<PAGE>      1


                       SECURITIES AND EXCHANGE COMMISSION

                                WASHINGTON DC 20549

                                     FORM 10-Q

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

                    For quarterly period ended October 31, 1998

                                       OR

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

                         For the transition period from To

Commission File No. 0-17870

                                 LECHTERS, INC.

               (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                      NEW JERSEY                        No. 13-2821526
(STATE OR OTHER JURISDICTION OF INCORPORATION)          (I.R.S. EMPLOYER
                                                        IDENTIFICATION NO.)

1 Cape May Street, Harrison, NEW JERSEY                 07029-2404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

Registrant's telephone number, including area code:   (973) 481-1100


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
during  the  preceding  12  months,  and (2) has  been  subject  to such  filing
requirements for the past 90 days.



                             YES     X  NO
                                    ----     ---


The number of shares of the Registrant's common stock, without par value,
outstanding at December 10, 1998: 17,176,286:


<PAGE> 2


                          LECHTERS, INC. AND SUBSIDIARIES
                                     FORM 10-Q
                       FOR QUARTER ENDED OCTOBER 31, 1998
                                       INDEX

                                                                        PAGE NO.
PART I.  Financial Information

         Item 1.  Financial Statements

                  Consolidated Balance Sheets
                  October 31, 1998 and January 31, 1998                        1

                  Consolidated Statements of Income  
                  for the Thirteen and Thirty-Nine Weeks Ended 
                  October 31, 1998 and November 1, 1997                        2

                  Consolidated Statements of Cash Flows
                  for the Thirty-Nine Weeks Ended
                  October 31, 1998 and November 1, 1997                        3

                  Consolidated Statement of Shareholders'
                  Equity for the Thirty-Nine Weeks Ended
                  October 31, 1998                                             4

                  Notes to Consolidated Financial Statements                 5-6

        Item 2.   Management's Discussion and Analysis of
                  Financial Condition and Results of Operations              6-9

PART II. Other Information

         Item 6.  Exhibits and Reports on Form 8-K                            10



--------------------------------------------------------------------------------
                               SAFE HARBOR STATEMENT
             UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

In  connection  with  the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform  Act of 1995  (Reform  Act),  the  Company  is hereby  filing
cautionary  statements  identifying  important  factors  that  could  cause  the
Company's   actual  results  to  differ   materially  from  those  projected  in
forward-looking  statements  (as such term is defined in the Reform Act) made by
or on  behalf  of the  Company  in  this  quarterly  report  on  Form  10-Q,  in
presentations,  in response to  questions  or  otherwise.  Any  statements  that
express, or involve discussions as to expectations,  beliefs, plans, objectives,
assumptions or future events or performance (often, but not always,  through the
use  of  words  or  phrases  such  as  "anticipates",  "believes",  "estimates",
"expects",  "intends",  "plans",  "predicts",  "projects", "will likely result",
"will continue",  or similar expressions) are not statements of historical facts
and may be forward-looking.


<PAGE> 3


Forward-looking statements involve estimates, assumptions, and uncertainties and
are  qualified in their  entirety by reference to, and are  accompanied  by, the
following   important   factors,   which  are  difficult  to  predict,   contain
uncertainties,  are  beyond  the  control of the  Company  and may cause  actual
results to differ materially from those contained in forward-looking statements:

-  economic and  geographic factors  including  political and economic  risks;
-  changes in and compliance  with  environmental  and safety laws and policies;
-  weather  conditions;  
-  population  growth  rates and  demographic  patterns;  
-  competition for retail customers; 
-  Year 2000 issues; 
-  market demand, including structural  market  changes;  
-  changes in tax rates or policies or in rates of inflation; changes in project
   costs;
-  unanticipated  changes in  operating  expenses  and capital  expenditures;  
-  capital market conditions; 
-  legal and administrative proceedings (whether civil or criminal) and 
   settlements that influence the business and profitability of the Company.

Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any  forward-looking
statement  to  reflect  events or  circumstances  after  the date on which  such
statement is made or to reflect the  occurrence  of  unanticipated  events.  New
factors  emerge  from  time to time and it is not  possible  for  management  to
predict all of such factors,  nor can it assess the impact of any such factor on
the business or the extent to which any factor,  or combination of factors,  may
cause results to differ  materially from those contained in any  forward-looking
statement.
--------------------------------------------------------------------------------


<PAGE> 4


PART I.      Financial Information


                         LECHTERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
           (Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
                                                    October 31,      January 31,
                                                        1998             1998   
  <S>                                               <C>                <C>      
                  A S S E T S                       (unaudited)
  Current Assets:
      Cash and Cash Equivalents                        $1,612          $  16,395
      Marketable Securities                            52,586             74,747
      Accounts Receivable                              12,276              5,084
      Merchandise Inventories                         129,909             99,034
      Prepaid Expenses                                  7,668              2,145
                                                        -----              -----

      Total Current Assets                            204,051            197,405
  Property and Equipment:
      Fixtures and Equipment                           59,276             58,841
      Leasehold Improvements                           97,675             94,556
                                                       ------            -------
                                                      156,951            153,397
      Less Accumulated Depreciation &                  88,227             79,891
        Amortization                                   ------          ---------

      Net Property and Equipment                       68,724             73,506
  Other Assets                                          8,976              6,523
                                                        -----          ---------
  Total Assets                                       $281,751           $277,434
                                                     ========           ========

      LIABILITIES AND SHAREHOLDERS' EQUITY
  Current Liabilities
      Accounts Payable                                $23,800          $  10,127
      Dividends Payable - Preferred Stock                   0              1,010
      Salaries, Wages and Other Accrued Expenses       20,012             18,102
      Taxes, Other Than Income Taxes                    2,194              1,227
      Income Taxes Payable                              1,076              2,941
                                                        -----             ------

      Total Current Liabilities                        47,082             33,407
  Long-term Debt
      5% Convertible Subordinated Debentures
      due September 27, 2001 (Net of Unamortized
      Discount of $4,085 and $4,999, respectively)     60,915             60,001
                                                       ------         ----------

      Total Long-Term Debt                             60,915             60,001

  Deferred Income Taxes and Other Deferred Credits     18,994             18,176
  Shareholders' Equity:
      Convertible Preferred Stock, $100 Par Value
       Authorized 1,000,000 Shares,
      Issued and Outstanding - Series A - 149,999
      Shares; Series B - 50,001 Shares                 20,000             20,000
      Common Stock, No Par Value,
         Authorized 50,000,000 Shares,
         Issued and Outstanding
         17,176,286 and 17,174,286, respectively           58                 58
      Unrealized Holding Gain on Available
         for Sale Securities                              232                 84
      Additional Paid-in Capital                       62,380             62,370
      Retained Earnings                                72,090             83,338
                                                       ------          ---------
      Total Shareholders' Equity                      154,760            165,850
                                                      -------          ---------

  Total Liabilities and Shareholders' Equity         $281,751           $277,434
                                                     ========           ========
  </TABLE>
          See accompanying notes to consolidated financial statements.

                                     - 1 -

<PAGE> 5


                         LECHTERS, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
           (Amounts in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                               Thirteen Weeks Ended         Thirty-Nine Weeks Ended
                                               --------------------         -----------------------
                                              October 31,   November 1,    October 31,   November 1,
                                                 1998          1997           1998         1997
                                                 ----          ----           ----         ----
                                                     (unaudited)                 (unaudited)
<S>                                           <C>           <C>             <C>           <C>
Net Sales                                     $  95,682     $  99,711       $ 273,298    $279,954
Cost of Goods Sold (including
   occupancy and indirect costs)                 72,894        74,902         207,292     212,320
                                              ---------     ---------       ---------     -------

      Gross Profit                               22,788        24,809          66,006      67,634

Selling, General and
   Administrative Expenses                       28,948        27,989          85,176      83,372
                                              ---------     ---------       ---------     -------
Operating Loss                                   (6,160)       (3,180)        (19,170)    (15,738)
Other Expenses (Income):
    Interest Expense                              1,121         1,153           3,343       3,433
    Interest Income                                (770)         (412)         (3,109)     (1,718)
    Net Investment
      (Gain/Income) Loss                           (118)         (131)           (339)       (175)
                                              ---------     ---------       ---------     -------

Total Other Expenses (Income)                       233           610            (105)      1,540
                                              ---------     ---------       ---------     -------

Loss Before Income Taxes                         (6,393)       (3,790)        (19,065)    (17,278)

