels of operations,
and  particularly  upon the  Company's  revised  business  model  and  operating
strategies,  the Company believes that its cash flow from  operations,  together
with amounts available under the Amended Credit  Agreement,  will be adequate to
meet its anticipated requirements in the foreseeable future for working capital,
capital  expenditures and debt service,  and will continue to enhance its credit
position in the vendor  community  and improve  vendor  business  relationships.
There can be no assurance, however, that the Company's business will continue to
generate sufficient cash flow from operations in the future to service its debt,
and the Company may be required to  refinance  all or a portion of its  existing
debt or to obtain additional financing or to reduce its capital spending.  There
can be no  assurance  that any such  refinancing  would be  possible or that any
additional  financing  could be obtained.  The  inability  to obtain  additional
financing could have a material adverse effect on the Company.

Seasonality and Weather

Prior to the management and operational  issues  encountered during fiscal 2000,
the Company historically generated positive operating income in each of its four
fiscal  quarters.  However,  because  the Company is an  agricultural  specialty
retailer,  its  sales  fluctuate  with the  seasonal  needs of the  agricultural
community.  The Company  responds to this  seasonality  by  attempting to manage
inventory  levels (and the  associated  working  capital  requirements)  to meet
expected demand,  and by varying its use of part-time  employees.  Historically,
the Company's sales and

                                      -18-
<PAGE>
operating  income have been highest in the second  quarter (May through July) of
each fiscal year due to the farming  industry's  planting season and the sale of
seasonal  products.  Working  capital needs are highest during the first quarter
(February  through April).  The Company expects these trends to continue for the
foreseeable future.

The  Company's  results  are  also  impacted  by  weather  patterns,  and can be
adversely  affected by temperature and  precipitation  fluctuations  outside the
expected  pattern for each  season.  Unseasonable  weather and  excessive  rain,
drought,  or early or late frosts may affect the  Company's  sales and operating
income.

Inflation

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


                                      -19-
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to  potential  market  value loss  arising  from  adverse
changes in interest rates. The Company's financial instruments subject to market
risk are held for purposes other than trading.

The Company is party to interest rate cap agreements (the Cap Agreements) with a
bank to reduce the impact of changes in interest rates on its floating term loan
debt. The Cap Agreements have a notional  amount of $105.0 million,  and cap the
eurodollar rate on the notional amount at 7%, plus an applicable margin. The Cap
Agreements  expire in fiscal 2001.  The Company is exposed to interest rate risk
in the  event  of  nonperformance  by the  counterparty  to the Cap  Agreements;
however, the Company does not anticipate nonperformance by the bank. At February
3, 2001, $189.4 million of term debt was outstanding.

The following table provides  principal cash flows and related interest rates of
the Company's long-term debt by fiscal year of maturity (in millions):
<TABLE>
<CAPTION>

                                                                                                      2000              1999
                                                                                                ----------------------------------
                                                                                                 Total    Fair     Total    Fair
                                     2001     2002     2003     2004     2005    2006     2007            Value             Value
                                    ----------------------------------------------------------------------------------------------
<S>                                <C>      <C>      <C>      <C>     <C>      <C>     <C>      <C>      <C>     <C>      <C>
Long-term debt,
  including current portion:
  Fixed rate                          $0.5    $0.3     $0.0     $0.0    $0.0     $0.0   $105.0   $105.8    $22.3   $106.3    $97.9
  Average interest rate                                                                  10.6%    10.6%             10.6%

Variable rate                        $21.2   $21.2    $21.2   $165.3   $47.3    $34.4     $0.0   $312.6   $312.6   $304.4   $304.4
  Average interest rate               9.5%    9.6%     9.6%     9.3%    9.3%     9.3%       --     9.5%

Interest Rate Caps:
  Notional amount                   $105.0                                                       $105.0     $0.0
  Strike rate                         7.0%
  Forward rate                        4.3%

</TABLE>


ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Included at pages F-1 through F-31.

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

None.


                                      -20-
<PAGE>


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  following  table  sets  forth the  name,  age and  position  of each of the
Company's directors, executive officers, and other significant employees. All of
the Company's  officers are elected  annually and serve at the discretion of the
Board of Directors.

Name                     Age    Position(s)
-------------------------------------------------------------------------------
Jerry D. Horn             63    Chairman of the Board, President,
                                Chief Executive Officer, Director
William A. Waack          37    Senior Vice-President, Chief Operating Officer,
                                Director
Thomas J. Reinebach       51    Senior Vice-President of Finance, CFO,
                                Secretary, Director
John W. Childs            59    Director
Steven G. Segal           40    Vice-President, Director
Adam L. Suttin            33    Vice-President, Director
David C. Bliss            64    Director
Richard C. Dresdale       45    Director
Habib Y. Gorgi            44    Director
John L. Hilt              56    Director
Peter Lamm                49    Director
William E. Watts          48    Director


Jerry D. Horn joined the Company as  President  and Chief  Executive  Officer in
November 2001. He formerly was CEO from 1985 to 1991, then Chairman from 1991 to
1999 of General Nutrition Companies, Inc., a 4,500-store vitamin and nutritional
supplement retail chain operating under the GNC name. Mr. Horn was President and
CEO of  Recreational  Equipment,  Inc.,  from 1979 to 1983.  He was President of
Thousand  Trails,  a Seattle-based  membership  campground  company from 1983 to
1985.  From 1959 to 1979,  Mr. Horn  served in many  management  positions  with
Sears,  Roebuck & Company.  He joined J. W. Childs  Associates  as an  operating
partner in 1995 and is a director of Bass Pro Shops and Jillians  Entertainment.
Mr. Horn graduated from Drake University with a B.S. degree.

William A. Waack, Senior Vice-President and Chief Operating Officer,  joined the
Company in May 1999. Prior to May 1999, Mr. Waack was employed by Quality for 13
years,  where he held  several  management  positions  in store  operations  and
merchandising,  including Regional Manager,  Buyer, and Merchandise Manager. Mr.
Waack is a graduate of Saginaw Valley State University.

Thomas J.  Reinebach,  Senior  Vice-President  of  Finance  and Chief  Financial
Officer,   joined  the  Company  in  June  2000  as  Senior   Vice-President  of
Distribution and Chief Information  Officer. In November,  Mr. Reinebach took on
the additional  responsibilities of Chief Financial Officer. Prior to that time,
he held executive positions at Toys `R Us for 11 years,  including Senior VP and
CIO, Senior VP of Distribution, Senior VP and Toy Division CFO, and Senior VP of
Operations  Development.  Prior to that  time,  Mr.  Reinebach  was with  Arthur
Andersen  & Company in Chicago  for 17 years,  most  recently  as  partner.  Mr.
Reinebach is a graduate of Bob Jones University.

John W. Childs has been  President of J.W.  Childs  Associates  since July 1995.
Prior to that time,  he was an executive at Thomas H. Lee Company from May 1987,
most recently holding the position of Senior Managing Director. He is a director
of  Big  V  Supermarkets,   Inc.,  Edison  Schools,  Inc.,  Chevys,  Inc.,  DESA
International, Inc., Pan Am International Flight Academy, Inc., Ross University,
American Safety Razor Company, Bass Pro Shops, Inc., and Hartz Mountain, Inc..

Steven G. Segal is Senior Managing  Director of J.W.  Childs  Associates and has
been an executive of J.W. Childs Associates since July 1995. Prior to that time,
he was an  executive  at Thomas H. Lee Company  from  August 1987 most  recently
holding  the  position  of  Managing  Director.  He is a director  of  Universal
Hospital Services,  Inc., National Nephrology  Associates,  Inc., The NutraSweet
Company, Big V Supermarkets,  Inc., and Jillian's  Entertainment  Holdings, Inc.
and is Chairman of the Board of Empire Kosher Poultry, Inc.

                                      -21-
<PAGE>

Adam L. Suttin is a Managing  Director of J.W. Childs Associates and has been an
executive of J.W. Childs  Associates since July 1995. Prior to that time, he was
an executive at Thomas H. Lee Company from August 1989,  most  recently  holding
the position of Associate.  He is a director of American  Safety Razor  Company,
The NutraSweet Company, Ross University,  Empire Kosher Poultry,  Inc., and DESA
International, Inc.

David C. Bliss,  is retired from Quality.  Prior to its acquisition in May 1999,
Mr. Bliss was employed by Quality,  joining as a Director. He was Vice-President
and  Secretary/Treasurer in 1976 and was promoted to President in 1986, to Chief
Executive  Officer  in 1992,  and served as  Chairman  of the Board from 1995 to
2000. Mr. Bliss is a graduate of Western Michigan University.

Richard C. Dresdale is President of Fenway  Partners,  Inc.,  and was a founding
partner.  Prior to  founding  Fenway,  Mr.  Dresdale  was  employed  by Clayton,
Dubilier and Rice,  Inc.,  most recently as Principal.  Mr. Dresdale serves as a
director of a number of Fenway's  portfolio  companies,  including Aurora Foods,
Inc., Simmons Company, Delimex Holdings, Inc., and Blue Capital Management, LLC.

Habib Y.  Gorgi is a  Managing  Director  of Navis  Partners,  LLC and  formerly
President  of Fleet  Private  Equity Co.,  Inc.,  an  affiliate  of  FleetBoston
Financial. He is currently President of Silverado III Corp., the General Partner
of Silverado  III,  L.P.,  the General  Partner of Chisholm  Partners  III, L.P.
Pursuant to an agreement between FleetBoston  Financial and the general partners
of Silverado  III,  Corp.,  Silverado  III, Corp. has sole voting and investment
authority over the QSI stock held by Fleet Growth  Resources III, Inc. Mr. Gorgi
is President of Silverado V Corp. Silverado V Corp is a general partner of Fleet
Equity Partners VII, L.P. He is also a Managing General Partner of Kennedy Plaza
Partners.  Mr. Gorgi serves as a Director for several  companies,  including IOS
Brands Corporation,  Simonds Industries,  Inc., Roadrunner Freight Systems, Inc.
and Savage  Sports  Corporation.  He received  his  bachelors  degree from Brown
University and a master's degree from Columbia University.

John L. Hilt is  retired  from  Quality.  Prior to his  retirement,  he held the
position of Chairman Emeritus of the Board of Directors.  John joined Quality in
1967 and held several positions during his full-time career with the Company. He
became  President in 1974,  was  promoted to Chairman of the Board in 1986,  and
became  Chairman  Emeritus in December of 1995. Mr. Hilt is a graduate of Purdue
University.

