SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998

                         COMMISSION FILE NUMBER 33-61534

                          LEVITZ FURNITURE CORPORATION
             (Exact name of registrant as specified in its charter)

          FLORIDA                                              23-1657490
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)

7887 NORTH FEDERAL HIGHWAY, BOCA RATON, FL                          33487-1613
(Address of Principal Executive Offices)                            (Zip Code)

                                 (561) 994-6006
              (Registrant's telephone number, including area code)

                              --------------------

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(D) OF THE ACT:
                                      NONE

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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

On May 29, 1998, there were 1,000 shares of the registrant's Common Stock
outstanding, with no shares held by the registrant in its treasury. As of that
date all shares of such Common Stock were owned by the registrant's parent,
Levitz Furniture Incorporated, a Delaware Corporation.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE

The registrant meets the conditions set forth in General Instruction J(1) (a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.


<PAGE>


                                     PART I

ITEM 1.  BUSINESS

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "BUSINESS" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THESE
FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE
CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS: (1) BANKRUPTCY OR DISTRICT
COURT ACTIONS OR PROCEEDINGS RELATED TO THE BANKRUPTCY OF LEVITZ AND ITS
SUBSIDIARIES; (2) COMPETITIVE PRESSURE IN LEVITZ'S INDUSTRY; (3) GENERAL
ECONOMIC CONDITIONS; (4) CHANGES IN THE FINANCIAL MARKETS AFFECTING LEVITZ'S
FINANCIAL STRUCTURE AND LEVITZ'S COST OF CAPITAL AND BORROWED MONEY; (5)
INVENTORY RISKS DUE TO CHANGE IN MARKET DEMAND OR LFI'S BUSINESS STRATEGIES; (6)
CHANGES IN EFFECTIVE TAX RATES; AND (7) THE UNCERTAINTIES INHERENT IN LEVITZ'S
OPERATIONS. LEVITZ HAS NO DUTY UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 TO UPDATE THE FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT ON
FORM 10-K.

CHAPTER 11 FILING

On September 5, 1997 (the "Petition Date"), Levitz Furniture Incorporated, a
Delaware corporation ("LFI"), and 11 of its subsidiaries, including, Levitz
Furniture Corporation, a Florida corporation and wholly-owned subsidiary of LFI
("Levitz" or the "Company"), filed voluntary petitions for relief under Chapter
11, Title 11 of the United States Code (the "Bankruptcy Code") with the United
States Bankruptcy Court for the District of Delaware, Wilmington, Delaware. The
bankruptcy cases of LFI and Levitz and their affiliates are being jointly
administered, for procedural purposes only, before the United States District
Court, for the District of Delaware (the "Court") under Case No. 97-1842(JJF).
Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, Levitz, as debtor and
debtor-in-possession, has continued to manage and operate its assets and
businesses, pending the confirmation of a reorganization plan or plans and
subject to the supervision and orders of the Court. Because Levitz is operating
as debtor-in-possession under Chapter 11 of the Bankruptcy Code, the existing
directors and officers of Levitz continue to manage the operations of Levitz
subject to the supervision and orders of the Court.

The Debtors expect to reorganize under Chapter 11 and to propose a
reorganization plan or plans. The Court has extended the Debtors' exclusive
right to file a reorganization plan or plans through August 31, 1998. The
Debtors may request a further extension of the exclusivity period. There can be
no assurance that the Court will grant such further extension. After expiration
of the exclusivity period, creditors of the Debtors have the right to propose
alternative reorganization plans. Although management expects to file a
reorganization plan or plans that provide for emergence from bankruptcy in 1998
or 1999, there can be no assurance that a reorganization plan or plans will be
proposed by the Debtors or confirmed by the Court, or that such plan or plans
will be consummated.

At this time, it is not possible to predict the outcome of the Debtors' Chapter
11 cases or their effect on the Debtors' business. Reference is made to Item 7 -
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Report of Independent Public Accountants included on page 23
which indicates the substantial doubt about Levitz's ability to continue as a
going concern.


                                       2
<PAGE>

THE COMPANY

Levitz Furniture Corporation (which together with its subsidiaries are
collectively referred to as "Levitz"), was organized in 1965 as a Florida
corporation, is the successor to a business originally commenced in 1910 and was
acquired by LFI in 1985. Levitz is one of the largest specialty retailers of
furniture in the United States with, as of May 31, 1998, a chain of 58
warehouse-showrooms and 47 satellite stores located in major metropolitan areas
in 22 states. Levitz pioneered the warehouse-showroom concept by opening the
first warehouse-showroom in 1963 in Allentown, Pennsylvania. Levitz stores
generated revenues of $836.8 million in the year ended March 31, 1998 ("Fiscal
1998"). Management believes the Levitz name to be one of the most recognized in
furniture retailing. The principal executive offices of Levitz are located at
7887 North Federal Highway, Boca Raton, FL 33487-1613, and its telephone number
is (561) 994-6006.

LFI was incorporated in Delaware in 1984 under the name LFC Holding Corporation
for the purpose of acquiring Levitz Furniture Corporation. LFI changed its name
to Levitz Furniture Incorporated in 1993. LFI's only material asset is the
common stock of Levitz Furniture Corporation and it conducts no business other
than holding the common stock of Levitz Furniture Corporation.

Levitz stores offer a wide selection primarily of brand-name furniture and
accessories including living room, bedroom, dining room, kitchen and occasional
furniture and bedding. Some of the well known, nationally advertised brands
offered by Levitz stores include Ashley, Bassett, Benchcraft, Berkline,
Broyhill, Douglas, Klaussner, Lane, Lea Industries, Rowe, Sealy, Simmons,
Stanley, Stratford, and Universal. Levitz does not manufacture any of the
merchandise sold in its stores but instead devotes all of its resources to the
retail sale of furniture.

Levitz has experienced declining sales, profitability and cash flows over the
past several fiscal years. Reference is made to Item 7 - "Management's
Discussion and Analysis of Results of Operations and Financial Condition".

BUSINESS STRATEGY

Levitz's retailing concept targets value-conscious consumers by offering:

                  -        broad selections of furniture and accessories;
                  -        nationally advertised brands;
                  -        competitive prices; and
                  -        immediate availability of merchandise.

Levitz offers one of America's largest selection of quality brand name furniture
at guaranteed low prices. The Company's large showrooms facilitate display of a
broad selection of furniture and accessories. In each of its warehouse-showroom
facilities, Levitz can maintain substantial inventory, carrying in-stock the
depth of merchandise necessary for customers to carry away purchases
immediately. In addition to the warehouse-showrooms, Levitz also operates
"satellite" stores which utilize the warehouse and delivery functions of nearby
warehouse-showrooms. The satellite showrooms enable Levitz to more
cost-effectively penetrate existing markets by leveraging costs of supervisory
personnel, advertising programs and warehouse operations. The sales volumes
inherent in the warehouse-showroom/satellite concept make Levitz a key channel
of distribution for its principal vendors. Management has developed strong
partnerships with these principal vendors from whom it purchases large
quantities of quality merchandise, often at substantial savings. This buying
power enables Levitz to price its merchandise very competitively.

                                       3
<PAGE>

MERCHANDISING

Levitz's merchandising strategy is generally to display more merchandise in a
larger selling space than its competition, with 175 to 260 settings typically
displayed on its showroom floors. The merchandise sales mix among product line
groupings for Fiscal 1998 was upholstery/seating 44.1%, bedroom 20.6%,
occasional 11.2%, dining room (formal and casual) 12.0%, bedding 10.1%, and
other 2.2%. Percentage breakdowns have been relatively consistent for the past
several years. Levitz intends to open satellite stores that contain less selling
space than previously operated while generally maintaining this merchandising
strategy.

Levitz's stores feature moderately priced merchandise targeting value-conscious
consumers. Management believes its customer base includes "the middle 80%" of
consumers who buy furniture. A typical purchaser is a married female homeowner
under 45 years of age with family income of up to $75,000 per year. Based on
statistical information, management believes the 18 to 44 age bracket of
consumers is expected to remain relatively constant for the next decade, while
the 45 to 64 age bracket is expected to expand due to the aging of the
population.

To attract consumers who prefer more customized merchandise and are less
concerned with immediate delivery, Levitz has a "Choices" program. The "Choices"
program enables the customer to select from hundreds more of pre-selected
fabrics than are typically available in stock. Due to the strength of its vendor
relationships, Levitz is able to promise delivery of these custom order
furniture items generally within four weeks of purchase. During Fiscal 1998, the
"Choices" program represented approximately 10.2% of upholstery sales.

ADVERTISING AND PROMOTION

Levitz retains independent national advertising firms for creative and
production services in connection with its print, radio and television
advertisements. For Fiscal 1998, Levitz's advertising expenditures amounted to
$108.1 million or 12.9% of net sales, as compared to $102.1 million or 10.6% of
net sales, for Fiscal 1997. Levitz's name is widely recognized by furniture
consumers.

CUSTOMER SERVICE

Levitz is committed to providing high-quality customer service in all phases of
its business, including immediate merchandise availability, instant store credit
and prompt delivery. Through its warehouse-showrooms, Levitz provides immediate
availability on the majority of its items. If delivery is desired, Levitz will
generally deliver the item within seven days of the purchase for a modest
delivery charge. Levitz provides its customers with instant credit at the time
of purchase utilizing point-of-sale terminals on the showroom floors. In the
case of any damaged or defective merchandise Levitz will repair or replace the
item or, if impracticable to repair or replace, will offer a refund to the
customer. Management believes its commitment to customer service has contributed
to the substantial percentage of repeat purchases by Levitz's customers.

STORE OPERATIONS

WAREHOUSE-SHOWROOMS

Each of Levitz's warehouse-showrooms incorporate a warehouse and a showroom
within a single building. High-bay warehouse racks, filled floor-to-ceiling with
ready-to-deliver furniture, emphasize Levitz's dominant selection and in-stock
position on thousands of furniture items and accessories. The warehouse is
designed to allow maximum use of available space through the use of modern
materials handling systems.

                                       4
<PAGE>

The warehouse-showrooms range from 62,000 square feet to 250,000 square feet,
featuring selling space of 30,000 to 110,000 square feet. Merchandise is
typically displayed in model room settings of which approximately 260 are
located in each facility containing 50,000 or more square feet of selling space.
Smaller facilities feature approximately 175 model room settings. Levitz's
customers typically have the option to receive their merchandise at the
warehouse-showroom immediately upon purchase or to have their merchandise
delivered to their homes for a modest delivery charge. Levitz's
warehouse-showrooms are typically located within easy access of expressway
interchanges or major highways and have adjacent parking facilities. See
"Properties" for information regarding the locations of Levitz's
warehouse-showrooms.

SATELLITE STORES

Levitz's forty-seven satellite stores are free-standing showrooms utilizing the
warehouse and delivery functions of nearby warehouse-showrooms. As a result,
satellite stores require a smaller capital investment than a full
warehouse-showroom and leverage the relatively fixed operating costs of the
larger facilities including warehouse and delivery, supervision and advertising.
Satellite stores enable Levitz to more cost-effectively penetrate existing
markets. While the average warehouse-showroom is approximately two to three
times the size of an average satellite store, selling space is approximately
equal. Satellite stores range from approximately 25,000 to 60,000 square feet.
See "Properties" for information regarding the locations of Levitz's satellite
stores. Levitz intends to open new satellite stores having approximately 30,000
square feet of space.

Levitz's retail facilities are generally open Monday through Saturday from 10:00
a.m. to 9:00 p.m., and on Sundays from 12:00 noon to 6:00 p.m.

CUSTOMER CREDIT POLICIES

Levitz sells its merchandise either for cash, under customer installment
purchase plans or bank credit cards and a private label credit program. During
Fiscal 1998 and 1997, approximately 40% and 36%, respectively, of sales at
Levitz's facilities were for cash (including bank credit cards), and
approximately 60% and 64%, respectively, of sales were under customer credit
plans. Levitz accepted bank credit cards in all stores starting January 1998.
For the period January 1998 through May 1998, sales at Levitz for cash were
approximately 25%, sales by bank credit cards were approximately 25% and sales
under customer credit plans were approximately 50%.

On September 5, 1997 Levitz and General Electric Capital Corporation ("GECC")
entered into a Second Amended and Restated Account Purchase and Credit Card
Program Agreement (the "GECC Agreement"), whereby GECC is required to purchase
Levitz's customer credit obligations, subject to certain restrictions, without
recourse up to a maximum investment of $900.0 million. The GECC Agreement
expires on October 31, 1999 and may require Levitz to repurchase the outstanding
customer credit obligations at the expiration date. There is significant doubt
as to Levitz's ability to repurchase the outstanding customer credit obligations
due to the Chapter 11 filing and current financial condition.

Levitz is exposed to market risks under the terms of the GECC Agreement. Levitz
may pay a fee or may receive income, based on the relationship among the
interest earned on the portfolio, the amount of the promotional discount fees,
the amount of the servicing fee, the prime rate, and to a limited extent, credit
losses. For Fiscal 1998 and 1997, Levitz recorded income under the GECC
Agreement of $7.9 million and $12.8 million, respectively. These amounts are
included in selling, general and administrative expenses and unusual operating
expenses. Levitz expects the income under the GECC Agreement to be minimal in
Fiscal 1999.

Levitz is also engaged in discussions with another party to finance and service
its customer credit obligations. The outcome of these discussions and


                                       5
<PAGE>

negotiations are not predictable, consequently the impact on the financial
statements are not known.

VENDOR PARTNERSHIPS/INVENTORY

The success of the warehouse-showroom/satellite concept with consumers has made
Levitz a key channel of distribution for its principal vendors. Levitz purchases
substantial inventories as a result of its significant sales volume and strategy
of immediate merchandise availability. As a result, Levitz can purchase
merchandise more competitively in truckload lots because manufacturers can plan
longer production runs and produce goods more efficiently.

Levitz's volume purchasing also results in faster receipt of furniture orders
from manufacturers. Smaller retailers are typically unable to order a full
production run, and as a result, do not receive orders until full run quotas are
satisfied by additional orders. While some other retailers maintain large
inventories, Levitz's warehouse-showroom/satellite strategy contrasts with
prevalent industry practice whereby retailers carry minimal inventory for
immediate availability, and instead purchase merchandise upon receipt of
specific orders. The efficiency of this strategy from the standpoint of
selection, availability and price creates exceptional value for the customer.

Management has established strong partnerships with its principal vendors to
review new merchandise and plan promotions and marketing strategies, as well as
manage inventory levels. Substantially all manufacturers have cooperative
advertising budgets with Levitz. Electronic data interchange ("EDI") is an
important aspect of these partnerships. One hundred sixteen manufacturers
currently participate in Levitz's EDI system which enables manufacturers to plan
and produce goods more efficiently while making it possible for Levitz to
maintain an in-stock position with less inventory. During May 1998, 98.1% of all
furniture purchases were made through the EDI system as compared to 97.6% for
the same month of the prior year. The Company intends to continue working with
vendors to introduce additional EDI features such as advance ship notices and
invoices which are expected to enhance relations and improve efficiencies for
the Company.

Levitz currently purchases merchandise from over 213 independent manufacturers.
For Fiscal 1998, Levitz's top 10 vendors accounted for 44.5% of purchases.
Levitz has no long-term contractual commitments with any of its manufacturers,
and with the exception of the disruption caused by its 1997 Chapter 11 filing,
has had no difficulty in the past in obtaining merchandise for sale.

MANAGEMENT INFORMATION SYSTEMS

Levitz maintains an IBM AS/400 computer in each warehouse-showroom to track all
inventory and sales activity.

When merchandise arrives at the warehouse, it has been or is immediately bar
coded, enabling scanning by hand-held readers. This information is directly
loaded into the AS/400 thereby eliminating clerical errors, increasing available
inventory for sale and minimizing inventory shrinkage. Shrinkage has been
minimal in recent years. The sales floors in all stores are equipped with
on-line point-of-sale terminals enabling sales persons to access inventory
status, reserve inventory, schedule delivery and begin the credit approval
process for customers. All data is transmitted to corporate headquarters each
night. Management at corporate headquarters and at the store level monitor
inventory composition, age and condition. Sales and promotion activities feature
Levitz's aggressive product prices and are targeted regionally and locally to
inventories on hand. Aged merchandise is promptly marked down for rapid sale.

                                       6
<PAGE>

COMPETITION

The home furnishings industry is a highly competitive and fragmented market with
sales for furniture, bedding and decorative accessories by furniture stores in
the United States estimated at $35.0 billion in 1997. According to a leading
industry publication, the nation's 100 largest furniture retailers accounted for
approximately 41.0% of all furniture sales by furniture stores in the United
States in 1997. According to the same publication, in 1997 Levitz represented
2.4% of total domestic furniture sales, and was the second largest specialty
retailer of furniture in the United States.

Levitz's competition varies significantly according to geographic areas.
Levitz's principal competitors consist of local independent specialty furniture
retailers. Levitz also competes with national and regional specialty furniture
retailers, general merchandisers and, in certain limited categories, wholesale
clubs. In the future Levitz may have increasing competition from other major
retail operations, some of which may have greater financial and other resources
than Levitz and may derive revenues from sales of products other than household
furnishings.