Income Tax Benefit                               (2,621)       (1,554)         (7,817)     (7,084)
                                              ---------     ---------       ---------     -------

Net Loss                                         (3,772)       (2,236)        (11,248)    (10,194)

Preferred Stock Dividend Requirement                253           253             758         758
                                              ---------     ---------       ---------     -------

Net Loss Applicable to Common
  Shareholders                                ($  4,025)    ($  2,489)      ($ 12,006)   ($10,952)
                                              =========     =========       =========     =======

Net Loss Per Common Share - Basic             ($   0.23)    ($   0.15)      ($   0.70)   ($  0.64)
                                              =========     =========       =========     =======

Net Loss Per Common Share - Diluted           ($   0.23)    ($   0.15)      ($   0.70)   ($  0.64)
                                              =========     =========       =========     =======

Weighted Average Common Shares
   Outstanding - Basic                       17,176,000    17,155,000      17,176,000   17,155,000
                                             ==========    ==========      ==========   ==========

Weighted Average Common Shares
   Outstanding - Diluted                     17,176,000    17,155,000      17,176,000   17,155,000
                                             ==========    ==========      ==========   ==========
</TABLE>
             See accompanying notes to consolidated financial statements.

                                        - 2 -

<PAGE> 6


                          LECHTERS, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Amounts in thousands)

<TABLE>
<CAPTION>
                                                       Thirty-Nine Weeks Ended
                                                      October 31,   November 1, 
                                                         1998          1997
                                                        -----          ----
                                                           (unaudited)
<S>                                                   <C>            <C>
Cash Flows From Operating Activities:
   Net Loss                                           ($11,248)      ($10,194)

Adjustments to Reconcile Net Loss to Net
   Cash Used In Operating Activities:
   Depreciation and Amortization                        12,455         13,445
   Deferred Rent                                           694            694
   Other                                                   641            611

Changes in Assets and Liabilities:
   Increase in Accounts Receivable                      (7,192)        (8,919)
   Increase in Merchandise Inventories                 (30,875)       (40,505)
   Increase in Prepaid Expenses                         (5,523)        (2,955)
   Increase in Accounts Payable,
     Accrued Expenses and Taxes Other
     Than Income Taxes                                  16,550         27,423
   Decrease in Income Taxes Payable                     (1,865)        (1,180)
   Increase in Other Assets                             (3,305)        (2,454)
                                                       --------       --------

   Net Cash Used In Operating Activities               (29,668)       (24,034)

Cash Flows From Investing Activities:
   Capital Expenditures                                 (6,526)        (3,453)
   Decrease in Available for Sale Securities            22,411         25,376
                                                      --------       --------

   Net Cash Provided by Investing Activities            15,885         21,923

Cash Flows From Financing Activities:
   Payment of Preferred Stock Dividend                  (1,010)        (1,010)
   Exercise of Stock Options                                10             --
                                                      --------       --------

   Net Cash Used In Financing Activities                (1,000)        (1,010)
                                                      --------       --------

Net  Decrease  in Cash and Cash Equivalents            (14,783)        (3,121)

Cash and Cash Equivalents, Beginning of Period          16,395          7,022
                                                      --------       --------

Cash and Cash Equivalents, End of Period              $  1,612       $  3,901
                                                      ========       ========

Supplemental Disclosure of Cash Flows Information:

Cash Paid During the Period for:
   Interest                                           $  2,769       $  3,378
                                                      ========       ========

   Income Taxes                                       $  2,289       $  2,061
                                                      ========       ========
</TABLE>


          See accompanying notes to consolidated financial statements

                                      - 3 -

<PAGE> 7


                         LECHTERS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                         Common   Preferred  Additional              Unrealized
                         Stock     Stock      Paid-In    Retained    Holding
                         Issued    Issued     Capital    Earnings   (Loss)Gain    Total

<S>                       <C>     <C>        <C>         <C>           <C>       <C>
Balance,
   January 31, 1998       $58     $20,000    $62,370     $83,338       $ 84      $165,850

Net Loss Thirty-Nine
  Weeks Ended
  October 31, 1998         --          --         --     (11,248)        --       (11,248)

Unrealized
  Holding Gain
  Adjustment               --          --         --          --        148           148

Exercise of Stock           -           -         10           -           -           10
Options                -------   --------    -------    --------    --------   ----------


Balance, October 31,
1998                      $58     $20,000    $62,380    $ 72,090        $232    $ 154,760
(unaudited)               ===     =======    =======    ========    ========    =========

</TABLE>



          See accompanying notes to consolidated financial statements.


