BON TON STORES INC, 424B4, 1998-04-29

BON TON STORES INC
424B4, 1998-04-29
DEPARTMENT STORES

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<PAGE>

Filed Pursuant to Rule 424(b)(4)
Under the Securities Act of 1933, As Amended
Commission File No. 333-48811
PROSPECTUS
APRIL 28, 1998

4,000,000 SHARES
[LOGO OF THE BON-TON YOUR FASHION STORE APPEARS HERE]

COMMON STOCK

Of the 4,000,000 shares of Common Stock, $0.01 par value per share ("Common
Stock"), offered hereby, 2,500,000 shares are being sold by The Bon-Ton
Stores, Inc., and 1,500,000 shares are being offered by Selling Shareholders.
See "Principal and Selling Shareholders." The Company will not receive any of
the proceeds from the sale of the shares being sold by the Selling
Shareholders.

The Company has two classes of authorized common stock, Common Stock, which
is offered hereby and is entitled to one vote per share, and Class A Common
Stock, $0.01 par value per share ("Class A Common Stock" and, together with
the Common Stock, the "Common Shares"), which is entitled to ten votes per
share. See "Description of Capital Stock." Upon completion of the offering, M.
Thomas Grumbacher, Chairman of the Board of the Company, and certain entities
affiliated with Mr. Grumbacher collectively will own approximately 34.4% of
the outstanding Common Shares and will control approximately 77.1% of the
combined voting power of the outstanding Common Shares. Consequently, such
shareholders will control the ability to determine the outcome of shareholder
votes, including votes with respect to corporate transactions requiring the
approval of shareholders and the election of the Company's Board of Directors.
See "Principal and Selling Shareholders."

The Common Stock is listed on the Nasdaq National Market under the symbol
"BONT." On April 27, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $16 1/4 per share. See "Price Range of Common
Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN RISKS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCU-
RACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO THE DISCOUNTS AND TO THE TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $15.00 $0.825 $14.175 $14.175
Total(3).................... $60,000,000 $3,300,000 $35,437,500 $21,262,500
</TABLE>
- -------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses estimated at $500,000, which will be paid by the
Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 600,000 additional shares at the Price to the Public
less Underwriting Discounts and Commissions, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to the Public, Underwriting Discounts and Commissions, and Proceeds to the
Company will be $69,000,000, $3,795,000, and $43,942,500, respectively.
See "Underwriting."

The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or
in part. It is expected that delivery of share certificates will be made in
New York, New York, on or about May 1, 1998.

DONALDSON, LUFKIN & JENRETTE NATIONSBANC MONTGOMERY
SECURITIES CORPORATION SECURITIES LLC
<PAGE>

[MAP DEPICTING LOCATIONS OF THE BON-TON STORES. PICTURE OF ENTRANCE TO
COMPANY STORE; SEVERAL MODELS WEARING APPAREL OFFERED BY THE COMPANY; LOGOS OF
SEVERAL VENDORS TO THE COMPANY INCLUDING COLE . HAAN, LAUREN, POLO JEANS,
TOMMY HILFIGER AND NAUTICA; TEXT READING "THE BON-TON'S BUSINESS STRATEGY IS
TO POSITION ITSELF AS THE PREMIER FASHION RETAILER OF BETTER GOODS IN THE
MARKETS IT SERVES."]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK PRIOR TO THE
PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON
STOCK, THE PURCHASE OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO
COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH
THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE>

PHOTOS OF THE FOLLOWING LOGOS: The Bon Ton's business strategy
-------------
COLE-HAAN RALPH LAUREN is to position itself as the premier
fashion retailer of better goods
POLO BOYS RL POLO JEANS in the markets it serves.

<PAGE>

PHOTOS OF THE FOLLOWING LOGOS:

TOMMY HILFIGER NAUTICA

100 years
THE BON-TON
YOUR FASHION STORE SINCE 1898

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus does not give effect to the exercise of the
Underwriters' over-allotment option. Unless the context otherwise requires or
indicates, all references to "The Bon-Ton" or the "Company" in this Prospectus
refer to The Bon-Ton Stores, Inc. and its direct and indirect wholly-owned
subsidiaries. As used in this Prospectus, references to a "fiscal year" refer
to the 52- or 53-week period ending on the Saturday nearer to January 31 of the
following calendar year (e.g., a reference to "fiscal 1996" is a reference to
the fiscal year ended February 1, 1997). For a discussion of certain factors
which should be considered by prospective purchasers of the Common Stock, $0.01
par value per share ("Common Stock"), offered hereby, see "Risk Factors."

THE COMPANY

The Bon-Ton is a leading operator of quality fashion department stores
offering moderate and better apparel, home furnishings, cosmetics, accessories
and shoes in secondary markets. The Company's strategy focuses on being the
premier fashion retailer in smaller markets that demand, but often have limited
access to, better branded merchandise. In many of its markets, The Bon-Ton is
the primary destination for branded fashion merchandise from top designers such
as Calvin Klein, Liz Claiborne, Nautica, Ralph Lauren and Tommy Hilfiger. The
Bon-Ton operates 64 stores, with 35 stores in Pennsylvania, 24 stores in New
York, three stores in Maryland, and one store in each of West Virginia and New
Jersey.

The Bon-Ton provides an in-depth selection of high-quality, well-known
branded merchandise at competitive prices in upscale shopping environments.
None of The Bon-Ton's stores is located in a major metropolitan market, and
most are located in smaller secondary markets. The Bon-Ton's strategic focus is
on smaller secondary markets that are served primarily by moderate-price
competitors offering a more limited selection of better branded fashion
merchandise.

Since 1995, the Company has strengthened the quality and depth of management
by hiring a new chief executive officer and seven additional senior executives,
all of whom have extensive experience with major department stores. This
management team has pursued a series of key initiatives to generate growth.
These initiatives include:

-- shifting the merchandise mix to include a higher proportion of better
branded apparel;

-- offering an extended choice of merchandise in sizes, colors and styles;

-- strengthening relationships with key vendors;

-- intensifying the selection of private brands;

-- expanding and upgrading stores in selected smaller markets; and

-- enhancing customer service through frequent purchaser clubs and
promoting The Bon-Ton proprietary credit card.

As a result of these initiatives, The Bon-Ton has achieved comparable storeks
among the highest in the department store industry in each of the last six
fiscal quarters as shown in the following table:

<TABLE>
<CAPTION>
FISCAL 1996 COMPARABLE STORE SALES GROWTH
<S> <C>
Third Quarter 3.2%
Fourth Quarter 9.2%
FISCAL 1997
First Quarter 5.1%
Second Quarter 6.9%
Third Quarter 7.1%
Fourth Quarter 6.5%
</TABLE>

3
<PAGE>

BUSINESS STRATEGY

The Company's business strategy is to position itself as the premier fashion
retailer in its targeted smaller markets. Key elements of the strategy are
summarized below.

PURSUE NICHE AS PREMIER FASHION RETAILER

The Bon-Ton carves out and maintains a niche in smaller secondary markets by
offering a higher proportion of better to moderate merchandise in an upscale
environment with superior customer service. Moderate-price competitors in these
markets generally offer a more limited selection of quality brands or do not
carry the same better brands as The Bon-Ton.

Realign merchandise mix and increase selection. The Bon-Ton is shifting its
apparel merchandise mix to incorporate an improved balance of moderate and
better merchandise. Merchandise categories in which sales of better goods have
increased significantly from fiscal 1995 to fiscal 1997 include misses
sportswear (increasing from 31% of category sales to 36% of category sales),
petites (21% to 30%) and men's sportswear (18% to 36%). The Bon-Ton also is
categories. By offering better brands in addition to moderately priced goods,
The Bon-Ton not only attracts new customers who shop for better brands but also
$30,000 - $75,000) with a broader selection of merchandise.

Enhance relationships with higher-quality vendors. The Company has reduced
its vendor base from approximately 2,400 in 1994 to 1,350 in 1997, resulting in
improved relations with and increased support from its vendors in the form of
enhanced purchasing opportunities and greater advertising subsidies. In
addition, The Bon-Ton intends to increase significantly the number of vendor
shops featuring merchandise from key vendors such as Calvin Klein, Nautica,
Ralph Lauren, Tommy Hilfiger and Tommy Hilfiger Jeans. In vendor shops,
merchandise is grouped and positioned in preferred floor locations and enhanced
with distinctive, vendor-specific fixturing, signage and displays.

Differentiate with private brands. The Bon-Ton positions its private brand
merchandise as quality fashion apparel at competitive prices. These private
brands, which include Andrea Viccaro, Jenny Buchanan, Susquehanna Trail
Outfitters and Susquehanna Blues, differentiate The Bon-Ton from its
competitors. In 1996, the Company expanded its private brand program with
better sportswear, utilizing manufacturers of well-known better branded
merchandise. Private brand merchandise represented approximately 8% of apparel
sales in fiscal 1995 and 15% of apparel sales in fiscal 1997.

EMPHASIZE CUSTOMER SERVICE

The Company places great emphasis on providing a high level of customer
service to distinguish its stores from the competition and to create customer
loyalty. The Company accomplishes this through its well-trained and experienced
sales and support associates and by offering services such as free gift wrap,
The Bon-Ton proprietary credit card, frequent-purchaser clubs and in-store
alterations.

FOCUS ON GROWTH IN EXISTING STORES IN SMALLER SECONDARY MARKETS

The Company believes growth opportunities are available through positioning
better branded merchandise in additional existing Bon-Ton stores in smaller
secondary markets. The Company will continue to focus on improving its
merchandise mix in these stores and upgrading these stores by refixturing and
remodeling in order to increase store productivity and enhance The Bon-Ton's
image as an upscale retail destination. In 1997, the Company increased the
square footage at three locations, increasing the size of existing merchandise
categories and adding new merchandise categories. In addition, the Company has
identified 25 of its 64 stores for potential expansion. Over the next three to
five years, the Company anticipates expanding the square footage of its more
productive stores by adding up to 400,000 square feet.

4
<PAGE>

GROW BY OPENING NEW STORES AND THROUGH ACQUISITIONS

The Company opened a new 60,000 square foot store in the Jamestown, New York
market in March 1998. The Company has preliminarily identified approximately 50
secondary markets which meet The Bon-Ton's demographic and competitive criteria
for opening new stores. The Company anticipates opening several new stores in
the next three to five years, adding up to 600,000 square feet. The Company
also intends to consider opportunities for growth through acquisitions of
department store companies or their real estate assets if and when such
opportunities arise. These acquisitions may or may not be in lieu of new store
openings.

BACKGROUND AND HISTORY

In 1994, the Company doubled its number of stores with three acquisitions
involving 35 stores, including 19 stores from Hess's Department Stores, Inc.
("Hess"), the ten stores of Adam, Meldrum & Anderson Co., Inc. ("AM&A") based
in Buffalo, New York and the six stores of C.E. Chappell & Sons, Inc.
("Chappell's") based in Syracuse, New York. In 1995 and 1996, the Company
entered the Rochester and Elmira, New York markets with four acquired stores
and the opening of one additional store. In addition, the Company closed ten
stores between March 1995 and January 1997 to eliminate mall or market
duplication resulting from such acquisitions or to close underperforming
stores. The Company closed its Rome, Georgia store in April 1998. All of the
Company's stores operate as "The Bon-Ton."

The Company was incorporated in Pennsylvania in 1996 and is the successor to
S. Grumbacher & Son, a family business which was founded in 1898. The Company's
executive offices are located at 2801 East Market Street, York, Pennsylvania
17402 and its telephone number is (717) 757-7660.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered:
By the Company......................... 2,500,000 shares(1)
By the Selling Shareholders............ 1,500,000 shares
Total.................................. 4,000,000 shares
Common Stock to be outstanding after this 11,402,925 shares(1)(2)
offering................................
Use of proceeds by the Company........... For expansion and upgrading of
existing stores, opening new stores,
working capital and for general
corporate purposes. Pending such
uses, the proceeds will be used to
reduce indebtedness under the Credit
Facility (as defined herein). The
Company will receive no proceeds
from the sale of shares of Common
Stock offered hereby by certain
shareholders of the Company (the
"Selling Shareholders"). See "Use of
Proceeds."
Nasdaq National Market symbol............ BONT
</TABLE>
- --------------------
(1) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
(2) Excludes (i) an aggregate of 1,528,811 shares of Common Stock reserved for
issuance under the Company's equity incentive plans, of which 1,128,352 are
issuable upon the exercise of stock options outstanding as of April 24,
1998 with a weighted average exercise price of $8.37; (ii) 2,989,853 shares
of the Company's Class A Common Stock, $0.01 par value per share ("Class A
Common Stock" and, with the Common Stock, the "Common Shares") each of
which is convertible into one share of Common Stock; and (iii) 250,000
shares of Common Stock issuable upon the exercise of stock options and
250,000 restricted shares of Common Stock to be issued to Heywood Wilansky,
the Company's President and Chief Executive Officer, subject to approval by
the Company's shareholders.

5
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------
STATEMENT OF OPERATIONS
DATA: 1993 1994 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales(1)........... $336,733 $494,908 $607,357 $626,482 $656,399
Gross profit(2)........ 130,191 194,994 219,410 230,919 242,553
Income (loss) from
operations(3)(4)...... 17,548 26,668 (6,247) 26,447 29,170
Interest expense, net.. 4,042 5,475 8,722 14,687 13,202
Income (loss) before
taxes................. 13,506 21,193 (14,969) 11,760 15,968
Income (loss) before
accounting
change/extraordinary
item.................. 8,779 13,630 (9,203) 6,811 9,698
Net income
(loss)(5)(6).......... $ 10,279 $ 13,630 $ (9,203) $ 6,811 $ 9,252
Per share amounts--
Basic:
Net income (loss)
before accounting
change/extraordinary
item................. $ 0.80 $ 1.24 $ (0.83) $ 0.62 $ 0.87
Effect of accounting
change/extraordinary
item................. 0.14 -- -- -- (0.04)
-------- -------- -------- -------- --------
Net income (loss)..... $ 0.94 $ 1.24 $ (0.83) $ 0.62 $ 0.83
Basic shares
outstanding........... 10,935 10,955 11,044 11,064 11,122
Diluted:
Net income (loss)
before accounting
change/extraordinary
item................. $ 0.79 $ 1.23 $ (0.83) $ 0.61 $ 0.85
Effect of accounting
change/extraordinary
item................. 0.14 -- -- -- (0.04)
-------- -------- -------- -------- --------
Net income (loss)..... $ 0.93 $ 1.23 $ (0.83) $ 0.61 $ 0.81
Diluted shares
outstanding........... 11,051 11,041 11,044 11,106 11,377
<CAPTION>
JANUARY 31, 1998
------------------------
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(7)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital........ $123,078 $123,078
Total assets........... 352,686 352,686
Long-term debt,
including capital
leases................ 123,384 88,446
Shareholders' equity... 124,394 159,332
<CAPTION>
FISCAL YEAR
------------------------------------------------------
SELECTED OPERATING DATA: 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Comparable stores sales
growth(8)............. (0.6)% 6.1% 0.2% 4.2% 6.5%
Comparable stores
data(9):
Sales per selling
square foot........... $ 157 $ 163 $ 160 $ 138 $ 143
Selling square footage
(in thousands)........ 1,850 2,185 2,278 4,153 4,511
Capital expenditures
(in thousands)........ $ 8,935 $ 18,532 $ 43,587 $ 9,730 $ 10,978
Number of stores:
Beginning of year...... 36 35 69 68 64
Additions.............. 1 35 4 1 --
Closings............... (2) (1) (5) (5) --
-------- -------- -------- -------- --------
End of year............ 35 69 68 64 64
</TABLE>
- --------------------
(1) Fiscal 1995 includes the 53 weeks ended February 3, 1996.
(2) Fiscal 1995 includes a $3.5 million charge related to inventory liquidation
associated with the elimination of certain vendors and other merchandise
changes.
(3) Reflects expenses related to the hiring of the Chief Executive Officer and
the gain recognized on the pension termination in fiscal years 1995 and
1996, respectively.
(4) Fiscal 1995 reflects a $5.7 million restructuring charge for a store
closing and work force reduction reserve.
(5) Fiscal 1997 reflects a loss of $446,000, net of tax, resulting from the
early extinguishment of the Company's term loan and revolving credit
facility.
(6) Fiscal 1993 reflects an extraordinary gain of $1.5 million, net of tax,
resulting from a change in accounting for income taxes.
(7) Adjusted to reflect the sale of the Common Stock offered by the Company and
the use of the estimated net proceeds therefrom. See "Use of Proceeds."
(8) Fiscal 1996 sales are compared to the 52 weeks ended January 27, 1996.
Comparable store sales growth is calculated based upon the comparison of
sales for stores open for the entire current and prior fiscal years.
(9) Selling square footage and sales per square foot are based upon the square
footage of selling space of stores open for the entire current and prior
fiscal years.

6
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Common Stock offered by this Prospectus. Certain statements contained herein
under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
including those concerning the Company's strategy and the Company's growth
plans, contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause such differences include, but are not limited to,
those discussed under "Risk Factors."

RISKS ASSOCIATED WITH MERCHANDISING STRATEGY

The Company's merchandising strategy is designed to position the Company as
the premier fashion retailer in its smaller secondary markets. The execution
of this strategy requires significant investment by the Company to increase
and realign its inventories to higher price points and to upgrade, remodel and
refixture stores. In addition, communicating the Company's new image to
customers and educating customers about the Company's new product offerings is
a gradual process that will require increased advertising. There can be no
assurance that the Company will be successful, particularly during any
economic downturns in its markets, in migrating its traditional customers to
higher price point merchandise or in attracting new customers. During this
positioning process, the Company expects to experience, among other things,
excess inventories, higher markdowns and lower gross margins with respect to
its new merchandise. Such conditions, if sustained, would have a material
adverse effect on the Company's business. In addition, the failure of the
Company's merchandising strategy in a number of its markets could result in a
material adverse change in the Company's business. There can be no assurance
that the Company will continue to experience growth in comparable store sales.

RISKS ASSOCIATED WITH EXPANSION

The Company's strategy involves remodeling and/or expanding existing stores
or acquiring or opening new stores. The Company's success in achieving future
growth through expanding existing stores or opening new stores will be
dependent upon the Company's ability to identify, finance, obtain and
construct or refurbish suitable store sites and, where applicable, hire
appropriate store personnel. In addition, the Company may consider
acquisitions or new store openings in new geographic areas which cannot be
serviced by the Company's current distribution system or which will require
publicizing The Bon-Ton name in markets where the Company is not currently
known. Future acquisitions will be dependent upon the Company's ability to
identify, negotiate and finance acquisitions on acceptable terms and integrate
acquired stores into its existing operations. There can be no assurance that
the Company will be able to remodel or expand existing stores or acquire, open
or operate new stores on a timely or profitable basis or that comparable store
sales will increase in the future. The failure by the Company's management to
effectively implement an expansion strategy could have a material adverse
effect on the business and operations of the Company.

COMPETITION

The Bon-Ton faces competition for customers from traditional department
stores, specialty stores and catalogue and other retailers and faces
competition for suitable store locations from other department stores and
other large retailers. In a number of its markets, the Company competes for
customers with national department stores which are better established in such
markets than the Company and which offer a mix of better branded merchandise
that is similar to the Company's offerings. In other markets, the Company
faces potential competition from national chains that to date have not entered
such markets and from national chains which have stores in the Company's
markets but currently do not carry better branded merchandise similar to that
carried by the Company. In all markets, the Company generally competes for
customers with department stores that offer moderately priced goods. Many of
the Company's competitors are units of large national or regional chains that
have substantially greater financial and other resources than the Company.
Some of the Company's competitors

7
<PAGE>

may have greater leverage with vendors of better merchandise than does the
Company, which may allow such competitors to obtain such merchandise more
easily or on better terms than the Company. Competition with The May
Department Store Company ("The May Company"), in particular, increased during
fiscal 1994 and 1995 as a result of The Bon-Ton's entry into certain markets
in which The May Company stores are located and The May Company's entry into
certain markets in which The Bon-Ton's stores are located. Currently, The
Bon-Ton competes directly with The May Company in a significant number of The
Bon-Ton's geographic markets. In several of the Company's markets, the
Company's stores compete with other department stores in the immediate
vicinity which are larger and/or have a superior location in the relevant mall
or local shopping area. There can be no assurance that existing or new
competitors will not begin to carry, or increase their offering of, better
branded merchandise, or that the Company will be able to successfully compete
in individual markets against department stores with such competitive
advantages. Either of these circumstances could have a material adverse effect
on the Company's business. See "Business--Competition."

ECONOMIC AND MARKET CONDITIONS; SEASONALITY

The Bon-Ton's stores are situated in secondary markets that are largely
dependent upon their respective local economies. The retail business is
dependent upon the level of consumer spending, which will be adversely
affected by an economic downturn or a decline in consumer confidence. An
economic downturn in either Pennsylvania or New York would have a material
adverse effect on the Company's business.

The Company's success depends in part upon its ability to anticipate and
respond to changing consumer preferences and fashion trends in a timely
manner. Any sustained failure by the Company to identify and respond to such
emerging trends in lifestyle and consumer preferences could have a material
adverse effect on the Company's business.

The Company's business is seasonal and its quarterly sales and profits
traditionally have been lower during the first three quarters of the fiscal
year and higher during the fourth quarter of the fiscal year. In addition,
working capital requirements fluctuate during the year, increasing
substantially in October and November in anticipation of the holiday season,
which requires significantly higher inventory levels. Any substantial decrease
in sales for the last three months of the calendar year could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

DEPENDENCE ON KEY PERSONNEL

The success of the Company depends to a large extent on its executive
management team, including the Company's President and Chief Executive
Officer, Heywood Wilansky. The loss of the services of any key member of its
senior management team could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to retain its executive officers and
key personnel or attract additional qualified members to its management team
in the future. See "Business--The Company" and "Management."

DEPENDENCE ON VENDOR RELATIONSHIPS

The Company's business is dependent to a significant degree upon close
relationships with vendors and the Company's ability to purchase brand name
merchandise at competitive prices. The loss of key vendor support could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to acquire brand name merchandise at competitive prices or on competitive
terms in the future. For example, certain merchandise that is high profile and
in high demand may be allocated by vendors based upon the vendor's internal
criteria which are beyond the Company's control. See "Business--Merchandising"
and "--Purchasing and Distribution."

LEVERAGE AND RESTRICTIVE COVENANTS

The Company has a significant amount of outstanding indebtedness. As of
January 31, 1998, the Company had outstanding indebtedness of $121.7 million
in principal amount (excluding capital leases, trade payables,

8
<PAGE>

accrued liabilities and unused commitments under the Company's revolving
credit facility (the "Credit Facility")). The Company's leverage poses several
risks to the Company, including the risks that: (i) a substantial portion of
the Company's cash flow from operations will be dedicated to the payment of
interest on the Company's indebtedness; (ii) the Company's leveraged position
may impede its ability to obtain financing in the future for working capital,
capital expenditures and general corporate purposes, including acquisitions;
(iii) the Company's leveraged financial position may make it more vulnerable
to economic downturns and may limit its ability to withstand competitive
pressures; (iv) the Company will be vulnerable to increases in interest rates
with respect to indebtedness under the Credit Facility, which bears interest
at variable rates, and with respect to the third party interests in
receivables under the Company's accounts receivable program, which bear
interest at variable rates; and (v) the Company's flexibility in planning for
or reacting to changes in market conditions may be limited. In addition, the
Credit Facility imposes operating and financial restrictions on the Company.
Such restrictions limit, among other things, the Company's ability to incur
additional indebtedness, grant additional liens, make dividend payments and
make capital expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

EFFECT OF YEAR 2000 ON MANAGEMENT INFORMATION AND CONTROL SYSTEM

Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming century change in the year 2000. If not corrected,
many computer applications could fail or create erroneous results when
processing year 2000 data. The Company's business may be adversely affected if
the Company and/or other organizations with which the Company does business
are unsuccessful in completing in a timely manner the conversion to
applications that can process year 2000 dates. See "Business--Management
Information and Control System."