Peter Lamm is Chairman and Chief Executive Officer of Fenway Partners, Inc., and
was a founding  partner.  Fenway is a New  York-based  private  equity  firm for
institutional   investors  with  the  primary  objective  of  acquiring  leading
middle-market  companies.  Prior to founding  Fenway,  Mr.  Lamm was  previously
Managing  Director of Butler Capital  Corporation and General Partner of each of
the BCC funds.  Mr. Lamm serves as a director of a number of Fenway's  portfolio
companies,  including Aurora Foods,  Inc.,  Simmons Company,  Delimex  Holdings,
Inc., Blue Capital Management, LLC, and Iron Age Corporation.

William E. Watts was President and Chief Executive  Officer of General Nutrition
Companies,  Inc.,  from  1991  through  March  2001.  Prior to that he served as
President  and Chief  Operating  Officer.  General  Nutrition  is a 5,000+ store
retail chain selling  vitamin and  nutritional  supplements  operating under the
name GNC. Mr. Watts is also a member of the Supervisory Board of Royal Numico, a
leading  multi-national  consumer products company whose primary  businesses are
infant  formula  and  dietary  supplements  as well as a Member  of the Board of
Directors for Equinox, a specialty health club chain.

                                      -22-
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth compensation  earned for all services rendered to
the Company during fiscal 2000, fiscal 1999, and fiscal 1998, as applicable,  by
the Company's  Chief  Executive  Officer and other four most highly  compensated
executive  officers who were employed by the Company at the close of fiscal 2000
(collectively,  the "Named  Executives"),  the Company's  former Chief Executive
Officer and certain other persons employed by the Company as executive  officers
during fiscal 2000.
<TABLE>
<CAPTION>
                                                                                   Annual Compensation
                                                                 ------------------------------------------------------
                                                                                                          All Other
                                                                  Fiscal    Salary (1)      Bonus      Compensation (2)
Name and Principal Position                                        Year        ($)           ($)             ($)
-----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>        <C>           <C>             <C>
Jerry D. Horn (3)                                                  2000             0             0              0
Chairman of the Board, President, Chief Executive Officer,
Director

William A. Waack (4)                                               2000       155,048             0          1,157
Senior Vice-President, Chief Operating Officer, Director           1999        85,175        53,647          1,260

Thomas J. Reinebach (5)                                            2000       149,039             0         14,019
Senior Vice-President of Finance, Chief Financial Officer,
Secretary, Director

Ted G. Britton (6)                                                 2000       108,954             0          3,929
Vice-President, Human Resources and Administration                 1999        64,174        38,626          1,925

John J. Keenan, Jr. (7)                                            2000        86,731        25,000         43,393
Vice-President, Merchandising

James T. McKitrick (8)                                             2000       472,500             0         57,039
Former President & Chief Executive Officer                         1999       535,000       286,318          6,742
                                                                   1998       435,000       224,743          5,000

Alan L. Fansler (9)                                                2000       264,827             0         33,685
Former Executive Vice-President & Chief Operating Officer          1999       198,654       147,173          4,520

G. Dean Longnecker (10)                                            2000       225,750             0         63,404
Former Executive Vice-President-Integration                        1999       273,000       146,103          1,890
                                                                   1998       265,000       136,912          4,587

-----------------------------------------------------------------------------------------------------------------------
<FN>
(1)  Includes compensation deferred at the Named Executive's election under the Company's 401(k) Plan.
(2)  Represents amounts contributed by the Company during each fiscal year, as applicable, to the Named Executive's
     401(k) Plan, and relocation benefits provided by the Company.
(3)  Mr. Horn was appointed  President and Chief  Executive  Officer of the Company in November 2000. Mr. Horn does
     not receive compensation for his position.
(4)  Mr. Waack joined the Company as of May 7, 1999, in connection with the merger of CT and Quality. Mr. Waack was
     appointed to his present position in November 2000.
(5)  Mr. Reinebach joined the Company in June 2000 and was appointed to his present position in November 2000.
(6)  Mr. Britton joined the Company as of May 7, 1999, in connection with the merger of CT and Quality.
(7)  Mr. Keenan joined the Company as of May 28, 2000.
(8)  Mr. McKitrick's employment with the Company terminated in November 2000.
(9)  Mr.  Fansler  joined the  Company as of May 7, 1999,  in  connection  with the merger of CT and  Quality.  Mr.
     Fansler's employment with the Company terminated in September 2000.
(10) Mr. Longnecker's employment with the Company terminated in November 2000.
</FN>
</TABLE>

                                                       -23-
<PAGE>

Employment Arrangements with Executive Officers

Various  executives  and other  members of management  participate  in incentive
bonus programs targeted to Corporate and individual performance objectives.

There are no employment agreements with any of the Company's current executives.

Mr.  McKitrick's  Employment  Agreement  provided  for a base salary of $535,000
subject to the annual  increases as determined  by the Board of  Directors.  Mr.
McKitrick's  Employment  Agreement provided for a severance payment equal to his
base  salary for 18 months if his  employment  was  terminated  or if he was not
reelected as President  and Chief  Executive  Officer or Chairman,  not subject,
however,  to reduction  for any  compensation  earned from during such  18-month
period from other businesses.

Mr.  Fansler's  Employment  Agreement  provided  for a base  salary of  $275,000
subject to the annual  increases as determined  by the Board of  Directors.  Mr.
Fansler's  Employment  Agreement  provided for a severance  payment equal to his
base  salary for 12 months if his  employment  was  terminated  or if he was not
reelected as Executive Vice-President and Chief Operating Officer.

Mr.  Longnecker's  Employment  Agreement  provided for a base salary of $273,000
subject to the annual  increases as determined  by the Board of  Directors.  Mr.
Longnecker's  Employment Agreement provided for a severance payment equal to his
base salary for 12 months if his employment was terminated.

The Employment  Agreements also  contemplated that certain members of management
will participate in stock option plans of Holdings. Allocations of options among
the  management  group  were to be  made  in the  first  instance  by the  Chief
Executive Officer of the Company,  subject to ratification by Holdings' Board of
Directors.  A portion of such  allocations was made during fiscal years 1999 and
1998. The management  stock options are subject to accelerated  vesting based on
the Company's achievement of certain operating cash flow targets.

At the time of the  management  change in  November,  2000,  options to purchase
stock in Holdings were granted to certain  members of  management.  Such options
vest 50% after 18 months and 100% after 36 months.  The following table provides
certain information  concerning options to purchase Holdings common stock during
fiscal 2000 to each Named Executive Officer of the Company.

                                      -24-
<PAGE>
<TABLE>
<CAPTION>
Options Granted in Last Fiscal Year
                                                                                         Potential Realizable Value At
                                                                                            Assumed Annual Rates Of
                                                                                         Stock Price Appreciation For
                                         Individual Grants                                        Option Term (1)
                           --------------------------------------------------------------------------------------------
                             Number of       Percent Of       Exercise
                              Shares        Total Options        or          Expiration
Name                          Granted         Granted         Base Price       Date            5%            10%
-----------------------------------------------------------------------------------------------------------------------
<S>                           <C>               <C>              <C>         <C>            <C>            <C>
Jerry D. Horn                       0                0               0
William A. Waack               31,460            22.4%            $.01         none          $50,930        $53,371
Thomas J. Reinebach            25,740            18.4%            $.01         none           41,670         43,667
Ted G. Britton                 11,440             8.2%            $.01         none           18,520         19,408
John J. Keenan, Jr.            20,020            14.3%            $.01         none           32,410         33,963
-----------------------------------------------------------------------------------------------------------------------
<FN>
(1) The options do not have a stated term.  A term of 10 years has been used for the purposes of these computations.
</FN>
</TABLE>

Mr. Horn personally invested  approximately $1.0 million in Holdings, the parent
of QSI,  during January 2001,  increasing  his direct and indirect  interests in
Holdings to approximately 11%.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of  February 3, 2001,  Holdings  holds 100% of the  outstanding  stock of the
Company.  All  outstanding  options  were  repurchased  in  connection  with the
Acquisition or exchanged for options to acquire shares of Holdings common stock.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Two of the  Company's  suppliers,  Iron Age  Corporation  ("Iron  Age") and DESA
International,   Inc.  ("DESA"),  are  controlled  by  certain  stockholders  of
Holdings.  Iron  Age  is a  manufacturer  and  distributor  of  work  boots  and
protective  footwear.  DESA is a manufacturer and marketer of zone  heating/home
comfort products and specialty tools. The Company believes that the terms of its
purchases  from Iron Age and DESA are at least as  favorable  to the  Company as
could be obtained from other suppliers.  In fiscal 2000, the Company's purchases
from Iron Age and DESA totaled $13.3 million.

For fiscal 2000,  fiscal 1999, the three-month  period of 1999, and fiscal 1998,
Childs was paid a management and consulting services fee of $0.07 million,  $0.2
million,  $0.2 million,  and $0.2  million,  respectively.  In addition,  Fenway
Partners, a stockholder of QSI Holdings,  was paid a quarterly management fee of
$0.03 million  during all fiscal periods  presented.  Such  management  fees are
prohibited by the Amended Credit Agreement for fiscal 2001.

In connection with the  consummation of the Acquisition and subsequent  employee
stock  purchases,  Holdings  loaned  amounts  to  certain  employees  and former
employees of the Company to partially fund their  investment in Holdings  common
stock in fiscal 1998 and 1997. The loans, which totaled $0.4 million at February
3, 2001,  are due in 14 years and bear  interest at an interest rate of 8.5%. No
such loans were made to any current  executives of the Company,  and the Company
does not intend to provide such loans in the foreseeable future.

