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 May 5, 2001

                                       OR

   | | TRANSACTION 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.
                    (Debtor-in-Possession as of May 21, 2001)
             (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 June 26, 2001: 15,334,986:



<PAGE>


                         LECHTERS, INC. AND SUBSIDIARIES
                   (DEBTORS-IN-POSSESSION AS OF MAY 21, 2001)
                                    FORM 10-Q
                          FOR QUARTER ENDED MAY 5, 2001
                                      INDEX


PART I. Financial Information                                           Page No.
        ---------------------                                           --------

        Item 1.       Financial Statements

                      Consolidated Balance Sheets at
                      May 5, 2001 and February 3, 2001                     1

                      Consolidated Statements of Operations
                      for the Thirteen Weeks Ended May 5, 2001             2

                      Consolidated Statements of Cash Flows
                      for the Thirteen Weeks Ended May 5, 2001             3

                      Consolidated Statement of Shareholders'
                      Equity for the Thirteen Weeks Ended
                      May 5, 2001                                          4

                      Notes to Consolidated Financial Statements           5-10

        Item 2.       Management's Discussion and Analysis of
                      Financial Condition and Results of Operations        10-14

        Item 3.       Quantitative and Qualitative Disclosures About
                      Market Risk                                          14

PART II.Other Information
        -----------------

        Item 6.       Exhibits and Reports on Form 8-K                     15

<PAGE>


Part. I  Financial Information
Item 1.  Financial Statements

                         LECHTERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                            (DEBTORS-IN-POSSESSION)
           (Amounts in thousands, except share and per share amounts)

                                                 May 5, 2001    February 3, 2001
                                                 -----------    ----------------
                                                 (unaudited)
         ASSETS

Current Assets:
     Cash and cash equivalents                   $    5,356     $     3,235
     Accounts receivable                              2,708           1,706
     Merchandise inventories                         67,566          82,299
     Prepaid expenses and other current assets        6,736           2,242
                                                  ---------      ----------

               Total Current Assets                  82,366          89,482

Property and equipment:
     Fixtures and equipment                          45,918          53,783
     Leasehold improvements                          73,754          86,915
                                                  ---------      ----------
                                                    119,672         140,698
     Less accumulated depreciation and
     amortization                                    81,729         101,469
                                                  ---------      ----------
     Net Property and equipment                      37,943          39,229

     Other Assets                                    14,018          13,778
                                                  ---------      ----------

               Total Assets                      $  134,327     $   142,489
                                                  =========      ==========


         LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     5% Convertible subordinated debentures due
     September 27, 2001 (net of unamortized
     discount of $348 and $562,
     respectively)                                   36,562          36,348
     Accounts payable                                12,163           6,479
     Dividends payable-preferred stock                  - -           1,010
     Salaries, wages and other accrued expenses      17,965          19,488
     Estimated restructuring liabilities             15,450          16,336
     Taxes, other than income taxes                   1,375           2,085
                                                  ---------      ----------

               Total Current Liabilities             83,515          81,746

Long-Term Debt
     Borrowings under revolving credit facility      27,830          10,908
                                                  ---------      ----------

Total long-term debt                                 27,830          10,908

Deferred income taxes and other deferred credits      9,072           9,197

Shareholders' Equity:
     Convertible preferred stock, $100 par value
          authorized 1,000,000 shares issued and
          outstanding Series A- 149,999 shares
          and Series B-50,001 shares                 20,000          20,000
     Common stock, no par value, authorized-
          50,000,000 shares, issued, 17,176,286
          shares and 17,176,286 shares,
          respectively                                   58              58
     Accumulated other comprehensive loss               - -             - -
     Additional paid-in-capital                      62,380          62,380
     Retainedc deficit                              (65,426)        (38,698)
                                                  ---------      ----------
                                                     17,012          43,740

     Less: Treasury stock at cost
         Common Stock:  1,841,300 shares
         and 1,841,300 shares, respectively          (3,102)         (3,102)
                                                  ---------      ----------
               Total Shareholders' Equity            13,910          40,638
                                                  ---------      ----------
Total Liabilities And Shareholders'Equity        $  134,327     $   142,489
                                                  =========      ==========

          See accompanying notes to consolidated financial statements.

                                       -1-

<PAGE>


                         LECHTERS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                              DEBTORS-IN-POSSESSION
           (Amounts in thousands, except share and per share amounts)


                                                      Thirteen Weeks Ended
                                                      --------------------
                                                  May 5, 2001    April 29, 2000
                                                  -----------    --------------
                                                          (unaudited)


Net sales                                        $   58,650     $    83,743
Cost of good sold
     (including occupancy and indirect costs)        52,295          63,822
                                                  ---------      ----------

Gross profit                                          6,355          19,921

Selling, general and administrative expenses         29,666          30,285
Restructuring expense                                 2,290             - -
                                                  ---------      ----------

Operating loss                                      (25,601)        (10,364)
Other expenses (income):
     Interest expense                                 1,127             977
     Interest income                                    - -            (693)
     Net investment gain/income                         - -             (63)
                                                  ---------      ----------
               Total other expenses (income)          1,127             221
                                                  ---------      ----------

Loss before tax benefit and
     extraordinary item                             (26,728)        (10,585)

Income tax benefit                                      - -          (3,705)
                                                  ---------      ----------

Net loss before extraordinary item                  (26,728)         (6,880)

Extraordinary item - gain on early
     extinguishment of debentures (net of
     income tax of $474)                                - -             879
                                                  ---------      ----------

Net Loss                                            (26,728)         (6,001)

Preferred stock dividend requirement                    252             252
                                                  ---------      ----------
Net loss available to common
     shareholders                               ($   26,980)   ($     6,253)
                                                  =========      ==========

Net loss per common share
     Basic and diluted
     Loss before extraordinary item             ($     1.76)   ($      0.43)
     Extraordinary item                                 - -            0.05
                                                  ---------      ----------
     Net Loss                                   ($     1.76)   ($      0.38)
                                                  =========      ==========

Weighted average common shares
     outstanding
     Basic and diluted                           15,335,000      16,401,000
                                                 ==========      ==========

          See accompanying notes to consolidated financial statements.

