10-Q

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 29, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to _____________________

Commission file number 00019774

United Retail Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware 51 0303670

State or other jurisdiction of (I.R.S. Employer

incorporation or organization Identification No.)

365 West Passaic Street, Rochelle Park, NJ 07662

(Address of principal executive offices) (Zip Code)

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

_______________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ___X___ NO _______

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one.)

Large accelerated filer _____ Accelerated filer X Non-accelerated filer _____

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

YES ______ NO ___X____

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.

YES _______ NO _______

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 29, 2006, there were outstanding 13,508,019 units, each consisting of one share of the registrant’s common stock, $.001 par value per share, and one attached stock purchase right. The units are referred to herein as “shares.”

ITEM 1. FINANCIAL STATEMENTS

UNITED RETAIL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

	July 29,	January 28,	July 30,
	2006	2006	2005
ASSETS	(Unaudited)		(Unaudited)
Current assets:
Cash and cash equivalents	$48,184	$32,268	$33,086
Accounts receivable	1,393	3,899	1,847
Inventory	62,522	62,801	54,100
Prepaid rents	4,622	4,607	4,619
Restricted cash	345	846	320
Current deferred taxes	5,208	9,350	-
Other prepaid expenses	2,368	1,448	1,794
Total current assets	124,642	115,219	95,766
Property and equipment, net	61,613	66,791	72,125
Deferred compensation plan assets	4,232	4,086	3,957
Long-term deferred taxes	10,314	9,473	189
Other intangible assets, net of accumulated
amortization of $548, $517 and $485	334	366	398
Other assets	1,267	1,561	1,294
Total assets	$202,402	$197,496	$173,729

LIABILITIES
Current liabilities:
Current portion of distribution center financing	$788	$756	$723
Current portion of capital leases	761	1,695	1,810
Accounts payable and other	33,880	29,466	31,325
Disbursement accounts	9,899	10,240	9,423
Accrued expenses	22,355	26,511	26,584
Total current liabilities	67,683	68,668	69,865
Long-term distribution center financing	1,475	1,877	2,263
Long-term capital leases	-	-	803
Deferred lease incentives	9,513	10,636	11,733
Deferred compensation plan liabilities	4,231	4,086	3,957
Other long-term liabilities	8,122	9,066	7,826
Total liabilities	91,024	94,333	96,447
STOCKHOLDERS’ EQUITY
Preferred stock, $.001 par value; authorized
1,000,000 shares; none issued
Series A junior participating preferred stock,
$.001 par value; authorized 150,000 shares;
none issued
Common stock, $.001 par value; authorized
30,000,000 shares; issued 14,851,400 shares,
14,652,400 shares, and 14,287,900 shares	15	15	14

Additional paid-in capital	89,538	87,743	85,027
Deferred compensation obligation (279,870 shares)	1,353	1,353	1,353
Retained earnings (accumulated deficit)	28,651	21,757	(1,436)
Treasury stock (1,343,381 shares, 1,312,955 shares
and 1,310,896 shares) at cost	(8,179)	(7,705)	(7,676)
Total stockholders’ equity	111,378	103,163	77,282
Total liabilities and stockholders’ equity	$202,402	$197,496	$173,729

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

UNITED RETAIL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)

(Unaudited)

	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 29,	July 30,	July 29,	July 30,
	2006	2005	2006	2005
Net sales	$120,912	$114,702	$230,332	$221,233
Cost of goods sold, including
buying and occupancy costs	89,036	83,999	170,030	164,839
Gross profit	31,876	30,703	60,302	56,394
General, administrative and
store operating expenses	25,622	26,069	51,011	50,896
Operating income	6,254	4,634	9,291	5,498
Interest income	413	144	638	199
Interest expense	(49)	(127)	(191)	(346)
Income before income taxes	6,618	4,651	9,738	5,351
Provision for income taxes	1,661	597	2,844	293
Net income	$4,957	$4,054	$6,894	$5,058
Net income per share
Basic	$0.37	$0.32	$0.51	$0.40
Diluted	$0.35	$0.31	$0.49	$0.39

Weighted average number of
shares outstanding
Basic	13,504,711	12,784,318	13,448,052	12,723,254
Common stock equivalents
(stock options)	649,802	285,332	712,291	236,261
Diluted	14,154,513	13,069,650	14,160,343	12,959,515

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

UNITED RETAIL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	Twenty-Six Weeks Ended
	July 29,	July 30,
	2006	2005
Cash Flows From Operating Activities:
Net income	$6,894	$5,058
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment	6,063	6,771
Amortization of deferred charges and other
intangible assets	48	48
Loss on disposal of assets	67	177
Non-cash compensation expense	246	624
Tax benefit from exercise of stock options	(279)	-
Deferred income taxes	3,580	-
Changes in operating assets and liabilities:
Accounts receivable	2,505	(343)
Income taxes	(252)	464
Inventory	279	7,205
Accounts payable and accrued expenses	510	3,402
Other current assets	(434)	320
Deferred lease incentives	(1,123)	(1,175)
Other assets and liabilities	(666)	(892)
Net Cash Provided by Operating Activities	17,438	21,659
Investing Activities:
Capital expenditures	(953)	(262)
Deferred payment for property and equipment	-	-
Net Cash Used in Investing Activities	(953)	(262)

Financing Activities:
Repayments of long-term debt	(369)	(339)
Payments on capital lease obligations	(934)	(996)
(Decrease) increase in disbursement accounts	(341)	357
Repayments under line-of-credit agreement	-	(100)
Tax benefit from exercise of stock options	279	-
Treasury stock acquired	(474)	-
Proceeds from exercise of stock options	1,270	171
Net Cash (Used in) Financing Activities	(569)	(907)
Net increase in cash and cash equivalents	15,916	20,490
Cash and cash equivalents, beginning of period	32,268	12,596
Cash and cash equivalents, end of period	$48,184	$33,086

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

UNITED RETAIL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of United Retail Group, Inc. and its subsidiaries (the “Company”). All significant intercompany balances and transactions have been eliminated.

The condensed consolidated financial statements as of and for the thirteen and twenty-six weeks ended July 29, 2006 and July 30, 2005 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all disclosures required by generally accepted accounting principles for a full set of financial statements and should be read in conjunction with the financial statement disclosures contained in the Company’s 2005 Annual Report and 2005 Form 10-K. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year.

Inventories are stated at the lower of cost or market and include import inventory in-transit under FOB shipping point terms. Import inventory in-transit has been included in the balance sheet and accounts payable on the basis of the FOB shipping point terms. Prior year inventory and accounts payable amounts have been revised to appropriately reflect the FOB shipping point amounts at July 30, 2005 in the amount of $12.5 million. The comparable amounts of import inventory in-transit at July 29, 2006 and January 28, 2006 was $13.9 million and $11.8 million, respectively.

Certain prior year balances have been reclassified to conform with the current year presentation.

2. Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition of uncertain tax positions, financial statement classification, accounting for interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company does not believe that the adoption of FASB Interpretation No. 48 will have a significant impact on its consolidated financial condition, results of operations or cash flows.

3. Net Earnings Per Share

Basic per share data has been computed based on the weighted average number of shares of common stock outstanding. Diluted per share data includes the weighted average effect of dilutive options on the weighted average shares outstanding. The computation of earnings per diluted share excludes options whose exercise prices were greater than the average market price of the common shares for the thirteen weeks ended July 29, 2006 and July 30, 2005.

Options to purchase shares of common stock which were not included in the computation of diluted per share data were as follows:

	Thirteen Weeks Ended		Twenty-six Weeks Ended
	July 29, 2006	July 30, 2005	July 29, 2006	July 30, 2005
Options	50,000	765,475	50,000	1,068,475
Range of option prices per share	$14.16 - $18.73	$7.16 - $15.13	$14.16 - $18.73	$6.31 - $15.13

4. Vendor Discounts

The Company avails itself of excess cash positions by paying vendors earlier than required by the terms of the purchase order. Such payments resulted in additional discounts in the amount of $0.7 million and $0.5 million for the twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively, and were deducted from general, administrative and store operating expenses.

5. Credit Cards

Charges and credits associated with credit card transactions (MasterCard, Visa, American Express, Discover, Military Star Card and private label credit) are included in general, administrative and store operating expenses and amounted to a net credit of $0.8 million and $1.2 million for the twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively.

6. Stock Based Compensation

Effective January 29, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”), a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” using the modified prospective transition method. Under the modified prospective transition method of SFAS 123R, the value of stock-based compensation is measured at fair value on the grant date of the award based on the estimated number of awards that are expected to vest. Compensation cost for awards that vest would not be reversed if the awards expire without being exercised. SFAS 123R applies to all outstanding and unvested share-based payment awards at the adoption date. Prior to adoption of SFAS 123R, the Company accounted for its stock-based awards using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Under the provisions of APB No. 25, no stock-based compensation cost was reflected in the consolidated financial statements unless options were granted that had an exercise price less than the market value of the underlying stock on the date of grant. In adopting SFAS 123R using the modified prospective transition method, the Company was not required to restate the results of prior periods.

As a result of adopting SFAS 123R stock-based compensation expense related to stock options recognized for the twenty-six weeks ended July 29, 2006 was $0.2 million and the deferred income tax benefit recognized for stock option expense was less than $0.1 million For the thirteen weeks ended July 29, 2006, stock based compensation expense related to stock options was $0.1 million and the deferred income tax benefit recognized for stock option expense was less than $0.1 million. Cash received from the exercise of stock options was $0.9 million and $0.1 million for the twenty-six weeks and thirteen weeks ended July 29, 2006, respectively.

Prior to the adoption of SFAS 123R, the Company presented all benefits of tax deductions resulting from the exercise of share-based compensation as operating cash flows in the condensed Statements of Cash Flows. SFAS 123R requires the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash inflows. For the twenty-six weeks ended July 29, 2006, the Company reported $0.3 million of excess tax benefits as a financing cash inflow.

Under APB No. 25, the Company did not expense stock-based compensation costs during the twenty-six weeks ended July 30, 2005. The Company’s pro forma net income and pro forma earnings per share for the twenty-six weeks ended July 30, 2005, had compensation costs for the Company’s stock option plans been determined under the fair value based method and recognition provisions of SFAS 123 at the grant date, would have been as follows (in thousands, except per share amounts):

		13 Weeks Ended July 30, 2005			26 Weeks Ended July 30, 2005
Net Income, as reported			$ 4,054			$ 5,058
Deduct:
	Stock-based compensation			(103)			(209)
Pro forma net income			$ 3,951			$ 4,849
Net income per share:
	Basic, as reported		$ .32			$ .40
	Basic, pro forma		$ .31			$ .38
	Diluted, as reported		$ .31			$ .39
	Diluted, pro forma		$ .30			$ .37

The weighted average grant date fair value of options granted during the thirteen and twenty-six weeks ended July 29, 2006 were estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 45%, expected term of 5 years, risk-free interest rate of 4.92%, and expected dividend yield of 0%. Expected volatility is based on an average of the historical volatility of the Company’s stock, the implied volatility of market options, peer company volatility, and other factors. The average expected life represents the period of time that option grants are expected to be outstanding and is derived from historical terms and other factors. The risk-free rate is based on the rate of U.S. Treasury securities at a constant maturity equal to the expected life of option grants. The Company uses historical data to estimate pre-vesting forfeiture rates.

