<PAGE>   1



                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-K

X        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (FEE REQUIRED)

                   For the fiscal year ended February 1, 1997

                                       OR

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
         For the transition period from           To

Commission File No. 0-17870


                                 LECHTERS, INC.
     ----------------------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


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


1 Cape May Street, Harrison, NEW JERSEY                      07029-9998
--------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                     (ZIP CODE)


Registrant's telephone number, including area code:        (201) 481-1100

Securities registered pursuant to Section 12(b) of the Act:

                                                      Name of each exchange
       Title of each class                             on which registered
                None                                          None

Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, without par value

         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
                                     ---     ---

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
--------------------------------------------------------------------------------
<PAGE>   2
         As of April 18, 1997, 17,155,086 shares of Common Stock were
outstanding and the aggregate market value of the Common Stock held by
non-affiliates of the registrant (based upon the closing price on the NASDAQ
National Market on that date) was approximately $47,077,169.

         For the purposes of such calculation, all outstanding shares of Common
Stock have been considered held by non-affiliates, other than the 4,388,396
Shares beneficially owned by directors and executive officers of the registrant.
In making such calculation, the registrant does not determine the affiliate or
non-affiliate status of any shares for any other purpose.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference to the registrant's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held on June 17, 1997.
<PAGE>   3




PART I

ITEM 1.           BUSINESS.

HISTORY

         Lechters, Inc. (together with its subsidiaries, unless the context
otherwise requires, the "Company") was incorporated in New Jersey in July 1975
to operate leased houseware and giftware departments in discount department
stores. Subsequently, Donald Jonas, then Chairman and Albert Lechter, then
President of the Company, recognized an opportunity to operate specialty
houseware stores in malls. In 1977, the repositioning of the Company from a
leased department operator to a specialty store operator was commenced.

         The Company opened its first store in Rockaway, New Jersey, and, has
expanded until at February 1, 1997, the Company operated a total of 649 stores
as more fully set forth in the table on page 7 herein. During the past five
years, the Company increased the number of stores operated by it from 438 on
January 1992, including the Famous Brands Housewares Outlets(R) concept added in
1990, and discontinued the use of the Kitchen Place trade name. Stores operated
under the name Lechters Housewares(R) are primarily located in malls, but can
also be found in strip centers as well as city locations. Stores operated under
the name Famous Brands Housewares Outlets(R) are located in outlet centers.
Stores formerly operated under the name Kitchen Place are primarily located in
strip centers.

         The Company operated as a private concern during the period from its
inception to its initial public offering on July 25, 1989. The Company's common
stock is listed on NASDAQ under the symbol LECH.

         In January 1994 the Company elected Steen Kanter as Chief Executive
Officer, replacing Donald Jonas who had held the position since the date the
Company was organized. Mr. Kanter left the employ of the Company during January
1996 when it became apparent that there was a difference of philosophy with
respect to the future priorities of the Company. Unable to resolve this
difference, Mr. Kanter determined that it was in his best interest to consider
various career options in all fields. During the period Mr. Kanter acted as
C.E.O., Mr. Jonas remained active as Chairman of the Board of Directors and a
member of the Board's Executive Committee. Upon the termination of Mr. Kanter's
employment during January 1996, Mr. Jonas resumed the position of Chief
Executive Officer of the Company.

         Except as otherwise indicated or the context otherwise requires,
references to Fiscal 1995, 1996, 1997 and each subsequent fiscal year shall mean
the fiscal year ending on the Saturday closest to January 31st in the following
year in accordance with an amendment to the by-laws of the Company adopted in
1996. References to Fiscal 1994 shall mean the fiscal year ending on the last
Saturday in January of the following year.
<PAGE>   4
MERCHANDISING AND MARKETING

         The Company's business is conducted through two retail store concepts,
namely, Lechters Housewares(R) and Famous Brands Housewares Outlets(R) .

         The mission of the Lechters Housewares(R) concept is to become the
leading housewares retailer in the mall, city and strip environments in which it
competes. Lechters Housewares(R) concept is focused on the kitchen, and, also,
aggressively pursues the frame, storage and organization business. The
merchandise assortment offers moderately priced functional products which solve
our customer's problems and capitalize on current trends.

         Lechters Housewares(R) stores are merchandised and marketed to a large
cross section of customers typically found in high-traffic, regional shopping
malls having at least two major department stores as "anchors" with at least
200,000 square feet of retail space for specialty stores. City stores and larger
stores referred to herein as Super Lechters are also operated under this trade
name. Merchandise is displayed utilizing fixtures designed to maximize
versatility in merchandise mix, minimize space requirements and enable customers
to serve themselves. The Company believes that its wide selection of products,
competitive prices and convenient store locations create competitive advantages
over traditional sources for home products, such as department stores, specialty
stores and general merchandise discount stores.

         Product categories include cookware, bakeware, kitchen gadgets and
utensils, microwave accessories, small electrics, table top, textiles, household
storage and organization, frames and other decorative housewares. The product
line includes over 4,000 items. All products sold by the Company are either
private label or national brand names such as, Rubbermaid, Durand, Ecko,
Farberware, Henckels, Krups, OXO, Pyrex, Revere and T-Fal. The Company estimates
that approximately 20% of the product line accounted for approximately 75% of
Fiscal 1996 net sales. Private label merchandise (Cook's Club(R), Simple
Solutions(R), Regent Gallery(R)) which represents approximately 28% of the
products sold by the Company, accounted for approximately 31% of Fiscal 1996 net
sales. No product accounted for more than 1.0% of Fiscal 1996 net sales.


                                        2
<PAGE>   5
         The following table shows the approximate contribution to net sales of
the Company's two principal product categories for the periods indicated:
<TABLE>
<CAPTION>
                                     Fiscal         Fiscal            Fiscal
     Category                        1996            1995              1994
     --------                        ----           ------            -----
<S>                                    <C>            <C>               <C>
     Basic Housewares                  62%            60%               57%
     Decorative Housewares             38%            40%               43%
</TABLE>


         The Company has adopted an every day low pricing strategy. Lechters
Housewares(R) merchandise is generally priced at a discount to department stores
and other specialty retailers offering similar goods. Its value position is
further enhanced by sales and promotional events which also heighten customer
awareness and sense of buying urgency. The Company's price advantage reflects
its purchasing power and the economies of its private label program.

         Items generally range in price from $1.00 to $200.00, with most items
selling for less than $10.00. All sales are transacted in cash or through
third-party credit cards, which accounted for approximately 64% and 36%,
respectively, of Fiscal 1996 net sales.

         During Fiscal 1996 the Company initiated an advertising test in support
of the Lechters Housewares(R) business. The test program was conducted in
specific markets utilizing circulars, weekly newspaper advertising, and
television. The Company also advertises by participating in mall circulars and
contributing to mall merchants associations and marketing funds. Advertising
expense which had historically averaged approximately 1.0% of net sales
increased to 1.2% as a result of new advertising initiatives. The Company
intends to expand its advertising test in Fiscal 1997 given the favorable
results of the current year initiative.

         The Lechters Housewares(R) business is highly seasonal. As a
convenience concept, the chain benefits from the high concentration of traffic
about its stores during certain times of the year. Sales are highest during the
year end holiday season, followed by a strong back to school business which
commences in late July. In 1996, November/December and back to school sales
accounted for approximately 31% and 16%, respectively, of total year sales.



                                        3
<PAGE>   6
         The mission of the Famous Brands Housewares Outlets(R) concept is to
become the leading retailer of off-price housewares in outlet centers and the
preferred retailer for U.S. housewares manufacturers to liquidate their excess,
discontinued, and slow selling inventory.

         The Company believes it can offer its outlet customers extraordinary
savings opportunities as compared to regular priced retailers through its
ability to purchase off-price housewares. This commitment to off price
merchandise is a new direction based on a strategic assessment of the market and
Famous Brands Housewares Outlets(R) position in the outlet malls. The outlet
customer is more price driven than the mall customer and requires a fresh
assortment to inspire a purchase decision.

         The strategy is supported by a merchandising team dedicated to Famous
Brands Housewares Outlets(R). The Famous Brands stores offer an assortment of
basic Lechters Housewares(R) merchandise to supplement the constantly changing
assortment of off-price purchases. Famous Brands Housewares Outlets(R) stores
typically have lower occupancy expenses and leasehold improvement requirements
versus stores located in malls, city locations and strip centers. The lower cost
structure subsequently supports the lower price points of the outlet
environment.

         Given the geographic dispersion of customers who frequent outlet
centers, the marketing strategy to drive the Famous Brands Housewares Outlets(R)
business will continue to rely primarily on in-store signing, handouts and
displays to explain the values to our customer.

         The seasonality of the Famous Brands Housewares Outlets(R) business
differs slightly from that of the Company's Lechters Housewares(R) concept. The
summer season represents a greater portion of the annual sales in Famous Brands
Housewares Outlets given the increase in leisure travel and the proximity of
outlet centers to major routes and vacation destinations. The November and
December period represents a slightly lower portion of the year in Famous Brands
Housewares Outlets(R) versus Lechters Housewares(R), 26% and 33% respectively.


                                        4
<PAGE>   7
PURCHASING, WAREHOUSING AND DISTRIBUTION

         Service Office management is responsible for virtually all
merchandising decisions, including product selection, sourcing, pricing and
in-store display. Merchandise mix is determined by the Service Office at each
store's inception and is dictated by store size and configuration. All
categories of merchandise are reviewed and edited on a regular basis to
accommodate seasonal sales opportunities and evolving customer requirements.

         The Company's buying staff is comprised of a Senior Vice President -
General Merchandise Manager, a Vice President - Merchandising, two Merchandise
Managers and three buyers. In 1996, a separate buying organization was
established to support the Famous Brands Housewares Outlets(R) business. The
dedicated staff was deemed necessary given the distinct differences in the two
concepts' evolving merchandise strategies and the nature of the transactions
involving off-price merchandise. Previously, merchants and buyers bought for
both concepts as essentially the same business.

         The buying staff is supported by a Planning and Allocation staff that
includes a Vice President - Merchandise Replishment and Logistics and eight
reorder buyers each specializing in certain product categories. The Company
purchases its products from over 400 suppliers with no supplier accounting for
more than 7% of Fiscal 1996 sales. Approximately 71% of its products are
purchased in the United States which ensures sufficient flexibility in the
management and flow of merchandise. The remaining 29% is imported merchandise
and is sourced primarily in the Far East. The Company believes that there are
alternate sources for virtually all of its products.

         Most of the Company's merchandise is shipped directly from
manufacturers to the Company's distribution centers in Harrison, New Jersey and
North Las Vegas, Nevada where it is held until reshipment to the Company's
stores. The Company believes that its ability to buy in bulk directly from
manufacturers enables the Company to obtain lower merchandise costs, favorable
trade terms and a broader selection of products. The Company believes that these
facilities are adequate to satisfy its foreseeable distribution requirements.

         The Company generally maintains an average of 10 weeks supply of
merchandise at the distribution centers. The stores, themselves, have minimum
storage capacity which in instances is augmented by additional lease space in
proximity to each store.

         The Company uses contract carriers to supply its stores with
merchandise from its distribution centers. The Company's stores are supplied
with merchandise within two to five days of placing an order, depending upon the
store's distance from the distribution centers. On average, stores are supplied
with merchandise on a bi-weekly basis. Shipments are accelerated during peak
sales periods and are more frequent in high volume and city locations. The
ordering process is facilitated by a Computer Assisted Replenishment (CAR)
system.


                                        5
<PAGE>   8
STORE OPERATIONS

         Store Operations' objective is to provide an easy to shop store
environment supported by knowledgeable, customer oriented and sales focused
associates.