                                       -2-

<PAGE>


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


                                                      Thirteen Weeks Ended
                                                      --------------------

                                                  May 5, 2001    April 29, 2000
                                                  -----------    --------------

                                                         (unaudited)

Cash flows from operating activities:
     Net loss                                   ($   26,728)   ($     6,001)

Adjustments to reconcile net loss to
     net cash used in operating activities:
         Depreciation and amortization                3,380           3,888
         Gain on repurchase of debentures               - -          (1,353)
         Other                                           87             261
           Changes in operating assets and
            liabilities:
               Increase in accounts receivable       (1,002)         (3,912)
               Decrease (increase) in
                merchandise inventories              14,733         (12,022)
               Increase in prepaid expenses          (4,494)         (2,222)
               Increase (decrease) in accounts
                payable, accrued salaries, wages
                and other accrued expenses and
                taxes, other than income taxes        2,557          (3,437)
               Increase in other assets                (950)           (741)
                                                  ---------      ----------

           Net cash used in operating activities    (12,417)        (25,539)

Cash flows from investing activities:
           Capital expenditures                      (1,374)           (567)
           Decrease in available for sale
            securities                                  - -          37,572
                                                  ---------      ----------

           Net cash (used in) provided by
            investing activities                     (1,374)         37,005

Cash flows from financing activities:
           Payment of preferred stock dividend       (1,010)         (1,010)
           Borrowings under Revolving Credit
            Facility                                 16,922             - -
           Purchase of treasury stock                   - -            (870)
           Repurchase of debentures                     - -         (14,761)
                                                  ---------      ----------
           Net cash provided by (used in)
            financing activities                     15,912         (16,641)
                                                  ---------      ----------

Net increase (decrease) in cash and cash
 equivalents                                          2,121          (5,175)

Cash and cash equivalents, beginning of period        3,235           9,917
                                                  ---------      ----------

Cash and cash equivalents, end of period         $    5,356     $     4,742
                                                  =========      ==========

Supplemental disclosures of cash flow information:
Cash paid during the period for:

           Interest                              $      457     $       437
                                                  =========      ==========
           Income taxes                          $       23     $        31
                                                  =========      ==========

          See accompanying notes to consolidated financial statements.

                                       -3-

<PAGE>

<TABLE>
<CAPTION>


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

                                     CONVERTIBLE    ADDITIONAL
                           COMMON     PREFERED       PAID-IN       RETAINED    TREASURY             COMPREHENSIVE
                           STOCK       STOCK         CAPITAL       DEFICIT      STOCK       TOTAL        LOSS
<S>                         <C>         <C>           <C>          <C>          <C>       <C>          <C>
Balance,
  February 3, 2001            $58        $20,000       $62,380     ($38,698)    ($3,102)  $40,638

Net loss - thirteen weeks
  ended May 5, 2001           - -            - -           - -      (26,728)        - -   (26,728)       ($26,728)
                           ------    -----------   -----------     --------   ---------    ------   -------------

Balance,
  May 5, 2001 (unaudited)     $58        $20,000       $62,380     ($65,426)    ($3,102)  $13,910        ($26,728)
                           ======    ===========   ===========     ========   =========    ======   =============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       -4-

<PAGE>


                         LECHTERS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (DEBTORS-IN-POSSESSION)
           (Amounts in thousands, except share and per share amounts)
                                   (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  February 3, 2001.
     The  Company's  results of operations  for the thirteen  weeks ended May 5,
     2001 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 Year
     2001.


2.   SUBSEQUENT EVENTS

        a.     Chapter 11 Filing

          On May 21, 2001, the Company and its  subsidiaries  (collectively  the
     "Debtors")  filed  voluntary  petitions  with the United States  Bankruptcy
     Court for the Southern  District of the New York (the  "Bankruptcy  Court")
     for  reorganization  under Chapter 11 of the United States  Bankruptcy Code
     (the "Bankruptcy  Code").  The Chapter 11 cases Nos. 01-41432 (AJG) through
     01  41-483  (AJG)  have  been   consolidated   for  the  purpose  of  joint
     administration.

          As  a  result  of  these  filings,  actions  to  collect  pre-petition
     indebtedness  are  stayed and other  contractual  obligations  against  the
     Debtors may not be enforced.  In addition,  under the Bankruptcy  Code, the
     Debtors  may  assume  or  reject  executory   contracts,   including  lease
     obligations.  Parties affected by these rejections may file claims with the
     Bankruptcy   Court  in   accordance   with  the   reorganization   process.
     Substantially all pre-petition  liabilities are subject to settlement under
     a plan of reorganization to be voted on by the creditors and equity holders
     and approved by the Bankruptcy Court. Although the debtors expect to file a
     reorganization  plan or plans that provide for  emergence  from  bankruptcy
     sometime  during  Fiscal  Year 2002 or Fiscal  Year  2003,  there can be no
     assurance  that a  reorganization  plan or plans  will be  proposed  by the
     Debtors or confirmed by the Bankruptcy  Court or that any such plan will be
     consummated.

          As provided by the  Bankruptcy  Code,  the Debtors have the  exclusive
     right to  submit  a plan of  reorganization  for 120 days  from the date of
     filing of the voluntary petitions.  Further extension may be sought and may
     be granted or rejected by the Bankruptcy Court. If the Debtors fail to file
     a plan of reorganization during such period or if such plan is not accepted
     by the  required  number of  creditors  and  equity  holders,  any party in
     interest  may  subsequently  file  its own plan of  reorganization  for the
     Debtors.  A plan of  reorganization  must be  confirmed  by the  Bankruptcy
     Court,  upon certain  findings being made by the Bankruptcy Court which are
     required by the Bankruptcy  Code.  The Bankruptcy  Court may confirm a plan
     notwithstanding  the  non-acceptance  of the plan by an  impaired  class of
     creditors or equity holders if certain  requirements of the Bankruptcy Code
     are met.  A plan of  reorganization  could  also  result in  holders of the
     Common Stock receiving no value for their interest.

