BON TON STORES INC - 10-K Annual Report

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2003 FORM 10-K

(LOGO WITH PICTURE OF WOMAN)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
JANUARY 31, 2004 0-19517

THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA 17402

(717) 757-7660
WWW.BONTON.COM

INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE

The Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Act during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.

The Registrant is not an accelerated filer (as defined in Rule 12b-2 of the
Act).

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in the Registrant's proxy statement incorporated by reference in Part
III of this Form 10-K.

As of the last business day of the Registrant's most recently completed
second fiscal quarter, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $45,938,000, based upon the
closing price of $5.46 per share.*

As of April 6, 2004, there were 12,756,540 shares of Common Stock, $.01 par
value, and 2,989,853 shares of Class A Common Stock, $.01 par value,
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III -- Portions of the Proxy Statement for the 2004 Annual Meeting of
Shareholders (the "Proxy Statement").

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

* Calculated by excluding all shares held in the treasury of the Registrant or
that may be deemed to be beneficially owned by executive officers and
directors of the Registrant, without conceding that all such persons are
"affiliates" of the Registrant for purposes of the federal securities laws.

References to a fiscal year in this Form 10-K refer to The Bon-Ton
Stores, Inc. fiscal year, which is the 52 or 53 week period ending on the
Saturday nearer January 31 of the following calendar year (e.g., a reference to
fiscal 2003 is a reference to the fiscal year ended January 31, 2004).

PART I

ITEM 1. BUSINESS.

GENERAL

The Bon-Ton Stores, Inc. (the "Company") is a Pennsylvania corporation.
The Company and its predecessors have been operating department stores since
1898.

On October 24, 2003, the Company acquired The Elder-Beerman Stores Corp.
("Elder-Beerman"), which operated sixty-seven department stores and two
furniture stores in nine states, primarily in the Midwest.

As of January 31, 2004, the Company operated 140 department stores and
two furniture stores in sixteen states from the Northeast to the Midwest under
the names "Bon-Ton" and "Elder-Beerman." The stores carry a broad assortment of
quality, brand-name fashion apparel and accessories for women, men and children,
cosmetics, furnishings and other goods. The Bon-Ton and Elder-Beerman stores
enjoy a strong reputation for providing quality merchandise at competitive
prices delivered with top-quality service in targeted markets.

The Company's executive offices are located at 2801 East Market Street,
York, Pennsylvania.

MERCHANDISING

Our stores offer opening price point, moderate and better merchandise in
apparel, home furnishings, cosmetics, accessories, shoes and other categories.
Sales of apparel constituted 56.5%, 59.7% and 60.7% of owned sales for fiscal
2003, 2002 and 2001, respectively (owned sales exclude leased department sales).
The following table illustrates owned sales by product category for fiscal 2003,
2002 and 2001 (fiscal 2003 includes Elder-Beerman store sales from October 24,
2003 through January 31, 2004):

We carry a number of highly recognized brand names, including Calvin
Klein, Estee Lauder, Liz Claiborne, Nautica, Nine West, Ralph Lauren, Van
Heusen, Sag Harbor, OshKosh, Easy Spirit, Pfaltzgraff and Tommy Hilfiger, and
within these brands choose collections which balance fashion, price and
selection.

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We depend on our relationships with our key vendors to secure branded
merchandise. If we lose the support of these vendors, it could have a material
adverse effect on the Company.

Complementing branded merchandise, our private brand merchandise provides
fashion at competitive pricing under names such as Andrea Viccaro, Jenny
Buchanan, Madison & Max and statements. We view this private brand merchandise
as a strategic addition to our strong array of highly recognized, quality
national brands and as an opportunity to increase brand exclusiveness, customer
loyalty and competitive differentiation. Private brand merchandise sold
represented 10.7%, 11.1% and 9.8% of owned sales in fiscal 2003, 2002 and 2001,
respectively (fiscal 2003 includes Elder-Beerman store sales from October 24,
2003 through January 31, 2004). Private brand merchandise sold in Elder-Beerman
stores during the period of October 24, 2003 through January 31, 2004
represented 7.8% of Elder-Beerman owned sales for that period.

Our 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 year, which includes the back-to-school and holiday seasons.

MARKETING

The Company's primary target customers are women between the ages of
thirty-five and sixty-five with annual household incomes between $35,000 and
$100,000. Advertising messages are focused on communicating the Company's
merchandise offerings and the strong quality/value relationship in those
offerings. The Company employs advertising programs that include print and
broadcast as well as creative in-store signing, displays and special promotions.
Newspaper inserts are used on a regular cadence. The Company also uses
television and radio in markets where it is productive and cost efficient. The
Company uses a database targeting system that allows focused direct mail to our
preferred charge customers, who are most likely to respond to a merchandise
offering.

CUSTOMER CREDIT

Our customers may pay for their purchases with our proprietary credit
card (the Bon-Ton or Elder-Beerman credit card in their respective markets);
third party credit cards such as Visa, Mastercard, American Express and
Discover; cash or check.

Our proprietary credit card holders generally constitute our most loyal
and active customers; during fiscal 2003, the average dollar amount for
proprietary credit card purchases substantially exceeded the average dollar
amount for cash purchases. We believe our credit cards are a particularly
productive tool for customer segmentation and target marketing.

The following table summarizes the percentage of total fiscal year sales
generated by payment type at Bon-Ton stores (fiscal 2003 includes sales made on
the Elder-Beerman proprietary credit card at Elder-Beerman stores from October
24, 2003 through January 31, 2004):

COMPETITION

We face competition for customers from traditional department stores,
mass merchandisers, specialty stores, off-price and discount stores, and, to a
lesser extent, catalogue and internet retailers. Many of our competitors have
substantially greater financial and other resources than the
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Company, and some of our competitors have greater leverage with vendors, which
may allow such competitors to obtain merchandise more easily or on better terms.

We believe we compare favorably with our competitors with respect to
quality, assortment of merchandise, prices for comparable quality merchandise,
customer service and store environment. We also believe our knowledge of
secondary markets, developed over many years of operation, gives us a
competitive advantage as we focus on secondary markets as our primary area of
operation.

ASSOCIATES

As of January 31, 2004, we had approximately 13,500 full-time and
part-time associates. We employ additional part-time associates during peak
periods. None of our associates are represented by a labor union. We believe
that our relationship with our associates is good.

AVAILABLE INFORMATION

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports are available without charge
on our website, www.bonton.com, as soon as reasonably practicable after they are
filed electronically with the SEC. We are providing the address to our Internet
site solely for the information of investors. We do not intend the listing of
our website address to be an active link or to otherwise incorporate the
contents of the website into this report.

EXECUTIVE OFFICERS

The Executive Officers of the Company are:

Mr. Grumbacher has been Chairman of the Board for more than five years,
and has served as Chief Executive Officer since June 2000.

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Mr. Tworecke was named President and Chief Operating Officer in March
2003. He joined the Company in November 1999 as Vice Chairman and Chief
Merchandising Officer. From January 1996 until November 1999, he was with Jos.
A. Bank Clothiers, serving as President from February 1997 until November 1999.
Effective May 7, 2004, Mr. Tworecke resigned from the Company.

Mr. Bergren was named Vice Chairman in November 2003. He has served as
President and Chief Executive Officer of The Elder-Beerman Stores Corp. since
February 2002. He served as Chairman of the Southern Division of Belk Stores,
Inc. from 1999 to February 2002, as Partner of the Florida Division of Belk
Stores from 1992 to 1999, and in senior executive positions at Belk Stores from
1985 to 1992.

Mr. Baireuther has been Vice Chairman, Chief Administrative Officer and
Chief Financial Officer since September 2001. From February 2000 to September
2001, he was Executive Vice President -- Chief Financial Officer, and for more
than two years prior to that time he was Senior Vice President -- Chief
Financial Officer.

Mr. Culver was appointed Senior Vice President -- Human Resources in
September 2003. For more than five years prior to that time, Mr. Culver was Vice
President -- Employment.

Ms. Derry was appointed Senior Vice President -- General Merchandise
Manager in February 2001. For more than three years prior to that time, Ms.
Derry was a Divisional Merchandise Manager.

Mr. Farrell was appointed Senior Vice President -- Stores in June 2000.
For more than three years prior to that time, Mr. Farrell was Vice
President -- Stores.

Mr. Geisenberger was appointed Senior Vice President -- General
Merchandise Manager in July 2000. For more than three years prior to that time,
Mr. Geisenberger was a Divisional Merchandise Manager.

Mr. Harmon joined the Company as Senior Vice President -- Sales
Promotion, Marketing and Strategic Planning in June 1997 and was named Senior
Vice President -- Marketing, Planning and Allocation in April 2002.

Mr. Lance was named Senior Vice President -- Chief Information Officer in
November 2003. For more than five years prior to that time, he served as Senior
Vice President -- Information Systems at The Elder-Beerman Stores Corp.

Mr. McIntyre joined Bon-Ton as Senior Vice President -- Chief Information
Officer in June 1997, and was designated Senior Vice President -- Information
Services in November 2003.

Mr. Plowman was appointed Senior Vice President -- Finance in September
2001 and Principal Accounting Officer in June 2003. From May 1999 to September
2001, he was Vice President -- Controller, and from August 1997 to May 1999 he
was Divisional Vice President -- Controller of the Company.

Ms. Rivera was named Senior Vice President -- General Merchandise Manager
in February 2004. From March 2003 to February 2004, she was Vice
President -- General Merchandise Manager, and for more than five years prior to
that time, Ms. Rivera was a Divisional Merchandise Manager.

Mr. Sattler was appointed Senior Vice President -- Operations, Corporate
Communications and Community Services in September 2003. From September 2001 to
September 2003, he was Senior Vice President -- Human Resources and from June
2000 to September 2001, he was Senior Vice President -- Human Resources and
Operations. For more than three years prior to that time, Mr. Sattler was Senior
Vice President -- Operations.

Mr. Zamberlan has served as Executive Vice President -- Stores of
Elder-Beerman since July 1997.

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CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION AND RISK FACTORS

The Company and its representatives may, from time to time, make written
or oral forward-looking statements. In addition, some statements in this Form
10-K are forward-looking. Forward-looking statements relate to developments,
results, conditions or other events the Company expects or anticipates will
occur in the future. Without limiting the foregoing, those statements may relate
to future revenues, earnings, store openings, market conditions and the
competitive environment. Forward-looking statements are based on management's
then-current views and assumptions and, as a result, are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected.

Any such forward-looking statements are qualified by the following
important risk factors that could cause actual results to differ materially from
those predicted by the forward-looking statements.

An investment in the Company's common stock carries certain risks.
Investors should carefully consider the risks described below and other risks
which may be disclosed in the Company's filings with the SEC before investing in
the Company's common stock.

Risks Related to Our Business, Finances and Operations

If we are unable to successfully integrate the sixty-nine new stores we
recently obtained in our acquisition of Elder-Beerman, our results of
operations could be adversely affected.

On October 24, 2003, we acquired all of the issued and outstanding
capital stock of Elder-Beerman and as a result have added the sixty-nine
Elder-Beerman stores to the seventy-three Bon-Ton stores base, giving us a total
of 142 stores. Integration of the acquired business could disrupt our business
by diverting management away from day-to-day operations. Further, failure to
successfully integrate Elder-Beerman may cause significant operating
inefficiencies and could adversely affect our profitability and the price of our
stock.

We may not be able to accurately predict customer-based trends, which could
reduce our revenues and adversely affect our results of operations.

It is difficult to predict what merchandise consumers will want. A
substantial part of our business is dependent on our ability to make correct
trend decisions for a wide variety of goods and services. Failure to accurately
predict constantly changing consumer tastes, preferences, spending patterns and
other lifestyle decisions could adversely affect short-term results and long-
term relationships with our customers.

If we are unable to effectively manage our inventory levels, our business
could be adversely affected.

Our merchants focus on inventory levels and balance these levels with
plans and trends. If our inventories become too large, we may have to "mark
down," or decrease the sales price of, significant amounts of our inventory,
which could reduce our revenues.

If we are unable to keep our expenses at an appropriate level, our results of
operations could be adversely affected.

Our performance depends on appropriate management of our expense
structure, including our selling, general and administrative costs. If we fail
to meet our expense budget or to appropriately reduce expenses during a weak
sales season, our results of operations could be adversely affected.

5

We incurred significant debt in connection with our acquisition of
Elder-Beerman. The failure to satisfy our debt obligations could adversely
affect our ability to operate our business and adversely impact our results.

As of January 31, 2004, we had total debt of $171.8 million. We will have
significant debt service obligations, consisting of required cash payments of
principal and interest, for the foreseeable future. Our ability to service our
indebtedness will depend upon, among other things, our ability to replenish
inventory, generate sales and maintain our stores. In the event we are unable to
meet our debt service obligations or in the event we default in some other
manner under our credit agreements, the lenders thereunder could elect to
declare all borrowings outstanding, together with accrued and unpaid interest
and other fees, immediately due and payable.

Our discretion in some matters is limited by restrictions contained in our
credit agreements and any default on our debt agreements could harm our
business, profitability and growth prospects.

Our primary credit agreement contains a number of covenants that limit
the discretion of our management with respect to certain business matters. The
credit facility agreement, among other things, restricts our ability to:

- incur additional indebtedness;

- declare or pay dividends or other distributions;

- create liens;

- make certain investments or acquisitions;

- enter into mergers and consolidations;

- make sales of assets; and

- engage in certain transactions with affiliates.

The occurrence of an event of default under the agreements governing our
debt would permit acceleration of the related debt, which could harm our
business, profitability and growth prospects.

We have grown significantly through our acquisition of Elder-Beerman, and we
plan additional growth. If we do not manage our past growth and planned future
growth effectively, our results of operations may be adversely affected.

Our operating challenges and management responsibilities have increased
as we have grown and will continue to increase if we grow as planned. Successful
future growth will require that we continue to expand and improve our internal
systems and our operations. Our business plan depends on our ability to operate
new retail stores and to convert, where applicable, the formats of existing
stores on a profitable basis. In addition, we will need to identify, hire and
retain a sufficient number of qualified personnel to work in our new stores.
These objectives have created and may continue to create additional pressure on
our staff and on our operating systems. We cannot assure you that our business
plan will be successful, or that we will achieve our objectives as quickly or as
effectively as we hope.

Our credit card operations are an integral component of our sales and
marketing efforts. The inability to continue our credit card operations or the
failure to collect payments for charges made on existing credit cards could
reduce our revenues and adversely affect our results of operations.