CONSUMER CREDIT RISKS

Proprietary Credit Card Portfolio. Sales under The Bon-Ton's proprietary
credit card program represent a significant portion of the Company's business,
accounting for approximately 50% of the Company's net sales for fiscal 1997.
In recent years, there have been substantial increases in the rate of charge-
offs on the Company's accounts receivable. To date, aggregate increases in
finance charge revenue and late fee income have more than offset the increases
in charge-offs. However, further deterioration in the quality of the Company's
accounts receivable portfolio or any adverse changes in laws regulating the
granting or servicing of credit (including late fees and the finance charge
applied to outstanding balances) could have a material adverse effect on the
Company's business and financial condition. There can be no assurance that the
rate of charge-offs on the Company's accounts receivable portfolio will not
increase further or that increases in finance charge revenue and late fee
income will continue to offset any such increases in charge-offs.

Accounts Receivable Program. The Company currently securitizes substantially
all of the receivables derived from its proprietary credit card accounts.
Under the accounts receivable program, the Company causes such receivables to
be transferred to a special purpose entity which from time to time issues
interests in such receivables. There can be no assurance that receivables will
continue to be generated by credit card holders or that new credit card
accounts will continue to be established at the rate historically experienced
by the Company. Any decline in the generation of receivables or in the rate of
cardholder payments on accounts could have a material adverse effect on the
Company's financial condition and results of operations. See Note 4 of the
Notes to the Company's Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

CONTROL BY CURRENT SHAREHOLDERS

M. Thomas Grumbacher, trusts for the benefit of members of the Grumbacher
family and The Grumbacher Family Foundation (collectively, the "Grumbacher
Family") upon completion of the offering will collectively

9
<PAGE>

own 1,960,972 issued and outstanding shares of Common Stock and all of the
2,989,853 issued and outstanding shares of the Class A Common Stock. The Class
A Common Stock is entitled to ten votes per share and the Common Stock is
entitled to one vote per share. The Grumbacher Family's ownership of Common
Shares upon completion of the offering will constitute 34.4% of the
outstanding Common Shares and represent 77.1% of the combined voting power of
the outstanding Common Shares. Accordingly, the Grumbacher Family will
continue to control the ability to determine the outcome of shareholder votes,
including votes with respect to corporate transactions requiring the approval
of shareholders and the election of the Company's Board of Directors (the
"Board of Directors").

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 11,402,925 shares of
Common Stock outstanding (assuming no exercise of outstanding options). Of
these shares, 9,267,226 shares, including the 4,000,000 shares sold in the
Offering, will be freely transferable by persons other than affiliates of the
Company without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"). The remaining 2,135,699
outstanding shares of Common Stock are "restricted securities" as that term is
defined in Rule 144 under the Securities Act, all of which are eligible for
sale in the public market in compliance with Rule 144. In addition, the
Company has outstanding 2,989,853 shares of Class A Common Stock, all of which
are owned by the Grumbacher Family and each of which is convertible into one
share of Common Stock. Any shares of Common Stock acquired by the Grumbacher
Family upon conversion of shares of Class A Common Stock would be freely
tradeable, subject to the limitations under Rule 144 applicable to affiliates
of the Company. The Company and its directors and executive officers, the
Selling Shareholders and certain other shareholders of the Company holding in
the aggregate 2,632,136 shares of Common Stock and 2,951,490 outstanding
shares of Class A Common Stock have agreed not to sell, transfer or otherwise
dispose of any Common Stock or Class A Common Stock for a period of 90 days
after the date of this Prospectus without the consent of the Underwriters,
except for issuances of Common Stock upon the exercise of outstanding stock
options or otherwise pursuant to the Company's equity incentive plans. The
sale or issuance or the potential for sale or issuance of any such Common
Stock could have an adverse effect on the market price for the Common Stock.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares of Common Stock for
future sale would have on the market price of the Common Stock prevailing from
time to time. Sales of substantial amounts of the Common Stock in the public
market following the offering, or the perception that such sales could occur,
could have an adverse effect of prevailing market prices for the Common Stock.
See "Shares Eligible for Future Sale" and "Underwriting."

RESTRICTIONS ON PAYMENT OF DIVIDENDS ON COMMON STOCK

The Company intends to retain its earnings to finance the growth and
development of its business and does not expect to pay any cash dividends in
the foreseeable future. The Credit Facility contains restrictions on the
Company's ability to pay dividends or make other distributions. See "Dividend
Policy."

10
<PAGE>

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby, after deducting the estimated underwriting discounts and
commissions and offering expenses, are expected to be approximately $34.9
million ($43.4 million if the Underwriters' over-allotment option is exercised
in full). The proceeds will be used for expansion and upgrading of existing
stores, opening new stores, working capital and for general corporate
purposes. Pending such uses, the net proceeds will be used to temporarily
reduce indebtedness under the Credit Facility ($88.9 million outstanding at
January 31, 1998) which bears interest determined under various interest rate
options (8.11% for fiscal 1997) and which terminates on April 15, 2000. A
portion of the net proceeds may also be used to fund the acquisition of
companies which own existing stores or their real estate assets, if and when
such opportunities arise. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

DIVIDEND POLICY

The Company has not paid cash dividends since its initial public offering in
September 1991 and does not anticipate paying any cash dividends in the
foreseeable future. The Company intends to retain its earnings, if any, for
the operation and expansion of its business. The payment and rate of future
dividends, if any, are subject to the discretion of the Board of Directors and
will depend upon the Company's earnings, financial condition, capital
requirements, contractual restrictions under its current indebtedness and
other factors. The Credit Facility contains restrictions on the Company's
ability to pay dividends and make other distributions.

PRICE RANGE OF COMMON STOCK

The Common Stock is listed on the Nasdaq National Market under the symbol
"BONT." The following table sets forth for the periods indicated the high and
low sales prices for the Common Stock as reported by the Nasdaq National
Market.

<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON STOCK
----------------
HIGH LOW
<S> <C> <C>
FISCAL 1996
First Quarter.............................................. $ 8 1/4 $ 4 7/8
Second Quarter............................................. 6 7/8 5
Third Quarter.............................................. 6 3/4 5 1/8
Fourth Quarter............................................. 7 3/8 4 7/8
FISCAL 1997
First Quarter.............................................. $ 7 3/8 $ 5 5/8
Second Quarter............................................. 9 1/8 6 1/4
Third Quarter.............................................. 15 7 7/8
Fourth Quarter............................................. 17 1/2 11 3/4
FISCAL 1998
First Quarter (through April 27, 1998)..................... $18 $ 13 3/4
</TABLE>

On April 27, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $16 1/4 per share. As of April 27, 1998, there were
approximately 300 record holders of shares of Common Stock and five record
holders of shares of Class A Common Stock.

11
<PAGE>

CAPITALIZATION

The following table sets forth the short-term debt and capitalization of the
Company as of January 31, 1998 and as adjusted as of that date to give effect
to the sale by the Company of 2,500,000 shares of Common Stock in this
offering and the application of the estimated net proceeds from this offering
as described in "Use of Proceeds." The following table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
related Notes thereto.

<TABLE>
<CAPTION>
JANUARY 31, 1998
------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED(1)
<S> <C> <C>
Short-term debt and capital leases.................... $ 935 $ 935
======== ========
Long-term debt and capital leases(2).................. $123,384 $ 88,446
Shareholders' equity:
Common Stock authorized 40,000,000 shares at $0.01
par value; issued and outstanding 8,847,333 shares;
11,347,333 as adjusted............................. 88 113
Class A Common Stock authorized 20,000,000 shares at
$0.01 par value; issued and outstanding 2,989,853
shares............................................. 30 30
Additional paid-in capital.......................... 62,585 97,498
Deferred compensation............................... (2,010) (2,010)
Retained earnings................................... 63,701 63,701
-------- --------
Total shareholders' equity............................ 124,394 159,332
-------- --------
Total capitalization.................................. $247,778 $247,778
======== ========
</TABLE>
- ---------------------
(1) Adjusted to reflect the sale of Common Stock offered by the Company and
the use of the net proceeds therefrom. See "Use of Proceeds."
(2) See Note 2 of the Notes to the Company's Consolidated Financial Statements
for a description of the Company's long-term debt.

12
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected financial data included in the following table should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Prospectus. The
statements of operations data and the balance sheet data have been derived
from the Company's audited financial statements.

<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND STORE
DATA)
STATEMENT OF OPERATIONS DA-
TA:
Net sales(1).............. $336,733 $494,908 $607,357 $626,482 $656,399
Other income, net......... 2,597 2,581 2,266 2,430 2,349
Gross profit(2)........... 130,191 194,994 219,410 230,919 242,553
Selling, general and ad-
ministrative expenses.... 108,647 162,442 207,058 197,315 202,850
Depreciation and amortiza-
tion..................... 6,593 8,465 11,895 12,758 12,882
Unusual (income) ex-
pense(3)................. -- -- 3,280 (3,171) --
Restructuring charges(4).. -- -- 5,690 -- --
-------- -------- -------- -------- --------
Income (loss) from opera-
tions.................... 17,548 26,668 (6,247) 26,447 29,170
Interest expense, net..... 4,042 5,475 8,722 14,687 13,202
-------- -------- -------- -------- --------
Income (loss) before tax-
es....................... 13,506 21,193 (14,969) 11,760 15,968
Income tax provision (ben-
efit).................... 4,727 7,563 (5,766) 4,949 6,270
-------- -------- -------- -------- --------
Income (loss) before ac-
counting
change/extraordinary
item..................... 8,779 13,630 (9,203) 6,811 9,698
Extraordinary item, net of
tax(5)................... -- -- -- -- (446)
Cumulative accounting
change, net of tax(6).... 1,500 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)......... $ 10,279 $ 13,630 $ (9,203) $ 6,811 $ 9,252
======== ======== ======== ======== ========
Per share amounts--
Basic:
Net income (loss) before
accounting
change/extraordinary
item..................... $ 0.80 $ 1.24 $ (0.83) $ 0.62 $ 0.87
Effect of accounting
change/extraordinary
item..................... 0.14 -- -- -- (0.04)
-------- -------- -------- -------- --------
Net income (loss)......... $ 0.94 $ 1.24 $ (0.83) $ 0.62 $ 0.83
Basic shares outstanding.. 10,935 10,955 11,044 11,064 11,122
Diluted:
Net income (loss) before
accounting
change/extraordinary
item..................... $ 0.79 $ 1.23 $ (0.83) $ 0.61 $ 0.85
Effect of accounting
change/extraordinary
item..................... 0.14 -- -- -- (0.04)
-------- -------- -------- -------- --------
Net income (loss)......... $ 0.93 $ 1.23 $ (0.83) $ 0.61 $ 0.81
Diluted shares outstand-
ing...................... 11,051 11,041 11,044 11,106 11,377
BALANCE SHEET DATA (AT END
OF PERIOD):
Working capital........... $ 70,688 $ 62,539 $ 90,758 $102,853 $123,078
Total assets.............. 190,431 270,228 331,173 341,252 352,686
Long-term debt, including
capital leases........... 34,741 60,521 127,893 128,098 123,384
Shareholders' equity...... 98,551 112,447 104,174 111,485 124,394
SELECTED OPERATING DATA:
Comparable stores sales
growth(7)................ (0.6)% 6.1% 0.2% 4.2% 6.5%
Comparable stores data(8):
Sales per selling square
foot..................... $ 157 $ 163 $ 160 $ 138 $ 143
Selling square footage (in
thousands)............... 1,850 2,185 2,278 4,153 4,511
Capital expenditures...... $ 8,935 $ 18,532 $ 43,587 $ 9,730 $ 10,978
Number of stores:
Beginning of year......... 36 35 69 68 64
Additions................. 1 35 4 1 --
Closings.................. (2) (1) (5) (5) --
-------- -------- -------- -------- --------
End of year............... 35 69 68 64 64
</TABLE>

13
<PAGE>

- ---------------------
(1) Fiscal 1995 reflects the 53 weeks ended February 3, 1996.
(2) Fiscal 1995 includes a $3.5 million charge related to inventory
liquidation associated with the elimination of certain vendors and other
merchandise changes.
(3) Reflects expenses related to the hiring of the Chief Executive Officer and
the gain recognized on the pension termination in fiscal years 1995 and
1996, respectively.
(4) Includes a $5.7 million restructuring charge for a store closing and work
force reduction reserve.
(5) Expense resulting from the early extinguishment of the Company's term loan
and revolving credit facility.
(6) Change in accounting for income taxes.
(7) Fiscal 1996 sales are compared to the 52 weeks ended January 27, 1996.
Comparable store sales growth is calculated based upon the comparison of
sales for stores open for the entire current and prior fiscal years.
(8) Selling square footage and sales per square foot are based upon the square
footage of selling space of stores open for the entire current and prior
fiscal years.

14
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus.

OVERVIEW

The Bon-Ton is a leading operator of quality fashion department stores
offering moderate and better apparel, home furnishings, cosmetics, accessories
and shoes in secondary markets. The Company's strategy focuses on being the
premier fashion retailer in smaller markets that demand, but often have
limited access to, better branded merchandise. In many of its markets, The
Bon-Ton is the primary destination for branded fashion merchandise from top
designers such as Calvin Klein, Liz Claiborne, Nautica, Ralph Lauren and Tommy
Hilfiger. The Bon-Ton operates 64 stores, with 35 stores in Pennsylvania, 24
stores in New York, three stores in Maryland, and one store in each of West
Virginia and New Jersey.

The Bon-Ton provides an in-depth selection of high-quality, well-known
branded merchandise at competitive prices in upscale shopping environments.
None of The Bon-Ton's stores are located in major metropolitan markets, and
most are located in smaller secondary markets. The Bon-Ton's strategic focus
is on smaller secondary markets that are served primarily by moderate-price
competitors offering a more limited selection of better branded fashion
merchandise.

RESULTS OF OPERATIONS

The following table summarizes the changes in selected operating indicators,
illustrating the relationship of various income and expense items to net sales
for each fiscal year presented:

<TABLE>
<CAPTION>
PERCENT OF NET SALES
FISCAL YEAR
-----------------------
1995 1996 1997
<S> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0%
Other income, net................................... 0.4 0.4 0.4
Costs and expenses (percent of net sales):
Costs of merchandise sold......................... 63.9 63.1 63.0
Selling, general and administrative............... 34.1 31.5 30.9
Depreciation and amortization..................... 2.0 2.1 2.0
Unusual (income) expense.......................... 0.5 (0.5) --
Restructuring charges............................. 0.9 -- --
------ ------ ------
Income (loss) from operations....................... (1.0) 4.2 4.4
Interest expense, net............................... 1.4 2.3 2.0
------ ------ ------
Income (loss) before income taxes................... (2.4) 1.9 2.4
Income tax provision (benefit)...................... (0.9) 0.8 1.0
------ ------ ------
Income (loss) before extraordinary item............. (1.5) 1.1 1.5
Extraordinary loss, net of tax...................... -- -- 0.1
------ ------ ------
Net income (loss)................................... (1.5)% 1.1% 1.4%
====== ====== ======
</TABLE>

FISCAL 1997 COMPARED TO FISCAL 1996

Net sales. Net sales were $656.4 million for the fifty-two weeks ended
January 31, 1998, an increase of $29.9 million, or 4.8%, over the fifty-two
week period ended February 1, 1997. Comparable store sales for the same period
increased 6.5%. Strong sales performances were achieved in fiscal 1997 in
better ladies' sportswear,

15
<PAGE>

men's collections, men's designer denim, Club X (junior department),
children's better collections and men's and ladies' special sizes. The sales
increases in these categories reflect the results of the Company's merchandise
realignment from a predominately moderate mix to an improved balance of
moderate and better merchandise and a larger selection of sizes, colors and
styles.

Other income, net. Net other income, which is comprised mainly of income
from leased departments, remained constant at 0.4% of net sales for fiscal
1997.

Costs and expenses. Gross margin dollars for fiscal 1997 increased $11.6
million over fiscal 1996 as a result of the sales volume increase and an
improvement in the gross margin rate. Gross profit as a percentage of net
sales increased slightly from 36.9% in fiscal 1996 to 37.0% for fiscal 1997.
The increase in the margin rate was primarily attributable to the continued
improvement in the Company's shrinkage rate as a result of concerted inventory
loss prevention efforts and a decrease in the markdown rate, partially offset
by a strategic reduction in the cumulative markup percentage and reduced
margins on the better merchandise mix.

Selling, general and administrative expenses for fiscal 1997 were $202.9
million, or 30.9% of net sales, as compared to $197.3 million, or 31.5% of net
sales, in the prior year. The percentage decrease in fiscal 1997 was primarily
attributable to the increased sales volume, a $4.0 million improvement in the
profitability of the Company's credit operations in fiscal 1997 and reduced
advertising costs, partially offset by the expense of sales growth programs,
including additional personnel costs, and general inflation costs.

Depreciation and amortization decreased slightly to 2.0% of net sales in
fiscal 1997 from 2.1% of net sales in fiscal 1996. The decrease primarily
reflects the increased sales volume in fiscal 1997.

Fiscal 1996 results were affected by the recognition of $3.2 million in pre-
tax unusual income as the result of terminating the pension plan associated
with one of the Company's 1994 acquisitions.

Income (loss) from operations. Income from operations in fiscal 1997
amounted to $29.2 million, or 4.4% of net sales, as compared to $26.4 million,
or 4.2% of net sales, in fiscal 1996. The improvement was primarily
attributable to the increase in current year sales and gross margin combined
with selling, general and administrative expenses increasing at a rate less
than sales.

Interest expense, net. Net interest expense decreased $1.5 million to $13.2
million, or 2.0% of net sales, in fiscal 1997 from $14.7 million, or 2.3% of
net sales, in the prior fiscal period. The decrease was primarily attributable
to lower average borrowing levels, partially offset by slightly higher
borrowing costs.

Extraordinary item. The Company recorded an expense of $446,000, net of tax,
related to the early extinguishment of the Company's term loan and revolving
credit facility in fiscal 1997.

Net income (loss). Net income in fiscal 1997 amounted to $9.3 million, or
1.4% of net sales, as compared to $6.8 million, or 1.1% of net sales, in
fiscal 1996.

The decrease in the effective tax rate to 39.3% in fiscal 1997 from 42.1% in
fiscal 1996 was primarily a result of the nondeductibility of the Federal
excise tax of $1.1 million relating to the pension plan termination in fiscal
1996.

FISCAL 1996 COMPARED TO FISCAL 1995

Net sales. Net sales were $626.5 million for the fifty-two weeks ended
February 1, 1997, an increase of 4.1% over the fifty-two week period ended
January 27, 1996. Comparable store sales for the fifty-two week period
increased 4.2%. Net sales for the fifty-two weeks ended February 1, 1997
increased 3.1% versus the fifty-three weeks ended February 3, 1996. Solid
performances were posted in the ladies' apparel, shoes, home and intimate
apparel merchandise categories, all of which showed sales gains above the
Company average. The strong showing in these categories reflects the results
of the Company's merchandise realignment from a predominately moderate mix to
an improved balance of moderate and better merchandise and a larger selection
of sizes, colors and styles.

16
<PAGE>

Other income, net. Net other income, which consisted mainly of income from
leased departments, remained constant at 0.4% of net sales for fiscal 1996.

Costs and expenses. Gross margin dollars increased $11.5 million over fiscal
1995 as a result of the sales volume increase and the improvement in the gross
margin rate. Gross profit as a percentage of net sales increased from 36.1%
for fiscal 1995 to 36.9% for fiscal 1996. The increase in margin rate was
primarily attributable to a significant improvement in the Company's shrinkage
rate as a result of concerted inventory loss prevention efforts, partially
offset by a strategic reduction in the cumulative markup percentage.
Additionally, fiscal 1995 results were adversely impacted by a $3.5 million
one-time charge relating to inventory liquidation associated with the
Company's elimination of certain vendors and other merchandising strategies.

Selling, general and administrative expenses for fiscal 1996 decreased $9.7
million to 31.5% of net sales from 34.1% of net sales in the prior year. The
rate decrease was primarily attributable to expense control efforts initiated
at the end of fiscal 1995 and applied throughout fiscal 1996 at corporate and
store levels and the absence of $2.2 million in store pre-opening costs
incurred in fiscal 1995. The cost containment initiatives, established in
fiscal 1996, were partially offset by an increase in the Company's advertising
expense. Technological advances in the Company's merchandise handling and
distribution processes resulted in payroll savings at the corporate level. The
store expense rate improved over the prior year, most notably due to the
continued productivity improvements in 1996.

Depreciation and amortization increased slightly to 2.1% of net sales in
fiscal 1996 from 2.0% of net sales in fiscal 1995. The increase was primarily
a result of recognizing a full year of depreciation on the three Rochester
stores and the one store in Elmira, New York opened in late 1995 and asset
additions relating to the August 1996 opening of the Company's fourth store in
the Rochester market.

Fiscal 1996 results were affected by the one-time pre-tax income recognition
of $3.2 million as the result of terminating the pension plan associated with
one of the Company's 1994 acquisitions. Fiscal 1995 results were adversely
impacted by one-time expenses and restructuring charges. Unusual expenses
amounting to $3.3 million were recorded in October 1995 related to the hiring
of the Company's Chief Executive Officer. Restructuring charges amounting to
$5.7 million were recorded in January 1996; $5.0 million was attributable to
costs related to the expected closure of unprofitable locations with the
remainder related to a workforce reduction. Five store locations were closed
in fiscal 1996; costs expended and charged against this reserve through year-
end for these closings were $1.5 million. It is anticipated that the remaining
portion of the restructuring charges, for items such as noncancellable lease
costs, will be expended through the end of 2005.

Income (loss) from operations. Income from operations in fiscal 1996
amounted to $26.4 million, or 4.2% of net sales, as compared to a loss from
operations in fiscal 1995 of $6.2 million, or 1.0% of net sales. The
significant improvement was primarily attributable to an increase in the
fiscal 1996 gross margin combined with a decrease in selling, general and
administrative expenses, the $3.2 million gain recognized on the pension
termination and non-reoccurrence of the unusual expense and restructuring
charges incurred in fiscal 1995.

Interest expense, net. Net interest expense increased $6.0 million to $14.7
million, or 2.3% of net sales, in fiscal 1996 from $8.7 million, or 1.4% of
net sales, in the prior fiscal period. The increase was attributable to higher
average borrowing levels over the prior year, primarily to fund inventory
increases and $9.7 million of capital improvements.

Net income (loss). Net income in fiscal 1996 amounted to $6.8 million, or
1.1% of net sales, as compared to a net loss of $9.2 million, or 1.5% of net
sales, in fiscal 1995.

The increase in the effective tax rate to 42.1% in fiscal 1996 from 38.5% in
fiscal 1995 was primarily attributable to certain expenses relating to
executive compensation and a Federal excise tax of $1.1 million relating to
the pension plan termination in fiscal 1996, both of which were not deductible
for tax reporting purposes.