A summary of stock option activity under the Company’s stock-based compensation plans for the twenty-six weeks ended July 29, 2006 is summarized below:

	Number Outstanding	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
			(in years)	(in thousands)
Outstanding at January 28, 2006	1,502,300	$ 6.86
Granted	50,000	15.53
Exercised	(199,000)	6.38
Forfeited or expired	(3,800)	4.81
Outstanding at July 29, 2006	1,349,500	$ 7.26	4.56	$ 9,697
Exercisable at July 29, 2006	1,048,400	$ 7.44	3.61	$ 7,295

The weighted-average grant-date fair value of options granted during the twenty-six weeks ended July 29, 2006 was $ 7.13 and the total intrinsic value of options exercised during the same period was $2.3 million. As of July 29, 2006, the total unrecognized compensation cost related to outstanding non-vested options was $0.8 million, which is expected to be recognized over a weighted average period of approximately 1.9 years.

7. Financing Arrangements

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

The Company and certain of its subsidiaries (collectively, the “Companies”) are parties to a Financing Agreement, dated August 15, 1997 (the “Financing Agreement”), with The CIT Group/Business Credit, Inc. (“CIT”) that provides a revolving line of credit for a term ending on August 15, 2008. The maximum amount available under the line of credit is $50 million, which is subject to availability of credit under an asset-based formula.

The Companies are required to maintain unused at all times combined asset availability of at least $5 million. Except for the maintenance of a minimum availability of $5 million and a limit on capital expenditures, the Financing Agreement does not contain any significant financial covenants.

The revolving line of credit is used by the Companies to support trade letters of credit and standby letters of credit and to finance loans, which could be used for working capital and general corporate purposes.

The Financing Agreement also includes certain restrictive covenants that impose limitations (subject to certain exceptions) on the Companies with respect to, among other things, making certain investments, declaring or paying dividends, making loans, engaging in certain transactions with affiliates, consolidating, merging, making acquisitions outside the ordinary course of business or incurring indebtedness to third parties for borrowed money.

In the event a loan is made to one of the Companies, interest is payable monthly based on a 360-day year at the Chase Manhattan Bank prime rate plus incremental percentages ranging from 0.00% to 0.75% or the LIBOR rate plus incremental percentages ranging from 1.75% to 2.50% as determined by the average excess availability each month per the Financing Agreement on a per annum basis. The borrower can select either the prime rate or the LIBOR rate as the basis for determining the interest rate. Payments of revolving loans are not required until termination of the agreement unless either 1) the outstanding balance of revolving loans and outstanding letters of credit exceeds the availability under the agreement, in which case the excess would be payable upon demand from CIT or 2) the Company is in default under the Financing Agreement.

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

At July 29, 2006, the borrowing capacity of the Companies under the Financing Agreement with CIT, after satisfying the $5 million minimum availability requirement, was $5.3 million, trade letters of credit for the account of the Companies were outstanding in the amount of $28.8 million, standby letters of credit were outstanding in the amount of $6.1 million and no loan from CIT was outstanding. The Company’s balance sheet cash and cash equivalents of $48.2 million were unrestricted.

The Company is required by CIT, Inc. to maintain at all times balances in a designated account in an amount not less than 25% of the amount of gift cards and merchandise credits issued and not redeemed during the prior six-month period. The balance in this account as of July 29, 2006 was $0.3 million and was classified as restricted cash on the balance sheet.

In January 2002, the Company executed a five-year $8.2 million sale and lease back agreement for certain fixtures in new and remodeled stores. The lease bears an interest rate of 7.0% per annum. The Company was required to pay sales tax as part of the agreement. The agreement provides for equal monthly rent payments of $163,344 beginning February 2002 and gives the Company the option of buying back the fixtures at the end of the term for a nominal price.

8. Income Taxes

In March 2005, the Company received $0.3 million to settle state income tax refund claims which was recorded as a benefit during the first quarter of fiscal 2005.

In the fourth quarter of fiscal 2005, due to a number of factors, primarily that the Company recorded income before taxes of $11.4 million for fiscal 2005 (and taxable income exceeded that amount), management increased its projection of future taxable income. As a result of these increased projections, management concluded the future utilization of its deferred tax assets (with the exception of charitable contributions carryforward) was more likely than not. In the fourth quarter of fiscal 2005, the Company reduced its valuation allowance by $22.6 million.

9. Stock Appreciation Rights

In the second quarter of fiscal 2000 and annually thereafter through the second quarter of fiscal 2004, each non-management Director received an award of stock appreciation rights (“SAR’s”) under the Company’s Stock Appreciation Rights Plan that provides for a cash payment by the Company when the Director exercises the stock option granted to him contemporaneously under the Company’s Stock Option Plans. The payment will be an amount equivalent to the equity in the option that is being exercised, that is, the excess of the then current market price of the shares issued over the exercise price of the corresponding option. Further, SAR’s were awarded in June 2005 that provide for payment of an amount equivalent to twice the equity in the related option.

In May 2006, each non-management Director received an award of 10,000 SAR’s under the Company’s 2006 Equity-Based Compensation and Performance Incentive Plan (the “2006 Plan”). SAR’s under the 2006 Plan are free standing and exercisable for a term of seven years in four equal annual installments commencing on the first anniversary of the date of grant.

The amount accrued at July 29, 2006 was $1.2 million for future potential payments; none of which had been made as of such date.

10. Supplemental Cash Flow Information

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

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	July 29, 2006		July 30, 2005		July 29, 2006		July 30, 2005
Cash interest paid		$ 121		$136		$ 285		$ 361
Cash interest received		(347)		(142)		(661)		(197)
Net cash interest (received) paid		($226)		$ 6		($376)		$ 164
Income taxes paid		$ 469		$ 96		$ 555		$ 119
Income taxes refunded		(3)		0		(21)		(291)
Net income taxes paid (refunded)		$ 466		$ 96		$534		($172)

The Company, in certain stock option plans, allows its participants to tender shares of common stock instead of cash when exercising their stock options. Non-cash financing activities include the receipt of 30,426 shares of Company stock with a market value equal to the exercise price of the options exercised in the amount of approximately $474,000 in the twenty-six weeks ended July 29, 2006.

11. Contingencies

The Company is involved in legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims, net of reserves, will not have a material adverse effect on the Company’s financial position, annual results of operations or cash flows. Legal fees are typically expensed as incurred.

On May 1, 2003, a suit in California Superior Court, Los Angeles County, styled Erik Stanford vs. United Retail Incorporated was served on the Company by a former store manager in California. On March 3, 2004, an amended complaint was served that added another plaintiff. The suit was purportedly a class action on behalf of certain current and former associates in California in the previous four years.

The plaintiffs in the Stanford case asserted federal and state wage and hour claims and related claims against the Company.

Total expense related to this matter was $0.7 million in fiscal 2003 and $1.6 million in fiscal 2004.

The Stanford case was settled in the second quarter of fiscal 2005 at a cost of $1.8 million, at which time the underlying accruals were adjusted resulting in $0.5 million of income. During the third quarter of fiscal 2005, $1.1 million of this liability was paid. The final payment of $0.7 million was paid during the first quarter of fiscal 2006. In anticipation of the settlement, compensation of store managers employed by the Company in California had been converted from salaried to hourly wages in January 2005.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

EXECUTIVE SUMMARY

Introduction

The Executive Summary section of Management’s Discussion and Analysis of Financial Condition and Results of Operations provides a high level summary of the more detailed information elsewhere in this Report and an overview to put this information in context. This section is also an introduction to the discussion and analysis that follows. Accordingly, it necessarily omits details that appear elsewhere in this Report. It should be read together with the balance of this Report and the Company’s Annual Report on Form 10-K for the year ended January 28, 2006 (the “Form 10-K”) filed with the Securities and Exchange Commission (the “Commission”), which is available online at www.sec.gov.

Products and Purchasing

The Company is a leading specialty retailer of women’s fashions featuring its proprietary AVENUE® brand. Its product line features AVENUE® brand large size (14 or larger) women’s wearing apparel, AVENUE BODY® brand large size women’s undergarments and lingerie and CLOUDWALKERS® brand women’s footwear, as well as AVENUE® brand accessories and gifts.

Most of the Company’s products are made for the Company by contract manufacturing abroad.

Customer Base

The Company serves the mass market in the United States and targets fashion conscious women who are from 25 to 55 years of age and wear size 14 or larger apparel. Management believes that the number of women in this age range who wear large size apparel has increased in recent years.

Merchandising and Marketing

Design is an important aspect of the Company’s products. Many AVENUE® and AVENUE BODY® products are custom designed. The Company emphasizes a contemporary brand image and consistency of merchandise quality and fit.

The Company has used direct mail, print media advertising, credit card statement inserts, in-store signage and e-mail messages in its marketing activities.

Channel of Distribution

The Company’s channel of distribution is retail stores using its AVENUE® trade name. At July 29, 2006, it leased 495 stores in 37 states. See, “Stores.” The Company also has operated a website at www.avenue.com that sells a selection of the merchandise that is also on sale in the stores.

Until March 2003, the Company also mailed catalogs that featured a merchandise selection that included both items in the stores and similar products. (The website and the catalog, while it was in existence, are referred to as “shop @ home” activities.) The Company licensed its AVENUE trade name to a leading catalog publisher to conduct a market test of an AVENUE catalog earlier in fiscal 2006. The Company was not responsible for the costs of the market test, did not supply the merchandise featured and did not include sales to catalog customers in its reported sales. The results of the market test have been analyzed and the Company and the catalog publisher will not go forward with further mailings.

Increased Competition

The women’s retail apparel and shoe industries are highly competitive. Operating results of businesses in these industries, especially businesses that emphasize fashionable merchandise, can vary materially from year to year. The Company’s competition includes other specialty retailers, mass merchants, department stores, discount stores, mail order companies, television shopping channels and Internet websites. Management believes that total sales of large size women’s apparel from these sources of supply increased in recent years. Among specialty retailers for large size women like the Company, the competition includes large store chains that have announced long-term store growth plans to aggressively expand into additional strip shopping center locations. (Most of the Company’s stores are in strip shopping center locations.)

Deflationary Price Trend in Apparel Industry

The Consumer Price Index published by the U.S. Dept. of Labor, Bureau of Labor Statistics, city average for women’s and girls’ apparel (the “CPI”) declined 1.5% in fiscal 2003, 0.5% in fiscal 2004 and 2.0% in fiscal 2005, comparing January 31^st each year with that date in the previous year. During the 10 years ended January 31, 2006, the CPI declined 14.3%. Price deflation in the industry has limited the extent to which the Company’s is able to increase prices. There is no assurance that this general deflationary trend will not continue.

Company Sales Fluctuations

The Company conducts a weekly interdisciplinary review of sales and merchandise margins and prepares budgets for two six-month seasons each year, the Spring season and the Fall season. Management uses comparable store sales (for stores open at least 12 months at the time) to measure business trends.