Sales of merchandise and services are facilitated by our credit card
operations. These credit card operations also generate additional revenue from
fees related to extending credit. Our ability to extend credit to our customers
depends on many factors, including compliance with federal and state laws which
may change from time to time. In addition, changes in credit card use,
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payment patterns and default rates may result from a variety of economic, legal,
social and other factors that we cannot control or predict with certainty.
Changes that adversely affect our ability to extend credit and collect payments
could negatively affect our results of operations and financial condition.

An inability to find qualified domestic and international vendors and
fluctuations in the exchange rate with countries in which our international
vendors are located could adversely affect our business.

The products we sell are sourced from a wide variety of domestic and
international vendors. Our ability to find qualified vendors and source products
in a timely and cost-effective manner, including obtaining vendor allowances in
support of the Company's advertising and promotional programs, represents a
significant challenge. The availability of products and the ultimate costs of
buying and selling these products, including advertising and promotional costs,
are not completely within our control and could increase our merchandise and
operating costs and adversely affect our business. Additionally, costs and other
factors specific to imported merchandise, such as trade restrictions, tariffs,
currency exchange rates and transport capacity and costs are beyond our control
and could restrict the availability of imported merchandise or significantly
increase the costs of our merchandise sales and adversely affect our business.

Our business could be significantly disrupted if we cannot replace members of
our management team, especially Tim Grumbacher, our chairman of the board of
directors and chief executive officer, who has announced his intent to
relinquish his role as CEO effective mid-2004.

We believe that our success depends to a significant degree upon the
continued contributions of our executive officers and other key personnel, both
individually and as a group. Our future performance will be substantially
dependent on our ability to retain or replace such key personnel and the
inability to retain or replace such personnel could prevent us from executing
our business strategy.

If we are unable to effectively market our business or if our advertising
campaigns are ineffective, our revenues may decline and our results of
operations could be adversely affected.

We spend extensively on advertising and marketing. Our business depends
on effective marketing to generate high customer traffic in our stores. If our
advertising and marketing efforts are not effective, our results could be
negatively affected.

If we have difficulty consummating and integrating any future acquisitions,
our ability to grow our financial condition and results of operations could be
adversely affected.

If we are unable to successfully complete acquisitions or to effectively
integrate acquired businesses, our ability to grow our business or to operate
our business effectively could be reduced, and our financial condition and
operating results could suffer. The consummation and integration of acquisitions
by us involve many risks, including the risk of:

- diverting management's attention from our ongoing business concerns;

- obtaining financing on terms unfavorable to us;

- diluting our shareholders' equity;

- entering markets in which we have no direct prior experience;

- improperly evaluating new services, products and markets;

- being unable to maintain uniform standards, controls, procedures and
policies; and

- being unable to integrate new technologies or personnel.

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Our failure to effectively consummate acquisitions and integrate newly
acquired businesses could have a material adverse effect on our financial
condition and results of operations.

Tim Grumbacher beneficially owns shares of our capital stock giving him voting
control over matters submitted to a vote of the shareholders, and his
interests may differ from those of other investors.

Tim Grumbacher, trusts for the benefit of members of Mr. Grumbacher's
family and The Grumbacher Family Foundation, collectively, currently
beneficially own shares of our outstanding common stock (which is entitled to
one vote per share) and shares of our Class A common stock (which is entitled to
ten votes per share) representing approximately 78% of the votes eligible to be
cast by shareholders in the election of directors and generally. Accordingly,
Mr. Grumbacher has the power to control all matters requiring the approval of
our shareholders, including the election of directors and the approval of
mergers and other significant corporate transactions, which may also have the
effect of delaying, preventing or expediting, as the case may be, a change in
control of the Company.

Risks Related to our Industry

We may not be able to attract or retain a sufficient number of customers in a
highly competitive retail environment, which would have an adverse effect on
our business.

We compete primarily with other department stores, many of which are
units of national or regional chains that have significant financial and
marketing resources. The principal competitive factors in our business are
price, quality, selection of merchandise, reputation, store location,
advertising and customer service. We cannot assure you that we will be able to
compete successfully against existing or future competitors. Our expansion into
new markets served by our competitors and the entry of new competitors or
expansion of existing competitors into our markets could have a material adverse
effect on our business, financial condition and results of operations.

An increase in internet-based sales could adversely affect our results of
operations.

We rely on in-store sales for a substantial majority of our revenues.
Internet retailing is extremely competitive and could result in fewer sales and
lower margins. A significant shift in customer buying patterns from in-store
purchases to purchases via the Internet could have a material adverse effect on
our business and results of operations.

Our operating results fluctuate from season to season.

Our stores experience seasonal fluctuations in net sales and consequently
in operating income, with peak sales occurring during the back-to-school and
holiday seasons. In addition, extreme or unseasonable weather can affect our
sales. Any decrease in net sales or margins during our peak selling periods,
decrease in the availability of working capital needed in the months before
these periods or reduction in vendor allowances could have a material adverse
effect on our business, financial condition, and results of operations. We
usually order merchandise in advance of peak selling periods and sometimes
before new fashion trends are confirmed by customer purchases. We must carry a
significant amount of inventory, especially before the peak selling periods. If
we are not successful in selling our inventory, especially during our peak
selling periods, we may be forced to rely on markdowns or promotional sales to
dispose of the inventory or we may not be able to sell the inventory at all,
which could have a material adverse effect on our business, financial condition,
and results of operations.

Our results of operations may be subject to significant fluctuations.

General economic factors that are beyond our control influence our
forecasts and directly affect performance. These factors include interest rates,
recession, inflation, deflation, consumer
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credit availability, consumer debt levels, tax rates and policy, unemployment
trends and other matters that can adversely influence consumer confidence and
spending and, in turn, our sales. Increasing volatility in financial markets may
cause these factors to change with a greater degree of frequency and magnitude.

Our stock price has been and may continue to be highly volatile.

The market price of our common stock has been and may continue to be
volatile and may be significantly affected by:

- actual or anticipated fluctuations in our operating results;

- announcements of new services by us or our competitors;

- developments with respect to conditions and trends in our industry;

- governmental regulation;

- general market conditions; and

- other factors, many of which are beyond our control.

In addition, the stock market has, recently and from time to time,
experienced significant price and volume fluctuations that have adversely
affected the market prices of securities of companies without regard to their
operating performances.

In addition to Mr. Grumbacher's voting control, certain provisions of our
charter documents and Pennsylvania law could discourage potential acquisition
proposals and could deter, delay or prevent a change in control of our company
that our shareholders consider favorable and could depress the market value of
our common stock.

Certain provisions of our articles of incorporation and by-laws, as well
as provisions of the Pennsylvania Business Corporation Law, could have the
effect of deterring takeovers or delaying or preventing changes in control or
management of our company that our shareholders consider favorable and could
depress the market value of our common stock.

Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law
of 1988, which is applicable to us, 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 Pennsylvania Business Corporation
Law delays for five years and imposes conditions upon "business combinations"
between an "interested shareholder" and us, unless prior approval of our board
of directors is given. The term "business combination" is defined broadly to
include various merger, consolidation, division, exchange or sale transactions,
including transactions using our 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.

Weather conditions could adversely affect our results of operations.

Because a significant portion of our business is apparel and subject to
weather conditions in our markets, our operating results may be unexpectedly and
adversely affected by inclement weather. Frequent or unusually heavy snow, ice
or rain storms or extended periods of unseasonable temperatures in our markets
could adversely affect our performance.

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Labor conditions could adversely affect our results of operations.

Our performance is dependent on attracting and retaining a large and
growing number of quality associates. Many of those associates are in entry
level or part time positions with historically high rates of turnover. Our
ability to meet our labor needs while controlling costs is subject to external
factors such as unemployment levels, prevailing wage rates, minimum wage
legislation and changing demographics. Changes that adversely impact our ability
to attract and retain quality associates could adversely affect our performance.

Regulatory and litigation developments could adversely affect our results of
operations.

Various aspects of our operations are subject to federal, state or local
laws, rules and regulations, any of which may change from time to time.
Additionally, we are regularly involved in various litigation matters that arise
in the ordinary course of business. Litigation or regulatory developments could
adversely affect our business operations and financial performance.

Other factors could adversely affect our results of operations and our ability
to grow.

Other factors that could cause actual results to differ materially from
those predicted and that may adversely affect our ability to grow include:
changes in the availability or cost of capital, the availability of suitable new
store locations on acceptable terms, shifts in seasonality of shopping patterns,
work interruptions, the effect of excess retail capacity in our markets and
material acquisitions or dispositions.

The Company does not undertake to revise any forward-looking statement to
reflect events or circumstances that occur after the date the statement is made.

ITEM 2. PROPERTIES.

The properties of the Company consist primarily of stores and related
facilities, including warehouses and distribution centers. The Company also owns
or leases other properties, including corporate office space in York,
Pennsylvania. As of January 31, 2004, the Company operated 142 stores in sixteen
states in the Northeast and Midwest, comprising a total of approximately
12,000,000 square feet. Of such stores, nine were owned, 131 were leased and two
stores were operated under arrangements where the Company owned the building and
leased the land. Pursuant to various shopping center agreements, the Company is
obligated to operate certain stores for periods of up to twenty years. Some of
these agreements require that the stores be operated under a particular name.
Most leases require the Company to pay real estate taxes, maintenance and other
costs; some also require additional payments based on percentages of sales.
Certain of the Company's real estate leases have terms that extend for a
significant number of years and provide for rental rates that increase over
time.

ITEM 3. LEGAL PROCEEDINGS.

We are a party to legal proceedings and claims which arise during the
ordinary course of business. We do not expect the ultimate outcome of all such
litigation and claims to have a material adverse effect on our financial
position, results of operations or liquidity.

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

None.

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PART II

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

The Company's Common Stock is traded on the Nasdaq Stock Market (symbol:
BONT). There is no established public trading market for the Class A Common
Stock. The Class A Common Stock is convertible on a share for share basis into
Common Stock at the option of the holder. The following table sets forth the
high and low sales price of the Common Stock as furnished by Nasdaq:

On April 6, 2004, there were approximately 262 shareholders of record of
Common Stock and five shareholders of record of Class A Common Stock.

The Company declared quarterly cash dividends, each at $0.025 per share
on Class A Common Stock and Common Stock, payable July 15, 2003, October 15,
2003 and January 15, 2004. Pursuant to the Company's revolving credit facility
agreement, dividends paid by the Company may not exceed $7.5 million over the
life of the agreement, or $4.0 million in any single year. The Company's board
of directors will consider dividends in subsequent periods as it deems
appropriate.

EQUITY COMPENSATION PLAN INFORMATION

At January 31, 2004, the Amended and Restated 1991 Stock Option and
Restricted Stock Plan, The Bon-Ton Stores, Inc. 2000 Stock Incentive Plan and
the Company's Phantom Equity Replacement Plan were in effect. Each of these
plans has been approved by the shareholders. There were no other equity
compensation plans in effect. The following information concerning these plans
is as of January 31, 2004:

RECENT SALE OF UNREGISTERED SECURITIES

On October 23, 2003 the Company sold 476,890 shares of common stock to
Tim Grumbacher, the chairman and chief executive officer of the Company,
pursuant to a Stock Purchase Agreement dated as of October 23, 2003 between the
Company and Mr. Grumbacher. Under the terms of the Stock Purchase Agreement, Mr.
Grumbacher purchased the shares of common stock for an aggregate purchase price
of $6.5 million, or $13.63 per share. The purchase price was paid to the Company
in cash, and net proceeds to the Company were approximately

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$6.5 million. The entire amount of proceeds was used to partially fund
acquisition costs in connection with the Company's acquisition of Elder-Beerman
on October 24, 2003.

In making the sale of unregistered securities, the Company relied upon
the exemption set forth in Section 4(2) under the Securities Act of 1933, as
amended. Factors upon which the Company relied in making the sale of
unregistered securities pursuant to Section 4(2) included Mr. Grumbacher's
status as a financially sophisticated person, Mr. Grumbacher's access to
information regarding the Company and the fact that the offer of the shares was
made to only one person.

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ITEM 6. SELECTED FINANCIAL DATA.

(1) Fiscal 2003 includes operations of The Elder-Beerman Stores Corp. for the
period from October 24, 2003 through January 31, 2004.

(2) Fiscal 2000 reflects the 53 weeks ended February 3, 2001. All other periods
presented include 52 weeks.

(3) Reflects expense recognized for workforce reductions and realignment and
elimination of certain senior management positions in fiscal 2001; expense
recognized for workforce reductions, early retirement of Heywood Wilansky
and realignment and elimination of certain senior management positions in
fiscal 2000; and an asset write-down in fiscal 1999.

(4) Income recognized in fiscal 1999 as a result of a lease termination for a
closed store.

(5) Fiscal 1999 includes expense resulting from renegotiation of the Company's
revolving credit facility.

(6) Fiscal 2000 reflects the 52 weeks ended January 27, 2001.

(7) Comparable stores data (sales and selling square footage) reflects stores
open for the entire current and prior fiscal year. Comparable stores data
for fiscal 2003 does not include stores of The Elder-Beerman Stores Corp.

(8) Includes the addition of 69 stores pursuant to the acquisition of The
Elder-Beerman Stores Corp. during fiscal 2003.

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

RESULTS OF OPERATIONS

The Company is a traditional department store retailer with a 106-year
history of providing high quality merchandise to its customers in secondary
markets. On October 24, 2003, the Company acquired The Elder-Beerman Stores
Corp., nearly doubling its number of stores and adding 5.7 million square feet
of retail space. As a result of the acquisition, the Company operates 140
department stores and two furniture stores in sixteen states, from the Northeast
to the Midwest, under the Bon-Ton and Elder-Beerman names. The stores carry a
broad assortment of quality, brand-name and private label fashion apparel and
accessories for women, men and children, as well as distinctive cosmetics and
home furnishings. The Company's strategy is to profitably sell merchandise by
providing its customers with differentiated fashion merchandise at compelling
value in the secondary markets the Company serves.

The Company's revenues are generated through sales in existing stores and
through sales from new stores opened through expansion and acquisition. During
fiscal 2003, the Company's total sales increased 29.9% to $926.4 million,
including $229.9 million from the acquired Elder-Beerman stores. Comparable
store sales, which do not include Elder-Beerman stores, decreased 2.0% in fiscal
2003 as compared to fiscal 2002.