                                       -5-
<PAGE>

          At the first day hearing  held on May 21, 2001 before  Judge Arthur J.
     Gonzalez,  the  Bankruptcy  Court  entered  its' first day orders  granting
     authority to the  Debtors,  among other  things,  to pay  pre-petition  and
     post-petition  employee  wages,  salaries,   benefits  and  other  employee
     obligations  to pay  all  outstanding  premiums,  administrative  fees  and
     insurance  related  obligations  and to honor  customer  service  programs,
     including warranties, returns, layaways and gift certificates.

        b.     Debtor-In-Possession Credit Facility

          The  Company  has entered  into an  agreement  dated May 22, 2001 with
     Fleet Retail Finance,  Inc. as agent for the Tranche A Lenders and Back Bay
     Capital Funding, LLC for a  debtor-in-possession  credit facility (the "DIP
     Facility") under which the Company may borrow up to $86 million, subject to
     certain  limitations,  to fund  ongoing  working  capital  needs  while  it
     prepares a  reorganization  plan.  The DIP  Facility  was  approved  by the
     Bankruptcy Court on June 12, 2001.

          The DIP  Facility  includes  an $80 million  Tranche A Senior  Secured
     Facility  with Fleet  Retail  Finance,  Inc. as agent for a group of banks.
     There is also a $6  million  Junior  Secured  Tranche  B Loan with Back Bay
     Capital Funding LLC. The DIP Facility  includes a $10 million  sublimit for
     the  issuance of letters of credit  (both  documentary  and  standby).  The
     proceeds  of the DIP  Facility  were first  used to repay the  pre-petition
     Amended and Restated  Credit  Facility and may be used for on going working
     capital  requirements and general  corporate  purposes which are subject to
     the  supervision  and direction of the Bankruptcy  Court.  The DIP Facility
     matures  on the  earliest  of (a) May  31,  2003,  or if such  day is not a
     business  day, the next  succeeding  business  day; (b) the date set by the
     Bankruptcy  Court for a hearing on the Final  Borrowing  Order,  unless the
     Bankruptcy  Court on such date approves the Final  Borrowing  Order; or (c)
     the effective date of a Plan of Reorganization. The DIP Facility is secured
     by a security interest in substantially all the Company's assets.

          The Company's  maximum  borrowing (the "Borrowing Base") under the DIP
     Facility  may not exceed the lesser of (a) $86 million  made up of $80.0 of
     Tranche A Loan  ceiling and $6.0 million of Tranche B Loan or (b) the total
     of (i) a stipulated  proportion  of 83% for the period  January 1st through
     August 31st and 88% for the period  September 1st through  December 31st of
     the cost value of the Company's  acceptable  inventory,  including eligible
     letter  of credit  inventory;  plus  (ii) 85% of the  Company's  acceptable
     credit  card  receivables;  plus  (iii)  95%  of  the  Company's  cash  and
     acceptable  investments  held  in  a  Fleet  custody  account;  minus  (iv)
     applicable reserves.

          The DIP Facility contains certain covenants,  including limitations on
     capital expenditures,  indebtedness, and transactions with affiliates and a
     prohibition on the payment of dividends,  other than scheduled  payments of
     preferred dividends by the Company and dividends paid to the Company by its
     subsidiaries.  Under the DIP  Facility,  the  Company is not  permitted  to
     repay,   prepay,   redeem,   defease  or  repurchase   its  5%  Convertible
     Subordinated Debentures nor can it repurchase its Common Stock.

          Advances under the DIP Facility Tranche A Senior Secured Facility will
     bear interest per annum at the Fleet base rate plus the  applicable  margin
     of 1.00% or the Eurodollar rate (LIBOR) plus 2.75% at the Company's option.
     The  applicable  margins are  determined  based upon the  Company's  excess
     availability under the credit facility.

          The $6.0 million Junior  Secured  Tranche B Loan from Back Bay Capital
     Funding LLP carries a rate of interest of 13.50% per annum with  payment in
     kind interest accruing at 2.50% per annum payable upon maturity. The Junior
     Secured Tranche B Loan also has annual fees of 3.0% payable on May 22, 2002
     and 2.0% payable on May 22, 2003.

          The  Company  will pay an  unused  line fee of 0.50%  per annum on the
     unused portion of the credit facility, a standby letter of credit fee equal
     to the then applicable  Eurodollar margin less 25 basis points per annum of
     the total face amount of each  outstanding  letter of credit, a documentary
     letter of credit fee equal to 1.25% per annum of the total  face  amount of
     each outstanding  letter of credit and certain other fees. The DIP Facility
     completely  replaced the Amended and  Restated  Credit  Facility  which was
     dated February 9, 2001. As a result of the replacement of the  pre-existing
     credit facility, the Company will charge operations approximately $2,800 in
     the second  quarter of Fiscal Year 2001  representing  the write-off of the
     deferred financing costs for that facility.