                                       - 4 -

<PAGE> 8


                          LECHTERS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)


1.    GENERAL

      The accompanying  unaudited  Consolidated  Financial  Statements have been
      prepared  in  accordance  with the  instructions  for Form 10-Q and do not
      include all the information and footnotes  required by generally  accepted
      accounting principles for complete financial statements. In the opinion of
      management,  all  adjustments  (consisting of normal  recurring  accruals)
      considered necessary for a fair presentation for interim periods have been
      included.  Certain information and footnote  disclosures normally included
      in financial  statements  prepared in accordance  with generally  accepted
      accounting principles have been condensed or omitted. It is suggested that
      these condensed  consolidated  financial statements be read in conjunction
      with the audited  financial  statements and the notes thereto  included in
      the  Company's  Annual  Report on Form 10-K for the year ended January 31,
      1998.

      The Company's results of operations for the thirteen and thirty-nine weeks
      ended  October 31, 1998 are not  necessarily  indicative  of the operating
      results for the full year.

      Certain  reclassifications  have been made to the financial  statements of
      the prior year to conform with the classifications used for Fiscal 1998.

2.    NET LOSS PER SHARE

      "Basic"  net loss per  share  data were  computed  by  dividing  net loss,
      reduced by the Convertible  Preferred Stock Dividend  requirement,  by the
      weighted average number of common shares  outstanding  during the thirteen
      and  thirty-nine  weeks ended October 31, 1998 and November 1, 1997.  With
      respect to "diluted" net loss per share, stock options which are potential
      common  shares,  were  excluded from the weighted  average of  outstanding
      shares because  inclusion would reduce the loss per share. With respect to
      the Company's 5%  Convertible  Subordinated  Debentures  and the Company's
      Convertible Preferred Stock, for the purpose of computing diluted net loss
      per share,  the assumed  conversion of such  debentures and such preferred
      stock would each have an  anti-dilutive  effect on diluted  loss per share
      for the thirteen and thirty-nine weeks ended October 31, 1998 and November
      1, 1997.

                                       - 5 -
<PAGE> 9


3.    COMPREHENSIVE INCOME (LOSS)

      In June, 1997, the Financial  Accounting  Standards Board issued Statement
      of Financial Accounting Standards (SFAS) No.130,  "Reporting Comprehensive
      Income."  As required  by SFAS  No.130 the  following  is a summary of the
      Company's comprehensive income (loss):


                                                       Thirty-Nine Weeks Ended  
                                                      October 31,    November 1,
                                                         1998           1997    
                                                        ----            ----    
      Net  Loss                                       ($11,248)      ($10,194)  

      Components of Comprehensive (Loss) Income:

      Unrealized Holding (Loss) Gain on Available
        For Sale Securities - Net of Applicable
        Income Tax Benefit/Expense                         148             31   
                                                           ---            ---   
       Comprehensive Loss                             ($11,100)      ($10,163)  
                                                      ========       ========   


4.    RECENT ACCOUNTING PRONOUNCEMENTS

      The  Financial   Accounting   Standards  Board  issued  SFAS  No.  131,  "
      Disclosures  about  Segments of an  Enterprise  and Related  Information",
      effective for fiscal years  beginning after December 15, 1997. As provided
      by SFAS No. 131,  disclosures  are not required for interim periods of the
      initial year of application,  but comparative information will be reported
      in  financial  statements  for interim  periods  during the second year of
      application.

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

THIRTEEN  WEEKS ENDED OCTOBER 31, 1998 IN COMPARISON  WITH THIRTEEN  WEEKS ENDED
NOVEMBER 1, 1997.