EMPLOYEES

As of March 31, 1998, Levitz had 4,489 employees, of whom 1,485 were engaged in
sales, 7 in advertising, 375 in merchandising and display, 1,113 in warehouse
and maintenance functions and 1,509 in office and administrative work. As of
March 31, 1998, 3,403 of Levitz's employees were full-time and 1,086 were
part-time. Sales personnel are paid primarily on a commission basis. Levitz's
store managers and key marketing, distribution and operations personnel may
receive, in addition to their base salaries, bonus compensation based upon
achieving planned sales and operating performance for the location or locations
for which the employee has responsibility. Certain of Levitz's national staff
personnel, including officers, may receive bonuses based upon favorable
operating results during the fiscal year.

Levitz maintains one facility in which its sales employees are covered by a
collective bargaining agreement with a local of the United Food and Commercial
Workers Union ("UFCW"). This collective bargaining agreement expired in December
1997. The parties are engaged in negotiations concerning that agreement.

In 1995 the Company withdrew recognition of a UFCW local as bargaining agent for
the employees at one Company facility. That decision was upheld by the NLRB
Regional Director and the local has appealed the matter to the NLRB. In June
1998 two petitions were filed by a Teamsters Union local seeking recognition as
the bargaining agent for the employees at two of the Company's facilities.

In the past, a number of petitions were received from various unions, including
affiliates of the UFCW and the Teamsters Union, for organization of some or all
of the employees in certain other of Levitz's facilities. Except as noted above,
none of these petitions or other union activities has resulted in a current
collective bargaining agreement. Levitz has not experienced a material work
stoppage due to union activity in the past 10 years.

Levitz expects that union efforts to organize the employees at its facilities
will continue, but cannot predict what effect these activities may have on
Levitz's business operations, employee relations or income from operations.
Although nationwide organizational campaigns may be instituted by one or more
unions, all union activities to date have been confined to the local or regional
level.

                                       7
<PAGE>

RESTRUCTURING ACTIVITIES

Since the filing of the Chapter 11 voluntary petitions on September 5, 1997,
management of the Company and its advisors in the bankruptcy proceedings have
conducted an extensive analysis of business operations with the objective of
making the changes necessary to improve operating performance. The following
paragraphs summarize key components of actions taken:

MARKET BY MARKET PERFORMANCE ANALYSIS

Management has performed a study of each of the market areas in which its stores
operate. This study compared the operating performance of the Company's stores
against key competitors in each market. In markets where the Company's store
operations were not providing an adequate return on invested assets, management
considered the steps that could be taken to improve profitability. In some
cases, it was determined that the prospects were not good for achieving an
adequate return on invested assets. Accordingly, the decision was made to close
selected stores or, in some cases, to close all stores in a specific market. The
Company has either already closed or announced the intention to close a total of
thirty-nine stores since its Chapter 11 filing. Correspondingly, management
believes the Company's profitability can be improved by opening as many as
fifteen stores in seven existing markets in which the Company's competitive
position is already strong. Management expects to open these new stores by the
end of 1999, subject to Court approval, and dependent on general business
conditions and the Company's ability to finance such openings.

SELLING, MERCHANDISING AND ADVERTISING INITIATIVES

A number of initiatives are being pursued which are expected to improve
operating performance. In addition to introducing a number of new items to the
merchandise assortment in the spring of 1998, management has taken steps to
improve merchandise planning and replenishment programs. Advertising programs
are being revised to introduce new events and to change the mix of media on a
market by market basis. Store sales associates are being trained on
"customer-driven" selling techniques. In addition, internal "best practices"
benchmarking is being used to improve performance in sales and customer service
and to reduce non-selling operating expenses.

EXPENSE REDUCTION INITIATIVES

In January 1998, Levitz sold its corporate headquarters building, with Court
approval, and moved its offices to a leased building housing its Boca Raton,
Florida retail store.

The Company is implementing a "warehouse rationalization program" which is aimed
at limiting the number of warehouses servicing each market. This initiative will
reduce warehousing costs, other support costs through consolidation and reduce
the overall inventory investment to service stores in a given market area. The
program is also intended to provide additional income by leasing excess
warehouse capacity or entering into new lease agreements. The nature of the
sublease rental may vary depending on the suitability of the space for other
parties. Management expects the reduction in operating expense and the savings
from reduced inventory investment to justify the warehouse closing even when a
sublease tenant is not immediately available. This program has been implemented
in seven locations and is currently underway at two other locations. At the nine
locations where the warehouse has or will be eliminated, the Company has entered
into new lease agreements at two locations eliminating the warehouse space and
has subleased the former warehouse to a tenant in two other locations.
Management believes opportunities exist to take this action in other locations
thereby improving profitability while reducing required inventory investment.

                                       8
<PAGE>

ITEM 2.  PROPERTIES

On May 31, 1998, Levitz operated 105 retail facilities, including 58
warehouse-showrooms and 47 satellite stores located in major metropolitan areas
in 22 states, with a concentration in California. The following table sets forth
the number of retail facilities owned or leased by Levitz on May 31, 1998:

                                             OWNED(A)               LEASED(B)
                                             --------               ---------
Warehouse-showrooms.........................    16                     42
Satellite stores............................     7                     40
----------
(a)      Two warehouse-showrooms and one satellite store are located on land
         occupied by Levitz under long-term ground leases. Each of the owned
         properties is encumbered by either a first or second mortgage, most of
         which mortgages secure borrowings by Levitz under its DIP Facility.

(b)      The terms of the leases range from 7 months to 56 years, including
         renewal options. Rentals are either fixed or fixed minimums coupled
         with contingent rentals based on the Consumer Price Index or a
         percentage of net sales.

On May 31, 1998, these facilities contained a total of approximately 11,200,000
square feet, including approximately 4,900,000 square feet of selling space.
Levitz also owns a 35,000 square foot facility in Pottstown, Pennsylvania which
is used for accounting offices.

The following sets forth, as of May 31, 1998, the retail premises operated by
Levitz:
<TABLE>
<CAPTION>
                    OWNED PREMISES                                                LEASED PREMISES
-----------------------------------------------------          -----------------------------------------------------
                                  MONTH AND     STORE                                            MONTH AND     STORE
     LOCATION                     YEAR OPENED TYPE(1)               LOCATION                     YEAR OPENED TYPE(1)
-----------------------------------------------------          -----------------------------------------------------
<S>                                <C>           <C>           <C>                               <C>            <C>
Tampa, FL(2)...................    Oct. 1969     WS            Allentown, PA...................  Sept. 1963     WS
Los Angeles, CA................    Dec. 1970     WS            Phoenix, AZ.....................   Nov. 1963     ST
Denver, CO(2)..................    Jan. 1971     WS            Dallas, TX......................    May 1967     ST
Oxnard, CA.....................    Jan. 1971     WS            Santa Clara, CA.................  Sept. 1968     WS
St. Louis, MO(2)...............   Sept. 1971     WS            Wilmington, DE..................   June 1969     WS
Portland, OR...................    Nov. 1971     WS            San Bernardino, CA..............   Aug. 1969     WS
St. Paul, MN...................    Dec. 1971     WS            Huntington Beach, CA............   Nov. 1969     WS
Southington, CT................    Aug. 1975     WS            San Diego, CA(2)................    May 1970     WS
Independence, MO...............    Feb. 1976     ST            Sacramento, CA..................  Sept. 1970     WS
Paramus, NJ....................    Aug. 1977     WS            Ft. Lauderdale, FL..............   Oct. 1970     WS
Garden City, NY(3).............    Aug. 1977     WS            Seattle, WA.....................   Nov. 1970     WS
S. Miami, FL...................    Dec. 1977     ST            San Leandro, CA.................   Aug. 1971     WS
W. Palm Beach, FL..............    Nov. 1979     ST            So. San Francisco, CA...........   Aug. 1971     WS
Lynnwood, WA...................    June 1980     WS            Cherry Hill, NJ.................  Sept. 1971     WS
La Puente, CA(3)...............    Jan. 1981     ST            Willowbrook, NJ.................   Dec. 1971     WS
Woodbridge, NJ(3)..............    Jan. 1981     WS            Minneapolis, MN.................   Dec. 1971     WS
Modesto, CA....................    Nov. 1981     WS            San Antonio, TX.................   Jan. 1972     WS
Mesquite, TX...................    Dec. 1982     WS            Suitland, MD....................   Jan. 1972     WS
Plantation, FL.................    Aug. 1983     WS            Rockville, MD...................   Jan. 1972     WS
Colo. Springs, CO(2)...........    Nov. 1983     ST            Miami, FL.......................  April 1972     WS
Arlington, TX..................    Jan. 1984     WS            Fairfax, VA.....................    May 1972     WS
San Marcos, CA(2)..............    Feb. 1984     ST            San Dimas, CA...................    May 1972     WS
Portland, OR...................    July 1986     ST            Northridge, CA..................   June 1972     WS
                                                               Indianapolis, IN................   Aug. 1972     WS
                                                               Fresno, CA......................   Aug. 1972     WS
                                                               Redondo Beach, CA...............   Aug. 1972     WS
                                                               King of Prussia, PA.............   Aug. 1972     ST
                                                               Fort Worth, TX..................   Oct. 1972     WS
                                                               Kansas City, KS.................   Nov. 1972     WS
                                                               El Paso, TX.....................   Feb. 1973     WS
</TABLE>
----------
(1) The column refers to warehouse-showrooms ("WS") or satellite stores ("ST").
(2) In June 1998 Levitz announced its intent to close these stores. 
(3) Stores located on land occupied by Levitz pursuant to long-term ground 
    lease.

                                       9
<PAGE>
<TABLE>
<CAPTION>

                   LEASED PREMISES                                                LEASED PREMISES
-----------------------------------------------------          -----------------------------------------------------
                                  MONTH AND     STORE                                            MONTH AND     STORE
     LOCATION                     YEAR OPENED TYPE(1)               LOCATION                     YEAR OPENED TYPE(1)
-----------------------------------------------------          -----------------------------------------------------
<S>                                <C>           <C>           <C>                                <C>           <C>
Mesa, AZ.......................    Mar. 1973     WS            Kansas City, MO................    Oct. 1986     ST
Farmingdale, NY................   April 1973     WS            Reading, PA ...................    Jan. 1987     ST
Langhorne, PA..................     May 1973     WS            Bakersfield, CA ...............    Mar. 1987     ST
New Orleans, LA................   Sept. 1973     WS            Chula Vista, CA(2) .............   Mar. 1987     ST
Baltimore (Glen Burnie), MD....    July 1974     WS            Pinole, CA......................   Dec. 1987     ST
Winter Park, FL(2).............    June 1977     WS            Tacoma, WA......................   Jan. 1988     ST
Dedham, MA.....................    Aug. 1977     WS            Alhambra, CA(2).................   Aug. 1988     ST
Danvers, MA....................    Aug. 1977     WS            Smithtown, NY...................   Aug. 1989     ST
Westboro, MA...................    Aug. 1977     WS            Brooklyn Park, MN...............   Nov. 1989     ST
Enfield, CT....................    Aug. 1977     WS            Corona, CA......................   Nov. 1989     ST
Clearwater, FL(2)..............   Sept. 1977     ST            Nashua, NH......................   Nov. 1990     ST
Concord, CA....................    Dec. 1978     WS            Fullerton, MD...................   Jan. 1991     ST
Austin, TX.....................    Oct. 1979     WS            Las Vegas, NV...................   Aug. 1991     WS
Denver, CO(2)..................    Oct. 1979     ST            New Port Richey, FL(2)..........   Oct. 1992     ST
Anaheim, CA....................    Nov. 1981     ST            Glendale, AZ....................   Nov. 1992     ST
Laguna Hills, CA...............   April 1983     ST            Victorville, CA.................   Dec. 1992     ST
Baltimore, MD..................    Nov. 1983     ST            Rohnert Park, CA................   Mar. 1994     ST
Pleasanton, CA.................    Jan. 1984     ST            N. Richland Hills, TX...........  April 1994     ST
San Carlos, CA.................   April 1984     ST            Arroyo Grande, CA...............  April 1994     ST
San Antonio, TX................    Nov. 1984     ST            Cathedral City, CA..............  April 1994     ST
Stockton, CA...................    June 1985     ST            Tempe, AZ.......................   June 1994     ST
Cerritos, CA...................    June 1985     ST            Indianapolis, IN................   Aug. 1994     ST
Boca Raton, FL.................    Nov. 1985     ST            Fremont, CA.....................   Aug. 1994     ST
Phoenix, AZ....................    Nov. 1985     ST            Middle Village, NY..............   Oct. 1994     WS
Milford, CT....................   April 1986     ST            Plano, TX(2)....................   Oct. 1994     WS
Orlando, FL(2).................     May 1986     ST            Manchester, MO(2)...............   Oct. 1995     ST
</TABLE>
----------
(1) The column refers to warehouse-showrooms ("WS") or satellite stores ("ST").
(2) In June 1998 Levitz announced its intent to close these stores. 
(3) Stores located on land occupied by Levitz pursuant to long-term ground 
    lease.

In addition to the above properties, as of May 31, 1998 Levitz had available for
disposition three owned and three leased properties formerly operated as retail
stores.

On June 17, 1998, the Company announced its intention to close all warehouse and
showroom facilities in the Tampa, FL, Orlando, FL, San Diego, CA, Denver, CO,
and St. Louis, MO markets. This announcement affected five warehouse facilities
and a total of thirteen showrooms. In addition, the Company has recently
announced the decision to close the warehouse and showroom located in Plano, TX
and the showroom located at Alhambra, CA.

As part of its "warehouse rationalization program", the Company has completed
the closing of its Paramus, NJ and Northridge, CA warehouses and has initiated
the closing of warehouses in Minneapolis, MN and Austin, TX. The adjacent
showrooms at these locations will continue to operate as "satellites" of other
warehouse facilities serving these markets.

Following the above closings, the Company will have a total of 48 warehouses in
operation which will be serving a total of 48 warehouse-showrooms and 42
satellite showrooms.

ITEM 3.  LEGAL PROCEEDINGS

CHAPTER 11 FILING

On September 5, 1997, LFI and 11 of its subsidiaries, including Levitz, filed
voluntary petitions for relief under the Bankruptcy Code, Chapter 11, Title 11
of the United States Code, with the United States Bankruptcy Court for the
District of Delaware, Wilmington, Delaware 19801. The bankruptcy cases of LFI
and Levitz and their affiliates are being jointly administered, for procedural
purposes only, before the United States District Court for the District of
Delaware under Case No. 97-1842(JJF).

Under section 362 of the Bankruptcy Code, during a Chapter 11 case, creditors
and other parties in interest may not, without Court approval: (i) commence or
continue judicial, administrative or other proceedings against the Debtors 


                                       10
<PAGE>

that were or could have been commenced prior to commencement of the Chapter 11
case, or recover a claim that arose prior to commencement of the case; (ii)
enforce any pre-petition judgments against the Debtors; (iii) take any action to
obtain possession of or exercise control over property of the Debtors or their
estates; (iv) create, perfect or enforce any lien against the property of the
Debtors; (v) collect, assess or recover claims against the Debtors that arose
before the commencement of the case; or (vi) set off any debt owing to the
Debtors that arose prior to the commencement of the case against a claim of such
creditor or party in interest against the Debtors that arose before the
commencement of the case.

Although the Debtors are authorized to operate their businesses and manage their
properties as debtors-in-possession, they may not engage in transactions outside
of the ordinary course of business without complying with the notice and hearing
provisions of the Bankruptcy Code and obtaining Court approval.

As debtors-in-possession, the Debtors have the right, subject to Court approval
and certain other limitations, to assume or reject executory, pre-petition
contracts and unexpired leases. In this context, "assumption" requires the
Debtors to perform their obligations and cure all existing defaults under the
assumed contract or lease and "rejection" means that the Debtors are relieved
from their obligations to perform further under the rejected contract or lease,
but are subject to a claim for damages for the breach thereof subject to certain
limitations contained in the Bankruptcy Code. Any damages resulting from
rejection are treated as general unsecured claims in the reorganization cases.

Under the Bankruptcy Code, a creditor's claim is treated as secured only to the
extent of the value of such creditor's collateral, and the balance of such
creditor's claim is treated as unsecured. Generally, unsecured and undersecured
debt does not accrue interest after the Petition Date.

Pre-petition claims that were contingent or unliquidated at the commencement of
the Chapter 11 cases are generally allowable against the Debtors in amounts to
be fixed by the Court or otherwise agreed upon. These claims, including, without
limitation, those which arise in connection with the rejection of executory
contracts and leases, are expected to be substantial. The Debtors have
established reserves approximating what the Debtors believe will be its
liability under these claims. The Court fixed August 10, 1998 as the last date
by which most creditors of the Debtors could file proofs of claim for claims
that arose prior to the Petition Date.

PLAN OF REORGANIZATION PROCEDURES

For 120 days after the date of the filing of a voluntary Chapter 11 petition, a
debtor has the exclusive right to propose and file a reorganization plan with
the Court and an additional 60 days within which to solicit acceptances to any
plan so filed (the "Exclusive Period"). The Court may increase or decrease the
Exclusive Period for cause shown, and as long as the Exclusive Period continues,
no other party may file a reorganization plan.

Given the magnitude of the operations of the Debtors and the number of
interested parties asserting claims that must be resolved in the Chapter 11
cases, the plan formulation process is complex. The Debtors currently retain the
exclusive right to propose and solicit acceptances of a plan or plans of
reorganization until August 31, 1998 and October 30, 1998, respectively.