         The Company's stores are designed to attract traffic through prominent
in-store displays generally organized according to a store planogram provided by
the Service Office. The Company attempts to keep the signage and design of its
store fronts consistent among its stores to enhance the name recognition of its
stores. Merchandise is displayed utilizing fixtures designed to maximize
versatility in merchandise mix, minimize space requirements and enable customers
to purchase through self choice and/or be assisted by an associate. The Company
enhances consumer interest by using store front space for seasonal and
promotional presentations which are rotated regularly. In addition, it uses
selected stores as test sites for the introduction of new products, new product
categories and new store designs.

         The stores organization is headed by a Senior Vice President and
supported by a Service Office staff. The latter is responsible for the
development of store operations policies and procedures, the design of in-store
programs, store associate training programs, coordination of activities with
other functions residing in the Service Office and general communications.

         As of April 1, 1997, the field organization was comprised of four
Regional Vice Presidents and one Regional Manager, who each have profit and loss
responsibility for several districts and provide leadership to 45 District
Managers. The District Managers, in turn, are responsible for the day to day
operations of the stores. Their supervisory span of control ranges from 7 to 23
stores, averaging approximately 14 stores each. Those Districts Managers at the
high end of the range are supported by Area Managers who are Store Managers with
additional oversight responsibility for 1 to 3 stores. Stores are typically
staffed with a Manager, 2 Assistant Managers and 5 sales/cashier Associates. The
stores schedule their labor from a pool of hourly Associates, the majority of
which are part-time. The number of Associates on hand at any one time is a
function of customer traffic and scheduled store activities, such as training
events and the receipt of merchandise.

         Recognizing the value of distinct concept identities, the Company
realigned its field organization in 1996 along concept lines. Previously, field
management had combined concept responsibility which did not afford the focused
attention required of each.

         The Company is committed to the in-store development of its Associates.
A training and evaluation program is provided to new Managers. Additionally, the
Company has developed a program under which it transfers qualified Associates to
other stores throughout the country to gain the experience necessary for
promotion. All store Associates otherwise attend periodic training sessions
designed to develop their management, merchandising and customer service skills.

         The Company believes its pay and benefits package is competitive with
retail industry standards. Complemented by the aforementioned training program
and promotional opportunities, it enables the Company to attract and retain a
quality workforce.

         The Company believes that the security measures in its stores are
strict, reflecting the cash orientation of the Company's business. The Company
employs 6 field Loss Prevention Managers, who are responsible for the review of
cash register transactions and inventory management procedures, in a effort to
control inventory shrinkage. Their periodic reviews are complemented by audit
programs to include District Manager conducted reviews and Service Office
monitoring of store transaction reports. Particular emphasis is placed on stores
with a history of inventory shrinkages in excess of the norm.



                                        6
<PAGE>   9
REAL ESTATE


         The Company considers its ability to obtain and retain attractive,
high-traffic store locations to be a critical element of its business and a key
determinant of the Company's future growth and profitability. Lechters
Housewares(R) mall stores are located primarily in high-traffic regional
enclosed projects while strip centers and city stores are located in the premium
project or downtown area as defined by market analysis. Famous Brands Housewares
Outlets(R) stores are located in the dominant outlet projects nationally.

         As shown in the following table, the Company operated 396 Lechters
Housewares(R) stores as of year end. These stores range in size from 1,800 to
5,700 square feet and average approximately 3,200 square feet. To take advantage
of higher volume locations and extended product line opportunities, the Company
has also developed a larger format store of which there are 89. Internally
referred to as Super Lechters, these stores range in size from 4,500 to 10,900
square feet, averaging 6,000 square feet. The Company's 164 Famous Brands
Housewares Outlets(R) stores range in size from 3,000 to 7,500 square feet and
average 3,900 square feet.

         The Company converted its 15 Kitchen Place stores to either Lechters
Housewares(R) or Famous Brands Housewares Outlets(R) during 1996.
<TABLE>
<CAPTION>
                     Lechters      Super       Famous      Kitchen
                    Housewares    Lechters     Brands       Place         Total
                    ----------    --------     ------       -----         -----
<S>                  <C>           <C>         <C>          <C>         <C>      
February 3, 1996
   Units                   389          88         150          15            642
   Square Feet       1,216,000     533,400     597,000      58,700      2,405,100

1996 Additions:
   Units                     4           1          11           0             16
   Square Feet          13,300       4,100      39,400           0         56,800

1996 Closings:
   Units                     6           1           2           0              9
   Square Feet          17,500       8,000       8,500           0         34,000

Adjustments:(1)
   Units                     9           1           5         (15)             0
   Square Feet          39,300       6,500      17,200     (58,700)         4,300

February 1, 1997
   Units                   396          89         164           0            649
   Square Feet       1,251,100     536,000     645,100           0      2,432,200(2)
</TABLE>


(1)      Includes square footage adjustments due to store categorization shifts
         including the conversion of Kitchen Place stores.

(2)      Approximately 90% of the total store space of the Company's stores
         represents selling area. The balance is storage and office space.




                                        7
<PAGE>   10
         The Company's present expansion plan is limited and opportunistic given
its high level of penetration of the better performing malls and outlet centers,
and the need to fully implement new merchandising and promotional strategies. In
the near future it perceives the greater opportunity for new store development
to lie in strip centers of which the Company had 37 store locations at year end.
The Company's Fiscal 1997 development plan is to open approximately 10 new
stores.

         In determining where and in what format new stores will be opened, the
Company's preference is to backfill existing markets to enhance its marketing
and operations leverage. Specific store development decisions give due
consideration to such factors as market area demographics, competition, center
quality and customer traffic, store location within the center, costs of
development and ongoing occupancy expense. Performance comparables are also
reviewed if available.

         The costs of new store development differ by concept and further varies
with the size of the store and site conditions. The costs incurred by the
Company to open an average size store under typical site conditions are
approximately, as shown below:
<TABLE>
<CAPTION>
                                        Leasehold       Fixtures      Inventory,      Preopening
                                       Improvement    & Equipment     net of A/P       Expense
                                       -----------    -----------     ----------       -------
<S>                                     <C>             <C>            <C>             <C>    
Lechters Housewares(R)                  $210,000        $60,000        $ 80,000        $ 8,000
Super Lechters                           255,000         71,000         150,000         15,000
Famous Brands Housewares Outlets(R)       42,000         60,000          80,000         13,000
</TABLE>



         The Company actively manages its real estate portfolio to ensure
profitability at the store level. In case of an underperforming store, the
Company will seek reduction in its occupancy expense under its existing lease
agreement, or any agreement extending the term thereof. Where profitability is
unattainable, the Company will exercise its right to terminate its lease
agreement under any volume termination provision or upon expiration of the term.
The Company plans to close approximately 15 stores in Fiscal 1997.

         A majority of the Company's leases expire or will be subject to
termination by the Company over the next three years. In the current real estate
environment, this gives the Company leverage in the management of its occupancy
expenses and flexibility in store location. The Company intends to maintain this
flexibility and therefor will seek shorter terms upon renewal in those instances
where it is an advantage to do so. This strategy was pursued during Fiscal 1996.

                                        8
<PAGE>   11
INFORMATION TECHNOLOGY

The Company is heavily reliant upon systems technology in the conduct of its
business. Over the years it has migrated its technology and enhanced its
software applications to support the more efficient execution of its core
operations and the facilitation of its decision support requirements.

The Company's core operating systems reside on IBM AS400's, IBM RS6000's, and
IBM OS/2 Local Area Network (LAN) servers which are connected in an open
systems, client-server environment. The hardware is located in the Company's
operations center at the Service Office. To ensure continuous operations, the
Company also maintains backup systems capabilities at a third party contracted
disaster recovery site.

In-store systems consist of IBM 4684 and 4694 Point of Sale registers with
Symbol Technology laser scanners. This technology enables the efficient
processing of customer transactions, daily reporting of basic sales and
transaction information, ordering and receipt of inventories, payroll processing
and e-mail communication with the Service Office. Additionally, field managers
are equipped with laptop computers which facilitate their communications
capabilities and access to essential store, district and region level management
reports.

The Company has in place a Computer Assisted Replenishment (CAR) system which
controls the flow of merchandise to the stores from its distribution centers in
Harrison and Las Vegas. The system facilitates the maintenance of in-stock
service levels with a minimum required investment in inventory. Additionally,
the system's automated shelf marking capability has resulted in substantial
store labor savings as the pricing of individual SKU's has been eliminated for
most products. The operations of both distribution centers are, in turn, driven
by an automated warehouse management system which also incorporates radio
frequency laser scanning technology. This system enables the cost efficient
handling and control of inventory in a paperless environment.

Currently the Company is communicating through Electronic Data Interchange (EDI)
with 48 of its highest volume vendors. During 1997 the company plans to continue
to build these vendor partnerships and to integrate EDI technology into
additional areas of the business. The objective of this technology is to improve
the Company's supply chain management and enhance its inventory pipeline
flexibility.

The Company has been on the World Wide Web since the Fall of 1995 at
'www.lechters.com'. Its home page includes basic company information, a store
locator, a customer service feedback form, and promotional information. The
Company plans to expand its on-line presence in 1997.

The Company is committed to maintaining the integrity and functionality of its
information systems. Accordingly, it will continue to upgrade its current
technology and expand its applications to ensure their effective support of the
business, both internal operations and market focused programs.


                                        9
<PAGE>   12
COMPETITION

         The business in which the Company is engaged is highly competitive and
many items sold by the Company are sold by department stores, general
merchandise discount stores, hardware stores and others having greater financial
and other resources than the Company. To a lesser extent, the Company also
competes with mail order companies and other specialty retailers of home-related
products. However, the Company believes that it competes favorably with such
retailers because in the shopping and outlet centers where the Company's stores
are located, the Company's stores are typically the only specialty housewares
retailer. The Company offers a broader assortment of housewares merchandise than
most of its competitors, and the Company's prices are generally lower than those
charged by department stores and are generally competitive with those charged by
general merchandise discount stores. Nevertheless, there can be no assurance
that any or all of the factors listed above which enable the Company to compete
favorably will not be adopted by companies having greater financial and other
resources than the Company.

ASSOCIATES

         On April 1, 1997, the Company employed 6,364 persons, 1,949 of whom
were full-time (30 or more hours per week) and 4,415 of whom were part-time
Associates. Of this total, 464 were located at the Company's Harrison, New
Jersey Service Office and two distribution centers, 49 as Regional and District
Managers, 6 as Loss Prevention Managers and the balance located at the Company's
stores.

         On April 1, 1997, the 173 non-management office and distribution
Associates at the Harrison, New Jersey facility were represented by UNITE, Local
99, under contracts expiring on March 15, 1999 with respect to non-management
distribution center Associates and June 30, 1997 with respect to non-management
office Associates. The 5,845 Associates in the Company's 649 retail stores are
non-union. The 40 Associates at the Company's North Las Vegas, Nevada
distribution center are also non-union.

         The Company has never experienced a strike or other labor disruption
and is unaware of any current efforts or plans to organize its non-union
Associates. The Company believes that its employee relations are satisfactory.



                                       10
<PAGE>   13
TRADEMARKS

         The Company has registered in the United States Patent and Trademark
Office its service marks "Lechters," "Lechters Home Store," "Lechters
Housewares," "The Kitchen Place" and "Famous Brands Housewares Outlet" for
retail services, and its trademarks "Lechters", "The Kitchen Place", "Regent
Gallery", "Cooks Club", "Perfect Bake", and "Simple Solutions" for certain
housewares items.