Net sales for the thirteen weeks ended October 31, 1998 decreased  $4,029,000 to
$95,682,000, a decrease of 4.0% compared to the comparable period of Fiscal Year
1997. The decrease was primarily  attributable to the reduction in the number of
stores in operation which averaged 26 fewer than the number of stores during the
comparable  period of Fiscal Year 1997.  The  reduction  in the number of stores
reflects the Company's strategy to improve the quality of its store locations by
upgrading to better performing sites. Lechters Housewares(R) store sales for the
third quarter  decreased  3.8% to  $72,451,000  while Famous  Brands  Housewares
Outlet(R) sales declined 4.6% to $23,231,000. On a comparable store basis, sales
for the Company  declined 2.0%.  Lechters  Housewares(R)  comparable store sales
decreased  1.3% for the quarter and Famous Brands  Housewares  Outlet(R)  stores
decreased 4.3%. During the third quarter of Fiscal Year 1998, the Company opened
7 stores and closed 5 increasing  the stores in operation at October 31, 1998 to
614 from the 612 in operation at the beginning of the second quarter. There were
642 stores in operation at November 1, 1997.

                                        - 6 -
<PAGE> 10


Gross Profit for the third quarter was  $22,788,000  or 23.8% of sales,  and was
$2,021,000 and 1.1 percentage  points,  as a percent of sales,  lower than gross
profit for the third  quarter of Fiscal Year 1997.  The sales  decrease  was the
primary  reason for the decrease in gross profit.  Additional  price  reductions
related to the "off-price" and "special buy" initiatives partially offset by the
reduction in occupancy costs related to fewer stores in operation,  was the most
significant factor with respect to the gross profit rate decrease.

Selling,  General and Administrative  Expenses increased $959,000 to $28,948,000
or 30.3% of sales, and were 2.2% percentage  points higher than the expense rate
for the third quarter of Fiscal Year 1997.  While store operating  expenses with
the  exception  of payroll  were  reduced  from the prior year,  expenses in the
Service Office were higher  reflecting the continued  increased payroll costs in
the  merchandise  department and in  information  technology in support of a new
infra-structure and other initiatives including Year 2000 compliance.

Other (Income)/Expense for the quarter was an expense of $233,000 or 0.2% of net
sales,  and was  $377,000  and 0.4  percentage  points  below the amount for the
comparable period last year.  Interest expense was virtually  equivalent to last
year's  amount while  interest  and  investment  income and gains were  $345,000
higher for the third  quarter  versus the  comparable  period  last year.  As of
October 31, 1998  Marketable  Securities  classified  as available for sale were
$52,586,000  which was  $23,824,000  higher than at November 1, 1997,  and there
higher balances produced the increased interest and investment related income.

THIRTY-NINE WEEKS ENDED OCTOBER 31,1998 IN COMPARISON WITH THIRTY-NINE WEEKS
ENDED NOVEMBER 1, 1997

Net sales for the thirty-nine weeks ended October 31, 1998 decreased  $6,656,000
to $273,298,000,  a 2.4% decrease from the comparable thirty-nine week period of
Fiscal Year 1997.  The sales decrease was primarily due to the reduced number of
stores in operation  during Fiscal Year 1998 which on average had 29 fewer store
locations in operation  during Fiscal Year 1998 versus the comparable  period of
Fiscal  Year  1997.  Sales  for  the  Company's  Lechters  Housewares(R)  stores
decreased  1.4% to  $209,780,000  and  sales  for the  Company's  Famous  Brands
Housewares Outlet(R) stores decreased 5.5% to $63,518,000. On a comparable store
basis,  sales for the Company  decreased  0.1% with the  Lechters  Housewares(R)
stores increasing 1.4% and Famous Brands Housewares  Outlet(R) stores decreasing
5.0%.  Year-to-date,  the  Company has opened 14 stores and has closed 26 stores
reducing  the  stores in  operation  from 626 at January  31,  1998 to 614 as of
October 31, 1998. There 642 stores in operation at November 1, 1997.

Gross Profit for the  thirty-nine  week period ended October 31, 1998  decreased
$1,628,000 to $66,006,000.  At 24.2% of sales, the gross margin rate equaled the
rate for the  comparable  period of Fiscal  Year  1997.  While  increased  price
reductions  related to the Company's  emphasis on "off-price"  and "special buy"
programs decreased the gross profit rate, the decrease was offset by the reduced
occupancy costs related to the fewer stores in operation.

