Faulty garment in shop - exchange now at sale price only?

Could you please advise me with regards to a current problem I am having with a clothes shop.
In July 2006 I purchased a garment for 33 euros. The top frayed and edging came away when I first wore it. I dd not wash the top and returned it to the shop who agreed to send it to their Head Office in the UK to be analysed by a 'garment technologist'. They came back to say that there was a problem with the top. However they could not give me a refund and instead would give me an exchange when I wanted it which I reluctantly accepted.
I was very reluctant to buy anything else from this shop given the quality and this week I went to the shop to use this exchange faciltiy. I was told that the most they can now offer me is 11e which was the last sale price. I refused to accept as I was definitely not advised of any time limit in which to 'exchange'. My query is that this top was not of merchantable quality and therefore could not be re-sold.
Following a further phonecall this morning I have now been informed that the 'exchange' was offered only as a 'gesture of goodwill' and that the top was not faulty!.
Where do I stand in regards to this policy? Initially I accepted unhappily that I could not get a refund and now I can no longer even exchange for the full price of the garment?
Under the Consumer Act 1980 goods must be of a merchantable quality. This garment was not. I realise that this is not for a large sum of money but surely they cannot do this?
Any advice or information would be appreciated.

The price you paid for it is the amount you are entitled to.... sale prices only apply to people who change their mind, not to fauly goods....

If an item is faulty and not fit for the use it was sold for then you are entitled to a full refund.
This battle should have been faught months ago though and I think with the time lapse they may be valid in what they say. IMO,.

from expereince normally the excahnge at last sold price is when you present item to be exchanged without a receipt. Would I be correct? If you can present the receipt most store will refund the full amount

PM1234 said:

In July 2006 I purchased a garment for 33 euros. The top frayed and edging came away when I first wore it. I dd not wash the top and returned it to the shop who agreed to send it to their Head Office in the UK to be analysed by a 'garment technologist'. They came back to say that there was a problem with the top. However they could not give me a refund and instead would give me an exchange when I wanted it which I reluctantly accepted.

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If the garment was faulty and you had proof of purchase (not necessarily a receipt) then you should be entitled to a full refund. If you accepted something else then you may have undermined your entitlement to a full refund.