The retail industry is highly competitive and 2003 was no exception as
evidenced by comparable store sales decreases throughout the industry and, in
particular, among the Company's department store peer group. Like the Company,
numerous department store retailers experienced comparable store sales decreases
over the past three years as economic downturn and declining consumer confidence
have unfavorably impacted retail businesses. The entrance of new competitors in
its markets further challenged the Company. The Company anticipates these
competitive pressures and challenges will continue in the future. As a result,
the Company will continue its highly promotional posture and emphasis on
offering a wider range of value merchandise. Additionally, expansion of the
Company's private labels and growth of exclusive brands support its strategy of
product differentiation and provide opportunity for higher gross margin.

In light of continued economic uncertainty, the Company is focusing its
efforts on asset and overhead cost management to improve its financial position.
The Company is focused on improving its return on inventory investment. The
Company has been able to achieve reductions in inventory levels that have
resulted in a steadily improving turnover. Lower inventory levels enhance the
Company's ability to react to fashion trends and replenishment needs on a timely
basis. Additionally, through the continuing comprehensive review of store and
corporate operating expenses, the Company looks for meaningful ways to improve
its ratio of expenses to sales. Execution of these initiatives is necessary to
achieve earnings growth in light of the Company's comparable store sales
decreases.

In October 2003, the Company added sixty-seven department stores and two
furniture stores as a result of its acquisition of Elder-Beerman. The Company's
consolidated balance sheet and consolidated statements of operations for fiscal
2003 include Elder-Beerman operations for the period from October 24, 2003
through January 31, 2004. The Company believes that its fiscal 2003 results are
not indicative of expected operating results for 2004. Due to the timing of the
Elder-Beerman acquisition, the Company included Elder-Beerman's most profitable
quarter in the Company's consolidated results without having to recognize the
first three quarters of the year, which traditionally reflect a net loss.
Elder-Beerman operations reflect preliminary purchase accounting, which is
subject to future refinement based upon updated valuations of certain assets
acquired. See Note 2 to the Company's Consolidated Financial Statements for
disclosure of pro forma results of operations.

14

The Company's challenge in 2004 is the successful integration of the two
companies into one business unit and ensuring that the new company remains a
stable financial performer. The Company is implementing initiatives to
capitalize on the inherent economies of scale in merchandising and operations
that accompany a merger of this relative magnitude. Achieving these synergies
will be critical to the Company's ongoing success. Of equal importance is
expediting the Company's systems integration efforts; the majority of the
Company's capital expenditures in 2004 will be directed towards strategic
systems improvements. The Company incurred a charge of $2.4 million in fiscal
2003 for the write-off of duplicate information systems software, as a decision
was made to install the Elder-Beerman point-of-sale system in Bon-Ton stores in
2004. In the course of its integration efforts, another challenge facing the
Company will be maintaining its sales base and ensuring customer satisfaction.

As a result of the acquisition, the Company has increased its debt levels
and, accordingly, its exposure to interest rate fluctuations.

The Company opened one new store in the fourth quarter of 2003. In 2004,
the Company's capital projects will focus on information systems and its
existing store base. Although the Company does not anticipate opening any new
stores in 2004, it will continue to explore opportunities for new stores in 2005
and beyond, with the goal of capitalizing on its increased geographic presence.

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

FISCAL 2003 COMPARED TO FISCAL 2002

NET SALES: Net sales were $926.4 million for fiscal 2003, an increase of
$213.2 million, or 29.9%, compared to fiscal 2002. Net sales include $229.9
million from Elder-Beerman operations for the period from October 24, 2003
through January 31, 2004. Comparable store sales, which exclude the impact of
Elder-Beerman, decreased 2.0% in fiscal 2003. The decrease in the Company's
comparable store sales coincided with a general economic decline and
deteriorating consumer confidence. Merchandise departments recording comparable
store sales increases were

15

Shoes, Intimate Apparel and Accessories. The favorable results in these
departments were driven by fresh inventories, intensification of key vendors and
compelling values. Additionally, the customer responded favorably to
open-selling in the Company's Shoe departments. Based on the success of this
initiative, the Company will continue to roll-out open-selling in its Shoe
departments to additional stores in 2004. Merchandise departments reflecting the
sharpest comparable store sales declines were Women's Clothing (particularly
Dresses and Special Sizes), Men's Clothing (Sportswear), and Children's. These
merchandise departments have experienced overall sales declines in each of the
last three years. The Company is addressing this trend by focusing on increased
product differentiation and improved merchandise assortments in these areas.

Elder-Beerman sales were not included in comparable store sales. For
informational purposes only, Elder-Berman comparable store sales for the
fifty-two weeks ended January 31, 2004 decreased 2.5%. On a combined basis,
Bon-Ton and Elder-Beerman comparable store sales for fiscal 2003 decreased 2.2%.

OTHER INCOME, NET: Net other income, principally income from leased
departments, increased $0.9 million in fiscal 2003 over fiscal 2002 due to the
impact of Elder-Beerman operations, but remained at 0.4% of net sales.

COSTS AND EXPENSES: Gross margin dollars for fiscal 2003 increased $75.3
million, or 28.7% over fiscal 2002, primarily due to the impact of Elder-Beerman
operations. Gross margin as a percentage of net sales was 36.4% in fiscal 2003,
a decrease of 0.4 percentage point from 36.8% in fiscal 2002. The decrease in
gross margin rate reflects the inclusion of Elder-Beerman sales at lower gross
margin, offset in part by increased vendor support, reduced seasonal carry-over
merchandise and increased markup rate for comparable store sales.

Selling, general and administrative expenses for fiscal 2003 were $275.1
million, or 29.7% of net sales, compared to $219.0 million, or 30.7% of net
sales, in fiscal 2002. The increase in selling, general and administrative
expense was largely due to the additional $56.5 million from Elder-Beerman
operations, while the rate was positively impacted by the inclusion of
Elder-Beerman net sales. Increases in advertising expense, rent expense,
distribution expense, store pre-opening expense and financing fees were offset
by a decrease in store payroll, a gain on the sale of the Harrisburg
distribution center and reduced bad debt expense.

Depreciation and amortization in fiscal 2003 increased $2.9 million, to
$24.2 million in fiscal 2003 from $21.3 million in 2002. The increase
principally reflects the impact of Elder-Beerman depreciation and amortization
of $2.0 million, asset impairment losses on long-lived assets of certain stores
of $0.8 million, and a charge of $2.4 million for the write-off of duplicate
information systems software due to the acquisition of Elder-Beerman. In fiscal
2002, the Company recognized approximately $2.0 million of impairment losses on
the long-lived assets of certain stores.

INCOME FROM OPERATIONS: Income from operations in fiscal 2003 was $42.0
million, or 4.5% of net sales, compared to $24.8 million, or 3.5% of net sales,
in fiscal 2002. The increase in income from operations is principally
attributable to the timing of the Elder-Beerman acquisition, which resulted in
the inclusion of its most profitable quarter.

INTEREST EXPENSE, NET: Net interest expense in fiscal 2003 decreased
$0.4 million to $9.0 million, or 1.0% of net sales, from $9.4 million, or 1.3%
of net sales, in fiscal 2002. The decrease in net interest expense was primarily
due to fair market value adjustments on interest rate swap agreements. Interest
expense in fiscal 2003 and 2002 included a reduction of interest expense of $1.7
million and an increase in interest expense of $1.4 million, respectively,
related to fair market value adjustments on interest rate swaps. This decrease
in interest expense was largely offset by increased interest expense and
financing fees expense on borrowings incurred to finance the Elder-Beerman
acquisition. Future interest expense will be impacted by the additional debt

16

incurred to finance the acquisition of Elder-Beerman. See Note 7 and 8 to the
Consolidated Financial Statements.

INCOME TAXES: The effective tax rate remained constant at 37.5% in
fiscal 2003 and fiscal 2002.

NET INCOME: Net income in fiscal 2003 was $20.6 million, or 2.2% of net
sales, compared to $9.6 million, or 1.3% of net sales, in fiscal 2002.

FISCAL 2002 COMPARED TO FISCAL 2001

NET SALES: Net sales were $713.2 million for fiscal 2002, a decrease of
$8.5 million relative to fiscal 2001. Total and comparable store sales for
fiscal 2002 decreased 1.2% from fiscal 2001. Merchandise departments recording
sales increases were Accessories and Women's Clothing (Coats and Petites).
Merchandise departments reflecting the sharpest sales declines were Women's
Clothing (Dresses), Children's, Men's Clothing and Intimate Apparel.

OTHER INCOME, NET: Net other income, principally income from leased
departments, remained constant at 0.4% of net sales for fiscal 2002 and fiscal
2001.

COSTS AND EXPENSES: Gross margin dollars for fiscal 2002 increased $0.4
million, or 0.1% over fiscal 2001, due to an increased margin percentage
partially offset by declining sales volume. Gross margin as a percentage of net
sales was 36.8% in fiscal 2002, an increase of 0.5 percentage point from 36.3%
in fiscal 2001. Gross margin percentage improvement over fiscal 2001 reflects
increased markup on purchases in fiscal 2002 and adjustments established for
seasonal carryover merchandise in fiscal 2001.

Selling, general and administrative expenses for fiscal 2002 were $219.0
million, or 30.7% of net sales, compared to $223.6 million, or 31.0% of net
sales, in fiscal 2001. Fiscal 2002 store expense decreased $1.0 million versus
fiscal 2001, primarily due to reduced advertising expense, but reflected an
expense rate increase of 0.1 percentage point due to reduced 2002 net sales.
Fiscal 2002 corporate expense decreased $3.6 million versus fiscal
2001 -- driving an overall selling, general and administrative expense rate
decrease of 0.3 percentage point. The decrease in corporate expense principally
reflects an increase in securitization income of $3.2 million from the Company's
proprietary credit card program and reduced equipment rental costs. The
increased securitization income in fiscal 2002 relative to fiscal 2001 was
principally a reflection of increased sales of accounts receivable, resulting in
a $0.3 million increase in finance charge income, and a $2.6 million reduction
in interest costs.

Depreciation and amortization increased to 3.0% of net sales in fiscal
2002 from 2.7% in fiscal 2001 partially as a result of a lower sales base and
capital expenditures in the amount of $14.8 million and $15.6 million in fiscal
2002 and 2001, respectively. Additionally, in fiscal 2002 the Company recognized
approximately $2.0 million of impairment losses on the long-lived assets of
certain stores. In fiscal 2001, the Company recorded accelerated depreciation of
$1.4 million for a store that was closed in January 2003.

Unusual expense in fiscal 2001 of $0.9 million, or 0.1% of net sales, was
incurred in the third quarter relating to a workforce reduction and the
realignment and elimination of certain senior management positions. See Note 17
to the Consolidated Financial Statements.

INCOME FROM OPERATIONS: Income from operations in fiscal 2002 was $24.8
million, or 3.5% of net sales, compared to $20.3 million, or 2.8% of net sales,
in fiscal 2001.

INTEREST EXPENSE, NET: Net interest expense in fiscal 2002 decreased
$0.8 million to $9.4 million, or 1.3% of net sales, from $10.3 million, or 1.4%
of net sales, in fiscal 2001. The decrease in interest expense was attributable
to decreased average borrowing levels and lower interest rates, partially offset
by increased interest expense pursuant to cash flow hedge ineffectiveness.
Interest expense includes cash flow hedge ineffectiveness, relating to interest
rate swaps, of
17

$1.4 million and $0.5 million in fiscal 2002 and 2001, respectively,
representing non-cash mark-to-market charges pursuant to Statement of Financial
Accounting Standards No. 133. See Note 7 to the Consolidated Financial
Statements.

INCOME TAXES: The effective tax rate decreased 0.5 percentage point to
37.5% in fiscal 2002 from 38.0% in fiscal 2001.

NET INCOME: Net income in fiscal 2002 was $9.6 million, or 1.3% of net
sales, compared to $6.2 million, or 0.9% of net sales, in fiscal 2001. As
discussed above, the increased gross profit rate, decreased selling, general and
administrative expenses and decreased interest expense more than offset the
impact of decreased sales -- thus driving the $3.4 million net income increase
over fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes material measures of the Company's
liquidity and capital resources:

The Company's primary sources of working capital are cash flows from
operations, borrowings under its revolving credit facility and proceeds from its
accounts receivable facility. The Company had working capital of $222.0 million,
$129.1 million and $117.2 million at the end of fiscal 2003, 2002 and 2001,
respectively. The Company's business follows a seasonal pattern and working
capital fluctuates with seasonal variations, reaching its highest level in
October or November. The increase in working capital at the end of fiscal 2003
as compared to the end of fiscal 2002 was principally due to the acquisition of
Elder-Beerman working capital, which was funded with long-term debt. Debt to
total capitalization ratio increased in fiscal 2003 over fiscal 2002 due to the
additional long-term debt assumed to fund the Elder-Beerman acquisition in
October 2003.

Net cash provided by operating activities amounted to $155.2 million in
fiscal 2003, $28.4 million in fiscal 2002 and $39.6 million in fiscal 2001. The
$126.8 million increase in cash provided by operating activities in fiscal 2003
relative to fiscal 2002 was primarily due to sales of the acquired Elder-Beerman
inventory, increased net income and the sale of $96.5 million of Elder-Beerman
accounts receivable in January 2004, partially offset by a reduction of $13.0
million in Bon-Ton accounts receivable sold during fiscal 2003.

Net cash used in investing activities amounted to $115.9 million, $14.8
million, and $15.5 million in fiscal 2003, 2002 and 2001, respectively. The net
cash outflow in fiscal 2003 increased from fiscal 2002 in the amount of $101.1
million, primarily related to the Elder-Beerman acquisition and the opening of a
new store in Latham, New York. Capital expenditures amounted to $19.5 million in
fiscal 2003.

Net cash used in financing activities was $36.3 million, $6.6 million,
and $28.3 million in fiscal 2003, 2002 and 2001, respectively. The net cash
outflow in fiscal 2003 was principally attributable to the conversion of $96.5
million of Elder-Beerman's previously existing on-balance sheet accounts
receivable facility to the Company's new off-balance sheet accounts receivable
facility and increased payments on the revolving credit facility due to
incremental fourth quarter sales related to acquired Elder-Beerman inventory,
partially offset by additional funds provided by the issuance of common stock
and borrowings required to finance the acquisition of Elder-Beerman.