EXECUTIVE OFFICERS

         The following table shows information regarding executive officers of
the Company as of April 19, 1997:
<TABLE>
<CAPTION>
                                            Position or Office                          Term of Employ-
Name                       Age              with the Company                            ment Commenced
----                       ---              ----------------                            --------------

<S>                         <C>              <C>                                         <C> 
Donald Jonas                67               Chairman of the Board                        January 1984
                                             Chief Executive
                                             Officer and President

Robert J. Harloe            52               Senior Vice President                         August 1994
                                             - Human Resources

Dennis Hickey               49               Senior Vice President                        January 1991
                                             - Stores

Frank J. O'Neill            48               Senior Vice President                       February 1992
                                             - Director of Real Estate


Ira S. Rosenberg            62               Vice President,                              January 1984
                                             Secretary and
                                             Corporate Counsel

James Shea                  51               Senior Vice President                       November 1994
                                             and General
                                             Merchandise Manager

John W. Smolak              48               Senior Vice President                       February 1995
                                             and Chief Financial
                                             Officer
</TABLE>



                                       11
<PAGE>   14
         Donald Jonas has been Chairman of the Board and a Director of the
Company or its former parent since 1979. From 1979 to January 1994 he was also
Chief Executive Officer. Mr. Jonas resumed the position of Chief Executive
Officer and became President in January 1996. He is also a Director of Dress
Barn, Inc.

         Robert J. Harloe was elected Senior Vice President - Human Resources of
the Company in March 1996. Mr. Harloe became Vice President - Human Resources in
September 1994 after joining the Company in August 1994. Prior to that he was
Senior Vice President of Human Resources for Allied-Lyons Retailing.
Allied-Lyons acquired Dunkin Donuts in 1990, where he was employed for 18 years.

         Dennis Hickey was elected Senior Vice President - Stores of the Company
in March 1996. Mr. Hickey became Vice President - Stores in April 1991 after
joining the Company in January 1991. Prior to that he was Vice President of Kay
Bee Toy Stores, a Division of Melville Corp. from August 1990 to January 1991.
From August 1985 to August 1990, Mr. Hickey was Vice President - Store
Operations for Circus World Toy Stores, a Division of Greenman Bros.

         Frank J. O'Neill was elected Senior Vice President - Director of Real
Estate of the Company in March 1996. Mr. O'Neill became Vice President -
Director of Real Estate in April 1992 after joining the Company in February
1992. Prior to that he was employed for 14 years with the Melville Realty
Company, most recently as the Senior Vice President.

         Ira S. Rosenberg has been Corporate Counsel of the Company or its
former parent since 1979 and Vice President and Secretary of the Company since
1984.

         James Shea was elected Senior Vice President - General Merchandise
Manager of the Company in December 1994. Prior to joining the Company in
November 1994, Mr. Shea served as Senior Vice President, General Merchandise
Manager, Homestore with Kaufmann's, a division of May Company, from 1990 to
November 1995. From 1985 through 1990 he was employed by Lechmere, a hardgoods
chain, as Vice President and General Merchandise Manager. Mr. Shea was also Vice
President of Marketing and Merchandising for Eddie Bauer and spent 12 years with
Dayton Department Stores in various merchandising positions.

         John W. Smolak was elected Senior Vice President and Chief Financial
Officer of the Company in March 1996. Mr. Smolak became Vice President and Chief
Financial Officer in April 1995 after joining the Company in February 1995.
Prior to that he was employed by Jungle Jim's Playlands, Inc., a chain of family
entertainment centers, as Senior Vice President, Finance and Administration. Mr.
Smolak previously held the positions of Vice President, Finance and Chief
Financial Officer for Precision Lenscrafters, Inc. and spent six years with the
Marriott Corporation, in both the Corporate Finance function and as Vice
President and Chief Financial Officer for their Roy Rogers Restaurants division.



                                       12
<PAGE>   15
ITEM 2.           PROPERTIES.

         The general offices of the Company are located at 1 Cape May Street,
Harrison, New Jersey. The Company leases approximately 540,000 square feet of
floor space at this location. Approximately 490,000 square feet are being
utilized for the distribution center, and approximately 50,000 square feet for
the Company's service offices. This lease expires on January 31, 2007 and the
Company has three five-year renewal options.

         The Company leases approximately 155,000 square foot distribution
center in North Las Vegas, Nevada. Approximately 151,000 square feet are being
utilized for the distribution center, and approximately 4,000 square feet for
administrative offices. Constructed and opened in 1993, the facility is designed
to enable expansion of an additional 100,000 square feet should the need arise.
This lease expires on March 31, 2008 and the Company has four five-year renewal
options.

         The Company leases all of its stores. Lease terms for the Company's
stores are generally 10 to 12 years in duration without renewal options or five
years with one or more renewal options and provide for a fixed minimum rental
plus a percentage of sales once the minimum has been satisfied. However, certain
stores are operated under short term extensions of otherwise expired leases.

         For additional information concerning the Company's leases, see the
section of Item 1 entitled Real Estate and Note 7 to the Consolidated Financial
Statements of the Company included elsewhere herein.

ITEM 3.           LEGAL PROCEEDINGS.

         There is no material litigation currently pending against the Company.

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

         No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through solicitations of
proxies or otherwise.


                                       13
<PAGE>   16
PART II

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

         The Common Stock is traded on the over-the-counter market and is
included in the National Market System of the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") under the symbol "LECH". The
initial public offering of the Common Stock occurred in July 1989.

         The following table sets forth (as reported by NASDAQ) for the periods
indicated the closing prices of the Common Stock.
<TABLE>
<CAPTION>
                                      Price of Common Stock
                                      ---------------------

         Fiscal 1996                 High                Low
         -----------                 ----                ---
<S>                                  <C>                <C>
1st Quarter                          8-1/8              4-1/4
2nd Quarter                          7-1/4              4-3/8
3rd Quarter                          5-3/4              4-1/4
4th Quarter                          5-1/4              3-7/8
<CAPTION>
         Fiscal 1995                 High                Low
         -----------                 ----                ---
<S>                                  <C>                <C>
1st Quarter                              19             14-3/4
2nd Quarter                          16-3/4             12-1/4
3rd Quarter                          14-1/4              9-1/4
4th Quarter                          10-3/8              4-1/4
</TABLE>


         These quotations reflect inter-dealer prices, without retail markups,
markdowns or commissions.

         On April 18, 1997, there were approximately 1,051 holders of record of
the Common Stock. On April 18, 1997, the closing price of the Common Stock was
$3.6875.

         The Company has never paid any cash dividends on its Common Stock and
does not presently intend to pay any dividends on the Common stock for the
foreseeable future. In addition, the Company's Credit Agreement contains certain
covenants which restrict the ability of the Company to pay dividends. See Notes
to the Consolidated Financial Statements.


                                       14
<PAGE>   17
ITEM 6.           SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

         The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto set
forth elsewhere herein.
<TABLE>
<CAPTION>
                                 Fifty-Two        Fifty-Three                                               Fifty-Three
                                Weeks Ended       Weeks Ended            Fifty-Two Weeks Ended              Weeks Ended
                                February 1,       February 3,       January 28,           January 29,       January 30,
                                   1997              1996              1995                  1994               1993
                                   ----         --------------   ------------------    ---------------      -----------
                                            (Dollars in thousands, except share, per share and selected operating data)
<S>                              <C>             <C>               <C>                   <C>                <C>
Income Statement Data:
Net sales                        $   441,243     $    432,048      $   399,264           $   350,196        $   306,043
Cost of goods sold                                                                                         
  (including occupancy                                                                                     
   and indirect costs)               322,110          310,163          282,875               242,833            207,862
                                 -----------     ------------      -----------           -----------        -----------
Gross profit                         119,133          121,885          116,389               107,363             98,181
Selling, general and,                                                                                      
  administrative expenses            111,218          109,414           93,853                83,669             71,252
Restructuring expense                   --               (217)          11,000                  --                 --
                                 -----------     ------------      -----------           -----------        -----------
                                                                                                           
Operating income                       7,915           12,688           11,536                23,694             26,929
Other expenses (1)                     3,372            5,039            5,838                 4,991              2,497
                                 -----------     ------------      -----------           -----------        -----------
                                                                                                           
Income before income                                                                                       
  tax provision                        4,543            7,649            5,698                18,703             24,432
Income tax provision                   1,200            3,146            2,336                 7,623              9,044
                                 -----------     ------------      -----------           -----------        -----------
                                                                                                           
Net income                             3,343            4,503            3,362                11,080             15,388
                                                                                                           
Preferred dividend                                                                                         
  requirement                            842             --               --                    --                 --
                                 -----------     ------------      -----------           -----------        -----------
                                                                                                           
Net income available to                                                                                    
common shareholders              $     2,501     $      4,503      $     3,362           $    11,080        $    15,388
                                 ===========     ============      ===========           ===========        ===========
                                                                                                           
Net income per share (2) (3)     $      0.15     $       0.26      $      0.20           $      0.65        $      0.90
                                                                                                           
Weighted average                                                                                           
shares outstanding                17,155,000       17,288,000       17,095,000            17,100,000         17,178,000
</TABLE>





                                       15
<PAGE>   18
<TABLE>
<CAPTION>
                                    Fifty-Two        Fifty-Three                                               Fifty-Three
                                   Weeks Ended       Weeks Ended            Fifty-Two Weeks Ended              Weeks Ended
                                   February 1,       February 3,       January 28,           January 29,       January 30,
                                      1997              1996              1995                  1994               1993
                                      ----         --------------   ------------------    ---------------      -----------
                                            (Dollars in thousands, except share, per share and selected operating data)
<S>                               <C>               <C>               <C>                     <C>               <C>      
Selected Operating Data:                                                                  
                                                                                          
Stores opened during year                  16                48               49                       61               81
Stores closed during year                   9                11               11                        7                6
Stores open at year end                   649               642              605                      567              513
Total square feet of store                                                                
  space (at year end) (4)           2,432,200         2,405,100        2,228,195                2,048,916        1,730,516
Sales per average square                                                                  
  foot of total space (4) (5)     $       182       $       186       $      187              $       185       $      197
Percentage increase                                                                       
  (decrease) in comparable                                                                
  store sales (6)                        (0.2%)            (1.6%)            3.2%                    (1.2%)            2.8%
                                                                                          
                                                                                          
Balance Sheet Data                                                                        
(At Year End):                                                                            
Working capital                   $   151,954       $   136,113       $  134,785              $   134,695       $  137,807
Total assets                          272,333           272,312          270,710                  256,812          239,019
Long-term debt                         58,853            75,038           77,777                   82,859           85,006
Shareholders' equity                  170,408           148,642          143,541                  136,632          125,131
Total debt to total                                                                       
  capitalization                         25.7%             34.4%            36.0%                    38.6%            40.5%
</TABLE>



(1)      Other expenses includes interest expense net of interest income and
         gains realized on the sale of government securities.

(2)      Net income per share for fiscal 1996 was calculated on net income less
         the preferred stock dividends requirement.

(3)      All share and per share amounts included herewith have been adjusted to
         give effect to the 2-for-1 stock split in April 1992. The Company has
         never paid any cash dividends on its Common Stock.

(4)      Approximately 90% of total store space represents selling area. The
         balance is storage and office space.

(5)      Average square feet of total store space represents the average of
         square feet of total store space at the beginning and end of each
         fiscal year. Sales per average square foot of total store space is the
         result of dividing net sales for the year by average square feet of
         total store space. These amounts are not adjusted to reflect the
         seasonal nature of the Company's sales or the impact of opening stores
         in different periods during the year.

(6)      Comparable store sales data are calculated based on each store's time
         in operation during the prior year (even if such store began operations
         in the prior year) compared with its corresponding time in operation
         during the current year. Comparable store sales for Fiscal 1996 and
         1995 are reported on a 52 week basis.