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

	2003		2004		2005		2006
	Spring	Fall	Spring	Fall	Spring	Fall	Spring
Total store sales ($ millions)*	$203.5	$187.7	$196.0	$196.9	$215.6	$209.0	$221.4
Sales per average store ($000’s)	$371	$344	$368	$372	$422	$412	$445
Average number of stores	548	545	532	529	511	507	497
Comparable store sales**	-9.3%	-4.2%	-2.2%	+6.8%	+12.8%	+10.2%	+4.8%

_______

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

**A store that is relocated within the same shopping center or mall is considered comparable. However, if the store is relocated elsewhere, it is considered a new store and not comparable. A store that is expanded or contracted is still comparable, i.e., the sales from the remodeled store are considered comparable. Stores that are closed are not considered comparable. The comparable store sales calculation is not adjusted for changes in the store sales return reserve and excludes sales on the Internet and through a catalog that was distributed until March 2003.

Store Count

Store counts averaged 546 stores, 531 stores and 509 stores, respectively, for fiscal 2003, 2004 and 2005. The decline in store counts resulted from the Company’s normal ongoing lease maintenance store closings combined with a business decision not to open significant numbers of new stores until there was a clear indication of customer acceptance of the Company’s new merchandise assortment.

The Company estimates that in fiscal 2006 it will close approximately 15-20 stores as part of its normal lease maintenance program and open approximately 10 new stores, generally in strip shopping centers. This paragraph contains forward-looking information under the Private Securities Litigation Reform Act (the “Reform Act”), which is subject to the variables, uncertainties and other risk factors referred to under the caption “Future Results.”

Liquidity

United Retail Group, Inc. and certain of its subsidiaries (collectively, the “Companies”) are parties to a Financing Agreement, dated August 15, 1997, as amended (the “Financing Agreement”), with The CIT Group/Business Credit, Inc. (“CIT”). The Financing Agreement provides credit to the Companies on a revolving basis.

The Company plans to use the Financing Agreement for its immediate and future working capital needs. Management believes that the borrowing capacity under the Financing Agreement, together with cash on hand and current and anticipated cash flow from operations, will be adequate to meet the Company’s cash requirements for at least the next 12 months. This paragraph constitutes forward-looking information under the Reform Act and is subject to the variables, uncertainties and other risk factors referred to under the caption “Future Results.”

Growth

The Company plans to continue its internal growth by increasing sales per square foot in its existing store base and will consider further store openings. Also, the Company from time to time conducts “due diligence” reviews of businesses that are either for sale as a going concern or are in liquidation. The Company would consider making a bid on a suitable corporate acquisition at an opportune price if adequate financing at acceptable rates were available.

DISCUSSION AND ANALYSIS

(This section and the following one provide details about the material line items in the Company’s statements of operations.)

Second quarter of fiscal 2006 versus second quarter of fiscal 2005

Net sales for second quarter of fiscal 2006 increased 5.4% from second quarter of fiscal 2005, to $120.9 million from $114.7 million.

The principal sources of net sales growth were as follows:

Amount	Attributable to
$6.9 million	6.3% increase in comparable store sales
0.2 million	new store
(2.5) million	closed stores
1.6 million	other
$6.2 million	Total

In the second quarter of fiscal 2006, average price per unit sold decreased approximately 1%, units sold per average store increased approximately 8% and transactions per average store increased approximately 6%.

There was better customer acceptance of knit tops and woven bottoms, which increased sales by $6.6 million in comparison to the second quarter of fiscal 2005.

The average number of stores decreased from 510 to 496. See, “Stores.”

Gross profit increased to $31.9 million in second quarter of fiscal 2006 from $30.7 million in second quarter of fiscal 2005, decreasing, however, as a percentage of net sales to 26.4% from 26.8%. Gross profit as a percentage of net sales decreased principally because increases in freight and marketing expenses (50 basis points in the aggregate as a percentage of net sales) and a decrease in merchandise margins (20 basis points) were only partially offset by a decrease in buying and occupancy expense (30 basis points). Future gross profit levels will be subject to the variables, uncertainties and other risk factors referred to under the caption “Future Results.”

General, administrative and store operating expenses decreased to $25.6 million in the second quarter of fiscal 2006 from $26.1 million in the second quarter of fiscal 2005 and decreased as a percentage of net sales to 21.2% from 22.7%. General, administrative and store operating expenses decreased as a percentage of net sales principally because of decreases in incentive compensation (80 basis points) and store payroll (50 basis points).

Operating income increased 35% to $6.3 million in the second quarter of fiscal 2006 from $4.6 million in the second quarter of fiscal 2005.

The provision for income taxes was $1.7 million in the second quarter of fiscal 2006 and $0.6 million in the second quarter of fiscal 2005. (At July 29, 2006, the Company had federal net operating loss carryforwards (“NOL’s”) of approximately $6 million and state NOL’s of approximately $57 million.) The Company’s effective tax rate was 25.1% for the second quarter of fiscal 2006 and 12.8% for the second quarter of fiscal 2005.

Net income increased 22% to $5.0 million in the second quarter of fiscal 2006 from $4.1 million in the second quarter of fiscal 2005.

First half of fiscal 2006 versus first half of fiscal 2005

Net sales for first half of fiscal 2006 increased 4.1% from first half of fiscal 2005, to $230.3 million from $221.2 million.

The principal sources of net sales growth were as follows:

Amount	Attributable to
$10.2 million	4.8% increase in comparable store sales
0.3 million	new store
(4.9) million	closed stores
3.5 million	other
$9.1 million	Total

In the first half of fiscal 2006, average price per unit sold increased approximately 1%, units sold per average store increased approximately 4% and transactions per average store increased approximately 4%.

There was better customer acceptance of knit tops, which increased sales by $8.2 million in comparison to the first half of fiscal 2005.

The average number of stores decreased from 511 to 497. See, “Stores.”

Gross profit increased to $60.3 million in first half of fiscal 2006 from $56.4 million in first half of fiscal 2005, increasing as a percentage of net sales to 26.2% from 25.5%. Gross profit as a percentage of net sales increased principally because merchandise margins increased (60 basis points).

General, administrative and store operating expenses increased to $51.0 million in the first half of fiscal 2006 from $50.9 million in the first half of fiscal 2005 but decreased as a percentage of net sales to 22.1% from 23.0%, primarily as a result of lower store payroll (50 basis points) and incentive compensation (40 basis points).

Operating income increased 69% to $9.3 million in the first half of fiscal 2006 from $5.5 million in the first half of fiscal 2005.

The provision for income taxes was $2.8 million in the first half of fiscal 2006 and $0.3 million in the first half of fiscal 2005. The Company’s effective tax rate was 29.2% for the first half of fiscal 2006 and 5.5% for the first half of fiscal 2005.

Net income increased 36% to $6.9 million in the first half of fiscal 2006 from $5.1 million in the first half of fiscal 2005.

August Sales

Net sales for August 2006 increased 2.2% from August 2005, to $26.4 million from $25.8 million, principally from a 3.3% increase in comparable store sales for the month.

Increased Competition

The women’s retail apparel and shoe industries are highly competitive. Operating results of businesses in these industries, especially businesses that emphasize fashionable merchandise, can vary materially from year to year. The Company’s competition includes other specialty retailers, mass merchants, department stores, discount stores, mail order companies, television shopping channels and Internet websites. Management believes that total sales of large size women’s apparel from these sources of supply increased in recent years. Among specialty retailers for large size women like the Company, the competition includes large store chains that have announced long-term store growth plans to aggressively expand into additional strip shopping center locations. (Most of the Company’s stores are in strip shopping center locations.)

Liquidity and Capital Resources

(This section provides details about the Company’s sources of liquidity.)

Cash Flow

Net cash provided from operating activities decreased to $17.4 million in the first half of fiscal 2006 from $21.7 million in the first half of fiscal 2005, principally because inventory decreased by only $0.3 million in the first half of fiscal 2006 compared to a decrease of $7.2 million in first half of fiscal 2005. The smaller decrease in inventory was partially offset by a provision for deferred income taxes of $3.6 million in the first half of fiscal 2006; there was no such provision in the first half of fiscal 2005.

Balance Sheet Sources of Liquidity

The Company’s cash and cash equivalents increased to $48.2 million at July 29, 2006 from $33.1 million at July 30, 2005 and $32.3 million at January 28, 2006.

Inventories were stated at $62.5 million at July 29, 2006 compared with $54.1 million at July 30, 2005 and $62.8 million at January 28, 2006. (Inventories at July 30, 2005 have been revised to include import in-transit inventories on a basis consistent with that used at July 29, 2006 and fiscal 2005 year end. See, Note 1 to the consolidated financial statements.) Inventory, excluding shop @ home inventory and import in-transit inventory, on a cost per square foot basis increased 16.4% from July 30, 2005 to July 29, 2006. The increase in inventory compared with July 30, 2005 was principally the result of (i) deliveries of merchandise in July 2006 earlier than scheduled and in August 2005 later than scheduled and (ii) orders for larger quantities of on-hand merchandise in anticipation of higher demand. See, “August Sales.” Variations in inventory levels may continue to affect net cash provided by operating activities in the future. See, “Cash Flow.”

Inventory levels are seasonal. (See, “Critical Accounting Policies – Inventory” for a discussion of estimates made by management in stating inventories in financial statements prepared in accordance with generally accepted accounting principles.)

Property and equipment decreased to $61.6 million at July 29, 2006 from $72.1 million at July 30, 2005 and $66.8 million at January 28, 2006, principally from depreciation.

Other Liquidity Sources

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

The Financing Agreement has a term expiring on August 15, 2008. The line of credit is $50 million for the Companies, subject to availability of credit as described in the following paragraphs. The line of credit may be used on a revolving basis by any of the Companies to support trade letters of credit and standby letters of credit and to finance loans. At July 29, 2006, trade letters of credit for the account of the Companies and supported by CIT were outstanding in the amount of $28.8 million and standby letters of credit were outstanding in the amount of $6.1 million. Standby letters of credit were used principally in connection with insurance policies issued to the Company.

Subject to the following paragraph, the availability of credit (within the aggregate $50 million line of credit) to any of the Companies at any time is the excess of its borrowing base over the aggregate outstanding amount of its letters of credit and its revolving loans, if any. The borrowing base, as to any of the Companies is (i) the sum of (x) a percentage of the book value of its eligible inventory (both on hand and unfilled purchase orders financed with letters of credit), ranging from 65% to 75% depending on the time of year, (y) the balance from time to time in a bank account in its name that has been pledged to the lenders (a “Pledged Account”) and (z) 85% of certain receivables from credit card companies less (ii) reserves for rent for 137 stores located in certain states and liens other than permitted liens and, at CIT’s option, a reserve for sales taxes collected but not yet paid.

The provisions of the preceding paragraph to the contrary notwithstanding, the Companies are required to maintain unused at all times combined availability of at least $5 million. Except for the maintenance of a minimum availability of $5 million and a limit on capital expenditures, the Financing Agreement does not contain any significant financial covenants.