Additionally, Messrs. Bliss, McKitrick, Fansler, Longnecker and two other former
executives of the Company are parties to a  Stockholders  Agreement  dated as of
May 7, 2000, applicable to all shares of Holdings common stock or vested options
to  acquire  such  common  stock held now or  hereafter  acquired  by them.  The
Stockholders  Agreement,  among other  terms,  permits  Holdings to "call" their
shares and vested options for a specified period following their  termination of
employment for any reason. Additionally,  if any of these parties was terminated
for any reason  other than for cause or without  good reason (as those terms are
defined in the Stockholders Agreement),  he has the right to "put" his shares or
vested options to Holdings for a specified  period  following that  termination.
Depending on the  circumstances,  the price for shares of Holdings  common stock
purchased in connection with a call or put under the Stockholders Agreement will
range  from  cost to  seven  times  EBITDA.  The put and  call  features  of the
Stockholders
                                      -25-
<PAGE>

Agreement do not apply to  terminations  of  employment  that occur after one or
more public  offerings of Holdings common stock that have yielded  aggregate net
proceeds of $50.0 million or more.  The execution of the put features is subject
to compliance with the Company's various borrowing  agreements,  which presently
preclude  Holdings from paying for such put shares in cash.  In connection  with
the  termination  of their  employment  with the Company,  the "put"  provisions
applicable to Mr.  McKitrick and the "put" and "call"  provisions  applicable to
Mr. Longnecker and one other former executive were terminated.

In February 2000, the Company sold the land, buildings, and certain fixtures and
equipment  for three  stores  to a limited  liability  company  whose  principal
members are Messrs.  McKitrick and Fansler.  The sales price of $7.0 million was
equal to the  Company's  cost for the assets.  The Company  then  entered into a
twelve-year  lease agreement with this same company for the use of these stores.
The total  minimum lease  payments  under the lease  agreements  range from $0.8
million in fiscal 2001 to $0.9 million in fiscal  2011.  The Company also leases
three stores and its  corporate  office  building  from other  stockholders  and
former  executives of Quality.  Total minimum  annual lease payments under these
leases  approximate  $0.9 million through fiscal 2004. The Company  believes the
terms of the lease  agreements  to be as  favorable  to the  Company as could be
obtained from other sources.



                                      -26-
<PAGE>

                                     PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)    Documents filed as part of this Report:

          1.   Financial  Statements.  See the  Index  to  Financial  Statements
               appearing at page F-1.

          2.   Financial  Statement   Schedules.   The  following   Consolidated
               Financial Statement Schedule is included at page F-31:

               Schedule II - Valuation and Qualifying Accounts

No other  Financial  Statement  Schedules have been presented since the required
information  is not  present or not  present in  amounts  sufficient  to require
submission of the schedule,  or because the information  required is included in
the consolidated financial statements or the notes thereto.

   3.    Exhibits.

         The  following  exhibits are filed with this Annual Report on Form 10-K
         or incorporated herein by reference.
3(i)     Certificate of Incorporation,  as amended,  filed as exhibit 3.1 to the
         Company's  Quarterly  Report on Form 10-Q for the quarter  ended May 1,
         1999, and incorporated herein by reference.
3(ii)    Bylaws  of the  Company,  filed  as  exhibit  3(ii)  to  the  Company's
         Registration Statement on Form S-1 (File #33-82620) originally filed on
         August 9, 1994 and incorporated herein by reference.
4.1      Form of Common Stock  Certificate of the Company,  filed as exhibit 4.1
         to the Company's  Registration  Statement on Form S-1 (File  #33-82620)
         originally  filed  on  August  9,  1994  and  incorporated   herein  by
         reference.
4.2      Indenture  relating to the Senior Notes, the form of which was filed as
         exhibit 4.4 to Amendment No. 3 to the Company's  Registration Statement
         on Form S-1 (File No. 333-19613) originally filed on March 19, 1997 and
         incorporated herein by reference.
10.1     Employment  Agreement  between the Company and James T. McKitrick dated
         as of  September  16,  1994,  filed as  exhibit  10.5 to the  Company's
         Registration Statement on Form S-1 (File #33-82620) originally filed on
         August 9, 1994 and incorporated herein by reference.
10.2     Employment  Agreement  between the Company and Dean Longnecker dated as
         of  September  16,  1994,  filed  as  exhibit  10.6  to  the  Company's
         Registration Statement on Form S-1 (File #33-82620) originally filed on
         August 9, 1994 and incorporated herein by reference.
10.3     Asset Purchase Agreement By and Between Central Tractor Farm & Country,
         Inc.,  (the  "Buyers") and Big Bear Farm Stores,  Inc. (the  "Sellers")
         dated  May 22,  1996,  filed as  exhibit  10.15 to the  Company's  10-Q
         originally  filed on  September  9,  1996 and  incorporated  herein  by
         reference.
10.4     Agreement  Plan of Merger dated  November 27, 1996 by and among Central
         Tractor Farm & Country,  Inc., J.W. Childs Equity  Partners,  L.P., JWC
         Holdings I, Inc., and JWC  Acquisition I, Inc.,  filed as an exhibit to
         the Company's 8-K originally filed on December 3, 1996 and incorporated
         herein by reference.
10.5     Securities  Purchase  Agreement  dated as of  November  27, 1996 by and
         among  Central  Tractor  Farm  &  Country,  Inc.,  J.W.  Childs  Equity
         Partners,  L.P.,  JWC Holdings I, Inc.,  and JWC  Acquisition  I, Inc.,
         filed as an exhibit to the Company's 8-K  originally  filed on December
         3, 1996 and incorporated herein by reference.
10.6     Securities  Purchase  Agreement,  dated as of November 6, 1996,  by and
         among  Mezzanine   Lending   Associates  I,  L.P.,   Mezzanine  Lending
         Associates II, L.P.,  Mezzanine  Lending  Associates III, L.P.,  Senior
         Lending Associates I, L.P., BCC Industrial Services, JWC Acquisition I,
         Inc.,  J.W.  Childs  Equity  Partners,  L.P.,  Central  Tractor  Farm &
         Country,  Inc.  filed as an exhibit to JWCAC's  Schedule 13D originally
         filed on December 9, 1996 and incorporated herein by reference.
10.7     Letter Agreement, dated as of November 27, 1996 between JWC Acquisition
         I, Inc.  and Mr.  James T.  McKitrick,  filed as an  exhibit to JWCAC's
         Schedule  13D  originally  filed on December  9, 1996

                                      -27-
<PAGE>
         and incorporated herein by reference.

10.8     Letter Agreement, dated as of November 27, 1996 between JWC Acquisition
         I, Inc.  and Mr. G. Dean  Longnecker,  filed as an  exhibit  to JWCAC's
         Schedule  13D  originally  filed on December  9, 1996 and  incorporated
         herein by reference.
10.9     Credit  Agreement  dated as of  December  23,  1996 among the  Company,
         Holdings,  JWCAC,  certain  banks,  financial  institutions  and  other
         institutional  lenders listed therein,  Fleet, as administrative agent,
         and NationsBank,  as co-agent,  filed as exhibit 10.22 to the Company's
         10-K originally  filed on January 31, 1997 and  incorporated  herein by
         reference.
10.10    Stock  Purchase  Agreement,  dated  June 26,  1997 by and  between  the
         Company  and  ConAgra,   Inc.  and  the  Amended  and  Restated  Credit
         Agreement, dated as of July 3, 1997, filed as exhibits to the Company's
         8-K filed on July 3, 1997 and incorporated herein by reference.
10.11    Letter  Amendment,  dated as of  February  18,  1998,  to  Amended  and
         Restated Credit Agreement,  filed as exhibit 10.1 to the Company's 10-Q
         originally  filed on  September  15,  1998 and  incorporated  herein by
         reference.
10.12    Second Amended and Restated Credit Agreement,  dated as of May 7, 1999,
         as amended by  Amendment  No. 1, dated as of March 31,  2000,  filed as
         exhibit 10.1 to the Company's  10-Q  originally  filed on June 13, 2000
         and incorporated herein by reference.
10.13    Amendment  No. 2 and Waiver to the Second  Amended and Restated  Credit
         Agreement, filed as exhibit 10.1 to the Company's 10-Q originally filed
         on December 12, 2000 and incorporated herein by reference.
10.14    Amendment No. 3 to the Second  Amended and Restated  Credit  Agreement,
         filed  as  exhibit  10.2 to the  Company's  10-Q  originally  filed  on
         December 12, 2000 and incorporated herein by reference.
10.15    Amendment No. 4 to the Second  Amended and Restated  Credit  Agreement,
         filed  as  exhibit  10.3 to the  Company's  10-Q  originally  filed  on
         December 12, 2000 and incorporated herein by reference.
10.16    Amendment No. 5 to the Second  Amended and Restated  Credit  Agreement,
         filed as exhibit 10.1 to the  Company's 8-K  originally  filed on March
         23, 2001 and incorporated herein by reference.
10.17    Amendment No. 6 to the Second  Amended and Restated  Credit  Agreement,
         filed as exhibit 10.2 to the  Company's 8-K  originally  filed on March
         23, 2001 and incorporated herein by reference.
12       Statement Regarding Computation of Ratio of Earnings to Fixed Charges
21       Subsidiaries of the Company
99       Important Factors Regarding Forward-Looking Statements

(b)    Reports on Form 8-K Filed Since the Third Quarter of Fiscal 2000

       The  Company  filed a current  report on Form 8-K dated  March 23,  2001,
       reporting an amendment of the Company's  credit  agreement dated February
       6, 2001, and filing as exhibits  Amendment Numbers 5 and 6 of the Amended
       Credit Agreement.

(c)    See Item 14(a)(3) of this report.

(d)    See Item 14(a)(2) of this report.


                                      -28-
<PAGE>



                              Quality Stores, Inc.

                        Consolidated Financial Statements

               Fiscal years ended February 3, 2001 and January 29,
              2000, period of three months ended January 30, 1999,
                     and fiscal year ended October 31, 1998



                                    Contents

Report of Independent Auditors.........................................F-2
Consolidated Balance Sheets............................................F-3
Consolidated Statements of Operations .................................F-5
Consolidated Statements of Stockholder's Equity........................F-6
Consolidated Statements of Cash Flows..................................F-7
Notes to Consolidated Financial Statements.............................F-9


                                      F-1

<PAGE>


                         Report of Independent Auditors

The Board of Directors
Quality Stores, Inc.

We have audited the accompanying  consolidated balance sheets of Quality Stores,
Inc.  and  subsidiaries  as of February 3, 2001 and January 29,  2000,  and the
related  consolidated  statements of operations,  stockholder's  equity and cash
flows for the fiscal  years ended  February 3, 2001 and  January 29,  2000,  the
three-month  period ended January 30, 1999 and the fiscal year ended October 31,
1998. Our audits also included the financial  statement  schedule  listed in the
Index  at  Item  14(a).   These  financial   statements  and  schedule  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Quality Stores,
Inc.  and  subsidiaries  at  February  3, 2001 and  January  29,  2000,  and the
consolidated  results  of their  operations  and their cash flows for the fiscal
years ended February 3, 2001 and January 29, 2000, the three-month  period ended
January 30, 1999 and the fiscal year ended October 31, 1998, in conformity  with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  financial  statements  taken as a whole,  presents  fairly in all
material respects the information set forth therein.

