CHESTER, CONN. -- It lives.

Five months ago the cast and creators of the musical "Annie 2" limped out of Washington, their Broadway opening canceled, their show's collapse fodder for Johnny Carson's monologue. T-shirts distributed to the departing actors, depicting the mop-haired orphan with a blackened eye and one arm in a sling, declared, "We'll Be Back."

It sounded like typical closed-out-of-town bravado. But in a summer workshop produced by the Goodspeed Opera House, a pared-down company -- accompanied by a three-man combo instead of an orchestra, using plywood platforms in place of the $1.5 million worth of sets stored in trailers in Bridgeport -- is indeed performing a drastically revised version of the misfired musical. Call it "Annie Two-and-a-Half."

Over the next couple of weeks, the show's producers will decide whether to resuscitate "Annie 2" for Broadway by raising more capital, scheduling another out-of-town tryout this fall and booking a New York theater this winter. Or whether to extend the workshop here, which may be deemed necessary before they sink more money in a show that's already used up most of its $7 million investment. Or whether to pull out altogether. What was already a risky undertaking -- there's never been a successful sequel to a Broadway musical -- has, since Washington, become an even longer shot.

But director, lyricist and unwavering believer Martin Charnin (who, after all, penned those lines about the sun coming out to-mor-row) says he can already envision the Broadway opening T-shirts. They'll say, "Not since Lazarus."

One evening last week, after playing to a virtually full house in the cozy Norma Terris Theatre (a 200-seat satellite of the larger Opera House in nearby East Haddam), Charnin and writer Thomas Meehan and most of the cast took seats on the stage for an audience "talk-back." Charnin held the latest Annie -- 10-year-old Lauren Gaffney of Summit, N.J. -- on his lap. "My protection," he announced. "So you can't throw things at me."

About 50 people stayed to discuss what they'd liked, and hadn't, about the still-in-progress show. What happened to the evil Miss Hannigan? one man wanted to know. Would a powerhouse like Daddy Warbucks accede without a fight, a woman a few rows back wondered, when a city bureaucrat tries to take away his beloved Annie? Everyone loved the singing and dancing orphans, but where were the now-missing Punjab and The Asp?

Meehan and Charnin listened to the back-talkers, but the fact is they think they already know what went wrong with "Annie 2" and how to fix it. With hindsight, it seems obvious to everyone. The Opera House at the Kennedy Center was too huge a theater; the four-week engagement didn't leave enough time for revisions. Audiences didn't respond to Danielle Findley, the 11-year-old who was cast as Annie after a much-publicized bicoastal talent hunt but has already outgrown the role. "She seemed so unchildlike," Meehan says. "She sang too well. She didn't have any vulnerability."

But all that paled beside the central problem. The first "Annie," which ran for six years on Broadway and made pots of money for all involved, was a sweet and upbeat tale of a little girl's search for a parent. "Annie 2," subtitled "Miss Hannigan's Revenge," focused more on the antics of Annie's comic tormentor than on the plucky tyke herself. And from the first sold-out Washington preview last December, "when the curtain went up on Dorothy Loudon {playing Hannigan} in prison, there was total rejection of that story," Meehan acknowledges. "One hundred percent lack of interest. ... What the audience is telling us is, they want a show like 'Annie,' with the emotions of 'Annie,' that champions family and love, not a satirical crazy comedy about Miss Hannigan."

Learning this was not, needless to say, a pleasant experience. As "Annie 2" floundered in Washington, Meehan thought that with some extra rehearsal time and a month of New York previews, he and Charnin and composer Charles Strouse, already revising feverishly, could turn the show around. Most of the cast assumed that something of that sort would happen. But, Meehan says, "there was a lot of panic, people sort of jumping off the Titanic." Harpooned by critics, the show closed after its month at the Opera House.

The cast responded with "shock and mourning," remembers actor Scott Robertson, who played a hairdresser named Maurice. "It was one of the most painful times in my life."

No one felt worse than Meehan, who "went from being a hero to an instant bum," he says. "I felt awful. People got their kids all dressed up for a Christmas treat, and they were so disappointed."