                                       -6-
<PAGE>


3.   BASIS OF PRESENTATION

          The accompanying unaudited Consolidated Financial Statements have been
     prepared  on a  going  concern  basis,  which  contemplates  continuity  of
     operations,  realization  of assets  and  liquidation  of  liabilities  and
     commitments  in the  normal  course  of  business  and do not  reflect  any
     adjustments  that might  result if the  Company is unable to  continue as a
     going concern. The filing of the voluntary Chapter 11 petitions referred to
     above,  losses from operations and negative cash flow from operations raise
     substantial  doubt  about the  Company's  ability  to  continue  as a going
     concern.  The  appropriateness  of using a going concern basis is dependent
     upon,   among   other   things,   confirmation   of  a  plan  or  plans  of
     reorganization,  future  profitable  operations and the ability to generate
     cash from operations and financing sources  sufficient to meet obligations.
     As  a  result  of  the  filing  of  the   Chapter  11  cases  and   related
     circumstances,  realization  of assets and  liquidation  of  liabilities is
     subject to significant  uncertainty.  While under the protection of Chapter
     11, the Debtors may sell or otherwise  dispose of assets,  and liquidate or
     settle   liabilities   for  amounts  other  than  those  reflected  in  the
     Consolidated   Financial   Statements.   Further,   a  plan  or   plans  of
     reorganization   could  materially  change  the  amounts  reported  in  the
     accompanying Consolidated Financial Statements.  The Consolidated Financial
     Statements do not include any adjustments relating to recoverability of the
     value of  recorded  asset  amounts  or the  amount  and  classification  of
     liabilities  that  might  be  necessary  as  a  consequence  of a  plan  of
     reorganization.  The Company  anticipates  significant  adjustments  to the
     Consolidated Financial Statements as a result of applying the provisions of
     Statement   of  Position   90-7   "Financial   Reporting   by  Entities  in
     Reorganization Under the Bankruptcy Code" during the proceedings.

          At this time, it is not possible to predict the outcome of the Chapter
     11 cases or their effect on the Company's business, its financial position,
     results  of  operations  or  cash  flows.  If it  is  determined  that  the
     liabilities  subject to  compromise in the Chapter 11 cases exceed the fair
     value of the assets, unsecured claims may be satisfied at less than 100% of
     their face value and equity  interests of the  Company's  shareholders  may
     have no value. The Company believes the DIP Facility, which was approved by
     the  Bankruptcy  Court on June 12,  2001,  should  provide the Company with
     adequate   liquidity   to  conduct  its   business   while  it  prepares  a
     reorganization plan. However,  the Company's liquidity,  capital resources,
     results of  operations  and  ability to  continue  as a going  concern  are
     subject to known and unknown risks and  uncertainties,  including those set
     forth in Item 2 below  under  "Safe  Harbor  Statement  Under  the  Private
     Securities Litigation Reform Act of 1995."


4.   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
     weeks  ended May 5, 2001 and April 29,  2001.  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 reduce the
     diluted loss per share for the  thirteen  weeks ended May 5, 2001 and April
     29, 2001.

                                       -7-
<PAGE>


5.   RESTRUCTURING EXPENSE

          During  the fourth  quarter  of Fiscal  2000,  the  Company  adopted a
     Strategic  Restructuring  Plan (the "Plan") to  streamline  operations  and
     reduce operating  expenses.  The major initiatives of the Plan included the
     following:  (1) exit the Cost  Less  Home  Store(SM)  business;  (2)  close
     unprofitable stores; (3) reduce support areas associated with the Off-Price
     Home Business;  (4) re-align and  consolidate the  merchandising  and store
     operation  support  areas;  and (5)  reduce  all  corporate  support  areas
     reflecting  the  reduction  of  stores  in  operation.  As a result  of the
     adoption of the Plan, the Specialty  Housewares  segment was reduced by 128
     stores and the  Off-Price  Home  segment  was reduced by 38 stores (11 Cost
     Less Home Stores(SM) and 27 Famous Brands Housewares  Outlet(R) stores.) As
     a  result  of  closing  of  the  166  stores  and  the   consolidation  and
     re-alignment  of corporate  support  functions,  an estimated 725 full-time
     positions were eliminated.

          In  connection  with the Plan,  in the fourth  quarter of Fiscal  Year
     2000, the Company recorded a charge to operations of $41,963, consisting of
     $5,871 as cost of goods sold and  $36,092  as  restructuring  expense.  The
     restructuring  expense included an asset impairment charge of $21,579 which
     consisted mainly of leasehold  improvements and capitalized  software.  The
     activity of the remaining  major  components of the  restructuring  expense
     during the thirteen  weeks ended May 5, 2001,  and the remaining  liability
     are as follows:


                            Lease
                         Termination    Miscellaneous   Severance       Total
                         -----------    -------------   ---------     ----------

     Balance,
      February 3, 2001   $    14,922    $       1,414   $     - -     $   16,336
     Provision                   - -              - -       2,290          2,290
     Paid                        - -             (886)     (2,290)       (3,176)
                         -----------    -------------   ---------     ----------
     Balance,
      May 5, 2001        $    14,922    $         528   $     - -     $   15,450
                         ===========    =============   =========     ==========

          The  liability  for the  lease  termination  costs  was  estimated  by
     management  prior the  Chapter  11 filing  under  the  assumption  that the
     Company could  successfully  negotiate  such  settlements.  The amounts for
     which these  landlords may make a pre-petition  claims under the Chapter 11
     proceedings could be materially higher.

          The inventory  reserves  recorded  during the fourth quarter of Fiscal
     Year 2000 were fully utilized  during the first quarter of Fiscal Year 2001
     as all of the inventory in the closed stores was liquidated.

                                       -8-
<PAGE>


6.   ASSET IMPAIRMENT

          The  Company's   e-commerce   strategy,   thinkkitchen.com,   formerly
     Lechters.com,  and  the  related  conversion  of  existing  stores  to  the
     thinkkitchen  prototype are under review as a consequence of the Chapter 11
     filing.  The Company's  investment in computer  software for the e-commerce
     strategy shown as other assets on the Consolidated  Balance Sheet, which as
     of May 5, 2001 was approximately $6,200, will likely become impaired during
     the  second  quarter  of Fiscal  2001.  The  amount of  impairment  will be
     dependent on the estimated  future cash flows generated by the website.  At
     the present time, the amount of impairment cannot be determined.


7.   SEGMENT INFORMATION

          The Company  defines its principal  business  into two  segments,  the
     Specialty Housewares segment,  which operates as Lechters Housewares(R) and
     Lechters Kitchen Place(R),  and the Off-Price Home Business segment,  which
     operates as Famous Brands  Housewares  Outlet(R) and until  February  2001,
     also  operated  as Cost  Less Home  Store(SM).  The  contribution  of these
     segments, as well as "corporate and other" for the thirteen weeks ended May
     5, 2001 and April 29,  2000 are  summarized  below.  "Corporate  and other"
     includes general corporate expenses, principally service office expense and
     distribution centers, as well as interest income and expense.