18

In October 2003, the Company amended and restated its revolving credit
facility agreement. The amendment increased the line from $150.0 million to
$300.0 million and added a term loan in the amount of $25.0 million. The
amendment modified the formula for determining borrowing availability based on
inventory, fixed assets and real estate. The interest rate, based on LIBOR or an
index rate plus an applicable margin, and fee charges are determined by a
formula based upon the Company's borrowing availability. The agreement contains
restrictions against the incurrence of additional indebtedness, pledging or sale
of assets, payment of dividends and other similar restrictions. Financial
covenants contained in the amended agreement include a limitation on capital
expenditures, minimum borrowing availability and fixed charge coverage ratio.
Borrowings at January 31, 2004 were $152.0 million, inclusive of the $25.0
million term loan. See Note 6 to the Consolidated Financial Statements for
interest rates, terms and principal balances outstanding.

To consummate the acquisition of Elder-Beerman in October 2003, the
Company amended and restated its $150.0 million off-balance sheet accounts
receivable facility. The amendment modified certain terms, interest and fee
calculation elements and extended the agreement expiration date from January
2004 to October 2004. Simultaneously, the Company amended Elder-Beerman's
accounts receivable facility, decreasing the line of credit from $135.0 million
to $100.0 million, modifying certain terms and altering the expiration date from
July 2005 to July 2004.

In January 2004, the Company entered into a new off-balance sheet
accounts receivable facility which replaced the two existing agreements referred
to in the preceding paragraph. The new agreement is with the same financial
institutions, has a funding limit of $250.0 million and expires October 2004.
The agreement has substantially the same terms for interest and fee calculations
as the previous Bon-Ton accounts receivable facility. Availability under the
off-balance sheet accounts receivable facility is calculated based on the amount
and performance of the Company's proprietary credit card portfolio. At January
31, 2004, accounts receivable in the amount of $228.5 million were sold under
the accounts receivable facility.

The Company is exposed to market risk associated with changes in interest
rates. To provide some protection against potential rate increases associated
with its variable-rate facilities, the Company has entered into a derivative
financial transaction in the form of an interest rate swap. The interest rate
swap is used to hedge the underlying variable-rate facilities.

On February 7, 2002, the Company announced a stock repurchase program
authorizing the purchase of up to $2.5 million of the Company's Common Stock
from time to time. During fiscal 2003, the Company purchased 60,800 Common Stock
shares at a cost of $0.3 million. During fiscal 2002, the Company purchased
277,000 Common Stock shares at a cost of $1.1 million. Treasury stock is
accounted for by the cost method.

The Company declared quarterly cash dividends, each at $0.025 per share
on Class A Common Stock and Common Stock, payable July 15, 2003, October 15,
2003 and January 15, 2004. Cash dividends paid in fiscal 2003 totaled $1.2
million. The Company declared a quarterly cash dividend of $0.025 per share,
payable April 15, 2004 to shareholders of record as of April 1, 2004. The
Company's board of directors will consider dividends in subsequent periods as it
deems appropriate.

The Company currently anticipates its capital expenditures for fiscal
2004 will be approximately $32.0 million. Of this amount, approximately $18.2
million is budgeted for the integration of the point-of-sale system in Bon-Ton
stores and information system enhancements. The remainder will be directed to
remodeling some of the Company's existing stores and general operations. No new
stores are currently planned for fiscal 2004.

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

19

anticipates that its cash balances and cash flows from operations, supplemented
by borrowings under the revolving credit facility and proceeds from the accounts
receivable facility, will be sufficient to satisfy its operating cash
requirements for at least the next twelve months.

The accounts receivable facility and revolving credit facility agreements
expire in October 2004 and October 2007, respectively. The Company anticipates
that it will be able to renew or replace these agreements with agreements of
substantially comparable terms. Failure to renew or replace these agreements on
substantially comparable terms would have a material adverse effect on the
Company's financial condition.

Cash flows from operations are impacted by consumer confidence, weather
conditions in the geographic markets served by the Company, the economic climate
and competitive conditions existing in the retail industry. A downturn in any
single factor or a combination of factors could have a material adverse impact
upon the Company's ability to generate sufficient cash flows to operate its
business.

The Company has not identified any probable circumstances that would
likely impair its ability to meet its cash requirements or trigger a default or
acceleration of payment of the Company's debt.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following tables reflect the Company's contractual obligations and
commitments:

CONTRACTUAL OBLIGATIONS

Debt within the "4-5 Years" category includes $152.0 million of amounts
currently outstanding under the revolving credit agreement, which expires in
2007.

COMMITMENTS

Standby letters of credit are primarily issued as collateral for
obligations related to general liability and workers' compensation insurance and
private brand merchandise purchase agreements. Surety bonds are primarily for
previously incurred and expensed obligations related to workers' compensation.

20

In the ordinary course of business, the Company enters into arrangements
with vendors to purchase merchandise up to twelve months in advance of expected
delivery. These purchase orders do not contain any significant termination
payments or other penalties if cancelled.

OFF-BALANCE SHEET ARRANGEMENTS

The Company engages in securitization activities involving the Company's
proprietary credit card portfolio as a source of funding. Off-balance sheet
proprietary credit card securitizations provide a significant portion of the
Company's funding and are one of its primary sources of liquidity. At January
31, 2004, off-balance sheet securitized receivables represented 57% of the
Company's funding. Gains and losses from securitizations are recognized in the
Consolidated Statements of Income when the Company relinquishes control of the
transferred financial assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities -- a Replacement of FASB
Statement No. 125" ("SFAS No. 140"), and other related pronouncements. The gain
or loss on the sale of financial assets depends in part on the previous carrying
amount of the assets involved in the transfer, allocated between the assets sold
and the retained interests based upon their respective fair values at the date
of sale. Based on the term of the securitization agreement (less than one year)
and the fact that the credit card receivables that comprise the retained
interests are short-term in nature, the Company has classified its retained
interests as a current asset.

The Company sells undivided percentage ownership interests in certain of
its credit card accounts receivable to unrelated third-parties under a $250.0
million accounts receivable securitization facility, which is described in
further detail below and in Note 9 to the Consolidated Financial Statements. The
unrelated third-parties, referred to as the conduit, have purchased a $228.5
million interest in the accounts receivable under this facility at January 31,
2004. The Company is responsible for servicing these accounts, retains a
servicing fee and bears the risk of non-collection (limited to its retained
interests in the accounts receivable). Associated off-balance-sheet assets and
related debt were $228.5 million at January 31, 2004 and $145.0 million at
February 1, 2003. This increase is due to the acquisition and subsequent sale of
Elder-Beerman's accounts receivable. Upon the facility's termination, the
conduit would be entitled to all cash collections on the accounts receivable
until its investment ($228.5 million at January 31, 2004) and accrued discounts
are repaid. Accordingly, upon termination of the facility, the assets of the
facility would not be available to the Company until all amounts due to the
conduit have been paid in full.

Based upon the terms of the accounts receivable facility, the accounts
receivable transactions qualify for "sale treatment" under generally accepted
accounting principles. This treatment requires the Company to account for
transactions with the conduit as a sale of accounts receivable instead of
reflecting the conduit's net investment as debt with a pledge of accounts
receivable as collateral. Absent this "sale treatment," the Company's balance
sheet would reflect additional accounts receivable and debt, which could be a
factor in the Company's ability to raise capital; however, results of operations
would not be significantly impacted. See Note 9 to the Consolidated Financial
Statements.

CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of financial condition and results
of operations are based upon the Consolidated Financial Statements, which have
been prepared in accordance with generally accepted accounting principles.
Preparation of these financial statements requires the Company to make estimates
and judgments that affect reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of its financial statements. On an ongoing basis, the Company evaluates its
estimates, including those related to merchandise returns, bad debts,
inventories, intangible assets, income taxes, financings,
21

and contingencies and litigation. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially lead to
materially different results under different assumptions and conditions. The
Company believes its critical accounting policies are described below. For a
discussion of the application of these and other accounting policies, see Notes
to Consolidated Financial Statements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit-worthiness. The Company continually monitors collections and payments
from customers and maintains an allowance for estimated credit losses based upon
its historical experience, how delinquent accounts ultimately charge-off, aging
of accounts and any specific customer collection issues identified (e.g.,
bankruptcy). While such credit losses have historically been within expectations
and provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates as in the past. If circumstances change
(e.g., higher than expected defaults or bankruptcies), the Company's estimates
of the recoverability of amounts due the Company could be materially reduced.
The allowance for doubtful accounts and sales returns was $6.3 million and $3.5
million as of January 31, 2004 and February 1, 2003, respectively.

INVENTORY VALUATION

As discussed in Note 1 to the Consolidated Financial Statements,
inventories are stated at the lower of cost or market with cost determined using
the retail last-in, first-out ("LIFO") method. Under the retail inventory
method, the valuation of inventories at cost and resulting gross margin is
derived by applying a calculated cost-to-retail ratio to the retail value of
inventories. The retail inventory method is an averaging method that has been
widely used in the retail industry. Use of the retail inventory method will
result in valuing inventories at the lower of cost or market if markdowns are
taken timely as a reduction of the retail value of inventories.

Inherent in the retail inventory method calculation are certain
significant management judgments and estimates including, among others,
merchandise markups, markdowns and shrinkage, which significantly impact both
the ending inventory valuation at cost and resulting gross margin. These
significant estimates, coupled with the fact that the retail inventory method is
an averaging process, can, under certain circumstances, result in individual
inventory components with cost above related net realizable value. Factors that
can lead to this result include applying the retail inventory method to a group
of products that is not fairly uniform in terms of its cost, selling price
relationship and turnover; or applying the retail inventory method to
transactions over a period of time that includes different rates of gross
profit, such as those relating to seasonal merchandise. In addition, failure to
take timely markdowns can result in an overstatement of cost under the lower of
cost or market principle. Management believes that the Company's retail
inventory method provides an inventory valuation that approximates cost and
results in carrying inventory in the aggregate at the lower of cost or market.

The Company regularly reviews inventory quantities on hand and records an
adjustment for excess or old inventory based primarily on an estimated forecast
of merchandise demand for the selling season. Demand for merchandise can
fluctuate greatly. A significant increase in the demand for merchandise could
result in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess

22

inventory quantities on-hand. Additionally, estimates of future merchandise
demand may prove to be inaccurate, in which case the Company may have
understated or overstated the adjustment required for excess or old inventory.
If the Company's inventory is determined to be overvalued in the future, the
Company would be required to recognize such costs in the costs of goods sold and
reduce operating income at the time of such determination. Likewise, if
inventory is later determined to be undervalued, the Company may have overstated
the costs of goods sold in previous periods and would be required to recognize
additional operating income when such inventory is sold. Therefore, although
every effort is made to ensure the accuracy of forecasts of future merchandise
demand, any significant unanticipated changes in demand or the economy in the
Company's markets could have a significant impact on the value of the Company's
inventory and reported operating results.

As is currently the case with many companies in the retail industry, the
Company's LIFO calculations have yielded inventory increases in recent years due
to deflation reflected in price indices used. This is the result of the LIFO
method whereby merchandise sold is valued at the cost of more recent inventory
purchases (which the deflationary indices indicate to be lower), resulting in
the general inventory on-hand being carried at the older, higher costs. Given
these higher values and the promotional retail environment, the Company reduced
the carrying value of its LIFO inventories to a net realizable value (NRV).
These reductions totaled $16.1 million at January 31, 2004. Inherent in these
NRV assessments are significant management judgments and estimates regarding
future merchandise selling costs and pricing. Should these estimates prove to be
inaccurate, the Company may have overstated or understated its inventory
carrying value. In such cases, operating income would ultimately be impacted.

VENDOR ALLOWANCES

As is standard industry practice, the Company receives allowances from
merchandise vendors as reimbursement for charges incurred on marked-down
merchandise. Vendor allowances are generally credited to costs of goods sold,
provided the allowance is: (1) collectable, (2) for merchandise either
permanently marked down or sold, (3) not predicated on a future purchase, (4)
not predicated on a future increase in the purchase price from the vendor, and
(5) authorized by internal management. If the aforementioned criteria are not
met, the Company reflects the allowances as an adjustment to the cost of
merchandise capitalized in inventory.

Additionally, the Company receives allowances from vendors in connection
with cooperative advertising programs. The Company reviews advertising
allowances received from each vendor to ensure reimbursements are for specific,
incremental and identifiable advertising costs incurred by the Company to sell
the vendor's products. If a vendor reimbursement exceeds the costs incurred by
the Company, the excess reimbursement is recorded as a reduction of cost
purchases from the vendor and reflected as a reduction of costs of merchandise
sold when the related merchandise is sold. All other amounts are recognized by
the Company as a reduction of the related advertising costs that have been
incurred and reflected in selling, general and administrative expenses.

INCOME TAXES

Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities, and the valuation
allowance recorded against net deferred tax assets. The process involves the
Company summarizing temporary differences resulting from differing treatment of
items (e.g., allowance for doubtful accounts) for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the consolidated balance sheet. The Company must then assess the
likelihood that deferred tax assets will be recovered from future taxable income
or tax carry-back availability and, to the extent the Company believes recovery
is not likely, a valuation allowance must be established. To the extent

23

the Company establishes a valuation allowance in a period, an expense must be
recorded within the tax provision in the statement of operations.

Pursuant to the acquisition of Elder-Beerman, the Company acquired
federal and state net operating loss carry-forwards of approximately $77.8
million and $153.2 million, respectively, which are available to offset future
federal and state taxable income -- subject to certain limitations imposed by
Section 382 of the Internal Revenue Code ("Section 382"). These net operating
losses will expire at various dates beginning in fiscal 2009 through fiscal
2022. In addition, pursuant to the acquisition of Elder-Beerman, the Company
acquired alternative minimum tax credits and general business credits in the
amount of $2.1 million and $0.6 million, respectively. Both credits are also
subject to the limitations imposed by Section 382. The alternative minimum tax
credits are available indefinitely, and the general business credits expire
beginning in fiscal 2007 through fiscal 2008.