17
<PAGE>

CHANGES IN ACCOUNTING POLICIES

In the fourth quarter of fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
The statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock. SFAS
No. 128 simplifies the standards for computing EPS previously found in
Accounting Principles Board Opinion No. 15, "Earnings Per Share," and makes
them comparable to international EPS standards. It replaces the presentation
of primary and fully diluted EPS with a presentation of basic and diluted EPS,
respectively. SFAS No. 128 also requires the dual presentation of basic and
diluted EPS on the face of the income statement and requires a reconciliation
of the numerator and the denominator of the basic EPS computation to the
numerator and the denominator of the diluted EPS calculation. In accordance
with this statement, the Company has restated all EPS calculations presented
in these financial statements and the notes thereto to reflect the
requirements of SFAS No. 128.

YEAR 2000 COMPLIANCE

Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed without consideration for the
impact of the upcoming century change in the year 2000. If not corrected,
applications which are not year 2000 compliant may fail or create erroneous
results when processing year 2000 information. The Company has completed an
assessment of the potential effects of the year 2000 century change and has
established procedures to coordinate the identification, evaluation and
implementation of changes to the established systems and applications
necessary to achieve a year 2000 date conversion. All internally developed
systems, which represent approximately 69% of installed applications, have
been modified to process year 2000 dates. The remaining systems are
commercially supplied software packages maintained by third party vendors and
are scheduled to be upgraded to a year 2000 version or replaced over the next
18 months. All installed systems require testing, which is planned over the
next two years. The cost to complete the conversion, including internal
personnel costs, is estimated to be $1.1 million. The Company is communicating
with major suppliers, financial institutions and service providers with which
it does business to coordinate the conversion effort. The Company's operations
may be adversely affected if the Company or other organizations with which the
Company does business are unsuccessful in completing the conversion in a
timely manner.

SEASONALITY AND INFLATION

The Company's business, like that of most retailers, is subject to seasonal
fluctuations, with the major portion of sales and income realized during the
latter half of each fiscal year, which includes the back-to-school and holiday
seasons. See Note 13 of Notes to Consolidated Financial Statements for the
Company's quarterly results for fiscal 1997 and 1996. Selling, general and
administrative expenses are typically higher as a percentage of net sales
during the first half of each fiscal year.

Because of the seasonality of the Company's business, results for any
quarter are not necessarily indicative of the results that may be achieved for
a full fiscal year. In addition, quarterly results of operations depend upon
the timing and amount of revenues and costs associated with the opening,
closing and remodeling of existing stores.

The Company does not believe inflation had a material effect on operating
results during the past three years. However, there can be no assurance that
the Company's business will not be affected by inflationary adjustments in the
future.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes material measures of the Company's liquidity
and capital resources (dollars in millions):

<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
<S> <C> <C> <C>
Working capital........................ $90.8 $102.9 $123.1
Current ratio.......................... 1.93:1 2.03:1 2.22:1
Funded debt to total capitalization.... 0.55:1 0.55:1 0.49:1
Unused availability under lines of
credit................................ $36.0 $22.0 $17.5
</TABLE>

18
<PAGE>

The Company's primary sources of working capital are cash flow from
operations, borrowings under its revolving credit facility and proceeds from
its accounts receivable facility. The Company had working capital of $90.8
million, $102.9 million and $123.1 million at the end of fiscal 1995, 1996 and
1997, respectively. The increase in working capital in fiscal 1997 was
principally attributable to an increase in merchandise inventories due to the
change in merchandise mix and a greater selection of sizes, colors and styles.
It also reflected the inventory required to support the increased sales volume
and the increase in accounts receivable as a result of the Company's increased
sales. The increase in working capital was partially offset by a decrease in
other current assets due to the pension asset termination in fiscal 1996,
increased payable levels consistent with increased inventory and an increase
in income taxes payable reflecting the Company's profit in fiscal 1997. The
Company's business follows a seasonal pattern and working capital fluctuates
with seasonal variations. Historically, the Company's working capital is at
its lowest levels from February through July and then increases very sharply
through November when it reaches its highest level.

To support the anticipated working capital requirements of the Company
during the next three years, the Company entered into a new asset based
borrowing agreement in April 1997. The terms of the new financing provide for
a secured revolving credit facility of up to $200.0 million (the "Credit
Facility"). The amount available for borrowing under the Credit Facility is
based on eligible inventory and selected fixed assets and real estate. The
Credit Facility provides the Company with additional borrowing capacity during
peak inventory periods and contains restrictive covenants, including a minimum
trade support ratio, a minimum fixed charge coverage ratio and limitations on
dividends, additional incurrence of debt and capital expenditures. As a result
of this transaction, the Company incurred an extraordinary charge of $446,000,
net of tax, relating to the early extinguishment of its existing term loan and
revolving credit facility. In addition, the Company completed a sale and
leaseback transaction on two of its owned properties in April 1997 which
generated net proceeds of $10.8 million. These proceeds were utilized to repay
certain indebtedness and to fund ongoing working capital requirements. The
leaseback terms under this agreement provide that the Company lease the
properties over a primary term of 20 years.

Net cash used in operating activities amounted to $14.2 million, $1.2
million and $7.7 million in fiscal 1995, 1996 and 1997, respectively. Net
operating outflows in fiscal 1997 primarily resulted from increases in working
capital over prior year levels, partially offset by depreciation and
amortization and net income in the current year. The major components of the
working capital increase were a higher level of merchandise inventories and
customer accounts receivable principally attributable to the increased sales
volume, partially offset by a decrease in other assets primarily relating to
the pension asset terminated in fiscal 1996 and increases in accounts payable,
accrued expenses and income taxes payable.

Net cash used in investing activities amounted to $48.4 million and $8.9
million in fiscal 1995 and 1996, respectively, while net cash provided by
investing activities amounted to $21.9 million in fiscal 1997. The net cash
inflow in fiscal 1997 primarily reflects proceeds received from the additional
sale of $22.0 million of proprietary credit card receivables under the
Company's accounts receivable facility and proceeds from a sale and leaseback
arrangement of $10.8 million, partially offset by capital expenditures of
$11.0 million that are primarily related to the construction of a new store in
Jamestown, New York, expansion and remodeling of existing stores and
expenditures for fixtures and displays. On February 17, 1998, the Company sold
its vacant facility in Lancaster, Pennsylvania. The net proceeds of $1.2
million were used to fund additional working capital requirements.

Net cash provided by financing activities amounted to $67.9 million and $9.7
million in fiscal 1995 and 1996, respectively, while net cash used in
financing activities was $11.6 million in fiscal 1997. The net cash outflow in
fiscal 1997 was primarily attributable to the net repayment on the Company's
long-term debt, partially offset by proceeds from stock options that were
exercised by employees.

19
<PAGE>

The Company currently anticipates that its capital expenditures for fiscal
1998 will be approximately $16.0 million. The expenditures will be directed
toward fixturing and leasehold improvements in the Company's stores, including
the new store in Jamestown, New York that opened in March 1998, and
information system enhancements.

Aside from planned capital expenditures, the Company's primary cash
requirements will be to service debt and finance working capital increases
during peak selling seasons. The Company anticipates that its cash balances
and cash flows from operations, supplemented by borrowings under the Credit
Facility and proceeds from its accounts receivable facility, will be
sufficient to satisfy its operating cash requirements.

20
<PAGE>

BUSINESS

THE COMPANY

The Bon-Ton is a leading operator of quality fashion department stores
offering moderate and better apparel, home furnishings, cosmetics, accessories
and shoes in secondary markets. The Company's strategy focuses on being the
premier fashion retailer in smaller markets that demand, but often have
limited access to, better branded merchandise. In many of its markets, The
Bon-Ton is the primary destination for branded fashion merchandise from top
designers such as Calvin Klein, Liz Claiborne, Nautica, Ralph Lauren and Tommy
Hilfiger. The Bon-Ton operates 64 stores, with 35 stores in Pennsylvania, 24
stores in New York, three stores in Maryland, and one store in each of West
Virginia and New Jersey.

The Bon-Ton provides an in-depth selection of high-quality, well-known
branded merchandise at competitive prices in upscale shopping environments.
None of The Bon-Ton's stores are located in major metropolitan markets, and
most are located in smaller secondary markets. The Bon-Ton's strategic focus
is on smaller secondary markets that are served primarily by moderate-price
competitors offering a more limited selection of better branded fashion
merchandise.

Since 1995, the Company has strengthened the quality and depth of management
by hiring a new chief executive officer and seven additional senior
executives, all of whom have extensive experience with major department
stores. This management team has pursued a series of key initiatives to
generate growth. These initiatives include:

-- shifting its merchandise mix to include a higher proportion of better
branded apparel;

--offering an extended choice of merchandise in sizes, colors and styles;

--strengthening relationship with key vendors;

--intensifying the selection of private brands;

--expanding and upgrading stores in selected smaller markets; and

-- enhancing customer service through frequent purchaser clubs and
promoting The Bon-Ton proprietary credit card.

As a result of these initiatives, The Bon-Ton has achieved comparable store
sales growth which ranks among the highest in the department store industry in
each of the last six fiscal quarters, compared to the same period in the prior
fiscal year, as shown in the following table:

<TABLE>
<CAPTION>
FISCAL 1996 COMPARABLE STORE SALES GROWTH
<S> <C>
Third Quarter 3.2%
Fourth Quarter 9.2%
<CAPTION>
FISCAL 1997
<S> <C>
First Quarter 5.1%
Second Quarter 6.9%
Third Quarter 7.1%
Fourth Quarter 6.5%
</TABLE>

BUSINESS STRATEGY

The Company's business strategy is to position itself as the premier fashion
retailer in its targeted smaller markets. Key elements of the strategy are
summarized below.

PURSUE NICHE AS PREMIER FASHION RETAILER

The Bon-Ton carves out and maintains a niche in smaller secondary markets by
offering a higher proportion of better to moderate merchandise in an upscale
environment with superior customer service. Moderate-price competitors in
these markets generally offer a more limited selection of quality brands or do
not carry the same better brands as The Bon-Ton.

21
<PAGE>

Realign merchandise mix and increase selection. The Bon-Ton is shifting its
apparel merchandise mix to incorporate an improved balance of moderate and
better merchandise. Mechandise categories in which sales of better goods have
increased significantly from fiscal 1995 to fiscal 1997 include misses
sportswear (31% of category sales to 36% of category sales), petites (21% to
30%) and men's sportswear (18% to 36%). The Bon-Ton also is increasing its
selection of sizes, colors and styles in key merchandise categories. By
offering better brands in addition to moderately priced goods, The Bon-Ton not
only attracts new customers who shop for better brands but also provides its
traditional core customers (households with annual incomes of $30,000--
$75,000) with a broader selection of merchandise.

Enhance relationships with higher-quality vendors. The Company has reduced
its vendor base from approximately 2,400 in 1994 to 1,350 in 1997, resulting
in improved relations with and increased support from its vendors in the form
of enhanced purchasing opportunities and greater advertising subsidies. In
addition, The Bon-Ton intends to increase significantly the number of vendor
shops featuring merchandise from key vendors such as Calvin Klein, Nautica,
Ralph Lauren, Tommy Hilfiger and Tommy Hilfiger Jeans. In vendor shops,
merchandise is grouped and positioned in preferred floor locations and
enhanced with distinctive, vendor-specific fixturing, signage and displays.

EMPHASIZE CUSTOMER SERVICE

The Company places great emphasis on providing a high level of customer
service to distinguish its stores from the competition and to create customer
loyalty. The Company accomplishes this through its well-trained and
experienced sales and support associates and by offering services such as free
gift wrap, The Bon-Ton proprietary credit card, frequent-purchaser clubs and
in-store alterations.

FOCUS ON GROWTH IN EXISTING STORES IN SMALLER SECONDARY MARKETS

GROW BY OPENING NEW STORES AND THROUGH ACQUISITIONS

The Company opened a new 60,000 square foot store in the Jamestown, New York
market in March 1998. The Company has preliminarily identified approximately
50 secondary markets which meet The Bon-Ton's demographic and competitive
criteria for opening new stores. The Company anticipates opening several new
stores in the next three to five years, adding up to 600,000 square feet. The
Company also intends to consider opportunities for growth through acquisitions
of department store companies or their real estate assets if and when such
opportunities arise. These acquisitions may or may not be in lieu of new store
openings.

MERCHANDISING

The Bon-Ton stores offer moderate and better fashion apparel, home
furnishings, cosmetics, accessories, shoes and other items. The Company's
sales of apparel constituted 63% of sales in fiscal year 1997. The chart below
illustrates the sales by product category for fiscal 1997:

22
<PAGE>

SALES BY PRODUCT CATEGORY

<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
1995 1996 1997
<S> <C> <C> <C>
Women's clothing........................................ 27.0% 27.4% 28.0%
Men's clothing.......................................... 17.6 17.7 17.8
Home.................................................... 11.8 12.0 12.2
Cosmetics............................................... 10.0 9.8 9.7
Children's clothing..................................... 8.1 7.4 7.0
Accessories............................................. 8.1 7.9 7.3
Junior's clothing....................................... 5.6 5.5 5.5
Intimate apparel........................................ 5.1 5.3 5.0
Shoes................................................... 4.4 4.7 5.0
Fine Jewelry............................................ 1.6 1.7 2.0
Beauty Salon............................................ 0.7 0.6 0.5
----- ----- -----
Total................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

The Company strives to be a fashion leader in the markets it serves, to
advertise and stock new merchandise and to carry a full range of quality
vendors and private brand merchandise at competitive prices. The Company
carries a number of highly recognized brand names, including Calvin Klein,
Cole.Haan, Estee Lauder, Jones New York, Kenneth Cole, Liz Claiborne, Nautica,
Nine West, Ralph Lauren, Steve Madden, Tommy Hilfiger, Tommy Hilfiger Jeans
and Via Spiga, and within these brands chooses collections which balance
fashion, price and selection.

The Company continues to implement its strategy of shifting the merchandise
mix from predominantly moderate to a higher proportion of better brands and
assessing each store to determine the appropriate product mix for the market
it serves. As part of this process, the Company has revised its inventory
strategy to carry a deeper selection from fewer, select vendors. By offering
expanded product lines from major national brand vendors, the Company seeks to
promote its quality image and attract customers to its stores.

The Company also is placing greater emphasis on vendor shops within its
stores from key vendors such as Calvin Klein, Nautica, Ralph Lauren, Tommy
Hilfiger and Tommy Hilfiger Jeans. The Company increased the number of vendor
shops from approximately 119 in 1995 to 234 in 1997. In such vendor shops,
merchandise is grouped and positioned in preferred floor locations to provide
enhanced visibility with distinctive, vendor-specific fixturing, signage and
displays. The Company's vendors seek to capitalize on the value of the
Company's customer base and are willing to make a financial commitment through
enhanced purchasing opportunities, increased advertising subsidies and
financial contributions to support enhanced presentation and fixturing.

Complementing its branded merchandise, the Company's exclusive private brand
merchandise provides fashion at competitive pricing under names such as Andrea
Viccaro, Jenny Buchanan, Susquehanna Trail Outfitters and Susquehanna Blues.
The Bon-Ton views its private brand merchandise as a strategic addition to its
strong array of highly recognized, quality national brands and as an
opportunity to increase brand exclusiveness, customer loyalty and competitive
differentiation. In 1996, the Company enhanced its private brand program by
supplementing its existing lines with better sportswear, utilizing
manufacturers which produce better goods for more widely-recognized brands.
The Company believes the combination of nationally recognized brands and
private brand merchandise differentiates the Company's stores from their
competitors. Private brand merchandise represented approximately 8% of apparel
sales in fiscal 1995 and 15% of apparel sales in fiscal 1997.

MARKETING

The Bon-Ton seeks to attract new customers and to maintain customer loyalty
with frequent-shopper clubs such as "Club X," which was created for the
Company's junior customers. Through its "retail-tainment" program, the Company
promotes in-store events such as fashion shows, wardrobe seminars and cooking
demonstrations in selected markets, and tie-ins with local charitable and
cultural organizations.

23
<PAGE>

The Company attracts customers by offering services such as free gift wrap,
special order capability and in-store alterations. In addition, through its
"Certified Value" program, the Company maintains everyday value prices on
staple items such as turtlenecks, T-shirts, shorts and denim within major
product groups. To increase merchandise turnover, the Company systematically
marks down slow-selling merchandise that is no longer current.

The Company conducts its advertising and promotional programs through
newspaper advertisements, direct mail and, to a lesser extent, local
television and radio. The Company maintains an in-house advertising group that
produces substantially all of its print advertising. The effectiveness of the
Company's direct mail efforts has been greatly enhanced through database
management systems. By accurately identifying the predictors of response to
its direct mail pieces, the Company now has the ability to rank, score and
select customers with event-specific information.

Management believes that because proprietary credit card customers tend to
be repeat customers and have higher purchasing levels per store visit, The
Bon-Ton proprietary credit card is an important element in customer loyalty
and provides a productive tool for customer segmentation and database
marketing. The Company's customers may pay for purchases with The Bon-Ton
proprietary credit card, Visa, Mastercard, American Express, cash or check. In
fiscal 1997 approximately 50% of the Company's net sales were purchased with
The Bon-Ton proprietary credit card.

The following table sets forth the percentage of total sales generated by
payment type:

<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
TYPE OF PAYMENT 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
The Bon-Ton Credit Card............................. 54% 54% 55% 51% 50%
Visa, Mastercard, AmEx.............................. 12 14 16 20 22
Cash, Check......................................... 34 32 29 29 28
</TABLE>

During fiscal 1996 and 1997, the Company issued 255,000 and 273,000 Bon-Ton
credit cards, respectively, for newly opened accounts.

THE BON-TON STORES

The Bon-Ton stores vary in size from approximately 45,000 to 160,000 gross
square feet, with 42 of such stores at less than 90,000 gross square feet. All
but two of The Bon-Ton stores are anchor tenants in shopping malls or in, or
adjacent to, strip shopping centers. All of the Company's stores are operated
as "The Bon-Ton."

As part of The Bon-Ton's merchandising strategy, the Company has upgraded
the appearance of its stores to reflect its commitment to be the leading
provider of better apparel in its markets. The Bon-Ton has aggressively
pursued strategic vendor partnerships and shop concepts to enhance its
merchandise presentation. The Company has worked closely with vendors such as
Calvin Klein, Liz Claiborne, Nautica, Ralph Lauren, Tommy Hilfiger, Waterford
and several major shoe vendors to upgrade the appearance of its selling floor
through distinctive fixturing. Continuing the strategy to emphasize its
exclusive lines, The Bon-Ton has supported its private brands with fixturing,
signage and visual enhancements in newly created shops. In addition to the
Company's corporate visual merchandising staff, each store has at least one
associate responsible for visual presentation. The Company continually
evaluates all aspects of its visual merchandising program to provide an
aesthetically pleasing atmosphere for its customers.

The Company utilizes prototype store layouts based primarily on the
Company's estimate of the size of the potential market. Store layouts are
customized based on the actual size and configuration of the individual
stores. The stores typically utilize a "race track" configuration (an oval
aisle encircling a central core), and the Company plans the aisle layouts to
provide a more pleasing visual experience. The Company attempts to arrange its
products to provide a logical flow from department to department and
continually monitors its product layouts in an attempt to make shopping easier
and to maximize sales per square foot.

24
<PAGE>

The cost of opening a new store varies substantially depending on the size
of the store, the amount of new construction involved, whether the store is
owned or leased and other factors. Leased stores are typically built by the
developer at the developer's expense and fixtured by the Company at its
expense. In both leased and owned stores, the developer may make some level of
contribution to the Company's cost.

The following table provides certain information regarding the Company's
stores:

<TABLE>
<CAPTION>
APPROXIMATE
GROSS SQUARE YEAR OPENED
MARKET LOCATION FEET OR ACQUIRED
<S> <C> <C> <C>
PENNSYLVANIA
Allentown South Mall 111,000 1994
Bethlehem Westgate Mall 107,100 1994
Bloomsburg Columbia Mall 46,100 1988
Butler Clearview Mall 63,600 1982
Carlisle Carlisle Plaza Mall 59,900 1977
Chambersburg Chambersburg Mall 55,600 1985
Doylestown Doylestown Shopping Center 55,500 1994
Easton Palmer Park Mall 120,200 1994
Greensburg Westmoreland Mall 99,900 1987
Hanover North Hanover Mall 67,600 1971
Harrisburg Camp Hill 145,200 1987
Colonial Park Shopping Center 136,500 1987
Indiana Indiana Mall 60,400 1979
Johnstown The Galleria 80,900 1992
Lancaster Park City Center 144,800 1992
Lebanon Lebanon Plaza Mall 53,700 1994
Lewistown Central Business District 46,700 1972
Oil City Cranberry Mall 45,200 1982
Pottsville Schuylkill Mall 61,100 1987
Quakertown Richland Mall 88,100 1994
Reading Berkshire Mall 159,400 1987
Scranton Keyser Oak Plaza 57,600 1980
State College Nittany Mall 70,200 1994
Stroudsburg Stroud Mall 87,000 1994
Sunbury Susquehanna Valley Mall 60,200 1978
Trexlertown Trexler Mall 54,000 1994
Uniontown Uniontown Mall 71,000 1976
Warren Warren Mall 50,000 1980
Washington Franklin Mall 78,100 1987
Williamsport Lycoming Mall 60,100 1986
Wilkes-Barre Midway Shopping Center 66,000 1987
Wyoming Valley Mall 159,500 1987
York York Galleria 128,200 1989
Queensgate Shopping Center 85,100 1962
West Manchester Mall 80,200 1981
NEW YORK
Binghamton Oakdale Mall 80,000 1981
Buffalo Northtown Plaza 100,800 1994
Walden Galleria 150,000 1994
Eastern Hills Mall 151,200 1994
McKinley Mall 97,200 1994
Sheridan/Delaware Plaza 124,100 1994
Southgate Plaza 100,500 1994
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
APPROXIMATE
GROSS SQUARE YEAR OPENED
MARKET LOCATION FEET OR ACQUIRED
<S> <C> <C> <C>
NEW YORK (CONT'D)
Elmira Arnot Mall 74,800 1995
Ithaca Pyramid Mall 52,400 1991
Jamestown Chautauqua Mall 60,000 1998
Lockport Lockport Mall 82,000 1994
Massena St. Lawrence Centre 51,000 1994
Niagara Falls Summit Park Mall 88,100 1994
Olean Olean Mall 73,000 1994
Rochester The Mall at Greece Ridge Center 144,600 1996
The Marketplace Mall 100,000 1995
Irondequoit Mall 102,600 1995
Eastview Mall 118,900 1995
Saratoga Springs Wilton Mall 71,700 1993
Syracuse Carousel Center 80,000 1994
Camillus Mall 64,700 1994
Great Northern Mall 98,400 1994
Shoppingtown Mall 70,100 1994
Watertown Salmon Run Mall 50,200 1992
MARYLAND
Cumberland Country Club Mall 60,900 1979
Frederick Frederick Towne Mall 77,900 1972
Hagerstown Valley Mall 100,000 1974
WEST VIRGINIA
Martinsburg Martinsburg Mall 65,800 1994
NEW JERSEY
Phillipsburg Phillipsburg Mall 65,000 1994
</TABLE>

ACQUISITIONS

The Company doubled its size in fiscal 1994 through the acquisition of 35
stores from three regional department store chains. In July 1994, The Bon-Ton
purchased AM&A, a department store company with ten stores located in and
around the greater Buffalo, New York area, and substantially remodeled and
repositioned such stores. Fiscal 1996 represented the former AM&A stores'
first full year of operation as The Bon-Ton stores, uninterrupted by remodels
or liquidations. In September 1994, the Company acquired 19 stores and a
326,000 square foot distribution center from Hess, a leading department store
chain in secondary markets in Pennsylvania. No major store remodeling or
repositioning was required to integrate the Hess stores into The Bon-Ton store
network. In October 1994, the Company acquired certain assets of Chappell's, a
department store company with six stores headquartered in Syracuse, New York,
to further complement its market position in upstate New York. Results for
fiscal year 1995 reflect investments in converting these stores. Four of the
six former Chappell's stores were remodeled and upgraded in fiscal 1996 and
completed a full year of uninterrupted operation as The Bon-Ton stores in
1997.