          The Company's segment disclosures are as follows:


                                                      Thirteen Weeks Ended
                                                      --------------------
                                                  May 5, 2001    April 29, 2001
                                                  -----------    --------------
 SALES
  Specialty Housewares                            $    45,376    $   63,755
  Off-Price Home Business                              13,274        19,988
                                                  -----------    ----------
  Total sales                                     $    58,650    $   83,743
                                                  ===========    ==========

 (LOSS) INCOME BEFORE INCOME TAX
  EXPENSE (BENEFIT) AND EXTRAORDINARY ITEM
  Specialty Housewares                           ($     9,676)  ($    1,689)
  Off-Price Home Business                        (      2,513)          640
  Corporate and other                            (     13,412)  (     9,315)
                                                  -----------    ----------
  Operating loss                                 (     25,601)  (   10,364)
  Other expenses                                        1,127           221
                                                  -----------    ----------
  Total loss before income tax expense (benefit)
    and extraordinary item                       ($    26,728)  ($   10,585)
                                                  ===========    ==========

 DEPRECIATION AND AMORTIZATION EXPENSE
  Specialty Housewares                            $     1,662    $    2,009
  Off-Price Home Business                                 243           415
  Corporate and other                                   1,475         1,464
                                                  -----------    ----------
  Total depreciation and amortization expense     $     3,380    $    3,888
                                                  ===========    ==========

 CAPITAL ADDITIONS
  Specialty Housewares                            $     1,228    $      189
  Off-Price Home Business                                  54           122
  Corporate and other                                      92           256
                                                  -----------    ----------
 Total capital additions                          $     1,374    $      567
                                                  ===========    ==========

                                                  May 5, 2001    April 29, 2001
                                                  -----------    --------------

 TOTAL ASSETS
  Specialty Housewares                            $    63,399    $   92,759
  Off-Price Home Business                              13,781        23,007
  Corporate and other                                  57,147       106,701
                                                  -----------    ----------
  Total assets                                    $   134,327    $  222,467
                                                  ===========    ==========

                                       -9-
<PAGE>


8.   COMPREHENSIVE LOSS

          The following is a summary of the Company's comprehensive loss:


                                                        Thirteen Weeks Ended
                                                        --------------------
                                                  May 5, 2001    April 29, 2000
                                                  -----------    --------------

 Net Loss                                        ($    26,728)  ($    6,001)

 Components of comprehensive loss:

 Adjustment to unrealized gain/(loss) on
  available-for-sale securities, net of
  applicable income tax provision/benefit                 - -   (        29)
                                                  -----------    ----------

 Comprehensive loss                              ($    26,728)  ($    6,030)
                                                  ===========    ==========

9.   STOCK REPURCHASE PLAN

          In May  1999,  the  Board  of  Directors  authorized  the  Company  to
     repurchase up to one million shares of the Company's common stock from time
     to time when  warranted by market  conditions.  In March 2000, the Board of
     Directors authorized an additional repurchase of up to three million shares
     of the  Company's  common  stock.  During  Fiscal  Year 1999,  the  Company
     purchased  684,000  shares at an average  cost of $1.96 per  share.  During
     Fiscal Year 2000, an additional  1,157,300  shares of the Company's  common
     stock  were  purchased  at an average  price of $1.52 per share.  At May 5,
     2001,  there were  1,841,300  shares held as  Treasury  Stock at an average
     price of $1.68.  Under the DIP Credit  Facility,  the Company does not have
     the right to repurchase its common stock.


10.  INCOME TAXES

          Due  to  the  operating  loss  for  Fiscal  Year  2000,  which  was  a
     continuation  of the trend of the Company's  most recent  fiscal year,  the
     Company will utilize a 0% rate for income tax provision.  This reflects the
     need  for a 100%  valuation  allowance  against  the  deferred  tax  assets
     generated by operating losses.


11.  RECENT ACCOUNTING PRONOUNCEMENTS

          Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
     for Derivative  Instruments  and Hedging  Activities,  is effective for all
     fiscal  years  beginning  after  June  15,  2000.  SFAS  133,  as  amended,
     establishes accounting and reporting standards for derivative  instruments,
     including certain derivative  instruments embedded in other contracts,  and
     for hedging  activities.  Under SFAS 133,  certain  contracts that were not
     formerly   considered   derivatives  may  now  meet  the  definition  of  a
     derivative.  The Company  adopted SFAS 133 effective  February 4, 2001. The
     adoption  of SFAS 133 did not have a  significant  impact on the  financial
     position, results of operations, or cash flows of the Company.


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

          For comparative  purposes,  interim balance sheets are more meaningful
     when compared to the balance  sheets at the same point in time of the prior
     year.  Comparisons to balance sheets of the most recent fiscal year end may
     not be meaningful due to the seasonal nature of the Company's business.

                                      -10-
<PAGE>


  SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT 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.

          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:
     - the ability of the Company to continue as a going  concern;
     - the  ability of the  Company to operate  pursuant to  the  terms  of  the
       DIP  Facility;
     - the  ability  of the  Company  to  operate successfully  under a  Chapter
       11  proceedings;
     - approval  of plans and activities by the  Bankruptcy  Court;
     - risks  associated  with operating a business  in Chapter  11;
     - the  ability of the  Company to create and have approved a reorganization
       plan  in the  Chapter  11  Cases;
     - consumer acceptance  of  the  upgraded  merchandise  assortments;
     - 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;
     - 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.