If a Chapter 11 debtor fails to file its plan during the Exclusive Period or
after such plan has been filed fails to obtain acceptance of such plan from
impaired classes of creditors and equity security holders during the exclusive
solicitation period, any party in interest, including a creditor, an equity
security holder or a committee of creditors, may file a reorganization plan for
such Chapter 11 debtor.

                                       11
<PAGE>

Inherent in a successful plan of reorganization is a capital structure which
permits the Debtors to generate sufficient cash flow after reorganization to
meet its restructured obligations and fund the current obligations of the
Debtors. Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and stockholders may be substantially altered. At this time it is not
possible to predict the outcome of the Chapter 11 case, in general, or the
effects of the Chapter 11 case on the business of the Debtors or on the
interests of creditors.

Generally, after a plan has been filed with the Court, it will be sent, with a
disclosure statement approved by the Court following a hearing, to members of
all classes of impaired creditors and equity security holders for acceptance or
rejection. Following acceptance or rejection of any such plan by impaired
classes of creditors and equity security holders, the Court, after notice and a
hearing, would consider whether to confirm the plan. Among other things, to
confirm a plan the Court is required to find that (i) each impaired class of
creditors and equity security holders will, pursuant to the plan, receive at
least as much as the class would have received in a liquidation of the debtor
and (ii) confirmation of the plan is not likely to be followed by the
liquidation or need for further financial reorganization of the debtor or any
successor to the debtor, unless the plan proposes such liquidation or
reorganization.

To confirm a plan, the Court generally is also required to find that each
impaired class of creditors and equity security holders has accepted the plan by
the requisite vote. If any impaired class of creditors or equity security
holders does not accept a plan but all of the other requirements of the
Bankruptcy Code are met, the proponent of the plan may invoke the so-called
"cram down" provisions of the Bankruptcy Code. Under these provisions, the Court
may confirm a plan notwithstanding the non-acceptance of the plan by an impaired
class of creditors or equity security holders if certain requirements of the
Bankruptcy Code are met, including that (i) at least one impaired class of
claims has accepted the plan, (ii) the plan "does not discriminate unfairly" and
(iii) the plan "is fair and equitable with respect to each class of claims or
interests that is impaired under, and has not accepted, the plan." As used by
the Bankruptcy Code, the phrases "discriminate unfairly" and "fair and
equitable" have narrow and specific meanings unique to bankruptcy law.

OTHER LEGAL PROCEEDINGS

In the ordinary course of business, Levitz is party to various legal actions
which it believes are routine in nature and incidental to the operation of its
business. In the opinion of management, the outcome of the proceedings to which
Levitz is currently party will not have a material adverse effect upon its
operations or financial condition.

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

         None.

                                       12
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

All of Levitz's Common Stock is owned by LFI. After September 24, 1997 there was
no public trading market for LFI's Common Stock. Prior to September 24, 1997,
LFI's Common Stock was traded on the New York Stock Exchange ("NYSE"). Effective
at the opening of the trading session on December 3, 1997, the NYSE formally
removed from listing and registration the Common Stock of LFI pursuant to an
Order, dated December 2, 1997, of the Securities and Exchange Commission
granting the application for removal by the NYSE. As of June 12, 1998, there
were 726 holders of record of Voting Common Stock and 7 holders of record of
Non-Voting Common Stock.

LFI has not paid dividends on any class of its Common Stock since 1987 and does
not intend to pay dividends in the foreseeable future. As a holding company,
LFI's ability to pay dividends is dependent on the receipt of dividends or other
payments from Levitz. The payment of dividends by Levitz to LFI is prohibited by
the Postpetition Credit Agreement, dated as of September 5, 1997 (the "DIP
Facility"). In addition, the payment of dividends by Levitz to LFI is subject to
certain restrictions under the DIP Facility, the indentures relating to debt
securities issued by LFI and Levitz and Florida law. See Item 7 - "Management's
Discussion and Analysis of Results of Operations and Financial
Condition-Liquidity and Capital Resources" and Note 4 to the Notes to
Consolidated Financial Statements. Florida law generally requires that, after
giving effect to a dividend, Levitz must be able to pay its debts as they become
due in the usual course of business and the fair value of Levitz's total assets
must be greater than the sum of its total liabilities plus certain preferential
rights. Any determination to pay cash dividends in the future will be at the
discretion of LFI's Board of Directors and will be dependent upon LFI's results
of operations, financial condition, contractual restrictions and other factors
deemed relevant at that time by the Board of Directors.

Any reorganization plan is likely to result in a minimal, if any, distribution
to existing stockholders of LFI as a result of the issuance of equity to
creditors or new investors.

The range of high and low sales prices for LFI's Common Stock as reported in the
New York Stock Exchange Composite Index for each quarterly period within the two
most recent fiscal years through September 24, 1997, (the last day of reported
trading on the NYSE), is as follows:

                  QUARTER ENDED              HIGH               LOW
                  -------------              ----              ----
                  June 30, 1996              5-1/8             3-3/4
                  September 30, 1996         5-1/8             3-3/4
                  December 31, 1996          4-1/8             2-1/4
                  March 31, 1997             3-1/2             2-5/8
                  June 30, 1997               3                1-7/16
                  September 24, 1997         1-11/16             7/32

                                       13
<PAGE>


ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS 
             AND FINANCIAL CONDITION

The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this document.

GENERAL

On September 5, 1997, the Debtors filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code and are presently operating
their business as debtors-in-possession subject to the jurisdiction of the
United States Bankruptcy Court for the District of Delaware. For further
discussion of Chapter 11 proceedings, see "Item 1. Business-Chapter 11 Filing",
"Item 3. Legal Proceedings" and Note 1 to Notes to Consolidated Financial
Statements.

The Company's 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. The Chapter 11 filing, related circumstances and the losses from
operations, raise substantial doubt about the Company's ability to continue as a
going concern. The appropriateness of reporting on the going concern basis is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, and the ability to generate sufficient cash from
operations and financing sources to meet obligations (see "Liquidity and Capital
Resources" and Note 1 to "Notes to Consolidated Financial Statements"). As a
result of the filing and related circumstances, however, such 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 accompanying consolidated financial statements. Further,
a plan 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 the recoverability of the
value of recorded asset amounts or the amounts and classification of liabilities
that might be necessary as a consequence of a plan of reorganization.

Comparable store sales for Fiscal 1998 declined 6.4% from Fiscal 1997. While
comparable sales declined in April 1998 by 9.5% from the April 1997 period,
comparable store sales in May and June 1998 increased by 1.5% and 0.5%,
respectively, over the same periods of the prior year.

Operating income has decreased from $17.2 million in Fiscal 1996 to $16.1
million in Fiscal 1997 and operations have resulted in a loss of $87.6 million
in Fiscal 1998. Net cash provided by operating activities has decreased from
$15.5 million in Fiscal 1996 to $1.2 million in Fiscal 1997 and a use of $17.2
million in Fiscal 1998.

                                       14
<PAGE>

The following table sets forth Levitz's results of operations expressed as a
percentage of net sales for the periods indicated:

                                              PERCENT OF NET SALES
                                   ----------------------------------------
                                             YEARS ENDED MARCH 31,
                                   ----------------------------------------
                                       1998          1997          1996
                                   ------------  ------------  ------------

Net sales                                 100.0%        100.0%        100.0%
Cost of sales                              55.9          55.2          54.2
                                   ------------  ------------  ------------
Gross profit                               44.1          44.8          45.8
Selling, general and 
  administrative expenses                  43.2          39.5          40.2
Unusual operating expenses                  1.9           -             -
Charge for store closings                   -             0.8           -
Restructuring expense                       -             -             0.9
Depreciation and amortization               2.9           2.8           3.0
Interest expense, net                       4.7           5.6           5.2
Reorganization items                        6.6           -             -
                                   ------------  ------------  ------------
Loss before income taxes                  (15.2)         (3.9)         (3.5)
Income tax benefit                          4.7           1.4           1.3
                                   ------------  ------------  ------------
Loss before extraordinary items           (10.5)         (2.5)         (2.2)
Extraordinary items                        (0.7)         (0.2)          -
                                   ------------  ------------  ------------
Net loss                                  (11.2)         (2.7)         (2.2)
                                   ============  ============  ============
Comparable store sales decrease (1)        (6.4%)        (1.3%)        (9.6%)
                                   ============  ============  ============
----------
 (1)   Comparable store sales are calculated by excluding the net sales of a
       store for any full month of one period if the store was not open during
       the same full month of the prior period.

COMPARISON OF OPERATIONS FOR FISCAL 1998 TO FISCAL 1997

Net sales for Fiscal 1998 decreased to $836.8 million or 13.5% from $966.9
million for Fiscal 1997. Comparable store sales for Fiscal 1998 declined 6.4%
from Fiscal 1997. Levitz has attempted to address the decrease in comparable
store sales declines by (i) changing its merchandise lineup, (ii) making a
concerted effort to liquidate older, discontinued merchandise, (iii) shifting
its focus in advertising expenditures by media outlet to those deemed most
effective, and (iv) closing certain underperforming stores to enable it to focus
efforts and resources on key markets. In addition to the comparable store sales
decline experienced during Fiscal 1998, the Company closed 24 under-performing
stores.

Gross profit for Fiscal 1998 was $369.2 million, or 44.1% of net sales, as
compared to $433.3 million, or 44.8% of net sales, for fiscal 1997. The decrease
in gross profit percentage of net sales is attributable to the increase in items
sold at lower margins that were deleted from the merchandise assortment.

Selling, general and administrative (SG&A) expenses decreased by $20.8 million
or 5.4% to $361.1 million in Fiscal 1998 from $381.9 million in Fiscal 1997. The
dollar decrease in SG&A expenses is primarily attributable to the reduction in
costs attributable to the disposal of 24 stores during 1998.

During Fiscal 1998, Levitz incurred unusual operating expenses of $1.3 million
under the provisions of an employment agreement due to the termination of an
officer. Additionally, Levitz recorded a $5.9 million write-off of the future
service revenue receivable under the GECC Agreement when Levitz was required to
account for the transfer of assets under the GECC Agreement as a secured
borrowing with a pledge of collateral rather than as a sale for financial
reporting purposes. During the fourth quarter of Fiscal 1998, the Company


                                       15
<PAGE>

reviewed certain discontinued and/or slow moving inventory items which did not
complement the new merchandise assortment. In an effort to accelerate the
liquidation of these items, the Company reduced their selling prices. Included
in unusual operating expenses is a $6.1 million charge reflecting the Company's
adjustment to record this inventory at its estimated net realizable value. The
Company also wrote off goodwill in the amount of $2.8 million.

Depreciation and amortization expenses decreased to $24.1 million in Fiscal 1998
from $27.0 million in Fiscal 1997. The decrease is primarily attributable to the
retirement of depreciable assets related to closed stores and the writeoff of
all goodwill.

During Fiscal 1998, Levitz recorded reorganization related expenses of $55.5
million which includes $33.6 million for 24 store closings, $15.0 million for
the acceleration of goodwill amortization and $6.9 million for professional
services provided to Levitz and the Creditors' Committee which, subject to Court
approval, are required to be paid by Levitz while it is in Chapter 11. In Fiscal
1997, Levitz closed five satellite stores which resulted in a pre-tax charge for
store closings of $8.3 million. The charge includes the reduction of the
carrying value of the store assets to their estimated fair value net of selling
expenses as well as reserves for future rental payments under operating lease
agreements.

Interest expense for Fiscal 1998 decreased to $39.0 million or 4.7% of net sales
from $54.1 million or 5.6% of net sales for Fiscal 1997. As a result of the
Chapter 11 filing, no principal or interest payments will be made on most
prepetition debt without Court approval or until a plan of reorganization
providing for the repayment terms has been confirmed by the Court and becomes
effective. Interest on prepetition unsecured obligations has not been accrued
after the Petition Date except that interest expense and principal payments will
continue to be recorded on capital lease obligations unless the leases are
rejected by the Debtors. If a capital lease is rejected the obligation will be
limited to the lease rejection claim. Contractual interest expense of $12.6
million was not recorded on certain prepetition debt for the period from
September 5, 1997 through March 31, 1998.

During Fiscal 1998 and 1997, Levitz incurred after-tax extraordinary losses of
$5.8 million and $2.0 million respectively due to the write-off of deferred
financing fees related to the previous bank credit agreements.

As a result of the aforementioned factors, net loss was $93.0 million or 11.2%
of net sales for Fiscal 1998 as compared to $26.5 million or 2.7% of net sales
for Fiscal 1997.

COMPARISON OF OPERATIONS FOR FISCAL 1997 TO FISCAL 1996

Net sales for Fiscal 1997 decreased to $966.9 million or 2.0% from $986.6
million for Fiscal 1996. Although comparable store sales for the last two
quarters of Fiscal 1997 increased 3.0% from the comparable period in Fiscal
1996, comparable store sales for the entire Fiscal 1997 declined 1.3% from
Fiscal 1996. Levitz has attempted to address the decrease in comparable store
sales declines by among other things: (i) hiring a new President-Store
Operations; (ii) renovating 19 showrooms in Fiscal 1997 with plans to renovate
approximately 6 showrooms in Fiscal 1998; (iii) hiring a new advertising agency
for electronic media; and (iv) hiring a new President-Merchandising/Marketing in
July 1997.

Gross profit for Fiscal 1997 was $433.3 million, or 44.8% of net sales, as
compared to $451.7 million, or 45.8% of net sales, for Fiscal 1996. The decrease
in gross profit as a percentage of net sales is attributable to a change in
merchandise pricing policy. The change in pricing policy was targeted to "value
conscious" consumers and competitive pressures.

Selling, general and administrative (SG&A) expenses decreased by $14.3 million
or 3.6% to $381.9 million in Fiscal 1997 from $396.2 million in Fiscal 1996. 


                                       16
<PAGE>

The dollar decrease in SG&A expenses is attributable to the reduction in
compensation expense and related payroll taxes and employee benefits of $21.3
million in Fiscal 1997 as compared to Fiscal 1996 which included a curtailment
gain of $8.3 million when Levitz amended its defined benefit pension plan which
curtailed future benefit accruals.

Depreciation and amortization expenses decreased to $27.0 million in Fiscal 1997
from $29.3 million in Fiscal 1996. The decrease is primarily attributable to the
expiration of capital leases on equipment which reduced amortization expense by
$1.0 million and reduced depreciation expense by $1.3 million.

In Fiscal 1997, Levitz closed five satellite stores which resulted in a pre-tax
charge for store closings of $8.3 million. The charge includes the reduction of
the carrying value of the store assets to their estimated fair value net of
selling expenses as well as reserves for future rental payments under operating
lease agreements. Included in the store closing charge for one of the closed
stores is a $2.4 million charge from the adoption of SFAS No. 121 effective
April 1, 1996.

In Fiscal 1996, Management implemented two restructuring plans to consolidate
regional offices and to eliminate certain support positions. The plans resulted
in a restructuring charge of $9.0 million. The charges include $7.8 million of
severance pay and related employee benefits and $1.2 million of lease
commitments on closed regional office facilities.

Interest expense for Fiscal 1997 increased to $54.1 million or 5.6% of net sales
from $51.8 million or 5.2% of net sales for Fiscal 1996. Interest expense
increased due to the Exchange Offer, and to increased borrowings under the
Senior Secured Facilities as compared to the previous Credit Agreement.

During Fiscal 1997, Levitz incurred an after-tax extraordinary loss of $2.0
million due to the write-off of deferred financing fees related to the previous
bank credit agreement.

As a result of the aforementioned factors, net loss was $26.5 million or 2.7% of
net sales for Fiscal 1997 as compared to $22.3 million or 2.2% of net sales for
Fiscal 1996.

SEASONALITY AND INFLATION

Management does not believe that seasonal variation has a significant impact on
its business. Levitz has generally been able to pass along any price increases
relating to inflation. Accordingly, the effect of inflation, if any, on Levitz's
results of operations has been minor.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Levitz's primary sources of liquidity are cash flows from operations (including
the proceeds from the transfer of customer credit obligations to GECC), trade
credit and borrowings under the DIP Facility. During Fiscal 1998, cash flow used
in operating activities before changes in working capital was $38.9 million.
During the second quarter ended September 30, 1997, cash flow used in operating
activities before changes in working capital was $21.6 million or 55.5% of the
total cash flow used for the year. As a result of the slow-down in shipments
from the vendors, sales declined $29.9 million from the same period of the prior
year creating a significant decline in gross profit dollars.

Cash flows provided by changes in working capital was $21.7 million for Fiscal
1998. Working capital was favorably impacted by the stay of payments for current
liabilities of approximately $70.7 million resulting from the Chapter 11 filing
on September 5, 1997. Changes in working capital were unfavorably 


                                       17
<PAGE>

impacted by the reduction in current liabilities due to the closing of 24 stores
and by the loss of favorable payment terms with vendors subsequent to the
Chapter 11 filing.

Net cash used in financing activities amounted to $19.4 million in Fiscal 1998,
and includes net repayments under the credit facilities of $1.4 million,
principal payments on long-term debt and capital lease obligations of $11.7
million, a decrease in the cash overdraft position of $3.1 million and payment
of deferred financing fees for the DIP Facility of $3.2 million. Net cash
provided by financing activities amounted to $2.4 million in Fiscal 1997 and
includes increased borrowings under the credit facilities of $22.7 million less
principal payments under long-term obligations of $11.1 million and payment of
deferred financing fees for the credit facilities of $10.9 million.