                                       16
<PAGE>   19
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

FISCAL 1996 IN COMPARISON WITH FISCAL 1995

         Net sales for Fiscal 1996, the 52 week period ended February 1, 1997,
increased $9,195,000 to $441,243,000, a 2.1% increase over Fiscal 1995, the 53
week period ended February 3, 1996, primarily as a result of the addition of 7
stores and the impact of the introduction of the Company's advertising program.
For Fiscal 1995, the Company adopted the National Retail Federation's reporting
calendar which resulted in the additional week. On a comparable 52 week basis
for both fiscal years, sales increased 3.5% and comparable store sales decreased
0.2%. At the close of the fiscal year, the Company operated 649 stores compared
to 642 stores at close of the previous fiscal year, a net increase of 7 stores
or 1.1%. Total retail space increased approximately 27,000 square feet to
2,432,000 at February 1, 1997.

         Gross profit for Fiscal 1996 was $119,133,000, a $2,752,000 decrease
from Fiscal 1995. The resulting gross profit rate of 27.0% was 1.2 percentage
points below that of Fiscal 1995. Gross profit was favorably impacted by an
increase of higher margin merchandise from both foreign and domestic sources.
However, promotional pricing associated with the Company's advertising programs
and a highly competitive retail market place produced price reductions in excess
of last year. Additionally, while inventory shrinkage was at the Company's
historical average, it deteriorated from the exceptional performance of the
prior year. Finally, rent and other occupancy costs were underabsorbed due to
the decline in comparable store sales.

         Selling, general and administrative expenses increased $1,804,000 to
$111,218,000. The expense rate of 25.2% of net sales was 0.1% percentage point
below the rate of Fiscal 1995. While expenses increased due to the net addition
of 7 stores and the implementation of the Company's advertising programs,
savings were achieved in variable expenses such as benefits and Service Office
payroll, one less week of operations expense, and the absence of significant
contingent liability provisions as were required last year.

         Other expenses decreased $1,667,000 to $3,372,000, 0.8% of net sales.
Interest expense decreased $1,917,000 as the early retirement of the outstanding
$20,250,000 of Senior Notes Payable reduced interest expense by $1,787,000 for
the year. Interest income of $1,650,000 was $205,000 lower than last year as the
balance of marketable securities was lower for most of the year compared with
Fiscal 1995.

         Income taxes for Fiscal 1996 were provided at a rate of 26.4% compared
41.1% for Fiscal 1995. The 1996 tax provision rate was reduced due to the
reversal of residual estimated liabilities for prior years.


                                       17
<PAGE>   20
FISCAL 1995 IN COMPARISON WITH FISCAL 1994

         Net sales for Fiscal 1995 increased $32,784,000 to $432,048,000, an
8.2% increase. Adjusting for the additional week which resulted from the
Company's adoption of the retail calendar proposed by the National Retail
Federation, net sales on a 52 week basis increased 6.8% over the prior year.
Comparable store sales declined 1.6%. Sales growth was due to the opening of new
stores. At the end of Fiscal 1995, the Company had 642 stores open compared to
605 at the close of the previous fiscal year, a net increase of 37 stores or a
6.1% increase. Total square feet of store space increased approximately 177,000
square feet during the year to 2,405,081 square feet.

         Gross profit for Fiscal 1995 was $121,885,000, a $5,496,000 increase
over Fiscal 1994. Gross profit was 28.2% of net sales compared with 29.2% of net
sales in Fiscal 1994. While the margins generated by merchandise sales were
comparable to prior year's, there was an under absorption of rent and other
occupancy expense caused by a decline in comparable store sales.

         Selling, general and administrative expenses increased by $15,561,000
to $109,414,000, and increased 1.8% as a percentage of net sales to 25.3%. The
increase in selling, general and administrative expenses was due to planned
increases in store and Service Office payroll and benefits and Service Office
operating expenses. There was also a reduction in vendor support related to the
increase in direct sourced foreign products and a set-a-side for certain
contingent events.

         The Company recorded a pre-tax restructuring charge of $11,000,000 in
the second quarter of Fiscal 1994. In the fourth quarter of Fiscal 1995, the
Company recorded a $217,000 restructuring credit representing the residual
reserve balance remaining after the final charges for inventory writedowns,
store closings and severance costs had been determined. The restructuring
reserve balance at the beginning of the fiscal year was approximately
$2,400,000. At the close of the fiscal year the reserve related to restructuring
was $951,000. This represents the final amount necessary to complete the
restructuring plan.

         Other expenses incurred in Fiscal 1995 decreased $799,000 to
$5,039,000, 1.2% of net sales. Interest expense for the year decreased $246,000
due to reduced long term debt resulting from scheduled repayments. Interest
income improved by $406,000 due to improved cash management and higher interest
rates earned on invested funds. The Company also earned a slight profit on
government securities transactions compared to a slight loss for Fiscal 1994.

         The effective income tax rate for the Company was 41.1% for Fiscal
1995, compared with a rate of 41.0% for Fiscal 1994. The effective state rate
declined in Fiscal 1995. The increase in the Other portion of the rate was due
to other factors such as the expiration of the Targeted Jobs Tax Credit which
expired for new hires on January 1, 1995.




                                       18
<PAGE>   21
LIQUIDITY AND CAPITAL RESOURCES

         Cash, cash equivalents and marketable securities at February 1, 1997 as
reflected on the Consolidated Balance Sheets increased $19,266,000 over the
balances at the close of the prior fiscal year. The increase in cash as depicted
in the Statements of Cash Flows was $2,788,000 as net cash provided by
operations exceeded cash used for investing activities, including the increase
in marketable securities, and cash used in financing activities.

         Cash flows from operating activities consist primarily of net income
adjusted for certain noncash expense items such as depreciation and
amortization, deferred taxes and loss on disposal of property and equipment.
Operating activities also include changes in accounts receivable, inventory,
accounts payable and accrued expenses and other items. Net cash provided by
operating activities was $28,604,000 for Fiscal 1996 compared to $9,333,000 for
Fiscal 1995. For Fiscal 1996, in addition to net income of $3,343,000, the most
significant operating activities providing cash, were depreciation and
amortization of $17,113,000 and the reduction of $9,456,000 in merchandise
inventories which was the result of strong inventory control measures. The most
significant operating activity which reduced operating cash flow was the
decrease in accounts payable, accrued liabilities and taxes of $5,089,000
primarily due to reduced vendor accounts payable related to the previously
mentioned reduction of inventory.

         With respect to investing activities, in addition to the increase in
marketable securities of $16,592,000, capital expenditures totaled $8,474,000
for Fiscal 1996 compared to $22,626,000 for Fiscal 1995. Capital expenditures
were principally for the construction of and fixtures for new stores. During
Fiscal 1996, 16 new stores were opened compared to 48 new stores during Fiscal
1995. Other capital expenditures were for renovation and remodeling of existing
stores, warehouse equipment and systems enhancements.

         For Fiscal 1997, totaled planned capital expenditures are $12,000,000
primarily for new stores, renovations, remodels and system enhancements.

         With respect to financing activities, the Company improved its
financial flexibility and liquidity through two significant transactions. On
April 5, 1996, the Company issued $20,000,000 in Convertible Preferred Stock
(See Note 3). This transaction has provided the Company with additional
flexibility to meet its future financing requirements. The proceeds from the
preferred stock issuance were utilized in the second transaction, the early
repayment of $17,625,000 of the Senior Notes Payable during the first quarter of
Fiscal 1996. The remaining Senior Notes Payable of $2,625,000 were retired
during the third quarter of Fiscal 1996.

         During Fiscal 1996, the Company entered into an Amended and Restated
Credit Agreement ("Credit Agreement") which provided for borrowings up to
$40,000,000 (See Note 5). The unsecured Credit Agreement established a
suballocation of $30,000,000 for letters of credit. At the close of Fiscal 1996,
there were $9,219,000 in outstanding letters of credit. The term of the Credit
Agreement was extended from November 19, 1996 to May 22, 1998. As of the close
of Fiscal 1996, there were no borrowings outstanding under the Credit Agreement.



                                       19
<PAGE>   22
INFLATION AND SEASONALITY

         The Company does not believe that its operations have been materially
affected by inflation during the two most recent fiscal years. While the Company
does not expect that inflation would have a material impact upon operating
results, there is no assurance that its business will not be affected by
inflation in the future.

         The Company's business is highly seasonal. The Company benefits from
the higher concentration of traffic in its stores during certain times of the
year, especially the July to September "Back to School" period and the holiday
selling seasons of November and December. In addition, the Company expects that
its quarterly results of operations will fluctuate depending on the timing and
amount of revenue contributed by new stores and the timing of costs associated
with the opening of new stores. The Company's current strategy is to open
substantially all of its new stores in the first three quarters of the fiscal
year in order to minimize business disruptions during the heavy selling season
in the last quarter of the fiscal year. See Note 10 of Notes to Consolidated
Financial Statements of the Company included elsewhere herein.

RECENT ACCOUNTING PRONOUNCEMENTS

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." The statement is effective for financial statements for periods ending
after December 15, 1997, and changes the method in which earnings or net income
per share will be determined. Adoption of this statement by the Company will not
have a material impact on earnings per share.




                                       20
<PAGE>   23
PART III

         The information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference to the Company's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held June 17, 1997.

PART IV

ITEM 14.          EXHIBITS AND REPORTS ON FORM 8-K.

(a)      1.       Financial Statements.  See the Index immediately following the
                  signature page.

(b)               Reports on Form 8-K.

                  None.

(c)               Exhibits.

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

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

 4.1              Preferred Stock Purchase Agreement dated April 5, 1996.*

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

10.1              1989 Stock Option Plan and form of Agreement pursuant to 1989
                  Stock Option Plan. (Incorporated herein by reference to 
                  Exhibit 10.3 to the Registration Statement).

10.2              Amended and Restated Revolving Credit Agreement as of May 24,
                  1996. (Incorporated herein by reference to the Company's Form
                  10-Q, for the period ended May 4, 1996).


                                       21
<PAGE>   24
10.3              Form of Deferred Compensation Agreement (Incorporated herein
                  by reference to Exhibit 10.5 to the Registration Statement).

10.4              Amendment No. 1 to Deferred Compensation Agreement, dated June
                  16, 1989. (Incorporated herein by reference to Exhibit 10.5.2
                  to Amendment No. 1 to the Registration Statement).

10.5              Amendment No. 2 to Deferred Compensation Agreement, dated
                  August 15, 1989. (Incorporated herein by reference to the
                  Company's Annual Report on Form 10-K for the year ended
                  January 26, 1991).

10.6              Amendment No. 3 to Deferred Compensation Agreement, dated June
                  15, 1995. (Incorporated herein by reference to the Company's
                  Form 10-Q for the period ended July 29, 1995.)

10.7              Amendment No. 4 to Deferred Compensation Agreement between the
                  Company and Donald Jonas dated April 8, 1996. (Incorporated
                  herein by reference to the Company's Annual Report on Form
                  10-K for the year ended February 3, 1996.)

10.8              Form of Consulting Agreement (Incorporated herein by reference
                  to Exhibit 10.9.1 to the Registration Statement).

10.9              Forms of Amendment of Consulting Agreement (Incorporated
                  herein by reference to Exhibit 10.9.2 to Amendment No. 1 to
                  the Registration Statement).

10.10             Agreement between the Company and Local 99, UNITE to a
                  collective bargaining agreement covering warehouse employees
                  dated March 16, 1996.*

10.11             Lease for distribution Center space (Incorporated herein by
                  reference to Exhibit 1 to the Company's Current Report on Form
                  8-K, dated January 2, 1992).