     BASIS OF PRESENTATION

          The accompanying unaudited Consolidated Financial Statements have been
     prepared  on a  going  concern  basis,  which  contemplates  continuity  of
     operations,  realization  of assets  and  liquidation  of  liabilities  and
     commitments  in the  normal  course  of  business  and do not  reflect  any
     adjustments  that might  result if the  Company is unable to  continue as a
     going concern. The filing of the voluntary Chapter 11 petitions referred to
     above, losses from operations and negative cash flows from operations raise
     substantial  doubt  about the  Company's  ability  to  continue  as a going
     concern.  The  appropriateness  of using a going concern basis is dependent
     upon,   among   other   things,   confirmation   of  a  plan  or  plans  of
     reorganization,  future  profitable  operations and the ability to generate
     cash from operations and financing sources  sufficient to meet obligations.
     As  a  result  of  the  filing  of  the   Chapter  11  cases  and   related
     circumstances,  realization  of assets and  liquidation  of  liabilities is
     subject to significant  uncertainty.  While under the protection of Chapter
     11, the Debtors may sell or otherwise  dispose of assets,  and liquidate or
     settle   liabilities   for  amounts  other  than  those  reflected  in  the
     Consolidated   Financial   Statements.   Further,   a  plan  or   plans  of
     reorganization   could  materially  change  the  amounts  reported  in  the
     accompanying Consolidated Financial Statements.  The Consolidated Financial
     Statements do not include any adjustments relating to recoverability of

                                      -11-
<PAGE>


     the value of recorded  asset  amounts or the amount and  classification  of
     liabilities  that  might  be  necessary  as  a  consequence  of a  plan  of
     reorganization.  The Company  anticipates  significant  adjustments  to the
     Consolidated Financial Statements as a result of applying the provisions of
     Statement   of  Position   90-7   "Financial   Reporting   by  Entities  in
     Reorganization Under the Bankruptcy Code" during the proceedings.

          At this time, it is not possible to predict the outcome of the Chapter
     11  cases or their  effect  on the  Company's  business,  its  consolidated
     financial  position,  results  of  operations  or  cash  flows.  If  it  is
     determined  that the  liabilities  subject to  compromise in the Chapter 11
     cases  exceed  the  fair  value  of the  assets,  unsecured  claims  may be
     satisfied at less than 100% of their face value and equity interests of the
     Company's  shareholders  may have no value.  The Company  believes  the DIP
     Facility,  which was  approved by the  Bankruptcy  Court on June 12,  2001,
     should provide the Company with adequate  liquidity to conduct its business
     while it prepares a reorganization  plan. However, the Company's liquidity,
     capital resources, results of operations and ability to continue as a going
     concern are subject to known and unknown risks and uncertainties, including
     those set forth  above  under  "Safe  Harbor  Statement  Under the  Private
     Securities Litigation Reform Act of 1995."


     RESULTS OF OPERATIONS
       (Amounts in thousands, except share and per share amounts)
     THIRTEEN  WEEKS ENDED MAY 5, 2001  IN  COMPARISON WITH THIRTEEN WEEKS ENDED
     APRIL 29, 2000.

          For the thirteen  weeks ended May 5, 2001 ("First  Quarter  2001") the
     Company's total  comparable  store sales decreased 2.9%.  Comparable  store
     sales for the Specialty Housewares segment,  which is comprised of Lechters
     Housewares(R)   and  Lechters  Kitchen   Place(R),   decreased  3.9%  while
     comparable store sales for the Off-Price Home Business  segment,  comprised
     of  Famous  Brands  Housewares  Outlet(R)  and Cost  Less  Home  Store(SM),
     increased  0.8%.  On an overall  basis,  net sales for First  Quarter  2001
     decreased  $25,093 to $58,650,  a 30.0% decrease from $83,743  reported for
     the  comparable  thirteen  week  period of the prior  fiscal  year  ("First
     Quarter  2000").  The decrease was  primarily  due to the  reduction in the
     number of stores in  operation,  for First  Quarter 2001  compared to First
     Quarter  2000.  On  February  9, 2001,  the  Company  announced a Strategic
     Restructuring  Plan (the  "Plan")  which  resulted  in the  closing  of 166
     stores.  Such  closings  were  the  cause  of  $19,266  out of the  $25,093
     reduction  in  sales.  For  First  Quarter  2001  sales  for the  Specialty
     Housewares segment,  which had 128 fewer stores due to the Plan,  decreased
     28.8% to $45,376 while sales for the Off-Price Home  Business  which had 38
     fewer  stores  as a result of  adoption  of the  Plan,  decreased  33.6% to
     $13,274.  During First Quarter 2001,  the Company opened 1 store and closed
     169  stores,  including  166  pursuant  to the Plan.  As of May 5, 2001 the
     Company  had 323  stores  in  operation  compared  to 491 in  operation  on
     February 3, 2001 and 517 in operation on April 29, 2000.

          Gross  profit for the First  Quarter  2001 was  $6,355,  a decrease of
     $13,566  from  $19,921 for First  Quarter  2000.  The gross profit rate was
     10.8% of net sales  compared  with 23.8% in the prior  year.  By  operating
     segment,  gross profit for Specialty  Housewares decreased $9,701 to $4,407
     or 9.7% of net  sales,  while the  Off-Price  Home  Business  gross  profit
     decreased  $3,865 to $1,948 or 14.7% of net sales.  The  reduction in gross
     profit  amount was due to reduced sales and reduced  vendor  support in the
     form of allowances  against price reductions taken as part of the Company's
     merchandise  migration.  The  reduction  in gross  profit  rate was further
     impacted by the decline in comparable store sales, which directly increased
     the cost of sales  rate of  occupancy.  Finally,  the rate of gross  profit
     during First Quarter 2001 was also adversely impacted by the closing of 166
     stores which had minimal  sales while still  incurring  residual  occupancy
     expenses.

          Selling,   general  and  administration  expenses  decreased  $619  to
     $29,666,  which was 50.6% of net sales. Store expenses,  with the exception
     of advertising, decreased due to fewer stores in operation. Advertising was
     increased to support the clearance of  merchandise  categories to be exited
     as part of the  Company's  merchandise  migration  initiative.  Advertising
     support  from  vendors  was  virtually   non-existent  in  support  of  the
     merchandise being exited.  Service Office related expenses increased due to
     increased  consultant costs related to the switch to a third party provider
     of the information  technology function and the settlement of the Company's
     obligation to provide future services to a former executive.  Expenses were
     also adversely  impacted due to the operation  during First Quarter 2001 of
     the  now-closed  Hazleton   distribution  center  facility  which  was  not
     operative in First  Quarter  2000.  First Quarter 2001 was also impacted by
     increased expenses of the Company's  e-commerce  initiative which was close
     to being  operational at the close of First Quarter 2001.  This  initiative
     was in the early stages of development during First Quarter 2000.