On March 1, the rainy night on which "Annie 2" was to have had its New York premiere, the cast consoled itself with a would-have-been-opening-night party at a restaurant in the Theater District. "We just laughed and ordered cheeseburgers and had a good time," says actor Laurent Giroux. By then they knew that a workshop production was in the works, but not who would be invited to join it.

There had been talk in Washington, as nearly $4 million in advance ticket orders was being returned to theatergoers, of reviving the original "Annie." But very quickly, the creative team and producers decided instead to return to Goodspeed, where the first "Annie" had been incubated in 1976. It's a comparatively cheap place to experiment: 11 weeks of rehearsal and performances will cost about $400,000, with half that amount covered by ticket sales, and Goodspeed and the producers picking up the shortfall. A similar stint in New York would cost several times as much.

So "Annie 2" is back on the boards, the actors housed in an inn a few miles down the road, earning half the salaries they got as members of a Broadway-bound company, performing a play that, at last reckoning, retains only two of the songs and maybe 10 percent (maybe less) of the dialogue that they learned for Washington. All musicals evolve, but this one must be setting some sort of record for change. The cast suffers occasional flashbacks; people lapse into some since-discarded line or say the wrong character name. "I get a different lyric every other day," Robertson, now playing Drake the butler, reports. "We get a new script every week... . I must have 20 'Annie' scripts piled up."

About all that survives from earlier versions of the plot is the device of Daddy Warbucks looking for a wife in order to keep Annie. Otherwise, it's a whole new show. It's warmer and cuddlier and getting more so; it's also, in several senses, smaller.

The company of 42 humans and two dogs has been halved. There's a new choreographer. Dorothy Loudon's gone -- a markedly diminished role for Hannigan was of little interest to the star -- and subsequently, Hannigan was also dematerialized, shipped off to Bolivia by Warbucks. Helen Gallagher, a two-time Tony winner, is replacing Loudon as female lead. Marian Seldes, who was making her musical debut after decades in the theater, formerly played a patrician congresswoman and didn't have a musical number; now she's a Bronxy-sounding child welfare official who has two. She's been taking singing lessons. (And she married Garson Kanin, mid-workshop.) Harve Presnell is again playing Daddy; he says he never stopped shaving his head, confident that the show would in fact go on.

Most of the cast members asked to return did, gladly, in some cases giving up more lucrative jobs. "This feels like an investment; I'm investing my time, my work, my money," Robertson says. In return, "I want all those wonderful things back, the things you get with a Broadway show. A nice long healthy run, a paycheck that's comparable to earning a living, the joy of being in a hit."

If "Annie 2" does go forward, it will not be the extravaganza originally planned. Even the necessary addition of six or seven singer-dancers will make for a company that's 15 salaries cheaper. There won't be big production numbers like "Coney Island." The sets, which designer David Mitchell is mulling over, will probably be less elaborate and more portable, since the show could have several engagements out of town, probably including Boston and probably not including Washington.

With virtually all the show's investors remaining in the limited partnership, about $2 million remains of the $7 million originally raised, according to producer Lewis Allen. Bringing a simpler "Annie 2" to Broadway might cost as little as $2.5 million (by Allen's estimate) or as much as $4.5 million (by Meehan's), but in any case wouldn't require the arduous fund-raising that was underway at about this time last year.

All parties are permitting themselves a bit of optimism. Or more than a bit: Presnell's been telling friends who ask about his plans that he expects to play Daddy for five years on Broadway and then do the movie. The idea of gracefully accepting defeat does not seem to have much appeal in these quarters.

Charnin, even as the tryout was teetering, was thinking ahead to the annually published volume called "Best Plays." "I didn't want to be in the wrap-up of the season as only a musical that closed out of town and, like all musicals that close out of town, promised to 'go back to the drawing board,' " he says, sitting on the edge of the stage during a break in rehearsals. "When 'Best Plays '89-90' comes out, it's going to say, 'closed in Washington after a four-week engagement' -- semicolon -- 'but' -- and that 'but' is very important to me -- 'went back into workshop at Goodspeed.' A small life is better than a death."