Cash provided by investing activities for Fiscal 1998 includes $46.8 million of
proceeds from asset sales of the JMS stores, the Company's Boca Raton
headquarters, and other closed facilities. All of these proceeds were applied as
repayments to the DIP Facilities as required by the agreement.

Levitz's capital expenditures (other than for capitalized leases) totaled
approximately $14.1 million, $11.0 million and $12.6 million during Fiscal 1998,
1997 and 1996, respectively. Capital expenditures during Fiscal 1998 were for
existing store improvements and equipment. Management estimates that
approximately $6.0 million to $10.0 million is required annually to adequately
maintain and/or improve its existing warehouse-showrooms and satellite stores.
Levitz expects to open three new stores and close fifteen stores during Fiscal
1999.

Long-Term Debt

LFI, Levitz and substantially all of its subsidiaries, as debtors-in-possession,
are parties to a Postpetition Credit Agreement dated as of September 5, 1997
(the "DIP Facility") with BT Commercial Corporation (BTCC) as agent. The DIP
Facility has been approved by the Bankruptcy Court and includes a total
commitment of $260.0 million which is comprised of revolving notes of $223.6
million and a term note of $36.4 million. Letter of Credit obligations under the
revolver portion of the DIP Facility are limited to $25.0 million. The DIP
Facility is intended to provide LFI with the cash and liquidity to conduct its
operations and pay for merchandise shipments at normal levels during the course
of the Chapter 11 proceedings.

Loans made under the DIP Facility revolving notes bear interest, at Levitz's
option, at a rate equal to either Bankers Trust Company's prime lending rate
plus 1.50% or BTCC's LIBOR rate plus 3.75%. The term note bears interest at 16%.
Levitz is required to pay an unused line fee of 0.50%, and a letter of credit
fee of 2.0%. Levitz paid financing fees of $3.2 million on the closing date.
These financing fees have been deferred and are being amortized over the life of
the DIP Facility.

The maximum borrowings, excluding the term commitments, under the DIP Facility
are limited to 85% of eligible accounts receivable, 75% of eligible inventory
(as defined in the DIP Facility) and a fixed asset sublimit which is permanently
reduced as the proceeds from the sale of fixed assets and leasehold interests
are received. Qualification of accounts receivable and inventory items as
"eligible" is subject to unilateral change at the discretion of the lenders.
Excess availability under the DIP Facility at May 31, 1998 was $24.1 million.

The DIP Facility is secured by substantially all of the assets of Levitz and its
subsidiaries and a perfected pledge of stock of all Levitz's subsidiaries. The
DIP Facility contains restrictive covenants including, among other things, the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization as defined (EBITDA), limitations on the incurrence of additional
indebtedness, liens, contingent obligations, sale of assets, capital
expenditures and a prohibition on paying dividends. In Fiscal 1998, the DIP


                                       18
<PAGE>

Facility was amended to include, among other things, a decrease in the minimum
EBITDA requirements through March 1998 and an increase in the capital
expenditure limit through March 1998. In July 1998, the DIP Facility was further
amended to decrease the EBITDA requirement through March 1999. The Company
expects to submit a reorganization plan prior to the expiration of the DIP
Facility. A component of that plan will be a financing agreement to succeed the
DIP Facility. LFI and Levitz are currently in compliance with the DIP Facility
covenants as amended.

The lenders under the DIP Facility have a super-priority administrative expense
claim against the estates of the Debtors. The DIP Facility expires on March 5,
1999.

The Company is currently in default of the senior notes and senior subordinated
notes, all of which are unsecured and have been classified as liabilities
subject to compromise.

As of March 31, 1998, Levitz (excluding obligations under account purchase
agreement of $554.3 million and liabilities subject to compromise of $195.3
million) had an aggregate of $155.4 million of total debt outstanding, of which
$149.7 million of principal payments are due during Fiscal 1999.

On September 5, 1997 Levitz and General Electric Capital Corporation (GECC)
entered into a Second Amended and Restated Account Purchase and Credit Card
Program Agreement (the "GECC Agreement"), whereby GECC is required to purchase
Levitz's customer credit obligations, subject to certain restrictions, without
recourse up to a maximum investment of $900.0 million. At March 31, 1998 GECC
had purchased $669.1 million of customer credit obligations. The GECC Agreement
expires October 31, 1999 and may require Levitz to repurchase the outstanding
customer credit obligations at a price equal to their outstanding balance less a
defined discount. In the event GECC would exercise its right to require Levitz
to repurchase the outstanding customer credit obligations at termination of the
GECC Agreement, Levitz would realize a loss in as much as the required
repurchase price would likely exceed the then fair market value of the
repurchased customer credit obligations. The amount of such loss would be
dependent upon the circumstances at termination date of the GECC Agreement which
would affect the fair market value of the then outstanding customer credit
obligations. There is significant doubt as to Levitz's ability to repurchase the
outstanding customer credit obligations due to the Chapter 11 filing and current
financial condition. The GECC Agreement also requires Levitz to pay a fee of
$3.5 million upon termination. The Court approved the GECC Agreement and granted
a perfected security interest and lien to GECC for any purchased customer credit
obligation and gave administrative expense status to any obligation of Levitz
arising from the GECC Agreement.

Effective January 1, 1997, Levitz was required to account for the transactions
under the GECC Agreement in accordance with Financial Accounting Standards Board
(FASB), Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". Under SFAS No. 125 Levitz was required to account for the
transactions under the GECC Agreement as a secured borrowing with a pledge of
collateral rather than as a sale, and therefore Levitz recorded $327.0 million
and $554.3 million as a Receivable Under Account Purchase Agreement and an
offsetting Obligation Under Account Purchase Agreement in its March 31, 1997 and
1998 financial statements, respectively.

Levitz is engaged in discussions with another party to finance and service its
customer credit obligations. The outcome of those discussions and negotiations
are not predictable, consequently the impact on the financial statements is not
known.

Levitz is exposed to market risk under the terms of the GECC Agreement. Levitz
may pay a fee or may receive income, based upon the relationship among the
interest earned on the portfolio, the amount of the servicing fee, the prime
rate, promotional advertising fees and to a limited extent, credit losses.


                                       19
<PAGE>

Levitz recorded income of $7.9 million, $12.8 million and $12.6 million,
respectively for the years ended March 31, 1998, 1997 and 1996. These amounts
are included in selling, general and administrative expenses and unusual
operating expenses. A one-percent change in the prime rate (when prime is
greater than 7%) would increase or decrease the income from GECC by
approximately $6.0 to $7.0 million per year. Levitz expects the income under the
GECC Agreement to be minimal in Fiscal 1999.

GOING CONCERN

The Company believes that cash on hand, amounts available under the DIP
Facility, as amended, and funds from operations will enable the Company to meet
its current liquidity and capital expenditures requirements. Until a plan of
reorganization is approved, the Company's long-term liquidity and the adequacy
of its capital resources cannot be determined.

Inherent in a successful plan of reorganization is a capital structure which
permits the Company to generate sufficient cash flow after reorganization to
meet its restructured obligations and fund the current obligations of the
Company. Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and stockholders may be substantially altered. At this time it is not
possible to predict the outcome of the Chapter 11 case, in general, or the
effects of such case on the business of the Company or on the interests of the
creditors.

YEAR 2000

Levitz recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 technology failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. Levitz is in the process of assessing the risk to the availability
and integrity of financial systems and the reliability of operational systems.
The Company is also communicating with vendors, financial institutions and
others with which it does business to coordinate year 2000 conversion. The cost
of achieving Year 2000 compliance, excluding in-house salaries, wages and
benefits, has been estimated at approximately $0.3 million for software
maintenance and development and $0.3 million for other operational systems. The
Company has committed in Fiscal 1998 or planned in Fiscal 1999 $2.4 million in
capital expenditures for the enhancement of operational and financial software
and hardware systems as needed for current changes in business strategy which
will eliminate the need for achieving Year 2000 compliance on some existing
software.

INCOME TAXES

Levitz has recorded a deferred tax asset (benefit) for its cumulative net
operating loss (NOL) for the fiscal year ended March 31, 1998. The cumulative
NOL benefit at March 31, 1998 is supported by deferred tax credits which are
projected to turn during the carryforward periods. Levitz is limited to the
amount of future NOL's it can benefit and may have to start providing offsetting
allowances. Additionally, if Levitz has any NOL carryforwards when it emerges
from bankruptcy, there could be limitations placed on the realization of these
NOL's.

                                    1998         1997         1996
                                    ----         ----         ----
Effective Tax Rate                  31.1%        35.5%        35.8%

The effective tax benefit decreased from 35.5% in Fiscal 1997 to 31.1% in Fiscal
1998 due to permanent differences arising from the write-off of goodwill and for
non-deductible expenses.

                                       20
<PAGE>


NEW ACCOUNTING STANDARDS

In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of
Information about Capital Structure". This statement establishes standards for
disclosing information about an entity's capital structure. The standard will be
effective for Fiscal 1999. This standard dows not change the currently reported
disclosures.

The FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information," in
June of 1997. These standards establish new disclosures for comprehensive income
and segments and will be effective for Fiscal 1999.

In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits". This standard is effective for
periods beginning after December 15, 1997. The implementation requires
restatement of disclosures and will not have a material effect on LFI's
consolidated financial statements.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard establishes accounting and
reporting for derivative instruments and hedging activities and will be
effective for Fiscal 2000. This standard will not have an affect on the
financial statements assuming current business strategies.

                                       21
<PAGE>


ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           PAGE
                                                                           ----
Report of Independent Public Accountants................................    23

Consolidated Balance Sheets.............................................    24

Consolidated Statements of Operations...................................    25

Consolidated Statements of Stockholder's Deficit........................    26

Consolidated Statements of Cash Flows...................................    27

Notes to Consolidated Financial Statements..............................    28

                                       22
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Levitz Furniture Corporation:

We have audited the accompanying consolidated balance sheets of Levitz Furniture
Corporation (a Florida corporation) and subsidiaries, debtor-in-possession (the
"Company") as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended March 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Levitz Furniture Corporation
and subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.

As discussed in Note 1, on September 5, 1997 the Company together with its
parent company, Levitz Furniture Incorporated, filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying
consolidated financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such consolidated
financial statements do not purport to show (a) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities; (b)
as to prepetition liabilities, the amounts that may be allowed and priority
thereof; (c) as to stockholder accounts, the effect of any changes that may be
made in the capitalization of the Company; or (d) as to operations, the effect
of any changes that may be made in the business.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Chapter 11 filing was the result
of violation of certain debt covenants, recurring losses, deterioration of
vendor support, and cash flow deficiencies. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Although the
Company is currently operating as a debtor-in-possession under the jurisdiction
of the bankruptcy court, the continuation of the business as a going concern is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of the creditors and shareholders and
confirmation by the bankruptcy court, success of future operations, the ability
to obtain financing and the ability to recover the carrying amount of assets
and/or the amount and classification of liabilities. Management's plans in
regard to these matters are also described in Note 1. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

                                       ARTHUR ANDERSEN LLP

Philadelphia, Pa.
July 13, 1998

                                       23
<PAGE>
<TABLE>
<CAPTION>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (Dollars in thousands, except share data)
                                                                         MARCH 31,
                                                              --------------------------------
                                                                  1998              1997
                                                              -------------    ---------------
<S>                                                                <C>                <C>
                                 ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                        $ 5,339            $ 9,267
  Receivables                                                       24,118             37,358
  Inventories                                                      142,618            169,488
  Deposits and prepaid expenses                                      3,442              3,514
  Deferred income taxes                                              3,418                933
                                                              -------------    ---------------
    Total current assets                                           178,935            220,560
                                                              -------------    ---------------
PROPERTY AND EQUIPMENT:
  Land                                                              25,501             47,731
  Buildings and building improvements                               91,736            142,949
  Leasehold improvements                                            71,936             74,469
  Store, warehouse and transportation equipment                     78,805             83,043
                                                              -------------    ---------------
                                                                   267,978            348,192
  Less-Accumulated depreciation and amortization                   124,729            133,566
                                                              -------------    ---------------
                                                                   143,249            214,626
  Property under capital leases, net of
    accumulated amortization of $85,623
    in 1998 and $98,993 in 1997                                     92,721            119,077
                                                              -------------    ---------------
                                                                   235,970            333,703
                                                              -------------    ---------------
OTHER ASSETS:
  Receivable under account purchase agreement (See Note 11)        554,322            327,000
  Intangible leasehold interests                                    14,151             15,613
  Deferred financing fees                                            2,061             11,975
  Goodwill                                                               -             18,177
  Property held for disposal                                        17,766                  -
  Other                                                              3,496              4,947
                                                              -------------    ---------------
                                                                   591,796            377,712
                                                              -------------    ---------------
                                                               $ 1,006,701          $ 931,975
                                                              =============    ===============
                  LIABILITIES AND STOCKHOLDER'S DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
  Cash overdrafts                                                 $ 16,395           $ 19,524
  Current portion of long-term debt                                  1,333             11,193
  Current portion of obligations under capital leases                    -              3,398
  Accounts payable, trade                                           30,511             73,044
  Accrued expenses and other liabilities                            55,847             88,897
  Payable to parent                                                 13,633             10,304
  Senior Secured Facilities                                              -             75,220
  DIP Facility                                                     148,381                  -
                                                              -------------    ---------------
    Total current liabilities                                      266,100            281,580
                                                              -------------    ---------------
LONG-TERM DEBT, net of current portion                               5,702            273,976
                                                              -------------    ---------------
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion                 -             74,466
                                                              -------------    ---------------
OBLIGATION UNDER ACCOUNT PURCHASE AGREEMENT (See Note 11)          554,322            327,000
                                                              -------------    ---------------
OTHER NONCURRENT LIABILITIES                                           683             24,424
                                                              -------------    ---------------
DEFERRED INCOME TAXES                                                8,825             48,101
                                                              -------------    ---------------
LIABILITIES SUBJECT TO COMPROMISE                                  360,976                  -
                                                              -------------    ---------------
COMMITMENTS AND CONTINGENCIES (See Note 15)
STOCKHOLDER'S DEFICIT:
  Common stock                                                           1                  1
  Capital in excess of par                                          58,453             58,453
  Retained earnings (deficit)                                     (248,361)          (155,389)
  Minimum pension liability                                              -               (637)
                                                              -------------    ---------------
      Total stockholder's deficit                                 (189,907)           (97,572)
                                                              -------------    ---------------
                                                               $ 1,006,701          $ 931,975
                                                              =============    ===============
</TABLE>
   The accompanying notes are an integral part of these financial statements.
                                       24
<PAGE>
<TABLE>
<CAPTION>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (Dollars in thousands, except share data)

                                                                 YEARS ENDED MARCH 31,
                                                  ----------------------------------------------------
                                                       1998              1997              1996
                                                  ----------------  ----------------  ----------------
<S>                                                     <C>               <C>               <C>
NET SALES                                               $ 836,802         $ 966,855         $ 986,622
                                                  ----------------  ----------------  ----------------

COSTS AND EXPENSES:
  Cost of sales                                           467,591           533,555           534,953
  Selling, general and administrative expenses            361,085           381,864           396,236
  Unusual operating expenses                               16,151                 -                 -
  Charge for store closings                                     -             8,295                 -
  Restructuring expense                                         -                 -             9,000
  Depreciation and amortization                            24,093            26,993            29,272
  Interest expense, net                                    38,974            54,053            51,829
                                                  ----------------  ----------------  ----------------
                                                          907,894         1,004,760         1,021,290
                                                  ----------------  ----------------  ----------------

LOSS BEFORE REORGANIZATION ITEMS AND
  INCOME TAXES                                            (71,092)          (37,905)          (34,668)

REORGANIZATION ITEMS:
  Loss on store closings and other                         33,649                 -                 -
  Acceleration of goodwill amortization                    14,975                 -                 -
  Professional fees                                         6,888                 -                 -
                                                  ----------------  ----------------  ----------------
    Total                                                  55,512                 -                 -
                                                  ----------------  ----------------  ----------------

LOSS BEFORE INCOME TAXES                                 (126,604)          (37,905)          (34,668)

INCOME TAX (BENEFIT)                                      (39,437)          (13,454)          (12,413)
                                                  ----------------  ----------------  ----------------

LOSS BEFORE EXTRAORDINARY ITEMS                           (87,167)          (24,451)          (22,255)

EXTRAORDINARY ITEMS, NET OF TAX
  BENEFIT OF $2,630 IN 1998 AND $1,090 IN 1997             (5,805)           (2,002)                -
                                                  ----------------  ----------------  ----------------

NET LOSS                                                $ (92,972)        $ (26,453)        $ (22,255)
                                                  ================  ================  ================

LOSS PER COMMON SHARE:
  Loss before extraordinary items                        ($87,167)         ($24,451)         ($22,255)
  Extraordinary items                                      (5,805)           (2,002)                -
                                                  ----------------  ----------------  ----------------

NET LOSS                                                 ($92,972)         ($26,453)         ($22,255)
                                                  ================  ================  ================

WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING                                        1,000             1,000             1,000
                                                  ================  ================  ================
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       25
<PAGE>
<TABLE>
<CAPTION>
                              LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