          Other  expenses for the first quarter  increased $906 to an expense of
     $1,127, 1.9% of sales compared to $221, or 0.3% of sales, for First Quarter
     2000.  The  increase  was due to the  elimination  of  interest  income and
     investment income reflecting the liquidation of the Company's  portfolio of
     marketable  securities.

                                      -12-
<PAGE>


          Due to the significantly lower-than-expected operating performance for
     Fiscal 2000 and the Company's  expected  operating  results for the future,
     the Company has increased the valuation  allowance against the deferred tax
     assets  and  currently  records  a 100%  valuation  allowance  against  any
     additional  deferred tax assets until the  Company's  operations  return to
     profitability.

          By operating  segment for First  Quarter  2001,  Specialty  Housewares
     incurred a loss before tax  provision  of $9,676  compared to a loss before
     tax provision of $1,689 for First Quarter  2000.  For the same period,  the
     Off-Price Home Business incurred a loss before income tax benefit of $2,513
     compared  to income of $640 for First  Quarter  2000.  Corporate  and other
     expenses including Lechters.com costs increased the loss before tax benefit
     by $13,412 for First  Quarter 2001 as compared to $9,315 for First  Quarter
     Fiscal 2000.

          During First Quarter  2000,  the Company  recognized an  extraordinary
     gain of $879,  net of tax, from the  repurchase  of $16,750 of  Convertible
     Subordinated Debentures prior to their due date of September 27, 2001.

          The net loss for First Quarter  Fiscal 2001 was $26,728  compared to a
     net loss for the comparable period of Fiscal 2000 of $6,001.  The increased
     loss was the result of decreased  sales which  reduced gross profit and the
     net effect of the other contributing expense factors noted above.


     LIQUIDITY AND CAPITAL RESOURCES

          Cash flow during the thirteen weeks ended May 5, 2001, as reflected on
     the  Consolidated  Statements of Cash Flows, was a net increase in cash and
     cash  equivalents  of  $2,121.  Operating  activities,   comprised  of  the
     operating  loss  of  $26,728   adjusted  for  non-cash   expenses  such  as
     depreciation and amortization and by changes in operating assets,  utilized
     $12,417 of cash during the  thirteen  weeks ended May 5, 2001.  Significant
     components of operating  activities included  depreciation and amortization
     which  was a  non-cash  expense  of $3,380  and  reduction  of  merchandise
     inventories  which  positively  impacted  cash  by  $14,733.  Increases  in
     accounts  receivable and prepaid expenses  increased cash use by $1,002 and
     $4,494,  respectively.  Accounts payable,  accrued expenses and taxes other
     than income taxes  increased cash by $2,557  primarily  attributable to the
     timing of  payments  due to the  impact of the 53 week  fiscal  period  for
     Fiscal Year 2000.

          Investing  activities  decreased  net cash by  $1,374  compared  to an
     increase of $37,005 for year-to-date Fiscal 2000. Capital expenditures were
     primarily for  construction of and fixtures of new stores,  renovations and
     remodels  of  existing  stores,  and a  new  distribution  center.  Capital
     expenditures  were $1,374 for Fiscal 2001 to date  compared to $567 for the
     comparable  period  last  year.  As  previously   mentioned,   the  Company
     liquidated its portfolio of marketable  securities during Fiscal Year 2000.
     As a result  there was no cash  provided by this source in Fiscal Year 2001
     to date  compared to $37,572  provided in the  comparable  period of Fiscal
     Year 2000.

          Cash  flows  from  financing   activities  provided  $15,912  of  cash
     consisting  of $16,922 from  borrowings  under the  Company's  pre-petition
     Amended and Restated  Credit  Facility  offset,  in part, by $1,010 paid in
     dividends on the Convertible Preferred Stock.

          The Company revised and amended its credit facility several times over
     the course of Fiscal 2000 and during First  Quarter  2001.  Early in Fiscal
     2001,  the Company  entered into the Amended and Restated Loan and Security
     Agreement dated February 9, 2001. With the filing of the voluntary petition
     for protection under Chapter 11 of the Bankruptcy Code on May 21, 2001, the
     February 9, 2001 credit  facility  scheduled to expire on November 30, 2003
     was terminated.


     Debtor-In-Possession Credit Facility

          The  Company  has entered  into an  agreement  dated May 22, 2001 with
     Fleet Retail Finance,  Inc. as agent for the Tranche A Lenders and Back Bay
     Capital  Funding,  LLC as the  Tranche B Lender for a  debtor-in-possession
     credit facility (the "DIP Facility")  under which the Company may borrow up
     to $86 million,  subject to certain  limitations,  to fund ongoing  working
     capital needs while it prepares a reorganization plan. The DIP Facility was
     approved by the Bankruptcy Court on June 12, 2001.

          The DIP  Facility  includes  an $80 million  Tranche A Senior  Secured
     Facility  with Fleet  Retail  Finance,  Inc. as agent for a group of banks.
     There is also a $6  million  Junior  Secured  Tranche  B Loan with Back Bay
     Capital Funding LLC. The DIP Facility  includes a $10 million  sublimit for
     the  issuance of letters of credit  (both  documentary  and  standby).  The
     proceeds

                                      -13-
<PAGE>


     of the DIP Facility were first used to repay the  pre-petition  Amended and
     Restated  Credit  Facility  and may be used  for on going  working  capital
     requirements  and  general  corporate  purposes  which are  subject  to the
     supervision and direction of the Bankruptcy Court. The DIP Facility matures
     on the earliest of (a) May 31, 2003,  or if such day is not a business day,
     the next succeeding  business day; (b) the date set by the Bankruptcy Court
     for a hearing on the Final Borrowing Order,  unless the Bankruptcy Court on
     such date approves the Final Borrowing  Order; or (c) the effective date of
     a Plan of  Reorganization.  The  DIP  Facility  is  secured  by a  security
     interest in substantially all the Company's assets.