Net deferred tax assets were $33.1 million and $7.2 million as of January
31, 2004 and February 1, 2003, respectively. Pursuant to the acquisition of
Elder-Beerman, the Company recorded $83.2 million of net deferred tax assets.
The Company's ability to utilize these assets will be limited by Section 382. As
part of preliminary purchase accounting, a valuation allowance of $46.7 million
was established against these deferred tax assets. As of January 31, 2004, $12.5
million and $34.2 million of this valuation allowance has been classified as
current and long-term, respectively, pursuant to requirements of SFAS No. 109,
"Accounting for Income Taxes." No valuation allowance was established at
February 1, 2003. In assessing the realizability of the deferred tax assets, the
Company considered whether it is more-likely-than-not that the deferred taxes
assets, or a portion thereof, will not be realized. The Company considered the
scheduled reversal of deferred tax liabilities, projected future taxable income,
tax planning strategies, and the limitations of Section 382 in making this
assessment. As a result, the Company concluded during fiscal 2003 that a
valuation allowance against a portion of the net deferred tax assets was
appropriate. If actual results differ from these estimates or these estimates
are adjusted in future periods, the Company may need to adjust its valuation
allowance, which could materially impact its financial position and results of
operations.

Legislative changes currently proposed by certain states in which the
Company operates could have a materially adverse impact on future operating
results of the Company. These legislative changes principally involve state
income tax laws.

LONG-LIVED ASSETS

Property, fixtures and equipment are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of such assets. Changes
in the Company's business model or capital strategy can result in the actual
useful lives differing from the Company's estimates. In cases where the Company
determines that the useful life of property, fixtures and equipment should be
shortened, the Company depreciates the net book value in excess of the salvage
value over its revised remaining useful life, thereby increasing depreciation
expense. Factors such as changes in the planned use of fixtures or leasehold
improvements could also result in shortened useful lives. Net property, fixtures
and equipment amounted to $160.9 million and $136.2 million as of January 31,
2004 and February 1, 2003, respectively.

The Company assesses, on a store-by-store basis, the impairment of
identifiable long-lived assets -- primarily property, fixtures and
equipment -- whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that could trigger an impairment
review include the following:

- Significant under-performance of stores relative to historical or
projected future operating results,

24

- Significant changes in the manner of the Company's use of assets or
overall business strategy, and

- Significant negative industry or economic trends for a sustained
period.

The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Cash flow estimates are
based on historical results adjusted to reflect the Company's best estimate of
future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Estimates of fair value represent the
Company's best estimate based on industry trends and reference to market rates
and transactions. Should cash flow estimates differ significantly from actual
results, an impairment could arise and materially impact the Company's financial
position and results of operations. Given the seasonality of operations,
impairment is not conclusive, in many cases, until after the holiday period in
the fourth quarter is concluded.

Newly opened stores may take time to generate positive operating and cash
flow results. Factors such as store type, store location, current marketplace
awareness of the Company's private label brands, local customer demographic data
and current fashion trends are all considered in determining the time-frame
required for a store to achieve positive financial results. If economic
conditions prove to be substantially different from the Company's expectations,
the carrying value of new stores may ultimately become impaired.

In fiscal 2003 and 2002, the Company evaluated the recoverability of its
long-lived assets. As a result, impairment losses of $0.8 million and $2.0
million were recorded in depreciation and amortization expense in fiscal 2003
and 2002, respectively.

Additionally, the Company has identified assets in various markets that
have under-performed relative to the Company average. The Company has taken
steps to address these issues and currently forecasts no impairment charge.
Should the Company's improvement efforts prove unsuccessful or economic
conditions change, the carrying value of these assets may ultimately become
impaired.

The Company is in the process of refining its preliminary purchase
accounting for long-lived assets acquired in the acquisition of Elder-Beerman.
The Company is in the process of obtaining updated fair valuations for certain
assets acquired.

In fiscal 2003, a charge of $2.4 million was recorded in depreciation and
amortization expense for the write-off of duplicate information systems software
due to the acquisition of Elder-Beerman. This charge arose due to a decision to
use Elder-Beerman's point-of-sale system in all of the Company's stores.

GOODWILL AND INTANGIBLE ASSETS

Goodwill was $3.0 million as of January 31, 2004 and February 1, 2003.

Intangible assets are comprised of lease interests that relate to
below-market-rate leases purchased in store acquisitions completed in fiscal
years 1992 through 1999, which were adjusted to reflect fair market value. These
leases had average lives of twenty-five years. Net intangible assets amounted to
$6.2 million and $6.5 million as of January 31, 2004 and February 1, 2003,
respectively.

As a result of the Company's adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"), the Company now reviews goodwill and other intangible assets that have
indefinite lives for impairment at least annually or when events or changes in
circumstances indicate the carrying value of these assets might exceed their
current fair values. The Company determines fair value using discounted cash
flow analysis, which requires certain assumptions and estimates regarding
industry economic factors and future
25

profitability of acquired businesses. It is the Company's policy to conduct
impairment testing based on its most current business plans, which reflect
anticipated changes in the economy and the industry. If actual results prove
inconsistent with Company assumptions and judgments, the Company could be
exposed to a material impairment charge.

SECURITIZATIONS

A significant portion of the Company's funding is through
off-balance-sheet credit card securitizations via sales of certain accounts
receivable through an accounts receivable facility ("the facility"). The sale of
receivables is to The Bon-Ton Receivables Partnership, LP ("BTRLP"), a special
purpose entity as defined by SFAS No. 140. BTRLP is a wholly owned subsidiary of
the Company. BTRLP may sell accounts receivable with a purchase price up to
$250.0 million through the facility to a conduit on a revolving basis.

The Company sells accounts receivable through securitizations with
servicing retained. When the Company securitizes, it surrenders control over the
transferred assets and accounts for the transaction as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The Company allocates the previous carrying amount of the
securitized receivables between the assets sold and retained interests, based on
their relative estimated fair values at the date of sale. Securitization income
is recognized at the time of the sale, and is equal to the excess of the fair
value of the assets obtained (principally cash) over the allocated cost of the
assets sold and transaction costs. During the revolving period of each accounts
receivable securitization, securitization income is recorded representing
estimated gains on the sale of new receivables to the conduit on a continuous
basis to replenish the investors' interest in securitized receivables that have
been repaid by the credit card account holders. Fair value estimates used in the
recognition of securitization income require certain assumptions of payment,
default, servicing costs (direct and indirect) and interest rates. To the extent
actual results differ from those estimates, the impact is recognized as a
component of securitization income.

The Company estimates the fair value of retained interests in
securitizations based on a discounted cash flow analysis. The cash flows of the
retained interest-only strip are estimated as the excess of the weighted average
finance charge yield on each pool of receivables sold over the sum of the
interest rate paid to the note holder, the servicing fee and an estimate of
future credit losses over the life of the receivables. Cash flows are discounted
from the date the cash is expected to become available to the Company. These
cash flows are projected over the life of the receivables using payment,
default, and interest rate assumptions that the Company believes would be used
by market participants for similar financial instruments subject to prepayment,
credit and interest rate risk. The cash flows are discounted using an interest
rate that the Company believes a purchaser unrelated to the seller of the
financial instrument would demand. As all estimates used are influenced by
factors outside the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. Any adverse change in the Company's assumptions could materially impact
securitization income.

The Company recognized securitization income of $8.0 million, $8.9
million and $5.6 million for fiscal year 2003, 2002, and 2001, respectively. The
decrease in income in fiscal 2003 relative to fiscal 2002 was principally due to
decreased sales of accounts receivable through the facility, resulting in a $1.9
million reduction of finance charge income, partially offset by a $1.0 million
reduction in interest costs. The increased securitization income in fiscal 2002
relative to fiscal 2001 was principally a reflection of increased sales of
accounts receivable, resulting in a $0.3 million increase in finance charge
income, and a $2.6 million reduction in interests costs.

26

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

MARKET RISK AND FINANCIAL INSTRUMENTS

The Company is exposed to market risk associated with changes in interest
rates. Based on the variable-rate facilities outstanding at January 31, 2004, a
100 basis-point increase in interest rates would result in an approximate $1.5
million charge to interest expense. To provide some protection against potential
rate increases associated with its variable-rate facilities, the Company entered
into a derivative financial transaction in the form of an interest rate swap.
The interest rate swap is used to hedge the underlying variable-rate facilities.
The swap is a qualifying hedge and the interest rate differential is reflected
as an adjustment to interest expense over the life of the swap. The Company
currently holds a "variable-to-fixed" rate swap with a notional amount of $30.0
million with one financial institution. The notional amount does not represent
amounts exchanged by the parties, but it is used as the basis to calculate
amounts due and to be received under the rate swap. During fiscal 2003 and 2002,
the Company did not enter into or hold derivative financial instruments for
trading purposes.

The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including debt obligations and interest rate swaps.
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates as of January 31,
2004. For interest rate swaps, the table presents notional amounts and weighted
average pay and receive interest rates by expected maturity date. For additional
discussion of the Company's interest rate swaps, see Note 7 to the Consolidated
Financial Statements.

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 second half of each fiscal year, which includes the back-to-school
and holiday seasons. See Note 16 of Notes to Consolidated Financial Statements
for the Company's quarterly results for fiscal 2003 and 2002. Due to the fixed
nature of certain costs, 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 results that may be achieved for a
full fiscal year. In addition, quarterly operating results are impacted by the
timing and amount of revenues and costs associated with the opening of new
stores and the closing and remodeling of existing stores.

27

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.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information called for by this item is set forth in the Company's
Consolidated Financial Statements and supplementary data contained in this
report and is incorporated herein by this reference. See index at page F-1.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934) as of the end of the period covered by
this report and, based on this evaluation, concluded that the Company's
disclosure controls and procedures, which have been designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission, are effective.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

Other than as described below, there has been no change in the Company's
internal control over financial reporting during the Company's most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the Company's internal control over financial reporting.

The Company is currently in the process of integrating the operations of
Elder-Beerman. As part of the integration, the Company is changing the
functional areas or locations responsible for certain transaction processing and
certain processes over financial data collection, consolidation and reporting.
As a result, the Company is changing the design and operation of certain
elements of its internal control over financial reporting. The Company believes
it is taking the necessary steps to monitor and maintain appropriate internal
control over financial reporting during this period of change.

28

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

As part of our system of corporate governance, our Board of Directors has
adopted a Code of Ethical Standards and Business Practices applicable to all
directors, officers and associates. This Code is available on our website at
www.bonton.com.

The information regarding executive officers is included in Part I under
the heading "Executive Officers." The remainder of the information called for by
this Item will be contained in the Company's Proxy Statement and is hereby
incorporated by reference thereto.

ITEM 11. EXECUTIVE COMPENSATION.

The information called for by this Item will be contained in the
Company's Proxy Statement and is hereby incorporated by reference thereto (other
than the information called for by Items 402(k) and (l) of Regulation S-K, which
is not incorporated herein by reference).

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

The information called for by this Item will be contained in the
Company's Proxy Statement and is hereby incorporated by reference thereto.

See also Part II, Item 5 for a discussion of securities authorized for
issuance under equity compensation plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information called for by this Item will be contained in the
Company's Proxy Statement and is hereby incorporated by reference thereto.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by this Item will be contained in the
Company's Proxy Statement and is hereby incorporated by reference thereto.

29

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report:

1. Consolidated Financial Statements -- See the Index to
Consolidated Financial Statements and Financial Statement Schedule on
page F-1.

2. Financial Statement Schedule -- See the Index to
Consolidated Financial Statements and Financial Statement Schedule on
page F-1.

3. The following are exhibits to this Form 10-K and, if
incorporated by reference, the Company has indicated the document
previously filed with the Commission in which the exhibit was included.

* Constitutes a management contract or compensatory plan or arrangement.

** Filed herewith.

(b) Reports on Form 8-K.

1. A report dated November 7, 2003 filed in connection with the
acquisition of The Elder-Beerman Stores Corp.

32

2. A report dated November 25, 2003 which furnished a Company
press release announcing its results of operations for the thirteen weeks
and thirty-nine weeks ended November 1, 2003.

3. A report dated December 12, 2003 which furnished a Company
press release with respect to a dividend declaration.

4. A report dated December 24, 2003 which amended and
supplemented a Form 8-K originally filed on November 7, 2003 in
connection with the acquisition of The Elder-Beerman Stores Corp.

The following Reports on Form 8-K were filed subsequent to January 31,
2004 but prior to the filing of this Report on Form 10-K:

1. A report dated March 11, 2004 which furnished a Company
press release announcing its results of operations for the thirteen weeks
and fifty-two weeks ended January 31, 2004.

2. A report dated March 18, 2004 which furnished a Company
press release with respect to a dividend declaration.

3. A report dated April 22, 2004 which furnished a Company
press release with respect to the resignation of the Company's president
and chief operating officer.

33

SIGNATURES

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

THE BON-TON STORES, INC.

By: /s/ TIM GRUMBACHER
------------------------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
Dated: April 27, 2004

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

35

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

Independent Auditors' Reports............................... F-2
Consolidated Balance Sheets................................. F-5
Consolidated Statements of Income........................... F-6
Consolidated Statements of Shareholders' Equity............. F-7
Consolidated Statements of Cash Flows....................... F-8
Notes to Consolidated Financial Statements.................. F-9
Schedule II -- Valuation and Qualifying Accounts............ F-39

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
The Bon-Ton Stores, Inc.:

We have audited the accompanying consolidated balance sheets of The
Bon-Ton Stores, Inc. and subsidiaries as of January 31, 2004 and February 1,
2003, and the related consolidated statements of income, shareholders' equity
and cash flows for the fiscal years then ended. In connection with our audits of
the fiscal 2003 and 2002 consolidated financial statements, we also have audited
the fiscal 2003 and 2002 periods in the financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits. The fiscal 2001 consolidated financial statements
and financial statement schedule for this period of The Bon-Ton Stores, Inc.
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements and
financial statement schedule, before the revisions described in Note 3 to the
consolidated financial statements, in their report dated March 6, 2002.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 fiscal 2003 and 2002 consolidated 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, 2004 and February 1, 2003 and the results of their operations and
their cash flows for the fiscal years then ended in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related fiscal 2003 and 2002 periods in the financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.

As discussed above, the fiscal 2001 consolidated financial statements of
The Bon-Ton Stores, Inc. and subsidiaries were audited by other auditors who
have ceased operations. As described in Note 3, these consolidated financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company as of February 3, 2002. In
our opinion, the disclosures for fiscal 2001 in Note 3 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the fiscal 2001
consolidated financial statements of The Bon-Ton Stores, Inc. and subsidiaries
other than with respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the fiscal 2001 consolidated
financial statements taken as a whole.