                             CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT

                                (Dollars in thousands, except share data)

                                     COMMON STOCK             CAPITAL        RETAINED          MINIMUM
                             ----------------------------    IN EXCESS       EARNINGS          PENSION
                                 SHARES         AMOUNT        OF PAR        (DEFICIT)         LIABILITY
                             ---------------  -----------  -------------  --------------     ------------
<S>                                   <C>            <C>       <C>           <C>                     <C>

BALANCE, MARCH 31, 1995               1,000          $ 1       $ 57,106      $ (106,681)             $ -

Net loss                                  -            -              -         (22,255)               -

Capital contribution                      -            -            747               -                -

Minimum pension liability                 -            -              -               -             (654)
                             ---------------  -----------  -------------  --------------     ------------

BALANCE, MARCH 31, 1996               1,000            1         57,853        (128,936)            (654)

Net loss                                  -            -              -         (26,453)               -

Capital contribution                      -            -            600               -                -

Minimum pension liability                 -            -              -               -               17
                             ---------------  -----------  -------------  --------------     ------------

BALANCE, MARCH 31, 1997               1,000            1         58,453        (155,389)            (637)

Net loss                                  -            -              -         (92,972)               -

Minimum pension liability                 -            -              -               -              637
                             ---------------  -----------  -------------  --------------     ------------

BALANCE, MARCH 31, 1998               1,000          $ 1       $ 58,453      $ (248,361)             $ -
                             ===============  ===========  =============  ==============     ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       26
<PAGE>
<TABLE>
<CAPTION>
                              LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          (Dollars in thousands)

                                                                       YEARS ENDED MARCH 31,
                                                           ----------------------------------------------
                                                               1998            1997             1996
                                                           -------------   --------------   -------------
<S>                                                           <C>              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                    $ (92,972)       $ (26,453)      $ (22,255)
                                                           -------------   --------------   -------------
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
      Depreciation                                               14,421           15,703          16,559
      Amortization                                                9,672           11,290          12,713
      Amortization of deferred financing fees                     2,318            2,620           2,003
      Pension expense (income)                                      901            1,874          (1,779)
      Loss (gain) on disposal of property and equipment             (39)            (637)            116
      Other                                                       6,146              384               -
      Deferred tax benefit                                      (42,174)         (11,526)         (8,157)
      Extraordinary loss related to early redemption
        of debt, before tax benefit                               8,435            3,092               -
      Inventory write-down                                        6,124                -               -
      Goodwill write-off                                          2,810                -               -
      Reorganization items                                       45,532                -               -
      Change in operating assets and liabilities:
        Decrease (increase) in:
          Receivables                                             6,265           (3,327)           (307)
          Inventories                                            19,376          (28,570)         14,090
          Deposits and prepaid expenses                             (49)             306           3,382
          Other, net                                                229               49             129
        Increase (decrease) in:
          Accounts payable, trade                                (2,320)          17,111          (1,680)
          Accrued expenses and other liabilities                 (4,871)          13,646           6,774
          Payable to parent                                       3,348            4,400          (4,091)
          Other noncurrent liabilities                             (305)           1,203          (2,014)
                                                           -------------   --------------   -------------
             Total adjustments                                   75,819           27,618          37,738
                                                           -------------   --------------   -------------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES             (17,153)           1,165          15,483
                                                           -------------   --------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                          (14,130)         (11,008)        (12,557)
  Proceeds from sale of property and equipment
    and other assets                                             46,775            3,959             353
  Proceeds from sale-leaseback transaction                            -                -          22,209
                                                           -------------   --------------   -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES              32,645           (7,049)         10,005
                                                           -------------   --------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings under credit facilities                            990,740        1,068,493         325,300
  Repayments under credit facilities                           (992,189)      (1,045,789)       (335,834)
  Principal payments on long-term debt                           (8,503)          (3,831)         (3,925)
  Principal payments under capital lease obligations             (3,174)          (7,222)         (5,184)
  (Decrease) increase in cash overdrafts                         (3,129)           1,612             609
  Payment of deferred financing fees                             (3,165)         (10,867)              -
                                                           -------------   --------------   -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES             (19,420)           2,396         (19,034)
                                                           -------------   --------------   -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS             (3,928)          (3,488)          6,454
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      9,267           12,755           6,301
                                                           -------------   --------------   -------------
CASH AND CASH EQUIVALENTS, END OF YEAR                          $ 5,339          $ 9,267        $ 12,755
                                                           =============   ==============   =============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       27
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 1998

1.       CHAPTER 11 PROCEEDINGS AND BASIS OF FINANCIAL STATEMENTS PRESENTATION:

         On September 5, 1997 (the "Petition Date", Levitz Furniture
         Incorporated, a Delaware corporation ("LFI"), and 11 of its
         subsidiaries, including, Levitz Furniture Corporation, a Florida
         corporation and wholly-owned subsidiary of LFI ("Levitz"), filed
         voluntary petitions for relief under Chapter 11, Title 11 of the United
         States Code (the "Bankruptcy Code") with the United States Bankruptcy
         Court for the District of Delaware, Wilmington, Delaware. The
         bankruptcy cases of LFI and Levitz and their affiliates are being
         jointly administered, for procedural purposes only, before the United
         States District Court, for the District of Delaware (the "Court") under
         Case No. 97-1842(JJF). Pursuant to Sections 1107 and 1108 of the
         Bankruptcy Code, Levitz, as debtor and debtor-in-possession, has
         continued to manage and operate its assets and businesses, pending the
         confirmation of a reorganization plan or plans and subject to the
         supervision and orders of the Court. Because Levitz is operating as
         debtor-in-possession under Chapter 11 of the Bankruptcy Code, the
         existing directors and officers of Levitz continue to manage the
         operations of Levitz subject to the supervision and orders of the
         Court.

         Certain subsidiaries were not included in the Chapter 11 filings. These
         subsidiaries are inactive and the results of their operations and
         financial position are not material to the consolidated financial
         statements.

         The Debtors expect to reorganize their affairs under the protection of
         Chapter 11 and to propose a Chapter 11 plan of reorganization for
         themselves. Although management expects to file a plan of
         reorganization during 1998 or 1999 which would contemplate emergence in
         1999, there can be no assurance at this time that a plan of
         reorganization proposed by the Debtors will be approved or confirmed by
         the Court, or that such plan will be consummated. The Court has granted
         the debtors' request to extend its exclusive right to file a plan of
         reorganization through August 31, 1998. The Debtors may request a
         further extension of the exclusivity period. There can be no assurances
         that the Court will grant such further extension. After the expiration
         of the exclusivity period, creditors will have the right to propose
         alternative plans of reorganization. The consummation of a plan of
         reorganization is the principal objective of the Company's Chapter 11
         case. A plan of reorganization sets forth the means for satisfying
         claims and interests in the Company and its debtor subsidiaries,
         including the liabilities subject to compromise. The consummation of a
         plan of reorganization for the Company and its debtor subsidiaries will
         require the requisite vote of impaired creditors under the Code and
         confirmation of the plan by the Court.

         The consolidated financial statements have been presented in accordance
         with the American Institute of Certified Public Accountants Statement
         of Position 90-7, "Financial Reporting by Entities in Reorganization
         under the Bankruptcy Code" (SOP 90-7) and have been prepared in
         accordance with generally accepted accounting principles applicable to
         a going concern, which principles, except as otherwise disclosed,
         assume that assets will be realized and liabilities will be discharged
         in the ordinary course of business. As a result of the Chapter 11 cases
         and circumstances relating to this event, including Levitz's debt
         structure, its recurring losses, and current economic conditions, such
         realization of assets and liquidation of liabilities are subject to
         significant

                                       28
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         uncertainty. While under the protection of Chapter 11, the Company may
         sell or otherwise dispose of assets, and liquidate or settle
         liabilities, for amounts other than those reflected in the financial
         statements. Additionally, the amounts reported on the consolidated
         balance sheet could materially change because of changes in business
         strategies and the effects of any proposed plan of reorganization.

         The appropriateness of using the going concern basis is dependent upon,
         among other things, confirmation of a plan of reorganization, future
         profitable operations, the ability to comply with the terms of the DIP
         Facility and the ability to generate sufficient cash from operations
         and financing arrangements to meet obligations.

         In the Chapter 11 cases, substantially all unsecured liabilities as of
         the Petition Date are subject to compromise or other treatment under a
         plan of reorganization which must be confirmed by the Bankruptcy Court
         after submission to any required vote by affected parties. For
         financial reporting purposes, those liabilities and obligations whose
         treatment and satisfaction is dependent on the outcome of the Chapter
         11 cases have been segregated and classified as liabilities subject to
         compromise under reorganization proceedings in the consolidated balance
         sheets. Generally, all actions to enforce or otherwise effect repayment
         of pre-Chapter 11 liabilities as well as all pending litigation against
         the Debtors are stayed while the Debtors continue their business
         operations as debtors-in-possession. Unaudited schedules have been
         filed by the Debtors with the Court setting forth the assets and
         liabilities of the Debtors as of the Petition Date as reflected in the
         Debtor's accounting records. Levitz has notified all known claimants
         subject to the August 10, 1998 bar date of their need to file a proof
         of claim with the Court. A bar date is the date by which claims against
         Levitz must be filed if the claimants wish to receive any distribution
         in the Chapter 11 cases. Differences between amounts shown by the
         Debtors and eventual claims filed by creditors will be investigated and
         will be either amicably resolved or adjudicated before the Court. The
         ultimate amount of and settlement terms for such liabilities are
         subject to an approved plan of reorganization and accordingly are not
         presently determinable.

         Under the Bankruptcy Code, the Debtors may elect to assume or reject
         real estate leases, employment contracts, personal property leases,
         service contracts and other prepetition executory contracts, subject to
         Court approval. Claims for damages resulting from the rejection of real
         estate leases and other executory contracts will be subject to separate
         bar dates. The Debtors have not reviewed all real estate leases for
         assumption or rejection. As of March 31, 1998, the Debtors had rejected
         leases for 9 store locations and reached agreement with the landlord on
         one store location to terminate without liability. The Court has
         extended the time for which the Debtors may assume or reject unexpired
         leases of nonresidential real property to October 30, 1998. The
         liabilities subject to compromise include a reserve for an estimated
         amount that may be claimed by lessors for the stores that have been
         closed through March 31, 1998. The Debtors will continue to analyze
         their real estate leases and executory contracts and may assume or
         reject additional leases and contracts. Such rejections could result in
         additional liabilities subject to compromise.

                                       29
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998


2.       DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         DESCRIPTION OF BUSINESS

         Levitz Furniture Corporation (Levitz), a Florida Corporation, was
         acquired by Levitz Furniture Incorporated (LFI) in 1985. Levitz is a
         specialty retailer of furniture with a chain of 58 warehouse-showrooms
         and 47 satellite stores located in major metropolitan areas in 22
         states. See Note 18 - Subsequent Events (Unaudited).

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of Levitz
         and its wholly-owned subsidiaries. All material intercompany accounts
         and transactions are eliminated in consolidation.

         REVENUE RECOGNITION POLICY

         Levitz recognizes revenue at the time a sales order is written and the
         following conditions are met: the merchandise is in stock and is
         available for sale; for a credit sale, the credit is unconditionally
         approved; and for items requested to be delivered by a customer, a firm
         delivery date is set, and a minimum down payment is received.

         CASH, CASH EQUIVALENTS AND CASH OVERDRAFTS

         All highly liquid debt instruments purchased with original maturities
         of three months or less are considered to be cash equivalents. Cash
         overdrafts include checks outstanding which do not have the right of
         offset with cash and cash equivalents. The carrying value approximates
         fair value because of the short maturity of those instruments.

         INVENTORIES

         Inventories of furniture and accessories are stated at the lower of
         cost or market. See Note 7. Cost is determined using the last-in,
         first-out (LIFO) method. Inventories valued on the LIFO cost method
         were approximately $11.9 million and $11.2 million lower than first-in,
         first-out (FIFO) costs at March 31, 1998 and 1997, respectively.

         During 1998, LIFO inventory quantities were reduced resulting in a
         partial liquidation of the LIFO bases, the effects of which were not
         material.

         PROPERTY AND EQUIPMENT, DEPRECIATION AND AMORTIZATION

         Property and equipment purchased by Levitz are stated at cost. Capital
         leases are recorded at the lower of the present value of the future
         minimum lease obligations or fair market value of the property.
         Depreciation is provided substantially by the straight-line method over
         the estimated useful lives of the related assets. The estimated useful
         lives range from 10 to 40 years for buildings, building improvements
         and leasehold improvements, and 2 to 20 years for store, warehouse and
         transportation equipment. Fully depreciated assets are written off
         against accumulated depreciation. Capital leases are depreciated over
         their initial terms which generally range from 15 to 40 years.

                                       30
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         PROPERTY HELD FOR DISPOSAL

         Property held for disposal representing primarily closed retail and
         warehouse facilities at the lower of net book value or net realizable
         value, of $17.8 million, is included in other assets at March 31, 1998.

         Losses of $3.4 million, which are included in reorganization costs,
         were recognized during Fiscal 1998 in connection with the write-down of
         property and equipment associated with these stores to their net
         realizable values.

         INTANGIBLE LEASEHOLD INTERESTS

         Intangible leasehold interests represent the value associated with
         renewal terms of capital leases and original and renewal terms of
         operating leases acquired by Levitz at rents below market value. The
         recoverability of the remaining carrying value of intangible leasehold
         interests is dependent upon the Company's ability to generate
         sufficient future cash flows from operations at each leased site, or in
         the case of a sale or disposition of a lease or leases, the
         continuation of similar favorable market rents. Accordingly,
         recoverability of this asset could be significantly affected by future
         economic, market and competitive factors and is subject to the inherent
         uncertainty associated with estimates. Intangible leasehold interests
         are amortized by the straight-line method over the original and renewal
         terms of the related leases.

         LONG-LIVED ASSETS

         In Fiscal 1997, the Company adopted Statement of Financial Accounting
         Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
         and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). This
         statement requires recognition of impairment losses for long-lived
         assets whenever events or changes in circumstances result in the
         carrying amount of the assets exceeding the sum of the expected future
         undiscounted cash flows associated with such assets. The measurement of
         the impairment losses to be recognized is based on the difference
         between the fair values and the carrying amounts of the assets. SFAS
         No. 121 also requires any long-lived assets held for sale be reported
         at the lower of carrying amount or the fair value less selling cost.
         The adoption of this statement resulted in a $2.4 million charge during
         Fiscal 1997.

         GOODWILL

         Goodwill has been written-off during 1998 due to the sale of
         substantially all the assets of John M. Smyth Company (JMS) on January
         9, 1998 and the current financial condition of Levitz. JMS was a
         wholly-owned subsidiary of Levitz. Prior to the write-off, goodwill was
         being amortized on a straight-line basis over forty years.

         ACCUMULATED AMORTIZATION

         Accumulated amortization related to intangible leasehold interests was
         $12.3 million as of March 31, 1998. Accumulated amortization related to
         intangible leasehold interests and goodwill was $16.0 million as of
         March 31, 1997.

                                       31
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         INCOME TAXES

         Levitz accounts for income taxes under an asset and liability approach
         that requires the recognition of deferred tax assets and liabilities
         for the expected future tax consequences of events that have been
         recognized in Levitz's financial statements or tax returns. In
         estimating future tax consequences, Levitz generally considers all
         expected future events other than enactment of changes in the tax laws
         or rates.

         DEFERRED FINANCING FEES

         Deferred financing fees at March 31, 1998 represent costs associated
         with obtaining the DIP financing and are being amortized over the terms
         of the related debt. Accumulated amortization of the DIP financing fees
         was $1.1 million at March 31, 1998. Net deferred financing costs as of
         the Petition Date of $8.4 million and $2.5 million for the senior
         secured facilities and for the various unsecured debt obligations were
         written off during 1998 as an extraordinary item and as reorganization
         items, respectively.

         ADVERTISING EXPENSES

         Levitz expenses all advertising costs the first time the advertising
         takes place including direct-response advertising. Advertising expense
         for fiscal years ended March 31, 1998, 1997 and 1996 was $108.1
         million, $102.1 million and $100.5 million, respectively.

         USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates. See Note 1 regarding proceedings under Chapter
         11.

         SELF INSURANCE

         Levitz is generally self-insured for losses and liabilities related to
         worker's compensation, health and welfare claims and comprehensive
         general, product and vehicle liability. Losses are accrued based upon
         Levitz's estimates of the aggregate liability for claims incurred using
         certain actuarial assumptions followed in the insurance industry and
         based on Levitz's experience.

         NEW ACCOUNTING PRONOUNCEMENTS

         In March 1997, the Financial Accounting Standards Board ("FASB") issued
         Statement of Financial Accounting Standards ("SFAS") No. 129,
         "Disclosure of Information about Capital Structure". This statement
         establishes standards for disclosing information about an entity's
         capital structure. The standard will be effective for Fiscal 1999. This
         standard dows not change the currently reported disclosures.

         The FASB issued SFAS No. 130, "Reporting Comprehensive Income," and
         SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
         Information," in June of 1997. These standards establish new


                                       32
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         disclosures for comprehensive income and segments and will be effective
         for Fiscal 1999.