In March 1995, the Company acquired three vacant department stores in
Rochester, New York and leased a store in Elmira, New York. These stores
opened to the public in November 1995. Also in November 1995, the Company
acquired an additional vacant store in Rochester which opened in August 1996,
completing its entry into this market. In March 1998, the Company opened a
60,000 square foot store in the Jamestown, New York market.

26
<PAGE>

CLOSURES

As the Company integrated its acquisitions, management performed a full
review of operating assets and identified stores that it classified as
overlapping or as underperforming assets. In March 1995, the Company closed
downtown stores located in Lancaster, Pennsylvania and Buffalo, New York. In
January 1996, the Company closed its downtown Allentown, Pennsylvania store
and two former Hess stores located in malls which already contained The
Bon-Ton stores. The Company also closed two more overlapping stores and three
underperforming stores in January 1997 and is closing its Rome, Georgia store
in April 1998. As part of its commitment to improve return on assets, the
Company continues to review underperforming stores and evaluate not only store
performance but also the impact of future closures on each market. No further
store closures are planned at this time.

The following table sets forth the total of The Bon-Ton stores at the
beginning and end of each of the last five fiscal years, including the number
of additional stores from acquisitions and the opening of new stores and the
number of store closures:

<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Number of stores:
Beginning of year................................. 36 35 69 68 64
Additions........................................ 1 35 4 1 0
Closings......................................... (2) (1) (5) (5) 0
--- --- --- --- ---
End of year....................................... 35 69 68 64 64
</TABLE>

PURCHASING AND DISTRIBUTION

The Bon-Ton's strategy is to build relationships with its top vendors,
creating working alliances that will be mutually beneficial to the vendor and
the Company. The Company has reduced its total number of vendors by 44% since
1994 and, as of January 1998, the Company purchases merchandise from
approximately 1,350 domestic and foreign manufacturers and suppliers, with
relatively little concentration in any one supplier.

The Company purchases certain of its private brand merchandise through
Frederick Atkins, Inc. ("Atkins"), an association of major retailers that
provides its members with group purchasing opportunities. The Company's
membership in Atkins also entitles it to receive current information about
marketing and operating trends.

The Company employs four general merchandise managers and 12 divisional
merchandise managers who direct 58 buyers. The Company's planner/distributor
department, utilized more typically by larger department store chains,
relieves the Company's buying staff from responsibility for planning and
allocation decisions among stores and merchandise categories, thereby
permitting buyers to focus on their primary responsibilities of trend
identification, merchandise selection, product development and marketing. This
specialized planner /distributor staff also provides detailed and efficient
analysis and planning with respect to allocation of merchandise among stores
and lines of business. The Company believes that its planner/distributor
system results in more efficient merchandise allocations and faster
merchandise replenishments and turnovers, thereby increasing sales.

The Company operates two automated distribution centers: a 143,700 square
foot facility in York, Pennsylvania and a 326,000 square foot facility in
Allentown, Pennsylvania. The Company utilizes an incentive program based upon
engineered standards to continually improve the productivity of its
distribution center workers. The distribution centers currently operate on one
shift; however, by adding second shifts, the Company believes that the
capacity of the distribution centers can be at least doubled. There is
substantial space for additional expansion at the York and Allentown sites and
additional truck docks in place not currently used in Allentown.

MANAGEMENT INFORMATION AND CONTROL SYSTEM

General. The Company operates a proprietary management information and
control system with the capability to track inventory from the distribution
centers to the point-of-sale and to generate financial reports by

27
<PAGE>

multiple categories. The Company currently operates seven primary system
modules: Merchandising; Financial; Point-of-Sale; Purchase Order Management;
Financial Transfer; Receiving; and Planning & Allocation. The Company utilizes
the information generated from these modules to execute timely decisions in
relation to the management of its business on a daily, weekly and monthly
basis.

The Company is in the process of enhancing its management information and
control system to utilize advance shipping information through an electronic
data interchange in order to expedite the flow of merchandise through the
distribution centers. The Company believes that this system will provide
improved productivity and better in-stock availability. The Company also plans
to modernize its in-store systems over the next several years to improve
operating efficiencies. The use of radio frequency for barcode scanning will
streamline price change processing, re-ticketing, price audits and signage for
promotional events, and an upgrade to the point-of-sale system, including an
updated gift registry system, is planned to further enhance customer service
and inventory management.

Effects of Year 2000. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming century change in the year
2000. If not corrected, many computer applications could fail or create
erroneous results when processing year 2000 data.

The Company has completed an assessment of the potential effects of the year
2000 century change and has established a central office to coordinate the
identification, evaluation and implementation of changes to the Company's
systems and applications necessary to achieve a year 2000 date conversion. All
internally developed systems, which represent 69% of installed applications,
have been modified to process year 2000 dates. The remaining systems are
commercially supplied software packages maintained by third party vendors and
are scheduled to be upgraded to a year 2000 version or replaced over the next
18 months. All installed systems require testing, which is planned over the
next two years. The cost to complete the conversion, including internal
personnel costs, is estimated to be $1.1 million. The Company is communicating
with major suppliers, financial institutions and service providers to
coordinate the conversion effort.

PROPRIETARY CREDIT CARD OPERATIONS AND RECEIVABLES SECURITIZATION

All phases of The Bon-Ton proprietary credit card operation are handled by
the Company except statement mailing and the processing of customer mail
payments, which processing is performed pursuant to a retail lockbox agreement
with a bank. Decisions whether to issue a credit card to an applicant are made
on the basis of a credit scoring system. According to the National Retail
Federation, net write-offs as a percentage of credit sales for the retail
industry ranged from 1.06% to 5.09% in 1996. The Company's bad debt expense is
in the lower end of this range.

In June 1995, the Company established The Bon-Ton Receivables Partnership,
LP ("BTRLP"), a limited partnership created for the purpose of selling
securitized credit card receivables. Under the securitization agreement, the
Company may have outstanding at any one time up to $150 million of securitized
credit card receivables on a limited recourse basis. The agreement requires
that BTRLP typically hold a 15% participation interest in receivables sold. In
fiscal 1996 and 1997, the Company reported securitization income, which
represents the spread between finance charge yield and the cost of financing
receivables, reduced by a provision for bad debt, of $6.2 million and $8.4
million, respectively. The impact of the proprietary credit card program on
net income is significantly less than the amount of the aforementioned
securitization income, as operating expenses associated with the credit
division are excluded from the calculation of securitization income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 of the Notes to the Consolidated Financial Statements.

COMPETITION

The Bon-Ton faces competition for customers from traditional department
stores such as J.C. Penney and Company, Inc. ("J.C. Penney"), Federated
Department Stores Inc. ("Federated"), The May Company and

28
<PAGE>

Sears, Roebuck and Co. ("Sears"), from regional department stores such as
Boscov's and from specialty stores and catalogue and other retailers. In
addition, the Company faces competition for store locations from other
department stores and other large retailers. In a number of its markets, the
Company competes for customers with national department store chains which are
better established in such markets than the Company and which offer a similar
mix of better branded merchandise as the Company. In other markets, the
Company faces potential competition from national chains that to date have not
entered such markets and from national chains which have stores in the
Company's markets but currently do not carry similar better branded goods as
the Company. In all markets, the Company generally competes for customers with
department stores offering moderately priced goods. Many of the Company's
competitors are units of large national or regional chains that may have
substantially greater financial and other resources than the Company. Some of
the Company's competitors have greater leverage with vendors of better
merchandise than the Company, which may allow such competitors to obtain such
merchandise more easily or on better terms than the Company. Competition with
The May Company, in particular, increased during fiscal 1994 and 1995 as a
result of The Bon-Ton's entry into certain markets in which The May Company
stores are located and The May Company's entry into certain markets in which
The Bon-Ton's stores are located. Currently, The Bon-Ton competes directly
with The May Company in a significant number of The Bon-Ton's geographic
markets. In several of the Company's markets, the Company's stores compete
with other department stores in the immediate vicinity which are larger and/or
have a superior location in the relevant mall or local shopping area.

The Company believes it compares favorably with its competitors with respect
to quality, depth and breadth of merchandise, prices for comparable quality
merchandise, customer service and store environment. The Company also believes
its knowledge of smaller secondary markets in particular, developed over its
many years of operation, and its focus on secondary markets as its primary
area of operation, give it an advantage that cannot be readily duplicated.

ASSOCIATES

As of January 31, 1998, the Company had approximately 2,600 full-time and
6,000 part-time associates. The Company also employs additional part-time
clerks and cashiers during peak periods. None of the Company's associates are
represented by a labor union. Management believes that the Company's
relationship with its associates is good.

PROPERTIES

The Company leases 56 of its stores and owns eight stores, three of which
are subject to ground leases. The Company leases a total of 154,600 square
feet for its executive and administrative offices which are located at or near
the York Mall in York, Pennsylvania. The Company also leases the land (but
owns the building) for its 143,700 square foot distribution center in York,
Pennsylvania and leases its 326,000 square foot distribution center in
Allentown, Pennsylvania.

29
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS

The following table sets forth certain information regarding the Company's
executive officers and directors:

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Heywood Wilansky........ 50 President, Chief Executive Officer and Director
M. Thomas ("Tim") 58 Chairman of the Board and Director
Grumbacher.............
Michael L. Gleim........ 55 Vice Chairman, Chief Operating Officer and
Director
Douglas G. Lamm......... 51 Executive Vice President, Softlines Merchandise
James H. Baireuther..... 51 Senior Vice President, Chief Financial Officer
Robert W. Bennet........ 41 Senior Vice President, General Merchandise
Manager
Jack Boonshaft.......... 55 Senior Vice President, Stores
J. Rick Cusick.......... 40 Senior Vice President, General Merchandise
Manager
H. Stephen Evans........ 48 Senior Vice President, Real Estate, Legal and
Governmental Affairs
Elizabeth R. Feher...... 37 Senior Vice President, General Merchandise
Manager
William T. Harmon....... 43 Senior Vice President, Sales Promotion, Marketing
and Strategic Planning
Theodore C. Johnson, 64 Senior Vice President, Human Resources
Jr.....................
Cheryl Jan Ladnier...... 49 Senior Vice President, Product Development,
Fashion Merchandising and Special Events
Patrick J. McIntyre..... 53 Senior Vice President, Chief Information Officer
Ryan J. Sattler......... 53 Senior Vice President, Operations
Stephen M. Sloane....... 51 Senior Vice President, General Merchandise
Manager
Stephanie Stough........ 46 Senior Vice President, Merchandise Planning &
Control
Samuel J. Gerson........ 56 Director
Roger S. Hillas......... 71 Director
Lawrence J. Ring........ 49 Director
Leon D. Starr........... 79 Director
Leon F. Winbigler....... 72 Director
</TABLE>

Heywood Wilansky joined the Company in August 1995 as President, Chief
Executive Officer and a director. Prior to joining the Company, Mr. Wilansky
was employed by The May Company for more than 19 years. From 1992 to August
1995, he was President and Chief Executive Officer of the Foley's division of
The May Company, and from 1991 to 1992, he was President and Chief Executive
Officer of the Filene's division of The May Company. Prior to that, he was
with the Hecht's and Lord & Taylor divisions of The May Company.

M. Thomas Grumbacher joined the Company in 1961 and has been Chairman of the
Board since August 1991. From 1977 to 1989, he was President and from 1985 to
1995 he was Chief Executive Officer of the Company.

Michael L. Gleim joined the Company in 1989 as Executive Vice President and
Chief Administrative Officer. He became Senior Executive Vice President and a
director in 1991, and Vice Chairman and Chief Operating Officer in December
1995. Prior to joining the Company, Mr. Gleim was employed by Federated for
more than 25 years.

Douglas G. Lamm joined the Company as Senior Vice President, General
Merchandise Manager in October 1995. He was appointed Executive Vice
President, Softlines Merchandise in February 1998. Prior to joining the
Company, Mr. Lamm owned a chain of women's large size apparel boutiques from
1988 to 1995, and from 1984 to 1988 was Senior Vice President and General
Merchandise Manager at Venture Stores, Inc. in St. Louis.

30
<PAGE>

James H. Baireuther joined the Company as Senior Vice President and Chief
Financial Officer in June 1996. From September 1994 until he joined the
Company, Mr. Baireuther served in the same capacity for DAC Vision ("DAC") in
Garland, Texas, a manufacturer and distributor of optical supplies, parts and
contact lenses. Prior to joining DAC, Mr. Baireuther was Executive Vice
President and Chief Financial Officer for Eye Care Centers of America, a
retail optical superstore chain and wholly-owned subsidiary of Sears. From
1969 until 1989, he held a variety of corporate positions with Sears,
including Director of Mergers and Acquisitions, Manager of Corporate Financial
Analysis and Controller.

Robert W. Bennet joined the Company in March 1993 as Divisional Vice
President, Divisional Merchandise Manager. He was named Senior Vice President,
General Merchandise Manager in February 1998. Prior to joining the Company, he
was associated with Famous-Barr, a division of The May Company, for 14 years,
where he held a variety of merchandising positions.

Jack Boonshaft joined the Company in January 1996 as Vice President, Stores'
Merchandising, and was named Senior Vice President, Stores in February 1998.
Prior to joining the Company, Mr. Boonshaft was employed by Hecht's, a
division of The May Company, where his last position was Regional Vice
President, Stores, in which position he served for ten years.

J. Rick Cusick joined the Company in October 1996 as Divisional Vice
President, Divisional Merchandise Manager. He was named Senior Vice President,
General Merchandise Manager in July 1997. Prior to joining the Company, Mr.
Cusick was employed by Marshall's from September 1995 to February 1996 where
he held the position of Divisional Vice President, Divisional Merchandise
Manager. From 1980 to 1995, Mr. Cusick held a variety of merchandising
positions with Filene's, Foley's and The Broadway.

H. Stephen Evans joined the Company as Senior Vice President, Real Estate in
1991. He was named Senior Vice President, Real Estate, Legal and Governmental
Affairs in 1993. Prior to joining the Company, Mr. Evans was employed by J.C.
Penney from 1978 to 1991 where he served most recently as Senior Regional Real
Estate Representative from 1986 to 1991 in Pittsburgh, Pennsylvania.

Elizabeth R. Feher joined the Company as Divisional Vice President,
Divisional Merchandise Manager in October 1994. She was promoted to Senior
Vice President, General Merchandise Manager in February 1998. Ms. Feher was
previously associated with Hess where she served as Vice President,
Merchandise Manager for over six years.

William T. Harmon joined the Company in June 1997 as Senior Vice President,
Sales Promotion, Marketing and Strategic Planning. Prior to joining the
Company, Mr. Harmon was with Foley's from December 1992 to June 1997, last
serving as Senior Vice President, Merchandising Planning. Mr. Harmon had
previously served as Vice President/Assistant to the President for Filene's
for more than three years and was employed by McKinsey & Company for seven
years.

Theodore C. Johnson joined the Company in 1988 as Senior Vice President,
Human Resources. Prior to joining the Company, Mr. Johnson was associated with
the Higbee Company, a department store company based in Cleveland, Ohio, where
he served most recently as Senior Vice President- Human Resources for more
than five years.

Cheryl Jan Ladnier joined the Company as Senior Vice President, Sales
Promotion and Marketing in December 1993 and was subsequently named Senior
Vice President, Marketing and Corporate Communications. In May 1997, Ms.
Ladnier was named Senior Vice President, Product Development, Fashion
Merchandising and Special Events. From January 1993 until October 1993, Ms.
Ladnier served as Corporate Vice President, Public Relations with Neiman
Marcus in Dallas, Texas. Prior to January 1993, she was associated with The
May Company for 14 years.

Patrick J. McIntyre joined the Company as Senior Vice President, Chief
Information Officer in June 1997. Prior to joining the Company, Mr. McIntyre
was associated with The Cato Corporation, a woman's specialty

31
<PAGE>

apparel retailer, where he served as Senior Vice President, Chief Information
Officer for more than eight years. Prior to his association with The Cato
Corporation, Mr. McIntyre held similar positions with the Higbee Company,
Burdine's Department Store and Kaufmann's.

Ryan J. Sattler joined the Company as Vice President, Distribution and
Operations in 1986 and was promoted to Senior Vice President, Operations in
1990. Mr. Sattler previously served as Vice President, Director of Gimbels
Midwest Department Stores in Milwaukee, Wisconsin from 1983 to 1986.

Stephen M. Sloane joined the Company in February 1997 as Senior Vice
President, General Merchandise Manager for the Home merchandise area. Prior to
joining the Company, Mr. Sloane held senior merchandise manager positions with
Dick's Clothing and Sporting Goods, McRae's and Foley's during the preceding
five years. Additionally, he has held a variety of positions at Hecht's and
Woodward and Lothrop in Washington, DC.

Stephanie Stough joined the Company in March 1987 as Director of Merchandise
Planning and Control. In February 1991, she was promoted to Vice President,
Merchandise Planning and Control. In May 1997, she was promoted to Senior Vice
President, Merchandise Planning and Control.

Samuel J. Gerson has been a director of the Company since 1996. Mr. Gerson
has been Chairman and Chief Executive Officer of Filene's Basement since 1984.
Prior to that, he was President and Chief Operating Officer of The Gap and
President and Chief Executive Officer of The Denver, a division of Associated
Dry Goods Co. Mr. Gerson is a director of Filene's Basement Corp. and ASAHI
America, Inc., a trustee associate of Boston College and is chairman of the
Urban League of Eastern Massachusetts.

Roger S. Hillas has been a director of the Company since 1991. Mr. Hillas
was Chairman and Chief Executive Officer of Meritor Savings Bank until
December 1992. Mr. Hillas has been retired since such time. He served as
Chairman and Chief Executive Office of Provident National Bank from 1974 to
1988 and Chairman of PNC Financial Corp. from 1985 to 1988. Mr. Hillas is a
director of Consolidated Rail Corporation, P.H. Glatfelter Company and Toll
Brothers, Inc.

Lawrence S. Ring has been a director of the Company since 1997. Dr. Ring has
been Professor of Business Administration at The College of William and Mary's
Graduate School of Business Administration in Williamsburg, Virginia for more
than five years, and conducts an international consulting and executive
education practice. Dr. Ring is a director of Sportmart, Inc.

Leon D. Starr has been a director of the Company since 1991. Mr. Starr has
been a management consultant to department and specialty stores since 1984.
Prior thereto, he held various positions with Allied Stores Corporation for
over 35 years.

Leon F. Winbigler has been a director of the Company since 1991. Mr.
Winbigler served as Chairman and Chief Executive Officer of Mercantile Stores
Company, Inc. for 15 years before retiring in 1989. He is a member of the
advisory board of Liberty Mutual Insurance Company.

32
<PAGE>

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth, for the Company's last three fiscal years,
the compensation paid or accrued by the Company for those years to the
Company's Chief Executive Officer and to each of the other four most highly
compensated executive officers of the Company in fiscal 1997 (collectively,
the "Named Executives"):

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------- -----------------------
OTHER RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL ANNUAL STOCK UNDERLYING COMPENSATION
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($)(1) OPTIONS(#) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Heywood Wilansky ....... 1997 800,000 264,000 872,423(2) -- 99,000 1,065,260(3)
President and Chief 1996 800,000 200,000 948,778 -- 104,800 --
Executive Officer 1995 353,846 841,500 117,803 1,687,500 250,000 --
Michael L. Gleim ....... 1997 414,417 132,000 9,848(4) -- 49,600 291,147(3)
Vice Chairman and Chief 1996 414,417 -- 4,530 -- 52,400 --
Operating Officer 1995 311,923 -- 20,628 117,500 56,600 --
M. Thomas Grumbacher ... 1997 350,000 87,120 7,931(5) -- 43,300 --
Chairman of the Board 1996 351,923 -- 2,175 -- 45,800 --
of
Directors 1995 450,000 -- 675 -- 25,000 --
Douglas G. Lamm(6) ..... 1997 254,808 67,329 9,406(7) 89,982 -- --
Executive Vice 1996 244,984 -- 1,302 -- -- --
President,
Softlines Merchandise 1995 79,279 -- -- -- 20,000 10,000
James H. Baireuther(8) 1997 224,808 42,000 6,367(9) -- -- 85,306(10)
.......................
Senior Vice President 1996 135,785 -- 381 -- 20,000 25,234
and Chief Financial
Officer
</TABLE>
- ---------------------
(1) Such awards were made pursuant to the Option Plan or the MIP (as defined
below). See "Equity Incentive Plans." Mr. Wilansky's award vests in three
equal annual installments beginning August 21, 1998. Mr. Gleim's award
will be fully vested on December 15, 1998. Mr. Lamm's award will vest in
conjunction with his bonus payouts or, if none, at the end of fiscal 2007.
At January 31, 1998, the aggregate number of Restricted Shares held by
Messrs. Wilansky, Gleim and Lamm, and the market value of such shares,
were as follows: Mr. Wilansky, 250,000 shares with a market value of
$3,500,000; Mr. Gleim, 6,666 shares with a market value of $93,324; and
Mr. Lamm, 14,691 shares with a market value of $205,674.
(2) Includes loan forgiveness in the amount of $375,000, $230,709 for club
membership fees paid by the Company for Mr. Wilansky, $200,000 for the
purchase of an annuity in Mr. Wilansky's name, imputed interest of $48,796
on a loan by the Company to Mr. Wilansky and Company contributions to its
Retirement Savings/Profit Sharing Plan in the amount of $7,256.
(3) Consists of value realized upon exercise of stock options.
(4) Includes premiums on excess life insurance in the amount of $2,592 and
Company contributions to its Retirement Savings/Profit Sharing Plan in the
amount of $7,256.
(5) Consists of premiums on excess life insurance in the amount of $675 and
Company contributions to its Retirement Savings/Profit Sharing Plan in the
amount of $7,256.
(6) Mr. Lamm joined the Company in 1995.
(7) Includes premiums on excess life insurance in the amount of $2,150 and
Company contributions to its Retirement Savings/Profit Sharing Plan in the
amount of $7,256.
(8) Mr. Baireuther joined the Company in 1996.
(9) Includes Company contributions to its Retirement Savings/Profit Sharing
Plan in the amount of $4,783 and premiums on excess life insurance in the
amount of $1,584.
(10) Consists of relocation expenses of $80,240 and imputed interest of $5,066
on a loan by the Company to Mr. Baireuther.

33
<PAGE>

STOCK OPTION GRANTS

The following table contains information concerning the grant of stock
options to each of the Named Executives during fiscal 1997. The Company does
not have any plan pursuant to which stock appreciation rights may be granted.

OPTION GRANTS IN FISCAL 1997

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM ($) (1)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED(#) IN FISCAL 1997 ($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Heywood Wilansky........ 99,000(2) 33.40 7.25 3/6/2007 451,389 1,143,909
Michael L. Gleim........ 24,800(2) 8.37 7.25 3/6/2007 113,075 286,555
24,800(3) 8.37 7.25 3/6/2007 113,075 286,555
M. Thomas Grumbacher.... 43,300(2) 14.61 7.25 3/6/2007 197,426 500,316
Douglas G. Lamm......... -- -- -- -- -- --
James H. Baireuther..... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Illustrates value that might be realized upon exercise of options
immediately prior to the expiration of their term, assuming specified
compounded rates of appreciation on the Common Stock over the term of the
options. Assumed rates of appreciation are not necessarily indicative of
future stock performance.
(2) The options vest on March 6, 2000 only upon the Company meeting pre-
established goals for (a) return on investment and (b) for total
shareholders' return on the Common Stock as compared to a group of other
retailers, each measured during the three-year period of 1997 to 1999.
Fifty percent of the options vest upon the attainment of each goal.
(3) One-third of the options vest on each of March 6, 1998, 1999 and 2000.