                                       /s/ ERNST & YOUNG LLP


Grand Rapids, Michigan
April 13, 2001

                                       F-2
<PAGE>
<TABLE>
<CAPTION>
                                      Quality Stores, Inc.

                                  Consolidated Balance Sheets

                   (In Thousands of Dollars, Except Share and Par Value Data)


                                                                 February 3,      January 29,
                                                                    2001              2000
                                                               ------------------------------
<S>                                                             <C>              <C>
Assets
Current assets:
   Cash and cash equivalents                                     $  3,382         $ 11,029
   Trade and other receivables, less allowances of
     $1,438 in fiscal 2000 and $1,275 in fiscal 1999                9,955            7,742
   Recoverable income taxes from parent                             4,414            4,827
   Inventory                                                      325,116          365,383
   Deferred income taxes                                            1,898               --
   Other current assets                                             4,242            5,408
                                                                 -------------------------
Total current assets                                              349,007          394,389

Property, improvements, and equipment:
   Land                                                             4,534            4,242
   Buildings and improvements                                      77,821           75,696
   Furniture and fixtures                                          91,246           65,410
   Automobiles and trucks                                             965            2,332
                                                                 -------------------------
                                                                  174,566          147,680
   Less accumulated depreciation and amortization                  40,310           24,213
                                                                 -------------------------
                                                                  134,256          123,467

Other assets:
   Goodwill, net of accumulated amortization of $20,084 in
     fiscal 2000 and $12,430 in fiscal 1999                       286,241          293,895
   Other intangibles, net of accumulated amortization of
     $572 in fiscal 2000 and $412 in fiscal 1999                   12,264           10,712
   Deferred income taxes                                           11,971               --
                                                                 -------------------------
                                                                  310,476          304,607
                                                                 -------------------------
Total assets                                                     $793,739         $822,463
                                                                 =========================


                                               F-3
<PAGE>
<CAPTION>


                                                                 February 3,     January 29,
                                                                    2001             2000
                                                              --------------------------------
<S>                                                           <C>               <C>

Liabilities and stockholder's equity
Current liabilities:
   Accounts payable                                             $ 132,319        $ 124,012
   Accrued payroll and incentives                                   4,682           10,937
   Other accrued expenses                                          37,825           43,880
   Deferred income taxes                                               --            1,285
   Current portion of long-term debt and
     capital lease obligations                                     22,039           22,371
                                                                -----------   ------------
Total current liabilities                                         196,865          202,485

Long-term debt, less current portion                              396,696          388,554
Capital lease obligations, less current portion                     2,922            1,103
Deferred income taxes                                                  --            5,694
Other noncurrent liabilities                                        5,805               --

Stockholder's equity:
   Common stock, $.01 par value:
     3,000 authorized shares; 100 shares issued
     and outstanding                                                   --               --
   Additional paid-in capital                                     226,877          209,377
   Retained earnings (deficit)                                    (35,426)          15,250
                                                                -----------   ------------
Total stockholder's equity                                        191,451          224,627



                                                                -----------   ------------
Total liabilities and stockholder's equity                      $ 793,739        $ 822,463
                                                                ===========   ============

<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>

                                       F-4
<PAGE>
<TABLE>
<CAPTION>

                                         Quality Stores, Inc.

                                Consolidated Statements of Operations

                               (In Thousands of Dollars, Except Ratio)



                                                                            Period of
                                             Fiscal year    Fiscal year    three months   Fiscal year
                                                ended          ended          ended          ended
                                             February 3,    January 29,    January 30,    October 31,
                                                 2001          2000            1999           1998
                                           -----------------------------------------------------------
<S>                                        <C>            <C>           <C>           <C>
Net sales                                   $ 1,126,039    $ 1,092,021   $   146,147   $   587,195
Cost of sales, including inventory
   liquidation losses related to store
   closings of $4,453 in fiscal 2000            826,539        774,455       103,521       410,179
                                            ------------------------------------------------------
Gross profit                                    299,500        317,566        42,626       177,016

Selling, general and
   administrative expenses                      299,598        251,385        33,742       134,623
Store closing expenses                            7,335             --            --            --
Distribution network reorganization costs         4,919             --            --            --
Severance costs                                   2,556             --            --            --
Merger integration expenses                       1,850         15,820            --            --
Amortization of intangibles                       7,814          6,327           972         3,552
                                            ------------------------------------------------------
Operating income (loss)                         (24,572)        44,034         7,912        38,841

Interest expense                                 47,946         34,637         4,959        20,466
                                            ------------------------------------------------------
Income (loss) before income taxes               (72,518)         9,397         2,953        18,375

Income taxes (credit)                           (21,842)         6,234         1,468         8,400
                                            ------------------------------------------------------
Net income (loss)                           $   (50,676)   $     3,163   $     1,485   $     9,975
                                            ======================================================

Ratio (deficiency) of earnings to
   fixed charges                            $   (72,518)          1.2x          1.5x          1.8x
                                            ======================================================


<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
                                                  F-5

<PAGE>
<TABLE>
<CAPTION>

                                         Quality Stores, Inc.

                           Consolidated Statements of Stockholder's Equity

                                      (In Thousands of Dollars)


                                                     Additional        Retained          Total
                                      Common          Paid-In          Earnings      Stockholder's
                                      Stock           Capital          (Deficit)        Equity
                                   ----------------------------------------------------------------
<S>                                 <C>              <C>             <C>             <C>
Balances at November 2, 1997         $    --          $ 118,920       $     627       $ 119,547

Net income                                --                 --           9,975           9,975
Capital contribution                      --                235              --             235
                                     ----------------------------------------------------------
Balances at October 31, 1998              --            119,155          10,602         129,757

Net income                                --                 --           1,485           1,485
                                     ----------------------------------------------------------
Balances at January 30, 1999              --            119,155          12,087         131,242

Net income                                --                 --           3,163           3,163
Capital contribution                      --             91,764              --          91,764
Dividend to parent                        --             (1,542)             --          (1,542)
                                     ----------------------------------------------------------
Balances at January 29, 2000              --            209,377          15,250         224,627

Net loss                                  --                 --         (50,676)        (50,676)
Capital contribution                      --             17,500              --          17,500
                                     ----------------------------------------------------------
Balances at February 3, 2001         $    --          $ 226,877       $ (35,426)      $ 191,451
                                     ==========================================================

<FN>

( ) Denotes deduction.

See accompanying notes to consolidated financial statements.
</FN>
</TABLE>

                                                  F-6


<PAGE>
<TABLE>
<CAPTION>


                                         Quality Stores, Inc.

                                Consolidated Statements of Cash Flows

                                      (In Thousands of Dollars)

                                                                                Period of
                                             Fiscal year      Fiscal year     three months     Fiscal year
                                                ended            ended            ended           ended
                                             February 3,      January 29,      January 30,     October 31,
                                                 2001            2000             1999            1998
                                            --------------------------------------------------------------

<S>                                          <C>              <C>             <C>             <C>
Operating activities
Net income (loss)                             $ (50,676)       $   3,163       $   1,485       $   9,975
Adjustments to reconcile net income
   (loss) to net cash provided by (used in)
   operating activities:
     Nonrecurring charges                        21,113           15,820              --              --
     Depreciation and amortization               21,430           13,713           1,317           5,221
     Amortization of intangibles                  7,814            6,327             972           3,552
     Amortization of deferred financing
       costs                                      2,055            2,162             257           1,052
     Deferred income taxes (credit)             (20,848)           4,397           1,234           6,417
     Changes in operating assets and
       liabilities:
         Trade and other receivables             (2,213)           1,271             839           2,616
         Recoverable income taxes
           from parent                              413           (3,678)            789            (621)
         Inventory                               35,814            5,177          (9,609)          5,053
         Other current assets                       966              788             665             126
         Accounts payable                         8,307          (50,115)          2,065          10,307
         Other current liabilities              (27,743)         (18,003)         (1,666)         (6,478)
                                              ----------------------------------------------------------
Net cash provided by (used in)
   operating activities                          (3,568)         (18,978)         (1,652)         37,220

Investing activities
Purchases of property, improvements, and
   equipment, net                               (48,505)         (35,681)         (3,997)         (4,842)
Proceeds from sale-leaseback transactions        23,069               --              --              --
Business acquisitions, net of
   cash acquired                                     --         (111,502)         (6,020)         (1,568)
Other                                                --            2,200            (538)            394
                                              ----------------------------------------------------------
Net cash used in investing activities           (25,436)        (144,983)        (10,555)         (6,016)


                                                  F-7
<PAGE>
<CAPTION>

                                                                                Period of
                                             Fiscal year      Fiscal year     three months     Fiscal year
                                                ended            ended            ended           ended
                                             February 3,      January 29,      January 30,     October 31,
                                                 2001            2000             1999            1998
                                            --------------------------------------------------------------

<S>                                          <C>              <C>             <C>             <C>
Financing activities
Borrowings under revolving line of credit     $ 242,050        $ 401,696       $  91,180       $ 273,645
Repayments on revolving line of credit         (208,350)        (358,196)        (79,255)       (302,320)
Proceeds from issuance of long-term debt          2,000          221,309              --              --
Payments on long-term debt                      (28,008)         (88,147)         (1,500)         (3,000)
Payments on capitalized lease obligations          (268)            (284)            (45)           (171)
Capital contributions                            17,500               --              --             235
Dividend to parent                                   --           (1,542)             --              --
Deferred financing costs                         (3,567)          (4,990)             --              --
                                              ----------------------------------------------------------
Net cash provided by (used in) financing
   activities                                    21,357          169,846          10,380         (31,611)
                                              ----------------------------------------------------------
Net increase (decrease) in cash and cash
   equivalents                                   (7,647)           5,885          (1,827)           (407)

Cash and cash equivalents at beginning of
   period                                        11,029            5,144           6,971           7,378
                                              ----------------------------------------------------------
Cash and cash equivalents at end of period    $   3,382        $  11,029       $   5,144       $   6,971
                                              ==========================================================

Supplemental cash flow information
Interest payments                             $  50,378        $  28,124       $   1,941       $  19,838
Net income taxes paid (refund)                   (2,000)           4,504             225             355
Note payable issued in acquisition of Fisco
   Farm and Home                                     --               --           1,084              --
Capital contribution of common stock
   received from parent used to consummate
   Quality Stores, Inc. acquisition                  --           91,764              --              --
Property acquired under capital lease             2,205               --              --              --


<FN>
( ) Denotes reduction in cash and cash equivalents.