/s/ KPMG LLP

Philadelphia, Pennsylvania
March 10, 2004, except as
to Note 19, which is as
of March 18, 2004

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

To 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
February 2, 2002 and February 3, 2001, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three fiscal
years in the period ended February 2, 2002. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Bon-Ton Stores,
Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended February 2, 2002 in conformity with accounting
principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Philadelphia, PA
March 6, 2002

NOTE: THE REPORT ABOVE IS A COPY OF A PREVIOUSLY ISSUED REPORT AND HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP. THE INFORMATION FOR THE PERIOD ENDED FEBRUARY
2, 2002 IN THE TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS," WHICH WAS
ADOPTED BY THE COMPANY AS OF FEBRUARY 3, 2002, AS DESCRIBED IN NOTE 3, WAS NOT
REVIEWED BY ARTHUR ANDERSEN LLP.

F-3

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To The Bon-Ton Stores, Inc.:

We have audited in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements included in The
Bon-Ton Stores, Inc.'s annual report to shareholders incorporated by reference
in this Form 10-K, and have issued our report thereon dated March 6, 2002. Our
audit was made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in the accompanying index is the responsibility
of the company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

/s/ Arthur Andersen LLP

Philadelphia, PA
March 6, 2002

NOTE: THE REPORT ABOVE IS A COPY OF A PREVIOUSLY ISSUED REPORT AND HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP. SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS,
IS LOCATED AT PAGE F-39.

F-4

THE BON-TON STORES, INC.

CONSOLIDATED BALANCE SHEETS

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

F-5

THE BON-TON STORES, INC.

CONSOLIDATED STATEMENTS OF INCOME

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

F-6

THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

F-7

THE BON-TON STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

F-8

THE BON-TON STORES, INC.
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 incorporated on January 31, 1929,
and currently operates, through its subsidiaries, 140 department stores and two
furniture stores in sixteen states from the Northeast to the Midwest under the
names "Bon-Ton" and "Elder-Beerman." The Company conducts its operations through
one business segment.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of The Bon-Ton
Stores, Inc. and all of its wholly owned subsidiaries (the "Company"). All
intercompany transactions have been eliminated in consolidation. Results of
operations for the year ended January 31, 2004 include Elder-Beerman operations
for the period from October 24, 2003 to January 31, 2004 (see Note 2).

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 January 31, and
consisted of fifty-two weeks for fiscal years 2003, 2002 and 2001. Fiscal years
2003, 2002 and 2001 ended on January 31, 2004, February 1, 2003 and February 2,
2002, respectively.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the
current year presentation. These reclassifications did not impact the Company's
net income for fiscal 2003, 2002 or 2001.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid short-term investments with a
remaining term of three months or less to be cash equivalents. Cash equivalents
are generally overnight money market investments.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company owns and administers two proprietary credit card programs.
The Company performs ongoing credit evaluations of its customers who hold the
Company's proprietary credit cards, and adjusts credit limits based upon payment
history and the customer's current credit-worthiness. The Company continually
monitors collections and payments from customers and maintains an allowance for
estimated credit losses based upon its historical experience and any specific
customer collection issues identified (e.g. bankruptcy). While such credit
losses have historically been within expectations and provisions established,
the Company cannot guarantee that it will continue to experience the same credit
loss rates as in the past. If circumstances change (e.g., higher than expected
defaults or bankruptcies), the Company's estimates of the recoverability

F-9

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

of amounts due the Company could be reduced by a material amount. The Company's
policy is to write-off any receivables that have gone 180 days without a payment
or for which the Company received notification of a customer bankruptcy, or
write-off sooner based upon the Company's judgement. The allowance for doubtful
accounts and sales returns amounted to $6,299 and $3,540 as of January 31, 2004
and February 1, 2003, respectively.

MERCHANDISE INVENTORIES

For financial reporting and tax purposes, merchandise inventories are
determined by the retail method using a LIFO (last-in, first-out) cost basis.
There was no adjustment to costs of merchandise sold for LIFO valuations in
fiscal 2003. Fiscal 2002 reflects a charge of $712 and fiscal 2001 reflects
income of $3,712 for LIFO valuation. If the first-in, first-out (FIFO) method of
inventory valuation had been used instead of the LIFO method, merchandise
inventories would have been $6,637 lower at January 31, 2004 and February 1,
2003.

Costs for merchandise purchases, product development and distribution are
included in costs of merchandise sold.

PROPERTY, FIXTURES AND EQUIPMENT: DEPRECIATION AND AMORTIZATION

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

Buildings 20 to 40 years
Leasehold improvements 2 to 15 years
Fixtures and equipment 3 to 10 years

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
incurred during the construction of new facilities or major improvements to
existing facilities. The amount of interest costs capitalized is limited to that
incurred during the construction period. Interest of $1, $3 and $25 was
capitalized in fiscal years 2003, 2002 and 2001, respectively.

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

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 of the lease.

The Company assesses the impairment of property, fixtures and equipment
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. An impairment loss of approximately $800 and $2,000 for
certain store assets was recorded and is included as part of depreciation and
amortization expense in fiscal 2003 and 2002, respectively (see Note 4). In
addition, charges of $2,378 were recorded within depreciation and amortization
expense in fiscal 2003 for the write-off of duplicate information systems
software due to the acquisition of Elder-Beerman.

F-10

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

GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of goodwill and lease-related
interests classified as intangible assets:

These lease interests relate to below-market-rate leases purchased in
store acquisitions completed in fiscal years 1992 through 1999, which were
adjusted to reflect fair market value. These leases have average lives of
twenty-five years.

In fiscal 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). In
accordance with SFAS No. 142, the Company periodically reviews goodwill and
other intangible assets that have indefinite lives for impairment. This review
is performed at least annually and may be performed more frequently if events or
changes in circumstances indicate the carrying value of goodwill and other
intangible assets might exceed their current fair values. The Company determines
fair value using discounted cash flow analysis, which requires certain
assumptions and estimates regarding industry economic factors and future
profitability. It is the Company's policy to conduct impairment testing based on
its most current business plans and forecasts, which reflect anticipated changes
in the economy and the industry.

DEFERRED FINANCING FEES

Amounts paid by the Company to lenders to secure credit and accounts
receivable securitization facilities are reflected in non-current other assets
and are amortized over the term of the related facility. Amortization of credit
facility costs and accounts receivable securitization facility costs are
classified as interest expense and selling, general and administrative expense,
respectively. Unamortized amounts at January 31, 2004 and February 1, 2003 were
$7,494 and $1,255, respectively. Deferred financing fees amortized to expense
for fiscal 2003, 2002 and 2001 were $1,635, $296 and $223, respectively.

ACCRUED EXPENSES

Accrued expenses consist of liabilities associated with store and
corporate facility operations, such as lease expense, advertising, employee
severance, real estate taxes, legal expense and expense recorded pursuant to
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (see Note 7).

F-11

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

Accrued expenses at January 31, 2004 and February 1, 2003 were comprised
of the following:

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 and from net operating losses and credit carryforwards, using
applicable current marginal tax rates (see Note 13).

REVENUE RECOGNITION

The Company recognizes revenue at either the point-of-sale or at the time
merchandise is shipped to the customer. Sales are net of returns and exclude
sales tax. A reserve is provided for estimated merchandise returns based on
experience and is reflected as an adjustment to sales and costs of merchandise
sold.

LEASED DEPARTMENT SALES

The Company leases space to third parties 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 $3,814, $2,903
and $2,738 in fiscal 2003, 2002 and 2001, respectively.

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, net of vendor allowances,
included in selling, general and administrative expenses for fiscal 2003, 2002
and 2001 were $34,270, $25,694 and $26,717, respectively. Prepaid expenses and
other current assets include prepaid advertising costs of $1,032 and $589 at
January 31, 2004 and February 1, 2003, respectively.

F-12

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

VENDOR ALLOWANCES

As is standard industry practice, the Company receives allowances from
merchandise vendors as reimbursement for charges incurred on marked-down
merchandise. Vendor allowances are credited to costs of goods sold, provided the
allowance is: (1) collectable, (2) for merchandise either permanently marked
down or sold, (3) not predicated on a future purchase; (4) not predicated on a
future increase in the purchase price from the vendor, and (5) authorized by
internal management. If the aforementioned criteria are not met, the Company
reflects the allowance dollars as an adjustment to the cost of merchandise
capitalized in inventory.

Additionally, the Company receives allowances from vendors in connection
with cooperative advertising programs. These amounts are recognized by the
Company as a reduction of the related advertising costs that have been incurred
and reflected in selling, general and administrative expenses. The Company
reviews advertising allowances received from each vendor to ensure
reimbursements are for specific, incremental and identifiable advertising costs
incurred by the Company to sell the vendor's products. If a vendor reimbursement
exceeds the costs incurred by the Company, the excess reimbursement is recorded
as a reduction of cost purchases from the vendor and reflected as a reduction of
costs of merchandise sold when the related merchandise is sold.

PURCHASE ORDER VIOLATIONS

The Company, consistent with industry practice, mandates that vendor
merchandise shipments conform to certain standards. These standards are usually
defined in the purchase order and include items such as proper ticketing,
security tagging, quantity, packaging, on-time delivery, etc. Failure by vendors
to conform to these standards increases Company merchandise handling costs.
Accordingly, various purchase order violation charges are billed to vendors;
these charges are reflected by the Company as a reduction of cost of sales in
the period in which the respective violations occur. The Company establishes
reserves for purchase order violations that may become uncollectible.

SELF-INSURANCE LIABILITIES

The Company is self-insured for certain losses related to workers'
compensation and health insurance, although it maintains stop-loss coverage with
third party insurers to limit exposures. The estimate of its self-insurance
liability contains uncertainty since the Company must use judgment to estimate
the ultimate cost that will be incurred to settle reported claims and unreported
claims for incidents incurred but not reported as of the balance sheet date.
When estimating its self-insurance liability, the Company considers a number of
factors which include, but are not limited to, historical claim experience,
demographic factors, severity factors and information provided by independent
third-party advisors. The Company has not made any material changes in the
accounting methodology used to establish its self-insurance liabilities during
the past three fiscal years.

REVOLVING CHARGE ACCOUNTS

Finance charge income and late fees on customer revolving charge accounts
are reflected as a reduction of selling, general and administrative expenses.
Finance charge income and late fees earned by the Company, before considering
costs of administering and servicing revolving charge accounts, for fiscal 2003,
2002 and 2001 were $41,586, $34,732 and $33,706, respectively. Finance charge
income is a component of securitization income but is also recognized on
retained

F-13

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

interests in the securitized receivables (see Note 9). Late fees are not
considered when calculating the gain on the sale of receivables; rather, they
are recognized when earned.

RECEIVABLE SALES

When the Company sells receivables in securitizations of credit card
loans, it retains interest-only strips, subordinated interests and servicing
rights, all of which are retained interests in the securitized receivables. Gain
or loss on sale of the receivables depends in part on the previous carrying
amount of financial assets involved in the transfer, allocated between the
assets sold and retained interests, based on their relative fair value at date
of transfer. To obtain fair values, quoted market prices are generally not
available for retained interests and the Company estimates fair value based on
the present value of future expected cash flows using management's best
estimates of key assumptions -- credit losses, prepayment impact and an
appropriate discount rate commensurate with the risks involved. Factors
impacting this estimate of fair value are updated each quarter based on the
historical performance of the Company's credit card portfolio. Similar to other
estimates used that are influenced by factors outside the Company's control,
uncertainty is inherent in these estimates, making it reasonably possible that
they could change in the near term.

STOCK-BASED COMPENSATION

The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") and related interpretations including
Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25," issued in March 2000, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of the
grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net income if the fair-value-based method had been
applied to all outstanding and unvested awards in each period:

F-14

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

All stock options granted during the fiscal years presented in the table
above were issued with an option exercise price equal to the per-share market
price at date of grant. The Company used the Black-Scholes option pricing model
to calculate the fair value of stock options at the grant date. See Note 15 for
assumptions used.

The FASB is currently reviewing the accounting for stock options, and may
require use of the fair value method prescribed by SFAS No. 123. In addition, on
February 19, 2004, the International Accounting Standards Board issued
accounting rules that require the expensing of stock options, and the FASB is
working to align U.S. accounting with international standards. As required by
SFAS No. 123 for companies retaining APB 25 accounting, the Company discloses
the estimated impact of fair value accounting for stock options issued.

EARNINGS PER SHARE

The presentation of earnings per share ("EPS") requires a reconciliation
of the numerators and denominators used in basic and diluted EPS calculations.
The numerator, net income, is identical in both calculations. The following
table presents a reconciliation of the weighted average shares outstanding used
in EPS calculations for each of fiscal 2003, 2002 and 2001:

Options to purchase shares with exercise prices greater than average
market price were excluded from the above table for fiscal 2003, 2002 and 2001
in the amounts of 341,042, 620,000 and 908,000, respectively, as they would have
been antidilutive.

2. ACQUISITION

Effective October 24, 2003, pursuant to the Agreement and Plan of Merger
dated as of September 15, 2003, among the Company, The Elder-Beerman Stores
Corp. ("Elder-Beerman") and Elder Acquisition Corp., an indirect wholly owned
subsidiary of the Company ("Merger Sub"), Merger Sub was merged with and into
Elder-Beerman with Elder-Beerman continuing as the surviving corporation and as
an indirect wholly owned subsidiary of the Company (the "Merger"). Elder-Beerman
is headquartered in Dayton, Ohio and operates sixty-seven department stores and
two home furniture stores in Illinois, Indiana, Iowa, Kentucky, Michigan, Ohio,
Pennsylvania, West Virginia and Wisconsin.

Prior to the Merger, Merger Sub had acquired 10,892,494 shares of
Elder-Beerman common stock, representing approximately 94% of the outstanding
Elder-Beerman common stock, pursuant to a tender offer for all of the
outstanding shares of Elder-Beerman common stock. The consideration paid
pursuant to the tender offer was $8.00 in cash per share. As a result of the
Merger, each share of Elder-Beerman common stock outstanding at the effective
time of the Merger was converted into the right to receive $8.00 in cash. On
October 23, 2003, there were 11,585,457 shares of Elder-Beerman common stock
outstanding. Following consummation of the Merger, the Elder-Beerman common
stock was delisted from Nasdaq. As of January 31, 2004, the

F-15

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

consolidated balance sheet of the Company includes a liability of $2,716 for
Elder-Beerman common stock not yet tendered.

The Company financed the Elder-Beerman acquisition by amending and
restating its revolving credit facility agreement and accounts receivable
facility agreements (see Note 6). In addition, the Company obtained equity
financing in an aggregate amount of $6,500 from the Chairman and Chief Executive
Officer of the Company pursuant to a Stock Purchase Agreement dated as of
October 23, 2003 under which the Company issued 476,890 shares, at fair market
value, of the Company's common stock.