                                      - 7 -

<PAGE> 11


Selling, General and Administrative Expenses increased $1,804,000 to $85,176,000
and at 31.2% of net sales,  were 1.4 percentage  points higher than the rate for
the  comparable  period of Fiscal  Year  1997.  As  mentioned  for the  previous
quarters, the expense trends are similar with store operating expenses, with the
exception of payroll,  reduced due to fewer stores in operation  than last year.
Service  Office  expenses have increased due to additional  resources  needed to
support  the "off  price"  and  "special  buy"  strategies  and to  support  the
information technology initiatives including Year 2000 compliance.

Year to date net other expense (income) was an income of $105,000  compared to a
net expense of  $1,540,000  for the  comparable  thirty-nine  week period of the
prior fiscal year.  Interest expense decreased $90,000 while interest income and
investment  income and gains increased  $1,555,000 over the comparable period of
the prior fiscal year.  Higher invested  balances in marketable  securities have
produced the increased interest and investment income.

YEAR 2000

The Year 2000 ("Y2K") issue is primarily the result of computer  programs  using
two digits  instead of four digits to indicate the year.  The Company  initiated
its Year 2000  compliance  project  during Fiscal Year 1997 with a review of all
existing information technology ("IT") software systems.

In Fiscal Year 1996,  prior to the recognition of the Year 2000 as a significant
business risk, in the normal course of business, the Company identified key core
systems which needed to be replaced. A new financial suite including modules for
general ledger, accounts payable and fixed assets was installed at the beginning
of the current fiscal year.  Additional modules are being installed for use with
the start of Fiscal Year 1999. A new merchandise  inventory analysis and control
system  is also  scheduled  for  replacement  prior to the Year  2000.  The core
software  package is currently being installed  during Fiscal Year 1998. The new
core merchandise  systems are scheduled to be operational  during the first half
of Fiscal Year 1999.  Finally,  the Company has also contracted to install a new
warehouse management system which is in the early stages of development and will
be  implemented  prior to the  commencement  of the Year 2000.  All three  major
systems  acquisitions have been certified Year 2000 compliant.  All new software
to be  acquired by the Company  will be  required to be  certified  as Year 2000
compliant.

The Company has recently  established  a Year 2000  Compliance  Task Force whose
charter is to review all of the  Company's  efforts to ensure  that the  Company
will  be  Year  2000  compliant  prior  to  December  31,  1999.   Comprised  of
representatives  from  Information   Technology,   Operations,   Finance,   Loss
Prevention,  Merchandising and Human Resources,  the task force is reviewing all
potential  Year 2000  issues.  The Y2K Task  Force's  initial  focus has been to
review steps taken to date  primarily in the IT area.  Currently in process is a
survey of merchandise vendors specifically regarding Electronic Data Interchange
("EDI") issues.

The Y2K Task  Force has also  commenced  its  review of  non-IT  related  issues
involving  equipment  with  embedded  technology  which  may  not be  Year  2000
compliant. This phase of the project will be complete early in the first quarter
of Fiscal Year 1999.

The second phase of the Year 2000 compliance project involves a questionnaire, a
draft of which is currently  being  reviewed  and edited,  to be sent to all the
Company's  vendors,  suppliers,  landlords  and  outside  service  providers  to
determine the degree of Year 2000 readiness with respect to these parties.

                                        - 8 -
<PAGE> 12


With the evaluation of the  questionnaire  results,  the third phase of the Year
2000   compliance   project  will  focus  on  evaluating   the  results  of  the
questionnaire,  reviewing  the  results  of  the  non-IT  equipment  survey  and
verifying IT software surveys previously conducted.  Based on the above process,
the Y2K Task Force will  develop  before the end of the first  quarter of Fiscal
Year  1999,  a final Year 2000  remediation  plan to be  completed  by the third
quarter of Calendar Year 1999. If deemed necessary, third party consultants will
be engaged to evaluate and/or assist in the completion of the plan.

The final two phases of the Year 2000 remediation plan involve the establishment
of  contingency  plans  scheduled for  development  during the second quarter of
Fiscal Year 1999 and the  development of a worst case scenario.  The development
of a "worst case"  scenario  will be based on the  assessment  of the  Company's
readiness and the readiness of its key vendors,  major suppliers,  landlords and
key service  suppliers.  Given the fact that the Company operates a large number
of stores which are geographically  dispersed and has a large supplier base, the
Company's  initial  evaluations to date indicates that these two conditions will
tend to  mitigate  potential  adverse  impacts  of the Year  2000  issues.  This
evaluation,  however, is based on certain expectations and assumptions which may
ultimately prove to be inaccurate.