10.12             Lease for Distribution Center space. (Incorporated herein by
                  reference to Exhibit 1 to the Company's Form 10-Q, for the
                  period ended July 25, 1992).

21                Subsidiaries of the Company. (Incorporated herein by reference
                  to the Company's Annual Report on Form 10-K for the year ended
                  February 3, 1996.)

23                Consent of Deloitte & Touche LLP.*

24                Powers of Attorney dated April 10, 1997.*

*Filed herewith.



                                       22
<PAGE>   25
                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                         LECHTERS, INC.
                                         (Registrant)

                                         By: /s/ Donald Jonas
                                             ------------------------------
                                         Chairman of the Board
                                         and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on May 2, 1997 by the following persons in their
respective capacities set forth opposite their names, which include its
principal executive officer, its principal financial and accounting officer and
a majority of the board of directors.
<TABLE>
<CAPTION>
        Signature                       Title
        ---------                       -----

<S>                             <C>
    /s/ DONALD JONAS            Chairman of the Board and
---------------------------     Chief Executive Officer and Director
      (DONALD JONAS)            (Principal Executive Officer)
                                
  /s/ JOHN W. SMOLAK            Senior Vice President (Principal Financial
---------------------------     Officer and Principal Accounting Officer)
     (JOHN W. SMOLAK)            

 /s/  MARTIN BEGUN              Director
---------------------------
     (MARTIN BEGUN*)

 /s/ CHARLES A. DAVIS           Director
---------------------------
   (CHARLES A. DAVIS*)

/s/ BERNARD D. FISCHMAN         Director
---------------------------
  (BERNARD D. FISCHMAN*)

   /s/ ROBERT KNOX              Director
---------------------------
      (ROBERT KNOX*)

  /s/ ALBERT LECHTER            Director
---------------------------
    (ALBERT LECHTER*)

 /s/ ANTHONY MALKIN             Director
---------------------------
    (ANTHONY MALKIN*)

 /s/ ROBERTA MANEKER            Director
---------------------------
    (ROBERTA MANEKER*)
</TABLE>


                                       23
<PAGE>   26

<TABLE>
<CAPTION>
                Signature                                         Title
                ---------                                         -----
<S>                                                             <C>
       /s/     NORMAN MATTHEWS                                  Director
------------------------------------------------
              (NORMAN MATTHEWS*)

      /s/      LEONARD PFEFFER                                  Director
------------------------------------------------
              (LEONARD PFEFFER*)

     /s/          JOHN WOLFF                                    Director
------------------------------------------------
                (JOHN WOLFF*)
</TABLE>



*By:       John W. Smolak
           Attorney-in-fact



                                       24


<PAGE>   27


                         LECHTERS, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                     <C>
MANAGEMENT'S REPORT                                                        F-1

INDEPENDENT AUDITORS' REPORT                                               F-2

FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED
       FEBRUARY 1, 1997:

       Consolidated Balance Sheets                                         F-3

       Consolidated Statements of Income                                   F-4

       Consolidated Statements of Cash Flows                               F-5

       Consolidated Statements of Shareholders' Equity                     F-6

       Notes to Consolidated Financial Statements                       F-7 - F-19
</TABLE>

<PAGE>   28

MANAGEMENT'S REPORT

To the Shareholders of Lechters, Inc.:

We have prepared Lechters, Inc. consolidated financial statements, including the
notes and other financial information appearing in this Annual Report on Form
10-K, and are responsible for the integrity and objectivity of the accompanying
financial statements and related information. In order to fulfill this
responsibility, policies have been established that require each system of
internal accounting control provide reasonable assurance, giving due regard to
the cost of implementing and maintaining the system, that transactions are
executed in accordance with management's intention and authorization, that
accounting books and records are prepared and maintained so as to permit the
preparation of the financial statements in accordance with generally accepted
accounting principles, and that accountability for assets, liabilities and
equity is maintained.

Compliance with these policies is verified, and the continuing adequacy of
accounting policies and procedures is evaluated. In addition, Lechters, Inc.'s
independent auditors obtain and maintain an understanding of the accounting and
administrative controls in place and, based on tests of those controls and of
accounting records, render an opinion on the fairness of presentation of the
financial statements. The Audit Committee of the Board of Directors, composed of
non-management Board members, and management representatives, meet periodically
with the independent auditors to receive their reports and direct compliance
with their recommendations.

Further, we recognize our responsibility to conduct Lechters' business in
accordance with high moral and ethical standards. Policies have been established
and review programs are maintained to ensure that all business activities are in
compliance with these standards.



Donald Jonas
Chairman of the Board and
Chief Executive Officer



John W. Smolak
Senior Vice President and
Chief Financial Officer



                                      F-1
<PAGE>   29

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
Shareholders of Lechters, Inc.
Harrison, New Jersey

We have audited the accompanying consolidated balance sheets of Lechters, Inc.
and subsidiaries (collectively the "Company") as of February 1, 1997 and
February 3, 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ending February 1, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of February 1, 1997
and February 3, 1996, and the results of their operations and their cash flows
for each of the three years in the period ended February 1, 1997 in conformity
with generally accepted accounting principles.


DELOITTE & TOUCHE LLP

Parsippany, New Jersey
March 26, 1997



                                      F-2
<PAGE>   30

LECHTERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                             February 1,       February 3,
                                                                1997              1996
                                                             -----------       -----------
<S>                                                           <C>              <C>     
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                  $   7,022        $  4,234
   Marketable securities (Note 9)                                54,084          37,606
   Accounts receivable                                            5,561           5,573
   Merchandise inventories                                      100,442         109,898
   Prepaid expenses                                               5,734           5,519
                                                              ---------        --------
     Total current assets                                       172,843         162,830
                                                              ---------        --------

PROPERTY AND EQUIPMENT:
   Fixtures and equipment                                        66,828          64,688
   Leasehold improvements                                       102,912         100,840
                                                              ---------        --------
                                                                169,740         165,528
   Less accumulated depreciation
      and amortization                                           74,356          60,446
                                                              ---------        --------
      Net property and equipment                                 95,384         105,082
                                                              ---------        --------

OTHER ASSETS                                                      4,106           4,400
                                                              ---------        --------
TOTAL ASSETS                                                  $ 272,333        $272,312
                                                              =========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                           $   3,264        $  7,827
   Dividends payable-preferred stock                              1,010              --
   Salaries, wages and other accrued expenses                    13,318          13,546
   Taxes, other than income taxes                                 1,318           1,591
   Income taxes payable (Note 6)                                  1,979             753
   Current portion long-term debt (Note 4)                           --           3,000
                                                              ---------        --------
     Total current liabilities                                   20,889          26,717

LONG-TERM DEBT, LESS CURRENT PORTION
   (Note 4):                                                     58,853          75,038

DEFERRED INCOME TAXES (Note 6)                                   16,454          17,348

OTHER LIABILITIES                                                 5,729           4,567

COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 7 and 8)

SHAREHOLDERS' EQUITY (Note 3):
   Convertible preferred stock, $100 par value
       authorized 1,000,000 shares,
   Issued and outstanding Series A - 149,999 shares and
       Series B - 50,001 shares                                  20,000              --
   Common stock, no par value,
       authorized 50,000,000 shares,
       issued and outstanding 17,155,086                             58              58
   Unrealized holding gain (loss) on
       available for sale securities (Note 9)                       (29)             38
   Additional paid-in capital                                    62,273          62,773
   Retained earnings                                             88,106          85,773
                                                              ---------        --------
     Total shareholders' equity                                 170,408         148,642
                                                              ---------        --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                    $ 272,333        $272,312
                                                              =========        ========
</TABLE>

See notes to consolidated financial statements.


                                      F-3
<PAGE>   31

LECHTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                             Fifty-Two         Fifty-Three           Fifty-Two
                                                                            Weeks Ended        Weeks Ended          Weeks Ended
                                                                            February 1,        February 3,          January 28,
                                                                               1997               1996                 1995
                                                                            -----------        -----------         ------------
<S>                                                                        <C>                 <C>                 <C>         
        NET SALES                                                          $    441,243        $    432,048        $    399,264
        
        COST OF GOODS SOLD (including occupancy and
           indirect costs)                                                      322,110             310,163             282,875
                                                                           ------------        ------------        ------------
        GROSS PROFIT                                                            119,133             121,885             116,389
        
        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 7 and 8)
                                                                                111,218             109,414              93,853
        
        RESTRUCTURING EXPENSE (Note 2)                                               --                (217)             11,000
                                                                           ------------        ------------        ------------
        
        OPERATING INCOME                                                          7,915              12,688              11,536
        
        OTHER EXPENSES (INCOME):
           Interest Expense                                                       5,003               6,920               7,166
           Interest Income                                                       (1,650)             (1,855)             (1,449)
           Loss (Gain) on Sale of Government
              Securities (Note 9)                                                    19                 (26)                121
                                                                           ------------        ------------        ------------
                                                                                  3,372               5,039               5,838
                                                                           ------------        ------------        ------------
        
        INCOME BEFORE INCOME TAX PROVISION                                        4,543               7,649               5,698
        
        INCOME TAX PROVISION (Note 6)                                             1,200               3,146               2,336
                                                                           ------------        ------------        ------------
        
        NET INCOME                                                                3,343               4,503               3,362
        
        Preferred Stock Dividend Requirement                                        842                  --                  --
                                                                           ------------        ------------        ------------
        
        Net Income Available to Common Shareholders                        $      2,501        $      4,503        $      3,362
                                                                           ============        ============        ============
        
        NET INCOME PER COMMON SHARE                                        $       0.15        $       0.26        $       0.20
                                                                           ============        ============        ============
        
        WEIGHTED AVERAGE SHARES  OUTSTANDING                                 17,155,000          17,288,000          17,095,000
                                                                           ============        ============        ============
</TABLE>

        See notes to consolidated financial statements 


                                      F-4
<PAGE>   32

LECHTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)
<TABLE>
<CAPTION>
                                                             Fifty-Two       Fifty-Three      Fifty-Two
                                                            Weeks Ended      Weeks Ended     Weeks Ended
                                                            February 1,      February 3,     January 28,
                                                               1997              1996           1995
                                                            -----------      -----------     -----------
<S>                                                          <C>             <C>             <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                   $  3,343        $  4,503        $  3,362
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
  Restructuring charge                                             --            (217)         11,000
  Depreciation and amortization                                17,113          16,056          14,269
  Loss on disposal of property and equipment                    1,067             954             550
  Deferred income taxes                                          (894)          3,227           1,397
  Deferred rent                                                 1,160           1,020             800
  Other                                                         1,297           1,442             579
Changes in operating assets and liabilities, net 
  of effects of restructuring:
  Decrease (Increase) in accounts receivable                       12           1,095            (753)
  Decrease (Increase) in merchandise inventories                9,456         (12,575)         (7,052)
  Decrease (Increase) in prepaid expenses                        (215)           (918)            761
  Decrease (Increase) in other assets                             128             (51)             17
  Increase (Decrease) in accounts payable,
    accrued salaries, wages and other accrued
    expenses and taxes, other than income taxes                (5,089)         (5,201)          8,911
  Increase (Decrease) in income taxes payable                   1,226              (2)            425
                                                             --------        --------        --------

Net cash provided by operating activities                      28,604           9,333          34,266
                                                             --------        --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                         (8,474)        (22,626)        (20,592)
  (Increase) Decrease in marketable securities                (16,592)          6,153          (4,546)
                                                             --------        --------        --------

  Net cash used in investing activities                       (25,066)        (16,473)        (25,138)
                                                             --------        --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of convertible preferred stock                      20,000              --              --
  Expenses of Issuance of convertible preferred stock            (500)             --              --
  Repayment of long-term debt                                 (20,250)         (3,750)         (6,000)
  Exercise of stock options                                        --             350           2,683
                                                             --------        --------        --------
  Net cash used in financing activities                          (750)         (3,400)         (3,317)
                                                             --------        --------        --------

NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                  2,788         (10,540)          5,811

CASH AND CASH EQUIVALENTS, BEGINNING
   OF YEAR                                                      4,234          14,774           8,963
                                                             --------        --------        --------

CASH AND CASH EQUIVALENTS, END OF YEAR                       $  7,022        $  4,234        $ 14,774
                                                             ========        ========        ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
  Unrealized holding gain (loss) on available
    for sale securities                                      $    (50)       $     64        $   (356)
                                                             ========        ========        ========

  Cash paid (refunded) during the year for:
     Interest                                                $  4,616        $  6,031        $  6,491
                                                             ========        ========        ========

     Income taxes                                            $    920        $   (820)       $    121
                                                             ========        ========        ========
</TABLE>

See notes to consolidated financial statements.