STOCK OPTION EXERCISES AND HOLDINGS

The following table sets forth information related to the stock options
exercised by the Named Executives in fiscal 1997 and the number and value of
stock options of each of the Named Executives at January 31, 1998.

AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL 1997
YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
JANUARY 31, 1998 (#) AT JANUARY 31, 1998 ($)(1)
------------------------- -----------------------------
SHARES ACQUIRED VALUE
ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Heywood Wilansky........ 166,667 1,065,260 -- 287,133 -- 2,097,714
Michael L. Gleim........ 25,076 291,147 106,649 117,667 672,754 817,443
M. Thomas Grumbacher.... -- -- -- 114,100 -- 721,700
Douglas G. Lamm......... -- -- 10,000 10,000 63,750 63,750
James H. Baireuther..... -- -- 5,000 15,000 38,125 114,375
</TABLE>
- ---------------------
(1) In-the-money options are options having a per share exercise price below
$14.00, the last reported sale price of shares of Common Stock on the
Nasdaq National Market on January 30, 1998 (the last trading day in fiscal
1997). The amounts shown are the amounts by which the product of such
closing price and the number of shares purchasable upon the exercise of
such in-the-money options exceeds the aggregate exercise price of such
shares.

34
<PAGE>

COMPENSATION OF DIRECTORS

The Company compensates each of its directors who is neither an employee nor
a consultant to the Company at an annual rate of $20,000 plus $2,000 for
attendance at each board meeting ($400 for participation in a meeting held via
teleconference) and $1,000 for attendance at each board committee meeting
($400 for participation in a meeting held via teleconference). In addition,
each such director shall receive an annual grant of options to purchase 1,000
shares of Common Stock. The Company compensates each non-employee director who
is a consultant to the Company at one-half of the cash compensation of a non-
employee director who is not serving as a consultant, and each such director
shall receive an annual grant of options to purchase 500 shares of Common
Stock. Leon D. Starr is a non-employee director who has rendered consulting
services to the Company since 1984 and received approximately $65,000 in
consulting fees from the Company in fiscal 1997.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

In 1997, the Compensation Committee of the Board of Directors (the
"Committee") was composed of Roger B. Hillas, Leon F. Winbigler and Samuel J.
Gerson. None of the executive officers of the Company served on the board of
directors or compensation committee of any entity whose executive officers
served either on the Board of Directors or the Committee.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Heywood Wilansky,
President and Chief Executive Officer, effective February 1, 1998 (the
"Employment Agreement"), which expires January 31, 2003, pursuant to which Mr.
Wilansky is entitled to receive an annual base salary of at least $1.0 million
and is eligible for an annual cash bonus based on the performance of the
Company according to criteria established by the Compensation Committee under
the terms of a cash bonus plan established for this purpose. The maximum bonus
attainable under the cash bonus plan is 100% of Mr. Wilansky's base salary.
The Employment Agreement provides that the remaining $375,000 due on a loan
previously made by the Company to Mr. Wilansky will be forgiven on April 30,
1999 provided his employment with the Company is not terminated prior to that
date by the Company for Cause (as defined in the Employment Agreement) or by
Mr. Wilansky for any reason other than following a Change of Control (as
defined in the Employment Agreement). The Employment Agreement also provides
that the Company will award Mr. Wilansky an additional 250,000 shares of
Common Stock and options to purchase an additional 250,000 shares of Common
Stock at an option price of $8.00 per share following the adoption by the
Company of a Performance Based Stock Incentive Plan established for this
purpose. Mr. Wilansky's ownership in the shares vests in three annual
installments on the third, fourth and fifth anniversaries of the effective
date of the Employment Agreement and the options vest on the first, second and
third anniversaries of the effective date of the Employment Agreement provided
that Mr. Wilansky meets certain performance goals. The Employment Agreement
provides that in the event the Company discharges Mr. Wilansky without Cause,
Mr. Wilansky shall continue to receive his base salary and medical benefits
for the greater of the remaining term of the Employment Agreement or one year
from termination of employment and his bonus compensation for the year in
which he is discharged determined on a pro-rata basis taking into account the
number of days worked during the year up to his termination of employment. In
addition, Mr. Wilansky shall be entitled to immediate vesting of his
restricted stock awards and options and retirement benefits.The Company's
obligation to continue Mr. Wilansky's base salary is subject to Mr. Wilansky's
obligation to mitigate damages by seeking employment and is subject to a
limited offset on the basis of Mr. Wilansky's subsequent earnings. In the
event that Mr. Wilansky voluntarily terminates his employment following a
Change of Control, he shall be entitled to his base salary in monthly
installment payments for the remaining term of the Employment Agreement,
subject to certain potential taxation-related limitations on the value of such
payments, and to immediate vesting of his restricted stock awards and options.
The Employment Agreement contains a covenant against competition for at least
one year after termination of his employment or as long as Mr. Wilansky is
entitled to receive severance pay, and the Company's obligation to pay certain
amounts to Mr. Wilansky following his termination ceases if the covenant
against competition is broken. In addition to the other compensation provided
pursuant to the Employment Agreement, the Company has agreed to establish a
supplemental retirement plan for Mr. Wilansky which will provide supplemental
retirement income of approximately $300,000 per year commencing when he
reaches age 55 or following his retirement or other

35
<PAGE>

termination of employment after reaching age 55. The Company believes that the
present value of the aggregate cost of this supplemental retirement plan over
time, assuming an interest rate of 6%, is approximately $2.8 million.

The Company has entered into an employment agreement with Michael L. Gleim,
Vice Chairman and Chief Operating Officer, which expires January 31, 1999,
pursuant to which Mr. Gleim is entitled to receive an annual salary of at
least $400,000 and is eligible for an annual bonus to be determined by the
Committee. The agreement provides that in the event the Company discharges Mr.
Gleim without cause or Mr. Gleim resigns for good reason (each as defined in
the agreement), Mr. Gleim shall continue to receive his base salary and other
benefits for the greater of the remaining term of the agreement or one year
from termination of employment.

The Company has entered into a severance agreement with certain of its
executive officers other than Messrs. Grumbacher, Wilansky and Gleim which
provides for certain payments to be made by the Company in the event the
executive officer is terminated without cause (as defined in such agreement).
Pursuant to such agreements, the Company shall pay such executive officers the
equivalent of one year's base salary following the date of termination.
Executive officers who have been employed by the Company less than one year as
of the date of termination shall be entitled to the equivalent of six months'
base salary following such termination.

EQUITY INCENTIVE PLANS

STOCK OPTION AND RESTRICTED STOCK PLAN

The Company's Amended and Restated 1991 Stock Option and Restricted Stock
Plan (the "Option Plan") provides for the grant of options ("Options") to
purchase shares of Common Stock and awards ("Awards") of shares of Common
Stock subject to substantial risks of forfeiture ("Restricted Shares") to the
Company's employees, directors, consultants and advisors. Under the Option
Plan, Options and Awards presently can be granted for up to an aggregate of
1,900,000 shares of Common Stock. If any shares subject to any Option or Award
are forfeited, or an Option is terminated without the issuance of shares, the
shares subject to such Option or Award will again be available for grant
pursuant to the Option Plan. The Option Plan is currently administered by the
Committee, which determines the terms and conditions of each Option or Award.

Options granted under the Option Plan may be either incentive stock options
("ISOs") or non-qualified stock options. ISOs are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. Unless an Option is specifically designated
at the time of grant as an ISO, Options granted under the Option Plan are non-
qualified options. The exercise price of an ISO may not be less than the fair
market value of a share of Common Stock on the date the Option is granted. The
maximum number of shares of Common Stock for which options may be granted to
any single optionee in any fiscal year is 500,000 shares. Options generally
terminate ten years from the date of grant but may terminate earlier upon the
termination of the optionee's employment or service with the Company or in the
event there is a Change of Control of the Company, as defined in the Option
Plan.

The Committee administers Awards under the Option Plan and determines the
period, which generally will extend for at least six months from the date of
the Award, during which the recipient may not sell, transfer, pledge or assign
("Restrictions") Restricted Shares. The Committee will determine the rights
that recipients will have with respect to Restricted Shares, including the
right to vote the Restricted Shares and the right to receive dividends paid
with respect to the Restricted Shares. In the event a grantee terminates
employment with the Company or its affiliates for any reason other than death
or disability, all Restricted Shares remaining subject to Restrictions will be
forfeited by the grantee.

Notwithstanding any other provision of the Option Plan, in the event of a
Change of Control of the Company (which is defined as including certain
changes in the ownership or corporate structure of the Company, as well as a
liquidation of the Company or any other event that may be defined by the
Company's Board of Directors as constituting a Change of Control), the
Committee may take whatever action with respect to Options and Awards
outstanding as it deems necessary or desirable, including acceleration of the
expiration or termination date or the date of exercisability of an Option or
removing any Restrictions from or imposing any additional Restrictions on any
outstanding Awards.

36
<PAGE>

LONG-TERM INCENTIVE PLAN FOR PRINCIPALS

The Bon-Ton Stores, Inc. Long-Term Incentive Plan for Principals (the "LTI
Plan") is a performance-based compensation plan established by the Board of
Directors of the Company. The LTI Plan provides for grants of "Performance
Awards" of cash bonuses, Options and Awards, or combinations thereof, to
certain eligible employees based on the achievement by the Company of certain
performance goals during three- to five-year performance cycles which commence
on an annual basis. The LTI Plan is currently administered by the Committee,
and the participants under the LTI Plan are the principal employees of the
Company as designated by the Committee from time to time. With respect to the
performance cycles that commenced as of February 4, 1996 and February 2, 1997,
the participants were Heywood Wilansky, M. Thomas Grumbacher and Michael L.
Gleim. No additional grants of Performance Awards for future performance
cycles will be granted under the LTI Plan.

MANAGEMENT INCENTIVE PLAN

The Company's Management Incentive Plan (the "MIP") provides for the
granting of cash bonuses and/or shares of Common Stock to participants based
on a combination of Company performance and the participant's individual
performance. The MIP is currently administered by the Committee. All employees
at the level of divisional vice president and above, exclusive of participants
in the LTI Plan, and certain other managerial employees are eligible to
participate in the MIP. Bonus payouts are discretionary and no bonus payouts
may be made if the Company fails to achieve established performance goals. MIP
participants may elect to receive a portion of their MIP bonus in shares of
Common Stock ("Restricted MIP Shares") which Shares are issued in the name of
the participant but are restricted and are not eligible for resale until bonus
awards for such participant are made. All such resale restrictions will lapse
after the end of fiscal year 2005, whether or not such Restricted MIP Shares
have been awarded pursuant to a bonus award. In addition, the Committee may
accelerate the vesting of the unvested Restricted MIP shares. In the event of
the death, disability or retirement of a participant or a Change of Control of
the Company, the Committee may vest a pro-rata portion of a participant's
Restricted MIP Shares.

37
<PAGE>

CERTAIN TRANSACTIONS

The Company leases its Oil City, Pennsylvania and Butler, Pennsylvania
stores from M. Thomas Grumbacher, the Company's Chairman of the Board and
principal shareholder. Mr. Grumbacher is the ground tenant under leases from
the owners of the respective shopping centers. These leases between the
Company and Mr. Grumbacher were entered into on January 1, 1981 and February
17, 1981, respectively. The aggregate rental payments during fiscal 1997 for
the Oil City store and the Butler store to Mr. Grumbacher were $223,500 and
$264,000, respectively. The Oil City and Butler leases also require payment of
a percentage rent (1% of sales in excess of $5.3 million with respect to Oil
City and 1% of sales in excess of $7.0 million with respect to Butler), which
Mr. Grumbacher passes through to the ground lessor. Both leases terminate on
July 31, 2006 and provide the Company with five five-year renewal options.

Additionally, the Company leases the land for its York Galleria store from
MBM Land Associates Limited Partnership ("MBM"), a partnership of which Mr.
Grumbacher, through a wholly-owned corporation, and certain trusts established
for the benefit of his three children, are the partners. The lease expires on
September 30, 2019, and provides the Company with six five-year renewal
options. Rental payments by the Company during fiscal 1997 pursuant to this
lease aggregated $63,000.

The Company also leases a portion of the property on which its distribution
center is located from MBM. The remainder is leased from Mr. Grumbacher.
Aggregate annual rental payments under these leases are $162,000 until January
1, 2001. During fiscal 1997, Mr. Grumbacher and MBM received rental payments
from the Company under such leases aggregating $126,767 and $35,233,
respectively. Each of the leases terminates on May 31, 2017, and provides the
Company with two-five year renewal options at the then fair market rental
value.

Total lease payments by the Company to Mr. Grumbacher and affiliated
entities for fiscal 1997 were $712,500.

In 1995, in connection with his employment by the Company, Heywood Wilansky,
President and Chief Executive Officer of the Company, received a non-interest
bearing loan from the Company in the principal amount of $750,000, which loan
was to be forgiven in two installments of $375,000 each in December 1997 and
April 1999 provided that Mr. Wilansky remained employed by the Company. One
such installment was forgiven in December 1997, and $375,000 in principal
amount of such loan remains outstanding.

In November 1996, the Company extended to James H. Baireuther, Senior Vice
President and Chief Financial Officer, an interest-free relocation loan in the
amount of $85,000 in connection with his employment by the Company. Such loan
was repaid when due in January 1998.

In January 1998, the Company extended to Patrick J. McIntyre, Senior Vice
President, Chief Information Officer, an interest-free relocation loan in the
amount of $65,000 in connection with his employment by the Company. Such loan
was repaid when due in April 1998.

In fiscal 1997, Leon D. Starr, a director of the Company, received
approximately $65,000 in consulting fees from the Company. The Company
anticipates that it will pay Mr. Starr approximately $65,000 in consulting
fees in fiscal 1998.

38
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information concerning the beneficial
ownership of the Common Stock and Class A Common Stock of (i) the Selling
Shareholders; (ii) each person who was known to the Company to be a beneficial
owner of more than 5% of the Common Stock or the Class A Common Stock; (iii)
each director of the Company; (iv) Heywood Wilansky, President and Chief
Executive Officer of the Company, and each of the other Named Executives; and
(v) all of the Company's directors and executive officers as a group, as of
April 24, 1998 and as adjusted to reflect the sale of 1,500,000 shares of
Common Stock by the Selling Shareholders and 2,500,000 shares of Common Stock
by the Company in the offering:

<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK(1)
-------------------- -----------------------------------------------------------------------
SHARES SHARES TO BE
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
NAME AND ADDRESS OF ----------------------------- SHARES BEING -------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C> <C> <C>
M. Thomas
Grumbacher(2)(3)....... 2,444,616(4) 81.8% 5,141,811(5) 57.8% 998,000(6) 4,084,084(7) 35.8%
David J. Kaufman(8)..... 545,237(9) 18.2% 1,397,191(10) 15.7% 0(11) 1,097,964(12) 9.6%
Nancy T. Grumbacher..... -- -- 270,450(13) 3.0% 0(14) 210,723(15) 1.8%
Mary Jo Grumbacher(16).. 545,237(9) 18.2% 1,251,741(17) 14.1% 25,000(18) 991,741(19) 8.7%
David J. Kaufman and
Mary Jo Grumbacher, as
Trustees for the M.
Thomas Grumbacher Trust
for the benefit of Max
Aaron Grumbacher(20)... 181,745 6.1% 375,579(21) 4.2% 86,667 288,912(21) 2.5%
David J. Kaufman and
Mary Jo Grumbacher, as
Trustees for the M.
Thomas Grumbacher Trust
for the benefit of
Matthew Reed
Grumbacher(20)......... 181,745 6.1% 375,579(21) 4.2% 86,667 288,912(21) 2.5%
David J. Kaufman and
Mary Jo Grumbacher, as
Trustees for the M.
Thomas Grumbacher Trust
for the benefit of Beth
Anne Grumbacher(20).... 181,745 6.1% 375,579(21) 4.2% 86,666 288,913(21) 2.5%
David J. Kaufman and
Nancy T. Grumbacher, as
Trustees for the M.
Thomas Grumbacher Trust
for the benefit of Max
Aaron Grumbacher(22)... -- -- 16,250 * 6,833 9,417 *
David J. Kaufman and
Nancy T. Grumbacher, as
Trustees for the M.
Thomas Grumbacher Trust
for the benefit of
Matthew Reed
Grumbacher(22)......... -- -- 16,250 * 6,833 9,417 *
David J. Kaufman and
Nancy T. Grumbacher, as
Trustees for the M.
Thomas Grumbacher Trust
for the benefit of Beth
Anne Grumbacher(22).... -- -- 12,950 * 6,834 6,116 *
The Grumbacher Family
Foundation............. -- -- 225,000 2.5% 39,227 185,773 1.6%
Mercersburg Academy..... 157,273 1.8% 157,273 0 *
Brinson Holdings, -- -- 711,181(23) 8.0% 0 711,181(23) 6.2%
Inc. ..................
209 South LaSalle
Street
Chicago, IL 60604-1295
Dimensional Fund -- -- 491,400(24) 5.5% 0 491,400(24) 4.3%
Advisors, Inc. ........
1299 Ocean Avenue
Santa Monica, CA 90401
Heywood Wilansky........ -- -- 364,467(25) 4.1% 0 364,467(25) 3.2%
Samuel J. Gerson........ -- -- 2,000(26) * 0 2,000(26) *
Michael L. Gleim........ -- -- 198,152(27) 2.2% 0 198,152(27) 1.7%
Roger S. Hillas......... -- -- 4,000(26) * 0 4,000(26) *
Lawrence J. Ring........ -- -- 2,000(26) * 0 2,000(26) *
Leon D. Starr........... -- -- 48,080 * 0 48,080 *
Leon F. Winbigler....... -- -- 3,000(26) * 0 3,000(26) *
Douglas G. Lamm......... -- -- 49,691(28) * 0 49,691(28) *
James H. Baireuther..... -- -- 15,800(29) * 0 15,800(29) *
All directors and
executive officers as a
group (22 persons)..... 2,444,616 81.8% 6,026,802(30) 67.7% 998,000(6) 4,969,075(30) 43.6%
Total shares of Common
Stock being offered by
Selling Shareholders.. 1,500,000
</TABLE>

39
<PAGE>

- ---------------------
* Less than one percent.
(1) Each share of Class A Common Stock is convertible at any time into one
share of Common Stock. Accordingly, the number of shares of Common Stock
for any person owning Class A Common Stock includes the number of shares
of Common Stock issuable upon conversion of all shares of Class A Common
Stock beneficially owned by such person. Also, in accordance with Rule
13d-3(d)(1) under the Exchange Act, the total number of shares of Common
Stock outstanding for purposes of calculating percentage ownership of a
person or group owning Class A Common Stock includes the number of shares
of Class A Common Stock beneficially owned by such person or group.
(2) M. Thomas Grumbacher is the Chairman of the Board of the Company.
(3) The address of M. Thomas Grumbacher is c/o the Company, 2801 East Market
Street, York, PA 17402.
(4) Includes 38,363 shares of Class A Common Stock held by a trust for the
benefit of a child of Mr. Grumbacher, of which Mr. Grumbacher is the sole
trustee. Does not include an aggregate of 545,237 shares of Class A Common
Stock held by other trusts for the benefit of Mr. Grumbacher's three
children of which David J. Kaufman and Mary Jo Grumbacher are the co-
trustees. Mr. Grumbacher disclaims beneficial ownership of all shares
referred to in this note.
(5) Includes 225,000 shares of Common Stock held by The Grumbacher Family
Foundation, a charitable foundation of which Mr. Grumbacher, Mr.
Grumbacher's spouse Nancy T. Grumbacher, and David J. Kaufman are the
directors. Also includes 40,915 shares of Common Stock held by a trust for
the benefit of a child of Mr. Grumbacher, of which Mr. Grumbacher is the
sole trustee, and 45,450 shares of Common Stock held by trusts for the
benefit of Mr. Grumbacher's three children of which Nancy T. Grumbacher
and David J. Kaufman are the co-trustees. Does not include an aggregate of
545,237 shares of Class A Common Stock and 581,504 shares of Common Stock
held by other trusts for the benefit of Mr. Grumbacher's three children of
which David J. Kaufman and Mary Jo Grumbacher are the co-trustees. Mr.
Grumbacher disclaims beneficial ownership of all shares referred to in
this note.
(6) Excludes 39,227 shares of Common Stock offered by The Grumbacher Family
Foundation of which Mr. Grumbacher, Mr. Grumbacher's spouse, Nancy T.
Grumbacher, and David J. Kaufman are the directors and 20,500 shares of
Common Stock offered by trusts for the benefit of Mr. Grumbacher's three
children, of which Nancy T. Grumbacher and David J. Kaufman are the co-
trustees. Mr. Grumbacher disclaims beneficial ownership of all shares
referred to in this note.
(7) Includes 185,773 shares of Common Stock held by The Grumbacher Family
Foundation, a charitable foundation of which Mr. Grumbacher, Mr.
Grumbacher's spouse Nancy T. Grumbacher, and David J. Kaufman are the
directors. Also includes 40,915 shares of Common Stock held by a trust for
the benefit of a child of Mr. Grumbacher, of which Mr. Grumbacher is the
sole trustee, and 24,950 shares of Common Stock held by trusts for the
benefit of Mr. Grumbacher's three children of which Nancy T. Grumbacher
and David J. Kaufman are the co-trustees. Does not include an aggregate of
545,237 shares of Class A Common Stock and 321,500 shares of Common Stock
held by other trusts for the benefit of Mr. Grumbacher's three children of
which David J. Kaufman and Mary Jo Grumbacher are the co-trustees. Mr.
Grumbacher disclaims beneficial ownership of all shares referred to in
this note.
(8) The address of Mr. Kaufman is c/o Wolf, Block, Schorr and Solis-Cohen LLP,
Twelfth Floor Packard Building, 111 South 15th Street, Philadelphia, PA
19102.
(9) Consists of 545,237 shares of Class A Common Stock held by trusts for the
benefit of M. Thomas Grumbacher's three children, of which Mr. Kaufman and
Mary Jo Grumbacher are the co-trustees. Mr. Kaufman and Mary Jo Grumbacher
each disclaim beneficial ownership of these shares.
(10) Includes 225,000 shares of Common Stock held by The Grumbacher Family
Foundation, a charitable foundation of which Mr. Kaufman, Nancy T.
Grumbacher and M. Thomas Grumbacher are the directors, 45,450 shares of
Common Stock held by trusts for the benefit of M. Thomas Grumbacher's
three children, of which Mr. Kaufman and Nancy T. Grumbacher are the co-
trustees and an aggregate of 545,237 shares of Class A Common Stock and
581,504 shares of Common Stock held by trusts for the benefit of M.
Thomas Grumbacher's three children, of which Mr. Kaufman and Mary Jo
Grumbacher are the co-trustees. Mr. Kaufman disclaims beneficial
ownership of all shares referred to in this note.
(11) Excludes 260,000 shares of Common Stock offered by trusts held for the
benefit of M. Thomas Grumbacher's three children, of which Mr. Kaufman
and Mary Jo Grumbacher are the co-trustees, 20,500 shares of Common Stock
offered by trusts for the benefit of M. Thomas Grumbacher's three
children, of which Mr. Kaufman and Nancy T. Grumbacher are the co-
trustees, and 39,227 shares of Common Stock offered by The Grumbacher
Family Foundation, of which Mr. Kaufman, M. Thomas Grumbacher and Nancy
T. Grumbacher are the directors. Mr. Kaufman disclaims beneficial
ownership of all shares referred to in this note.
(12) Includes 185,773 shares of Common Stock held by The Grumbacher Family
Foundation, a charitable foundation of which Mr. Kaufman, Nancy T.
Grumbacher and M. Thomas Grumbacher are the directors, 24,950 shares of
Common Stock held by trusts for the benefit of M. Thomas Grumbacher's
three children, of which Mr. Kaufman and Nancy T. Grumbacher are the co-
trustees and an aggregate of 545,237 shares of Class A Common Stock and
321,500 shares of Common Stock held by trusts for the benefit of M.
Thomas Grumbacher's three children, of which Mr. Kaufman and Mary Jo
Grumbacher are the co-trustees. Mr. Kaufman disclaims beneficial
ownership of all shares referred to in this note.
(13) Consists of 45,450 shares of Common Stock held in trusts for the benefit
of M. Thomas Grumbacher's three children, of which Nancy T. Grumbacher
and David J. Kaufman are the co-trustees, and 225,000 shares of Common
Stock held by The Grumbacher Family Foundation, a charitable foundation
of which Nancy T. Grumbacher, M. Thomas Grumbacher and David J. Kaufman
are the directors. Nancy T. Grumbacher disclaims beneficial ownership of
the shares referred to in this note.
(14) Excludes 20,500 shares of Common Stock offered by trusts for the benefit
of M. Thomas Grumbacher's three children, of which Nancy T. Grumbacher
and David J. Kaufman are the co-trustees and 39,227 shares of Common
Stock offered by The Grumbacher Family Foundation, of which Nancy T.
Grumbacher, M. Thomas Grumbacher and David J. Kaufman are the directors.
Nancy T. Grumbacher disclaims beneficial ownership of all shares referred
to in this note.