The combined borrowing capacity of the Companies under the Financing Agreement is cyclical due to the seasonality of the retail industry. At July 29, 2006, the combined borrowing capacity of the Companies, after satisfying the $5 million minimum availability requirement, was $5.3 million; the Pledged Account had a zero balance; no loan was outstanding; and the Companies’ balance sheet cash and cash equivalents of $48.2 million were unrestricted. The Company has agreed with CIT to have its subsidiary, Avenue Giftcards, Inc. (which issues AVENUE® giftcards), maintain a minimum level of high-grade liquid investments. These investments, which amounted to $0.3 million, were classified as restricted cash on the balance sheet at July 29, 2006 and will fluctuate each quarter in relation to the volume of net issuances of AVENUE® giftcards and merchandise credits during the previous six months. (The volume of net issuances is seasonal.)

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

The Financing Agreement includes certain restrictive covenants that (i) impose limitations (subject to certain exceptions) on the Companies with respect to making certain investments, declaring or paying dividends, making loans, engaging in certain transactions with affiliates, or consolidating, merging or making acquisitions outside the ordinary course of business, (ii) prohibit the Company from incurring secured indebtedness to third parties for borrowed money and (iii) limit the amount of unsecured indebtedness to third parties for borrowed money to $250,000 outstanding at any time.

The Company has drawn on the revolving loan facility under the Financing Agreement from time to time to meet its peak working capital requirements. Interest is payable monthly based on a 360-day year either at the prime rate plus an incremental percentage up to 0.75% per annum or at the LIBOR rate plus an incremental percentage ranging from 1.75% to 2.50% per annum. The borrower can select either the prime rate or the LIBOR rate as the basis for determining the interest rate. In either case, the incremental percentage is determined by the average excess availability. Payment of revolving loans is not required until termination of the Financing Agreement unless either (1) the outstanding balance of revolving loans and outstanding letters of credit exceeds the combined borrowing capacity of the Companies, in which case the excess would be payable upon demand from CIT or (2) a default under the Financing Agreement arises.

Short-term trade credit represents a significant source of financing for purchases of merchandise by the Company. Trade credit arises from the willingness of the Company’s vendors of these products to grant extended payment terms for inventory purchases and is generally financed either by the vendor or a third-party factor. The availability of trade credit depends on the Company’s having other sources of liquidity, as well. In particular, credit authorizations by trade creditors focus on the amount of the Company’s cash and cash equivalents and its borrowing capacity under the Financing Agreement.

Capital Expenditures

(This section and the following one provide details about certain uses of cash by the Company.)

Capital expenditures were $1.0 million in the first half of fiscal 2006 and $0.3 million in the first half of fiscal 2005.

Capital expenditures are estimated to be $10 million for fiscal 2006, including costs of refurbishing certain stores and building new stores. See, “Stores.” The Company has sufficient cash and cash equivalents for its planned capital expenditures. This paragraph constitutes forward-looking information under the Reform Act and is subject to the variables, uncertainties and other risk factors referred to under the caption “Future Results.”

Principal Contractual Obligations

The principal contractual obligations of the Company at January 28, 2006 were summarized in the Form 10-K.

During the first half of fiscal 2006, there was no material change outside the ordinary course of the Company’s business in the principal contractual obligations of the Company, taken as a whole.

Pending Litigation

The Company is involved in legal actions and claims arising in the ordinary course of business. Management believes that pending litigation and claims, net of reserves, will not have a material adverse effect on the Company’s financial position, annual results of operations or cash flows. See, also, “Critical Accounting Policies-Incurred But Not Reported Claims For Personal Injuries and Medical Benefits.” This paragraph constitutes forward-looking information under the Reform Act.

Meeting Cash Requirements

The Company’s cash requirements include (i) anticipated working capital needs, including seasonal inventory financing, (ii) financing activities, including payments due on its principal contractual obligations and (iii) investing activities, including costs for refurbishing and building stores and replacing fixtures where appropriate. During the first half of fiscal 2006, the Company funded its cash requirements from net cash provided from operating activities. The Company’s historical sources of liquidity have been the availability of credit under the Financing Agreement on a revolving basis and short-term trade credit, as well as its cash on hand and net cash provided by operating activities.

The Company plans to use the Financing Agreement for its immediate and future working capital needs. Management believes that the borrowing capacity under the Financing Agreement, together with cash on hand and current and anticipated cash flow from operations, will be adequate to meet the Company’s cash requirements for at least the next 12 months.

This section constitutes forward-looking information under the Reform Act and is subject to the variables, uncertainties and other risk factors referred to under the caption “Future Results.”

Critical Accounting Policies

(This section discusses the Company’s critical accounting policies.)

Introduction

Financial statements in accordance with generally accepted accounting principles are affected by the policies followed by management in preparing them. Some accounting policies require difficult, subjective or complex judgments by management, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Among the most important accounting policies of the Company that involve such managerial judgments are the use of the retail method of accounting for inventory and the use of estimates of incurred but not reported claims for uninsured damages for personal injuries and workers’ compensation benefits and for benefits under the Company’s self-insured medical, dental and prescription plans for its associates, as well as future development costs of reported claims (collectively, “IBNR Claims”).

Inventory

In accordance with generally accepted accounting principles, inventories are stated at the lower of cost or market. The Company utilizes the retail method, under which a cost-to-price relationship is developed on the basis of original cost as compared to initial retail selling price. The valuation of inventories at cost and the resulting margins are calculated by applying this cost-to-price relationship to the retail value of inventories. Consequently, the use of the retail inventory method results in valuing inventories at lower of cost or market.

Inherent in the retail inventory method are estimates by management on current and future selling value of the inventory. These estimates, which are described in the following paragraph, can significantly impact the ending inventory valuation at cost, as well as resulting margins. In the women’s retail specialty apparel industry, sales, especially in businesses that emphasize fashionable merchandise, can vary significantly over time. Sales are volatile because of shifts in consumer spending patterns, consumer preferences and overall economic conditions; the impact of increased competition; variations in weather patterns; fluctuations in consumer acceptance of products; changes in the ability to develop new merchandise; differences in promotional strategies; and movements in consumer confidence levels. The necessity for managerial estimates based on these variables, coupled with the fact that the retail inventory method is an averaging process, can produce inventory valuations at any point in time that are inexact.

Permanent markdowns, when taken, reduce both the price and cost components of inventory on hand, which maintains the established cost-to-price relationship. Deferred markdowns can result in an overstatement of inventories under the lower of cost or market principle. Accordingly, at the end of each six-month merchandising season, management conducts a thorough review of inventory on hand and, based on management’s business judgment, estimates what quantities of current merchandise are in excess of the amounts saleable at historical margin rates. A markdown reserve is established to reduce to estimated net realizable value the carrying value of excess current merchandise and obsolete categories of merchandise.

The markdown reserve was $0.8 million at July 29, 2006 and $1.3 million at July 30, 2005.

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

Markdown reserves may fluctuate because the market environment is dynamic for the reasons set forth in the second paragraph in this section. However, a consistent methodology for markdown reserves is one of the Company’s important accounting objectives.

Incurred But Not Reported Claims For Personal Injuries and Medical Benefits

The Company records a liability for IBNR Claims, which is based on (i) the number and size of outstanding claims, (ii) a comparison between the dates paid claims were incurred and the dates they were paid, (iii) an analysis of the amounts previously paid, (iv) projections of inflation in medical costs and (v) advice from time to time from its insurance broker. The Company has insurance policies with coverage for auto, general liability and workers’ compensation claims but it remains liable for a self-insured retention of $0.1 million for each auto claim and $0.3 million for each general liability and workers’ compensation claim. The Company is self-insured for its medical, dental and prescription plans for associates. The Company has stop loss insurance coverage for employee medical claims over $0.2 million each. Also, there is an aggregate limit for these plans which, at January 28, 2006, was $6.7 million based on the number of associates participating at that time.

The Company’s methodologies for estimating liabilities for IBNR claims are discussed in the Form 10-K.

Private Label Credit Cards Issued By The Bank

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

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

In accordance with generally accepted accounting principles, the Company did not include the receivable asset created under the 1998 Credit Card Program Agreement in the Company’s accounts receivable on its balance sheets because the Company had no interest in the customer accounts or receivables. In this connection, it should be noted that the 1998 Credit Card Program Agreement stated that (i) the Bank is the sole and exclusive owner of all customer accounts, (ii) the Company has no interest in the customer accounts and (iii) the Bank is the creditor in respect of receivables (defined in the 1998 Credit Card Program Agreement as amounts owed with respect to retail purchases, finance charges, deferred finance charges, other fees and charges for sales tax). Also, depending on the circumstances, the Company might not purchase the accounts from the Bank upon the expiration of the contractual term.

The credit card program premium reflected in general, administrative and store operating expenses was an amount equal to royalties paid to the Company by the Bank minus costs charged by the Bank. Costs were based on the volume of credit card program processing activities performed by the Bank.

Royalties were based on program revenues minus receivables written off by the Bank and the cost of funds for the program.

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

Under the Amended Agreement, the Bank pays the Company specified percentages of net credit sales and outstanding receivables, respectively, less chargebacks and “pass through” expenses. Bank payments reduce general, administrative and store operating expenses.

Net credit sales volume with the Bank was $68.8 million in the first half of fiscal 2006 and $66.6 million in the first half of fiscal 2005.

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

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

At the expiration of the Term, the Company shall have the right to purchase the customer accounts from the Bank for a price equal to the receivables. Also, the Bank shall then have the right to sell the customer accounts to the Company at that price if the Company commences a private label credit card program either on its own or through another issuer of credit cards. When the Amended Agreement is about to expire without being renewed, the Company is likely to submit requests for proposals to other banks that issue private label credit cards to retailers’ customers and to use the banks’ proposals to evaluate a continuation of the private label credit card program. There is no assurance, however, that other banks would make proposals to continue the program on terms satisfactory to the Company or that the Company could finance a program on its own without involving a bank. The penultimate sentence constitutes forward-looking information under the Reform Act and is subject to possible changes in the sector of the banking industry that issues co-branded credit cards to customers of retail chains and in governmental regulations affecting that sector.

Stock Options

Financial Accounting Standards Board SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”) requires all share-based payments to employees, including grants of employee stock options, to be measured at their fair values at the date of grant and recognized as expense over the service period, which is generally the vesting period. The Company adopted SFAS No. 123R in the first quarter of fiscal 2006, using the modified prospective method. The adoption of SFAS No. 123R increased compensation expense for the second quarter of fiscal 2006 by $0.1 million.

Stores

The Company’s channel of distribution is retail stores using its AVENUE® trade name. The Company leased 495 stores in 37 states at July 29, 2006.

Store counts averaged 546 stores, 531 stores and 509 stores, respectively, for fiscal 2003, 2004 and 2005. The decline in store counts resulted from the Company’s normal ongoing lease maintenance store closings combined with a business decision not to open significant numbers of new stores until there was a clear indication of customer acceptance of the Company’s new merchandise assortment.

The Company estimates that in fiscal 2006 it will close approximately 15-20 stores as part of its normal lease maintenance program and open approximately 10 new stores, generally in strip shopping centers. This paragraph contains forward-looking information under the Reform Act, which is subject to the variables, uncertainties and other risk factors referred to under the caption “Future Results.”