                                      F-5
<PAGE>   33

LECHTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Amounts in thousands, except share amounts)


<TABLE>
<CAPTION>
                                         Common          Convertible Preferred                            Unrealized 
                                      Stock Issued          Stock Issued          Additional               Holding
                                   ------------------    ---------------------     Paid-In     Retained      Gain
                                   Shares      Amount     Shares      Amount       Capital     Earnings     (Loss)        Total
                                   ------      ------     ------      ------       -------     --------     ------        -----
<S>                              <C>            <C>      <C>         <C>          <C>           <C>         <C>       <C>      
BALANCE, JANUARY 29, 1994        16,783,472     $58           --          $-      $ 58,666      $ 77,908    $  --     $ 136,632
Unrealized holdings loss                 --      --           --          --            --            --     (210)         (210)
Exercise of stock
  options                           335,174      --           --          --         2,683            --       --         2,683
Tax benefit from
  exercise of stock options              --      --           --          --         1,074            --       --         1,074
Net Income                               --      --           --          --            --         3,362       --         3,362
                                 ----------     ---      -------     -------      --------      --------    -----     ---------
BALANCE, JANUARY 28, 1995        17,118,646      58           --          --        62,423        81,270     (210)      143,541
Unrealized gain (loss)
  Adjustment                             --      --           --          --            --            --      248           248
Exercise of stock options            36,440      --           --          --           350            --       --           350
Net income                               --      --           --          --            --         4,503       --         4,503
                                 ----------     ---      -------     -------      --------      --------    -----     ---------
BALANCE, FEBRUARY 3, 1996        17,155,086      58           --          --        62,773        85,773       38       148,642
Unrealized gain (loss)
  Adjustment                             --      --           --          --            --            --      (67)          (67)
Issuance of Convertible
  Preferred Stock
    Net of Issuance Expenses             --      --      200,000      20,000          (500)           --       --        19,500
Net Income                               --      --           --          --            --         3,343       --         3,343
Declaration of Dividend on
  Convertible Preferred Stock            --      --           --          --            --        (1,010)      --        (1,010)
                                 ----------     ---      -------     -------      --------      --------    -----     ---------
BALANCE, FEBRUARY 1, 1997        17,155,086     $58      200,000     $20,000      $ 62,273      $ 88,106    ($ 29)    $ 170,408
                                 ==========     ===      =======     =======      ========      ========    =====     =========
</TABLE>

See notes to consolidated financial statements.


                                      F-6
<PAGE>   34

LECHTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED FEBRUARY 1, 1997

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         a.       Business - Lechters, Inc. and its subsidiaries (collectively,
         the "Company") is a specialty retailer of primarily brand-name basic
         housewares and decorative housewares. As of February 1, 1997, the
         Company operated 649 stores in 44 states.

         b.       Basis of Presentation - The consolidated financial statements
         include the accounts of Lechters, Inc. and its wholly owned
         subsidiaries. All significant intercompany accounts and transactions
         have been eliminated in consolidation.

                  References to Fiscal 1996 and Fiscal 1995 mean the fiscal year
         ending on the Saturday closest to the end of January. References to
         Fiscal 1994 mean the fiscal year ending on the last Saturday in January
         of the following year. Fiscal year 1996 was comprised of 52 weeks,
         Fiscal 1995 was comprised of 53 weeks and fiscal year 1994 was
         comprised of 52 weeks.


         c.       Cash Equivalents and Marketable Securities - The Company
         considers cash on hand in stores, deposits in banks and all highly
         liquid debt instruments, with original maturities of 90 days or less
         when purchased, as cash and cash equivalents. Marketable securities are
         cash investments, primarily U.S. Government securities, with original
         maturities exceeding 90 days at time of purchase.

                  The Company classifies marketable securities as "Available for
         Sale" which are carried at fair value, with any unrealized gains and
         losses excluded from earnings and reported as a separate component of
         shareholders' equity, net-of-taxes. (See Note 9.)


                                      F-7
<PAGE>   35

         d.       Merchandise Inventories - Merchandise inventories are stated
         on the following methods:

<TABLE>
<CAPTION>
                                          February 1,          February 3,
                                             1997                 1996
                                          -----------          -----------
<S>                                      <C>                  <C>         
         Lower of cost (first-in, 
         first-out) or market as  
         determined by the retail 
         inventory method (stores)       $ 73,993,000         $ 76,902,000
                                         
         Lower of cost (first-in, 
         first-out) or market                                             
         (distribution centers)            26,449,000           32,996,000
                                         ------------         ------------
                                         $100,442,000         $109,898,000
                                         ============         ============
</TABLE>

                  The Company includes as inventoriable costs, certain indirect
         costs, principally purchasing, warehousing and distribution costs,
         which are necessary to bring inventory to the point of sale. At
         February 1, 1997 total indirect costs included as part of inventory
         were approximately $8,750,000. At February 3, 1996, indirect costs
         included as part of inventory were approximately $9,600,000.

         e.       Property and Equipment - Property and equipment are stated at
         cost. Depreciation and amortization are computed principally by the
         straight-line method by charges to earnings in amounts sufficient to
         write-off the cost of depreciable assets over their estimated lives, or
         where applicable, the terms of the respective leases, whichever is
         shorter. During Fiscal 1996, the Company adopted Statement of Financial
         Accounting Standards (SFAS) 121 "Accounting for the Impairment of
         Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The
         adoption of SFAS 121 resulted in a $370,000 provision for Fiscal 1996.

         f.       Preopening Costs - Preopening costs are capitalized and
         amortized over a period of 12 months from the date operations commence.

         g.       Income Taxes - The Company uses the asset and liability method
         for financial accounting and reporting for income taxes. A valuation
         allowance is established, when necessary, to reduce the deferred tax
         assets to their estimated realizable amounts. (See Note 6.)


                                      F-8
<PAGE>   36

         h.       Net Income Per Share - Net income per share data were computed
         by dividing net income less dividend requirements on the Convertible
         Preferred Stock by the weighted average number of common shares and
         common share equivalents outstanding during each period. Common share
         equivalents include outstanding stock options. The Company's 5%
         Convertible Subordinated Debentures issued in September 1991 did not
         qualify as a common stock equivalent at the time of issue and are not
         included in the calculation of primary net income per share. The 5.05%
         Convertible Preferred Stock issued in April 1996, also did not qualify
         as a common stock equivalent at the time of issue and are not included
         in the calculation of primary net income per share. For the purpose of
         computing fully diluted net income per share, the assumed conversion of
         the debentures and the preferred stock would have an anti-dilutive
         effect on Fiscal 1996 and the assumed conversion of the debentures
         would have an anti-dilutive effect on Fiscal 1995 and 1994 net income
         per share.

                  The number of shares used in computing net income per share
         was determined as follows:


<TABLE>
<CAPTION>
                                                     Fiscal Year Ended
                                         --------------------------------------------
                                         February 1,      February 3,     January 28,
                                            1997             1996             1995
                                         ----------       ----------      -----------
          <S>                            <C>              <C>              <C>    
          Weighted average common
            shares outstanding           17,155,000       17,147,000       16,898,000
          Common share equivalents               --          141,000          197,000
                                         ----------       ----------       ----------
                                         17,155,000       17,288,000       17,095,000
                                         ==========       ==========       ==========
</TABLE>


         i.       Fair Value of Financial Instruments - SFAS No. 107,
         "Disclosures About Fair Value of Financial Instruments," requires
         disclosure of the fair value of financial instruments, both assets and
         liabilities recognized and not recognized in the consolidated balance
         sheet of the Company, for which it is practicable to estimate fair
         value. The estimated fair values of financial instruments which are
         presented herein have been determined by the Company using available
         market information and appropriate valuation methodologies. However,
         considerable judgment is required in interpreting market data to
         develop estimates of fair value. Accordingly, the estimates presented
         herein are not necessarily indicative of amounts the Company could
         realize in a current market exchange.


                                      F-9
<PAGE>   37

                  The fair value of the Company's cash and cash equivalents,
         accounts receivable and accounts payable approximate their carrying
         values at February 1, 1997 and February 3, 1996, due to the short term
         maturities of these investments. The fair value of the Company's
         long-term debt at February 1, 1997 and February 3, 1996 was $41,762,500
         and $61,380,000, respectively. The carrying value of long-term debt at
         February 1, 1997 and February 3, 1996 was $58,853,000 and $78,038,000,
         respectively. The fair value of the Company's long-term debt is based
         on market prices or dealer quotes (for publicly traded debentures) and
         on discounted future cash flows using current interest rates for
         financial instruments with similar characteristics and maturity (for
         senior notes).

         j.       Recent Accounting Pronouncements - In February 1997, the
         Financial Accounting Standards Board issued Statement of Financial
         Accounting Standards (SFAS) No. 128, "Earnings per Share." The
         statement is effective for financial statements for periods ending
         after December 15, 1997, and changes the method in which net income 
         per share will be determined. Adoption of this statement by the 
         Company will not have a material impact on net income per share.


         k.       Use of Estimates - The Company utilizes estimates and
         assumptions in the preparation of financial statements in conformity
         with generally accepted accounting principles. These estimates and
         assumptions affect the reported amounts of assets and liabilities and
         disclosure of contingent assets and liabilities at the date of the
         financial statements. The estimates and assumptions also affect the
         reported amounts of revenues and expenses during the reporting period.
         Actual results could differ from these estimates.

         l.       Reclassifications - Certain reclassifications have been made
         to the financial statements of prior years to conform with the
         classifications used for Fiscal 1996.


2.       RESTRUCTURING CHARGE

         During the second quarter of Fiscal 1994, the Company recorded a pretax
         restructuring charge of $11,000,000 (approximately $6,500,000 after
         tax, or $0.38 per share) related to its plan to close 10 unprofitable
         stores and discontinue various unprofitable merchandise lines. The plan
         called for the termination of the employment of approximately 19
         associates from store operations, the service office and distribution
         centers. This restructuring was completed in Fiscal 1995 and excess
         reserves of $217,000 were credited to operating income in Fiscal 1995.