         In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
         about Pensions and Other Postretirement Benefits". This standard is
         effective for periods beginning after December 15, 1997. The
         implementation requires restatement of disclosures and will not have a
         material effect on LFI's consolidated financial statements.

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
         Instruments and Hedging Activities". This standard establishes
         accounting and reporting for derivative instruments and hedging
         activities and will be effective for Fiscal 2000. This standard will
         not have an affect on the financial statements assuming current
         business strategies.

         STOCK-BASED COMPENSATION

         The Company follows Statement of Financial Accounting Standards No.
         123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
         provides for a fair value based method of accounting for grants of
         equity instruments to employees or suppliers in return for goods or
         services. As permitted under SFAS No. 123, the Company has elected to
         continue to account for compensation costs under the provisions
         prescribed by Accounting Principles Board Opinion No. 25, "Accounting
         for Stock Issued to Employees." Levitz has not made any grants of
         equity instruments to employees or suppliers.

         EARNINGS PER SHARE

         During the fourth quarter of 1998, the Company adopted Statement of
         Financial Accounting Standards No. 128 (SFAS 128), which requires
         companies to report both basic and dilutive earnings per share. Loss
         per common share is based on the weighted average number of common
         shares outstanding during each year of 1,000 shares.

         RECLASSIFICATIONS

         Certain amounts in prior years' consolidated financial statements have
         been reclassified to conform to the current year's presentation.

3.       CONSOLIDATED STATEMENTS OF CASH FLOWS:

         Supplemental disclosures of cash flow information (dollars in
         thousands):

         <TABLE>
         <CAPTION>
                                              1998                1997                 1996
                                         ---------------     ----------------     ---------------
         <S>                                    <C>                  <C>                 <C>
         Cash paid/(received) during
           the year for:
             Interest                           $37,853              $49,678             $49,291
             Income tax refunds, net             (2,417)              (6,985)             (1,293)
         Non-cash activities:
           Capital contributions                      -                  600                 747
         </TABLE>

                                       33
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

4.       SHORT-TERM AND LONG-TERM DEBT:

         Outstanding balances under debt arrangements are as follows (dollars in
         thousands):
         <TABLE>
         <CAPTION>
                                                                       MARCH 31,                  MATURITY
                                                            --------------------------------    YEAR ENDING
                                               RATE              1998             1997            MARCH 31
                                             --------       ---------------  ---------------  -----------------
         <S>                                 <C>                  <C>        <C>                    <C>
         DIP Facilities                      Variable             $148,381   $     -                1999
         Senior Secured Facilities           Variable                    -          149,710         2002
         Senior notes                         13.375%               91,267           91,141         1999
         Senior subordinated notes            9.625%               100,000          100,000         2004
         Subordinated notes                   12.375%                    -            6,016         1998
         Mortgages                          8.375%-13%               7,035            9,522     1998 to 2004
         Lease financing                     Variable                4,000            4,000         1999
                                                            ---------------  ---------------
                                                                   350,683          360,389
         Less -
         Current portion of long-
           term debt                                                 1,333           11,193
         Credit facilities classified
           as current                                              148,381           75,220
         Unsecured debt reclassified
           as subject to compromise                                195,267                -
                                                            ---------------  ---------------
                                                                   $ 5,702         $273,976
                                                            ===============  ===============
         </TABLE>

         LFI, Levitz and substantially all of its subsidiaries, as
         debtors-in-possession, are parties to a Postpetition Credit Agreement
         dated as of September 5, 1997 (the "DIP Facility") with BT Commercial
         Corporation (BTCC) as agent. The DIP Facility has been approved by the
         Court and includes a total commitment of $260.0 million which is
         comprised of revolving notes of $223.6 million and a term note of $36.4
         million. Letter of Credit obligations under the revolver portion of the
         DIP Facility are limited to $25.0 million. The DIP Facility is intended
         to provide Levitz with the cash and liquidity to conduct its operations
         and pay for merchandise shipments at normal levels during the course of
         the Chapter 11 proceedings.

         Loans made under the DIP Facility revolving notes bear interest, at
         Levitz's option, at a rate equal to either Bankers Trust Company's
         prime lending rate plus 1.50% or BTCC's LIBOR rate plus 3.75%. The term
         note bears interest at 16%. Levitz is required to pay an unused line
         fee of 0.50%, and a letter of credit fee of 2.0%. Levitz paid financing
         fees of $3.2 million on the closing date. These financing fees have
         been deferred and are being amortized over the life of the DIP
         Facility.

         The maximum borrowings, excluding the term commitments, under the DIP
         Facility are limited to 85% of eligible accounts receivable, 75% of
         eligible inventory (as defined in the DIP Facility) and a fixed asset
         sublimit which is permanently reduced as the proceeds from the sale of
         fixed assets and leasehold interests are received. Qualification of
         accounts receivable and inventory items as "eligible" is subject to
         unilateral change at the discretion of the lenders. Excess availability
         under the DIP Facility at March 31, 1998 and May 31, 1998 was $45.9
         million and $24.1 million, respectively.


                                       34
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998


         The DIP Facility is secured by substantially all of the assets of
         Levitz and its subsidiaries and a perfected pledge of stock of all
         Levitz's subsidiaries. The DIP Facility contains restrictive covenants
         including, among other things, the maintenance of minimum earnings
         before interest, taxes, depreciation and amortization as defined
         (EBITDA), limitations on the incurrence of additional indebtedness,
         liens, contingent obligations, sales of assets, capital expenditures
         and a prohibition on paying dividends. In Fiscal 1998, the DIP Facility
         was amended to include, among other things, a decrease in the minimum
         EBITDA requirements through March 1998 and an increase in the capital
         expenditure limit through March 1998. In July 1998, the DIP Facility
         was further amended to decrease the EBITDA requirement through March
         1999. LFI and Levitz are currently in compliance with the DIP Facility
         covenants as amended.

         The lenders under the DIP Facility have a super-priority administrative
         expense claim against the estate of the Debtors. The DIP Facility
         expires on March 5, 1999.

         The Company is currently in default of the senior notes and senior
         subordinated notes, all of which are unsecured and have been classified
         as liabilities subject to compromise.

         As of March 31, 1998, Levitz (excluding obligations under account
         purchase agreement of $554.3 million and liabilities subject to
         compromise of $195.3 million) had an aggregate of $155.4 million of
         total debt outstanding, of which $149.7 million of principal payments
         are due during Fiscal 1999.

5.       LIABILITIES SUBJECT TO COMPROMISE:

         The principal categories of obligations classified as liabilities
         subject to compromise under reorganization proceedings are identified
         below. The amounts below in total may vary significantly from the
         stated amount of proofs of claim that will be filed with the Court and
         may be subject to future adjustment depending on Court action, further
         developments with respect to potential disputed claims, determination
         as to the value of any collateral securing claims, or other events.
         Additional claims may arise from the rejection of additional real
         estate leases and executory contracts by the Debtors.

                                       35
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         <TABLE>
         <CAPTION>
                                                                          MARCH 31,
                                                                             1998
                                                                         (DOLLARS IN
                            LIABILITIES SUBJECT TO COMPROMISE             THOUSANDS)
                            ---------------------------------            -----------
         <S>                                                              <C>
         Accounts payable, trade                                          $ 39,270
         Accrued expenses                                                   15,670
         13.375% Senior Notes due 10/15/98                                  96,031 (1)
         9.625% Senior Subordinated Notes due 7/15/03                      101,337 (1)
         Financing on store building                                         4,000
         Obligations under capital leases                                   64,030 (2)
         Reserve for lease rejection claims                                 11,012
         Deferred rent on operating leases                                   3,744
         Deferred gain on sale leasebacks                                    3,108
         Supplemental executive retirement programs                         13,156
         Employment agreement severance costs                                2,869
         General liability claims                                              736
         Reserve for previous store closings                                 2,852
         Real estate taxes                                                   2,565
         Personal property taxes                                               596
                                                                     --------------
                                                                         $ 360,976
                                                                     ==============
         </TABLE>

         (1)     Includes accrued interest at September 4, 1997.

         (2)     The above capital lease obligations include the obligations on
                 closed stores where the fair market value of leasehold
                 interests exceeds the capital lease asset value. A gain would
                 be recognized upon assumption and assignment of the lease.

         As a result of the Chapter 11 filing, no principal or interest payments
         will be made on most prepetition debt without Court approval or until a
         plan of reorganization providing for the repayment terms has been
         confirmed by the Court and becomes effective. Interest on prepetition
         unsecured obligations has not been accrued after the Petition Date
         except that interest expense and principal payments will continue to be
         recorded on capital lease obligations unless the leases are rejected by
         the Debtors. If a capital lease is rejected the obligation will be
         limited to the lease rejection claim. Contractual interest expense of
         $12.6 million was not recorded on certain prepetition debt for the
         period from September 5, 1997 through March 31, 1998.

6.       REORGANIZATION ITEMS:

         During Fiscal 1998 the Company initiated a series of actions under its
         reorganization proceedings to improve its performance, which included
         store closures and dispositions, and incurred professional fees in
         connection with the Bankruptcy proceedings. These reorganization items
         aggregated $38,248 per share, net of tax benefit, for the period ended
         March 31, 1998.

         During October, 1997, the Court approved a motion for Levitz to close
         eighteen stores in under-performing markets. The closings are expected
         to reduce future operating losses. The Company recorded a pre-tax


                                       36
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         charge of $23.8 million associated with the closing of these stores,
         which included non-cash items for the writedown of property, capital
         lease assets, furniture and fixtures to their net realizable values of
         $18.9 million, the loss on sale of inventory through liquidation in the
         amount $1.5 million and the write off of other assets in the amount of
         $0.8 million. Cash items include severance pay of $1.6 million and
         continuing expenses of $1.0 million. Additional non-cash
         reorganizational items written off at the same time included 
         acceleration of goodwill amortization of $4.7 million and deferred
         financing fees of $2.5 million.

         On January 9, 1998, Levitz sold substantially all of the assets of the
         John M. Smyth Company ("JMS"), a wholly-owned subsidiary of Levitz,
         which then operated five store locations in the Chicago, Illinois
         vicinity. The gross proceeds from the sale which includes reimbursed
         amounts were approximately $35.6 million. The proceeds were used to pay
         mortgages, accounts payable, accrued liabilities and reduce borrowings
         under the DIP Facilities. In December 1997, Levitz incurred a charge of
         $18.0 million on the sale and closing of the JMS facilities. The charge
         included non-cash items for loss on sale of property and equipment of
         $5.0 million, acceleration of goodwill amortization of $10.3 million,
         lease rejection claims of $1.6 million and write-off of other assets of
         $0.2 million. The charge included cash items of $0.3 million for
         severance pay and $0.6 million for continuing expenses.

         Net sales and operating loss (exclusive of certain central office
         expense allocations and prior to interest expense, income taxes and
         reorganization items) from the 24 stores closed or disposed of during
         1998 and the 5 stores closed during fiscal 1997 (see Note 8) were (in
         000's):

                                          1998               1997
                                     ---------------   -----------------

         Net sales                          $77,678            $145,187

         Operating loss                      (3,061)             (3,393)

         Professional fees include accounting, legal and consulting services
         provided to Levitz and the Creditors' Committee which, subject to Court
         approval, are required to be paid by Levitz while it is in Chapter 11.
         Fees accrued for these services totaled $6.9 million in Fiscal 1998.

7.       UNUSUAL OPERATING EXPENSES:

         During Fiscal 1998, upon the resignation of an officer, Levitz accrued
         severance costs (i.e., future payroll and employee benefit) of $1.3
         million under the provisions of an employment agreement. Additionally,
         Levitz recorded a $5.9 million write-off of the future service revenue
         receivable under the GECC Agreement when Levitz was required to account
         for the transfer of assets under the GECC Agreement as a secured
         borrowing with a pledge of collateral rather than as a sale for
         financial reporting purposes. The charges increased net loss by $5.0
         million or $4,973 per share.

         During the fourth quarter of Fiscal 1998, the Company reviewed certain
         discontinued and/or slow moving inventory items which did not
         complement the new merchandise assortment. In an effort to accelerate
         the 


                                       37
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         liquidation of these items, the Company reduced their selling prices.
         Included in unusual operating expenses is a $6.1 million charge
         reflecting the Company's adjustment to record this inventory at its
         estimated net realizable value. The Company also wrote off goodwill in
         the amount of $2.8 million. The charges increased net loss by $6.1
         million or $6,156 per share.

8.       STORE CLOSING AND RESTRUCTURING EXPENSE:

         In the fiscal year ended March 31, 1997, management developed a plan to
         close five satellite stores. The stores were closed on October 31,
         1996. The plan resulted in a pre-tax charge for store closings of $8.3
         million. The charge includes the reduction of the carrying value of the
         store assets to their estimated realizable value net of selling
         expenses as well as reserves for future rental payments under operating
         lease agreements. Included in the store closing charge is a $2.4
         million charge from the adoption of SFAS No. 121 effective April 1,
         1996 for one of the closed stores. The charge increased net loss by
         $5.4 million or $5,352 per share. As of March 31, 1998 approximately
         $3.9 million of these store closing reserves remained and is included
         in accrued expenses and other liabilities and liabilities subject to
         compromise.

         In the fiscal year ended March 31, 1996, management implemented two
         restructuring plans to consolidate regional offices and to eliminate
         certain support positions. The plans resulted in a restructuring charge
         of $9.0 million. The charges include $7.8 million of severance pay and
         related employee benefits and $1.2 million of lease commitments on
         closed regional office facilities. The two restructuring charges
         increased the net loss by $5.8 million or $5,828 per share. As of March
         31, 1998 approximately $2.9 million of the restructuring charges
         remained and are included in liabilities subject to compromise.

9.       EXTRAORDINARY ITEMS:

         On September 5, 1997, Levitz incurred a before-tax extraordinary loss
         of $8.4 million on the write-off of deferred financing fees related to
         the termination of the previous credit facilities. The after-tax loss
         was $5.8 million or $5,805 per share. In the period ended December 31,
         1996, Levitz incurred a before-tax extraordinary loss of $3.1 million
         on the write-off of deferred financing fees related to the termination
         of the previous bank credit agreement, the after-tax loss was $2.0
         million or $2,002 per share.

10.      LEASING ARRANGEMENTS:

         Levitz leases its warehouse-showrooms generally under non-cancelable
         leases for original terms ranging from 10 to 40 years. Most leases
         contain renewal options and some include options to purchase the
         properties.

                                       38
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         The following is an analysis of property under capital leases by major
         classes (dollars in thousands):

                                                1998               1997
                                           ---------------    ---------------

         Land, buildings and improvements        $177,192           $216,918
         Equipment                                  1,152              1,152
                                           ---------------    ---------------
                                                  178,344            218,070
         Less- Accumulated amortization            85,623             98,993
                                           ---------------    ---------------
                                                  $92,721           $119,077
                                           ===============    ===============

         Amortization expense relating to property under capital leases for the
         years ended March 31, 1998, 1997 and 1996 was $8.3 million, $9.5
         million and $10.6 million, respectively.

         Minimum annual rentals on open stores at March 31, 1998 (net of
         sublease income to be received) for the five years subsequent to March
         31, 1998 and in the aggregate are as follows (dollars in thousands):

                                                 CAPITAL           OPERATING
         YEAR                                    LEASES              LEASES
                                              --------------     ---------------

         1999                                        $9,874             $18,743
         2000                                         9,604              15,993
         2001                                         9,438              13,099
         2002                                         9,095              12,454
         2003                                         7,942              11,716
         Thereafter                                 126,115             106,097
                                              --------------     ---------------
         Total minimum lease payments               172,068            $178,102
                                                                 ===============
         Less - Amount representing interest        113,251
                                              --------------
         Present value of net minimum
           payments under capital leases             58,817
         Less - Current portion                       2,739
                                              --------------
                                                    $56,078
                                              ==============

         The obligations under capital leases have been included in liabilities
         subject to compromise at March 31, 1998.

         Rent expense includes minimum rentals on operating leases, contingent
         payments based on either the Consumer Price Index or a percentage of
         sales for both capital and operating leases and amortization of
         intangible leasehold interests.

         Rent expense consists of the following (dollars in thousands):

                                    1998            1997             1996
                                -------------   --------------   --------------

         Rent expense                $23,835          $24,567          $24,681
         Sublease income                (519)            (888)            (799)
                                -------------   --------------   --------------
         Rent expense, net           $23,316          $23,679          $23,882
                                =============   ==============   ==============



                                       39
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         In May 1995, under a sale-leaseback agreement, Levitz sold three
         warehouse-showrooms and one satellite store for approximately $22.2
         million and leased them back under a twenty year operating lease
         agreement. The transaction resulted in a deferred gain of $3.6 million
         which is being amortized over the twenty-year lease period.

         Some rental agreements contain escalation provisions that may require
         higher future rent payments. Rent expense incurred under rental
         agreements which contain escalation clauses is recognized on a
         straight-line basis over the life of the lease.