See accompanying notes to consolidated financial statements.
</FN>
</TABLE>

                                                  F-8

<PAGE>
                              Quality Stores, Inc.

                   Notes to Consolidated Financial Statements

               Fiscal years ended February 3, 2001 and January 29,
            2000, period of three months ended January 30, 1999, and
                       fiscal year ended October 31, 1998



1.  Summary of Significant Accounting Policies

Principles of Consolidation and Business

Quality  Stores,  Inc. (the Company),  formerly known as Central  Tractor Farm &
Country,  Inc.,  is a  wholly  owned  subsidiary  of  QSI  Holdings,  Inc.  (QSI
Holdings),  formerly  known as CT Holding,  Inc.,  an  affiliate of J. W. Childs
Equity Partners,  L.P. (Childs).  The consolidated  financial statements include
the Company and its wholly owned subsidiaries. All intercompany transactions are
eliminated in consolidation.

Quality  Stores,  Inc. is the  largest  agricultural  specialty  retailer in the
United States,  serving the agricultural,  hardware,  and related needs of rural
customers,  especially  part-time  and  full-time  farmers and  ranchers,  hobby
gardeners,  skilled trades persons,  and do-it-yourself  customers.  The Company
operates  nationally in a single  business  segment  consisting of  agricultural
specialty  retail  stores  located  primarily  in the  Midwest,  Northeast,  and
Southeast United States.

Fiscal Year End

The  Company  currently  operates  on a 52 or 53-week  fiscal year ending on the
Saturday  nearest to January 31. The fiscal year ended  February 3, 2001 (fiscal
2000) is a 53-week  year,  while the fiscal year ended  January 29, 2000 (fiscal
1999) is a 52-week year.  Prior to fiscal 1999, the Company  operated on a 52 or
53-week  fiscal  year  ending  on  the  Saturday  nearest  to  October  31.  The
three-month  transition  period ended  January 30, 1999  (three-month  period of
1999) presented herein results from this change in fiscal  year-end.  The fiscal
year ended October 31, 1998 was a 52-week year.

Use of Estimates

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

                                       F-9

<PAGE>

                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)



1.  Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

The Company  considers  all highly liquid  investments  with a maturity of three
months or less when purchased to be cash equivalents.

Trade Receivables

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

Inventory

Substantially all inventory is recorded at the lower of cost or market using the
last-in,  first-out  (LIFO)  method.  The  Company  reviews  its  inventory  for
slow-moving,  obsolete or otherwise  unsalable  items and records any  estimated
losses  to be  incurred  as  such  inventory  is  identified.  If the  first-in,
first-out method of inventory  valuation had been used,  inventories  would have
been $0.6 million and $1.3 million  lower than  reported at February 3, 2001 and
January 29, 2000, respectively.

Property, Improvements, and Equipment

Property,  improvements,  and  equipment  are  recorded  on the  basis  of cost.
Depreciation  is  computed  primarily  using the  straight-line  method over the
estimated  useful  lives of the  respective  assets as  follows:  buildings  and
improvements  from 10 to 39  years;  leasehold  improvements  (not in  excess of
underlying lease terms) from 5 to 20 years;  furniture and fixtures from 3 to 15
years; and automobiles and trucks from 3 to 10 years.

Certain long-term lease  transactions have been accounted for as capital leases.
The related  assets are  amortized on a  straight-line  basis over the lesser of
their estimated useful lives or the respective terms of the leases.


                                       F-10
<PAGE>

                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




1.  Summary of Significant Accounting Policies (continued)

Goodwill and Other Intangibles

Goodwill is being amortized  utilizing the  straight-line  method over 40 years.
Other  intangibles  consist  primarily  of  deferred  financing  costs  that are
amortized  over the term of the  related  debt using the  straight-line  method,
which approximates the effective interest method.

Impairment of Long-lived Assets

When events or  conditions  warrant,  the  Company  reviews  and  evaluates  the
recoverability of long-lived assets,  including goodwill,  and considers whether
these assets are impaired  and,  therefore,  should be  completely  or partially
written off or the amortization or depreciation periods accelerated. The Company
assesses  the  recoverability  of  these  assets  based  upon  several  factors,
including  management's intention with respect to individual store locations and
each location's  projected  undiscounted  cash flows. If projected  undiscounted
cash flows are less than the carrying amount of the related assets,  the Company
adjusts the carrying amounts of such assets to their estimated fair value.

Deferred Income Taxes

Deferred income tax assets and liabilities are determined by applying  currently
enacted tax laws and rates to the cumulative  temporary  differences between the
carrying values of assets and liabilities for financial reporting and income tax
purposes.  Deferred  income tax  expense or credit is based on the net change in
deferred income tax assets and liabilities during the period.


                                       F-11
<PAGE>

                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




1.  Summary of Significant Accounting Policies (continued)

Financial Instruments and Risk Management

The Company's financial instruments consist of cash and cash equivalents,  trade
and other  receivables,  accounts  payable,  interest  rate cap  agreements  and
long-term  debt.  The  Company's  estimate of the fair value of these  financial
instruments  approximates their carrying amounts at the respective  consolidated
balance sheet dates,  except for  long-term  debt,  which had an estimated  fair
value that is $83.5  million and $8.4 million  lower than its carrying  value at
February 3, 2001 and January 29, 2000,  respectively.  Fair value was determined
using quoted market prices for the Company's  senior debt and interest rate caps
and discounted  cash flow analyses for all other  instruments.  The Company does
not hold or issue financial instruments for trading purposes.

The  Financial   Accounting   Standards  Board  issued  Statement  of  Financial
Accounting  Standards (SFAS) No. 133, Accounting for Derivative  Instruments and
Hedging Activities,  which is effective for the Company in fiscal 2001. SFAS No.
133 requires companies to record derivative  instruments on the balance sheet at
fair  value and  establishes  accounting  rules for  changes  in fair value that
result from hedging activities.  The Company has determined that the adoption of
SFAS No.  133 will not have a  material  effect  on its  consolidated  financial
position or future results of operations.

Interest Rate Cap Agreements

The fee paid in connection  with interest rate cap agreements is being amortized
over the terms of the  agreements.  Any  amounts to be  received  by the Company
under the agreements are recognized in the period that they become known.

Revenue Recognition

Revenue is  recognized  at the point of purchase and payment by the customer for
cash and credit card sales.  Revenue  associated  with  layaway  merchandise  is
deferred until such time as full payment is received. Sales on account result in
revenue at the time the related goods are released or shipped to the customer.

Distribution and Transportation Costs

Distribution  and  transportation  costs  incurred by the Company are charged to
cost of sales when the related merchandise is sold.

                                       F-12
<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




1.  Summary of Significant Accounting Policies (continued)

Catalogs, Sale Flyers, and Advertising Costs

The direct cost of printing and mailing the Company's  annual mail order catalog
is deferred and amortized  against mail order revenues over the year the catalog
is in use. The direct cost of printing and distributing  sale flyers is deferred
and amortized over the life of the flyer,  which is generally two weeks or less.
Other  advertising  costs are  expensed as incurred.  There were no  unamortized
costs relating to the annual catalog or periodic sale flyers at February 3, 2001
and January 29, 2000.  Advertising  expenses were $39.5 million,  $29.1 million,
$3.9 million and $15.1  million for fiscal 2000,  fiscal 1999,  the  three-month
period of 1999 and fiscal 1998, respectively.

Store Opening Costs

Direct costs incurred to open or acquire new stores are expensed as incurred.

Reclassifications

Certain amounts  previously  recorded in prior periods have been reclassified to
conform with the presentation used in fiscal 2000.

2.  Nonrecurring Charges

Distribution Network Reorganization

On January 9, 2001, a plan was approved to reorganize the Company's distribution
network.  The  reorganization  includes  the  closure  of six  of the  Company's
satellite  distribution  facilities and a full-line  distribution  center in Des
Moines,  Iowa by July 2001.  Liabilities of $4.6 million for remaining occupancy
obligations and $0.3 million for severance payments to 110 terminated  employees
were  recorded as of the plan's  approval  date.  As of  February 3, 2001,  $0.4
million had been incurred and charged against these liabilities.

                                       F-13

<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




2.  Nonrecurring Charges (continued)

Store Closings

As part of a plan to  improve  overall  store  profitability,  reduce  inventory
levels and generate cash to improve liquidity, the Company announced the closing
of seventeen under-performing stores in September 2000. Expenses associated with
these  store  closings  totaled  $11.8  million  and  included  $4.5  million of
inventory  liquidation  losses that were charged to cost of sales,  $1.2 million
for asset impairment and $6.1 million for remaining lease  obligations and other
exit costs. As of February 3, 2001, $4.6 million of the occupancy and other exit
costs had been incurred and charged against the related liabilities. The closing
of these stores was completed by the end of fiscal 2000.

The Company  periodically  reviews store performance and in the normal course of
business  closes  stores that do not meet  expected  performance  criteria.  The
Company closed eleven other  under-performing  stores during fiscal 2000, ten in
fiscal 1999 and  fourteen in fiscal  1998.  There were no store  closings in the
three-month  period of 1999. These closings generally occurred at the expiration
of the various store lease  agreements and did not have a material effect on the
Company's operating results for the affected periods.

Employee Terminations

Primarily  in the fourth  quarter of fiscal  2000,  the Company  terminated  the
employment  of ten  executive  and  forty-five  administrative  personnel at its
corporate  headquarters.  Severance liabilities of $2.3 million were recorded as
of the  employee  termination  dates.  As of February 3, 2001,  $0.8  million of
severance payments had been made and charged against these liabilities.


                                       F-14
<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




3.  Business Acquisitions

Quality Stores, Inc.

On May 7, 1999,  Central  Tractor Farm & Country,  Inc. (CT) acquired the former
Quality Stores, Inc. (Quality) in a transaction in which Quality was merged with
and into CT. At the  completion  of the  acquisition,  the name of the surviving
corporation  was changed to Quality  Stores,  Inc. (the Company).  In connection
with the  acquisition,  the former  shareholders  and option  holders of Quality
received, in the aggregate,  $111.5 million in cash and 792,430 shares of common
stock of CT's parent company that was contributed to CT and had a value of $91.8
million. In addition, CT repaid $42.1 million in debt owed by Quality. The total
purchase price for Quality,  including $4.7 million of transaction expenses, was
$208.0 million.