          The Company's  maximum  borrowing (the "Borrowing Base") under the DIP
     Facility  may not exceed the lesser of (a) $86 million  made up of $80.0 of
     Tranche A Loan  ceiling and $6.0 million of Tranche B Loan or (b) the total
     of (i) a stipulated  proportion  of 83% for the period  January 1st through
     August 31st and 88% for the period  September 1st through  December 31st of
     the cost value of the Company's  acceptable  inventory,  including eligible
     letter  of credit  inventory;  plus  (ii) 85% of the  Company's  acceptable
     credit  card  receivables;  plus  (iii)  95%  of  the  Company's  cash  and
     acceptable  investments  held  in  a  Fleet  custody  account;  minus  (iv)
     applicable reserves.

          The DIP Facility contains certain covenants,  including limitations on
     capital expenditures,  indebtedness, and transactions with affiliates and a
     prohibition on the payment of dividends,  other than scheduled  payments of
     preferred dividends by the Company and dividends paid to the Company by its
     subsidiaries.  Under the DIP  Facility,  the  Company is not  permitted  to
     repay,   prepay,   redeem,   defease  or  repurchase   its  5%  Convertible
     Subordinated Debentures nor can it repurchase its Common Stock.

          Advances under the DIP Facility Tranche A Senior Secured Facility will
     bear interest per annum at the Fleet base rate plus the  applicable  margin
     of 1.00% or the Eurodollar rate (LIBOR) plus 2.75% at the Company's option.
     The  applicable  margins are  determined  based upon the  Company's  excess
     availability under the credit facility.

          The $6.0 million Junior  Secured  Tranche B Loan from Back Bay Capital
     Funding LLP carries a rate of interest of 13.50% per annum with  payment in
     kind interest accruing at 2.50% per annum payable upon maturity. The Junior
     Secured Tranche B Loan also has annual fees of 3.0% payable on May 22, 2002
     and 2.0% payable on May 22, 2003.

          The  Company  will pay an  unused  line fee of 0.50%  per annum on the
     unused portion of the credit facility, a standby letter of credit fee equal
     to the then applicable  Eurodollar margin less 25 basis points per annum of
     the total face amount of each  outstanding  letter of credit, a documentary
     letter of credit fee equal to 1.25% per annum of the total  face  amount of
     each outstanding  letter of credit and certain other fees. The DIP Facility
     completely  replaced the Amended and  Restated  Credit  Facility  which was
     dated February 9, 2001. As a result of the replacement of the  pre-existing
     credit facility, the Company will charge operations of approximately $2,800
     in the second  Fiscal  Quarter of 2001  representing  the  write-off of the
     deferred financing costs for that facility.

     ASSET IMPAIRMENT

          The  Company's   e-commerce   strategy,   thinkkitchen.com,   formerly
     Lechters.com,  and  the  related  conversion  of  existing  stores  to  the
     thinkkitchen  prototype are under review as a consequence of the Chapter 11
     filing.  The Company's  investment in computer  software for the e-commerce
     strategy shown as other assets on the Consolidated  Balance Sheet, which as
     of May 5, 2001 was approximately $6,200, will likely become impaired during
     the  second  quarter  of Fiscal  2001.  The  amount of  impairment  will be
     dependent on the estimated  future cash flows generated by the website.  At
     the present time, the amount of impairment cannot be determined.

     RECENT ACCOUNTING PRONOUNCEMENTS

          Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
     for Derivative  Instruments  and Hedging  Activities,  is effective for all
     fiscal  years  beginning  after  June  15,  2000.  SFAS  133,  as  amended,
     establishes accounting and reporting standards for derivative  instruments,
     including certain derivative  instruments embedded in other contracts,  and
     for hedging  activities.  Under SFAS 133,  certain  contracts that were not
     formerly   considered   derivatives  may  now  meet  the  definition  of  a
     derivative.  The Company  adopted SFAS 133 effective  February 4, 2001. The
     adoption  of SFAS 133 did not have a  significant  impact on the  financial
     position, results of operations, or cash flows of the Company.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK

          The Company imports about 20% of its merchandise  from Far East, which
     subjects  it to the market  risk of  currency  fluctuations.  However,  the
     Company  uniformly  utilizes  purchase  contracts  and  letters  of  credit
     denominated  in US dollars to mitigate this risk.  Additionally,  there are
     multiple suppliers, both foreign and domestic, for its products.

                                      -14-
<PAGE>


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  Annual  Report on Form  10-K for the year ended
          February 3, 2001).

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).

10.1.2    Loan and  Security   Agreement   among  the   Company  as  Debtor  and
          Debtor-In-Possession, Fleet Retail  Finance,  Inc.  as  Agent  for the
          Tranche A Lender and Back Bay Capital Funding,  LLC,  Tranche B Lender
          dated May 22, 2001  (Incorporated herein by reference to the Company's
          Current Report on Form 8-K filed July 3, 2001).

10.8.1    Amendment  No. 6 to the  Deferred Compensation Agreement  between  the
          Company and Donald Jonas dated April 4, 2001.*

b.        Reports on Form 8-K

1.        A Current Report on Form 8-K reporting one item  under  Item 5 - Other
          Events and one item under Item 7(c) was filed on April 3, 2001.

2.        A Current Report on Form 8-K reporting one  item  under Item 5 - Other
          Events was filed on May 4, 2001.

3.        A  Current  Report  on  Form  8-K  reporting  one  item under Item 2 -
          Acquisition  or  Disposition  of  Assets  and  one item under Item 5 -
          Other Events was filed on July 3, 2001.

*Filed herewith.

                                   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/ Daniel L. Anderton
                                     ----------------------
                                     Senior Vice President,
                                     Chief Financial Officer and Treasurer

Date:   July 5, 2001









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