The cost of the software  purchased  for the major  systems as  described  above
approximates  $3,700,000.  Future costs of new  software  for major  systems are
estimated to be  $1,300,000  for the  completion  of the  merchandise  inventory
analysis and control system and $1,200,000  for a warehouse  management  system.
Costs  of  compliance  such as  hardware  upgrades,  equipment  replacement  and
miscellaneous  software  are  currently  under  study by the  Company.  Costs of
re-training or modifications to existing  programs will be expensed as incurred.
It is anticipated that funds for Year 2000 compliance costs will be generated by
internal sources.

LIQUIDITY AND CAPITAL RESOURCES.

Cash, cash  equivalents and marketable  securities  increased  $21,535,000  over
their combined balances at the close of the third quarter of Fiscal Year 1997.

Cash flow during the  thirty-nine  weeks ended  October 31, 1998 as reflected on
the Statements of Cash Flows, was a net decrease of cash and cash equivalents of
$14,783,000.  Operating  activities,  which  are  comprised  of the net  loss of
$11,248,000 adjusted for non-cash expenses such as depreciation and amortization
and changes in operating assets, utilized $29,668,000 of cash during Fiscal Year
1998 to date.  Significant components of operating cash flow for the thirty-nine
weeks ended  October 31,  1998  included  depreciation  and  amortization  which
provided cash of $12,455,000, merchandise inventories which increased, utilizing
cash of $30,875,000,  accounts  receivable and prepaid expenses which increased,
utilizing cash of $7,192,000 and $5,523,000, respectively, and accounts payable,
accrued  expenses and taxes other than income taxes which increased and provided
cash of $16,550,000.  Total  merchandise  inventories were $11,038,000  lower at
October  31,  1998 than at  November  1,  1997.  Investing  activities  provided
$15,885,000 as the Company's capital  expenditures  utilized  $6,526,000 of cash
while the $22,411,000 reduction in marketable securities provided cash.

Capital  expenditures  to date of $6,526,000  were for the  construction  of and
fixtures for new and relocated  stores,  store  renovations and remodels and for
computer  hardware  upgrades  and  additions.   Financing   activities  utilized
$1,000,000 of cash as the Company paid the dividend on the convertible preferred
stock of $1,010,000 and the exercise of stock options provided $10,000.

                                        - 9 -
<PAGE> 13


During  the first  quarter  of  Fiscal  1998,  the  Company  entered  into a new
$40,000,000  Credit  Agreement with a syndicate of banks led by Chase  Manhattan
Bank to replace the existing  credit  facility  which was to expire in May 1998.
The new facility  consists of a $20,000,000 line of credit for direct borrowings
and a  $20,000,000  line for the issuance of letters of credit.  The term of the
new agreement is for three years, with the letter of credit component  renewable
annually during that period.

Item 6-Exhibits and Reports on Form 8-K

a.     Exhibits.

3.1      Restated  Certificate  of  Incorporation  of the Company (Incorporated 
         herein by  reference  to  Exhibit  3.2 to the  Company's  Registration 
         Statement on Form S-1 File No.33-29465(the "Registration Statement")). 

3.2      By-laws of the Company (Incorporated herein by reference to Exhibit 3.2
         to the Company's Registration Statement on Form S-1 File No.33-40372). 

4.1      Preferred Stock Purchase Agreement dated April 5, 1996.  (Incorporated 
         herein by reference to the  Company's  Annual  Report on Form 10-K for 
         the year ended February 1, 1997).

4.2      Indenture,  dated as of September  27,  1991,  between the Company and 
         Chemical  Bank, as Trustee.  (Incorporated  herein by reference to the 
         Company's  Annual  Report on Form 10-K for the year ended  January 25, 
         1992).

27       Financial Data Schedule

b. No reports on Form 8-K were filed.


                                   SIGNATURES


Pursuant  to the  requirements  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.


                                 LECHTERS, INC.

                                    By:   /s/ James J. Sheppard   
                                          James J. Sheppard
                                          Senior Vice President and
                                          Chief Financial Officer
Date: December 10, 1998

                                      - 10 -