Quality,  based in Muskegon,  Michigan, had a strong retail presence in Michigan
and Ohio and,  at the time of the  acquisition,  operated  114  stores  offering
merchandise oriented to farm and country living, including animal care products,
farm and ranch supplies, workwear, and lawn and garden products.

The  acquisition of Quality was accounted for as a purchase.  The purchase price
was allocated to the tangible and intangible assets and the liabilities based on
fair values as follows (in thousands):

Accounts receivable and other assets                                  $  12,693
Inventory                                                               135,692
Property, leaseholds and equipment                                       57,485
Deferred income taxes                                                     1,817
Goodwill                                                                163,969
Accounts payable and accrued expenses                                  (121,504)
Long-term debt                                                          (42,109)
                                                                      ---------
                                                                      $ 208,043
                                                                      =========

                                       F-15

<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




3.  Business Acquisitions (continued)

Quality Stores, Inc. (continued)

In connection with the acquisition of Quality,  the Company  initiated a plan to
relocate its corporate  headquarters to Muskegon,  Michigan.  This plan included
the closing of the CT  headquarters  in Des Moines,  Iowa and the termination of
certain CT employees.  Liabilities  of $4.0 million for estimated exit costs and
$3.6 million for the cost of severance  payments to  terminated  employees  were
recorded as of the plan's  approval  date.  Exit costs of $1.0  million and $2.9
million and severance of $2.6 million and $1.1 million were incurred and charged
against  these  liabilities  during  fiscal 2000 and 1999,  respectively.  Other
merger  integration costs of $1.9 million and $8.2 million  (primarily store and
computer  system  conversion  costs) that were  attributable  to fiscal 2000 and
1999, respectively,  were expensed as incurred. The relocation and exit plan was
completed in the first quarter of fiscal 2000.

Fisco Farm and Home

Effective  December 31, 1998, the Company acquired  substantially all assets and
assumed certain  liabilities of The H. C. Shaw Company,  doing business as Fisco
Farm and Home (Fisco), a chain of nine agricultural specialty retail stores, for
$6.0 million in cash and a $1.1 million note payable over a four-year period.

The acquisition of Fisco was accounted for as a purchase. The purchase price was
allocated to the tangible and  intangible  assets and the  liabilities  based on
fair values as follows (in thousands):

Accounts receivable and other assets                                    $ 1,319
Inventory                                                                 8,195
Leaseholds and equipment                                                    756
Goodwill                                                                  3,245
Accounts payable and accrued expenses                                    (6,411)
                                                                        -------
                                                                        $ 7,104
                                                                        =======

The results of operations of Quality and Fisco are included in the  accompanying
consolidated statements of operations from the respective dates of purchase.

                                       F-16

<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




3.  Business Acquisitions (continued)

Pro Forma Results of Operations

Pro forma results of operations  presented below (in thousands) are based on the
historical results of operations of the Company,  adjusted to give effect to the
acquisition  of  Quality  described  above and the debt  financing  arrangements
relating to the  acquisition,  as though this  acquisition  had  occurred at the
beginning  of the  periods  presented.  The  acquisition  of Fisco  has not been
included in the  three-month  period of 1999 and fiscal 1998 amounts because its
operating results would not materially affect the pro forma calculations.

                                                       Three-
                                                       month
                                        Fiscal        period of          Fiscal
                                         1999           1999              1998
                                    --------------------------------------------

Net sales                           $1,235,423       $  285,282       $1,093,896
Operating income                        46,375           15,303           49,711
Net income                               1,477            1,087            5,051

4.  Long-Term Debt

Long-term debt consists of the following obligations (in thousands):

                                                      February 3,    January 29,
                                                         2001            2000
                                                      --------------------------

10.625% Senior Notes                                   $105,000         $105,000
Term loans                                              189,368          216,900
Revolving credit obligations                            121,200           87,500
Other notes payable                                       2,806            1,281
                                                       --------         --------
                                                        418,374          410,681
Less current portion                                     21,678           22,127
                                                       --------         --------
                                                       $396,696         $388,554
                                                       ========         ========

                                       F-17

<PAGE>

                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)



4.  Long-Term Debt (continued)

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

At  February  3,  2001,  the  Company  had a bank  credit  agreement  for  which
borrowings totaled $189.4 million under two term loan facilities  (Tranche A and
B) and $121.2 million under a revolving  credit  facility.  On February 6, 2001,
contemporaneous  with an equity  infusion of $15.0 million,  an amendment to the
bank credit agreement (the Amended Credit Agreement)  extended the maturity date
of the Company's revolving credit facility to October 31, 2004 and increased its
maximum  availability  to $160.0  million,  through a  combination  of revolving
credit  borrowings  up to  $150.0  million  and  letters  of  credit up to $15.0
million.  Revolving  credit  borrowings  are also subject to limits imposed by a
requirement to maintain a certain ratio of senior debt to inventory on a monthly
basis.  The Amended Credit  Agreement  specifically  requires a reduction of the
revolving credit borrowings to $130.0 million for thirty consecutive days during
the period from July 1, 2001 to  September  30,  2001.  Thereafter,  no specific
reductions  are  required.  Finally,  the  amendment  waived  certain  financial
covenants for fiscal 2000 and adjusted such covenants for future periods.

The Tranche A term loan  ($75.1  million)  is payable in  alternating  quarterly
installments  of $2.5 million and $7.5 million  through April 30, 2004, and then
final quarterly  installments of $11.25 million and $0.9 million through October
31,  2004.  The  Tranche  B term  loan  ($114.3  million)  requires  alternating
quarterly  installments  of $0.2  million and $0.5 million  through  October 31,
2004, followed by alternating quarterly principal  installments of $28.4 million
and $5.5  million  through  April 30,  2006.  The  Company is  required  to make
mandatory  prepayments  based on the Company's excess cash flow, as defined,  or
upon the sale of certain assets or the issuance of additional equity.

Borrowings  under the Amended Credit  Agreement are secured by all assets of the
Company and bear interest at the prime or  eurodollar  rates plus a margin (8.9%
to 9.9% at February 3, 2001 and 8.6% to 10% at January 29, 2000).  The revolving
credit debt is also subject to a 0.5% commitment fee on its unused portion.

                                       F-18
<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




4.  Long-Term Debt (continued)

The Company's long-term borrowing agreements contain covenants which require the
Company to maintain  certain other  financial  ratios and also  restrict,  among
other things,  the payment of dividends,  incurrence of additional debt, capital
expenditures, mergers and acquisitions, and the disposition of assets.

Commercial  and standby  letters of credit  outstanding  at February 3, 2001 and
January 29, 2000 totaled $4.4 million and $9.9 million, respectively.

The Company is a party to interest rate cap agreements (the Cap Agreements) with
a bank to reduce the impact of changes in interest  rates on its  floating  term
loan debt. The Cap Agreements have a notional amount of $105.0 million,  and cap
the eurodollar rate on the notional amount at 7%, plus an applicable margin. The
Cap  Agreements  expire in fiscal 2001.  The Company is exposed to interest rate
risk in the event of  nonperformance  by the counterparty to the Cap Agreements;
however, the Company does not anticipate nonperformance by the bank.

5.  Leases

The Company has entered into long-term  capital lease  agreements for the use of
warehouses,  certain  retail store  facilities and computer  equipment.  The net
carrying value of the assets  recorded under capital leases was $2.8 million and
$0.8 million at February 3, 2001 and January 29, 2000, respectively.

The Company also has entered into certain noncancelable operating leases for the
use of real estate,  automobiles  and trucks,  and office  equipment.  Aggregate
rental expense for operating leases, including related party leases, amounted to
$29.4 million,  $23.6 million,  $3.9 million, and $16.2 million for fiscal 2000,
fiscal 1999, the three-month period of 1999, and fiscal 1998, respectively.


                                       F-19
<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




5.  Leases (continued)

At February 3, 2001,  future minimum rental payments due under all noncancelable
leases, including related party leases, with a term greater than one year are as
follows (in thousands):

                                                           Capital     Operating
                                                           Leases        Leases
                                                         -----------------------

Fiscal 2001                                              $    755       $ 26,277
Fiscal 2002                                                   755         21,737
Fiscal 2003                                                   555         18,989
Fiscal 2004                                                   405         14,903
Fiscal 2005                                                   379          9,435
Thereafter                                                  4,531         35,726
                                                         -----------------------
Total minimum lease payments                                7,380       $127,067
                                                                        ========
Less amount representing interest                           4,097
                                                         --------
Present value of minimum lease payments                     3,283
Less current portion                                          361
                                                         --------
                                                         $  2,922
                                                         ========

In January 2001, the Company completed  sale-leaseback  transactions involving a
store in Battle Creek, Michigan and the land, buildings,  fixtures and equipment
associated with a distribution  center in Fostoria,  Ohio. The transaction had a
total  aggregate cash sale price of $16.1 million.  Concurrent with the Fostoria
sale,  the Company  leased the land and buildings  back for a period of fourteen
years at an annual rental of $1.5 million,  and the fixtures and equipment for a
period of seven years at an annual rental of $0.7 million.  The Company also has
an option to  repurchase  the fixtures and equipment for their fair value at the
expiration  of the lease.  As a result of the fair value  purchase  option,  the
fixtures and equipment lease is recorded as a financing  transaction rather than
a sale, and the related  accounts  continue to be recognized in the accompanying
consolidated  financial statements.  The land and building lease is renewable at
the Company's  option for six  successive  five-year  periods.  The Battle Creek
lease has a  nineteen-year  term and is renewable  thereafter  at the  Company's
option for three successive five-year periods.  The sale-leaseback  transactions
involving the Battle Creek store and the land and buildings in Fostoria resulted
in a gain of $1.7  million  that is being  deferred  over the lease terms and is
included in other noncurrent liabilities in the fiscal 2000 consolidated balance
sheet.