11.      TRANSFER AND SERVICING OF FINANCIAL ASSETS:

         On September 5, 1997 Levitz and General Electric Capital Corporation
         (GECC) entered into a Second Amended and Restated Account Purchase and
         Credit Card Program Agreement (the "GECC Agreement"), whereby GECC is
         required to purchase Levitz's customer credit obligations, subject to
         certain restrictions, without recourse up to a maximum investment of
         $900.0 million. At March 31, 1998 GECC had purchased $669.1 million of
         customer credit obligations. The GECC Agreement expires October 31,
         1999 and may require Levitz to repurchase the outstanding customer
         credit obligations at a price equal to their outstanding balance less a
         defined discount. In the event GECC would exercise its right to require
         Levitz to repurchase the outstanding customer credit obligations at
         termination of the GECC Agreement, Levitz would realize a loss in as
         much as the required repurchase price would likely exceed the then fair
         market value of the repurchased customer credit obligations. The amount
         of such loss would be dependent upon the circumstances at termination
         date of the GECC Agreement which would affect the fair market value of
         the then outstanding customer credit obligations. There is significant
         doubt as to Levitz's ability to repurchase the outstanding customer
         credit obligations due to the Chapter 11 filing and current financial
         condition. The GECC Agreement also requires Levitz to pay a fee of $3.5
         million upon termination. The Court approved the GECC Agreement and
         granted a perfected security interest and lien to GECC for any
         purchased customer credit obligation and gave administrative expense
         status to any obligation of Levitz arising from the GECC Agreement.

         Effective January 1, 1997, Levitz was required to account for the
         transactions under the GECC Agreement in accordance with Financial
         Accounting Standards Board (FASB), Statement of Financial Accounting
         Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
         Financial Assets and Extinguishments of Liabilities". Under SFAS No.
         125 Levitz was required to account for the transactions under the GECC
         Agreement as a secured borrowing with a pledge of collateral rather
         than as a sale, and therefore Levitz recorded $327.0 million and $554.3
         million as a Receivable Under Account Purchase Agreement and an
         offsetting Obligation Under Account Purchase Agreement in its March 31,
         1997 and 1998 financial statements, respectively.

         Levitz is engaged in discussions with another party to finance and
         service its customer credit obligations. The outcome of those
         discussions and negotiations are not predictable, consequently the
         impact on the financial statements is not known.

         Levitz is exposed to market risk under the terms of the GECC Agreement.
         Levitz may pay a fee or may receive income, based upon the relationship
         among the interest earned on the portfolio, the amount of the servicing
         fee, the prime rate, promotional advertising fees and to a limited


                                       40
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         extent, credit losses. Levitz recorded income of $7.9 million, $12.8
         million and $12.6 million, respectively for the years ended March 31,
         1998, 1997 and 1996. These amounts are included in selling, general and
         administrative expenses and unusual operating expenses. A one-percent
         change in the prime rate (when prime is greater than 7%) would increase
         or decrease the income from GECC by approximately $6.0 to $7.0 million
         per year.

12.      INCOME TAXES:

         Levitz has recorded a deferred tax asset (benefit) for its cumulative
         net operating loss ("NOL") for the year ended March 31, 1998. The
         cumulative NOL benefit at March 31, 1998 is supported by deferred tax
         credits which are projected to turn during the carryforward periods. As
         of March 31, 1998, Levitz has Federal NOL carryforwards of $62.4
         million which will expire beginning in 2012 and alternative minimum tax
         ("AMT") credits of $2 million to offset future federal income tax
         liabilities.

         Levitz maintains no valuation reserves relating to the realizeability
         of the NOL carryforwards at March 31, 1998. Levitz is limited to the
         amount of future NOL's it can benefit and will have to start providing
         offsetting allowances during Fiscal 1999. Additionally, if Levitz has
         any NOL carryforwards when it emerges from bankruptcy, there could be
         limitations placed on the realization of these NOL's. Management
         believes that the NOL carryforwards could be realized by selling assets
         held for disposal, if necessary, to avoid allowing the carryforwards to
         expire without being used. Management has obtained third party
         valuations to establish the probable proceeds from such sales.

         The benefit for income taxes was allocated as follows (dollars in
         thousands):
         <TABLE>
         <CAPTION>
                                                 1998              1997          1996
                                           -------------  ---------------  -------------
         <S>                                   <C>              <C>            <C>
         Loss before extraordinary items       ($39,437)        ($13,454)      ($12,413)
         Extraordinary items                     (2,630)          (1,090)             -
                                           -------------  ---------------  -------------
                                               ($42,067)        ($14,544)      ($12,413)
                                           =============  ===============  =============
         </TABLE>

                                       41
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         The components of the benefit for income taxes applicable to loss
         before extraordinary items is (dollars in thousands):

                                      1998             1997              1996
                                      ----             ----              ----
         Current:
           Federal                     $ -           ($1,245)         ($4,334)
           State                        57                13                -
                            ---------------  ----------------  ---------------
                                        57            (1,232)          (4,334)
                            ---------------  ----------------  ---------------

         Deferred:
           Federal                 (35,209)          (10,565)          (6,390)
           State                    (4,285)           (1,657)          (1,689)
                            ---------------  ----------------  ---------------
                                   (39,494)          (12,222)          (8,079)
                            ---------------  ----------------  ---------------
                                  ($39,437)         ($13,454)        ($12,413)
                            ===============  ================  ===============

         A reconciliation of the statutory benefit for income taxes on loss
         before extraordinary items to the actual tax benefit is as follows
         (dollars in thousands):
         <TABLE>
         <CAPTION>

                                                  1998           1997          1996
                                              ------------   -----------  ------------
         <S>                                     <C>           <C>           <C>
         Computed income tax benefit
           at Federal statutory rate             ($43,045)     ($12,849)     ($11,787)
         State and local income tax benefit,
           net of federal income tax               (2,748)       (1,085)       (1,115)
         Permanent differences                      6,797           182           181
         Other                                       (441)          298           308
                                              ------------   -----------  ------------
                                                 ($39,437)     ($13,454)     ($12,413)
                                              ============   ===========  ============
         </TABLE>

                                       42
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         Components of the deferred income tax assets and liabilities are
        (dollars in thousands):

                                                          MARCH 31,
                                              ----------------------------------
                                                   1998               1997
                                              ---------------    ---------------

         Deferred tax assets:
           Expense deducted for book and
             not for tax                              $8,660             $7,193
           Obligations under capital lease            20,797             23,888
           Other liabilities                          21,745             21,888
           Federal NOL benefit                        20,765              2,881
           AMT credit carryover                        2,039              2,058
                                              ---------------    ---------------
                                                      74,006             57,908
                                              ---------------    ---------------

         Deferred tax liabilities:
           Inventory                                  11,419             13,904
           Property and equipment                      4,059             30,358
           Property under capital lease
             and intangible leasehold
             interests                                47,687             47,546
           Stepped-up values on plant
             and equipment due to
             purchase accounting                      15,282             11,918
           Other                                         966              1,350
                                              ---------------    ---------------
                                                      79,413            105,076
                                              ---------------    ---------------
         Net deferred tax liability                   $5,407            $47,168
                                              ===============    ===============

         Levitz files a consolidated Federal income tax return and certain state
         returns with LFI. Levitz records its share of the consolidated Federal
         and state income tax provision or benefit by multiplying its separate
         taxable income or loss for the year by the corporate income tax rates
         applicable to such year. A tax benefit is recorded only if realized on
         a consolidated basis. Substantially all income taxes payable are
         payable to LFI under the tax-sharing arrangement and are included in
         payable to parent in the consolidated balance sheets.

13.      EMPLOYEE BENEFIT PLANS:

         Levitz has a non-contributory, defined benefit plan (the Pension Plan).
         Pension benefits are based on length of service and final average
         compensation and are integrated with Social Security. The maximum
         pension benefit per individual is limited to $130,000 per year. Plan
         assets consist primarily of marketable equity and debt securities and
         cash equivalents. Levitz's funding policy is to make the minimum annual
         contributions required by applicable regulations.

         In March 1996, Levitz amended the Pension Plan to exclude future
         benefit accruals for credited service and annual earnings after March
         31, 1996 and also excluded any associate from becoming a participant in
         the plan after January 1, 1996 (Pension Curtailment). This amendment
         resulted in a net curtailment gain of $8.3 million, which was recorded
         as a 


                                       43
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         reduction of selling, general and administrative expenses in the fiscal
         year ended March 31, 1996.

         Certain officers and certain key employees of Levitz are participants
         in an unfunded non-contributory supplemental executive retirement plan
         (SERP) and a life insurance plan. The SERP provides supplemental
         retirement, disability and/or death benefits. Retirement and disability
         benefits are equal to 4.0% of the highest consecutive five-year average
         of salary plus bonus paid for each year of service, limited to a
         maximum of 60% of compensation or $0.3 million on an indexed basis.
         Death benefits are equal to 3% per year of service to a maximum of 45%
         of such compensation. Benefits are subject to a dollar-for-dollar
         reduction for benefits paid under the Pension Plan, Social Security and
         certain other specified pension plan payments. The liability for the
         SERP and insurance plan is included in liabilities subject to
         compromise.

         The actuarial information included below for the fiscal years ended
         March 31, 1998, 1997 and 1996, was derived from the actuarial reports
         for the Pension Plan and SERP for the plan years ended December 31,
         1997, 1996 and 1995. As adjusted for the Pension Curtailment and
         restructuring, pension expense for the years ended March 31, 1998, 1997
         and 1996, was comprised of the following (dollars in thousands):

         <TABLE>
         <CAPTION>
                                                     1998                   1997                   1996  
                                            --------------------------------------------------------------------
                                             PENSION                 PENSION                PENSION
                                               PLAN        SERP       PLAN        SERP       PLAN        SERP
                                            -----------  ---------  ----------  ---------  ----------  ---------
         <S>                                  <C>           <C>       <C>         <C>        <C>         <C>         
         Service cost of benefits
           earned during the period           $      -      $ 272     $     -     $   83     $ 2,941     $  181
         Interest cost on projected
           benefit obligation                    4,258        559       4,296      1,108       4,957        994
         Actual return on plan assets          (17,879)         -      (3,870)         -      (9,914)         -
         Net amortization and deferral          13,553        113        (240)       395       5,091        610
         One-time charge for
           terminations                              -         55           -         45           -      1,706
         Curtailment expense (gain)                  -          -           -          -      (8,805)       460
                                            -----------  ---------  ----------  ---------  ----------  ---------

         Net pension expense (gain)               ($68)      $999        $186     $1,631     ($5,730)    $3,951
                                            ===========  =========  ==========  =========  ==========  =========

         Assumptions:
           Weighted average discount
             rate                                 7.00%      7.00%       7.75%      7.75%       8.35%      8.35%
           Rates of increase in
             compensation levels                     -       3.80%          -       2.00%       2.00%      2.00%
           Expected long-term rate
             of return on assets                  9.00%         -        9.00%         -        9.00%         -
         </TABLE>

                                       44
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         The following is a reconciliation of the funded status of the plans
         with the March 31 balance sheets (dollars in thousands):

         <TABLE>
         <CAPTION>
                                                      1998                                1997
                                        ---------------------------------   ---------------------------------
                                           PENSION                             PENSION
                                             PLAN              SERP              PLAN              SERP
                                        ---------------   ---------------   ---------------   ---------------
         <S>                                  <C>               <C>               <C>               <C>                     
         Actuarial present value
           of benefit obligation-
             Vested                           $(59,280)         $(13,902)         $(52,382)         $(13,617)
             Nonvested                          (1,891)             (710)           (2,019)             (443)
                                        ---------------   ---------------   ---------------   ---------------
         Accumulated benefit
           obligation                         $(61,171)         $(14,612)         $(54,401)         $(14,060)
                                        ===============   ===============   ===============   ===============
         Actuarial present value
           of projected
           benefit obligations                $(61,171)         $(15,080)         $(55,879)         $(14,908)
         Plan assets at fair
           market value                         68,382                 -            55,912                 -
                                        ---------------   ---------------   ---------------   ---------------
         Plan assets less
           projected benefit
           obligation                            7,211           (15,080)               33           (14,908)
         Unrecognized net (gain) loss           (4,406)            1,752             2,704             1,879
         Unrecognized prior service
           cost                                      -               268                 -               313
         Unrecognized net transition
           obligation                                -               370                 -               408
         Minimum liability                           -                 -                 -            (1,752)
         Other                                       -               (23)                -               102
                                        ---------------   ---------------   ---------------   ---------------
         Prepaid (accrued) pension
           costs recognized on the
           balance sheet                       $ 2,805          $(12,713)          $ 2,737          $(13,958)
                                        ===============   ===============   ===============   ===============
         </TABLE>

         An additional minimum liability is required when the projected benefit
         obligation exceeds plan assets and the deficiency is greater than the
         actuarial computed pension liability. The minimum additional liability
         was accrued with the recording of an offsetting intangible asset. The
         intangible asset recognized cannot exceed the amount of unrecognized
         prior service cost and unrecognized net transition obligation. The
         excess, net of tax benefits, is reported as a separate reduction of
         stockholders' equity (deficit) at March 31, 1998 and 1997 as follows
         (dollars in thousands):

                                               1998              1997
                                            -------------     --------------

         Intangible asset                           $ -              $ 720
         Reduction in stockholders'
           equity (deficit)                           -                637
         Tax benefits                                 -                395
                                           -------------     --------------
         Additional minimum liability               $ -             $1,752
                                           =============     ==============



                                       45
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         ASSOCIATES SAVINGS PLAN

         Levitz has savings plans which were adopted under Section 401(k) of the
         Internal Revenue Code. Under the provisions of the Associates Savings
         Plans, substantially all employees who meet the age and service
         requirements of the plan are entitled to defer a certain percentage of
         their compensation. Levitz contributed to the fund 20% of the first 6%
         beginning January 1, 1998, 1997 and 1996 subject to certain
         limitations. Such matching contributions of $0.8 million, $0.9 million
         and $1.1 million were made by Levitz for the years ended March 31,
         1998, 1997 and 1996, respectively.

14.      ACCRUED EXPENSES AND OTHER LIABILITIES (DOLLARS IN THOUSANDS):

                                            1998              1997
                                        -------------     --------------

         Payroll                             $12,510            $15,278
         Payroll and sales taxes               4,547              5,253
         Real estate taxes                     2,809              4,853
         Interest                              1,687             10,235
         Promotional discount fee              3,127             23,121
         Workers Compensation                  7,663              6,857
         Other                                23,504             23,300
                                        -------------     --------------

                                             $55,847            $88,897
                                        =============     ==============

15.      COMMITMENTS AND CONTINGENCIES:

         As a result of the bankruptcy filing, the initiation of litigation
         against the Debtors involving matters arising prior to the filing for
         bankruptcy is stayed. Such stay may be lifted by the Court handling the
         bankruptcy proceedings in appropriate circumstances.

         Levitz has employment agreements with nine officers. Each of these
         agreements is for an initial term of eighteen months and will be
         automatically renewed for an additional twelve months unless either
         party gives prior written notice of intent to terminate the agreement.
         The agreements provide that if the officer is terminated by Levitz
         other than for Cause (as defined in the agreements) or disability or by
         the officer for Good Reason (as defined in the agreements), Levitz must
         continue to pay such officer's base salary for eighteen months and, for
         certain of the officers, would be required to credit such officer with
         three years of additional service and age for purposes of Levitz's
         SERP. In the event of such termination following a Change in Control
         (as defined in the agreements), Levitz must pay such officer a lump sum
         amount equal to one and one-half times his or her annual base salary.
         Each agreement also contains certain non-competition provisions.

         Levitz is subject to a number of lawsuits, investigations and claims
         arising out of the normal conduct of its business, including those
         relating to government regulations, environment, general and product
         liability and employee relations. Although there are a number of
         actions pending against Levitz as of March 31, 1998, in the opinion of
         Management such actions as currently known would not have a material
         effect on the financial position of Levitz.

                                       46
<PAGE>
                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998


16.      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

         The following is a summary of Levitz's unaudited quarterly results of
         operations for the years ended March 31, 1998 and 1997:
         <TABLE>
         <CAPTION>
         
                                                                               QUARTER ENDED
                                                   -----------------------------------------------------------------------
                                                     JUNE 30,         SEPTEMBER 30,        DECEMBER 31,       MARCH 31,
                                                       1997              1997(1)               1997              1998
                                                   -------------     ----------------     ---------------    -------------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
         <S>                                          <C>                  <C>                 <C>              <C>              
         Net sales                                    $ 211,367            $ 207,258           $ 232,592        $ 185,585
         Gross profit                                    95,600               90,486             103,001           80,124
         Net loss before extraordinary items            (10,044)             (36,277)(2)         (26,398) (2)     (14,448)
         Net loss                                       (10,044)             (41,739)(3)         (26,741)         (14,448)
         Loss per common share:
           Loss before extraordinary items            $ (10,044)           $ (36,277)          $ (26,398)       $ (14,448)
           Extraordinary items                                -               (5,462) (3)           (343)               -
                                                   -------------     ----------------     ---------------    -------------
           Net loss per common share                  $ (10,044)           $ (41,739)          $ (26,741)       $ (14,448)
                                                   =============     ================     ===============    =============


         <CAPTION>

                                                                               QUARTER ENDED
                                                   -----------------------------------------------------------------------
                                                     JUNE 30,         SEPTEMBER 30,        DECEMBER 31,       MARCH 31,
                                                       1996               1996                 1996              1997
                                                   -------------     ----------------     ---------------    -------------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

         Net sales                                    $ 228,128            $ 237,146           $ 272,007        $ 229,574
         Gross profit                                   101,615              106,819             120,976          103,890
         Net loss before extraordinary items            (10,805)(4)           (6,949)             (1,776)          (4,971)
         Net loss                                       (12,807)(3)           (6,949)             (1,776)          (4,971)
         Loss per common share:
           Loss before extraordinary items            $ (10,805)            $ (6,949)           $ (1,726)        $ (4,971)
           Extraordinary items                           (2,002)(3)                -                   -                -
                                                   -------------     ----------------     ---------------    -------------
           Net loss per common share                  $ (12,807)            $ (6,949)           $ (1,726)        $ (4,971)
                                                   =============     ================     ===============    =============
         </TABLE>
         ----------
         (1)      See Note 1 to consolidated financial statements.
         (2)      See Note 5, 6 and 7 to consolidated financial statements.
         (3)      See Note 9 to consolidated financial statements.
         (4)      See Note 7 to consolidated financial statements.