Retail selling space was approximately 2.2 million square feet both at July 29, 2006 and July 30, 2005.

Depreciation and amortization of property and equipment relate principally to assets in stores and declined to $6.1 million in the first half of fiscal 2006 from $6.8 million in the first half of fiscal 2005.

E-Commerce

The Company has an Internet site (www.avenue.com) that sells a selection of the merchandise that is also for sale in the Company’s stores. The Company ships its avenue.com orders from its national distribution center in Troy, Ohio.

Suspension of Catalog Operations

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

The Company licensed its AVENUE trade name to a leading catalog publisher to conduct a market test of an AVENUE catalog earlier in fiscal 2006. The Company was not responsible for the costs of the market test, did not supply the merchandise featured and did not include sales to catalog customers in its reported sales. The results of the market test have been analyzed and the Company and the catalog publisher will not go forward with further mailings.

Supplemental Retirement Savings Plan

Prior to fiscal 2005, the trust under the Company’s Supplemental Retirement Savings Plan (“SRSP”) had purchased 279,870 shares using a portion of the funds accumulated in the deferred compensation account of Raphael Benaroya, the Company’s Chairman, President and Chief Executive Officer. (56.2% of the account balance at the time represented amounts withheld from Mr. Benaroya’s salary and earnings thereon and the remainder represented contributions by the Company pursuant to the general terms of the SRSP and earnings thereon.)

In the first quarter of fiscal 2005, the shares held in Mr. Benaroya’s SRSP account were classified as treasury shares and had no voting rights. With respect to the deferred compensation obligations of the SRSP, the liability was marked to market and this liability adjustment flowed through the statement of operations as either an increase or a decrease in compensation expense. With respect to the SRSP assets, marketable securities were also marked to market except shares of Company stock, which were recorded permanently at cost. This asset adjustment also flowed through the statement of operations. The liability adjustment and the asset adjustment were not necessarily equal in amount because of the disparate treatment of Company stock. In the first quarter of fiscal 2005, the market price of Company stock rose and compensation expense was increased $0.1 million as a result of the foregoing accounting treatment.

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

Growth

The Company plans to continue its internal growth by increasing sales per square foot in its existing store base and will consider further store openings. Also, the Company from time to time conducts “due diligence” reviews of businesses that are either for sale as a going concern or are in liquidation. The Company would consider making a bid on a suitable corporate acquisition at an opportune price if adequate financing at acceptable rates were available.

Off-Balance Sheet Arrangements

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

Future Results

The Company cautions that any forward-looking statements (as such term is defined in the Reform Act) contained in this Report or otherwise made by management of the Company involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Accordingly, the Company’s future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements.

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

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

The following additional factors, among others, could also affect the Company’s actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this Report or otherwise made by management: threats of terrorism; war risk; shifts in consumer spending patterns, overall economic conditions; the impact of increased competition; variations in weather patterns; increases in interest rates; the ability to retain, hire and train key personnel; risks associated with the ability of the Company’s manufacturers to deliver products in a timely manner; political instability and other risks associated with foreign sources of production and increases in fuel costs.

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

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

Stockholder Rights Plan

Any action by the Company’s stockholders with respect to any proposed merger or business combination with another corporation shall be taken by a majority of the votes cast at a meeting at which a quorum is present except as may be otherwise prescribed by the General Corporation Law of Delaware (the “GCL”) at the time. However, the Company’s stockholder rights plan (filed with the Commission as the exhibit to the Company’s Registration Statement on Form 8-A, dated September 15, 1999, and available online at www.sec.gov) and certain provisions of the By-Laws (filed with the Commission as Exhibit No. 3 to the Company’s Current Report on Form 8-K, dated March 2, 2006, and available online at www.sec.gov) impose restrictions on mergers and business combinations in addition to the requirements of the GCL. These rights and By-Law provisions may make it more difficult for a third party to acquire the Company even if doing so would allow the stockholders to receive a premium over the prevailing market price of the Common Stock. These rights and By-Law provisions are intended to encourage potential acquirers to negotiate and allow the Board of Directors the opportunity to consider alternative proposals in the interest of maximizing stockholder value. However, these rights and provisions may also discourage acquisition proposals or delay or prevent a change in control, which could negatively affect the price of the Common Stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company does not hold or issue financial instruments for trading purposes.

Management of the Company believes that its exposure to interest rate risk is not material. See, however, in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” the penultimate paragraph under the caption “Other Liquidity Sources” regarding the variable interest rate payable on revolving loans to the Companies. The pertinent paragraph is incorporated herein by reference.

In the second quarter of fiscal 2006, a decrease in the market price of Company stock reduced compensation expense related to stock appreciation rights to be settled in cash (“SAR’s”) held by the nonmanagement Directors. The amount of the reduction in the second quarter was $0.3 million. On the contrary, in the first quarter of fiscal 2006, an increase in the market price of Company stock increased compensation expense related to SAR’s by $0.5 million. Management of the Company believes that its equity price risk at the current market price of Company stock is not material.

The Company is not exposed to foreign currency exchange rate risk under its existing contracts, such as purchase orders for imported merchandise, which are payable in U.S. dollars.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls

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

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

As of the end of second quarter of fiscal 2006, such an evaluation was carried out under the supervision and with the participation of the CEO and CFO. Based on this evaluation, the CEO and CFO each concluded that, at July 29, 2006, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed in Commission reports is recorded, processed, summarized and reported within the requisite time periods.

Internal Control Over Financial Reporting

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

Each fiscal quarter, the Company performs a formal evaluation, in which the Company’s CEO and CFO participate, of changes in the Company’s internal control over financial reporting. Based on this evaluation, management concluded that there was no change in the Company’s internal control over financial reporting during the fiscal quarter ended July 29, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The subsection in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” captioned “Pending Litigation” is incorporated herein by reference.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In the first month of the second quarter of fiscal 2006, the Company repurchased a total of 25,631 shares at the then current market price of $15.33 per share from Raphael Benaroya, the Company’s Chairman of the Board, President and Chief Executive Officer. The repurchase was in connection with a net issuance of 12,369 shares upon the exercise of employee stock options by Mr. Benaroya, as provided in the pertinent stock option plan. (A net issuance of shares upon option exercise involves withholding a portion of the shares that otherwise would have been issued in lieu of cash payment by the optionholder of the exercise price and withholding taxes.) The Company has no present intention of repurchasing shares other than in connection with net issuances of shares upon exercises of employee stock options, as provided in the Company’s stock option plans.

The Financing Agreement does not permit the Company to pay dividends.

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

(a) The Annual Meeting of Stockholders (the “Meeting”) was held on May 26, 2006.

(c) (i)             The Meeting elected all the directors of the Company for terms ending at the next Annual Meeting of Stockholders, by the following vote:

Name	For	Withhold Authority to Vote
Joseph A. Alutto	11,058,962	1,582,684
Raphael Benaroya	11,955,954	685,692
Joseph Ciechanover	11,822,454	819,912
Ross B. Glickman	12,100,484	541,162
Michael Goldstein	11,030,445	1,611,201
Ilan Kaufthal	11,957,284	684,362
Vincent P. Langone	11,957,501	684,145
George R. Remeta	11,957,201	684,445
Richard W. Rubenstein	11,106,446	1,535,200

(ii)The Meeting approved the adoption of the 2006 Equity-Based Compensation and Performance Incentive Plan by a vote of 8,331,191 FOR, 1,712,995 AGAINST and 70,442 ABSTAIN.

ITEM 5. OTHER INFORMATION.

(a)The Company is a party to Employment Agreements, dated September 3, 2004, with Raphael Benaroya, the Company’s Chairman of the Board, President and Chief Executive Officer, and George R. Remeta, the Company’s Vice Chairman of the Board and Chief Administrative Officer (collectively, the “Employment Agreements”).

On August 25, 2005, the Compensation Committee, having discussed the provisions of the Employment Agreements at two previous meetings, recommended extending the term of each of the Employment Agreements by one year, that is, to September 3, 2011, with no change in the other contractual provisions. The extension of the term of the Employment Agreements was approved by the Board in executive session among the nonmanagement Directors later on August 25, 2006.

The amendments to the Employment Agreements discussed above were authorized by the Board in order to assure the continued availability of the services of Messrs. Benaroya and Remeta.

On September 5, 2006, the Company entered into Amendments to the Employment Agreements with Messrs. Benaroya and Remeta, respectively, extending the contractual term by one year.

The Employment Agreements and the amendments discussed above are exhibits to this Report.

ITEM 6. EXHIBITS.

(a)Consolidated Financial Statements of the Corporation for second quarter of fiscal 2006 are included herein.

(b)

(1) The following additional exhibits are filed herewith:

Number	Description
10.1*	Amendment dated as of August 25, 2006, to Employment Agreement, dated September 3, 2004, between the Corporation and Raphael Benaroya (“Benaroya Employment Agreement”)
10.2*	Amendment dated as of August 25, 2006, to Employment Agreement, dated September 3, 2004, between the Corporation and George R. Remeta (“Remeta Employment Agreement”)
10.3*	Form of Incentive Stock Option Award Agreement under the Corporation’s 2006 Equity-Based Compensation and Performance Incentive Plan (“2006 Plan”)
31	Certifications pursuant to Section 302

(2) Certifications pursuant to Section 906 are furnished as Exhibit 32 hereto.

(3) The following additional documents available online at www.sec.gov are incorporated herein by

reference:

The following exhibit to the Corporation’s Current Report on Form 8-K filed on August 31, 2006 is incorporated herein by reference:

Number in Filing	Description
10*	Amendment dated as of August 25, 2006, to Employment Agreement, dated September 3, 2004, between the Corporation and Kenneth P. Carroll (“Carroll Employment Agreement”)

The following exhibits to the Corporation’s Current Report on Form 8-K filed on August 24, 2006 are incorporated herein by reference:

Number in Filing	Description
10.1*	Form of Incentive Compensation Award Agreement under 2006 Plan
10.2*	Form of Stock Appreciation Rights settled in stock award agreement under 2006 Plan
10.3*	Form of Restricted Stock Award Agreement under 2006 Plan

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended April 29, 2006 is incorporated herein by reference:

Number in Filing	Description
10*	Bonus Agreement, dated June 1, 2006, between the Corporation and Ellen Demaio (Confidential portions filed separately with the Secretary of the Commission)

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

Number in Filing	Description
10.1*	Form of Nonqualified Stock Option award agreement under the 2006 Plan
10.2*	Form of Stock Appreciation Right settled in cash award agreement under the 2006 Plan
10.3*	Form of Stock Appreciation Right settled in cash granted to nonmanagement Directors under the Corporation’s former Stock Appreciation Rights Plan
10.4*	Tax Accounting Fee Reimbursement Plan

The 2006 Plan set forth as the appendix to the Corporation’s proxy statement on Schedule 14A for its 2006 annual meeting of stockholders is incorporated herein by reference.*

The following exhibit to the Corporation’s Annual Report on Form 10-K for the year ended January 28, 2006 is incorporated herein by reference:

Number in Filing	Description
10	Private Label Credit Card Program Agreement between the Corporation and United Retail Incorporated and World Financial Network National Bank (“Private Label Credit Card Program Agreement”) (Confidential portions filed separately with the Secretary of the Commission)

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

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

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

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

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

Number in Filing	Description
10.2*	Amendment to Supplemental Retirement Savings Plan
10.3*	Amendment, dated August 29, 2005, to Benaroya Employment Agreement
10.4*	Amendment, dated August 29, 2005, to Remeta Employment Agreement
10.5*	Amendment, dated August 29, 2005, to Carroll Employment Agreement
10.6*	Form of Severance Pay Agreements, dated August 26, 2005, between the Corporation and Terence Puffer and Rose Panicali, respectively
10.9*	Bonus Agreement, dated August 22, 2005, between the Corporation and Rose Panicali

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

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

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

Number in Filing	Description
10*	Restated Stock Appreciation Rights Plan

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

Number in Filing	Description
21	Subsidiaries of the Corporation

The following exhibits to the Corporation’s Quarterly Report on Form 10-Q for the period ended July 31, 2004 are incorporated herein by reference:

Number in Filing	Description
10.1*	Benaroya Employment Agreement
10.2*	Remeta Employment Agreement
10.3*	Carroll Employment Agreement

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended April 29, 2004 is incorporated herein by reference:

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

The following exhibits to the Corporation’s Annual Report on Form 10-K for the year ended January 31, 2004 are incorporated herein by reference:

Number in Filing	Description
10.2*	Form of Indemnification Agreement between the Corporation and each of its Directors
14	Code of Ethics for Principal Executive and Senior Financial Officers pursuant to Section 406

The following exhibit to the Corporation’s Current Report on Form 8-K filed on January 8, 2004 is incorporated herein by reference:

Number in Filing	Description
10	Amendment, dated December 23, 2003, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and The CIT Group/Business Credit, Inc., as Agent and Lender (“CIT”)

The 2003 Stock Option Plan set forth as the appendix to the Corporation’s proxy statement on Schedule 14A for its 2003 annual meeting of stockholders is incorporated herein by reference.*

The following exhibit to the Corporation’s Annual Report on Form 10-K/A for the year ended February 1, 2003 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated January 31, 2003, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended August 3, 2002 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated August 2, 2002, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibits to the Corporation’s Annual Report on Form 10-K for the year ended February 2, 2002 are incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated April 5, 2002, to Private Label Credit Card Program Agreement, dated January 27, 1998
10.2	Amendment, dated December 29, 1999, to Private Label Credit Card Program Agreement
10.3	Amendment, dated August 19, 1999, to Private Label Credit Card Program Agreement

The following exhibits to the Corporation’s Quarterly Report on Form 10-Q for the period ended November 3, 2001 are incorporated herein by reference:

Number in Filing	Description
10.4*	Summary Plan Description for United Retail Group, Inc. Incentive Compensation Program for Executives
10.5	Amendment, dated October 1, 2001, to Private Label Credit Card Program Agreement

The 2001 Stock Option Plan set forth as an appendix to the Corporation’s proxy statement on Schedule 14A for its 2001 annual meeting of stockholders is incorporated herein by reference.*

The following exhibit to the Corporation’s Registration Statement on Form S-8 (Registration No. 333-44868) is incorporated herein by reference:

Number in Filing	Description
10	Amendment, dated August 21, 2000, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibits to the Corporation’s Annual Report on Form 10-K for the year ended January 29, 2000 are incorporated herein by reference:

Number in Filing	Description
10.2	Amendment, dated December 28, 1999, to Financing Agreement among the Corporation, United Retail Incorporated and CIT (“Financing Agreement”)
10.3	Amendment, dated January 31, 2000, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended October 30, 1999 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated October 6, 1999, to Financing Agreement

The following exhibit to the Corporation’s Current Report on Form 8-K, filed September 23, 1999, is incorporated herein by reference:

Number in Filing	Description
3	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock

The stockholders’ rights plan filed as the exhibit to the Corporation’s Registration Statement on Form 8-A, dated September 15, 1999, is incorporated herein by reference.

The following exhibit to the Corporation’s Annual Report on Form 10-K for the year ended January 30, 1999 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated March 29, 1999, to Financing Agreement

The 1999 Stock Option Plan set forth as the Appendix to the Corporation’s proxy

statement on Schedule 14A for its 1999 annual meeting of stockholders is incorporated herein by

reference.*

The following exhibits to the Corporation’s Quarterly Report on Form 10-Q for the period ended May 2, 1998 are incorporated herein by reference:

Number in Filing	Description
10.1*	Benaroya Stock Option
10.2*	Remeta Stock Option

The following exhibits to the Corporation’s Annual Report on Form 10-K for the year ended January 31, 1998 are incorporated herein by reference:

Number in Filing	Description
10.1	Restated Stockholders’ Agreement, dated December 23, 1992, between the Corporation and certain of its stockholders and Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto
10.2	Private Label Credit Card Program Agreement
10.4*	Restated 1990 Stock Option Plan as of March 6, 1998
10.5*	Restated 1990 Stock Option Plan as of May 28, 1996
10.6*	Restated 1996 Stock Option Plan as of March 6, 1998

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended November 1, 1997 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated September 15, 1997, to Financing Agreement

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

Number in Filing	Description
10.1	Financing Agreement

The following exhibits to the Corporation’s Registration Statement on Form S-1 (Registration No. 33-44499), as amended, are incorporated herein by reference:

Number in Filing	Description
3.1	Amended and Restated Certificate of Incorporation of the Corporation
4.1	Specimen Certificate for Common Stock of the Corporation

_______________

*A compensatory plan for the benefit of the Corporation’s management or a management contract.

SIGNATURES

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

(Registrant) UNITED RETAIL GROUP, INC.

Date: September 7, 2006

By: /s/ GEORGE R. REMETA

George R. Remeta, Vice Chairman of the Board, Chief

Administrative Officer and Chief Financial Officer – Authorized Signature

By: /s/ JON GROSSMAN

Jon Grossman, Vice President, Finance and Chief Accounting Officer

EXHIBIT INDEX

(a)Consolidated Financial Statements of the Corporation for first quarter of fiscal 2006 are included herein.

(b)

(1) The following additional exhibits are filed herewith:

Number	Description
10.1*	Amendment dated as of August 25, 2006, to Employment Agreement, dated September 3, 2004, between the Corporation and Raphael Benaroya (“Benaroya Employment Agreement”)
10.2*	Amendment dated as of August 25, 2006, to Employment Agreement, dated September 3, 2004, between the Corporation and George R. Remeta (“Remeta Employment Agreement”)
10.3*	Form of Incentive Stock Option Award Agreement under the Corporation’s 2006 Equity-Based Compensation and Performance Incentive Plan (“2006 Plan”)
31	Certifications pursuant to Section 302

(2) Certifications pursuant to Section 906 are furnished as Exhibit 32 hereto.

(3) The following additional documents available online at www.sec.gov are incorporated herein by

reference:

The following exhibit to the Corporation’s Current Report on Form 8-K filed on August 31, 2006 is incorporated herein by reference:

Number in Filing	Description
10*	Amendment dated as of August 25, 2006, to Employment Agreement, dated September 3, 2004, between the Corporation and Kenneth P. Carroll (“Carroll Employment Agreement”)

The following exhibits to the Corporation’s Current Report on Form 8-K filed on August 24, 2006 are incorporated herein by reference:

Number in Filing	Description
10.1*	Form of Incentive Compensation Award Agreement under 2006 Plan
10.2*	Form of Stock Appreciation Rights settled in stock award agreement under 2006 Plan
10.3*	Form of Restricted Stock Award Agreement under 2006 Plan

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended April 29, 2006 is incorporated herein by reference:

Number in Filing	Description
10*	Bonus Agreement, dated June 1, 2006, between the Corporation and Ellen Demaio (Confidential portions filed separately with the Secretary of the Commission)

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

Number in Filing	Description
10.1*	Form of Nonqualified Stock Option award agreement under 2006 Plan
10.2*	Form of Stock Appreciation Right settled in cash award agreement under the 2006 Plan
10.3*	Form of Stock Appreciation Right settled in cash granted to nonmanagement Directors under the Corporation’s former Stock Appreciation Rights Plan
10.4*	Tax Accounting Fee Reimbursement Plan

The 2006 Plan set forth as the appendix to the Corporation’s proxy statement on Schedule 14A for its 2006 annual meeting of stockholders is incorporated herein by reference.*

The following exhibit to the Corporation’s Annual Report on Form 10-K for the year ended January 28, 2006 is incorporated herein by reference:

Number in Filing	Description
10	Private Label Credit Card Program Agreement between the Corporation and United Retail Incorporated and World Financial Network National Bank (“Private Label Credit Card Program Agreement”) (Confidential portions filed separately with the Secretary of the Commission)

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

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

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

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

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

Number in Filing	Description
10.2*	Amendment to Supplemental Retirement Savings Plan
10.3*	Amendment, dated August 29, 2005, to Benaroya Employment Agreement
10.4*	Amendment, dated August 29, 2005, to Remeta Employment Agreement
10.5*	Amendment, dated August 29, 2005, to Carroll Employment Agreement
10.6*	Form of Severance Pay Agreements, dated August 26, 2005, between the Corporation and Terence Puffer and Rose Panicali, respectively
10.9*	Bonus Agreement, dated August 22, 2005, between the Corporation and Rose Panicali

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

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

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

Number in Filing	Description
10*	Restated Stock Appreciation Rights Plan

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

Number in Filing	Description
21	Subsidiaries of the Corporation

The following exhibits to the Corporation’s Quarterly Report on Form 10-Q for the period ended July 31, 2004 are incorporated herein by reference:

Number in Filing	Description
10.1*	Benaroya Employment Agreement
10.2*	Remeta Employment Agreement
10.3*	Carroll Employment Agreement

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended April 29, 2004 is incorporated herein by reference:

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

The following exhibits to the Corporation’s Annual Report on Form 10-K for the year ended January 31, 2004 are incorporated herein by reference:

Number in Filing	Description
10.2*	Form of Indemnification Agreement between the Corporation and each of its Directors
14	Code of Ethics for Principal Executive and Senior Financial Officers pursuant to Section 406

The following exhibit to the Corporation’s Current Report on Form 8-K filed on January 8, 2004 is incorporated herein by reference:

Number in Filing	Description
10	Amendment, dated December 23, 2003, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and The CIT Group/Business Credit, Inc., as Agent and Lender (“CIT”)

The 2003 Stock Option Plan set forth as the appendix to the Corporation’s proxy statement on Schedule 14A for its 2003 annual meeting of stockholders is incorporated herein by reference.*

The following exhibit to the Corporation’s Annual Report on Form 10-K/A for the year ended February 1, 2003 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated January 31, 2003, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended August 3, 2002 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated August 2, 2002, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibits to the Corporation’s Annual Report on Form 10-K for the year ended February 2, 2002 are incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated April 5, 2002, to Private Label Credit Card Program Agreement, dated January 27, 1998
10.2	Amendment, dated December 29, 1999, to Private Label Credit Card Program Agreement
10.3	Amendment, dated August 19, 1999, to Private Label Credit Card Program Agreement

The following exhibits to the Corporation’s Quarterly Report on Form 10-Q for the period ended November 3, 2001 are incorporated herein by reference:

Number in Filing	Description
10.4*	Summary Plan Description for United Retail Group, Inc. Incentive Compensation Program for Executives
10.5	Amendment, dated October 1, 2001, to Private Label Credit Card Program Agreement

The 2001 Stock Option Plan set forth as an appendix to the Corporation’s proxy statement on Schedule 14A for its 2001 annual meeting of stockholders is incorporated herein by reference.*

The following exhibit to the Corporation’s Registration Statement on Form S-8 (Registration No. 333-44868) is incorporated herein by reference:

Number in Filing	Description
10	Amendment, dated August 21, 2000, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibits to the Corporation’s Annual Report on Form 10-K for the year ended January 29, 2000 are incorporated herein by reference:

Number in Filing	Description
10.2	Amendment, dated December 28, 1999, to Financing Agreement among the Corporation, United Retail Incorporated and CIT (“Financing Agreement”)
10.3	Amendment, dated January 31, 2000, to Financing Agreement among the Corporation, United Retail Incorporated, Cloudwalkers, Inc. and CIT

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended October 30, 1999 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated October 6, 1999, to Financing Agreement

The following exhibit to the Corporation’s Current Report on Form 8-K, filed September 23, 1999, is incorporated herein by reference:

Number in Filing	Description
3	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock

The stockholders’ rights plan filed as the exhibit to the Corporation’s Registration Statement on Form 8-A, dated September 15, 1999, is incorporated herein by reference.