                                       F-20

<PAGE>

                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




5.  Leases (continued)

In February 2000, the Company sold the land, buildings, and certain fixtures and
equipment  for  three  stores  to a  company  owned  and  managed  by two of the
Company's former  executive  officers that terminated  employment  during fiscal
2000 and  continue  as  stockholders  of QSI  Holdings.  The sales price of $7.0
million was equal to the Company's net carrying value of the assets. The Company
then entered into a twelve-year  lease  agreement with this same company for the
use of these stores.  Aggregate  rental  expense under these leases  amounted to
$0.8 million in fiscal 2000.  The total minimum  annual lease payments under the
lease  agreements  range  from $0.8  million in fiscal  2001 to $1.0  million in
fiscal 2011.

In addition to the above related party  leases,  the Company  leases three other
stores  and its  corporate  headquarters  from  certain  former  executives  and
stockholders of QSI Holdings through fiscal 2004. Aggregate rental expense under
these leases amounted to $0.9 million and $0.7 million in fiscal 2000 and fiscal
1999, respectively.

6.  Stock Options

QSI  Holdings  has stock option  arrangements  with  various  members of Company
management  that  are  accounted  for  under  APB  Opinion  No.  25 and  related
interpretations.  Compensation  expense recognized in connection with the option
arrangements was not significant.

Under SFAS No. 123, certain pro forma information is required as if QSI Holdings
had accounted for stock options under the alternative  fair value method and the
resulting  compensation  expense was recorded by the Company.  The pro forma net
loss of the Company for fiscal 2000 would have been $50.8 million, and pro forma
net income for fiscal 1999, the three-month period of 1999 and fiscal 1998 would
have been $2.9 million, $1.4 million, and $9.7 million, respectively,  under the
alternative fair value method.


                                       F-21
<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




7.  Income Taxes

The Company's results of operations are included in the consolidated  income tax
return of its parent.  Income tax expense (credit)  included in the consolidated
statements of operations has been  calculated as if the Company filed a separate
return.

The components of income tax expense (credit) are as follows (in thousands):

                           Fiscal        Fiscal      Three-month        Fiscal
                            2000          1999      period of 1999       1998
                        --------------------------------------------------------
Current:
   Federal                $   (994)     $  1,082       $    234       $     --
   State                        --           755             --            200
                          ----------------------------------------------------
                              (994)        1,837            234            200
Deferred                   (20,848)        4,397          1,234          8,200
                          ----------------------------------------------------
                          $(21,842)     $  6,234       $  1,468       $  8,400
                          ====================================================

A  reconciliation  of the  Company's  income tax expense  (credit) to the amount
computed by applying  the  statutory  federal  income tax rate to income  (loss)
before income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
                                              Fiscal      Fiscal     Three-month      Fiscal
                                               2000        1999     period of 1999     1998
                                           ---------------------------------------------------

<S>                                        <C>         <C>           <C>           <C>
Income tax at federal statutory rate        $(24,656)   $  3,195      $  1,004      $  6,248
State income taxes, net of federal income
   tax effect                                     --         578            --           132
Nondeductible goodwill amortization            2,134       1,742           192           766
Nondeductible losses                             441          --            --            --
Other                                            239         719           272         1,254
                                            ------------------------------------------------
                                            $(21,842)   $  6,234      $  1,468      $  8,400
                                            ================================================

</TABLE>

                                       F-22
<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




7.  Income Taxes (continued)

Significant  components of the Company's  deferred  income tax  liabilities  and
assets are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                 February 3,     January 29,
                                                                     2001           2000
                                                               ------------------------------

<S>                                                             <C>              <C>
Deferred income tax liabilities:
   Tax over book depreciation                                    $ (3,088)        $ (5,732)
   Cost basis differences in inventory due to LIFO and uniform
     capitalization                                               (14,568)         (14,123)
   Other                                                           (1,371)          (1,271)
                                                                 -------------------------
Total deferred income tax liabilities                             (19,027)         (21,126)

Deferred income tax assets:
   Net operating loss carryforwards                                15,777              372
   Alternative minimum tax credit carryforward                        404              750
   Accounts receivable and inventory valuation allowances           3,709            2,667
   Compensation and employee benefit accruals                       4,895            2,259
   Accrued store closing costs                                      5,499            2,551
   Insurance and other reserves                                     2,059            4,439
   Other                                                              553            1,109
                                                                 -------------------------
Total deferred income tax assets                                   32,896           14,147
                                                                 -------------------------
Net deferred income tax assets (liabilities)                     $ 13,869         $ (6,979)
                                                                 =========================

</TABLE>

The Company has net  operating  loss  carryforwards  of $42.6  million that will
expire   principally  in  fiscal  2021.  The  alternative   minimum  tax  credit
carryforward is available indefinitely to offset future income taxes payable.

8.  Retirement Plan

The Company has a defined  contribution  plan  covering all  employees  who meet
certain eligibility  requirements.  The plan provides for discretionary employer
contributions  and  allows  voluntary  participant  contributions.  The  Company
recognized  expense in connection with this plan of $1.5 million,  $1.0 million,
and $0.2 million for fiscal 2000,  fiscal 1999,  and the  three-month  period of
1999, respectively. No such expense was recognized in fiscal 1998.


                                       F-23
<PAGE>


                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




9.  Transactions with Related Parties

The  following  related  party  transactions  are in  addition  to  the  leasing
transactions described in Note 5.

For fiscal 2000,  fiscal 1999, the  three-month  period of 1999 and fiscal 1998,
Childs was paid a management and consulting  services fee of $0.2 million,  $0.2
million,  $0.1 million,  and $0.2  million,  respectively.  In addition,  Fenway
Partners, a stockholder of QSI Holdings,  was paid a quarterly management fee of
$0.03 million during all fiscal periods presented.  The Amended Credit Agreement
prohibits such management fees beginning in fiscal 2001.

The Company has issued  non-recourse  promissory notes payable in the amounts of
$1.3  million  and $0.7  million to  affiliates  of Childs and Fenway  Partners,
respectively.  The notes bear interest monthly at the eurodollar rate plus 1.75%
and have no scheduled maturity dates.

The Company  purchases  inventory  from two  suppliers  that are  controlled  by
stockholders of QSI Holdings.  Purchases from these suppliers  aggregated  $13.3
million,  $21.6 million,  $1.4 million, and $5.0 million for fiscal 2000, fiscal
1999,  the  three-month  period of 1999 and fiscal 1998,  respectively.  Amounts
payable to these  suppliers  were $4.1  million and $1.2  million at February 3,
2001 and January 29, 2000, respectively.


                                       F-24
<PAGE>



                                   Quality Stores, Inc.

                  Notes to Consolidated Financial Statements (continued)




10.  Guarantee of Senior Notes

The Senior Notes described in Note 4 are guaranteed jointly and severally, fully
and  unconditionally  by  each  of  the  Company's  wholly  owned  subsidiaries.
Summarized   financial   information  for  the  Company  and  its  wholly  owned
subsidiaries that guarantee the Senior Notes is as follows (in thousands):
<TABLE>
<CAPTION>

                                                                 Combined
                                                                Joint and
                                                  Quality        Several
                                                Stores, Inc.    Guarantors     Consolidated
                                                -------------------------------------------
<S>                                            <C>             <C>           <C>

Fiscal 2000
Current assets:
   Trade and other receivables, net             $       819    $     9,136    $     9,955
   Inventory                                        113,742        211,374        325,116
   Other current assets                               2,476         11,460         13,936
                                                -----------------------------------------
Total current assets                                117,037        231,970        349,007

Property, improvements, and equipment, net           34,827         99,429        134,256
Other noncurrent assets, principally goodwill
   and other intangibles                            250,260         60,216        310,476
                                                -----------------------------------------
                                                $   402,124    $   391,615    $   793,739
                                                =========================================

Current liabilities, principally accounts
   payable and accrued expenses                 $    32,311    $   164,554    $   196,865
Noncurrent liabilities, principally
   long-term debt                                   219,632        185,791        405,423
Stockholder's equity                                150,181         41,270        191,451
                                                -----------------------------------------
                                                $   402,124    $   391,615    $   793,739
                                                =========================================

Net sales                                       $   321,817    $   804,222    $ 1,126,039
Cost of sales                                       225,358        601,181        826,539
                                                -----------------------------------------
Gross profit                                         96,459        203,041        299,500

Selling, general, administrative and other
   expenses                                         110,376        213,696        324,072
                                                -----------------------------------------
Operating loss                                      (13,917)       (10,655)       (24,572)

Interest expense                                     45,499          2,447         47,946
                                                -----------------------------------------
Loss before income taxes                            (59,416)       (13,102)       (72,518)
Income taxes (credit)                               (17,285)        (4,557)       (21,842)
                                                -----------------------------------------
Net (loss)                                      $   (42,131)   $    (8,545)   $   (50,676)
                                                =========================================

</TABLE>

                                            F-25
<PAGE>



                                   Quality Stores, Inc.

                  Notes to Consolidated Financial Statements (continued)


10.  Guarantee of Senior Notes (continued)
<TABLE>
<CAPTION>

                                                                 Combined
                                                                Joint and
                                                  Quality        Several
                                                Stores, Inc.    Guarantors     Consolidated
                                                -------------------------------------------
<S>                                            <C>             <C>           <C>

Fiscal 1999
Current assets:
   Trade and other receivables, net             $    1,088      $    6,654     $    7,742
   Inventory                                       131,612         233,771        365,383
   Other current assets                              6,590          14,674         21,264
                                                -----------------------------------------
Total current assets                               139,290         255,099        394,389

Property, improvements, and equipment, net          28,479          94,988        123,467
Other noncurrent assets, principally goodwill
   and other intangibles                           263,051          41,556        304,607
                                                -----------------------------------------
                                                $  430,820      $  391,643     $  822,463
                                                =========================================

Current liabilities, principally accounts
   payable and accrued expenses                 $   35,929      $  166,556     $  202,485
Noncurrent liabilities, principally
   long-term debt                                  220,079         175,272        395,351
Stockholder's equity                               174,812          49,815        224,627
                                                -----------------------------------------
                                                $  430,820      $  391,643     $  822,463
                                                =========================================

Net sales                                       $  397,603      $  694,418     $1,092,021
Cost of sales                                      282,876         491,579        774,455
                                                -----------------------------------------
Gross profit                                       114,727         202,839        317,566

Selling, general, administrative and other
   expenses                                         98,133         175,399        273,532
                                                -----------------------------------------
Operating income                                    16,594          27,440         44,034

Interest expense                                    33,554           1,083         34,637
                                                -----------------------------------------
Income (loss) before income taxes                  (16,960)         26,357          9,397
Income taxes                                       (11,162)         17,396          6,234
                                                -----------------------------------------
Net income (loss)                               $   (5,798)     $    8,961     $    3,163
                                                =========================================