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS:

         The carrying amounts and fair values of Levitz's financial instruments
         at March 31, 1998 and 1997, were as follows (dollars in thousands):
         <TABLE>
         <CAPTION>
                                                       1998                            1997
                                           ------------------------------   ---------------------------
                                             CARRYING           FAIR         CARRYING         FAIR
                                              AMOUNT           VALUE          AMOUNT          VALUE
                                           -------------    -------------   ------------   ------------
         <S>                                     <C>              <C>            <C>            <C>                  
         Cash and cash equivalents               $5,339           $5,339         $9,267         $9,267
         Receivable under account
           purchase agreement                   554,322          554,322        327,000        327,000
         Long-term debt obligations
           including current maturities         155,416          155,416        360,389        248,065
         Obligation under account
           purchase agreement                   554,322          554,322        327,000        327,000
         Letters of credit                            -           17,778         -              14,130
         </TABLE>

         The carrying amounts of cash and cash equivalents approximate fair
         value because of the short maturity of these instruments. The fair
         value of Levitz's long-term debt, including current maturities, is
         estimated based


                                       47
<PAGE>

                  LEVITZ FURNITURE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                 MARCH 31, 1998

         on the quoted market prices for the same or similar issues. The
         contract amount of the letter of credit approximates its fair value.
         The fair value of the Company's liabilities subject to compromise are
         not presently determinable as a result of the Chapter 11 proceedings.

18.      SUBSEQUENT EVENTS (UNAUDITED):

         In June 1998, Management finalized a plan to close fifteen stores in
         under-performing markets. The plan also includes the elimination of
         certain support functions and the closing of warehouses in certain
         locations. The store closings and the elimination of certain support
         functions will be completed during the quarter ending September 30,
         1998. The warehouse closings are expected to be completed by the end of
         Fiscal 1999. The estimated pre-tax charge for this plan of
         reorganization is estimated to range from $20.0 million to $25.0
         million dependent on the final inventory valuations, length of
         liquidation sale and lease termination expenses. The pre-tax charge
         will include the writedown of plant and equipment to their net
         realizable value, loss on sale of inventory to be liquidated, lease
         rejection claims, net of capital lease obligations, severance pay and
         other expenses.

                                       48
<PAGE>



ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

             None.

                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K

(A)  FINANCIAL STATEMENTS

The financial statements filed as part of this report are listed on the Index to
Consolidated Financial Statements on page 22.

FINANCIAL STATEMENT SCHEDULES

               INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

SCHEDULES

All schedules have been omitted because the required information is shown in the
Consolidated Financial Statements or Notes thereto or they are not applicable.

(B)  REPORTS ON FORM 8-K

        On January 20, 1998 the registrant filed a Report on Form 8-K reporting
        under Item 5. "Other Events" consummation of the previously announced
        sale of substantially all of the assets of John M. Smyth Company, a
        wholly-owned subsidiary of Levitz Furniture Corporation.

(C)  EXHIBITS

        See Page 51 for Index to Exhibits.

                                       49
<PAGE>


                                   SIGNATURES

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

                                   LEVITZ FURNITURE CORPORATION

Date:  July 13, 1998               By:  /S/      MICHAEL BOZIC
                                        ----------------------
                                                 Michael Bozic
                                             Chairman of the Board
                                          and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

         SIGNATURE                           TITLE                 DATE
         ---------                           -----                 ----

/s/    MICHAEL BOZIC                 Chairman of the Board        July 13, 1998
--------------------------------     and Chief Executive
       Michael Bozic                 Officer            


/s/   MICHAEL MCCREERY               Senior Vice President        July 13, 1998
--------------------------------     and Chief Financial
      Michael McCreery               Officer


/s/   EDWARD P. ZIMMER               Vice President,              July 13, 1998
--------------------------------     General Counsel and
      Edward P. Zimmer               Director


/s/   SHEILA C. REINKEN              Vice President,              July 13, 1998
--------------------------------     Treasurer and Director
      Sheila C. Reinken              


                                       50
<PAGE>


INDEX TO EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)

<TABLE>
<CAPTION>
EXHIBIT NO.                                          DESCRIPTION OF EXHIBITS
-----------                                          -----------------------
<S>                <C>
3.01               Form of Restated Certificate of Incorporation of the Company. (1)
3.02               Form of By-Laws of the Company. (1)
3.03               Certificate of Incorporation of Levitz. (2)
3.04               By-Laws of Levitz. (2)
4.01               Form of Stockholder Rights Plan, including exhibits. (1)
10.02              Form of Indemnification Agreement. (1)
10.04              Amendment to Shareholders Agreement dated as of May 14, 1993. (1)
10.05              Senior Deferred Coupon Debenture Indenture dated as of December 1, 1992  between  the  Company  and
                   First Bank National Association, as Trustee. (1)
10.06              Form of Senior Deferred Coupon Debenture (included as Exhibit A to 10.05 above). (1)
10.07              First Supplemental Indenture dated as of April 21, 1993, relating to the Debenture Indenture. (1)
10.08              Second Supplemental Indenture, dated as of June 16, 1993, relating to the Debenture Indenture. (1)
10.10              Shareholders Agreement, dated as of December 23, 1986 between the Company and the Investors. (3)
10.11              Form of  Agreement  of  Indemnification  dated  March 5, 1985  between  Levitz and  certain  directors  of Levitz
                   Furniture Corporation. (3)
10.14              Supplemental Executive Retirement Plan of Levitz dated April, 1995. (4)
10.15              Levitz Bonus Plan. (4)
10.16              13-3/8% Senior Note  Indenture,  dated as of March 1, 1996,  between Levitz  Furniture  Corporation  and American
                   Bank National Association, as Trustee. (4)
10.17              Form of 13-3/8% Senior Note (included as Exhibit A to 10.16 above). (4)
10.18              First Supplemental Indenture, dated as of May 29, 1996, to
                   the 13-3/8% Senior Note Indenture, dated as of March 1, 1996
                   between Levitz Furniture Corporation and American Bank
                   National Association, as Trustee. (4)
10.19              Warrant  Agreement,  dated as of March 25, 1996, by and between the Company and American  Stock  Transfer & Trust
                   Company, as Agent.(7)
10.20              Form of Warrant, dated March 25, 1996 (included as Exhibit A to Exhibit 10.19 above). (4)
10.22              Warrant Certificate, dated as of July 1, 1996, by and between the Company and Apollo Investment 
                   Fund III, L.P. (4)
10.23              Warrant  Certificate,  dated as of July 1, 1996,  by and between the Company and Apollo  Overseas  Partners  III,
                   L.P. (4)
10.24              Warrant  Certificate,  dated as of July 1, 1996, by and between the Company and Apollo (U.K.)  Partners III, L.P.
                   (4)
10.25              Registration  Rights Agreement,  dated as of July 1, 1996, by and among the Company,  Apollo Investment Fund III,
                   L.P., Apollo Overseas Partners III, L.P., Apollo (U.K.) Partners II, L.P. and Court Square Capital Limited. (4)
10.26              $150,000,000 Credit Agreement, dated as of July 1, 1996,
                   among Levitz Furniture Corporation, Levitz Furniture Company
                   of the Midwest, Inc., Levitz Furniture Company of the
                   Pacific, Inc., Levitz Furniture Company of Washington, Inc.,
                   John M. Smyth Company, each of the lenders from time to time
                   parties thereto, Apollo Investment Fund III, L.P., Apollo
                   Overseas Partners III, L.P., Apollo U.K. Partners III, L.P.
                   and BT Commercial Corporation, as agent. (4)


                                       51
<PAGE>

<CAPTION>
EXHIBIT NO.                    DESCRIPTION OF EXHIBITS
-----------                    -----------------------
10.27              $40,000,000 Credit Agreement, dated as of July 1, 1996, among
                   Levitz Furniture Corporation, Levitz Furniture Company of the
                   Midwest, Inc., Levitz Furniture Company of the Pacific, Inc.,
                   Levitz Furniture Company of Washington, Inc., John M. Smyth
                   Company, each of the lenders from time to time parties
                   thereto, Apollo Investment Fund III, L.P., Apollo Overseas
                   Partners III, L.P., Apollo U.K. Partners III, L.P. and BT
                   Commercial Corporation, as agent. (4)
10.28              Intercreditor and Collateral Agency Agreement, dated as of
                   July 1, 1996, among Levitz Furniture Corporation, Levitz
                   Furniture Company of the Midwest, Inc., Levitz Furniture
                   Company of the Pacific, Inc., Levitz Furniture Company of
                   Washington, Inc., John M. Smyth Company, BT Commercial
                   Corporation and the lenders named therein. (4)
10.29              Intercreditor  Agreement,  dated  as of July 1,  1996,  among  Levitz  Furniture  Corporation,  General  Electric
                   Capital Corporation, BT Commercial Corporation and the lenders named therein. (4)
10.30              Revolving  Note,  dated July 1, 1996,  by and among BT  Commercial  Corporation,  Levitz  Furniture  Corporation,
                   Levitz Furniture Company of the Midwest,  Inc.,  Levitz Furniture Company of the Pacific,  Inc., Levitz Furniture
                   Company of Washington, Inc., and John M. Smyth Company. (4)
10.31              Term Note,  dated July 1, 1996, by and among Apollo (UK) Partners  III,  L.P. and Levitz  Furniture  Corporation,
                   Levitz Furniture Company of the Midwest,  Inc.,  Levitz Furniture Company of the Pacific,  Inc., Levitz Furniture
                   Company of Washington, Inc., and John M. Smyth Company. (4)
10.32              Term  Note,  dated  July 1,  1996,  by and  among  Apollo  Overseas  Partners  III,  L.P.  and  Levitz  Furniture
                   Corporation,  Levitz  Furniture  Company of the Midwest,  Inc.,  Levitz Furniture  Company of the Pacific,  Inc.,
                   Levitz Furniture Company of Washington, Inc., and John M. Smyth Company. (4)
10.33              Term Note, dated July 1, 1996, by and among Apollo  Investment Fund III, L.P. and Levitz  Furniture  Corporation,
                   Levitz Furniture Company of the Midwest,  Inc.,  Levitz Furniture Company of the Pacific,  Inc., Levitz Furniture
                   Company of Washington, Inc., and John M. Smyth Company. (4)
10.34              Note,  dated July 1, 1996,  by and among BT  Commercial  Corporation  and Levitz  Furniture  Corporation,  Levitz
                   Furniture Company of the Midwest,  Inc., Levitz Furniture Company of the Pacific,  Inc., Levitz Furniture Company
                   of Washington, Inc., and John M. Smyth Company. (4)
10.35              Security Agreement,  dated as of July 1, 1996, by Levitz Furniture  Corporation,  Levitz Furniture Company of the
                   Midwest, Inc., Levitz Furniture Company of the Pacific,  Inc., Levitz Furniture Company of Washington,  Inc., and
                   John M. Smyth Company in favor of BT Commercial Corporation. (4)
10.36              Pledge  Agreement,  dated as of July 1, 1996,  by and between  Levitz  Furniture  Corporation  and BT  Commercial
                   Corporation. (4)
10.37              Amendment  No. 1 dated as of  December  6, 1996 to the Credit  Agreements  dated as of July 1, 1996 among  Levitz
                   Furniture Corporation, et al. and BT Commercial Corporation, as Agent. (5)
10.39              Amendment  No. 2 dated as of December  16, 1996 to the Credit  Agreements  dated as of July 1, 1996 among  Levitz
                   Furniture Corporation, et al. and BT Commercial Corporation, as Agent. (12)
10.40              Amendment  No. 3 dated as of June 13,  1997 to the  Credit  Agreements  dated  as of July 1,  1996  among  Levitz
                   Furniture Corporation, et al. and BT Commercial Corporation, as Agent. (7)

                                       52
<PAGE>

<CAPTION>
EXHIBIT NO.                    DESCRIPTION OF EXHIBITS
-----------                    -----------------------
10.41              Amendment  No. 4 dated as of June 30,  1997 to the  Credit  Agreements  dated  as of July 1,  1996  among  Levitz
                   Furniture Corporation et al. and BT Commercial Corporation, as Agent. (7)
10.44              Amendment No. 5 dated as of July 25, 1997 to the Credit  Agreements  among Levitz Furniture  Corporation,  et al.
                   and BT Commercial Corporation, as agent. (8)
10.45              $260,000,000 Postpetition Credit Agreement among Levitz
                   Furniture Incorporated, Levitz Furniture Corporation and
                   certain other subsidiaries and certain financial
                   institutions, with Levitz Furniture Corporation, as LFC Funds
                   Administrator and, BT Commercial Corporation, as Agent, dated
                   as of September 5, 1997. (9)
10.46              Second  Amended and Restated  Account  Purchase and Credit Card Program  Agreement by and among Levitz  Furniture
                   Corporation, certain other subsidiaries and General Electric Capital Corporation, dated September 5, 1997. (9)
10.47              Amendment  No. 1 dated as of  October  7,  1997 to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent. (10)
10.48              Amendment No. 1 dated as of October 7, 1997 to the Second Amended and Restated  Account  Purchase and Credit Card
                   Agreement among Levitz Furniture Corporation, et al. and General Electric Capital Corporation. (10)
10.49              Amendment  No. 2, dated as of December 30, 1997 to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent. (11)
10.50              Amendment  No. 3 dated as of February  23, 1998 to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent.
10.51              Amendment  No. 4 dated as of February  20, 1998 to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent.
10.52              Amendment  No.  5  dated  as of May  14,  1998  to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent.
10.53              Amendment  No.  6  dated  as of June  23,  1998 to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent.
10.54              Form of Employment  Agreement by and among Levitz  Furniture  Corporation and Edward L. Grund dated as of June 1,
                   1998.
10.55              Form of Employment Agreement between Levitz and certain officers.
21.01              Wholly Owned Subsidiaries of Levitz Furniture Incorporated.
21.02              Wholly Owned Subsidiaries of Levitz Furniture Corporation.
27                 Financial Data Schedule.
----------
 (1)               Incorporated by reference from the Company's and Levitz's  Registration  Statement Nos.  33-61534 and 33-61534-01
                   on Form S-1 filed April 23, 1993.
 (2)               Incorporated  by reference from Levitz's  Registration  Statement No.  33-1325 on Form S-1 declared  effective on
                   August 13, 1986.
 (3)               Incorporated by reference from Levitz's  Registration  Statement No.  33-12639 on Form S-1 declared  effective on
                   May 12, 1987.
 (4)               Incorporated  by  reference  from Levitz  Furniture  Corporation's  Form 10-K for the fiscal year ended March 31,
                   1996.
 (5)               Incorporated by reference to Form 8-K filed December 6, 1996.
 (6)               Incorporated  by reference  from Levitz  Furniture  Corporation's  quarterly  report on Form 10-Q for the quarter
                   ended December 31, 1996.
 (7)               Incorporated  by reference  from Levitz  Furniture  Corporation's  Annual  Report on Form 10-K for the year ended
                   March 31, 1997.


                                       53
<PAGE>

 (8)               Incorporated  by reference  from Levitz  Furniture  Corporation's  quarterly  report on Form 10-Q for the quarter
                   ended June 30, 1997.
 (9)               Incorporated by reference to Form 8-K filed September 12, 1997.
(10)               Incorporated  by reference  from Levitz  Furniture  Corporation's  quarterly  report on Form 10-Q for the quarter
                   ended September 30, 1997.
(11)               Incorporated  by reference  from Levitz  Furniture  Corporation's  quarterly  report on Form 10-Q for the quarter
                   ended December 31, 1997.
</TABLE>

                                       54
<PAGE>

                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT                               DESCRIPTION
-------                               -----------
<S>                <C>
10.50              Amendment  No. 3 dated as of February  23, 1998 to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent.
10.51              Amendment  No. 4 dated as of February  20, 1998 to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent.
10.52              Amendment  No.  5  dated  as of May  14,  1998  to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent.
10.53              Amendment  No.  6  dated  as of June  23,  1998 to the  Postpetition  Credit  Agreement  among  Levitz  Furniture
                   Incorporated, et al. and BT Commercial Corporation, as agent.
10.54              Form of Employment  Agreement by and among Levitz  Furniture  Corporation and Edward L. Grund dated as of June 1,
                   1998.
10.55              Form of Employment Agreement between Levitz and certain officers.
21.01              Wholly Owned Subsidiaries of Levitz Furniture Incorporated.
21.02              Wholly Owned Subsidiaries of Levitz Furniture Corporation.
27                 Financial Data Schedule.
</TABLE>

                                       55