The following exhibit to the Corporation’s Annual Report on Form 10-K for the year ended January 30, 1999 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated March 29, 1999, to Financing Agreement

The 1999 Stock Option Plan set forth as the Appendix to the Corporation’s proxy

statement on Schedule 14A for its 1999 annual meeting of stockholders is incorporated herein by

reference.*

The following exhibits to the Corporation’s Quarterly Report on Form 10-Q for the period ended May 2, 1998 are incorporated herein by reference:

Number in Filing	Description
10.1*	Benaroya Stock Option
10.2*	Remeta Stock Option

The following exhibits to the Corporation’s Annual Report on Form 10-K for the year ended January 31, 1998 are incorporated herein by reference:

Number in Filing	Description
10.1	Restated Stockholders’ Agreement, dated December 23, 1992, between the Corporation and certain of its stockholders and Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto
10.2	Private Label Credit Card Program Agreement
10.4*	Restated 1990 Stock Option Plan as of March 6, 1998
10.5*	Restated 1990 Stock Option Plan as of May 28, 1996
10.6*	Restated 1996 Stock Option Plan as of March 6, 1998

The following exhibit to the Corporation’s Quarterly Report on Form 10-Q for the period ended November 1, 1997 is incorporated herein by reference:

Number in Filing	Description
10.1	Amendment, dated September 15, 1997, to Financing Agreement

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

Number in Filing	Description
10.1	Financing Agreement

The following exhibits to the Corporation’s Registration Statement on Form S-1 (Registration No. 33-44499), as amended, are incorporated herein by reference:

Number in Filing	Description
3.1	Amended and Restated Certificate of Incorporation of the Corporation
4.1	Specimen Certificate for Common Stock of the Corporation

____________________

*A compensatory plan for the benefit of the Corporation’s management or a management contract.

EX-10

Exhibit No. 10.1

AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT

This AMENDMENT NO. 3 made as of the 25th day of August, 2006, to the Employment Agreement made as of the 3^rd day of September, 2004 (as amended, the “Agreement”), between UNITED RETAIL GROUP, INC., a Delaware corporation, with principal offices at 365 West Passaic Street, Rochelle Park, New Jersey 07662-6563, and RAPHAEL BENAROYA, residing at 179 Lincoln Street, Englewood, NJ 07631.

WHEREAS, capitalized terms used herein and defined in the Agreement shall have the same meaning as in the Agreement;

WHEREAS, the Executive has been employed by the Company as its Chairman of the Board, President and Chief Executive Officer;

WHEREAS, the Company desires to continue the services of the Executive, and the Executive desires to continue to provide such services to the Company, on the terms set forth in the Agreement;

WHEREAS, the provisions of the Agreement and the compensation practices of peer companies were discussed by the Compensation Committee of the Company’s Board of Directors on May 26, 2006 and August 17, 2006; and

WHEREAS on August 25, 2006, this Amendment was recommended by the Compensation Committee and approved by the Company’s Board of Directors in an executive session among the nonmanagement Directors.

NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Section 1(i) of the Agreement is amended to read in its entirety as follows:

“(i)Contract Term shall mean the period of time commencing on November 20, 1998 and ending on September 3, 2011 or such later date as may be mutually agreed upon by the Company and the Executive. (For the avoidance of doubt, Contract Term as used herein may extend beyond the termination of the Executive’s employment under this Agreement.)”

2. All the other provisions of the Agreement shall remain in force unchanged.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in Rochelle Park, New Jersey, in duplicate originals on August 28, 2006.

UNITED RETAIL GROUP, INC.

By: /s/ GEORGE R. REMETA

Name: George R. Remeta

Title: Chief Administrative Officer

/s/ RAPHAEL BENAROYA

Raphael Benaroya

KPC:jmt

EX-10

Exhibit No. 10.2

AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT

This AMENDMENT NO. 3 made as of the 25th day of August, 2006, to the Employment Agreement made as of the 3^rd day of September, 2004 (as amended, the “Agreement”), between UNITED RETAIL GROUP, INC., a Delaware corporation, with principal offices at 365 West Passaic Street, Rochelle Park, New Jersey 07662-6563, and GEORGE R. REMETA, residing at 25 Lee Way, Oakland, NJ 07436.

WHEREAS, capitalized terms used herein and defined in the Agreement shall have the same meaning as in the Agreement;

WHEREAS, the Executive has been employed by the Company as its Vice Chairman of the Board and Chief Administrative Officer;

WHEREAS, the Company desires to continue the services of the Executive, and the Executive desires to continue to provide such services to the Company, on the terms set forth in the Agreement;

WHEREAS, the provisions of the Agreement and the compensation practices of peer companies were discussed by the Compensation Committee of the Company’s Board of Directors on May 26, 2006 and August 17, 2006; and

WHEREAS on August 25, 2006, this Amendment was recommended by the Compensation Committee and approved by the Company’s Board of Directors in a vote from which the Executive abstained.

NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Section 1(i) of the Agreement is amended to read in its entirety as follows:

“(i)Contract Term shall mean the period of time commencing on November 20, 1998 and ending on September 3, 2011 or such later date as may be mutually agreed upon by the Company and the Executive. (For the avoidance of doubt, Contract Term as used herein may extend beyond the termination of the Executive’s employment under this Agreement.)”

2. All the other provisions of the Agreement shall remain in force unchanged.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in Rochelle Park, New Jersey, in duplicate originals on August 28, 2006.

UNITED RETAIL GROUP, INC.

By: /s/ RAPHAEL BENAROYA

Name: Raphael Benaroya

Title: Chief Executive Officer

/s/ GEORGE R. REMETA

George R. Remeta

KPC:jmt

EX-10

Exhibit No. 10.3

INCENTIVE

STOCK OPTION AGREEMENT

(Date)

No. of Shares: __,000

Exercise Price per Share: $

Date of Grant:

Expiration Date:

Option Number: ______

PERSONAL AND CONFIDENTIAL:

(Name and Address)

Dear (Salutation):

We are pleased to inform you that, as a key associate of United Retail Group, Inc. (herein called the “Company”) or one of its subsidiaries, you have been granted an option under the Company’s 2006 Equity-Based Compensation and Performance Incentive Plan (herein called the “Plan”). The option gives you the right to purchase units, consisting of one share of common stock, $.001 par value per share, with a stock purchase warrant attached (herein collectively called “shares”) of the Company, subject to your acceptance of the award as provided in Section 1 below and the terms and conditions that follow in this letter agreement or are contained in the Plan. The date of the grant evidenced by this letter agreement (herein called the date of grant), the date the option expires, the maximum number of shares the option entitles you to purchase and the exercise price per share are set forth above. (The option is intended to be an “incentive stock option” within the meaning of Section 422A of the Internal Revenue Code.) A copy of the Plan and a Notice of Exercise of Option form are enclosed. The terms and conditions of the option, including non-standard provisions permitted by the Plan, are set forth below, provided, however, that in the event of any inconsistency between the provisions of this letter agreement and the Plan, the provisions of the Plan shall prevail.

1.Acceptance of Option. The option cannot be exercised unless you sign your name in the space provided on the enclosed copies of this letter agreement and cause one signed copy to be delivered to the Secretary of the Company, 365 West Passaic Street, Rochelle Park, New Jersey, 07662, before 4:30 p.m. Eastern time on the 30th day after the date of grant. If the Secretary does not receive your properly executed copy of this letter agreement before 4:30 p.m. Eastern time on the 30th day after the date of grant, then, anything in this letter agreement to the contrary notwithstanding, the option will be void ab initio and of no effect. (Your signing and delivering a copy of this letter agreement will not commit you to purchase any of the shares that are subject to the option but will evidence your acceptance of the option upon the terms and conditions herein stated.)

2. Exercise.

•Subject to the provisions of this Section 2 and of Sections 4, 5(b), 8(c) and 9, the option shall be exercisable, in integral multiples of 100 shares each, as to 20% of the shares subject to the option on the completion of the first full year after the date of grant and as to an additional 20% of such shares on the completion of each of the next four years. Except as otherwise provided in Section 4, the option shall lapse on the seventh anniversary of the date of grant.

•The option shall not become exercisable unless you shall have remained continuously in the employ or service of the Company or of one or more of its subsidiaries (as defined in the Plan) for at least one year beginning with the date of grant, except as provided in Sections 4 and 9.

3.Transferability of Option. The option shall not be transferable by you otherwise than (i) by will, (ii) by the laws of descent and distribution, or (iii) pursuant to a domestic relations order.

4.Death or Disability. Section 2 to the contrary notwithstanding, if your employment by or service with the Company or a subsidiary terminates by reason of your death or disability (as defined in the Plan), the option will become immediately exercisable in full and non-forfeitable and shall continue to be exercisable for a period of one year from the date of termination.

5. Other Termination of Employment or Service.

•Subject to Section 5(b), if your employment or other service with the Company or a subsidiary terminates otherwise than by reason of your death or disability, the option shall terminate and cease to be exercisable three months after termination, except in the case of termination by the Company for cause (as defined in the Plan), in which case, subject to Section 9, the option shall be forfeited and no longer exercisable.

•Section 2 to the contrary notwithstanding but subject to Section 9, if the Compensation Committee of the Company’s Board of Directors (the “Committee”) determines that you violated a non-competition agreement with the Company in any material respect, the option shall be forfeited at the time the Committee’s determination is made and no shares shall be issued thereafter.