40
<PAGE>

(15) Consists of 24,950 shares of Common Stock held in trusts for the benefit
of M. Thomas Grumbacher's three children, of which Nancy T. Grumbacher
and David J. Kaufman are the co-trustees, and 185,773 shares of Common
Stock held by The Grumbacher Family Foundation, a charitable foundation
of which Nancy T. Grumbacher, M. Thomas Grumbacher and David J. Kaufman
are the directors. Nancy T. Grumbacher disclaims beneficial ownership of
the shares referred to in this note.
(16) The address of Mary Jo Grumbacher is 174 Eleventh Avenue, San Francisco,
CA 94118.
(17) Includes an aggregate of 545,237 shares of Class A Common Stock and
581,504 shares of Common Stock held by trusts for the benefit of M.
Thomas Grumbacher's three children, of which Mary Jo Grumbacher and David
J. Kaufman are the co-trustees. Mary Jo Grumbacher disclaims beneficial
ownership of the shares referred to in this note.
(18) Excludes 260,000 shares of Common Stock offered by trusts for the benefit
of M. Thomas Grumbacher's three children, of which Mary Jo Grumbacher and
David J. Kaufman are the co-trustees. Mary Jo Grumbacher disclaims
beneficial ownership of the shares referred to in this note.
(19) Includes an aggregate of 545,237 shares of Class A Common Stock and
321,500 shares of Common Stock held by trusts for the benefit of M.
Thomas Grumbacher's three children, of which Mary Jo Grumbacher and David
J. Kaufman are the co-trustees. Mary Jo Grumbacher disclaims beneficial
ownership of the shares referred to in this note.
(20) Such trust was created under an Indenture of Trust of M. Thomas
Grumbacher dated March 9, 1989.
(21) Includes 181,745 shares of Class A Common Stock held by such trust.
(22) Such trust was created under an Indenture of Trust of M. Thomas
Grumbacher dated June 21, 1993.
(23) Based solely on a review of a Schedule 13G dated February 10, 1998 filed
with the Securities and Exchange Commission. Such shares are held by
Brinson Partners, Inc. and Brinson Trust Company, which are subsidiaries
of Brinson Holdings, Inc.
(24) Based solely on a review of a Schedule 13G dated February 10, 1998 filed
with the Securities and Exchange Commission. Such shares are owned by
advisory clients of Dimensional Fund Advisors Inc. Dimensional Fund
Advisors Inc. disclaims beneficial ownership of all such shares.
(25) Includes 250,000 Restricted Shares issued pursuant to the Option Plan but
excludes 250,000 restricted shares to be awarded subject to shareholder
approval.
(26) Includes options to purchase 1,000 shares of Common Stock.
(27) Includes options to purchase 126,416 shares of Common Stock and 6,666
Restricted Shares issued pursuant to the Option Plan.
(28) Includes 10,276 Restricted MIP Shares issued pursuant to the MIP and
25,000 Restricted Shares issued pursuant to the Option Plan.
(29) Includes options to purchase 5,000 shares of Common Stock.
(30) Includes 281,666 Restricted Shares issued pursuant to the Option Plan,
options to purchase 272,541 shares of Common Stock and 37,359 Restricted
MIP Shares issued pursuant to the MIP.

41
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of (i) 40,000,000
shares of Common Stock, (ii) 20,000,000 shares of Class A Common Stock and
(iii) 5,000,000 shares of Preferred Stock, par value $0.01 per share (the
"Preferred Stock"). Prior to this offering, there were 8,902,925 shares of
Common Stock and 2,989,853 shares of Class A Common Stock issued and
outstanding. Upon the closing of this offering, 11,402,925 shares of Common
Stock will be issued and outstanding and 2,989,853 shares of Class A Common
Stock will be issued and outstanding, all of which shares of Class A Common
Stock will be owned by the Grumbacher Family. There are currently no shares of
Preferred Stock outstanding.

The following summary description relating to the Company's capital stock
sets forth the material terms of the capital stock, but does not purport to be
complete. A description of the Company's capital stock is contained in the
Company's Articles of Incorporation (the "Articles of Incorporation"), which
are filed as an exhibit to the Registration Statement of which this Prospectus
is a part. Reference is made to such exhibit for a detailed description of the
provisions thereof summarized below.

COMMON STOCK AND CLASS A COMMON STOCK

Voting, Dividend and Other Rights. The voting powers, preferences and
relative rights of the Common Stock and the Class A Common Stock are identical
in all respects, except that (i) at every meeting or action by consent in
writing of the shareholders, the holders of Common Stock are entitled to one
vote per share and holders of Class A Common Stock are entitled to ten votes
per share; (ii) stock dividends on Common Stock may be paid only in shares of
Common Stock and stock dividends on Class A Common Stock may be paid in shares
of Class A Common Stock or (with the majority approval of the holders of the
Class A Common Stock) Common Stock; (iii) in the case of any combination or
reclassification of the Common Stock, shares of Class A Common Stock shall
also be combined or reclassified so as to maintain the relationship of the
number of shares of Common Stock outstanding to the number of shares of Class
A Common Stock outstanding; and (iv) shares of Class A Common Stock have
certain conversion rights and are subject to certain restrictions on ownership
and transfer described below under "Conversion Rights and Restrictions on
Transfer of Class A Common Stock." Except as described above, issuances of
additional shares of Class A Common Stock (except in connection with stock
splits, combinations, reclassifications and stock dividends) and modifications
of the terms of the Class A Common Stock require the approval of a majority of
the holders of the Common Stock and Class A Common Stock, voting as separate
classes. Except as described above or as required by law, holders of Common
Stock and Class A Common Stock vote together as a single class on all matters
presented to the shareholders for their vote or approval, including, without
limitation, the election of directors. The shareholders are not entitled to
vote cumulatively for the election of directors. Shareholders may act without
a meeting upon written consent of shareholders who would have been entitled to
cast the minimum number of votes that would be necessary to authorize the
action at a meeting at which all shareholders entitled to vote thereon were
present and voting.

After the sale of the Common Stock offered hereby, the outstanding shares of
Common Stock will equal 79.2% of the total Common Shares outstanding and will
represent approximately 27.6% of the combined voting power of the Common
Shares, and the outstanding shares of Class A Common Stock will equal 20.8% of
the total Common Shares outstanding and will represent approximately 72.4% of
the combined voting power of the Common Shares. The holders of the Class A
Common Stock, in particular M. Thomas Grumbacher, will have sufficient voting
power to determine the outcome of any matter submitted to the shareholders for
approval, including the power to determine the outcome of all corporate
transactions and the election of directors.

Each share of Common Stock and Class A Common Stock is entitled to receive
dividends and other distributions in cash, stock or property of the Company
if, as and when declared by the Board of Directors out of assets or funds
legally available therefor. The Common Stock and Class A Common Stock share
equally, on a share-for-share basis, in any dividends declared by the Board of
Directors, provided that in the event of a

42
<PAGE>

dividend of shares or other equity interests of a corporation or other entity,
if the equity interests consist of two classes, one of which is entitled to
one vote per interest and the other of which is entitled to ten or fewer votes
per interest, the Board of Directors may distribute the interests with
multiple votes to the holders of Class A Common Stock provided that the
multiple-vote interests distributed are in the same proportion to the single
vote interests distributed as the number of shares of Class A Common Stock are
to the shares of Common Stock.

In the event of a merger or consolidation to which the Company is a party,
each share of Common Stock and Class A Common Stock will be entitled to
receive the same consideration, except that in the event of a merger,
consolidation, division or exchange in which holders of Class A Common Stock
will receive in exchange for their Class A Common Stock shares equity
interests of the surviving, resulting or exchanging entity, such holders of
Class A Common Stock shall be entitled to receive equity interests having
substantially similar relative designations, preferences, qualifications,
privileges, limitations, restrictions and rights as those of the Class A
Common Stock.

Shareholders of the Company have no preemptive or other rights to subscribe
for additional shares. Subject to any rights of holders of any Preferred
Stock, all holders of Common Shares, regardless of class, are entitled to
share equally on a share-for-share basis in any assets available for
distribution to shareholders on liquidation, dissolution or winding up of the
Company. No Common Shares are subject to redemption or a sinking fund. The
Company may not subdivide or combine shares of either class of Common Shares
without at the same time proportionally subdividing or combining shares of the
other class of Common Shares.

Conversion Rights and Restrictions on Transfer of Class A Common Stock. The
Common Stock has no conversion rights. However, at the option of the holder,
each share of Class A Common Stock is convertible at any time and from time to
time into one share of Common Stock.

Shares of Class A Common Stock may not be transferred except to (i) M.
Thomas Grumbacher, (ii) certain family members of Mr. Grumbacher, (iii) trusts
primarily for the benefit of such family members, (iv) certain entities
controlled by Mr. Grumbacher or certain members of his family or (v) the
estate of the holder of such Class A Common Stock (collectively, "Permitted
Transferees"). Upon any sale or transfer of ownership or voting rights to a
transferee other than a Permitted Transferee or to the extent an entity no
longer remains a Permitted Transferee, such shares of Class A Common Stock
will automatically convert into an equal number of shares of Common Stock. In
addition, holders of the Class A Common Stock have entered into a
shareholders' agreement pursuant to which each such shareholder (other than M.
Thomas Grumbacher) has granted to M. Thomas Grumbacher (or, if applicable, Mr.
Grumbacher's personal representative) a right of first refusal to acquire any
shares of Class A Common Stock proposed to be transferred. Accordingly, no
trading market is expected to develop in the Class A Common Stock and the
Class A Common Stock will not be listed or traded on any exchange or in any
market.

Effects of Disproportionate Voting Rights. The disproportionate voting
rights of the Common Stock and Class A Common Stock could have an adverse
effect on the market price of the Common Stock. Such disproportionate voting
rights may make the Company a less attractive target for a takeover than it
otherwise might be, or render more difficult or discourage a merger proposal,
a tender offer or a proxy contest, even if such actions were favored by
shareholders of the Company other than the holders of Class A Common Stock.
Accordingly, such disproportionate voting rights may deprive holders of Common
Stock of an opportunity to sell their shares at a premium over prevailing
market prices, since takeover bids frequently involve purchases of stock
directly from shareholders at such a premium price.

PREFERRED STOCK

The Company has authorized 5,000,000 shares of Preferred Stock. No shares of
Preferred Stock have been issued and the Company does not presently
contemplate the issuance of such shares. The Board of Directors is empowered
by the Articles of Incorporation to designate and issue from time to time one
or more classes or

43
<PAGE>

series of Preferred Stock without any action of the shareholders. The Board of
Directors may authorize issuances in one or more classes or series, and may
fix and determine the relative rights, preferences and limitations of each
class or series so authorized. Such action could adversely affect the voting
power of the holders of the Common Stock or the Class A Common Stock or could
have the effect of discouraging or making difficult any attempt by a person or
group to obtain control of the Company.

ANTI-TAKEOVER PROVISIONS

Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of
1988, as amended (the "BCL"), which is applicable to the Company, may have an
anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a shareholder might consider in his or her best
interest, including those attempts that might result in a premium over the
market price for the shares held by shareholders. In general, Subchapter F of
Chapter 25 of the BCL delays for five years and imposes conditions upon
"business combinations" between an "interested shareholder" and the Company,
unless prior approval of the Board of Directors is given. The term "business
combination" is defined broadly to include various merger, consolidation,
division, exchange or sale transactions, including transactions utilizing the
Company's assets for purchase price amortization or refinancing purposes. An
"interested shareholder," in general, would be a beneficial owner of shares
entitling that person to cast at least 20% of the votes that all shareholders
would be entitled to cast in an election of directors of the Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, New York, New York.

44
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of this offering the Company will have 11,402,925 shares
of Common Stock outstanding (assuming no exercise of the Underwriters'
overallotment option), and 1,128,352 shares of Common Stock will be reserved
for issuance upon the exercise of outstanding stock options pursuant to the
Company's stock option plans. Of the outstanding shares of Common Stock,
9,267,226 shares, including all of the shares of Common Stock sold in this
offering, will be freely tradeable without restriction or registration under
the Securities Act. The remaining 2,135,699 shares of Common Stock outstanding
as of the date of this Prospectus are "restricted securities" as defined by
Rule 144 of the Securities Act and may not be resold in a public distribution
except in compliance with the registration requirements of the Securities Act
or pursuant to a valid exemption from registration (including pursuant to Rule
144).

In general, under Rule 144 a person who has beneficially owned for at least
one year shares of Common Stock that are treated as restricted securities,
including an "affiliate" as that term is defined in the Securities Act, is
entitled to sell within any three-month period a number of shares that does
not exceed the greater of one percent of the then outstanding shares of Common
Stock, or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information and manner and notice of sale.
In addition, affiliates must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirements, in order to
sell shares of Common Stock that are not restricted securities. Under Rule
144(k), a person who is not an affiliate and has not been an affiliate for at
least three months prior to the sale and who has beneficially owned restricted
shares for at least a two year holding period may resell such shares without
compliance with the foregoing requirements. All of the 2,135,699 restricted
shares of Common Stock have been issued for more than two years and will be
eligible for sale under Rule 144(k) if their holders qualify for non-affiliate
status.

In addition to the 9,267,226 shares of Common Stock which upon completion of
this offering will be freely tradeable without restriction or registration
under the Securities Act, the Company has outstanding 2,989,853 shares of
Class A Common Stock, all of which are owned by the Grumbacher Family. Each
share of Class A Common Stock is convertible into one share of Common Stock.
See "Description of Capital Stock--Common Stock and Class A Common Stock--
Conversion Rights and Restrictions on Transfer of Class A Common Stock." Any
shares of Common Stock acquired by the Grumbacher Family upon conversion of
shares of Class A Common Stock would be freely tradeable, subject to the
limitations under Rule 144 under the Securities Act applicable to affiliates
of the Company.

Upon the completion of this offering, it is expected that there will be
1,128,352 shares of Common Stock issuable upon exercise of options granted
under the Company's stock option plans, approximately 384,315 of which are
currently vested and the remainder of which will vest at various times through
2001.

The Company, the Selling Shareholders, the executive officers and directors
of the Company and certain shareholders of the Company holding in the
aggregate 2,632,136 shares of Common Stock have agreed that, for a period of
90 days after the date of this Prospectus, they will not, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
register the sale of, offer to sell, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for any shares of Common Stock, subject to certain
limited circumstances.

45
<PAGE>

UNDERWRITING

Subject to certain conditions contained in the Underwriting Agreement, a
syndicate of underwriters named below (the "Underwriters"), for whom
Donaldson, Lufkin & Jenrette Securities Corporation and NationsBanc Montgomery
Securities LLC are acting as representatives, have severally agreed to
purchase from the Company and the Selling Shareholders an aggregate of
4,000,000 shares of Common Stock. The number of shares of Common Stock that
each Underwriter has agreed to purchase is set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............... 1,462,500
NationsBanc Montgomery Securities LLC............................. 1,462,500
BancAmerica Robertson Stephens.................................... 50,000
Bear, Stearns & Co. Inc. ......................................... 50,000
BT Alex. Brown Incorporated....................................... 50,000
CIBC Oppenheimer Corp ............................................ 50,000
Credit Suisse First Boston Corporation............................ 50,000
A.G. Edwards & Sons, Inc. ........................................ 50,000
Furman Selz LLC................................................... 50,000
Goldman, Sachs & Co. ............................................. 50,000
Lazard Freres & Co. LLC........................................... 50,000
Lehman Brothers Inc. ............................................. 50,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 50,000
Morgan Stanley & Co., Incorporated................................ 50,000
PaineWebber Incorporated.......................................... 50,000
Prudential Securities Incorporated................................ 50,000
Salomon Smith Barney.............................................. 50,000
The Buckingham Research Group Incorporated........................ 25,000
Crowell, Weedon & Co. ............................................ 25,000
EDWARD D. JONES & CO., L.P. ...................................... 25,000
Fahnestock & Co., Inc. ........................................... 25,000
First Montauk Securities Corp. ................................... 25,000
Janney Montgomery Scott Inc. ..................................... 25,000
C.L. King & Associates, Inc. ..................................... 25,000
McDonald & Company Securities, Inc. .............................. 25,000
Parker/Hunter Incorporated........................................ 25,000
Pennsylvania Merchant Group Ltd. ................................. 25,000
Raymond James & Associates, Inc. ................................. 25,000
Sands Brothers & Co., Ltd. ....................................... 25,000
Stifel, Nicolaus & Company, Incorporated.......................... 25,000
---------
Total........................................................... 4,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the shares of Common Stock offered hereby are subject
to approval of certain legal matters by their counsel and to certain other
conditions. If any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, the Underwriters are
obligated to purchase all such shares (other than those covered by the over-
allotment option described below).

The Company and the Selling Shareholders have been advised by the
Underwriters that they propose to offer the shares of Common Stock to the
public initially at the price to the public set forth on the cover page of
this Prospectus and to certain dealers (who may include the Underwriters) at
such price, less a concession not in

46
<PAGE>

excess of $0.48 per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $0.10 per share to certain other
dealers. After the public offering of the shares, the price to the public, the
concession and the discount to dealers may be changed by Donaldson, Lufkin &
Jenrette Securities Corporation and NationsBanc Montgomery Securities LLC.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 600,000 additional
shares of Common Stock at the initial price to the public less underwriting
discounts and commissions, solely to cover over-allotments. To the extent that
the Underwriters exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's commitment as indicated in the
preceding table.

In the Underwriting Agreement, the Company, the Selling Shareholders and the
Underwriters have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act. In addition, the Company and
the Selling Shareholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.

The Company, the Selling Shareholders, the executive officers and directors
of the Company and certain shareholders of the Company have each agreed that
they will not, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, register the sale of, sell, offer to sell,
grant any option to purchase or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or in any manner transfer all or a portion of the economic
consequences associated with the ownership of Common Stock, for a period of 90
days after the date of this Prospectus. See "Shares Eligible for Future Sale."

The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate short covering transactions and penalty bids in accordance with
Regulation M under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"). Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchase of shares of the Common Stock in the open market
after distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the shares of Common Stock originally
sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Common Stock to be higher than it would otherwise be in the absence of such
transactions.

The rules of the Securities and Exchange Commission (the "Commission")
generally prohibit the Underwriters and other members of the selling group
from making a market in the Common Stock during the "cooling off" period
immediately preceding the commencement of sales in this offering. The
Commission has, however, adopted an exemption from these rules that permits
passive market marking under certain conditions. These rules permit an
Underwriter or other member of the selling group to continue to make a market
in the Common Stock subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with this offering and
that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to those exemptions, certain Underwriters and other members of the
selling group intend to engage in passive market making in the Common Stock
during the cooling off period.

At the request of the Company, the Underwriters have agreed to pay to Tanner
& Co., Inc. ("Tanner") a fee related to its acting as a financial advisor to
the Company in connection with this offering in the amount of $495,000. Tanner
is not acting as an underwriter or a dealer with respect to the Common Stock
offered hereby.

47
<PAGE>

LEGAL MATTERS

The validity of the shares offered hereby will be passed upon for the
Company and the Selling Shareholders by Wolf, Block, Schorr and Solis-Cohen
LLP, Philadelphia, Pennsylvania. A retired partner of that firm is a trustee
of trusts for the benefit of certain members of the Grumbacher Family that
upon completion of the offering will own 1,097,964 shares of Common Stock and
545,237 shares of Class A Common Stock. Certain legal matters will be passed
upon for the Underwriters by Gibson, Dunn & Crutcher LLP, New York, New York.

EXPERTS

The consolidated financial statements and schedule included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy and information statements
and other information with the Commission. Such reports, proxy and information
statements and other information are available for inspection without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549-1004, as well as the Regional Offices of
the Commission at Seven World Trade Center, 13th Floor, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661-2511. Copies of such materials may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549, at prescribed rates. The Commission maintains a Web
site, located at http://www.sec.gov, that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission. The Common Stock is
quoted on the Nasdaq National Market, and reports, proxy and information
statements and other information concerning the Company may also be inspected
at the offices of the Nasdaq National Market, 1735 K Street, N.W. Washington,
DC 20006-1506.

The Company has filed a Registration Statement on Form S-1 (the
"Registration Statement," which term shall include any amendments thereto)
under the Securities Act with the Commission with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission, and to which reference is hereby made. For further information,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to contents of any
contract or other document referred to herein are not necessarily complete
and, where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions
of such exhibit, to which reference is hereby made.