</TABLE>
                                            F-26

<PAGE>

                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




10. Guarantee of Senior Notes (continued)

<TABLE>
<CAPTION>

                                                                 Combined
                                                                Joint and
                                                  Quality        Several
                                                Stores, Inc.    Guarantors     Consolidated
                                                -------------------------------------------
<S>                                              <C>            <C>            <C>

Three-month period of 1999
Net sales                                          $ 82,233      $ 63,914        $146,147
Cost of sales                                        58,052        45,469         103,521
                                                   --------------------------------------
Gross profit                                         24,181        18,445          42,626

Selling, general, administrative and other
   expenses
                                                     20,753        13,961          34,714
                                                   --------------------------------------
Operating income                                      3,428         4,484           7,912

Interest expense                                      2,792         2,167           4,959
                                                   --------------------------------------
Income before income taxes                              636         2,317           2,953
Income taxes                                            496           972           1,468
                                                   --------------------------------------
Net income                                         $    140      $  1,345        $  1,485
                                                   ======================================



Fiscal 1998
Net sales                                          $329,853      $257,342        $587,195
Cost of sales                                       231,261       178,918         410,179
                                                   --------------------------------------
Gross profit                                         98,592        78,424         177,016

Selling, general, administrative and other
  expenses
                                                     85,024        53,151         138,175
                                                   --------------------------------------
Operating income                                     13,568        25,273          38,841

Interest expense                                     11,299         9,167          20,466
                                                   --------------------------------------
Income before income taxes                            2,269        16,106          18,375
Income taxes                                          1,912         6,488           8,400
                                                   --------------------------------------
Net income                                         $    357      $  9,618        $  9,975
                                                   ======================================

</TABLE>

                                            F-27


<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




11.  Quarterly Results of Operations (Unaudited)

The following is a tabulation of the Company's  unaudited  quarterly  results of
operations for fiscal 2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                    First        Second      Third        Fourth
                                                   Quarter      Quarter     Quarter      Quarter
                                                --------------------------------------------------
<S>                                              <C>          <C>         <C>          <C>
Fiscal 2000
Net sales                                         $ 274,256    $ 331,690   $ 252,588    $ 267,505
Gross profit                                         78,078       99,694      74,587       47,141
Nonrecurring charges                                  1,822           28       7,900       11,363
Operating income (loss)                               3,340       26,512        (847)     (53,577)
Net income (loss)                                    (5,011)       7,943      (8,539)     (45,069)
Ratio (deficiency) of earnings to fixed charges      (7,382)        2.1x     (13,727)     (66,413)

Fiscal 1999
Net sales                                         $ 159,136    $ 330,830   $ 287,085    $ 314,970
Gross profit                                         47,227       96,153      84,336       89,850
Nonrecurring charges                                  7,639        4,357       3,824
Operating income                                      7,897       17,329       6,982       11,826
Net income (loss)                                       997        4,376      (2,400)         190
Ratio (deficiency) of earnings to fixed charges        1.4x         1.8x      (2,410)        1.1x
</TABLE>

Adjustments in the fourth quarter  related  primarily to  self-insurance  costs,
advertising  expenses and vendor rebates  increased the net loss by $6.9 million
in fiscal 2000. Fourth quarter adjustments in fiscal 1999 were not significant.

12.  Litigation and Contingencies

The Company is involved in various  environmental claims and other legal actions
arising in the normal course of business. The environmental claims include sites
where the Company has been notified that it is a potentially  responsible  party
with respect to environmental remediation. These remediation claims have not yet
advanced to a stage where the  Company's  liability  is fixed and are subject to
ongoing  environmental impact studies,  assessment of remediation  alternatives,
allocation of cost between  responsible  parties and  concurrence  by regulatory
authorities. However, after taking into consideration legal counsel's evaluation
of all actions and claims  against the Company,  management  is currently of the
opinion that their outcome will not have a  significant  effect on the Company's
consolidated financial position or future results of operations.

                                            F-28
<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




13.  Operating Considerations and Management Plans

The accompanying consolidated financial statements as of and for the fiscal year
ended  February 3, 2001 have been  prepared  on the basis that the Company  will
continue  normal  business  operations  into  the  foreseeable   future.   While
previously  profitable,  the Company incurred  significant  nonrecurring charges
that  contributed to an operating loss for fiscal 2000 and experienced cash flow
issues that related  primarily to  difficulties  encountered  as a result of the
merger of CT and Quality.  These difficulties  resulted in the application of an
inappropriate  business model for a highly  leveraged  company,  a $60.0 million
"overbuy" of spring  merchandise in early fiscal 2000, and cash constraints that
caused the  Company to extend  payment  periods to  vendors.  By the time excess
spring inventory was re-balanced among stores,  the selling season was over, and
the Company was forced to maintain this  merchandise  until the spring of fiscal
2001.  In addition,  an  ill-advised  strategy of  negotiating  unusually  short
payment terms with vendors for higher discounts, combined with the negative cash
flow implications of the overbuy of spring inventory,  did not allow the Company
to earn the intended  discounts.  Accordingly,  the Company became past due with
vendors  and  experienced  reduced  cash  flow as a  result  of not  effectively
managing  inventory  levels during the critical  spring  selling  season.  These
conditions  resulted in limited remaining borrowing capacity under the Company's
revolving  credit  facility to fund inventory  purchases for the fall and winter
2000 seasons,  credit issues with the its vendor community,  financial  covenant
violations under its Amended Credit Agreement and poor operating results.

The  Company  has  been  proactively   addressing  its  current   liquidity  and
operational  issues.  In November 2000,  the Board of Directors  installed a new
executive  management team that has quickly taken steps to correct the Company's
business  model,  improve  vendor  relations  and  instill  a  performance-based
culture.  Also, as more fully discussed in Note 4 to the consolidated  financial
statements,  the Company  received a capital  infusion of $15.0 million from the
shareholders  of QSI Holdings in February 2001 and finalized an amendment to its
bank credit  agreement  that provided  additional  borrowing  capacity under its
revolving credit  facility.  This amendment also eliminated  financial  covenant
requirements for fiscal 2000 and amended such covenants for future periods.

                                       F-29

<PAGE>



                              Quality Stores, Inc.

             Notes to Consolidated Financial Statements (continued)




13.  Operating Considerations and Management Plans (continued)

The Company is aggressively  pursuing several operating  initiatives to generate
cash,  reduce  costs and  improve  profitability.  Management  closed  seventeen
under-performing  stores in the last half of fiscal 2000 and has  announced  the
closing of seven distribution  centers by the end of the first quarter of fiscal
2001 to reduce occupancy and other related costs.  Inventory associated with the
closed  stores and other  slow-moving  inventory  totaling  approximately  $47.0
million was liquidated to reduce inventory levels and generate cash. Advertising
expenditures  have been  reduced by placing  greater  emphasis on the  Company's
customer loyalty program and eliminating the frequency of advertising circulars.
Management  anticipates  that these  reductions will not only lower  advertising
costs, but also improve margins as a result of reduced promotional  pricing. The
Company has also  implemented  improved expense control  procedures,  eliminated
approximately 17,000 low margin and slow-moving  stock-keeping units and reduced
executive  and  administrative  employee  headcount.  Additionally,  the Company
finalized  sale-leaseback  transactions  related to a store in Michigan  and its
full-line distribution facility in Fostoria, Ohio that resulted in cash proceeds
of $16.1 million.

Management  believes that the additional  debt financing,  capital  infusion and
operating  initiatives  discussed in the preceding paragraphs will be sufficient
to meet the Company's working capital needs for the foreseeable future,  enhance
its credit  position with vendors,  improve vendor  business  relationships  and
satisfy its debt service requirements.


                                      F-30

<PAGE>


                                   SCHEDULE II

                              QUALITY STORES, INC.

                        Valuation and Qualifying Accounts


                                                                 Allowance For
                                                                  Excess and
                                               Allowance For       Obsolete
                                              Trade Receivables   Inventory
                                             ------------------ --------------

Balance at November 1, 1997                   $   (386,000)      $ (7,923,000)
  Debited to expense                              (174,279)                --
  Write-off against reserve                        174,279          3,028,000
                                              ----------------- -------------

Balance at October 31, 1998                       (386,000)        (4,895,000)
  Debited to expense                               (24,365)        (2,931,000)
  Write-off against reserve                         24,365          3,755,596
                                              ----------------- -------------

Balance at January 30, 1999                       (386,000)        (4,070,404)
  Debited to expense                              (585,954)        (2,830,778)
  Write-off against reserve                        272,407          4,270,404
  Acquired from Quality Stores, Inc.              (575,453)        (2,100,000)
                                              ----------------- -------------

Balance at January 29, 2001                     (1,275,000)        (4,730,778)
  Debited to expense                              (894,017)       (11,300,000)
  Write-off against reserve                        731,017          7,171,170
                                              ----------------- -------------

Balance at February 3, 2001                   $ (1,438,000)      $ (8,859,608)
                                              ================= =============


                                      F-31
<PAGE>

                                   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.

                                 QUALITY STORES, INC.


DATED:  May 4, 2001              By:   /s/ Jerry D. Horn
                                       Jerry D. Horn, Chairman, President, and
                                       Chief Executive Officer, Director

         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 and on the date indicated.

DATED:  May 4, 2001

/s/ Jerry D. Horn              Chairman of the Board, President, Chief Executive
Jerry D. Horn                  Officer, Director (Principal Executive Officer)

/s/ Thomas J. Reinebach        Senior Vice-President of Finance, Chief Financial
Thomas J. Reinebach            Officer, Secretary, Director (Principal Financial
                               and Accounting Officer)

/s/ William A. Waack           Senior Vice-President, Chief Operating Officer,
William A. Waack               Director

/s/ Steven G. Segal            Vice-President, Director
Steven G. Segal

/s/ Adam L. Suttin             Vice-President, Director
Adam L. Suttin

/s/ David C. Bliss             Director
David C. Bliss

/s/ John W. Childs             Director
John W. Childs

/s/ Richard C. Dresdale        Director
Richard C. Dresdale

/s/ Habib Y. Gorgi             Director
Habib Y. Gorgi

________________               Director
John L. Hilt

________________               Director
Peter Lamm

/s/ William E. Watts           Director
William E. Watts