The primary reason for the acquisition was the addition of the
Elder-Beerman stores and the corresponding increase in geographic presence as
well as the Company's belief in the opportunity for enhanced growth and
profitability.

The Company's consolidated balance sheet and consolidated statement of
operations for fiscal 2003 include Elder-Beerman operations for the period from
October 24, 2003 through January 31, 2004. Elder-Beerman operations reflect
preliminary purchase accounting, which is subject to future refinement based
upon updated valuations of certain assets acquired.

The acquisition purchase price was $109,470, consisting of the following:

Purchase of common stock $ 92,684
Settlement of stock options 7,436
Professional fees incurred 9,350
- -----------------------------------------------------------------------
$109,470
- -----------------------------------------------------------------------

The total purchase price has preliminarily been allocated to the assets
acquired and liabilities assumed based on their estimated fair values at
acquisition as follows:

Cash and cash equivalents $ 11,826
Trade and other accounts receivable 111,847
Merchandise inventories 167,068
Deferred income taxes, net 36,495
Property, fixtures and equipment 30,575
Other assets 9,474
Accounts payable (65,831)
Debt (143,501)
Obligations under capital leases (2,914)
Other liabilities (45,569)
- ------------------------------------------------------------------------
Purchase price $ 109,470
- ------------------------------------------------------------------------

F-16

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

The following unaudited pro forma information presents the results of
operations of the Company as if the Elder-Beerman acquisition had taken place at
the beginning of the respective periods presented:

Pro forma adjustments have been made to reflect depreciation and
amortization based on preliminary valuations of property, fixtures and
equipment, interest expense on borrowings used to finance the acquisition and
issuance of 476,890 shares of the Company's common stock to the Chairman and
Chief Executive Officer of the Company.

Pro forma fiscal 2003 statement of operations includes nonrecurring
charges of $7,830 related to pre-acquisition costs incurred by Elder-Beerman and
other integration costs. In addition, the pro forma fiscal 2003 statement of
operations includes nonrecurring charges of $2,378 for the write-off of
duplicate information systems software due to the acquisition.

Pro forma fiscal 2002 statement of operations includes the cumulative
effect of changes in accounting principles associated with an Elder-Beerman
goodwill impairment charge and Elder-Beerman unrecognized actuarial gains and
losses related to pension benefits.

F-17

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

The above unaudited pro forma results of operations are presented for
informational purposes only, are not necessarily indicative of actual results of
operations had the acquisition been effected at the beginning of the respective
periods presented, do not reflect potential synergies, integration costs and
other such costs or savings and are not indicative of future results.

In connection with the acquisition, the Company developed integration
plans which will result in involuntary terminations, employee relocations, and
lease and other contract terminations. The liability for involuntary termination
benefits covers approximately three hundred employees, primarily in general and
administrative and merchandising functions. The Company expects to pay the
balance of involuntary termination benefits and employee relocations in fiscal
2004. The liability for lease and other contractual terminations benefits will
be paid over the remaining contract periods through 2030. In fiscal 2004, the
Company will finalize its integration plans, which may result in additional
liabilities. Liabilities recognized in connection with the acquisition and
activity to date are as follows:

3. GOODWILL AND INTANGIBLE ASSETS

Effective at the beginning of fiscal 2002, the Company adopted SFAS No.
142. Upon adoption of SFAS No. 142, goodwill amortization ceased. Goodwill is
now subject to fair-value based impairment tests performed, at a minimum, on an
annual basis. In addition, a transitional goodwill impairment test was required
as of the adoption date.

The Company completed the required goodwill impairment test and
determined that its goodwill was not impaired. During fiscal 2003 and 2002, no
goodwill amortization was recorded, no additional goodwill was acquired, no
impairment losses were recognized and no goodwill was disposed of through a
sale.

F-18

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

SFAS No. 142 requires the presentation of net income and related earnings
per share data adjusted for the effect of goodwill amortization. To illustrate
the impact of goodwill amortization on results of fiscal 2001, the following
table provides adjusted net income and earnings per share:

SFAS No. 142 also requires disclosure of intangible assets that are
subject to amortization. As of January 31, 2004 and February 1, 2003, the
Company reported the following lease-related interests classified as intangible
assets:

These lease interests relate to below-market-rate leases purchased in
store acquisitions completed in fiscal 1992 through 1999, which were adjusted to
reflect fair market value. These leases have average lives of twenty-five years.
Amortization of $390 and $488 was recorded on these intangible assets during
fiscal 2003 and 2002, respectively. The Company anticipates amortization on
these intangible assets of approximately $423, $493, $491, $470 and $470 for
fiscal 2004, 2005, 2006, 2007 and 2008, respectively.

4. LONG-LIVED ASSET IMPAIRMENT

In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-lived Assets" ("SFAS No. 144"), which supersedes SFAS No
121. SFAS No. 144 requires the Company to recognize an impairment loss only if
the carrying amount of the long-lived asset is not recoverable from its
undiscounted cash flows and to measure an impairment loss as the difference
between the carrying amount and the fair value of the asset.

F-19

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

The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 144 whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The evaluation measures
the fair value of the assets by comparing estimated future cash flows for
individual store locations to their carrying values. As a result of this
evaluation, impairment losses of approximately $800 and $2,000 were recorded in
fiscal 2003 and 2002, respectively, and are included in depreciation and
amortization expense.

In the third and fourth quarters of fiscal 2003, the Company recorded
charges totaling $2,378 for the write-off of duplicate information systems
software due to the acquisition of Elder-Beerman.

5. EXIT OR DISPOSAL ACTIVITIES

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities that were
previously accounted for pursuant to the guidance that the Emerging Issues Task
Force ("EITF") set forth in EITF Issue No. 94-3. The scope of SFAS No. 146 also
includes: (1) costs related to terminating a contract that is not a capital
lease, and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred compensation contract.
SFAS No. 146 was effective for exit or disposal activities that were initiated
after December 31, 2002.

In October 2002, the Company announced it would close its York,
Pennsylvania distribution operations in April 2003 and that all merchandise
processing functions would be consolidated into the Company's existing
Allentown, Pennsylvania distribution center. In addition, the Company announced
it would close its Red Bank, New Jersey store in January 2003. The closings were
completed as scheduled.

The Company elected to adopt SFAS No. 146 early for these exit activities
and, in fiscal 2003 and 2002, recorded a net reduction of expense of $4 and
charges of $696, respectively, relating to the closures. These expenses related
primarily to termination benefits for affected associates and other costs to
consolidate the distribution centers. All reduction of expenses and charges were
included within selling, general and administrative expense.

Following is a reconciliation of accruals related to the distribution
center and store closures:

Total closing costs were $692, with $404 for termination benefits and
$288 for other costs.

F-20

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

As of January 31, 2004, the remaining York, Pennsylvania distribution
center rental obligation through lease expiration in December 2020 is $9,431.
The Company continues to utilize a portion of this facility for its data
processing operations center and intends to assign the lease for the remaining
space. The Company anticipates that the fair market value of any sublet income
will equal or exceed its remaining rent obligation.

During the second quarter of 2003, the Company sold its Harrisburg,
Pennsylvania distribution center, resulting in a gain of $933 classified within
selling, general and administrative expenses.

6. DEBT

Debt consisted of the following:

Effective October 24, 2003, in connection with the acquisition of
Elder-Beerman, the Company amended and restated its revolving credit facility
agreement. The amendment increased the line from $150,000 to $300,000 and added
a term loan in the amount of $25,000. The amendment modified the borrowing
availability formula against eligible inventory, fixed assets and real estate.
The interest rate, based on LIBOR or an index rate plus an applicable margin,
and fee charges are determined by a formula based upon the Company's borrowing
availability. The agreement contains restrictions against the incurrence of
additional indebtedness, pledge or sale of assets, payment of dividends and
other similar restrictions. Per the agreement, dividends paid by the Company may
not exceed $7,500 over the life of the agreement, or $4,000 in any single year.
Financial covenants contained in the amended agreement include the following: A
limitation on fiscal 2004 capital expenditures of $52,468, minimum borrowing
availability of $10,000 and a fixed charge coverage ratio of 1.0-to-1. The fixed
charge coverage ratio is defined as earnings before interest, taxes,
depreciation and amortization divided by interest expense, capital expendi-

F-21

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

tures, tax payments and scheduled debt payments -- measured at fiscal
quarter-end based on the immediately preceding four fiscal quarters. As of
January 31, 2004, the Company had borrowings of $152,000 and letter-of-credit
commitments of $14,127, with $50,671 of additional borrowing availability
remaining under the agreement.

On May 17, 1996, the Company entered into a $23,400, twenty-year mortgage
agreement secured by its four stores in Rochester, New York.

On January 2, 2004, the Company paid-off the $4,500 mortgage note
payable. Unamortized fees of $89 related to the note were accelerated. No
prepayment penalty was incurred.

The Company entered into a loan agreement with the City of Scranton,
Pennsylvania on July 5, 2000. The loan provided $1,000 to be used in certain
store renovations. The agreement provides for interest payments beginning
February 1, 2006 at a rate of 5.0% per annum. The principal balance is to be
paid in full by January 1, 2011.

The installment note payable was assumed through the acquisition of
Elder-Beerman on October 24, 2003. The note relates to point-of-sale computer
equipment.

The Company was in compliance with all loan agreement restrictions and
covenants during fiscal 2003.

The fair value of the Company's debt, excluding interest rate swaps, was
estimated at $174,769 and $67,676 on January 31, 2004 and February 1, 2003,
respectively, and is based on an estimate of rates available to the Company for
debt with similar features.

Debt maturities by fiscal year as of January 31, 2004, are as follows:

2004 $ 1,113
2005 876
2006 970
2007 153,073
2008 1,188
2009 and thereafter 14,596
- -----------------------------------------------------------------------
$171,816
- -----------------------------------------------------------------------

7. INTEREST RATE DERIVATIVES

The Company maintains an interest rate swap that allows the Company to
convert variable rates under its credit facilities to fixed rates. The following
table indicates the notional amounts as of January 31, 2004 and February 1, 2003
and the range of interest rates paid and received by the Company during the
fiscal years ended on those respective dates:

The $30,000 interest rate swap held at January 31, 2004 will expire
February 6, 2006. The net income or expense from the exchange of interest rate
payments is included in interest expense. The estimated fair value of the
interest rate swap agreements, based on dealer quotes, at Janu-

F-22

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

ary 31, 2004 and February 1, 2003, was an unrealized loss of $1,991 and $4,940,
respectively, and represents the amount the Company would pay if the agreements
were terminated as of said dates.

On February 5, 2001, the Company adopted SFAS No. 133 and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of FASB Statement No. 133." SFAS No. 133 requires the
transition adjustment, net of tax effect, resulting from adopting these
Statements to be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle. In
the first quarter of fiscal 2001, a $426 net-of-tax loss transition adjustment
was recorded in accumulated other comprehensive loss as a result of recognizing
at fair value all derivatives designated as cash flow hedging instruments.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company recognizes all derivatives on the balance sheet at fair
value. On the date the derivative instrument is entered into, the Company
generally designates the derivative as a hedge of a forecasted transaction or of
the variability of cash flows to be received or paid related to a recognized
asset or liability ("cash flow hedge"). Changes in the fair value of a
derivative that is designated as, and meets all required criteria for, a cash
flow hedge are recorded in accumulated other comprehensive loss and reclassified
into earnings as the underlying hedged item affects earnings. The portion of the
change in fair value of a derivative associated with hedge ineffectiveness or
the component of a derivative instrument excluded from the assessment of hedge
effectiveness is recorded in current earnings. Also, changes in the entire fair
value of a derivative that is not designated as a hedge are recorded in
earnings. The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
relating all derivatives that are designated as cash flow hedges to specific
balance sheet liabilities.

The Company also formally assesses, both at the inception of the hedge
and on an ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values or cash flows of the hedged item. If it is
determined that a derivative is not highly effective as a hedge, or if a
derivative ceases to be a highly effective hedge, the Company will discontinue
hedge accounting prospectively for the respective derivative. In addition, if
the forecasted transaction is no longer likely to occur, any amounts in
accumulated other comprehensive loss related to the derivative are recorded in
the statement of operations for the current period.

DEBT PORTFOLIO MANAGEMENT

It is the policy of the Company to identify on a continuing basis the
need for debt capital and evaluate financial risks inherent in funding the
Company with debt capital. Reflecting the result of this ongoing review, the
debt portfolio and hedging program of the Company is managed to (1) reduce
funding risk with respect to borrowings made or to be made by the Company to
preserve the Company's access to debt capital and provide debt capital as
required for funding and liquidity purposes, and (2) reduce the aggregate
interest rate risk of the debt portfolio in accordance with certain debt
management parameters. The Company enters into interest rate swap agreements to
change the fixed/variable interest rate mix of the debt portfolio in order to
maintain the percentage of fixed-rate and variable-rate debt within parameters
set by management. In accordance with these parameters, swap agreements are used
to reduce interest rate risks and costs inherent in the Company's debt
portfolio. The Company currently has an interest rate swap contract outstanding
to effectively convert a portion of its variable-rate debt to fixed-rate debt.

F-23

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

This contracts entails the exchange of fixed-rate and floating-rate interest
payments periodically over the agreement life.

CASH FLOW HEDGES

Changes in the fair value of derivatives qualifying as cash flow hedges
are reported in accumulated other comprehensive loss. Gains and losses are
reclassified into earnings as the underlying hedged item affects earnings, such
as when quarterly settlements are made on the hedged forecasted transaction.

In fiscal 2002, the Company discontinued cash flow hedge accounting for
swaps with a notional amount of $40,000. As these swaps were no longer
considered highly effective under SFAS No. 133, they were then marked-to-market
through earnings each reporting period. For fiscal 2002, a reduction in interest
expense of $225 was recorded related to the mark-to-market adjustment for these
swaps. In addition, $1,672 related to these swaps was released from accumulated
other comprehensive loss to interest expense during fiscal 2002.

Interest expense for fiscal 2003 includes net gains related to interest
rate hedges of $1,714. Interest expense for fiscal 2002 and 2001 includes net
losses related to interest rate hedges of $1,395 and $543, respectively. As of
January 31, 2004, the Company reflected accrued expenses of $996 and other
long-term liabilities of $995 to recognize the fair value of its interest rate
swaps. All charges recorded in fiscal 2003, 2002 and 2001 pursuant to SFAS No.
133 are considered non-cash items in the Consolidated Statements of Cash Flows.