48
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997... F-3
Consolidated Statements of Operations for the Years Ended January 31,
1998, February 1, 1997 and February 3, 1996.............................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
January 31, 1998, February 1, 1997 and February 3, 1996.................. F-5
Consolidated Statements of Cash Flows for the Years Ended January 31,
1998, February 1, 1997 and February 3, 1996.............................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of The Bon-Ton Stores, Inc.:

We have audited the accompanying consolidated balance sheets of The Bon-Ton
Stores, Inc. (a Pennsylvania corporation) and subsidiaries as of January 31,
1998 and February 1, 1997 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three fiscal
years in the period ended January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

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

/s/ Arthur Andersen LLP

Philadelphia, PA
March 4, 1998

F-2
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 9,109 $ 6,516
Trade and other accounts receivable, net of allowance
for doubtful accounts of $1,977 and $2,769 in 1997
and 1996, respectively.............................. 28,485 16,306
Merchandise inventories.............................. 177,783 161,191
Prepaid expenses and other current assets............ 8,835 18,389
-------- --------
Total current assets............................... 224,212 202,402
-------- --------
Property, fixtures and equipment at cost, less
accumulated depreciation and amortization............. 108,568 117,716
Other assets........................................... 19,906 21,134
-------- --------
Total assets....................................... $352,686 $341,252
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 55,478 $ 51,626
Accrued payroll and benefits......................... 9,457 7,135
Accrued expenses..................................... 25,649 25,209
Current portion of long-term debt.................... 556 9,763
Current portion of obligations under capital leases.. 379 351
Deferred income taxes................................ 1,227 1,628
Income taxes payable................................. 8,388 3,837
-------- --------
Total current liabilities.......................... 101,134 99,549
-------- --------
Long-term debt, less current maturities................ 121,121 125,620
Obligations under capital leases, less current
maturities............................................ 2,263 2,478
Deferred income taxes.................................. 365 1,174
Other long-term liabilities............................ 3,409 946
-------- --------
Total liabilities.................................. 228,292 229,767
-------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock--authorized 40,000,000 shares at $0.01
par value; issued and outstanding shares of
8,847,333 and 8,349,699 in 1997 and 1996,
respectively........................................ 88 83
Class A Common Stock--authorized 20,000,000 shares at
$0.01 par value; issued and outstanding shares of
2,989,853 in 1997 and 1996.......................... 30 30
Additional paid-in capital........................... 62,585 58,182
Deferred compensation................................ (2,010) (1,259)
Retained earnings.................................... 63,701 54,449
-------- --------
Total shareholders' equity......................... 124,394 111,485
-------- --------
Total liabilities and shareholders' equity......... $352,686 $341,252
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-3
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
<S> <C> <C> <C>
Net sales.................................. $ 656,399 $ 626,482 $ 607,357
Other income, net.......................... 2,349 2,430 2,266
---------- ---------- ----------
658,748 628,912 609,623
---------- ---------- ----------
Costs and expenses:
Costs of merchandise sold................ 413,846 395,563 387,947
Selling, general and administrative...... 202,850 197,315 207,058
Depreciation and amortization............ 12,882 12,758 11,895
Unusual (income) expense (Note 15)....... -- (3,171) 3,280
Restructuring charges (Note 16).......... -- -- 5,690
---------- ---------- ----------
Income (loss) from operations.............. 29,170 26,447 (6,247)
Interest expense, net...................... 13,202 14,687 8,722
---------- ---------- ----------
Income (loss) before income taxes.......... 15,968 11,760 (14,969)
Income tax provision (benefit)............. 6,270 4,949 (5,766)
---------- ---------- ----------
Income (loss) before extraordinary item.... 9,698 6,811 (9,203)
Extraordinary item
--loss on early extinguishment of debt,
net of income tax benefit of $251....... (446) -- --
---------- ---------- ----------
Net income (loss).......................... $ 9,252 $ 6,811 $ (9,203)
========== ========== ==========
Per share amounts--
Basic:
Net income (loss) before extraordinary
item.................................... $ 0.87 $ 0.62 $ (0.83)
Effect of extraordinary item............. (0.04) -- --
---------- ---------- ----------
Net income (loss)........................ $ 0.83 $ 0.62 $ (0.83)
========== ========== ==========
Basic shares outstanding.................. 11,122,000 11,064,000 11,044,000
Diluted:
Net income (loss) before extraordinary
item.................................... $ 0.85 $ 0.61 $ (0.83)
Effect of extraordinary item............. (0.04) -- --
---------- ---------- ----------
Net income (loss)........................ $ 0.81 $ 0.61 $ (0.83)
========== ========== ==========
Diluted shares outstanding................ 11,377,000 11,106,000 11,044,000
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-4
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
CLASS A ADDITIONAL
COMMON COMMON PAID-IN DEFERRED RETAINED
STOCK STOCK CAPITAL COMPENSATION EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at January 28,
1995................... $ 51 $ 59 $55,827 $ (331) $56,841 $112,447
Net loss................ -- -- -- -- (9,203) (9,203)
Issuance of stock under
Stock Award Plans...... 3 -- 1,771 (1,774) -- --
Deferred compensation
amortization........... -- -- -- 293 -- 293
Exercised stock
options................ -- -- 643 -- -- 643
Cancellation of
Restricted Shares...... -- -- (44) 38 -- (6)
Conversion of Class A
Common Stock to Common
Stock.................. 29 (29) -- -- -- --
---- ---- ------- ------- ------- --------
Balance at February 3,
1996................... 83 30 58,197 (1,774) 47,638 104,174
Net income.............. -- -- -- -- 6,811 6,811
Deferred compensation
amortization........... -- -- -- 505 -- 505
Cancellation of
Restricted Shares...... -- -- (15) 10 -- (5)
---- ---- ------- ------- ------- --------
Balance at February 1,
1997................... 83 30 58,182 (1,259) 54,449 111,485
Net income.............. -- -- -- -- 9,252 9,252
Issuance of stock under
Stock Award Plans...... 2 -- 2,094 (1,256) -- 840
Deferred compensation
amortization........... -- -- -- 505 -- 505
Exercised stock
options................ 3 -- 2,314 -- -- 2,317
Cancellation of
Restricted Shares...... -- -- (5) -- -- (5)
---- ---- ------- ------- ------- --------
Balance at January 31,
1998................... $ 88 $ 30 $62,585 $(2,010) $63,701 $124,394
==== ==== ======= ======= ======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-5
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ 9,252 $ 6,811 $ (9,203)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization........... 12,882 12,758 11,895
Bad debt and other noncash charges...... 700 924 229
Stock compensation expense.............. 1,345 505 293
Gain on sale of property, fixtures and
equipment.............................. (17) (407) (144)
Cancellation of Restricted Shares....... (5) (5) (6)
(Increase) decrease in other long-term
assets................................. (80) 320 825
Deferred income taxes................... (1,210) 4,116 6,709
Decrease in other long-term
liabilities............................ (523) (476) (2,686)
Extraordinary loss on debt
extinguishment......................... 697 -- --
Loss from restructuring activities...... -- -- 5,690
Restructuring payments.................. (580) (1,252) (413)
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable.............................. (34,879) 216 7,728
Increase in merchandise inventories...... (16,592) (19,450) (21,087)
Decrease (increase) in prepaid expenses
and other current assets................ 9,554 (4,827) (4,118)
Decrease (increase) in income taxes
receivable.............................. -- 8,549 (8,549)
Increase (decrease) in accounts payable.. 3,852 (3,542) 13,138
Increase (decrease) in accrued expenses.. 3,343 (6,823) (9,365)
Increase (decrease) in income taxes
payable................................. 4,551 1,334 (5,185)
--------- --------- ---------
Total adjustments...................... (16,962) (8,060) (5,046)
--------- --------- ---------
Net cash used in operating activities.. (7,710) (1,249) (14,249)
Cash flows from investing activities:
Capital expenditures, net................. (10,978) (9,730) (43,587)
Proceeds from sale of property, fixtures
and equipment............................ 17 855 278
Purchase of accounts receivable........... -- -- (30,138)
Proceeds from sale of accounts receivable,
net...................................... 22,000 -- 25,000
Proceeds from sale and leaseback
arrangement.............................. 10,841 -- --
--------- --------- ---------
Net cash provided by (used in)
investing activities.................. 21,880 (8,875) (48,447)
Cash flows from financing activities:
Payments on long-term debt and capital
lease obligations........................ (320,996) (233,826) (301,738)
Proceeds from issuance of long-term debt.. 307,102 220,125 369,000
Proceeds from issuance of mortgages....... -- 23,400 --
Exercised stock options................... 2,317 -- 643
--------- --------- ---------
Net cash (used in) provided by
financing activities.................. (11,577) 9,699 67,905
Net increase (decrease) in cash and
cash equivalents...................... 2,593 (425) 5,209
Cash and cash equivalents at beginning of
period.................................... 6,516 6,941 1,732
--------- --------- ---------
Cash and cash equivalents at end of
period.................................... $ 9,109 $ 6,516 $ 6,941
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-6
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on
January 31, 1996 as the successor of a company established on January 31, 1929
and currently operates, through its subsidiaries, 64 retail department stores
located in Pennsylvania, New York, Maryland, West Virginia and New Jersey.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of The Bon-Ton
Stores, Inc. and its wholly-owned subsidiaries (the "Company"). All
intercompany transactions have been eliminated in consolidation.

ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions which affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FISCAL YEAR

The Company's fiscal year ends on the Saturday nearer to January 31 of the
following calendar year, and consisted of fifty-two weeks for fiscal years
1997 and 1996, and fifty-three weeks for fiscal year 1995. Fiscal years 1997,
1996 and 1995 ended on January 31, 1998, February 1, 1997 and February 3,
1996, respectively.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid short-term investments with an
original maturity of three months or less when purchased to be cash
equivalents. Cash equivalents are generally overnight money market
investments.

MERCHANDISE INVENTORIES

For both financial reporting and tax purposes, merchandise inventories are
determined by the retail method, using a LIFO (last-in, first-out) cost basis.
The estimated cost to replace inventories was $180,083 and $161,945 as of
January 31, 1998 and February 1, 1997, respectively.

PROPERTY, FIXTURES AND EQUIPMENT: DEPRECIATION AND AMORTIZATION

Depreciation and amortization of property, fixtures and equipment are
computed using the straight-line method based upon the following average
estimated service lives (or remaining lease terms):

<TABLE>
<S> <C>
Buildings................................................. 20 to 40 years
Leasehold improvements.................................... 15 years
Fixtures and equipment.................................... 5 to 10 years
</TABLE>

No depreciation is recorded until property, fixtures and equipment are
placed into service. Property, fixtures and equipment not placed into service
are classified as construction in progress.

The Company capitalizes interest costs incurred as a result of the
construction of any new facilities or major improvements. The amount of
interest capitalized is limited to that incurred during the construction
period.

F-7
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

Repair and maintenance costs are charged to operations as incurred. Property
retired or sold is removed from the asset and accumulated depreciation
accounts and the resulting gain or loss is reflected in income.

The costs of major remodeling and improvements on leased stores are
capitalized as leasehold improvements. Leasehold improvements are generally
amortized over the shorter of the lease term or the useful life of the asset.
Capital leases are recorded at the lower of fair market value or the present
value of future minimum lease payments. Capital leases are amortized over the
primary term.

STORE OPENING AND CLOSING COSTS

The Company follows the practice of accounting for store opening costs
incurred prior to opening a new retail unit as a current period expense. When
the decision to close a retail unit is made, the Company provides for
estimated future net lease obligations after store operations cease;
nonrecoverable investments in property, fixtures and equipment; and other
expenses directly related to discontinuance of operations. The estimates are
based upon historical information along with certain assumptions about future
events. Changes in the assumptions for store closing costs for such items as
the estimated period of future lease obligations and the amounts actually
realized relating to the recorded value of property, fixtures and equipment
could cause these estimates to change in the near term.

ADVERTISING

Advertising production costs are expensed the first time the advertisement
is run. Media placement costs are expensed in the period the advertising
appears. Total advertising expenses included in selling, general and
administrative expense for fiscal years 1997, 1996 and 1995 were $27,095,
$28,747 and $25,377, respectively. Prepaid expenses and other current assets
include prepaid advertising costs of $687 and $756 at January 31, 1998 and
February 1, 1997, respectively.

LEASED DEPARTMENT SALES

The Company leases space in several of its stores and receives compensation
based on a percentage of sales made in these departments. Other income, net
includes leased department rental income of approximately $2,502, $2,719 and
$2,607 in fiscal 1997, 1996 and 1995, respectively.

REVOLVING CHARGE ACCOUNTS

Finance charge income on customers' revolving charge accounts is reflected
as a reduction of selling, general and administrative expenses. The finance
charge income earned by the Company, before considering the costs of
administering and servicing the revolving charge accounts, for fiscal years
1997, 1996 and 1995 was $25,019, $19,502 and $21,869, respectively (see Note
4).

STOCK-BASED COMPENSATION

The Company follows Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which provides for
a fair value based method of accounting for grants of equity instruments to
employees or suppliers in return for goods or services. As permitted under
SFAS No. 123, the Company has elected to continue to account for compensation
costs under the provisions prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." The Company has included
pro forma disclosures of net income (loss) and basic and diluted earnings
(loss) per share in Note 11 as if the fair value based method had been applied
in measuring compensation cost.

F-8
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NET INCOME (LOSS) PER SHARE

In the fourth quarter of fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128, which supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share," requires dual presentation of Basic and Diluted earnings
per share ("EPS") on the face of the statement of operations. Basic EPS is
computed by dividing reported earnings available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS is computed assuming the conversion of all dilutive securities, such as
options and restricted stock. The effect of the adoption of SFAS No. 128 was
immaterial to the financial statements of the Company. In accordance with SFAS
No. 128, all prior period per share amounts have been restated to reflect the
new calculation and presentation. The statement requires a reconciliation of
the numerators and denominators used in the Basic and Diluted EPS
calculations. The numerator, net income (loss), is identical in both
calculations. The following table presents a reconciliation of the shares
outstanding for the respective calculations, as well as the calculated EPS for
each period presented on the accompanying Consolidated Statements of
Operations. The EPS shown in the reconciliation represents EPS before the
impact of extraordinary items.

<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- -----------------
SHARES EPS SHARES EPS SHARES EPS
<S> <C> <C> <C> <C> <C> <C>
Basic Calculation.......... 11,122,000 $0.87 11,064,000 $0.62 11,044,000 $(0.83)
Dilutive Securities--
Restricted Shares........ 72,000 10,000 --
Options.................. 183,000 32,000 --
---------- ----- ---------- ----- ---------- ------
Diluted Calculation........ 11,377,000 $0.85 11,106,000 $0.61 11,044,000 $(0.83)
========== ===== ========== ===== ========== ======
</TABLE>

RECLASSIFICATIONS

To conform to the 1997 presentation, store pre-opening expenses incurred in
1995 of $2,191 were reclassified from unusual (income) expense to selling,
general and administrative expenses on the Consolidated Statements of
Operations.

ACCOUNTING FOR LONG-LIVED ASSETS

In fiscal 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). This statement requires
recognition of impairment losses for long-lived assets whenever events or
changes in circumstances result in the carrying amount of the assets exceeding
the sum of the expected future undiscounted cash flows associated with such
assets. The measurement of the impairment losses to be recognized is based on
the difference between the fair values and the carrying amounts of the assets.
SFAS No. 121 also requires any long-lived assets held for sale be reported at
the lower of carrying amount or the fair value less selling cost. The adoption
of this statement had no effect on the consolidated financial results of the
Company.

TRANSFERS AND SERVICING OF FINANCIAL ASSETS

In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). Under SFAS No. 125, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent consideration other than beneficial interests in the transferred
assets is received in exchange. It also requires that servicing assets and
other retained interests in the transferred assets be measured by allocating
the previous carrying amount between assets sold, if

F-9
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

any, and retained interests, if any, based on their relative fair value at the
date of transfer. The adoption of this statement on January 1, 1997 did not
have a material effect on the consolidated financial results of the Company
for fiscal 1997 or fiscal 1996.

2. DEBT:

Debt consisted of the following:

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
<S> <C> <C>
Revolving credit agreement--principal payable April
15, 2000; interest payable periodically at varying
rates (8.11% for fiscal year 1997)................. $ 88,900 $ 37,000
Term loan........................................... -- 65,000
Mortgage notes payable--principal payable in varying
monthly installments through June 2016 plus
interest at a fixed rate of 9.62%; secured by land
and buildings...................................... 21,918 22,306
Mortgage note payable--principal and interest in
monthly installments of $68 through January 2001,
with a balloon payment in February 2001; interest
11.00%; secured by buildings....................... 6,359 6,465
Mortgage notes payable--principal payable February
1, 2012; interest payable monthly at various rates;
secured by a building.............................. 4,500 4,500
Other notes payable................................. -- 112
-------- --------
Total debt.......................................... 121,677 135,383
Less: current maturities............................ 556 9,763
-------- --------
Long-term debt...................................... $121,121 $125,620
======== ========
</TABLE>

In April 1997, the Company entered into a three-year revolving credit
agreement with several financial institutions, replacing the Company's
previous $86,250 term loan and $85,000 revolving credit agreement. The new
agreement provides for a borrowing base, with subjective elements, determined
upon eligible inventory and selected fixed assets and real estate, up to an
aggregate principal amount of $200,000. As of January 31, 1998, the Company
borrowed $88,900 with $17,500 of borrowings remaining available under this
agreement. The interest charged under this agreement, based on LIBOR or an
index rate plus an applicable margin, is determined by a formula based on the
Company's interest coverage ratios (defined as the ratio of earnings before
interest, taxes, depreciation and amortization (EBITDA) to interest expense).
In connection with the repayment of the previous term loan and revolving
credit agreement, the Company recognized a one-time extraordinary after-tax
charge of $446, or $0.04 per share in fiscal 1997.

In May 1996, the Company entered into a $23,400, twenty-year mortgage
agreement, secured by its four stores in Rochester, New York. The net proceeds
were used to repay debt and to fund ongoing working capital requirements.

The Company maintains an interest rate swap portfolio which allows the
Company to convert floating rate borrowings to fixed rates. The following
table indicates the notional amounts and the range of interest rates paid and
received by the Company as of January 31, 1998 and February 1, 1997:

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
<S> <C> <C>
Fixed swaps (notional amount)........................ $60,000 $60,000
Range of receive rate.............................. 5.56%-6.24% 5.50%-6.24%
Range of pay rate.................................. 5.97%-8.06% 7.02%-8.06%
</TABLE>

F-10
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

The interest rate swap agreements will expire on various dates from January
29, 1999 to December 22, 2000. The net income or expense from the exchange of
interest rate payments is included in interest expense. The estimated fair
value, based on dealer quotes, of the interest rate swap agreements at January
31, 1998 and February 1, 1997 was a loss of $1,261 and $1,963, respectively,
and represents the amount the Company would pay if the agreements were
terminated as of such dates.

Several of the Company's loan agreements contain restrictive covenants,
including a minimum trade support ratio, a minimum fixed charge ratio and
limitations on dividends, additional incurrence of debt and capital
expenditures.

The fair value of the Company's debt, excluding interest rate swaps, is
estimated at $122,310 and $133,844 on January 31, 1998 and February 1, 1997,
respectively, and is based on an estimate of the rates available to the
Company for debt with similar features.

Debt maturities, as of January 31, 1998, are as follows:

<TABLE>
<S> <C>
1998............................................................. $ 556
1999............................................................. 604
2000............................................................. 89,570
2001............................................................. 6,542
2002............................................................. 639
2003 and thereafter.............................................. 23,766
--------
$121,677
========
</TABLE>

3. INTEREST COSTS:

Interest and debt costs were:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
<S> <C> <C> <C>
Interest cost incurred................... $13,441 $14,955 $ 9,820
Interest income.......................... (234) (153) (437)
Capitalized interest, net................ (5) (115) (661)
------- ------- -------
Interest expense, net.................... $13,202 $14,687 $ 8,722
======= ======= =======
Interest paid............................ $12,887 $14,898 $10,441
======= ======= =======
</TABLE>

4. SALE OF RECEIVABLES:

The Company securitizes its private credit card portfolio through an
accounts receivable facility (the "Facility"). Under the securitization
agreement, which expires in January 2000 and is contingent upon the
receivables meeting certain performance criteria, the Company has the option
to sell through The Bon-Ton Receivables Partnership, LP ("BTRLP"), a wholly-
owned subsidiary of the Company, an undivided percentage interest in the
receivables, on a limited recourse basis. BTRLP assets of $27,979 and $15,413
as of January 31, 1998 and February 1, 1997, respectively, were included in
the accompanying Consolidated Balance Sheets and consist primarily of its
retained interest in receivables initially purchased from the Company and sold
under the Facility. The Company accounts for its undivided interest in the
receivables in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."

F-11
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

The Company has not recognized any unrealized gains or losses on its
participation interest as the current carrying value of customers' revolving
charge accounts receivable is a reasonable estimate of fair value since the
average interest rates approximate current market origination rates. Creditors
of BTRLP have a claim on BTRLP's assets prior to any equity in BTRLP becoming
available to creditors of the Company.

In January 1998, the Company increased its accounts receivable facility to
$150,000 to increase the level of receivables it may sell to fund working
capital. In September 1996, the Company reduced the Facility to $120,000 based
on the Company's analysis of credit sales as a percentage of total sales and
the required level of working capital.

As of January 31, 1998 and February 1, 1997, credit card receivables were
sold under the above referenced agreement in the amount of $132,000 and
$110,000, respectively. BTRLP holds a participating interest in an undivided
ownership interest in the receivables sold. This interest is required to be
held under terms of the agreement to provide credit support against future
losses and is subject to lien. The amount subject to credit support amounted
to $21,071 and $19,764 at January 31, 1998 and February 1, 1997, respectively.
New receivables are sold on a continual basis to replenish the investors'
respective level of participation in receivables which have been repaid by the
credit card holders. The Company does not recognize a servicing asset or
liability, as the amount received for servicing the receivables is a
reasonable approximation of market rates and servicing costs.

The net impact on earnings in connection with the sale of receivables under
this agreement was not significant. However, under the terms of the sale
agreement, the Company receives securitization income equal to the excess of
the finance charges collected on the receivables over the rate paid in these
securitization transactions and credit losses which are payable under the
recourse provisions of these agreements. The Company also continues to service
the accounts. The rate paid may be based on variable or fixed rate pricing
alternatives at the option of the Company. Securitization income, before
consideration of servicing expenses, was approximately $8,410, $6,211 and
$5,205 in fiscal 1997, 1996 and 1995, respectively, and has been reported as
part of finance charge income. Although the Company receives positive
securitization cash flow, an interest-only strip has not been recorded due to
the short life of the receivables and to provide for credit losses under the
recourse provision of the Facility.

5. PURCHASE OF RECEIVABLES:

The Company purchased certain customer accounts receivable of Hess's
Department Stores, Inc. on February 24, 1995. The net investment in this
purchase was $30,138. The receivables were purchased from a finance company
which had an agreement with Hess's Department Stores, Inc. to acquire and
service their receivables.

F-12
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

6. PROPERTY, FIXTURES AND EQUIPMENT:

As of January 31, 1998 and February 1, 1997, property, fixtures and
equipment and the related accumulated depreciation and amortization consisted
of:

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
<S> <C> <C>
Land................................................ $ 1,171 $ 1,409
Buildings and leasehold improvements................ 94,635 99,743
Furniture and equipment............................. 89,128 82,186
Buildings under capital leases...................... 5,052 5,052
-------- --------
189,986 188,390
Less: Accumulated depreciation and amortization..... 81,418 70,674
-------- --------
$108,568 $117,716
======== ========
</TABLE>

Property, fixtures and equipment with a net depreciated cost of
approximately $41,336 and $43,255 are pledged as collateral for secured loans
at January 31, 1998, and February 1, 1997, respectively.

Included in Land, Buildings and leasehold improvements is $2.6 million for a
vacant store owned by the Company located in Allentown, Pennsylvania. The
Company is currently negotiating for the sale of this property, however, at
this time, there is no binding contract for the sale. The Company will
continue to pursue opportunities to dispose of this property. The Company
believes the established reserves are adequate.

7. COMMITMENTS AND CONTINGENCIES:

LEASES

The Company is obligated under capital and operating leases for a major
portion of its store properties. Certain leases provide for additional rental
payments based on a percentage of sales in excess of a specified base
(contingent rentals) and for payment by the Company of operating costs (taxes,
maintenance and insurance). Also, selling space has been licensed to other
retailers in many of the Company's leased facilities.