                                      F-10
<PAGE>   38

3.       SHAREHOLDERS' EQUITY

         a. CONVERTIBLE PREFERRED STOCK - On April 5, 1996, the Company issued
         149,999 shares of Series A Convertible Preferred Stock, $100 par value
         ("Series A Preferred Stock") and 50,001 shares of Series B Convertible
         Preferred Stock, $100 par value ("Series B Preferred Stock") at par
         value. Said shares of Convertible Preferred Stock were sold to
         Prudential Private Equity Investors III, L.P. for $20,000,000. The
         proceeds from the sale of the Series A and Series B Preferred Stock
         were used to prepay $15,000,000 of the 9.53% Senior Notes due 2001 and
         $2,625,000 of the 10.5% Senior Notes due 1998. The balance of the
         proceeds were used for general corporate purposes. Expenses of the
         private placement were charged to Additional Paid-in Capital. Series A
         Preferred Stock and Series B Preferred Stock are convertible to Common
         Stock at a conversion price of $6.25 per share. Series A Preferred
         Stock is convertible to 2,399,984 shares of common stock and has voting
         rights equivalent to that number of common shares. Series B Preferred
         Stock is convertible to 800,016 of shares of common stock but has no
         voting rights. Both Series A Preferred Stock and Series B Preferred
         Stock receive a dividend of 5.05% payable annually. Series A Preferred
         Stock and Series B Preferred Stock did not qualify as common stock
         equivalents at the time of issue.

         Robert Knox, a Director of the Company, is a limited partner in
         Prudential Private Equity Investors III, L.P.

         b. STOCK OPTIONS - In October 1995, SFAS No. 123, "Accounting for
         Stock-Based Compensation," was issued and is effective for financial
         statements for fiscal years beginning after December 1995. As permitted
         by this statement, the Company will continue to measure compensation
         cost for stock option plans in accordance with Accounting Principles
         Board Opinion No. 25, "Accounting For Stock Issued to Employees."
         Accordingly, no compensation cost has been recognized for the Company's
         stock option plan.

         If compensation cost for stock options had been determined based on
         fair values at the grant dates, net income available to common
         shareholders and net income per share would have been reduced to the 
         pro forma amounts below, for the fiscal years ended February 1, 1997 
         and February 3, 1996.

<TABLE>
<CAPTION>
                                                      February 1,        February 3,
                                                         1997               1996
                                                      ----------         ----------
         <S>                                         <C>                 <C>        
         Net income available to common 
           shareholders:
           As reported                               $ 2,501,000         $ 4,503,000
           Pro-forma                                 $ 2,079,000         $ 4,478,000
         
         Net income per share:
           As reported                               $      0.15         $      0.26
           Pro-forma                                 $      0.12         $      0.26
</TABLE>

         The pro forma effect of applying FAS 123 is not necessarily indicative
         of the effect on reported net income for future years.


                                      F-11
<PAGE>   39

         The fair value of each option grant is estimated on the date of grant
         using the Black-Scholes option-pricing model. The following assumptions
         were used during the respective years to estimate the fair value of
         options granted:


<TABLE>
<CAPTION>
                                                  Fiscal Year Ended
                                             -------------------------
                                             February 1,   February 3,
                                                1997          1996
                                             -----------   -----------
<S>                                           <C>           <C>    
          Dividend yield                         0%            0%
          Expected volatility                   68%           51%
          Risk-free interest rate              6.3%          6.0%
          Expected life of options            6 years       6 years
</TABLE>

         Options granted under the Company's 1989 Incentive and Non-Qualified
         Stock Option Plan are granted at market value on the date of grant and
         are exercisable at a rate of 20% per year over a five-year period
         commencing with the date of grant and expire in 10 years.

         In June 1989, the Company granted to a consultant a non-qualified
         option to purchase 120,302 shares of the Company's common stock at a
         price of $6.65 per share, which reflected the fair market value on the
         date of grant. The option is exercisable in annual installments over a
         period of four years.

         Changes in stock options were as follows:

<TABLE>
<CAPTION>
                                                   Fiscal 1996                         Fiscal 1995
                                           -------------------------------     -------------------------------
                                                               Weighted                            Weighted  
                                                               Average                             Average
                                              Shares        Exercise Price       Shares         Exercise Price
                                              ------        --------------       ------         --------------
<S>                                         <C>              <C>              <C>              <C>        
          Beginning balance                   940,320        $      5.80          908,620        $     13.51
          Granted                             283,990               5.12        1,135,650               8.04
          Exercised                                 0                  0          (36,440)              9.62
          Canceled                           (114,990)              8.34       (1,067,510)             14.62
                                            ---------        -----------       ----------        -----------
          Ending balance                    1,109,320        $      5.36          940,320        $      5.80
                                            =========        ===========       ==========        ===========
          Reserved for future grant
            at year end                       405,590                             574,590
          Exercisable                         213,730        $      6.60          136,560        $      9.48
          Weighted average fair
            value of options granted
            during the year                                  $      3.41                         $      4.50
</TABLE>


                                      F-12
<PAGE>   40

         The following table summarizes information concerning stock options
         outstanding at February 1, 1997:
                                                                 
<TABLE>
<CAPTION>
                                         Options Outstanding                           Options Exercisable            
                         --------------------------------------------------      -------------------------------
                                          Weighted Average                           Number                            
                         Outstanding at      Remaining          Weighted         Exercisable at      Weighted          
    Number Range of        February 1,      Contractual         Average            February 1,       Average                       
    Exercise Prices          1997          Life in Years     Exercise Price           1997        Exercise Price             
    ---------------      --------------   ----------------   --------------      --------------   --------------        
<S>                      <C>                   <C>              <C>                 <C>              <C>                          
$ 4.25 to $  5.00          730,350             9.0              $ 4.99               99,630          $ 5.00
  5.01 to    8.50          344,220             8.2                5.61               80,720            6.97
 10.00 to   14.50           34,250             2.8               10.52               32,980           10.39
      20.50                    500             5.4               20.50                  400           20.50
                         ---------                                                  -------
$ 4.25 to $ 20.50        1,109,320                                                  213,730          
                         =========                                                  =======          
</TABLE>

4.       LONG-TERM DEBT

         Long-term debt outstanding is as follows:


<TABLE>
<CAPTION>
                                                           February 1,        February 3,
                                                               1997              1996
                                                           -----------        -----------
<S>                                                        <C>               <C>        
          Senior Notes, 10.5% due 1998 (a)                 $        --       $ 5,250,000
          Senior Notes, 9.53% due 2001 (a)                          --        15,000,000
          Convertible Subordinated 
             Debentures, 5% due 2001 (b)                    58,853,000        57,788,000
                                                           -----------       -----------
             Total                                          58,853,000        78,038,000
          Less current portion (c)                                   0         3,000,000
                                                           -----------       -----------
                                                           $58,853,000       $75,038,000
                                                           ===========       ===========
</TABLE>

         (a) During Fiscal Year 1996, the Company retired both series of Senior
         Notes Payable. Senior Notes (the "1988 Notes") were due September 1,
         1998. Interest on the 1988 Notes was payable semiannually on March 1
         and September 1 of each year. Beginning September 1, 1994, and each
         year thereafter until the 1988 Notes were paid in full, the Company was
         required to repay $3,000,000 of the principal amount of the 1988 Notes.
         The 9.53% Senior Notes (the "1991 Notes") were due May 1, 2001.
         Interest on the 1991 Notes was payable semiannually on May 1 and
         November 1 of each year. Beginning May 1, 1997, and each year
         thereafter until the 1991 Notes were paid in full, the Company was
         required to repay $3,000,000 of the principal amount of the 1991 Notes.
         The Company was able to prepay the 1988 Notes and the 1991 Notes
         (collectively, the "Notes") at any time, in whole or in part, at a
         price equal to the greater of par or the present value of the future
         debt service on the Notes, discounted at 1/2% above the then current
         yield on U.S. Treasury securities of a maturity comparable to the
         remaining weighted average life of the Notes. The provisions of the
         note agreements included a requirement that the Company maintain a
         current ratio of at least 1.5 to 1 and limitations on liens, sale and
         leaseback transactions, funded debt, payment of dividends,
         acquisitions, investments, sales of assets and incurrence of leases.



                                      F-13
<PAGE>   41

         (b) The 5% Convertible Subordinated Debentures (the "Debentures") were
         issued in 1991 with a yield to maturity of approximately 7.47%. At
         February 1, 1997 and February 3, 1996, the unamortized original issue
         discount was $6,147,000 and $7,212,000, respectively. The Debentures
         are convertible into Common Stock of the Company prior to maturity at a
         conversion of 32.79 shares per $1,000 principal amount at maturity.
         Amounts charged to income for the amortization of debenture discount
         were $1,066,000 and $1,011,000 for Fiscal 1996 and Fiscal 1995,
         respectively.

             The Debentures have not been and will not be registered under the
         United States Securities Act of 1933.

         (c) The long term debt at February 1, 1997 of $58,853,000 is due in the
         fiscal year 2001.

5.       LINE OF CREDIT

         At February 1, 1997, the Company had an unused $40,000,000 unsecured
         Credit Agreement (the "Credit Agreement") with a group of banks. This
         agreement was amended and restated on May 23, 1996. The Credit
         Agreement includes a sub-allocation of $30,000,000 for letters of
         credit. Borrowings under the Credit Agreement bear a base rate interest
         of either (1) the higher of the prime rate and the sum of the Federal
         Fund Rate plus 1/2%; or (2) an Adjusted Eurodollar Rate based on
         LIBOR. The Credit Agreement requires maintenance of certain earnings
         and fixed charge coverage ratios, and the interest rate payable is
         adjusted by from 1.4% to 2.5% over the above base rate depending on the
         ratio of consolidated indebtedness to pre-tax cash earnings. The Credit
         Agreement expires May 22, 1998. At the end of Fiscal 1996 and Fiscal
         1995, there were no borrowings outstanding under the Company's Credit
         Agreement.

         At February 1, 1997 and February 3, 1996, the Company was liable for
         outstanding letters of credit in the amount of approximately $9,219,000
         and $8,886,000, respectively.


                                      F-14
<PAGE>   42

6.       INCOME TAXES

         The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                          Fiscal Year Ended
                            ----------------------------------------------
                            February 1,       February 3,      January 28,
                                  1997              1996             1995
                           ------------       -----------      -----------
<S>                        <C>                <C>              <C>       
            Federal:
            Current        $ 1,448,000        $  832,000       $  677,000
            Deferred          (625,000)        1,505,000          936,000
                           -----------        ----------       ----------
            
                               823,000         2,337,000        1,613,000
                           -----------        ----------       ----------
            
            State:
            Current            625,000           630,000          262,000
            Deferred          (248,000)          179,000          461,000
                           -----------        ----------       ----------
            
                               377,000           809,000          723,000
                           -----------        ----------       ----------
            
                           $ 1,200,000        $3,146,000       $2,336,000
                           ===========        ==========       ==========
</TABLE>
            
         A reconciliation of the statutory Federal income tax rate with the
         effective rate is as follows:

<TABLE>
<CAPTION>
                                                            Fiscal Year Ended
                                                 --------------------------------------
                                                 February 1,  February 3,   January 28,
                                                    1997           1996          1995
                                                 -----------  -----------   -----------
<S>                                               <C>             <C>           <C>    
          Statutory Federal income
             tax rate                              34.0%          34.0%         34.0%
          State income taxes, net of
             Federal benefit                        5.5            7.0           8.4
          Reversal of prior year
            residual estimated liabilities        (12.4)            --            --
          Other                                    (0.7)           0.1          (1.4)
                                                   ----           ----          ----
          Effective income tax rate                26.4%          41.1%         41.0%
                                                   ====           ====          ====
</TABLE>


         Deferred income taxes reflect the net tax effects of temporary
         differences between the carrying amounts of assets and liabilities for
         financial reporting purposes and amounts used for income tax purposes.