(c)For the purposes of this letter agreement, your employment by a subsidiary of the Company shall be considered terminated on the date that the company by which you are employed is no longer a subsidiary of the Company

6.Listing Requirements. The Company shall not be obligated to deliver any certificates representing shares until all applicable requirements imposed by federal and state securities laws and by any stock exchanges or NASDAQ upon which the shares may be listed have been fully met. No fractional shares will be delivered.

7.Transfer of Employment; Leave of Absence. A transfer of your employment from the Company to a subsidiary or vice versa, or from one subsidiary to another, without an intervening period, shall not be deemed a termination of employment. If you are granted an authorized leave of absence, you shall be deemed to have remained in the employ of the Company or a subsidiary during such leave of absence.

8. Adjustments in Option.

•The existence of this letter agreement and the option shall not affect or restrict in any way the right or power of the Board of Directors or the stockholders of the Company to make or authorize any reorganization or other change in its capital or business structure, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the shares or the rights thereof, the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business.

•In the event of any change in or affecting the outstanding shares by reason of a stock dividend or split, merger or consolidation (whether or not the Company is the surviving corporation), recapitalization, spin-off, reorganization, combination or exchange of shares or other similar corporate changes or an extraordinary dividend in cash, securities or other property, the Board of Directors shall make such amendments to the Plan, this letter agreement and the option and make such adjustments and take actions thereunder as it deems appropriate, in its sole discretion, under the circumstances. Such amendments, adjustments and actions may include, but are not limited to, (i) changes in the number and kind of shares then remaining subject to the option, (ii) changes in the exercise price per share without any change in the aggregate exercise price to be paid therefor upon exercise of the option, and (iii) accelerating the vesting of the option. The determination by the Board as to the terms of any of the foregoing adjustments shall be conclusive and binding.

(c)In the event that changes in the number and kind of shares subject to the option or the exercise price per share referred to in Section 8(b) take effect upon a change in control, you shall have the right (herein called a “limited right”) in lieu of exercising the option to receive cash in lieu of shares equal to the excess of the fair market value of the shares on the date of change in control over the aggregate exercise price, less applicable income tax withholding.

(d)The limited right may be exercised for 10 business days after you first become aware of the change in control by delivering a signed notice of the exercise of the limited right to the Treasury Desk at the home office of the Company or the equivalent at its successor, as the case may be (a fax received there qualifies as delivery). Delivery of a signed notice constitutes your legally binding irrevocable commitment to accept cash in lieu of exercising the option, which shall be cancelled when the cash payment is made to you. Payment by the Company shall be made within seven calendar days after timely delivery of the notice of exercise of the limited right.

9.Change in Control. In the event the option remains outstanding when a change in control of the Company occurs, the option shall automatically become fully exercisable and non-forfeitable, Sections 2 and 5 to the contrary notwithstanding. However, the Committee may provide, at any time prior to the occurrence of a change in control, that the shares that may be issued pursuant to the option shall be cashed out on the basis of a net issuance using the fair market value on the date of the change in control and applicable income tax withholding.

10.Stockholder Rights. Neither you nor any other person shall have any rights of a stockholder as to shares underlying the option until, after proper exercise of the option, such shares shall have been recorded by the Company’s registrar, Continental Stock Transfer and Trust Company (herein called “Continental”), as having been issued or transferred, as the case may be.

11.Notice of Exercise. Subject to the terms and conditions of this letter agreement, the option may be exercised, in whole at any time or in part from time to time in integral multiples of 100 shares each, during the period permitted by the terms of this letter agreement. Options are exercised by delivering a signed Notice of Exercise of Option form to the Treasury Desk at the Home Office (a fax received there qualifies as delivery). Delivery of a signed form constitutes your legally binding irrevocable commitment to purchase the number of shares indicated on the form. In the case of any such delivery by facsimile transmission, the original Notice of Exercise of Option form shall be promptly forwarded by you by hand or mail to the Treasury Desk, but delivery thereof to the Treasury Desk shall not be a condition to exercise of the option and the receipt of the facsimile transmission by the Treasury Desk shall be sufficient therefor. If a properly executed Notice of Exercise of Option form is not received by the Treasury Desk of the Company by the applicable expiration date specified in Sections 2(a), 4 or 5, or if a properly executed notice of exercise of limited right is not received by the Treasury Desk of the Company or the equivalent at its successor by the expiration date specified in Section 8(d), such notice will be deemed void and of no effect. If notice of exercise of the option is given by a person other than you, the Company may require as a condition to exercise of the option the submission to the Company of appropriate proof of the right of such person to exercise the option. Certificates for any shares purchased upon exercise will be issued and delivered as soon as practicable, subject to Section 6.

12. Payment of Exercise Price.

(a) Subject to Section 12(d), payment of the full price per share plus taxes, if applicable, is due by the seventh calendar day after delivery of the Notice of Exercise of Option form. Payment for the shares to be issued is generally made by delivering to the Treasury Desk at the Home Office either a certified or cashier’s check or a check drawn by a stock brokerage firm to the order of United Retail Group, Inc. or stock certificates for shares that you have owned beneficially for at least six months together with a stock power signed in blank (the stock certificates are then cancelled and the shares are placed in the Company’s treasury to complete what is called a “swap.”) A combination of the two payment methods is allowed. Funds may also be delivered by a bank wire to the Company’s account (call the Treasury Desk for bank wire instructions). Shares of Company stock to be used in a swap may also be deposited with Continental electronically by DWAC for transfer to the Company’s treasury stock account (have your stock brokerage firm call the Company’s General Counsel for details).

(b)You may inquire of the Treasury Desk about the total amount due (including Federal, State and local taxes). The Treasury Desk will also advise you of the number of outstanding shares that need to be surrendered for cancellation, if you elect a swap in lieu of cash tender.

(c)If a Registration Statement on Form S-8 is in effect with respect to the option, you can arrange with your stockbroker to have the broker exercise your stock options on your behalf and have the shares withdrawn from Continental electronically by DWAC for deposit in your brokerage account. In that case, it is preferable send the signed Notice of Exercise of Option form to your broker for forwarding to the Treasury Desk with its check rather than sending the Notice directly to the Treasury Desk yourself. (If the stockbroker also sells shares, the transaction is called a “cashless exercise.”)

(d)Section 12(a) to the contrary notwithstanding, in lieu of paying the exercise price, you may direct the Company to satisfy the exercise price payable by withholding shares that would otherwise be issued to you upon exercise of the option having a fair market value equivalent to the exercise price, in which case the Company will issue to you only the net number of shares.

13. Tax Matters.

Before exercising the option, you should consult your tax accountant about tax consequences.

14. Employment.

Nothing contained in this letter agreement shall confer any right to continue in the employ or other service of the Company or a subsidiary or limit in any way the right of the Company or a subsidiary to change your compensation or other benefits or to terminate your employment or other service with or without cause.

15. Short-Swing Trading.

An executive officer of the Company or one of its subsidiaries or a member of the Board of Directors of the Company who exercises an option or whose option is cashed out must report the disposition of the option on a Form 4 Statement of Changes in Beneficial Ownership filed within two trading days with the EDGAR database of the Securities and Exchange Commission. (The General Counsel of the Company will draft the Form 4 on request but the filing is the personal responsibility of the optionholder.) Further, executive officers and Board members should review the Company’s Policy Statement On Insider Trading before making arrangements for the sale of shares to be issued upon exercise of the option, such as a cashless exercise procedure.

16. Recruiting Company Associates.

For a period of ten years after the date of grant set forth above, you shall not, directly or indirectly, (i) induce or attempt to influence any employee of, or consultant under contract with, the Company to leave its employ; or (ii) take an active part in aiding any competitor of the Company or any other person in any attempt to induce or influence any employee of, or consultant under contract with, the Company to leave its employ.

17. Confidential Information.

You shall never use, disclose or divulge, furnish or make accessible to anyone, directly or indirectly, any (i) trade secrets, confidential or proprietary information, and any other non-public knowledge, information, documents or materials, owned, developed or possessed by the Company, whether in tangible or intangible form, and learned or obtained while in the employ of the Company, including, but not limited to, the Company’s research and development operations, identities of employees, business relationships, products (including prices, costs, sales or content), processes, techniques, contracts, financial information or measures, business methods, future business plans, data bases, computer programs, designs, models and operating procedures, and (ii) private information about any of the Company’s other employees learned or obtained while in the employ of the Company (collectively, “Information”), but excluding any Information that shall become generally known to the public or in the trade without violation of this Section 17.

18. Making Disparaging Statements.

Neither you nor the Company shall ever make or authorize any public statement disparaging the other party, provided, however, that neither party shall be restricted in responding to any legal process.

19. Time of Essence.

Time is of the essence of the provisions of this letter agreement with respect to delivering notices and making payments. There is no grace period.

20. Successors.

This letter agreement is binding on your heirs and personal representatives and permitted transferees and on the successors of the Company.

21. Equitable Remedies.

Each party acknowledges and agrees that the other party may be irreparably injured by a breach of this letter agreement by such party and that money damages may be an inadequate remedy for breach of this letter agreement because of the difficulty of ascertaining the amount of damage that may be suffered in the event that this letter agreement is breached. Accordingly, each party agrees that the other party may seek specific performance of this letter agreement and injunctive or other equitable relief as a remedy for any such breach, without proof of actual damages, and further agrees to waive any requirement for the securing or posting of any bond in connection with any such remedy. Such remedy shall not be deemed to be the exclusive remedy for a breach of this letter agreement, but shall be in addition to all other remedies available at law or equity. In the event of litigation relating to this letter agreement, the non-prevailing party (as determined by a court of competent jurisdiction in a final, nonappealable order) will reimburse the prevailing party for its reasonable out-of-pocket expenses (including, without limitation, reasonable out-of-pocket legal fees and expenses) incurred in connection with all such litigation.

22.Counterparts. This letter agreement may be executed in duplicate counterparts each of which shall be determined to be an original.

	Very truly yours, UNITED RETAIL GROUP, INC.
	By
	Chief Executive Officer
I hereby agree to the terms and conditions set forth above and acknowledge that I have received and read a copy of the United Retail Group, Inc. 2006 Equity-Based Compensation and Performance Incentive Plan.
	_________________________________
(please sign your name)	(date stamp of Company Secretary)

EX-31

Exhibit No. 31

CERTIFICATIONS

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT

I, Raphael Benaroya, the registrant’s Chairman of the Board, President and Chief Executive Officer, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of United Retail Group, Inc.;

2. based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. the registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. the registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 7, 2006 /s/ RAPHAEL BENAROYA
Raphael Benaroya

I, George R. Remeta, the registrant’s Chief Administrative Officer and Chief Financial Officer, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of United Retail Group, Inc.;

2. based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. the registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. the registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 7, 2006 /s/ GEORGE R. REMETA
George R. Remeta

EX-32

Exhibit 32

CERTIFICATION

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Quarterly Report of United Retail Group, Inc. (the “Company”) on Form 10-Q for the period ended July 29, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Raphael Benaroya, Chief Executive Officer of the Company, and George R. Remeta, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act, that based on our knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ RAPHAEL BENAROYA

Raphael Benaroya

Chief Executive Officer

September 7, 2006

/s/ GEORGE R. REMETA

George R. Remeta

Chief Financial Officer

September 7, 2006