At January 31, 1998, future minimum lease payments under operating leases
and the present value of net minimum lease payments under capital leases are
as follows:

<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL LEASES OPERATING LEASES
<S> <C> <C>
1998.......................................... $ 579 $ 15,445
1999.......................................... 579 14,780
2000.......................................... 579 12,863
2001.......................................... 579 11,427
2002.......................................... 300 10,405
2003 and thereafter........................... 800 62,841
------ --------
Total net minimum rentals..................... 3,416 $127,761
========
Less: Amount representing interest............ 774
------
Present value of net minimum lease payments,
of which $379 is due within one year......... $2,642
======
</TABLE>

Minimum rental commitments under operating leases detailed earlier are
reflected without reduction for rental income due in future years under
noncancellable subleases since the amounts are immaterial. Some of the store
leases contain renewal options ranging from two to thirty-five years. Included
in the minimum lease payments under operating leases are leased vehicles,
copiers and computer equipment, as well as related-party commitments with the
Company's majority shareholder and related entities of $713, $713, $715, $745,
$745 and $5,568 for fiscal 1998, 1999, 2000, 2001, 2002 and 2003 and
thereafter, respectively.

F-13
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

Rental expense consists of the following:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
<S> <C> <C> <C>
Operating leases:
Buildings:
Minimum rentals........................... $13,898 $13,660 $13,580
Contingent rentals........................ 2,636 2,374 2,402
Fixtures and equipment..................... 1,332 750 2,265
Contingent rentals on capital leases....... 410 357 321
------- ------- -------
Totals.................................. $18,276 $17,141 $18,568
======= ======= =======
</TABLE>

CONTINGENCIES

The Company is party to legal proceedings and claims which arise during the
ordinary course of business. In the opinion of management, the ultimate
outcome of such litigation and claims will not have a material adverse effect
on the Company's financial position or results of its operations.

8. SHAREHOLDERS' EQUITY

The Company's capital structure consists of Common Stock with one vote per
share and Class A Common Stock with ten votes per share. In addition, the
Company has 5,000,000 shares of preferred stock authorized; however, none of
these shares have been issued.

Transfers of the Company's Class A Common Stock are restricted. Upon sale or
transfer of ownership or voting rights to other than permitted transferees, as
defined, such shares will convert to an equal number of shares of Common
Stock. During fiscal 1995, 2,935,317 shares of Class A Common Stock were
converted to an equal number of shares of Common Stock.

9. INCOME TAXES:

The Company accounts for income taxes according to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred tax assets and liabilities are computed based on
the difference between the financial statement and income tax basis of assets
and liabilities using applicable current marginal tax rates.

Components of income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
<S> <C> <C> <C>
Federal and State:
Current................................ $ 7,480 $ 833 $(12,475)
Deferred............................... (1,210) 4,116 6,709
------- ------ --------
Total.................................. $ 6,270 $4,949 $ (5,766)
======= ====== ========
</TABLE>

F-14
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

Components of gross deferred tax assets and liabilities were comprised of
the following:

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
<S> <C> <C>
Deferred tax assets:
Store closings..................................... $1,969 $ 1,535
Accrued expenses................................... 1,560 2,366
Restricted Shares.................................. 1,096 1,014
Sale and leaseback................................. 1,030 --
Bad debt reserve................................... 712 997
Loss carryforward.................................. 324 796
Capital leases..................................... 140 157
AMT credit carryforward............................ -- 833
Other.............................................. 168 166
Valuation allowance................................ (288) (169)
------ -------
Total gross deferred tax assets.................... $6,711 $ 7,695
====== =======
Deferred tax liabilities:
Fixed assets....................................... $4,740 $ 3,949
Inventory.......................................... 2,155 2,783
Pension asset...................................... -- 2,718
Other.............................................. 1,408 1,047
------ -------
Total gross deferred tax liabilities............... $8,303 $10,497
====== =======
</TABLE>

The loss carryforward at January 31, 1998 relates to the acquisition of
Adam, Meldrum & Anderson Co., Inc. and will expire in January 2009.

The valuation allowance relates to the deferred tax assets that result from
accrued expenses that are not deductible for tax purposes due to the
limitations arising from Section 162 of the Internal Revenue Code of 1986, as
amended ("IRC 162"), relating to deductions for executive compensation.

No other deferred tax assets have associated valuation allowances since
these tax benefits are realizable through the reversal of existing deferred
tax liabilities and future taxable income, exclusive of reversals of temporary
differences and carryforwards.

A reconciliation of the statutory federal income tax rate to the effective
tax rate for fiscal 1997, 1996 and 1995 is presented below:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
<S> <C> <C> <C>
Tax at statutory rate.................. 35.0% 35.0% (35.0)%
Tax credits............................ -- -- (4.0)
Refund of prior year income taxes...... -- -- (4.8)
Book expense in excess of IRC 162
limitation............................ 2.3 3.6 5.0
State income taxes, net of federal
benefit............................... 1.0 1.0 --
Excise tax on pension termination...... -- 3.4 --
Other, net............................. 1.0 (0.9) 0.3
---- ---- -----
Total................................ 39.3% 42.1% (38.5)%
==== ==== =====
</TABLE>

F-15
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

In fiscal 1997 and 1995, the Company made income tax payments of $2,194 and
$5,071, respectively. The Company received income tax refunds, net of
payments, of $8,641 in fiscal 1996.

10. EMPLOYEE BENEFIT PLANS:

The Company provides eligible employees with retirement benefits under a
401(k) salary reduction and profit sharing plan (the "Plan"). Employees are
eligible to participate in the Plan after they reach the age of 21, complete
one year of service and work at least 1,000 hours in any calendar year. Under
the 401(k) provisions of the Plan, the majority of eligible employees may
contribute up to 20% of their compensation to the Plan. Company matching
contributions, not to exceed 5% of eligible employees' compensation, are at
the discretion of the Company's Board of Directors. Company matching
contributions under the 401(k) provisions of the Plan become fully vested for
eligible employees after three years of service. Contributions to the Plan
under the profit sharing provisions are at the discretion of the Company's
Board of Directors. These profit sharing contributions become fully vested
after five years of service. The Company contributed $1,350 in fiscal 1997 and
$1,200 in fiscal 1996 under the profit sharing provisions of the Plan. No
contributions were made under the profit sharing provisions for fiscal 1995.

In addition to the above plans, the Company maintains a non-qualified
compensation plan for a select group of management employees.

The Company's fiscal 1997, 1996 and 1995 expense under the aforementioned
benefit plans was $1,951, $1,932 and $395, respectively.

In December 1995, the Company merged the Adam, Meldrum and Anderson Co.,
Inc. Pension Plan into the Hess's Department Stores, Inc. Employees' Pension
Plan. These defined benefit pension plans (the "Merged Plan") covered
substantially all the former employees of Adam, Meldrum and Anderson Co., Inc.
and Hess's Department Stores, Inc., respectively. The Adam, Meldrum and
Anderson Co., Inc. Pension Plan was curtailed in fiscal 1992 by the former
owners. The Hess's Department Stores, Inc. Employees' Pension Plan was
overfunded at the time of the purchase of certain assets of Hess's Department
Stores, Inc. Due to the overfunded status of the Merged Plan, an asset was
recorded in the purchase price allocation for the estimated net realizable
value of the overfunded plan at the expected termination date.

In April 1996, the Company began the termination process of the Merged Plan.
The participants' obligations were settled through an election by the
participants of either a lump sum payout or an annuity purchase. The
settlement of participants' obligations was completed in November 1996. As a
result of this settlement, the Company recorded a gain in fiscal 1996 of
$3,171, net of $1,132 Federal excise tax expense, to recognize the value of
assets to be reverted to the Company in excess of the asset established in
purchase accounting.

Completion of the funds reversion was completed in November 1997. Total
funds reverted to the Company amounted to $6,005, net of $1,132 Federal excise
taxes paid. Additionally, the Company also transferred $2,007 to the Company's
profit sharing plan of which $1,200 was used to fund the Company's 1996
contribution. The remaining balance in the Plan will partially fund the
Company's 1997 contribution of $1,350.

11. STOCK AWARD PLANS:

The Company's Amended and Restated 1991 Stock Option and Restricted Stock
Plan (the "Stock Plan"), as amended through June 17, 1997, provides for the
granting of the following options and awards to certain associates, officers,
directors, consultants and advisors: Common Stock options; performance-based
Common Stock options as part of a long-term incentive plan for selected
officers; and Common Stock awards subject to substantial risk of forfeiture
("Restricted Shares"). The maximum number of shares to be granted under the

F-16
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

Stock Plan, less forfeitures, is 1,900,000 shares. In addition to the Stock
Plan, during 1991 the Board of Directors approved a Phantom Equity Replacement
Plan (the "Replacement Plan") to replace the Company's previous deferred
compensation arrangement that was structured as a phantom stock program.

The Company amended its Management Incentive Plan (the "MIP Plan") in 1997
to provide, at the election of each participant, for bonus awards to be
received in vested Restricted Shares in lieu of cash on the satisfaction of
applicable performance goals. The maximum number of shares to be granted under
the MIP Plan is 300,000.

Options granted under the Stock Plan, excluding Restricted Share awards, are
generally issued at the market price of the Company's stock on the date of
grant, vest over three to five years and have a ten-year term. Grants under
the Replacement Plan vest over approximately one to six years and have a
thirty-year term.

Compensation cost charged to operations, calculated using the intrinsic
value method as required by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," was $1,345, $505 and $293 in
fiscal 1997, 1996 and 1995, respectively. Had the Company recorded
compensation expense using the fair value based method as discussed in SFAS
No. 123, "Accounting for Stock-Based Compensation," net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C>
Net income (loss)......................... As reported $9,252 $6,811 $(9,203)
Pro forma 8,416 5,987 (9,496)
Earnings (loss) per share
Basic................................... As reported $ 0.83 $ 0.62 $ (0.83)
Pro forma 0.76 0.54 (0.86)
Diluted................................. As reported $ 0.81 $ 0.61 $ (0.83)
Pro forma 0.74 0.54 (0.86)
</TABLE>

The Company used the Black-Scholes option pricing model to calculate the
fair value of the stock options at the grant date. The following assumptions
were used for 1997 calculations: risk-free interest rate--6.3%; expected
volatility--61.5%; expected life--7.2 years; expected dividend yield--0.0% and
for both 1996 and 1995 calculations: risk-free interest rate--6.4%; expected
volatility--65.0%; expected life--7 years; expected dividend yield--0.0%.

F-17
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

A summary of the options under the Stock Plan follows:

<TABLE>
<CAPTION>
PERFORMANCE- RESTRICTED
COMMON STOCK OPTIONS BASED OPTIONS SHARES
---------------------- ----------------- ----------
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER
OPTIONS PRICE OPTIONS PRICE OF SHARES
<S> <C> <C> <C> <C> <C>
FISCAL 1995
January 28, 1995.......... 401,976 $10.07 86,300 $ 7.25 21,528
Granted.................. 371,600 $ 7.26 33,300 $11.25 270,000
Exercised................ (68,868) $ 8.90 -- -- (7,176)
Forfeited................ (66,958) $ 9.91 (25,600) $ 7.25 (2,912)
----------- -------- ------- ------ -------
February 3, 1996.......... 637,750 $ 8.57 94,000 $ 8.67 281,440
=========== ======== ======= ====== =======
Options exercisable at
February 3, 1996......... 142,885 $11.26 -- -- --
Weighted average fair
value of options granted
during fiscal 1995....... $ 5.84 $ 7.89
FISCAL 1996
Granted.................. 131,286 $ 6.58 176,800 $ 6.13 --
Exercised................ -- -- -- -- (11,659)
Forfeited................ (17,216) $ 8.69 (60,700) $ 7.25 (1,456)
----------- -------- ------- ------ -------
February 1, 1997.......... 751,820 $ 8.22 210,100 $ 6.94 268,325
=========== ======== ======= ====== =======
Options exercisable at
February 1, 1997......... 328,653 $ 9.54 -- -- --
Weighted average fair
value of options granted
during fiscal 1996....... $ 4.40 $ 4.20
FISCAL 1997
Granted.................. 134,300 $ 6.86 167,100 $ 7.25 --
Exercised................ (243,759) $ 6.04 -- -- (10,955)
Forfeited................ (25,866) $10.32 -- -- (704)
----------- -------- ------- ------ -------
January 31, 1998.......... 616,495 $ 8.35 377,200 $ 7.08 256,666
=========== ======== ======= ====== =======
Options exercisable at
January 31, 1998......... 274,309 $10.03 -- -- --
Weighted average fair
value of options granted
during fiscal 1997....... $ 4.84 $ 4.95
</TABLE>

The exercised shares in the above summary for Restricted Shares represent
shares for which the restrictions have lapsed.

The range of exercise prices for the Common Stock options outstanding as of
January 31, 1998 was $5.88 to $13.00 with a weighted average contractual life
of 7.2 years. The range of exercise prices for the performance-based options
was $6.13 to $11.25, with a weighted average contractual life of 8.4 years.

F-18
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

A summary of the status of the Replacement Plan follows:

<TABLE>
<CAPTION>
NON-
DISCOUNT DISCOUNT
OPTIONS OPTIONS
<S> <C> <C>
Exercise Price.............................................. $ 3.25 $ 13.00
-------- -------
January 28, 1995............................................ 155,888 48,894
Exercised................................................. (10,239) --
Forfeited................................................. (3,071) (6,288)
-------- -------
February 3, 1996............................................ 142,578 42,606
Exercised................................................. -- --
Forfeited................................................. -- --
-------- -------
February 1, 1997............................................ 142,578 42,606
Exercised................................................. (57,309) --
Forfeited................................................. -- (5,054)
-------- -------
January 31, 1998............................................ 85,269 37,552
-------- -------
</TABLE>

As of January 31, 1998, February 1, 1997 and February 3, 1996, the
exercisable discounted options amounted to 83,411, 138,861 and 130,259,
respectively, and exercisable non-discounted options amounted to 36,122,
39,746 and 36,413, respectively.

The Company granted 202,300 Restricted Shares under the MIP Plan. No
Restricted Shares have vested or were forfeited during fiscal 1997.

Cancellation of options and shares in the above plans resulted primarily
from the termination of the employment of certain executives and voluntary
forfeitures by key executives.

12. ACQUISITIONS:

On March 6, 1995, the Company acquired three vacant department stores in
Rochester, New York for $14,565. After completing renovations, the stores
opened to the public on November 1, 1995. In addition, on November 13, 1995,
the Company acquired one department store in Greece Ridge, New York for
$3,670. This unit opened to the public on August 8, 1996 following major
remodeling.

F-19
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

13. QUARTERLY RESULTS (UNAUDITED):

<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-----------------------------------------------
MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31,
FISCAL 1997: 1997 1997 1997 1998
<S> <C> <C> <C> <C>
Net sales..................... $ 134,251 $ 137,994 $ 155,513 $ 228,641
Other income, net............. 491 472 457 929
---------- ---------- ---------- ----------
134,742 138,466 155,970 229,570
---------- ---------- ---------- ----------
Costs of merchandise sold..... 84,936 86,152 97,212 145,546
Selling, general and adminis-
trative expenses............. 46,002 47,457 51,064 58,327
Depreciation and amortiza-
tion......................... 3,166 3,196 3,500 3,020
---------- ---------- ---------- ----------
Income from operations........ 638 1,661 4,194 22,677
Interest expense, net......... 3,549 3,223 3,254 3,176
---------- ---------- ---------- ----------
Income (loss) before income
taxes........................ (2,911) (1,562) 940 19,501
Income tax provision (bene-
fit)......................... (1,108) (594) 367 7,605
---------- ---------- ---------- ----------
Income (loss) before extraor-
dinary item.................. (1,803) (968) 573 11,896
Extraordinary item--loss on
early extinguishment of debt,
net of income tax benefit of
$251......................... (446) -- -- --
---------- ---------- ---------- ----------
Net income (loss)............. $ (2,249) $ (968) $ 573 $ 11,896
========== ========== ========== ==========
Per share amounts--
Basic:
Net income (loss) before ex-
traordinary item............. $ (0.16) $ (0.09) $ 0.05 $ 1.06
Effect of extraordinary item.. (0.04) -- -- --
---------- ---------- ---------- ----------
Net income (loss)............. $ (0.20) $ (0.09) $ 0.05 $ 1.06
========== ========== ========== ==========
Basic shares outstanding...... 11,073,000 11,075,000 11,082,000 11,261,000
Diluted:
Net income (loss) before ex-
traordinary item............. $ (0.16) $ (0.09) $ 0.05 $ 1.00
Effect of extraordinary item.. (0.04) -- -- --
---------- ---------- ---------- ----------
Net income (loss)............. $ (0.20) $ (0.09) $ 0.05 $ 1.00
========== ========== ========== ==========
Diluted shares outstanding.... 11,073,000 11,075,000 11,493,000 11,867,000
</TABLE>

F-20
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
------------------------------------------------
MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1,
FISCAL 1996: 1996 1996 1996 1997
<S> <C> <C> <C> <C>
Net sales................. $ 129,320 $ 130,740 $ 148,374 $ 218,048
Other income, net......... 522 500 497 911
---------- ---------- ---------- ----------
129,842 131,240 148,871 218,959
---------- ---------- ---------- ----------
Costs of merchandise
sold..................... 80,518 81,276 93,514 140,255
Selling, general and ad-
ministrative expenses.... 46,615 46,172 48,497 56,031
Depreciation and amortiza-
tion..................... 3,048 3,025 3,256 3,429
Unusual income............ -- -- -- (3,171)(1)
---------- ---------- ---------- ----------
Income (loss) from opera-
tions.................... (339) 767 3,604 22,415
Interest expense, net..... 3,097 3,801 3,979 3,810
---------- ---------- ---------- ----------
Income (loss) before in-
come taxes............... (3,436) (3,034) (375) 18,605
Income tax provision (ben-
efit).................... (1,237) (1,088) (133) 7,407
---------- ---------- ---------- ----------
Net income (loss)......... $ (2,199) $ (1,946) $ (242) $ 11,198
========== ========== ========== ==========
Per share amounts--
Basic:
Net income (loss)......... $ (0.20) $ (0.18) $ (0.02) $ 1.01
========== ========== ========== ==========
Basic shares outstanding.. 11,062,000 11,064,000 11,064,000 11,067,000
Diluted:
Net income (loss)......... $ (0.20) $ (0.18) $ (0.02) $ 1.00
========== ========== ========== ==========
Diluted shares outstand-
ing...................... 11,062,000 11,064,000 11,064,000 11,235,000
</TABLE>
- ---------------------
(1) Gain recognized on the pension termination was $1.6 million or $0.14 per
share on an after-tax basis (see Note 10).

14. CHIEF EXECUTIVE OFFICER EMPLOYMENT:

In August 1995, the Company hired Mr. Heywood Wilansky as President and
Chief Executive Officer pursuant to a three year employment agreement. In
addition to a base salary, bonus eligibility, and other annual benefits and
perquisites, he received 250,000 Restricted Shares and an option to purchase
250,000 shares of Common Stock at $6.625 per share (the market price on
issuance date). The restricted shares, which as of the date of the grant had a
market value of $1,656, will vest at the rate of 33 1/3% per annum over three
years beginning at the third anniversary of the date of employment. The market
value of $1,656 is being amortized over the five-year vesting period. The
options will become exercisable at the rate of 33 1/3% per annum over three
years beginning on the first anniversary of the date of employment and
expiring upon the lapse of ten years from the date the options were granted.
Both the stock options and restricted shares were issued under the Stock Plan
(see Note 11). Should Mr. Wilansky leave the Company before vesting, these
benefits will be forfeited upon departure except in certain limited
circumstances. Mr. Wilansky also received a one-time signing bonus of $750 in
fiscal 1995.

The Company signed an agreement with Mr. Wilansky, effective February 1,
1998, to extend his employment as the Company's President and Chief Executive
Officer through January 31, 2003. This new agreement provides for increased
cash and stock-based compensation.

F-21
<PAGE>

THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

15. UNUSUAL (INCOME) EXPENSE:

In January 1997, the Company recorded unusual income of $3,171 before taxes,
which is presented separately as a component of income (loss) from operations
in the Consolidated Statements of Operations. The income relates to a $4,303
gain that was recognized on the termination of the Merged Plan. The gain was
partially offset by $1,132 for Federal excise tax that was paid when the
pension assets were reverted to the Company. The asset reversion occurred
during 1997 (see Note 10).

In October 1995, the Company recorded unusual expenses of $3,280 before
taxes. This is presented separately as a component of income (loss) from
operations in the Consolidated Statements of Operations. The charge is
comprised of relocation costs, employment agency fees, litigation costs and a
signing bonus associated with the hiring of the Chief Executive Officer (see
Note 14). The litigation cost related to actions brought by the Chief
Executive Officer's former employer, alleging violation of a non-compete
agreement between the Chief Executive Officer and the former employer. This
suit was settled in fiscal 1995.

16. RESTRUCTURING CHARGES:

In January 1996, the Company recorded a restructuring charge of $5,690
before taxes, which is presented separately as a component of income (loss)
from operations in the Consolidated Statements of Operations. The amount is
comprised of $5,000 relating to store closings and $690 for workforce
reductions. The $5,000 for store closings relates to stores that the Company
closed due to poor performance. The costs provided for these store closings
represented noncancellable lease costs after store operations cease, lease
cancellation costs and nonrecoverable investments in property, fixtures and
equipment. During 1996, the Company closed five locations, with combined sales
and net operating income of $12,600 and $293, respectively, for the 1996
fiscal year. The amounts incurred in fiscal 1997 and the remaining accrual for
store closing as of January 31, 1998 were $580 and $2,895, respectively. As of
February 1, 1997 the amounts incurred in fiscal 1996 and remaining accrual
were $1,525 and $3,475, respectively. It is anticipated that the remaining
costs will be expended through the end of 2005, and relate primarily to a
leased property located in Johnstown, Pennsylvania. The Company continues to
negotiate for the early termination of this lease. Currently, these
negotiations have not been successful. The Company believes the established
reserves are adequate. The $690 relating to workforce reductions consisted of
severance paid in connection with the elimination of approximately 700
positions. These positions were eliminated across all areas of the Company and
represented approximately 250 employees on a full-time equivalent basis. The
amounts paid during fiscal 1996 and 1995 for these workforce reductions were
$277 and $413, respectively. As of January 31, 1998 and February 1, 1997 there
was no accrual remaining.

17. SALE AND LEASEBACK ARRANGEMENT:

In April 1997, the Company sold the land, building and leasehold
improvements comprising its department store in Johnstown, Pennsylvania and
distribution center in Allentown, Pennsylvania and subsequently leased the
facilities back under a twenty-year lease. The lease has been accounted for as
an operating lease for financial reporting purposes. Annual payments under the
operating lease agreement are $1,270. The $10,841 of net proceeds received
from the sale were used to pay down debt by $8,208 and to provide additional
working capital. The gain associated with the sale, totaling $2,986, has been
deferred in other long-term liabilities and is being amortized on a straight-
line basis over the twenty-year lease term.

F-22
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITA-
TION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Price Range of Common Stock.............................................. 11
Capitalization........................................................... 12
Selected Consolidated Financial and Operating Data....................... 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 21
Management............................................................... 30
Certain Transactions..................................................... 38
Principal and Selling Shareholders....................................... 39
Description of Capital Stock............................................. 42
Shares Eligible for Future Sale.......................................... 45
Underwriting............................................................. 46
Legal Matters............................................................ 48
Experts.................................................................. 48
Available Information.................................................... 48
Index to Financial Statements............................................ F-1
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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4,000,000 SHARES

[LOGO OF THE BON-TON APPEARS HERE]
COMMON STOCK

----------------

PROSPECTUS

----------------

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY
SECURITIES LLC

APRIL 28, 1998

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- -------------------------------------------------------------------------------