As of January 31, 2004, it is expected that approximately $623 of
net-of-tax losses in accumulated other comprehensive loss will be reclassified
into earnings within the next twelve months. As of January 31, 2004, the maximum
time over which the Company is hedging its exposure to the variability in future
cash flows for forecasted transactions is twenty-four months.

8. INTEREST COSTS

Interest and debt costs were:

9. SALE OF RECEIVABLES

The Company securitizes its proprietary credit card portfolio through an
accounts receivable facility (the "Facility"). The securitization agreement was
amended and restated in October 2003 to extend the term of the Facility through
October 2004, modify the pricing and increase subordinated interest
requirements. The Company entered into a new agreement in January 2004 to
increase the funding capacity while retaining all other material terms of the
previous agreement.

F-24

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

Under the securitization agreement, which is contingent upon receivables
meeting certain performance criteria, the Company sells through The Bon-Ton
Receivables Partnership, LP ("BTRLP"), a wholly owned subsidiary of the Company
and qualifying special purpose entity under SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
up to $250,000 of an undivided percentage interest in the receivables on a
limited recourse basis. In connection with the securitization agreement, the
Company retains servicing responsibilities, subordinated interests and an
interest-only strip, all of which are retained interests in the securitized
receivables. The Company retains annual servicing fees of 2.0% of the
outstanding accounts receivable balance and rights to future cash flows arising
after investors in the securitization have received the return for which they
contracted. The investors have no recourse to the Company's other assets for
failure of debtors to pay when due. The Company's retained interests are
subordinate to the investors' interests. The value of the retained interest is
subject to credit, prepayment and interest rate risks. 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.

As of January 31, 2004 and February 1, 2003, credit card receivables were
sold under the securitization agreement in the amount of $228,488 and $145,000,
respectively, and the Company had subordinated interests of $96,755 and $44,520,
respectively, related to the amounts sold that were included in the accompanying
Consolidated Balance Sheets as retained interest in trade receivables. The
Company accounts for its subordinated interest in the receivables in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company has not recognized any unrealized gains or losses on
its subordinated interest, as the current carrying value of customer revolving
charge accounts receivable is a reasonable estimate of fair value and average
interest rates approximate current market origination rates. Subordinated
interests as of January 31, 2004 and February 1, 2003, included restricted cash
of $5,998 and $6,222, respectively, required pursuant to the terms of the
Company's accounts receivable facility agreement.

New receivables are sold on a continual basis to replenish each
investor's respective level of participation in receivables that have been
repaid by credit card holders.

During fiscal 2003, 2002 and 2001, the Company recognized securitization
income of $8,008, $8,860, and $5,613, respectively, on securitization of credit
card receivables. This income is reported as a component of selling, general and
administrative expenses.

Key economic assumptions used in measuring retained interests for Bon-Ton
during the year were as follows:

The interest-only strip was recorded at its fair value of $1,325 and
$1,111 at January 31, 2004 and February 1, 2003, respectively, and is included
in retained interest in trade receivables on the Consolidated Balance Sheets.
The following table shows key economic assumptions used in measuring the
interest-only strip for fiscal 2003. The table also displays the sensitivity of
the

F-25

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

current fair value of residual cash flows in fiscal 2003 to immediate 10% and
20% adverse changes in assumptions:

These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10% variation in an assumption generally cannot
be extrapolated because the relationship of the change in an assumption to the
change in fair value may not be linear. Also, in this table the effect of a
variation in a particular assumption on the fair value of retained interest is
calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another, which might magnify or counteract the
sensitivities.

The Company recognized servicing fees, which it reported as a component
of selling, general and administrative expenses, of $2,734, $2,890 and $2,854
for fiscal 2003, 2002 and 2001, respectively. As of January 31, 2004, $11,625 of
the total managed credit card receivables were 61 days or more past due. Net
credit losses on the total managed credit card receivables were $7,575, $7,364,
and $7,813 for fiscal 2003, 2002 and 2001, respectively.

10. PROPERTY, FIXTURES AND EQUIPMENT

As of January 31, 2004 and February 1, 2003, property, fixtures and
equipment and related accumulated depreciation and amortization consisted of:

Property, fixtures and equipment with a net book value of approximately
$25,629 and $24,063 were pledged as collateral for secured loans at January 31,
2004 and February 1, 2003, respectively.

F-26

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

11. 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 leased to other
retailers in many of the Company's facilities.

At January 31, 2004, future minimum lease payments under operating leases
and the present value of net minimum lease payments under capital leases are as
follows:

Minimum rental commitments under operating leases are reflected without
reduction for rental income due in future years under noncancellable subleases
since amounts are immaterial. Some of the store leases contain renewal options
ranging from five to thirty-five years. Included in the minimum lease payments
under operating leases are leased vehicles, copiers, fax machines, computer
equipment, and a related-party commitment with an entity related to the
Company's majority shareholder of $224 for each of fiscal 2004 and 2005 and $112
for fiscal 2006.

Rental expense consisted of the following:

F-27

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

CONTINGENCIES

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

12. 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. Transfers of the
Company's Class A Common Stock are restricted. Upon sale or transfer of
ownership or voting rights of Class A Common Stock to other than permitted
transferees, as defined, such shares will convert to an equal number of Common
Stock shares. Additionally, the Company authorized 5,000,000 shares of preferred
stock; however, no preferred shares were issued.

13. INCOME TAXES

The Company accounts for income taxes according to 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 and from net operating losses and credit carryforwards, using
applicable current marginal tax rates.

Components of the income tax provision are as follows:

F-28

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

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

Pursuant to the acquisition of Elder-Beerman, the Company acquired
federal and state net operating loss carry-forwards of approximately $77,800 and
$153,200, respectively, which are available to offset future federal and state
taxable income -- subject to certain limitations imposed by Section 382 of the
Internal Revenue Code ("Section 382"). These net operating losses will expire at
various dates beginning in fiscal 2009 through fiscal 2022. In addition,
pursuant to the acquisition of Elder-Beerman, the Company acquired alternative
minimum tax credits and general business credits in the amount of $2,100 and
$596, respectively. Both credits are also subject to the limitations imposed by
Section 382. The alternative minimum tax credits are available indefinitely, and
the general business credits expire beginning in fiscal 2007 through fiscal
2008.

Pursuant to the acquisition of Elder-Beerman, the Company recorded
$83,195 of net deferred tax assets. The Company's ability to utilize these
assets will be limited by Section 382. As part of preliminary purchase
accounting, a valuation allowance of $46,701 was established against these
deferred tax assets. As of January 31, 2004, $12,460 and $34,241 of this
valuation allowance has been classified as current and long-term, respectively,
pursuant to requirements of SFAS No. 109. No valuation allowance was established
at February 1, 2003. In assessing the realizability of the deferred tax assets,
the Company considered whether it is more-likely-than-not that the deferred
taxes assets, or a portion thereof, will not be realized. The Company considered
the

F-29

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

scheduled reversal of deferred tax liabilities, projected future taxable income,
tax planning strategies, and the limitations of Section 382 in making this
assessment. As a result, the Company concluded during fiscal 2003 that a
valuation allowance against a portion of the net deferred tax assets was
appropriate. If actual results differ from these estimates or these estimates
are adjusted in future periods, the Company may need to adjust its valuation
allowance, which could materially impact its financial position and results of
operations.

A reconciliation of the statutory federal income tax rate to the
effective tax rate is presented below:

In fiscal 2003, 2002 and 2001, the Company made income tax payments (net
of refunds) of $(6,363), $9,430 and $6,963, respectively.

14. EMPLOYEE BENEFIT PLANS

The Company provides eligible employees with retirement benefits under a
401(k) salary reduction and profit sharing plan (the "Plan"). In 2003, employees
were eligible to participate in the Plan after they reached the age of 21,
completed one year of service and worked at least 1,000 hours in any calendar
year. Under the 401(k) provisions of the Plan, the majority of eligible
employees were permitted to contribute up to 50% of their compensation to the
Plan. Company matching contributions, not to exceed 5% of eligible employees'
compensation, were at the discretion of the Company's board of directors.
Company matching contributions under the 401(k) provisions of the Plan became
fully vested for eligible employees after three years of service. Contributions
to the Plan under the profit sharing provisions were at the discretion of the
Company's board of directors. These profit sharing contributions became fully
vested after five years of service. The Company's fiscal 2003, 2002 and 2001
expense under the Plan was $2,483, $2,545 and $2,200, respectively.

Elder-Beerman provides eligible employees with a defined contribution
employee benefit plan (the "Elder-Beerman Plan"). In 2003, employees were
eligible to participate in the Elder-Beerman Plan after they reached the age of
18, completed one year of service and worked at least 1,000 hours in any
Elder-Beerman Plan year. Under the 401(k) provisions of the Elder-Beerman Plan,
the majority of eligible employees were permitted to contribute up to 50% of
their compensation to the Elder-Beerman Plan. Employees directed their
contributions to investment options made available to participants through the
Elder-Beerman Plan record-keeper. Company matching contributions, not to exceed
6% of eligible employee compensation, were based on a percentage of
Elder-Beerman earnings before income taxes to net sales, the participant's years
of service in the Elder-Beerman Plan and on a percentage of the employee's
compensation. Company matching contributions became vested at 20% for one year
of service, increasing by 20% increments each year until the contributions are
fully vested (100%) after five years of service. The

F-30

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

Company incurred no expense under the Plan for the period from October 24, 2003
to January 31, 2004.

In connection with its acquisition of Elder-Beerman, the Company assumed
a liability for a defined benefit pension plan in which accrued benefits were
frozen and the plan approved for termination. The plan was terminated during the
fourth quarter of fiscal 2003, during which the Company made payments totaling
$4,484 to satisfy this liability.

15. STOCK AWARD PLANS

The Company's Amended and Restated 1991 Stock Option and Restricted Stock
Plan ("1991 Stock Plan"), as amended through June 17, 1997, provided for the
granting of the following options and awards to certain associates, officers and
directors: 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"). A maximum of
1,900,000 shares could have been granted under the 1991 Stock Plan. Options
granted under the 1991 Stock Plan were generally issued at the market price of
the Company's stock on the date of grant, vested over three to five years and
had a ten-year term. No options or awards may be granted under the 1991 Stock
Plan after September 30, 2001.

In addition to the 1991 Stock Plan, during 1991 the Board of Directors
approved a Phantom Equity Replacement Plan ("Replacement Plan") to replace the
Company's previous deferred compensation arrangement that was structured as a
phantom stock program. Grants under the Replacement Plan generally vested over
one to six years and had a thirty-year term. No options or awards may be granted
from the Replacement Plan after December 31, 1991. As of January 31, 2004,
options for 30,000 shares remain outstanding at an exercise price of $3.25 with
a remaining contractual life of five years (all such shares are exercisable as
of January 31, 2004).

The Company amended its Management Incentive Plan ("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
was 300,000, with no shares to be granted after July 1998.

The Company implemented the 2000 Stock Incentive Plan ("2000 Stock Plan")
during fiscal 2000. The 2000 Stock Plan provides for the granting of Common
Stock options and Restricted Shares to certain associates, officers, directors,
consultants and advisors. A maximum of 1,900,000 shares may be granted under the
2000 Stock Plan. Grant vesting periods are at the discretion of the Company's
board of directors. No options or awards may be granted under the 2000 Stock
Plan after March 2, 2010. All options and awards granted pursuant to the 2000
Stock Plan through January 31, 2004 have been to Company associates.

The Company used the Black-Scholes option pricing model to calculate the
fair value of all stock options at the grant date. The following assumptions
were used:

F-31

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

A summary of the options and restricted shares under the 1991 Stock Plan
follows:

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

F-32

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

The range of exercise prices for the 1991 Stock Plan options outstanding
as of January 31, 2004 follows:

A summary of the Replacement Plan follows:

F-33

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

A summary of the MIP Plan follows:

A summary of the options and restricted shares under the 2000 Stock Plan
follows:

F-34

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

The range of exercise prices for the 2000 Stock Plan options outstanding
as of January 31, 2004 follows:

Forfeiture of options and shares in the above plans resulted primarily
from employment termination and voluntary forfeitures.

Amortization of restricted stock grants, charged to compensation expense,
was $209, $160 and $589 in fiscal 2003, 2002 and 2001, respectively.

F-35

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

16. QUARTERLY RESULTS (UNAUDITED)

(1) In the fiscal quarter ended November 1, 2003 and January 31, 2004, the
Company recorded a charge of $2,318 and $60, respectively, for the write-off
of duplicate information systems software due to the acquisition of
Elder-Beerman. Additionally, in the fiscal quarter ended January 31, 2004,
the Company recorded an impairment charge of approximately $800 for certain
store assets.

F-36

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

(1) In the fiscal quarter ended February 1, 2003, the Company recorded an
impairment charge of approximately $2,000 for certain store assets.

17. UNUSUAL EXPENSE

During the third quarter of fiscal 2001, the Company reported $916 in
unusual expense relating to a workforce reduction and realignment and
elimination of certain senior management positions. As of February 1, 2003, all
required payments were made and there was no remaining accrual.

18. STOCK REPURCHASES

On February 7, 2002, the Company announced a stock repurchase program
authorizing the purchase of up to $2,500 of the Company's Common Stock from time
to time. During fiscal 2003, the Company purchased 60,800 Common Stock shares at
a cost of $255. During fiscal 2002, the Company purchased 277,000 Common Stock
shares at a cost of $1,132. Treasury stock is accounted for by the cost method.

F-37

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

19. SUBSEQUENT EVENT

On March 18, 2004, the Company announced a quarterly cash dividend of
$0.025 per share on Class A Common Stock and Common Stock, payable April 15,
2004 to shareholders of record as of April 1, 2004.

F-38

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
THE BON-TON STORES, INC. AND SUBSIDIARIES

NOTES:

(1) Provision for merchandise returns and loss on credit sales.

(2) Uncollectible accounts written off, net of recoveries.

(3) Facility closing costs, net of recoveries.

(4) Fiscal 2003 and 2002 provision for store closing, as discussed in Note 5 to
Consolidated Financial Statements.

(5) Based upon preliminary purchase accounting pursuant to the acquisition of
The Elder-Beerman Stores Corp.

F-39

EXHIBIT INDEX