                                      F-15
<PAGE>   43

         The components of the non-current deferred tax liability (asset) are as
         follows:

<TABLE>
<CAPTION>
                                              February 1,         February 3,
                                                  1997                1996
                                             ------------        ------------
<S>                                          <C>                 <C>         
          Accelerated tax depreciation       $ 18,281,000        $ 18,085,000
          Reserve not currently
             deductible                          (539,000)           (737,000)
          AMT credit carryovers                (1,288,000)                 --
                                             ------------        ------------
                                             $ 16,454,000        $ 17,348,000
                                             ============        ============
</TABLE>

         The Company files consolidated Federal and state income tax returns.
         Deferred income tax expense during Fiscal 1996, 1995 and 1994
         principally resulted from the use of accelerated methods of
         depreciation for tax purposes over the straight-line method used for
         financial reporting purposes.

7.       LEASES

         At February 1, 1997, the Company leased all of its stores and two
         facilities for its corporate office, warehouse and distribution
         operations. These operating leases expire on varying dates to 2008.

         At February 1, 1997, aggregate minimum rentals in future periods are as
         follows:


<TABLE>
<CAPTION>
                                       Minimum
                  Fiscal               Rental
                   Year              Commitment
                  ------             -----------             
<S>                                  <C>        
                   1997              $49,919,000
                   1998              $46,645,000
                   1999              $41,319,000
                   2000              $36,735,000
                   2001              $32,537,000
                   Thereafter        $97,033,000
</TABLE>

         The preceding does not include contingent rentals which may be payable
         under certain leases on the basis of percentage of sales in excess of
         stipulated amounts. The amounts of such additional rentals incurred
         were as follows:

<TABLE>
<CAPTION>
                 Fiscal
                  Year                 Amount
                 ------                ------                            
<S>                                  <C>       
                  1996               $2,320,000
                  1995               $1,913,000
                  1994               $1,708,000

</TABLE>


                                      F-16
<PAGE>   44

         Total rent expense was as follows:

<TABLE>
<CAPTION>
                 Fiscal
                  Year                  Amount
                 ------                 ------
<S>                                  <C>        
                  1996               $52,729,000
                  1995               $50,712,000
                  1994               $45,014,000
</TABLE>

8.       EMPLOYEE BENEFIT PLANS AND OTHER COMMITMENTS

         Pursuant to collective bargaining agreements, the Company is obligated
         to make contributions to union-administered health and welfare,
         retirement and severance funds which provide benefits for the Company's
         union-represented associates. Payments under these agreements amounted
         to approximately $994,000, $1,070,000 and $1,037,000 in Fiscal 1996,
         Fiscal 1995 and Fiscal 1994, respectively.

         In January 1994, the Company adopted a voluntary 401(k) savings plan.
         The Company matches 25% of each associate's contribution, up to a
         maximum of 5% of salary. This match is paid in Company common stock
         purchased by the Trustee on the open market. Approximately $154,000,
         $181,000 and $176,000 were charged to expense in Fiscal 1996, Fiscal
         1995 and Fiscal 1994, respectively.

         The Company has a Deferred Compensation Plan covering certain key
         executives which provides that, at retirement, these associates will
         receive for a 10-year period an annual predetermined benefit, the
         amount of which is dependent upon their retirement age. The maximum
         amount that the associate may receive is being accrued for financial
         reporting purposes over the employment period. Approximately $129,000,
         $134,000 and $71,000 were charged to expense in Fiscal 1996, Fiscal
         1995 and Fiscal 1994, respectively.

         The Company has entered into consulting agreements with certain senior
         executives whereby, at retirement, these associates will provide
         consulting and advisory services for a 10-year period. The maximum
         aggregate amount payable under these agreements is $400,000 per year.


                                      F-17
<PAGE>   45

9.       AVAILABLE FOR SALE SECURITIES

         The following is a summary of the available for sale securities which
         comprise the balance in "marketable securities" at February 1, 1997 and
         February 3, 1996:

<TABLE>
<CAPTION>
                                                   Gross         Gross
            February 1,                          Unrealized    Unrealized     Estimated
               1997                    Cost        Gains         Losses        Fair Value
         -------------------          ------       -----         ------        ----------
<S>                                <C>            <C>           <C>          <C>        
         Government Bonds          $50,300,000    $    --       $(58,000)    $50,242,000
         Municipal Bonds             3,834,000      8,000             --       3,842,000
                                    -----------    -------       --------     -----------
         Total available for
           sale securities         $54,134,000    $ 8,000       $(58,000)    $54,084,000
                                   ===========    =======       ========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                   Gross         Gross
            February 3,                          Unrealized    Unrealized     Estimated
               1996                    Cost        Gains         Losses        Fair Value
         -------------------          ------       -----         ------        ----------
<S>                                <C>            <C>           <C>          <C>        
         Government Bonds          $35,489,000    $60,000       $ (2,000)    $35,547,000
         Municipal Bonds             2,053,000      6,000             --       2,059,000
                                   -----------    -------       --------     ----------- 
         Total available for
           sale securities         $37,542,000    $66,000       $ (2,000)    $37,606,000
                                   ===========    =======       ========     ===========
</TABLE>
 

         The cost and estimated fair value of debt securities at February 1,
         1997 by contractual maturity are as follows:


<TABLE>
<CAPTION>
                                                      Estimated
                                      Cost            Fair Value
                                     ------           ----------
<S>                                <C>               <C>        
             1997                  $35,642,000       $35,625,000
             1998                   14,658,000        14,617,000
             1999                    3,834,000         3,842,000
                                   -----------       -----------
             Total available for
             sale securities       $54,134,000       $54,084,000
                                   ===========       ===========
</TABLE>

         Net gains from the sales of available for sale securities are reported
         on the consolidated statement of income as "Loss (Gain) on Sale of
         Government Securities". The components of "Loss (Gain) on Sales of
         Government Securities" for Fiscal 1996, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
                       Gross            Gross         Loss (Gain)
         Fiscal       Realized        Realized        on Sale of
          Year         Gains           Losses    Government Securities
         ------        -----           ------    ---------------------
<S>                  <C>              <C>             <C>      
          1996       $  (9,000)       $ 28,000        $  19,000
          1995       $(114,000)       $ 88,000        $ (26,000)
          1994       $ (16,000)       $137,000        $ 121,000
</TABLE>


                                      F-18
<PAGE>   46

10.     QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                  Fiscal Quarter Ended
                                                        -----------------------------------------------------------------------
                                                             May 4,            August 3,         November 2,      February 1,
                                                              1996              1996                1996             1997
                                                             ------            ---------         -----------      -----------    
                                                              (Amounts in thousands except share and per share amounts)
<S>                                                     <C>                 <C>                 <C>              <C>        
         Net sales                                      $     84,992        $     92,727        $     98,495     $    165,029
         Gross profit                                         20,614              21,878              25,317           51,324
         Income (loss) before income                                                                            
           tax provision                                      (5,977)             (4,793)             (2,653)          17,966
         Net income (loss)                                    (3,526)             (2,828)             (1,565)          11,262
         Net income (loss) per share (a) (b) (d)        $      (0.21)       $      (0.18)       $      (0.11)    $       0.64
         Number of shares used in computing                                                                     
           net income (loss) per share                    17,155,000          17,155,000          17,155,000       17,155,000
</TABLE>

<TABLE>
<CAPTION>
                                                                                 Fiscal Quarter Ended         
                                                        -----------------------------------------------------------------------
                                                           April 29,           July 29,         October 28,       February 3,
                                                             1995                1995              1995               1996
                                                           --------            ---------         -----------      -----------    
                                                              (Amounts in thousands except share and per share amounts)           
<S>                                                     <C>                 <C>                 <C>              <C>         
         Net sales                                      $     80,316        $     88,671        $     95,148     $    167,913
         Gross profit                                         20,240              22,745              24,850           54,050
         Restructuring expense                                    --                  --                  --             (217)
         Income (loss) before income                                                                             
           tax provision                                      (3,973)             (3,163)             (1,559)          16,344
         Net income (loss)                                    (2,344)             (1,866)               (921)           9,634
         Net income (loss) per share (a) (c) (d)        $      (0.13)       $      (0.11)       $      (0.05)    $       0.56
         Number of shares used in computing 
           net income (loss) per share                    17,416,000          17,333,000          17,238,000       17,183,000
</TABLE>

         (a)      Net (loss) income per share is calculated based on net (loss)
                  income less the dividend requirement of the Convertible
                  Preferred Stock.

         (b)      Fully diluted net income per share, assuming conversion of the
                  Company's 5% Convertible Subordinated Debentures and
                  elimination of the related interest costs less applicable
                  income taxes and assuming conversion of the 5.05% Convertible
                  Preferred Stock and elimination of the related dividend was
                  $0.54 for the thirteen weeks ended February 1, 1997 on
                  weighted average shares outstanding of 22,487,000.

         (c)      Fully diluted net income per share, assuming conversion of the
                  Company's 5% Convertible Subordinate Debentures and
                  elimination of the related interest costs less applicable
                  income taxes was $0.53 per share for the fourteen weeks ended
                  February 3, 1996 on weighted average shares outstanding of
                  19,314,000.

         (d)      Difference of $0.01 between full year income per share and the
                  resulting income per share from the sum of each of the
                  quarters in Fiscal 1996 is due to rounding and Fiscal 1995 is
                  due to the weighted average share calculation and the
                  seasonality of the business.


                                      F-19
<PAGE>   47

                                EXHIBIT INDEX

Exhibit 
  No.                             Description
-------                           -----------

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

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

 4.1              Preferred Stock Purchase Agreement dated April 5, 1996.*

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

10.1              1989 Stock Option Plan and form of Agreement pursuant to 1989
                  Stock Option Plan. (Incorporated herein by reference to 
                  Exhibit 10.3 to the Registration Statement).

10.2              Amended and Restated Revolving Credit Agreement as of May 24,
                  1996. (Incorporated herein by reference to the Company's Form
                  10-Q, for the period ended May 4, 1996).

10.3              Form of Deferred Compensation Agreement (Incorporated herein
                  by reference to Exhibit 10.5 to the Registration Statement).

10.4              Amendment No. 1 to Deferred Compensation Agreement, dated June
                  16, 1989. (Incorporated herein by reference to Exhibit 10.5.2
                  to Amendment No. 1 to the Registration Statement).

10.5              Amendment No. 2 to Deferred Compensation Agreement, dated
                  August 15, 1989. (Incorporated herein by reference to the
                  Company's Annual Report on Form 10-K for the year ended
                  January 26, 1991).

10.6              Amendment No. 3 to Deferred Compensation Agreement, dated June
                  15, 1995. (Incorporated herein by reference to the Company's
                  Form 10-Q for the period ended July 29, 1995.)

10.7              Amendment No. 4 to Deferred Compensation Agreement between the
                  Company and Donald Jonas dated April 8, 1996. (Incorporated
                  herein by reference to the Company's Annual Report on Form
                  10-K for the year ended February 3, 1996.)

10.8              Form of Consulting Agreement (Incorporated herein by reference
                  to Exhibit 10.9.1 to the Registration Statement).

10.9              Forms of Amendment of Consulting Agreement (Incorporated
                  herein by reference to Exhibit 10.9.2 to Amendment No. 1 to
                  the Registration Statement).

10.10             Agreement between the Company and Local 99, UNITE to a
                  collective bargaining agreement covering warehouse employees
                  dated March 16, 1996.*

10.11             Lease for distribution Center space (Incorporated herein by
                  reference to Exhibit 1 to the Company's Current Report on Form
                  8-K, dated January 2, 1992).

10.12             Lease for Distribution Center space. (Incorporated herein by
                  reference to Exhibit 1 to the Company's Form 10-Q, for the
                  period ended July 25, 1992).

21                Subsidiaries of the Company. (Incorporated herein by reference
                  to the Company's Annual Report on Form 10-K for the year ended
                  February 3, 1996.)

23                Consent of Deloitte & Touche LLP.*

24                Powers of Attorney dated April 10, 1997.*

*Filed herewith.